UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended September 30, 2009
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o
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Transition
report under Section 13 or 15(d) of the Securities Exchange Act of
1934
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Commission
file number: 001-13992
RICK'S
CABARET INTERNATIONAL, INC.
(Exact
name of registrant as specified in its charter)
Texas
State or
other jurisdiction of (I.R.S. Employer incorporation or organization
Identification No.)
10959
Cutten Road, Houston, Texas 77066
(Address
of principal executive offices)
(281)
397-6730
Registrant’s
telephone number, including area code
Securities
registered pursuant to Section 12(b) of the Act:
n/a
Title of
each class
NASDAQ
Name of
each exchange on which registered
Securities
registered pursuant to section 12(g) of the Act:
Common
Stock, $.01 Par Value
(Title of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 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 o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§2323.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such
files. Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. Large
accelerated filer o Accelerated
filer o Non-accelerated
filer o
Smaller
reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.): Yes o No x
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o NOT
APPLICABLE
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold as of the last business day of the registrant’s most recently
completed second fiscal quarter was $30,653,690.
As of
December 3, 2009, there were approximately 9,365,670 shares of Common Stock
outstanding (excluding treasury shares).
PART
I
INTRODUCTION
Our name
is Rick's Cabaret International, Inc. Through our subsidiaries, we currently own
and/or operate a total of nineteen adult nightclubs that offer live adult
entertainment, restaurant and bar operations. Six of our clubs operate under the
name "Rick's Cabaret"; four operate under the name “Club Onyx”, upscale venues
that welcome all customers but cater especially to urban professionals,
businessmen and professional athletes; five operate under the name "XTC
Cabaret"; one club that operates as “Tootsie’s Cabaret” and one that operates as
“Cabaret North”. Our nightclubs are in Houston, Austin, San Antonio, Dallas and
Fort Worth, Texas; Charlotte, North Carolina; Minneapolis, Minnesota; New York,
New York; Miami Gardens, Florida; Philadelphia, Pennsylvania and Las Vegas,
Nevada. In April 2008, we acquired a media division, including the leading trade
magazine serving the multi-billion dollar adult nightclubs industry. As part of
the transaction we also acquired two industry trade shows, two other industry
trade publications and more than 25 industry websites.
We also
own and operate premiere adult entertainment Internet websites. Our online
entertainment sites are, CouplesTouch.com, NaughtyBids.com and xxxpassword.com.
CouplesTouch.com is a personals site for those in the swinging lifestyle.
Naughtybids.com is our online adult auction site. It contains consumer-initiated
auctions for items such as adult videos, apparel, photo sets, adult
paraphernalia and other erotica. There are typically approximately 10,000 active
auctions at this site at any given time. We charge the seller a fee for each
successful auction. The site xxxPassword.com features adult content licensed
through Voice Media, Inc. Most of our sites use proprietary software platforms
written by us to deliver the best experience to the user without being
constrained by off-the-shelf software solutions.
Our
website address is www.Ricks.com. Upon
written request, we make available free of charge our Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all
amendments to those reports as soon as reasonably practicable after such
material is electronically filed with the SEC under Securities Exchange Act of
1934, as amended. Information contained in the website shall not be construed as
part of this Form 10-K.
References
to “us,” “Rick’s” or the “Company” are to Rick’s Cabaret International, Inc. and
include our 100%-owned, 85%-owned and 51%-owned consolidated
subsidiaries.
BUSINESS
ACTIVITIES--NIGHTCLUBS
Prior to
the opening of the first Rick's Cabaret in 1983 in Houston, Texas, the topless
nightclub business was characterized by small establishments generally managed
by their owner. Operating policies of these establishments were often lax, the
sites were generally dimly lit, standards for performers' personal appearance
and personality were not maintained and it was customary for performers to
alternate between dancing and waiting tables. The quantity and quality of bar
service was low and food was not frequently offered. Music was usually "hard"
rock and roll, played at a loud level by a disc jockey. Usually, only cash was
accepted. Many businessmen felt uncomfortable in such environments. Recognizing
a void in the market for a first-class adult nightclub, we designed Rick's
Cabaret to target the more affluent customer by providing a unique quality
entertainment environment. The following summarizes our areas of operation that
distinguish us:
Female Entertainers.
Our policy is to maintain high standards for both personal appearance and
personality for the entertainers and waitresses. Of equal importance is a
performer's ability to present herself attractively and to talk with customers.
We prefer that performers who work at our clubs be experienced entertainers. We
make a determination as to whether a particular applicant is suitable based on
such factors of appearance, attitude, dress, communication skills and demeanor.
At all clubs, except for our Minnesota location, the entertainers are
independent contractors. We do not schedule their work hours.
Management. We often
recruit staff from inside the topless industry, as well as from large restaurant
and club chains, in the belief that management with experience in the sector
adds to our ability to grow and attract quality entertainers. Management with
experience is able to train new recruits from outside the industry.
Compliance
Policies/Employees. We have a policy of ensuring that our business is
operated in conformity with local, state and federal laws. In particular, we
have a "no tolerance" policy as to illegal drug use in or around the premises.
Posters placed throughout the nightclubs reinforce this policy, as do periodic
unannounced searches of the entertainers' lockers. Entertainers and waitresses
who arrive for work are not allowed to leave the premises without the permission
of management. If an entertainer does leave the premises, she is not allowed to
return to work until the next day. We continually monitor the behavior of
entertainers, waitresses and customers to ensure that proper standards of
behavior are observed.
Compliance Policies/Credit
Cards. We review all credit card charges made by our customers. We have
in place a formal policy requiring that all credit card charges must be
approved, in writing, by management before any charges are
accepted. Management is trained to review credit card charges to
ensure that the only charges approved for payment are for food, drink and
entertainment.
Food and Drink. We
believe that a key to the success of our branded adult nightclubs is a quality,
first-class bar and restaurant operation to compliment our adult entertainment.
We employ service managers who recruit and train professional wait staff and
ensure that each customer receives prompt and courteous service. We employ chefs
with restaurant experience. Our bar managers order inventory and schedule bar
staff. We believe that the operation of a first class restaurant is a necessary
component to the operation of a premiere adult cabaret, as is the provision of
premium wine, liquor and beer in order to ensure that the customer perceives and
obtains good value. At most locations, our restaurant operations provide
business lunch buffets and full lunch and dinner menu service with hot and cold
appetizers, salads, seafood, steak, and lobster. An extensive selection of
quality wines is available at most locations.
Controls. Operational
and accounting controls are essential to the successful operation of a cash
intensive nightclub and bar business. At each location, we have designed and
implemented internal procedures and controls to ensure the integrity of our
operational and accounting records. Wherever practicable, we separate management
personnel from all cash handling so that management is isolated from and does
not handle any cash. We use a combination of accounting and physical inventory
control mechanisms to maintain a high level of integrity in our accounting
practices. Information technology plays a significant role in capturing and
analyzing a variety of information to provide management with the information
necessary to efficiently manage and control each nightclub. Deposits of cash and
credit card receipts are reconciled each day to a daily income report. In
addition, we review on a daily basis (i) cash and credit card summaries which
tie together all cash and credit card transactions occurring at the front door,
the bars in the club and the cashier station, (ii) a summary of the daily
bartenders' check-out reports, and (iii) a daily cash requirements analysis
which reconciles the previous day's cash on hand to the requirements for the
next day's operations. These daily computer reports alert local management of
any variances from expected financial results based on historical norms. We
conduct a monthly overview of our financial condition and operating
results.
Atmosphere. We
maintain a high design standard in our facilities and decor. The furniture and
furnishings in the nightclubs create the feeling of an upscale restaurant. The
sound system provides quality sound at levels at which conversations can still
take place. The environment is carefully monitored for music selection,
entertainer and waitress appearance and all aspects of customer service on a
continuous basis.
VIP Room. In keeping
with our emphasis on serving the upper-end of the businessmen's market, some of
our nightclubs include a VIP room, which is open to individuals who purchase
memberships. A VIP room provides a higher level of service and
luxury.
Advertising and
Promotion. Our consumer marketing strategy is to position our “Rick's
Cabaret” brand clubs as premiere entertainment facilities that provide
exceptional topless entertainment in a fun, yet discreet, environment. We use a
variety of highly targeted methods to reach our customers including hotel
publications, local radio, cable television, newspapers, billboards, taxi-cab
reader boards, and the Internet, as well as a variety of promotional campaigns.
These campaigns ensure that the Rick's Cabaret name is kept before the
public.
Rick's
Cabaret has received a significant amount of media exposure over the years in
national magazines such as Playboy, Penthouse, Glamour Magazine, The Ladies Home
Journal, Time Magazine, Time Out New York, and Texas Monthly Magazine. Segments
about Rick's have aired on national and local television programs such as
“20/20”, "Extra" and "Inside Edition", and we have provided entertainers for
Pay-Per-View features as well. Business stories about Rick's Cabaret have
appeared in Forbes, Newsweek, The Wall Street Journal, The New York Times, The
New York Post, Los Angeles Times, Houston Business Journal, and numerous other
national and regional publications.
NIGHTCLUB
LOCATIONS
We
currently operate clubs under the name “Rick's Cabaret” in Houston, San Antonio
and Fort Worth, Texas; Minneapolis, Minnesota; New York, New York; and Las
Vegas, Nevada. We also own a Rick's Cabaret in Austin, Texas which is currently
listed for sale. We also operate a similar nightclub under the name
“Tootsie’s Cabaret” in Miami Gardens, Florida. We also operate a total of four
nightclubs (one in Houston, one in Dallas, one in Charlotte, North Carolina and
one in Philadelphia, Pennsylvania), as “Club Onyx”, upscale venues that welcome
all customers but cater especially to urban professionals, businessmen and
professional athletes. Additionally, we own five nightclubs that operate as “XTC
Cabaret” in San Antonio, Austin, Dallas, and two in Houston, Texas. We sold our
New Orleans, Louisiana nightclub in March 1999, but it continues to use the name
“Rick’s Cabaret” under a licensing agreement.
RECENT
NIGHTCLUB TRANSACTIONS
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1.
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On
November 30, 2007, we entered into a Stock Purchase Agreement for the
acquisition of 100% of the issued and outstanding common stock of Stellar
Management Corporation, a Florida corporation (the "Stellar Stock") and
100% of the issued and outstanding common stock of Miami Gardens Square
One, Inc., a Florida corporation (the "MGSO Stock") which owns and
operates an adult entertainment cabaret known as "Tootsie’s Cabaret"
("Tootsie’s") located at 150 NW 183rd Street, Miami Gardens, Florida 33169
(the "Transaction"). Pursuant to the Stock Purchase Agreement, we acquired
the Stellar Stock and the MGSO Stock from Norman Hickmore ("Hickmore") and
Richard Stanton ("Stanton") for a total purchase price of $25,000,000
payable $15,000,000 in cash and payable $10,000,000 pursuant to two
Secured Promissory Notes in the amount of $5,000,000 each to Stanton and
Hickmore (the "Notes"). The Notes will bear interest at the rate of 14%
per annum with the principal payable in one lump sum payment on November
30, 2012, as amended. Interest on the Notes will be payable monthly, in
arrears, with the first payment being due thirty (30) days after the
closing of the Transaction. We cannot pre-pay the Notes during the first
twelve (12) months; thereafter, we may prepay the Notes, in whole or in
part, provided that (i) any prepayment by us from December 1, 2008 through
November 30, 2009, shall be paid at a rate of 110% of the original
principal amount and (ii) any prepayment by us after November 30, 2009,
may be prepaid without penalty at a rate of 100% of the original principal
amount. The Notes are secured by the Stellar Stock and MGSO Stock under a
Pledge and Security Agreement. Additionally, as part of the Transaction,
we entered into Assignment to Lease Agreements with the landlord for the
property where Tootsie’s is located. The underlying Lease Agreements for
the property provide for an original lease term through June 30, 2014,
with two option periods which give us the right to lease the property
through June 30, 2034. The terms and conditions of the transaction were
the result of extensive arm's length negotiations between the
parties.
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2.
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On
March 31, 2008, our wholly owned subsidiary, RCI Entertainment
(Philadelphia), Inc. (the “Purchaser”) completed the acquisition of 100%
of the issued and outstanding shares of common stock (the “TEZ Shares”) of
The End Zone, Inc., a Pennsylvania corporation (the “Corporation”) which
owns and operated a nightclub previously known as “Crazy Horse Too
Cabaret” (the “Club”) located at 2908 South Columbus Blvd., Philadelphia,
Pennsylvania 19148 (the “Real Property”) from Vincent Piazza (the
“Seller”). As part of the transaction, our wholly owned subsidiary, RCI
Holdings, Inc. (“RCI Holdings”) acquired from the Piazza Family Limited
Partnership (the “Partnership Seller”) 51% of the issued and outstanding
partnership interest (the “Partnership Interests”) in TEZ Real Estate, LP,
a Pennsylvania limited partnership (the “Partnership”) and 51% of the
issued and outstanding membership interest (the “Membership Interests”) in
TEZ Management, LLC, a Pennsylvania limited liability company, which is
the general partner of the Partnership (the “General Partner”). The
Partnership owns the Real Property where the Club is located. At closing,
we paid a purchase price of $3,500,000 in cash for the Partnership
Interests and Membership Interests, and issued 195,000 shares of our
restricted common stock (the “Rick’s Shares”) valued at $23 per share for
the TEZ Shares.
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As part
of the transaction and as amended in April 2009, we entered into a
Lock-Up/Leak-Out Agreement with the Seller pursuant to which, on or after one
year after the closing date, the Seller shall have the right, but not the
obligation, to have Rick’s purchase from Seller not more than 3,000 Rick’s
Shares per month (the “Monthly Shares”), calculated at a price per share equal
to $23.00 (“Value of the Rick’s Shares”) until March 31, 2010 and at the rate of
5,000 shares per month thereafter until the Seller has
received $4,485,000 from the sale of the shares. At our
election during any given month, we may either buy the Monthly Shares or,
if we elect not to buy the Monthly Shares from the Seller, then the
Seller shall sell the Monthly Shares in the open market. Any
deficiency between the amount which the Seller receives from the sale of the
Monthly Shares and the Value of the Rick’s Shares shall be paid by us within
three (3) business days of the date of sale of the Monthly Shares during that
particular month. Our obligation to purchase the Monthly Shares from
the Seller shall terminate and cease at such time as the Seller has received a
total of $4,485,000 from the sale of the Rick’s Shares and any
deficiency. As of September 30, 2009, the 177,000 shares of
restricted common stock were classified on the consolidated balance sheet as
temporary equity in accordance with ASC Topic 480, Classification and Measurement of
Redeemable Securities. In April 2009, we renegotiated the
terms of these put options. Under the new terms, we have extended payback and
reduced the number of shares that can be put back to us. No
consideration was required by us to renegotiate the terms of the put
options.
Additionally,
at closing, the Seller and the Partnership Seller entered a five-year agreement
not to compete with us within a twenty (20) mile radius of the Club. Finally,
the Corporation entered into a new lease agreement with the Partnership giving
it the right to lease the Real Property for twenty (20) years (“Original Term”)
with an option for an additional nine (9) years eleven (11) eleven months
(“Option Term”) with rent payable at the rate of (i) $50,000 per month, subject
to adjustment for increases in the Consumer Price Index (CPI) every five years
during the Original Term and the Option Term, or (ii) 8% of gross sales,
whichever is higher. The maximum increase in the CPI for any five (5) year
period shall be 15%.
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3.
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On
March 31, 2008, our subsidiary, RCI Entertainment (Austin), Inc. (“RCI”),
completed the acquisition of 49% of the membership interest of Playmates
Gentlemen’s Club, LLC (“Playmates”) from Behzad Bahrami (“Seller”),
resulting in 100% ownership by us of RCI. Playmates owns an adult
entertainment cabaret previously known as “Playmates” (the “Club”) located
at 8110 Springdale Road, Austin, Texas 78724 (the “Premises”). Under the
terms of the Purchase Agreement, RCI paid a total purchase price of
$1,401,711 which was paid $701,711 in cash and debt forgiveness at the
time of closing and the issuance of 35,000 shares of our restricted common
stock valued at $20.00 per share (the “Shares”). For accounting purposes,
our investment in 2008 is only $751,000, due to the previous losses of the
minority interest which have been expensed. The investment has been
assigned to goodwill.
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Pursuant
to the terms of the Purchase Agreement and as amended in April 2009, on or after
one year after the closing date, the Seller shall have the right, but not the
obligation to have us purchase from Seller not more than 2,500 Shares per month
(the “Monthly Shares”), calculated at a price per share equal to $20.00 (“Value
of the Shares”). Seller shall notify us during any given month of its
election to “Put” the Monthly Shares to us during that particular
month. At our election during any given month, we may either buy the
Monthly Shares or, if we elect not to buy the Monthly Shares from the Seller,
then the Seller shall sell the Monthly Shares in the open market. Any
deficiency between the amount which the Seller receives from the sale of the
Monthly Shares and the Value of the Shares shall be paid by us within three (3)
business days of the date of sale of the Monthly Shares during that particular
month. Our obligation to purchase the Monthly Shares from the Seller
shall terminate and cease at such time as the Seller has received a total of
$700,000 from the sale of the Shares. As of September 30, 2009, the
20,000 shares of restricted common stock were classified on the consolidated
balance sheet as temporary equity in accordance with ASC Topic 480, Classification and Measurement of
Redeemable Securities. In April 2009, we renegotiated the
terms of these and other put options. No consideration was required
by us to renegotiate the terms of these put options. Under the new
terms, we have extended payback and reduced the number of shares that can be put
back to us. In the event the Seller elects not to “Put” the Shares to
us, the Seller shall not sell more than 10,000 Shares during any 90-day period
in the open market, provided that Seller complies with Rule 144 of the
Securities Act of 1933, as amended, in connection with his sale of the
Shares. The full results of operations of this entity are included in
our results of operations since March 31, 2008.
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4.
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On
April 11, 2008, our wholly owned subsidiary, RCI Entertainment (Dallas),
Inc., completed the acquisition of 100% of the issued and outstanding
partnership interest (the "Partnership Interest") of Hotel Development -
Texas, Ltd, a Texas limited partnership (the "Partnership") and 100% of
the issued and outstanding membership interest (the "Membership Interest")
of HD-Texas Management, LLC, a Texas limited liability company, the
general partner of the Partnership (the "General Partner") from Jerry
Golding, Kenneth Meyer, and Charles McClure (the "Sellers"). The
Partnership owns and operates an adult entertainment cabaret previously
known as "The Executive Club" (the "Club"), located at 8550 North Stemmons
Freeway, Dallas, Texas 75247 (the "Real Property"). As part of the
transaction, our wholly owned subsidiary, RCI Holdings, Inc. ("RCI"), also
acquired the Real Property from DPC Holdings, LLC, a Texas limited
liability company ("DPC").
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At
closing, we paid a total purchase price of $3,590,609 for the Partnership
Interest and Membership Interest, which was paid through the issuance of 50,694
shares of our restricted common stock to each of Messrs. Golding, Meyer and
McClure, for an aggregate total of 152,082 shares (collectively, the "Rick's
Club Shares") to be valued at $23.30 per share ($3,544,119) and $46,490 in cash.
As consideration for the purchase of the Real Property, RCI paid total
consideration of $5,599,721, which was paid (i) $4,250,000, payable $610,000 in
cash and $3,640,000 through the issuance of a five year promissory note (the
"Promissory Note") and (ii) the issuance of 57,918 shares of our restricted
common stock (the "Rick's Real Property Shares") to be valued at $23.30 per
share ($1,349,721). The Promissory Note bears interest at a varying rate at the
greater of (i) two percent (2%) above the Prime Rate or (ii) seven and one-half
percent (7.5%), and is guaranteed by Rick's and Eric Langan, our Chief Executive
Officer, individually. At Closing, the Parties entered into an Amendment to
Purchase Agreement solely to provide for the Sellers to set aside 10,500 Rick's
Club Shares under an Escrow Agreement for the offset of certain liabilities of
the Partnership. We also incurred costs in the amount of $37,848,
which was paid in cash.
At
Closing and as amended in May 2009, the Sellers entered into Lock-Up/Leak-Out
Agreements pursuant to which on or after one year after the closing date, the
Sellers shall have the right, but not the obligation to have Rick's purchase
from Sellers not more than an aggregate of 2,172 Shares per month (the "Monthly
Club Shares"), calculated at a price per share equal to $25.00 per share ("Value
of the Rick's Club Shares") from April 11, 2009 until April 11, 2010, at the
rate of 4,347 shares per month from April 11, 2010 until April 11, 2012 and
thereafter at the rate of 3,621 shares per month until each of the individual
Sellers has received a total of $1,267,350 from the sale of the Rick's Club
Shares. At our election during any given month, we may either buy the Monthly
Club Shares or, if we elect not to buy the Monthly Club Shares from the Sellers,
then the Sellers shall sell the Monthly Club Shares in the open market. Any
deficiency between the amount, which the Sellers receive from the sale of the
Monthly Club Shares and the Value of the Rick's Club Shares shall be paid by us
within three (3) business days of the date of sale of the Monthly Club Shares
during that particular month. Our obligation to purchase the Monthly
Club Shares from the Sellers shall terminate and cease at such time as the
Sellers have received an aggregate total of $3,802,050 from the sale of the
Rick's Club Shares and any deficiency.
Additionally,
at Closing and as amended in May 2009, DPC entered into a Lock-Up/Leak-Out
Agreement pursuant to which on or after one year after the closing date, DPC
shall have the right, but not the obligation to have Rick's purchase from DPC
not more than 828 Shares per month (the "Monthly Real Estate Shares"),
calculated at a price per share equal to $25.00 per share ("Value of the Rick's
Real Estate shares") from April 11, 2009 until April 11, 2010, at the rate of
1,653 shares per month from April 11, 2010 until April 11, 2012 and thereafter
at the rate of 1,379 shares per month until DPC has received a total of
$1,447,950 from the sale of the Rick's Real Estate Shares. At our election
during any given month, we may either buy the Monthly Real Estate Shares or, if
we elect not to buy the Monthly Real Estate Shares from DPC, then DPC shall sell
the Monthly Real Estate Shares in the open market. Any deficiency between the
amount which DPC receives from the sale of the Monthly Real Estate Shares and
the Value of the Rick's Real Estate Shares shall be paid by us within three (3)
business days of the date of sale of the Monthly Real Estate Shares during that
particular month. Our obligation to purchase the Monthly Real Estate Shares from
DPC shall terminate and cease at such time as DPC has received an aggregate
total of $1,447,950 from the sale of the Rick's Real Estate Shares and any
deficiency.
Finally,
at Closing each of the Sellers entered a five year Non-Competition Agreement
with us pursuant to which they agreed not to compete with us in Dallas County or
any adjacent county.
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5.
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On
June 18, 2008, our wholly owned subsidiary RCI Entertainment (Northwest
Highway), Inc. (the “Purchaser”) completed the acquisition of certain
assets (the “Purchased Assets”) of North by East Entertainment, Ltd., a
Texas limited partnership (the “Seller”) by and through its general
partner, Northeast Platinum, LLC, a Texas limited liability company (the
“General Partner”) pursuant to an Asset Purchase Agreement dated May 10,
2008. The Seller owned and operated an adult entertainment cabaret known
as “Platinum Club II” (the “Club”), located at 10557 Wire Way (at
Northwest Highway), Dallas, Texas 75220 (the “Real
Property”).
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At
closing, we paid a total purchase price of $1,500,000 cash for the Purchased
Assets. At Closing, the principal of the Seller entered into a five-year
agreement not to compete with the Club by operating an establishment with an
urban theme that both serves liquor and provides live female nude or semi-nude
adult entertainment in Dallas County, Tarrant County, Texas or any of the
adjacent counties thereto.
As part
of the transaction, our wholly owned subsidiary RCI Holdings, Inc. (“RCI”) also
acquired the Real Property from Wire Way, LLC, a Texas limited liability company
(“Wire Way”). Pursuant to a Real Estate Purchase and Sale Agreement (the “Real
Estate Agreement”) dated May 10, 2008, RCI paid total consideration of
$6,000,000, which was paid $1,650,000 in cash and $4,350,000 through the
issuance of a five (5) year promissory note (the “Promissory Note”). The
Promissory Note bears interest at a varying rate at the greater of (i) two
percent (2%) above the Prime Rate or (ii) seven and one-half percent (7.5%),
which is guaranteed by us and by Eric Langan, our Chief Executive Officer,
individually. We also incurred $69,998 in costs, which was paid in
cash.
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6.
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On
September 5, 2008, our wholly owned subsidiary RCI Entertainment (Las
Vegas), Inc. (the “Purchaser”) completed the acquisition of certain assets
(the “Purchased Assets”) of DI Food & Beverage of Las Vegas, LLC, a
Nevada limited liability company (the “Seller”) pursuant to a Third
Amended Asset Purchase Agreement (the “Third Amendment”) between
Purchaser, Rick’s Cabaret International, Inc. (“Rick’s”), Seller, and
Harold Danzig (“Danzig”), Frank Lovaas (“Lovaas”) and Dennis DeGori
(“DeGori”) who are all members of Seller. The Seller owned and operated an
adult entertainment cabaret previously known as “Scores” (the “Club”),
located at 3355 Procyon Street, Las Vegas, Nevada 89102 (the “Real
Property”).
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At
Closing, Purchaser paid Seller an aggregate amount as follows (the “Purchase
Price”):
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(i)
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$12,000,000
payable by wire transfer;
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(ii)
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$3,000,000
pursuant to a promissory note (“the Rick’s Promissory Note”), executed by
and obligating Rick’s, bearing interest at eight percent (8%) per annum
with a five (5) year amortization, with monthly payments of principal and
interest, with the initial monthly payment due in April 2009 with a
balloon payment of all then outstanding principal and interest due upon
the expiration of two (2) years from the execution of the Rick’s
Promissory Note; and
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(iii)
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200,000
shares of restricted common stock, par value $0.01 of Rick’s (the “Rick’s
Shares”) issued to the Seller.
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As part
of the transaction and as amended in April 2009, we entered into a
Lock-Up/Leak-Out Agreement with the Seller pursuant to which, on or after seven
(7) months after the closing date, the Seller shall have the right, but not the
obligation, to have Rick’s purchase from Seller a total of 150,000 of the Rick’s
Shares (“Rick’s Put Share”) in an amount and at a rate of not more than the
following number of the Rick’s Put Shares per month (the “Monthly Shares”)
calculated at a price per share equal to $20.00 per share (“Value of the Rick’s
Shares”):
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o
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from
April 5, 2009 until May 4, 2009, up to a total of 15,000
shares;
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o
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from
May 5, 2009 until November 5, 2009 at a rate of 3,000 shares per
month;
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o
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from
November 5, 2009 until May 4, 2010 at a rate of 4,000 shares per
month;
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o
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from
May 5, 2010 until November 4, 2010 at a rate of 5,000 shares per month;
and
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o
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from
November 5, 2010 until October 4, 2011 at a rate of 6,000 shares per
month.
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At our
election during any given month, we may either buy the Monthly Shares or, if we
elect not to buy the Monthly Shares from the Seller, then the Seller shall sell
the Monthly Shares in the open market. Any deficiency between the amount which
the Seller receives from the sale of the Monthly Shares and the Value of the
Rick’s Shares shall be paid by us within three (3) business days of the date of
sale of the Monthly Shares during that particular month. Our obligation to
purchase the Monthly Shares from the Seller shall terminate and cease at such
time as the Seller has received a total of $3,000,000 from the sale of the
Rick’s Shares and any deficiency. Under the terms of the Lock-Up/Leak-Out
Agreement, Seller may not sell more than 25,000 Rick’s Shares per 30-day period,
regardless of whether the Seller “Puts” the Rick’s Put Shares to Rick’s or sells
them in the open market or otherwise.
Upon
closing of the transaction, we entered a two-year Non-Compete Agreement with
DeGori (the “DeGori Non-Compete Agreement”) pursuant to which DeGori agreed not
to compete with the Club by operating an establishment serving liquor and
providing live female nude or semi-nude adult entertainment in Clark County,
Nevada or in a radius of 25 miles of Clark County, Nevada; provided, however,
that the Non-Competition Agreement specifically excluded the Penthouse Club and
the Bada Bing Club located in Clark County, Nevada. We agreed to pay DeGori cash
consideration of $66,667 for entering into the Non-Competition Agreement.
Additionally, at Closing, we also entered into a 12-month Consulting Agreement
with DeGori (the “Consulting Agreement”) for a total aggregate of $133,333 in
consulting fees payable in eighteen (18) equal monthly payments of $7,407.38 per
month with the first payment due October 15, 2008.
Upon
closing of the transaction, we entered a one-year Non-Compete Agreement with
Lovaas (the “Lovaas Non-Compete Agreement”) pursuant to which Lovaas agreed not
to compete with the Club by operating an establishment serving liquor and
providing live female nude or semi-nude adult entertainment in Clark County,
Nevada, or any of its surrounding counties; provided, however, that this
Non-Competition Agreement shall specifically exclude the Penthouse Club and the
Bada Bing Club located in Clark County, Nevada.
2009
Acquisition
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7.
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On
September 30, 2009, the Company’s subsidiary, RCI Entertainment (North
FW), Inc. (the “Purchaser”), purchased 100% of the outstanding common
shares of Cabaret North, Inc., a Texas corporation (“CNI”). CNI
owns and operates an adult entertainment cabaret known as “Cabaret North”
(the “Club”), located at 5316 Superior Parkway, Fort Worth, Texas
76106. The Company paid the Sellers total aggregate
consideration of $2,300,000 (the “Purchase Price”). The
Purchase Price was payable as
follows:
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(i)
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$140,000
directly to CNI to be used for the payment of outstanding
liabilities;
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(ii)
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$2,000,000
to the Sellers; and
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(iii)
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$160,000
to be held in an escrow account to pay any liabilities or obligations of
CNI which were incurred but unpaid as of Closing and to be held in
connection with the outcome of certain pending
litigation.
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Also, at
closing, each of the sellers entered into a five year Non-Competition Agreement,
and CNI obtained a consent from its landlord to the sale of the Shares of CNI by
the sellers to the purchaser and entered into an addendum to the lease agreement
by and between the CNI and the landlord of the premises where the Club is
located.
RECENT
MEDIA ACQUISITIONS
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8.
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On
April 15, 2008, our wholly owned subsidiary, RCI Entertainment (Media
Holdings), Inc., a Texas corporation ("RCI Media"), acquired 100% of the
issued and outstanding common stock (the "ED Stock") of ED Publications,
Inc., a Texas corporation ("ED"), 100% of the issued and outstanding
common stock (the "TEEZE Stock") of TEEZE International, Inc., a Delaware
corporation ("TEEZE") and 100% of the issued and outstanding membership
interest (the "Membership Interest") of Adult Store Buyers Magazine, LLC,
a Georgia limited liability
company.
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ED Publications,
Inc.
Under the
terms of a Purchase Agreement between Don Waitt ("Waitt"), RCI Media and Rick's
Cabaret International, Inc. ("Rick's") dated April 15, 2008 (the "ED Purchase
Agreement"), we agreed to pay Waitt the following consideration for the purchase
of the ED Stock:
(i)
$300,000 cash at closing;
(ii)
$200,000 cash payable in 6 months; and
(iii) The
issuance of 8,696 shares of restricted common stock valued at $23.00 per share
(the "Closing Shares").
(See the
explanation below of the subsequent renegotiation of these terms).
Additionally,
during the three (3) year period following the Closing Date (the "Earn Out
Period"), Waitt shall be entitled to earn additional consideration (the
"Additional Consideration") of up to $2,000,000 (the "Maximum Amount")
consisting of $500,000 cash (the “Cash”) and 65,217 shares of restricted common
stock valued at $23.00 per share (the "Earn Out Shares"), based upon the
earnings before income tax, depreciation and amortization ("EBITDA") of RCI
Media. RCI Media will pay the Maximum Amount of the Additional Consideration to
the Seller if RCI Media's EBITDA during the three (3) year period following the
Closing Date totals an aggregate of $2,400,000. At the end of each twelve (12)
month period after the Closing Date, RCI Media shall determine its EBITDA and
shall pay to Waitt any such portion of the Additional Consideration as has been
earned. The Closing Shares and Earn Out Shares are collectively referred to as
the "Rick's Shares".
At
Closing, Waitt entered into a Lock-Up/Leak-Out Agreement with us pursuant to
which on or after one year after the closing date with respect to the Closing
Shares, or on or after seven (7) months from the date of issuance with respect
to the Earn Out Shares, if any, Waitt shall have the right, but not the
obligation to have with respect to the Earn Out Shares, if any, Waitt shall have
the right, but not the obligation to have Rick's purchase from Waitt 5,000
Rick's Shares per month (the "Monthly Shares"), calculated at a price per share
equal to $23.00 per share ("Value of the Rick's Shares") until Waitt has
received an aggregate of $1,700,000 (i) from the sale of the Rick's Shares sold
in the open market or in a private transaction or otherwise, and (ii) the
payment of any deficiency (as defined in the ED Purchase Agreement) by Rick's.
At our election during any given month, we may either buy the Monthly Shares or,
if we elect not to buy the Monthly Shares from Waitt, then Waitt shall sell the
Monthly Shares in the open market. Any deficiency between the amount which Waitt
receives from the sale of the Monthly Shares and the Value of the Rick's Shares
shall be paid by us within three (3) business days of the date of sale of the
Monthly Shares during that particular month. Our obligation to
purchase the Monthly Shares from Waitt shall terminate and cease at such time as
Waitt has received an aggregate total of $1,700,000 from the sale of the Rick's
Shares and any deficiency (as defined in the ED Purchase
Agreement).
In April
2009, we renegotiated the terms of its purchase agreements with the former
owners of ED Publications, Teeze and Adult Store Buyer (“ASB”) publications. The
new agreement with the former owner of ED Publications provides for the
execution of a $200,000 promissory note payable over two years with interest at
4% per annum in lieu of the issuance of 8,696 shares. We simultaneously
purchased 6,522 shares that had been issued in connection with the Teeze
transaction by means of a $150,000 promissory note payable over two years with
interest at 4% per annum.
At
Closing, Waitt also entered a three (3) year Employment Agreement with RCI Media
(the "Employment Agreement") pursuant to which he will serve as President. The
Employment Agreement extends through April 15, 2011, and provides for an annual
base salary of $250,000. Pursuant to the Employment Agreement, Mr. Waitt is also
eligible to participate in all benefit plans maintained by our salaried
employees. Under the terms of the Employment Agreement, Mr. Waitt is bound to a
confidentiality provision and cannot compete with us upon the expiration of the
Employment Agreement.
TEEZE/ADULT STORE
BUYER
Under the
terms of a Purchase Agreement between John Cornetta ("Cornetta"), Waitt, RCI
Media and Rick's dated April 15, 2008 (the "TEEZE/ASB Purchase Agreement"), we
agreed to pay the following consideration to Cornetta and Waitt for the purchase
of the TEEZE Stock and the Membership Interest:
(i) an
aggregate of $200,000 cash at closing; and
(ii) the
issuance of 6,522 shares of restricted common stock to each of Messrs. Waitt and
Cornetta, for an aggregate of 13,044 shares of restricted common stock to be
valued at $23.00 per share (the "Rick's TEEZE Shares").
Pursuant
to the TEEZE/ASB Purchase Agreement, on or after one year after the closing
date, each of Messrs. Waitt and Cornetta shall have the right, but not the
obligation to have Rick's purchase the Rick's TEEZE Shares calculated at a price
per share equal to $23.00 per share ("Value of the Rick's TEEZE Shares") until
Messrs. Waitt and Cornetta have each received $150,000 (i) from the sale of the
Rick's TEEZE Shares sold by them, regardless of whether sold to Rick's, sold in
the open market or in a private transaction or otherwise, and (ii) the payment
of any deficiency (as defined in the TEEZE/ASB Purchase Agreement) by Rick's. At
our election during any given month, we may either buy the Rick's TEEZE Shares
or, if we elect not to buy the Rick's TEEZE Shares, then Cornetta and/or Waitt
shall sell the Rick's TEEZE Shares in the open market. Any deficiency between
the amount which Cornetta or Waitt receives from the sale of the Rick's TEEZE
Shares and the Value of the Rick's TEEZE Shares shall be paid by us within three
(3) business days of the date of sale of the Rick's TEEZE Shares during that
particular month. Our obligation to purchase the Rick's TEEZE Shares
shall terminate and cease at such time as Waitt and Cornetta have each received
$150,000 from the sale of the Rick's TEEZE Shares and any
deficiency.
At
Closing, Cornetta entered a five year Non-Competition Agreement with us pursuant
to which he agreed not to compete with us either directly or indirectly with
TEEZE, ASB, RCI Media, Rick's or any of their affiliates by publishing any
sexually oriented industry trade print publications, with the exception of a
publication known as "Xcitement" which is currently owned and operated by
Cornetta.
BUSINESS
ACTIVITIES--INTERNET ADULT ENTERTAINMENT WEB SITES
In 1999,
we began adult Internet website operations. Our xxxPassword.com website features
adult content licensed through Voice Media, Inc. We added CouplesTouch.com in
2002 as a dating site catering to those in the swinging lifestyle. In 2005 we
purchased CouplesClick.net, a competing site of our CouplesTouch.com site, in
order to broaden our membership throughout the United States. As part of this
transaction, we organized RCI Dating Services, Inc., which operates as an
addition to our internet operations, to acquire CouplesClick.net from
ClickMatch, LLC. We transferred our ownership in CouplesTouch.com to RCI Dating
and, as a result of the transaction, we obtained an 85% interest in RCI Dating,
with the remaining 15% owned by ClickMatch.
Our
Internet traffic is generated through the purchase of traffic from third-party
adult sites or Internet domain owners and the purchase of banner advertisements
or "key word" searches from Internet search engines. In addition, the bulk of
our traffic now comes from search engines on which we don’t pay for preferential
listings. There are numerous adult entertainment sites on the Internet that
compete with our sites.
BUSINESS
ACTIVITIES--INTERNET ADULT AUCTION WEB SITES
Our adult
auction site features erotica and other adult materials that are purchased in a
bid-ask method. We charge the seller a fee for each successful auction. Where
previously we operated six individual auctions sites, now we have combined these
into one main site, NaughtyBids.com, to maximize our brand name recognition of
this site. The site contains new and used adult oriented consumer initiated
auctions for items such as adult videos, apparel, photo sets and adult
paraphernalia. NaughtyBids.com has approximately 10,000 items for sale at any
given time. NaughtyBids.com offers third party webmasters an opportunity to
create residual income from web surfers through the NaughtyBids Affiliate
Program, which pays third party webmasters a percentage of every closing auction
sale in which the buyer originally came from the affiliate webmaster's site.
There are numerous auction sites on the Internet that offer adult products and
erotica.
BUSINESS
ACTIVITIES – MEDIA GROUP
Our Media
Group is the leading trade magazine serving the multi-billion dollar adult
nightclubs industry. It also owns two industry trade shows, two other industry
trade publications and more than 25 industry websites. Founded
in 1991, Exotic Dancer is the only national business magazine serving the 3,800
adult nightclubs in North America, which have annual revenues in excess of $2
billion, according to AVN Media Network. ED Publications currently publishes the
Annual VIP Guide of adult nightclubs, touring entertainers and industry vendors,
and "Club Bulletin", a bimonthly news
magazine for the owners and operators of adult nightclubs. ED Publications also
produces the annual Gentlemen's Club Owners
Expo, the only national convention for the adult nightclub and feature
entertainment industries, and offers the exclusive ED VIP Club Card honored at more than 850 adult
nightclubs.
COMPETITION
The adult
topless club entertainment business is highly competitive with respect to price,
service and location. All of our nightclubs compete with a number of locally
owned adult clubs, some of whose names may have name recognition that equals
that of ours. While there may be restrictions on the location of a so-called
"sexually oriented business", there are low barriers to entry into the adult
cabaret entertainment market. The names "Rick's" and "Rick's Cabaret",
“Tootsie’s Cabaret”, "XTC Cabaret" and “Club Onyx” are proprietary. We believe
that the combination of our existing brand name recognition and the distinctive
entertainment environment that we have created will allow us to compete
effectively in the industry and within the cities where we operate. The sexually
oriented business industry is highly competitive with respect to price, service
and location, as well as the professionalism of the entertainers. Although we
believe that we are well positioned to compete successfully, there can be no
assurance that we will be able to maintain our high level of name recognition
and prestige within the marketplace.
GOVERNMENTAL
REGULATIONS
We are
subject to various federal, state and local laws affecting our business
activities. In particular, in Texas the authority to issue a permit to sell
alcoholic beverages is governed by the Texas Alcoholic Beverage Commission
(“TABC”), which has the authority, in its discretion, to issue the appropriate
permits. We presently hold a Mixed Beverage Permit and a Late Hour Permit.
Previously subject to annual renewal, the TABC recently changed to a renewal
every two years, provided we have complied with all rules and regulations
governing the permits. Renewal of a permit is subject to protest, which may be
made by a law enforcement agency or by the public. In the event of a protest,
the TABC may hold a hearing at which time the views of interested parties are
expressed. The TABC has the authority after such hearing not to issue a renewal
of the protested alcoholic beverage permit. Rick's has never been the subject of
a protest hearing against the renewal of Permits. Minnesota, North Carolina,
Nevada, Pennsylvania, Florida, and New York have similar laws that may limit the
availability of a permit to sell alcoholic beverages or that may provide for
suspension or revocation of a permit to sell alcoholic beverages in certain
circumstances. It is our policy, prior to expanding into any new market, to take
steps to ensure compliance with all licensing and regulatory requirements for
the sale of alcoholic beverages as well as the sale of food.
In
addition to various regulatory requirements affecting the sale of alcoholic
beverages, in many cities where we operate, the location of a topless cabaret is
subject to restriction by city ordinance. For example, topless nightclubs in
Houston, Texas are subject to "The Sexually Oriented Business Ordinance", which
contains prohibitions on the location of an adult cabaret (see “Legal
Proceedings" herein). The prohibitions deal generally with distance from
schools, churches, and other sexually oriented businesses and contain
restrictions based on the percentage of residences within the immediate vicinity
of the sexually oriented business. The granting of a Sexually Oriented Business
Permit is not subject to discretion; the Business Permit must be granted if the
proposed operation satisfies the requirements of the Ordinance. In all states
where we operate, management believes we are in compliance with applicable city,
county, state or other local laws governing the sale of alcohol and sexually
oriented businesses.
TRADEMARKS
Our
rights to the tradenames "Rick's", "Rick's Cabaret", “Tootsie’s Cabaret”, “Club
Onyx” and “XTC Cabaret” are established under common law, based upon our
substantial and continuous use of these tradenames in interstate commerce since
at least as early as 1987. We have registered our service mark, “RICK'S AND
STARS DESIGN", with the United States Patent and Trademark Office. We have also
obtained service mark registrations from the Patent and Trademark Office for the
"RICK'S CABARET", “CLUB ONYX” and “XTC CABARET” service marks. We also own the
rights to numerous tradenames associated with our media division. There can be
no assurance that the steps we have taken to protect our service marks will be
adequate to deter misappropriation.
EMPLOYEES
AND INDEPENDENT CONTRACTORS
As of
September 30, 2009, we had approximately 1,000 employees, of which approximately
100 are in management positions, including corporate and administrative and
Internet operations and approximately 900 of which are engaged in entertainment,
food and beverage service, including bartenders, waitresses, and entertainers.
None of our employees are represented by a union. We consider our employee
relations to be good. Additionally, as of September 30, 2009, we had independent
contractor relationships with approximately 2,500 entertainers, who are
self-employed and conduct business at our locations on a non-exclusive basis as
independent contractors. Our entertainers in Minneapolis, Minnesota act as
commissioned employees. We believe that the adult entertainment industry
standard of treating entertainers as independent contractors provides us with
safe harbor protection to preclude payroll tax assessment for prior years. We
have prepared plans that we believe will protect our profitability in the event
that the sexually oriented business industry is required in all states to
convert entertainers who are now independent contractors into
employees.
SHARE
REPURCHASES
On
September 29, 2008, our Board of Directors authorized us to repurchase up to
$5,000,000 worth of our common stock. During the fiscal year ending September
30, 2008, no shares were purchased under this program. During the fiscal year
ended September 30, 2009, we purchased 303,959 shares of common stock in the
open market at prices ranging from $2.64 to $8.60. Under the Board's
authority, we have $4,171,425 remaining to purchase additional
shares.
An
investment in our Common Stock involves a high degree of risk. You should
carefully consider the risks described below before deciding to purchase shares
of our Common Stock. If any of the events, contingencies, circumstances or
conditions described in the risks below actually occurs, our business, financial
condition or results of operations could be seriously harmed. The trading price
of our Common Stock could, in turn, decline and you could lose all or part of
your investment.
Our Business Operations are
Subject to Regulatory Uncertainties Which May Affect Our Ability to Continue
Operations of Existing Nightclubs, Acquire Additional Nightclubs or Be
Profitable
Adult
entertainment nightclubs are subject to local, state and federal regulations.
Our business is regulated by local zoning, local and state liquor licensing,
local ordinances and state and federal time place and manner restrictions. The
adult entertainment provided by our nightclubs has elements of speech and
expression and, therefore, enjoys some protection under the First Amendment to
the United States Constitution. However, the protection is limited to the
expression, and not the conduct of an entertainer. While our nightclubs are
generally well established in their respective markets, there can be no
assurance that local, state and/or federal licensing and other regulations will
permit our nightclubs to remain in operation or profitable in the
future.
As
discussed in the section entitled “Legal Proceedings” herein, we are subject to
litigation regarding our Sexually Oriented Business licenses in Houston, Texas.
In 1997, the City of Houston passed a comprehensive new ordinance regulating the
location of and the conduct within sexually oriented businesses (the
“Ordinance”), which became the subject of litigation which affects our Sexually
Oriented Business licenses in Houston, Texas. After extensive litigation, the
Trial Court in Houston rendered its judgment in favor of the City of Houston in
January, 2007. After a lengthy series of court battles, the
Fifth Circuit Court of Appeals ruled in favor of the City of Houston in
September 2007. Despite efforts for further appeal, the United States
Supreme Court refused to hear the matter.
Additionally,
on behalf of three of our club locations in Houston, we filed state court
lawsuits seeking judicial review of the results of the amortization process
contained within the Ordinance. At the conclusion of the trial for
this matter, the Court ruled that the amortization awards were proper and
requested that findings of fact and conclusions of law be submitted to the Court
as well as a judgment in the case. A stay sought by the clubs during the appeal
was denied. As a result, we, as well as every other similarly
situated sexually oriented business located within the incorporated area of
Houston, Texas, has either ceased providing nude or semi-nude entertainment or
developed alternate methods of operating. We have already taken steps
to clothe our entertainers in a manner to eliminate the need for licenses and
not to be subject to the Ordinance. The Company’s four Houston clubs
had revenues of approximately $4.1 million and a loss before income taxes of
approximately $10,000 for the twelve months ended September 30, 2009. It is
unknown at this time whether this will have a material effect on the Company’s
operations.
Beginning
January 1, 2008, our Texas clubs became subject to a new state law requiring
each club to collect and pay a $5 surcharge for every club visitor. A
lawsuit was filed by the Texas Entertainment Association (“TEA”), an
organization to which we are a member, alleging the fee amounts to be an
unconstitutional tax. On March 28, 2008, a State District Court Judge
in Travis County, Texas ruled that the new state law violates the First
Amendment to the United States Constitution and is therefore
invalid. The judge’s order enjoined the State from collecting or
assessing the tax. The State appealed the Court’s
ruling. In Texas, when cities or the State give notice of appeal, it
supersedes and suspends the judgment, including the
injunction. Therefore, the judgment of the District Court cannot be
enforced until the appeals are completed. Given the suspension of the
judgment, the State has opted to collect the tax pending the outcome of its
appeal. In June 2009, the Texas Third Court of Appeals upheld the
judgment that the surcharge is unconstitutional. The State has
appealed the judgment to the Texas Supreme Court. We have paid the
tax for the first five calendar quarters under protest and expensed the tax in
the accompanying financial statements, except for two locations in Dallas where
the taxes have not been paid, but we are accruing and expensing the
liability. For the quarters ended June 30, 2009 and September 30,
2009, as a result of the Third Court’s decision, the Company accrued the fee,
but did not pay the State. As of September 30, 2009, we have
approximately $1.16 million in accrued liabilities for this tax. We
have paid more than $2 million to the State of Texas since the inception of the
tax. The Company’s Texas clubs have filed a separate lawsuit against
the State to demand repayment of the taxes. If the State’s appeal
ultimately fails, the Company’s current amount paid under protest would be
repaid or applied to future admission tax and other Texas state tax
liabilities.
Our Business has been, and
may Continue to be, Adversely Affected by Conditions in the U.S. Financial
Markets and Economic Conditions Generally
Our
nightclubs are often acquired with a purchase price based on historical EBITDA.
This results in certain nightclubs carrying a substantial amount of intangible
value, mostly allocated to licenses and goodwill. Generally accepted accounting
principles require an annual impairment review of these indefinite lived assets.
If difficult market and economic conditions continue over the next year and/or
we experience a decrease in revenue at one or more nightclubs, we could incur a
decline in fair value of one or more of our nightclubs. This could result in
future impairment charges of up to the total value of the indefinite lived
intangible assets.
We May Need Additional
Financing or Our Business Expansion Plans May Be Significantly
Limited
If cash
generated from our operations is insufficient to satisfy our working capital and
capital expenditure requirements, we will need to raise additional funds through
the public or private sale of our equity or debt securities. The timing and
amount of our capital requirements will depend on a number of factors, including
cash flow and cash requirements for nightclub acquisitions. If additional funds
are raised through the issuance of equity or convertible debt securities, the
percentage ownership of our then-existing shareholders will be reduced. We
cannot assure you that additional financing will be available on terms favorable
to us, if at all. Any future equity financing, if available, may result in
dilution to existing shareholders, and debt financing, if available, may include
restrictive covenants. Any failure by us to procure timely additional financing
will have material adverse consequences on our business operations.
There is Substantial
Competition in the Nightclub Entertainment Industry, Which May Affect Our
Ability to Operate Profitably or Acquire Additional Clubs
Our
nightclubs face competition. Some of these competitors may have greater
financial and management resources than we do. Additionally, the industry is
subject to unpredictable competitive trends and competition for general
entertainment dollars. There can be no assurance that we will be able to remain
profitable in this competitive industry.
Risk of Adult Nightclubs
Operations
Historically,
the adult entertainment, restaurant and bar industry has been an extremely
volatile industry. The industry tends to be extremely sensitive to the general
local economy, in that when economic conditions are prosperous, entertainment
industry revenues increase, and when economic conditions are unfavorable,
entertainment industry revenues decline. Coupled with this economic sensitivity
are the trendy personal preferences of the customers who frequent adult
cabarets. We continuously monitor trends in our customers' tastes and
entertainment preferences so that, if necessary, we can make appropriate changes
which will allow us to remain one of the premiere adult cabarets. However, any
significant decline in general corporate conditions or uncertainties regarding
future economic prospects that affect consumer spending could have a material
adverse effect on our business. In addition, we have historically catered to a
clientele base from the upper end of the market. Accordingly, further reductions
in the amounts of entertainment expenses allowed as deductions from income under
the Internal Revenue Code of 1954, as amended, could adversely affect sales to
customers dependent upon corporate expense accounts.
Permits Relating to the Sale
of Alcohol
We derive
a significant portion of our revenues from the sale of alcoholic beverages.
States in which we operate may have laws which may limit the availability of a
permit to sell alcoholic beverages or which may provide for suspension or
revocation of a permit to sell alcoholic beverages in certain circumstances. The
temporary or permanent suspension or revocations of any such permits would have
a material adverse effect on the revenues, financial condition and results of
operations of the Company. In all states where we operate, management believes
we are in compliance with applicable city, county, state or other local laws
governing the sale of alcohol.
Activities or Conduct at our
Nightclubs may Cause us to Lose Necessary Business Licenses, Expose us to
Liability, or Result in Adverse Publicity, Which may Increase our Costs and
Divert Management’s Attention from our Business
We are
subject to risks associated with activities or conduct at our nightclubs that
are illegal or violate the terms of necessary business licenses. Our nightclubs
operate under licenses for sexually oriented businesses and some protection
under the First Amendment to the U.S. Constitution. While we believe that the
activities at our nightclubs comply with the terms of such licenses, and that
the element of our business that constitutes an expression of free speech under
the First Amendment to the U.S. Constitution is protected, activities and
conduct at our nightclubs may be found to violate the terms of such licenses or
be unprotected under the U.S. Constitution. This protection is limited to the
expression and not the conduct of an entertainer. An issuing authority may
suspend or terminate a license for a nightclub found to have violated the
license terms. Illegal activities or conduct at any of our nightclubs may result
in negative publicity or litigation. Such consequences may increase our cost of
doing business, divert management’s attention from our business and make an
investment in our securities unattractive to current and potential investors,
thereby lowering our profitability and our stock price.
We have
developed comprehensive policies aimed at ensuring that the operation of each
nightclub is conducted in conformance with local, state and federal laws. We
have a “no tolerance” policy on illegal drug use in or around the facilities. We
continually monitor the actions of entertainers, waitresses and customers to
ensure that proper behavior standards are met. However, such policies, no matter
how well designed and enforced, can provide only reasonable, not absolute,
assurance that the policies’ objectives are being achieved. Because of the
inherent limitations in all control systems and policies, there can be no
assurance that our policies will prevent deliberate acts by persons attempting
to violate or circumvent them. Notwithstanding the foregoing limitations,
management believes that our policies are reasonably effective in achieving
their purposes.
Our Acquisitions may Result
in Disruptions in our Business and Diversion of Management’s
Attention
We have
made and may continue to make acquisitions of complementary nightclubs,
restaurants or related operations. Any acquisitions will require the integration
of the operations, products and personnel of the acquired businesses and the
training and motivation of these individuals. Such acquisitions may disrupt our
operations and divert management’s attention from day-to-day operations, which
could impair our relationships with current employees, customers and partners.
We may also incur debt or issue equity securities to pay for any future
acquisitions. These issuances could be substantially dilutive to our
stockholders. In addition, our profitability may suffer because of
acquisition-related costs or amortization, or impairment costs for acquired
goodwill and other intangible assets. If management is unable to fully integrate
acquired business, products or persons with existing operations, we may not
receive the benefits of the acquisitions, and our revenues and stock trading
price may decrease.
We Must Continue to Meet
NASDAQ Global Market Continued Listing Requirements or We Risk
Delisting
Our
securities are currently listed for trading on the NASDAQ Global Market. We must
continue to satisfy NASDAQ’s continued listing requirements or risk delisting
which would have an adverse effect on our business. If our securities are ever
de-listed from NASDAQ, it may trade on the over-the-counter market, which may be
a less liquid market. In such case, our shareholders’ ability to trade or obtain
quotations of the market value of shares of our common stock would be severely
limited because of lower trading volumes and transaction delays. These factors
could contribute to lower prices and larger spreads in the bid and ask prices
for our securities. There is no assurance that we will be able to maintain
compliance with the NASDAQ continued listing requirements.
In The Future, We Will Incur
Significant Increased Costs as a Result of Operating as a Public Company, and
Our Management Will Be Required to Devote Substantial Time to New Compliance
Initiatives
In the
future, we will incur significant legal, accounting and other expenses. The
Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), as well as new rules
subsequently implemented by the SEC, have imposed various new requirements on
public companies, including requiring changes in corporate governance practices.
Our management and other personnel will need to devote a substantial amount of
time to these new compliance initiatives. Moreover, these rules and regulations
will increase our legal and financial compliance costs and will make some
activities more time-consuming and costly. For example, we expect these new
rules and regulations to make it more difficult and more expensive for us to
obtain director and officer liability insurance, and we may be required to incur
substantial costs to maintain the same or similar coverage.
In
addition, the Sarbanes-Oxley Act requires, among other things, that we maintain
effective internal controls for financial reporting and disclosure controls and
procedures. In particular, commencing in fiscal 2008, we have been required to
perform system and process evaluation and testing on the effectiveness of our
internal controls over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act. Subsequently in fiscal 2010, our independent registered
public accounting firm will report on the effectiveness of our internal controls
over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act.
Our testing, or the subsequent testing by our independent registered public
accounting firm, may reveal deficiencies in our internal controls over financial
reporting that are deemed to be material weaknesses. Our compliance with Section
404 will require that we incur substantial accounting expense and expend
significant management efforts. We currently do not have an internal audit
group, and we will need to hire additional accounting and financial staff with
appropriate public company experience and technical accounting knowledge.
Moreover, if we are not able to comply with the requirements of Section 404 in a
timely manner, or if we or our independent registered public accounting firm
identifies deficiencies in our internal controls over financial reporting that
are deemed to be material weaknesses, the market price of our stock could
decline, and we could be subject to sanctions or investigations by the SEC or
other regulatory authorities, which would require additional financial and
management resources.
Uninsured
Risks
We
maintain insurance in amounts we consider adequate for personal injury and
property damage to which the business of the Company may be subject. However,
there can be no assurance that uninsured liabilities in excess of the coverage
provided by insurance, which liabilities may be imposed pursuant to the Texas
"Dram Shop" statute or similar "Dram Shop" statutes or common law theories of
liability in other states where we operate or expand. For example, the Texas
"Dram Shop" statute provides a person injured by an intoxicated person the right
to recover damages from an establishment that wrongfully served alcoholic
beverages to such person if it was apparent to the server that the individual
being sold, served or provided with an alcoholic beverage was obviously
intoxicated to the extent that he presented a clear danger to himself and
others. An employer is not liable for the actions of its employee who
over-serves if (i) the employer requires its employees to attend a seller
training program approved by the TABC; (ii) the employee has actually attended
such a training program; and (iii) the employer has not directly or indirectly
encouraged the employee to violate the law. It is our policy to require that all
servers of alcohol working at our clubs in Texas be certified as servers under a
training program approved by the TABC, which certification gives statutory
immunity to the sellers of alcohol from damage caused to third parties by those
who have consumed alcoholic beverages at such establishment pursuant to the
Texas Alcoholic Beverage Code. There can be no assurance, however, that
uninsured liabilities may not arise in the markets in which we operate which
could have a material adverse effect on the Company.
Limitations on Protection of
Service Marks
Our
rights to the tradenames "Rick's", "Rick's Cabaret", “Tootsie’s Cabaret”, “Club
Onyx”, and “XTC Cabaret” are established under the common law based upon our
substantial and continuous use of these tradenames in interstate commerce since
at least as early as 1987. "RICK'S AND STARS DESIGN" logo, "RICK'S CABARET",
“CLUB ONYX” and “XTC CABARET” are registered through service mark registrations
issued by the United States Patent and Trademark Office. We also own
the rights to numerous tradenames associated with our media division. There can
be no assurance that these steps taken by the Company to protect its Service
Marks will be adequate to deter misappropriation of its protected intellectual
property rights. Litigation may be necessary in the future to protect our rights
from infringement, which may be costly and time consuming. The loss of the
intellectual property rights owned or claimed by us could have a material
adverse affect on our business.
Anti-takeover Effects of
Issuance of Preferred Stock
The Board
of Directors has the authority to issue up to 1,000,000 shares of Preferred
Stock in one or more series, to fix the number of shares constituting any such
series, and to fix the rights and preferences of the shares constituting any
series, without any further vote or action by the stockholders. The issuance of
Preferred Stock by the Board of Directors could adversely affect the rights of
the holders of Common Stock. For example, such issuance could result in a class
of securities outstanding that would have preferences with respect to voting
rights and dividends and in liquidation over the Common Stock, and could (upon
conversion or otherwise) enjoy all of the rights appurtenant to Common Stock.
The Board's authority to issue Preferred Stock could discourage potential
takeover attempts and could delay or prevent a change in control of the Company
through merger, tender offer, proxy contest or otherwise by making such attempts
more difficult to achieve or more costly. There are no issued and outstanding
shares of Preferred Stock; there are no agreements or understandings for the
issuance of Preferred Stock, and the Board of Directors has no present intention
to issue Preferred Stock.
We Do Not Anticipate Paying
Dividends on Common Shares in the Foreseeable Future
Since our
inception we have not paid any dividends on our common stock and we do not
anticipate paying any dividends in the foreseeable future. We expect that future
earnings, if any, will be used for working capital and to finance
growth.
Future Sales of Our Common
Stock May Depress Our Stock Price
The
market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market, or as a result of
the perception that these sales could occur. In addition, these factors could
make it more difficult for us to raise funds through future offerings of common
stock.
Our Stock Price Has Been
Volatile and May Fluctuate in the Future
The
trading price of our securities may fluctuate significantly. This price may be
influenced by many factors, including:
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our
performance and prospects;
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the
depth and liquidity of the market for our
securities;
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sales
by selling shareholders of shares issued or issuable in connection with
certain convertible notes;
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investor
perception of us and the industry in which we
operate;
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changes
in earnings estimates or buy/sell recommendations by
analysts;
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general
financial and other market conditions;
and
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domestic
economic conditions.
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Public
stock markets have experienced, and may experience, extreme price and trading
volume volatility. These broad market fluctuations may adversely affect the
market price of our securities.
Our Management Controls a
Significant Percentage of Our Current Outstanding Common Stock and Their
Interests May Conflict With Those of Our Shareholders
As of
December 3, 2009, our Directors and executive officers and their respective
affiliates collectively and beneficially owned approximately 14.0% of our
outstanding common stock, including all warrants exercisable within 60 days.
This concentration of voting control gives our Directors and executive officers
and their respective affiliates substantial influence over any matters which
require a shareholder vote, including, without limitation, the election of
Directors, even if their interests may conflict with those of other
shareholders. It could also have the effect of delaying or preventing a change
in control of or otherwise discouraging a potential acquirer from attempting to
obtain control of us. This could have a material adverse effect on the market
price of our common stock or prevent our shareholders from realizing a premium
over the then prevailing market prices for their shares of common
stock.
We are Dependent on Key
Personnel
Our
future success is dependent, in a large part, on retaining the services of Mr.
Eric Langan, our President and Chief Executive Officer. Mr. Langan possesses a
unique and comprehensive knowledge of our industry. While Mr. Langan has no
present plans to leave or retire in the near future, his loss could have a
negative effect on our operating, marketing and financial performance if we are
unable to find an adequate replacement with similar knowledge and experience
within our industry. We maintain key-man life insurance with respect to Mr.
Langan. Although Mr. Langan is under an employment agreement (as described
herein), there can be no assurance that Mr. Langan will continue to be employed
by us. The loss of Mr. Langan could have a negative effect on our operating,
marketing, and financing performance.
Cumulative Voting is Not
Available to Stockholders
Cumulative
voting in the election of Directors is expressly denied in our Articles of
Incorporation. Accordingly, the holder or holders of a majority of the
outstanding shares of our common stock may elect all of our Directors.
Management’s large percentage ownership of our outstanding common stock helps
enable them to maintain their positions as such and thus control of our business
and affairs.
Our Directors and Officers
Have Limited Liability and Have Rights to Indemnification
Our
Articles of Incorporation and Bylaws provide, as permitted by governing Texas
law, that our Directors and officers shall not be personally liable to us or any
of our stockholders for monetary damages for breach of fiduciary duty as a
Director or officer, with certain exceptions. The Articles further provide that
we will indemnify our Directors and officers against expenses and liabilities
they incur to defend, settle, or satisfy any civil litigation or criminal action
brought against them on account of their being or having been its Directors or
officers unless, in such action, they are adjudged to have acted with gross
negligence or willful misconduct.
The
inclusion of these provisions in the Articles may have the effect of reducing
the likelihood of derivative litigation against Directors and officers, and may
discourage or deter stockholders or management from bringing a lawsuit against
Directors and officers for breach of their duty of care, even though such an
action, if successful, might otherwise have benefited us and our
stockholders.
The
Articles provide for the indemnification of our officers and Directors, and the
advancement to them of expenses in connection with any proceedings and claims,
to the fullest extent permitted by Texas law. The Articles include related
provisions meant to facilitate the indemnitee's receipt of such benefits. These
provisions cover, among other things: (i) specification of the method of
determining entitlement to indemnification and the selection of independent
counsel that will in some cases make such determination, (ii) specification of
certain time periods by which certain payments or determinations must be made
and actions must be taken, and (iii) the establishment of certain presumptions
in favor of an indemnitee.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, we have been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Other Risk Factors May
Adversely Affect Our Financial Performance
Other
risk factors that could cause our actual results to differ materially from those
indicated in the forward-looking statements by affecting, among many things,
pricing, consumer spending and consumer confidence, include, without limitation,
changes in economic conditions and financial and credit markets, credit
availability, increased fuel costs and availability for our employees, customers
and suppliers, health epidemics or pandemics or the prospects of these events
(such as reports on avian flu), consumer perceptions of food safety, changes in
consumer tastes and behaviors, governmental monetary policies, changes in
demographic trends, terrorist acts, energy shortages and rolling blackouts, and
weather (including, major hurricanes and regional snow storms) and other acts of
God.
Our
principal executive office is located at 10959 Cutten Road, Houston, Texas
77066, and consists of a 9,000 square feet office/warehouse building. We
purchased this property in December 2004 for $512,739, payable with $86,279 cash
at closing and $426,460 in a promissory note carrying 7% interest and a 15 year
term. The monthly payment is $3,834. As of September 30, 2009, the balance of
the mortgage was $335,738. The last mortgage payment is due in 2019. We believe
that our offices are adequate for our present needs and that suitable space will
be available to accommodate our future needs.
We own
the real property for four locations of Rick's Cabaret (in Houston, San Antonio,
Minneapolis and Fort Worth), three Club Onyx locations, one in Houston, one in
Dallas and one in Philadelphia and three locations of XTC (in Austin, Dallas and
San Antonio). In Houston, we own the property where we will open a club known as
“Club Q” in the first quarter of our 2010 fiscal year. We lease property for our
XTC South (Houston), XTC North (Houston), Rick’s Cabaret-New York and Las Vegas,
Club Onyx Charlotte, Rick’s Cabaret-Austin (currently closed and held for sale),
Cabaret North-Fort Worth and Tootsie’s Cabaret (Miami Gardens, Florida)
locations.
ADDITIONAL
PROPERTIES WE OWN:
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1.
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Club
Onyx, located on Bering Drive in Houston, has an aggregate 12,300 square
feet of space. In December 2004, we paid off the old mortgage and obtained
a new one with an initial balance of $1,270,000 and an interest rate of
10% per annum over a 10 year term. The money received from this new note
was used to finance the acquisition of the New York club. As of September
30, 2009, the balance of the mortgage was $1,151,272. During fiscal year
2009, we paid $12,256 in monthly principal and interest payments. The
monthly payment is calculated based on a 20 year amortization schedule.
The last mortgage payment is due in
2015.
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2.
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The
Rick's Cabaret, located on North Belt Drive in Houston, has 12,000 square
feet of space. In November 2004, we obtained a mortgage using this
property as collateral. The principal balance of the new mortgage was
$1,042,000, with an annual interest rate of 10% over a 10 year term. The
money received from this new note was used to finance the acquisition of
the New York club. As of September 30, 2009, the balance of the mortgage
was $942,403. The monthly payment of principal and interest is $10,056.
The monthly payment is calculated based on a 20 year amortization
schedule. The last mortgage payment is due in
2014.
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3.
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The
Rick's Cabaret located in Minneapolis has 15,400 square feet of space. The
balance, as of September 30, 2009, that we owe on the mortgage is
$1,000,000 and the interest rate is 9%. We pay $7,500 in monthly interest
payments. The last mortgage payment is due in
2013.
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4.
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The
property for our XTC Cabaret nightclub in Austin has 8,600 square feet of
space, which sits on 1.2 acres of land. In August 2005, we restructured
the mortgage by extending the term to 10 years. The balance of the this
mortgage as of September 30, 2009 is $179,219 with an interest rate of 11%
and monthly principal and interest payments of $3,445. We also have an
additional mortgage on the property which we obtained in November 2004.
The principal balance of the additional mortgage was $900,000, with an
annual interest rate of 11% over a 10 year term. In June and July 2005, we
obtained additional funds in the amount of $200,000, which we combined
with the $900,000 mortgage, and in August 2005 we restructured this
additional mortgage. The monthly principal and interest payment is
$15,034. As of September 30, 2009, the balance of the additional mortgage
was $782,062. The last payments for both mortgages are due in
2015.
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5.
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We
own the property for our XTC Cabaret nightclub in San Antonio, which has
7,800 square feet of space. In November 2004, we obtained a mortgage using
this property as collateral. The principal balance of the new mortgage was
$590,000, with an annual interest rate of 10% over a 10 year term. The
money received from this new note was used to finance the acquisition and
renovation of the New York club. As of September 30, 2009, the balance of
this mortgage was $533,606. The monthly principal and interest payment is
$5,694. The last mortgage payment is due in
2014.
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6.
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We
own an 8,000 square foot Houston property which has been leased for $8,500
per month through December 2012. In November 2004, this property, together
with property in Austin, was used as additional collateral to secure the
$900,000 mortgage referenced in paragraph 4
above.
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7.
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On
April 5, 2006, our wholly owned subsidiary, RCI Holdings, Inc. completed
the acquisition of real property located at 9009 Airport Blvd., Houston,
Texas where we previously operated Club Onyx South and Divas Latinas.
Pursuant to the terms of the agreement, we paid a total sales price of
$1,300,000, which consisted of $500,000 in cash and 160,000 shares of our
restricted common stock. This property is currently held for
sale.
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8.
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On
August 24, 2006, our subsidiary, RCI Holdings, Inc. acquired 100% of the
interest in the improved real property upon which our Rick’s-San Antonio
is located. The total purchase price for the business and real property
was $2,900,000. Under terms of the agreement, the Company paid the owners
of the club and property $600,000 in cash at the time of closing and
signed promissory notes for the remaining balance. As of September 30,
2009, the balance of the promissory notes was $874,715. This
note matures in 2011.
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9.
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On
April 23, 2007, RCI Holdings, Inc., our wholly owned subsidiary, acquired
the real property located at 7101 Calmont, Fort Worth, Texas for a total
purchase price of $2,500,000, which consisted of $100,000 in cash and
$2,400,000 payable in a six year promissory note to the sellers which will
accrue interest at the rate of 7.25% for the first two years, 8.25% for
years three and four and 9.25% thereafter. The promissory note is secured
by a Deed of Trust and Security Agreement. Further, RCI Holdings, Inc.
entered into an Assignment and Assumption of Lease Agreement with the
sellers to assume the lease agreement for the real property. We currently
operate this property as Rick’s Cabaret. As of September 30, 2009, the
balance of the promissory note was
$1,903,479.
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10.
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As
part of the acquisition of The End Zone in Philadelphia, Pennsylvania, we
acquired 51% of the issued and outstanding partnership interest of the
partnership that owns the real property at 2908 S. Columbus Blvd.,
Philadelphia, Pennsylvania. At closing, we paid a purchase price of
$3,500,000 in cash for the partnership
interests.
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11.
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As
part of the transaction to acquire Hotel Development, Ltd. which operated
the Executive Club in Dallas, RCI Holdings, Inc. acquired the related real
property located at 8550 N. Stemmons Freeway, Dallas, Texas from DPC
Holdings, LLC, a Texas limited liability company. As consideration for the
purchase of the real property, RCI Holdings, Inc. paid total consideration
of $5,599,721, which was paid (i) $4,250,000, payable $610,000 in cash and
$3,640,000 through the issuance of a five year promissory note and (ii)
the issuance of 57,918 shares of our restricted common stock to be valued
at $23.30 per share ($1,349,721). The promissory note bears interest at a
varying rate at the greater of (i) two percent (2%) above the Prime Rate
or (ii) seven and one-half percent (7.5%), and is guaranteed by us and
Eric Langan, our Chief Executive Officer, individually. As of September
30, 2009, the balance of the promissory note was
$3,526,096.
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12.
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As
part of the acquisition of the Platinum Club II in Dallas, we acquired the
real property located at 10557 Wire Way Place (at Northwest Highway),
Dallas, Texas from Wire Way, LLC, a Texas limited liability company.
Pursuant to a Real Estate Purchase and Sale Agreement dated May 10, 2008,
we paid total consideration of $6,000,000, which was paid $1,650,000 in
cash and $4,350,000 through the issuance of a five (5) year promissory
note. The promissory note bears interest at a varying rate at the greater
of (i) two percent (2%) above the Prime Rate or (ii) seven and one-half
percent (7.5%), which is guaranteed by us and by Eric Langan, our Chief
Executive Officer, individually. As of September 30, 2009, the balance of
the promissory note was $4,232,111.
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PROPERTIES
WE LEASE:
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1.
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We
lease the property in Houston, Texas, where our XTC North is located. The
lease term was for five years, beginning March 2004, and is currently on a
month-to-month lease. The monthly rent was $8,000 until August 31, 2006,
at which time the monthly base rent increased to
$9,000.
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2.
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We
lease the property in New York City, New York, where our Rick’s Cabaret
NYC is located. We assumed the existing lease, which will terminate in
April 2023. The monthly rent is currently $45,645. Under the term of the
existing lease, the base rent will increase by approximately 3% each
year.
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3.
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We
lease the property in Charlotte, North Carolina, where our Club Onyx
Charlotte is located. We executed an amended lease in February 2007, which
will terminate in February 2017. The monthly rent is $17,500 until
February 2010, at which time the monthly base rent will increase to
$18,500 until February 2013, at which time the rent will escalate to
$20,000 until February 2017.
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4.
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We
lease the property in South Houston, Texas, where our XTC South is
located. The lease term is for 79 months, beginning May 1, 2006, and
terminates in December 2022. The monthly rent is $3,000 until December
2012, then $3,500 until December 2014 then $4,000 until December 2019 and
$4,500 for the remaining three years of the
lease
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5.
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We
lease the property in Austin, Texas, where our Rick’s Cabaret Austin is
located. This club is currently closed and held for sale. The
lease term is for 10 years, beginning November 10, 2006, with monthly
payments of $29,000. This lease was amended in February, 2009
and the rent was decreased to $23,000 per month for twelve
months. We also have the option to renew for an additional ten
years.
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6.
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We
lease the property in Miami Gardens, Florida, where Tootsie’s Cabaret is
located with monthly rent of $70,938. Under the Assignment of Lease, the
original lease term continues through June 30, 2014, with two option
periods which give us the right to lease the property through June 30,
2034.
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7.
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We
lease the property in Las Vegas, Nevada, where our new Rick’s Cabaret Las
Vegas club is located with monthly rent of $100,000. The original lease
term continues through January 1, 2011 with an option period beginning on
that date through January 1, 2016 at $180,000 per month. We also have an
option to acquire the property through January 1, 2016 for
$23,000,000.
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8.
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We
acquired a club in Forth Worth, Texas on September 30,
2009. The property is leased from a third party for $30,000 per
month until 2018. We also received an option to purchase the five-acre
property on which the club sits within 19 months for approximately $2.4
million.
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Item 3. Legal Proceedings.
Beginning
January 1, 2008, our Texas clubs became subject to a new state law requiring
each club to collect and pay a $5 surcharge for every club visitor. A
lawsuit was filed by the Texas Entertainment Association (“TEA”), an
organization to which we are a member, alleging the fee amounts to be an
unconstitutional tax. On March 28, 2008, a State District Court Judge
in Travis County, Texas ruled that the new state law violates the First
Amendment to the United States Constitution and is therefore
invalid. The judge’s order enjoined the State from collecting or
assessing the tax. The State appealed the Court’s
ruling. In Texas, when cities or the State give notice of appeal, it
supersedes and suspends the judgment, including the
injunction. Therefore, the judgment of the District Court cannot be
enforced until the appeals are completed. Given the suspension of the
judgment, the State has opted to collect the tax pending the outcome of its
appeal. On June 5, 2009, the Court of Appeals for the Third
District (Austin) affirmed the District Court’s judgment that the Sexually
Oriented Business (“S.O.B.”) Fee violated the First Amendment to the U.S.
Constitution. The Attorney General of Texas has asked the Texas Supreme Court to
review the case. No mandate will be issued until the Supreme Court of Texas
either refuses the review or takes and decides the case. All parties are waiting
on the decision of the Supreme Court of Texas either to grant review or not. On
August 26, 2009, the Texas Supreme Court ordered both sides to submit
briefs on the merits, while not yet deciding whether to grant the State’s
Petition for review. The State’s brief was filed on September 25, 2009 and
the Texas Entertainment Association’s brief was filed on October 15,
2009. We have paid the tax for the first five calendar quarters
under protest and expensed the tax in the accompanying financial statements,
except for two locations in Dallas where the taxes have not been paid, but we
are accruing and expensing the liability. For the quarters ended June
30, 2009 and September 30, 2009, as a result of the Third Court’s decision, the
Company accrued the fee, but did not pay the State. As of September
30, 2009, we have approximately $1.16 million in accrued liabilities for this
tax. We have paid more than $2 million to the State of Texas since
the inception of the tax. The Company’s Texas clubs have filed a separate
lawsuit against the State to demand repayment of the taxes. If the
State’s appeal ultimately fails, the Company’s current amount paid under protest
would be repaid or applied to future admission tax and other Texas state tax
liabilities.
Item 4. Submission of Matters to a Vote of Security
Holders.
We held
our Annual Meeting of Shareholders on August 18, 2009. Eric S. Langan, Robert L.
Watters, Steven L. Jenkins, Alan Bergstrom, Travis Reese and Luke Lirot were
nominated and elected as Directors with the following vote results at the
shareholder meeting:
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For
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Withheld
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7,424,105 |
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658,660 |
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7,964,154 |
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118,611 |
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7,966,148 |
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116,617 |
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7,202,619 |
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880,146 |
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7,405,563 |
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677,202 |
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7,962,877 |
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119,888 |
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At the
Annual Meeting, the Shareholders ratified Whitley Penn LLP as the Company’s
Independent Registered Public Accounting Firm for the fiscal year ended
September 30, 2009, with the following vote results:
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Votes
AGAINST Ratification
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The
meeting was adjourned when all matters of business had been
discussed.
PART
II
Item 5. Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.
Our
common stock is quoted on the NASDAQ Global Market under the symbol "RICK". The
following table sets forth the quarterly high and low of sales prices per share
for the common stock for the last two fiscal years.
COMMON
STOCK PRICE RANGE
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HIGH
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LOW
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Fiscal Year Ended September
30, 2009
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$ |
9.69 |
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$ |
3.56 |
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$ |
5.69 |
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$ |
2.44 |
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|
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$ |
7.59 |
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$ |
4.53 |
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$ |
9.03 |
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$ |
5.75 |
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Fiscal Year Ended September
30, 2009
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$ |
29.79 |
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$ |
11.01 |
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$ |
27.47 |
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$ |
19.00 |
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|
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$ |
26.74 |
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$ |
14.80 |
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$ |
18.14 |
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$ |
9.64 |
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On
December 3, 2009, the last sales price for the common stock as reported on the
NASDAQ Global Market was $7.11. On December 3, 2009, there were approximately
211 stockholders of record of our common stock (excluding shares held by
shareholders in street name).
TRANSFER
AGENT AND REGISTRAR
The
transfer agent and registrar for our common stock is American Stock Transfer
& Trust Company, 59 Maiden Lane, New York, New York 10038.
DIVIDEND
POLICY
We have
not paid, and do not currently intend to pay cash dividends on our common stock
in the foreseeable future. Our current policy is to retain all earnings, if any,
to provide funds for operation and expansion of our business. The declaration of
dividends, if any, will be subject to the discretion of the Board of Directors,
which may consider such factors as our results of operation, financial
condition, capital needs and acquisition strategy, among others.
PURCHASES
OF EQUITY SECURITIES BY THE ISSUER
On
September 29, 2008, our board of directors authorized us to repurchase up to
$5,000,000 worth of our common stock. During the
fiscal year ending September 30, 2008, no shares were purchased under this
program. During the fiscal year ended September 30, 2009, we purchased 303,959
shares of common stock in the open market at prices ranging from $2.64 to
$8.60.
During
the three months ended September 30, 2009, we purchased 34,500 shares of common
stock from put option holders at prices ranging from $6.68 to $8.60 per
share. Following is a summary of our purchases by month:
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Period:
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(a)
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(b)
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(c)
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(d)
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Month
Ending
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Total
Number of Shares (or Units) Purchased
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Average
Price Paid per Share
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Total
Number of Shares (or Units) Purchased as Part of Publicly Announced Plans
or Programs
|
Maximum
Number (or Approximate Dollar Value) of Shares (or Units) that May Yet be
Purchased Under the Plans or Programs
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Jul-09
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11,500
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$ 7.17
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-
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$ 4,171,425
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Aug-09
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11,500
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$ 8.07
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-
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$ 4,171,425
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Sept-09
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11,500
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$ 8.08
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-
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$
4,171,425
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Total
for the three months ended Sept 30, 2009
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34,500
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$ 7.77
|
201,219
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$ 4,171,425
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EQUITY
COMPENSATION PLAN INFORMATION
The
following table sets forth all equity compensation plans as of September 30,
2009:
|
Plan
category
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Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
(a)
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Weighted-average
exercise price of outstanding options, warrants and rights
(b)
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
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|
Equity
compensation plans approved by security holders
|
120,000
|
$7.53
|
378,000
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EMPLOYEE
STOCK OPTION PLANS
While we
have been successful in attracting and retaining qualified personnel, we believe
that our future success will depend in part on our continued ability to attract
and retain highly qualified personnel. We pay wages and salaries that we believe
are competitive. We also believe that equity ownership is an important factor in
our ability to attract and retain skilled personnel. We have adopted stock
option plans (the “Plans”) for employees and directors. The purpose of the Plans
is to further our interests, our subsidiaries and our stockholders by providing
incentives in the form of stock options to key employees and directors who
contribute materially to our success and profitability. The grants recognize and
reward outstanding individual performances and contributions and will give such
persons a proprietary interest in us, thus enhancing their personal interest in
our continued success and progress. The Plans also assist us and our
subsidiaries in attracting and retaining key employees and directors. The Plans
are administered by the Board of Directors. The Board of Directors has the
exclusive power to select the participants in the Plans, to establish the terms
of the options granted to each participant, provided that all options granted
shall be granted at an exercise price equal to at least 85% of the fair market
value of the common stock covered by the option on the grant date and to make
all determinations necessary or advisable under the Plans.
In August
1999, we adopted the 1999 Stock Option Plan (the “1999 Plan”) with 500,000
shares authorized to be granted and sold under the 1999 Plan. In August 2004,
shareholders approved an Amendment to the 1999 Plan (the “Amendment”) which
increased the total number of shares authorized to 1,000,000. In July 2007,
shareholders approved an Amendment to the 1999 Plan (the “Amendment”), which
increased the total number of shares authorized to 1,500,000. As of September
30, 2009, 120,000 stock options were outstanding under the 1999
Plan.
RECENT
SALES OF UNREGISTERED SECURITIES
During
the quarter ended September 30, 2009, we completed no transactions in reliance
upon exemptions from registration under the Securities Act of 1933, as amended
(the "Act") as provided in Section 4(2) thereof, except as follows:
On August
6, 2009, the Company completed the sale of an aggregate of $7.2
million in 10 % Convertible Debentures (the “Debentures”) to certain
accredited investors (the “Holders”). The Debentures bear interest at
the rate of 10% per annum and mature on August 4, 2012. The
Debentures are payable with one initial payment of interest only due February 4,
2010, and, thereafter in ten equal quarterly principal payments, plus accrued
interest thereon. At the option of the Holders, the Debentures may be
converted into shares of the Company’s common stock at $8.75 per
share. The Debentures are redeemable by the Company at any time if
the closing price of its common stock for 20 consecutive trading days is at
least $11.50 per share. The Debentures provide that an event of
default occurs if: the Company should fail to pay any principal or interest when
due; the Company should fail to convert any Debenture when required; the Company
shall fail to observe or perform any covenant or agreement contained within the
Debenture; there are cross defaults to other indebtedness in excess of
$1,000,000; there is a reorganization, liquidation, voluntary or involuntary
bankruptcy or insolvency proceedings or other bankruptcy default; or a final
unsatisfied judgment not covered by insurance aggregating an excess of
$1,000,000 occurs against the Company and is not stayed, bonded or discharged
within seventy-five (75) days.
In
connection with the sale of the Debentures, the Company also issued an aggregate
of 164,569 warrants (the “Warrants”) to the Holders, on a pro-rata
basis. The Company issued each Holder a number of Warrants equal to
20% of the number of shares of common stock into which each Holder’s Debenture
is convertible. The Warrants have an exercise price of $8.75 and
expire on August 5, 2012. The Warrants provide that the Company has
the right to require exercise of the Warrants if the closing price of the
Company’s common stock for 20 consecutive trading days is at least
$12.25.
The
proceeds from the sale of the Debentures and Warrants are intended to be
utilized to make future acquisitions, and may be utilized for working capital
and general corporate purposes.
Item 6. Selected Financial Data.
The
following table sets forth certain of the Company’s historical financial data.
The selected historical consolidated financial data as of September 30, 2009 and
2008 and for the years ended September 30, 2009 and 2008 have been derived from
the Company’s audited consolidated financial statements and the related notes
included elsewhere herein. The selected historical consolidated financial data
as of September 30, 2007, 2006 and 2005 and for the years ended September 30,
2007, 2006 and 2005 have been derived from the Company’s audited financial
statements for such years, which are not included in this Annual Report on Form
10-K. The selected historical consolidated financial data set forth are not
necessarily indicative of the results of future operations and should be read in
conjunction with the discussion under the heading “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” and the historical
consolidated financial statements and accompanying notes included herein. The
historical results are not necessarily indicative of the results to be expected
in any future period.
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(In
thousands, except per share information)
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Year Ended September 30,
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2009
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2008
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|
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2007
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2006
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|
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2005
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|
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Revenue
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$ |
75,150 |
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$ |
57,908 |
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|
$ |
29,892 |
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|
$ |
24,003 |
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$ |
14,632 |
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Income
(loss) from continuing operations
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|
$ |
6,629 |
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$ |
8,622 |
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$ |
4,379 |
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$ |
2,026 |
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|
$ |
(361 |
) |
Fully
diluted income (loss) from continuing operations per common
share
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|
$ |
0.70 |
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$ |
1.02 |
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|
$ |
0.70 |
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|
$ |
0.40 |
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|
$ |
(0.09 |
) |
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Total
assets
|
|
$ |
145,077 |
|
|
$ |
137,069 |
|
|
$ |
42,588 |
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|
$ |
29,743 |
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|
$ |
24,750 |
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Total
stockholders' equity
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|
$ |
70,092 |
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$ |
63,003 |
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|
$ |
24,043 |
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$ |
13,908 |
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$ |
8,900 |
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Long-term
debt
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$ |
37,813 |
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$ |
33,557 |
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|
$ |
14,387 |
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|
$ |
13,921 |
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|
$ |
13,247 |
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Please
read the following selected consolidated financial data in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements and the related notes
appearing elsewhere in this Annual Report on Form 10-K for a discussion of
information that will enhance understanding of this data.
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
The
following discussion should be read in conjunction with our audited consolidated
financial statements and the related notes to the financial statements included
in this Form 10-K.
FORWARD
LOOKING STATEMENT AND INFORMATION
We are
including the following cautionary statement in this Form 10-K to make
applicable and take advantage of the safe harbor provision of the Private
Securities Litigation Reform Act of 1995 for any forward-looking statements made
by us or on behalf of us. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements, which are other than statements
of historical facts. Certain statements in this Form 10-K are forward-looking
statements. Words such as "expects," "believes," "anticipates," "may," and
"estimates" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially from those projected. Such risks and
uncertainties are set forth below. Our expectations, beliefs and projections are
expressed in good faith and we believe that they have a reasonable basis,
including without limitation, our examination of historical operating trends,
data contained in our records and other data available from third parties. There
can be no assurance that our expectations, beliefs or projections will result,
be achieved, or be accomplished. In addition to other factors and matters
discussed elsewhere in this Form 10-K, the following are important factors that
in our view could cause material adverse affects on our financial condition and
results of operations: the risks and uncertainties related to our future
operational and financial results, the risks and uncertainties relating to our
Internet operations, competitive factors, the timing of the openings of other
clubs, the availability of acceptable financing to fund corporate expansion
efforts, our dependence on key personnel, the ability to manage operations and
the future operational strength of management, and the laws governing the
operation of adult entertainment businesses. We have no obligation to update or
revise these forward-looking statements to reflect the occurrence of future
events or circumstances.
GENERAL
INFORMATION
We
operate in three businesses in the adult entertainment industry:
|
1.
|
We
own and/or operate upscale adult nightclubs serving primarily businessmen
and professionals. Our nightclubs offer live adult entertainment,
restaurant and bar operations. Through our subsidiaries, we currently own
and/or operate a total of nineteen adult nightclubs that offer live adult
entertainment, restaurant and bar operations. Six of our clubs operate
under the name "Rick's Cabaret"; four operate under the name “Club Onyx”,
upscale venues that welcome all customers but cater especially to urban
professionals, businessmen and professional athletes; five clubs operate
under the name "XTC Cabaret", one club operates as “Tootsie’s Cabaret”
and, effective as of September 30, 2009, one club operates as “Cabaret
North”. Our nightclubs are in Houston, Austin, San Antonio, Dallas and
Fort Worth, Texas; Charlotte, North Carolina; Minneapolis, Minnesota; New
York, New York; Miami Gardens, Florida; Philadelphia, Pennsylvania and Las
Vegas, Nevada. No sexual contact is permitted at any of our
locations.
|
|
2.
|
We
have extensive Internet activities.
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|
|
a)
|
We
currently own two adult Internet membership Web sites at
www.CoupleTouch.com and www.xxxpassword.com. We acquire xxxpassword.com
site content from wholesalers.
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|
|
b)
|
We
operate an online auction site www.NaughtyBids.com. This site provides our
customers with the opportunity to purchase adult products and services in
an auction format. We earn revenues by charging fees for each transaction
conducted on the automated site.
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|
3.
|
In
April 2008, we acquired a media division, including the leading trade
magazine serving the multi-billion dollar adult nightclubs industry. As
part of the transaction we also acquired two industry trade shows, two
other industry trade publications and more than 25 industry
websites.
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Our
nightclub revenues are derived from the sale of liquor, beer, wine, food,
merchandise, cover charges, membership fees, independent contractors' fees,
commissions from vending and ATM machines, valet parking and other products and
services. Our Internet revenues are derived from subscriptions to adult content
Internet websites, traffic/referral revenues, and commissions earned on the sale
of products and services through Internet auction sites, and other activities.
Media revenues include sale of advertising content and revenues from an annual
Expo convention. Our fiscal year end is September 30.
For
several years, we have greatly reduced our usage of promotional pricing for
membership fees for our adult entertainment web sites. This reduced our revenues
from these web sites.
CRITICAL
ACCOUNTING POLICIES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts in the financial
statements and accompanying notes. Estimates and assumptions are based on
historical experience, forecasted future events and various other assumptions
that we believe to be reasonable under the circumstances. Estimates and
assumptions may vary under different assumptions or conditions. We evaluate our
estimates and assumptions on an ongoing basis. We believe the accounting
policies below are critical in the portrayal of our financial condition and
results of operations.
On July
1, 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Statement
of Financial Accounting Standards No. 168, FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles, which is included in FASB Accounting Standards Codification
(“ASC”) 105 Generally Accepted
Accounting Principles. This new guidance approved the FASB ASC
as the single source of authoritative nongovernmental GAAP. The FASB
ASC is effective for interim or annual periods ending after September 15,
2009. All existing accounting standards have been superseded and all
other accounting literature not included in the FASB ASC will be considered
non-authoritative. The ASC is a restructuring of GAAP designed to
simplify access to all authoritative literature by providing a topically
organized structure. The adoption of FASB ASC did not impact the
Company’s financial condition or results of operations. Technical
references to GAAP included in these notes to the Consolidated Financial
Statements are provided under the new FASB ASC structure.
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
31 to 40 years. Furniture, equipment and leasehold improvements have estimated
useful lives between five and ten 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, Goodwill and Other
Intangibles Assets 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. All of the Company’s goodwill and intangible assets relate to the
nightclub segment, except for $567,000 related to the media
segment. 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, 2009, 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. The Company determined that there is no goodwill
impairment at September 30, 2009, except for the impairment taken in the second
quarter of fiscal 2009 relating to the discontinued operation in
Austin.
Certain
of our recent acquisitions, specifically Las Vegas, Philadelphia and the Media
Group, have been underperforming, principally due to the recent general economic
downturn, especially in Las Vegas, but also due to certain specific operational
issues, such as the change of concept in Philadelphia and the cab fare marketing
issues in Las Vegas. Our assumptions for the projected cash flows for
these units include a gradual recovery for the economy and gradual improvement
in the cab fare issue in Las Vegas. With these assumptions, the cash
flows from these units are adequate to show no need for impairment at this
time. We will continue to monitor these units in the future in case
our assumptions do not prove to be appropriate.
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,
2009 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 revenue for VIP memberships in accordance with FASB ASC
605-25, Revenue
Recognition, by deferring membership revenue and recognizing over the
estimated membership usage period. Management estimates that the weighted
average useful lives for memberships are 12 and 24 months for annual and
lifetime memberships, respectively. The Company does not track membership usage
by type of membership, however it believes these lives are appropriate and
conservative, based on management’s knowledge of its client base and membership
usage at the clubs.
The
Company 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 $4,544,160 and $3,815,648 for the year ended September
30, 2009 and 2008, 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, Accounting for Income
Taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. In addition, a valuation allowance is
established to reduce any deferred tax asset for which it is determined that it
is more likely than not that some portion of the deferred tax asset will not be
realized.
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 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.
Earnings Per Common
Share
The
Company computes earnings 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 (as adjusted for interest expense,
that would no longer occur if the debentures were converted).
Stock
Options
Effective
October 1, 2006, the Company adopted the fair value recognition provisions of
FASB ASC 718, Compensation—Stock
Compensation, using the modified prospective application
method.
The
compensation cost recognized for the year ended September 30, 2009 and 2008 was
$96,171 and $157,080, respectively. There were 300,000 stock options
exercises for the year ended September 30, 2009.
RESULTS
OF OPERATIONS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2009 AS COMPARED TO THE
FISCAL YEAR ENDED SEPTEMBER 30, 2008
For the
fiscal year ended September 30, 2009, we had consolidated total revenues of
$75,149,596, compared to consolidated total revenues of $57,907,727 for the year
ended September 30, 2008. This was an increase of $17,241,869 or 29.8%. The
increase in total revenues was primarily due to revenues generated in our new
clubs and increases in revenues from certain of our existing clubs, especially
from our New York location. Revenues from nightclub operations for same-location
same-period decreased by 4.1% and for Internet businesses decreased by a
negligible amount.
Our
operating margin (income from operations divided by total revenues) was 17.8%
for the year ended September 30, 2009 compared to 26.3% for the prior year. The
decrease was due principally to the poor U.S. economy in 2009 and the poor
results from our Las Vegas club, due to the steep dive in the Las Vegas
economy.
Our
income from continuing operations before income taxes for the year ended
September 30, 2009 was $10,043,335 compared to $12,495,437 for the year ended
September 30, 2008. The decrease was primarily due to the same factors discussed
in the previous paragraph. Our income from continuing nightclub
operations (excluding corporate overhead and before income taxes) was
$16,124,106 for the year ended September 30, 2009 compared with $18,556,590 for
the year ended September 30, 2008. Our income from operations for our Internet
businesses (excluding corporate overhead) was $162,071 for the year ended
September 30, 2009 compared with $148,194 for the year ended September 30, 2008.
Our income from operations for our nightclub operations for the
same-location-same-period decreased by 18.2%.
Our cost
of goods sold for the year ended September 30, 2009 was 11.7% of total revenues
compared to 11.3% of related revenues for the year ended September 30,
2008. Our cost of goods sold for the nightclub operations for the
year ended September 30, 2009 was 11.5% of our total revenues from club
operations compared to 11.3% for the year ended September 30, 2008. Cost of
goods sold for same-location-same-period decreased to 11.6% for the year ended
September 30, 2009 compared to 11.7% for the year ended September 30, 2008. We
continued our efforts to achieve reductions in cost of goods sold of the club
operations through improved inventory management. We are continuing a program to
improve margins from liquor and food sales and food service efficiency. Our cost
of sales from our Internet operations for the year ended September 30, 2009 was
1.5% compared to 2.6% of related revenues for the year ended September 30,
2008. The overall increase in costs of goods sold as a % of revenues
was due to extended happy hours and overall price discounting to attract a
higher volume of customers. The Company believes it will continue these
practices into 2010.
Our
payroll and related costs for the year ended September 30, 2009 were $16,135,304
compared to $12,963,804 for the year ended September 30, 2008. The increase was
primarily due to the increase in payroll in our new clubs and the increase in
the minimum wage. Our payroll for our nightclub operations for
same-location-same-period decreased by 2.9%. The decrease was primarily due to
more diligent review of our staffing by management. Our payroll for Internet
operations decreased by 7.7%. We believe that our labor and
management staff levels are at appropriate levels.
Our
interest expense for the year ended September 30, 2009 was $3,416,911 compared
to $2,640,987 for the year ended September 30, 2008. The increase was primarily
due to the increase in debt in relation to the purchase of new clubs during
mid-2008, including approximately $8 million in bank financing of real property
and the $7,200,000 in new convertible debt issued in July 2009. We have
increased our long term debt to $37,812,582 as of September 30, 2009 compared to
debt of $33,557,406 as of September 30, 2008.
Our net
income was $5,208,097 for the fiscal year ended September 30, 2009 compared to
$7,660,667 for the previous year. The decrease in our net income was primarily a
result of the factors discussed in the paragraphs above.
Following
is a comparison of the Company’s income statement for the years ended September
30, 2009 and 2008 with percentages compared to total revenue:
|
|
|
2009
|
|
|
%
|
|
|
2008
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of alcoholic beverages
|
|
$ |
28,298,098 |
|
|
|
37.7 |
% |
|
$ |
21,168,798 |
|
|
|
36.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of food and merchandise
|
|
|
6,174,763 |
|
|
|
8.2 |
% |
|
|
5,043,526 |
|
|
|
8.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
revenues
|
|
|
36,083,703 |
|
|
|
48.0 |
% |
|
|
28,024,450 |
|
|
|
48.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internet
revenues
|
|
|
640,667 |
|
|
|
0.9 |
% |
|
|
715,759 |
|
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media
|
|
|
1,404,238 |
|
|
|
1.9 |
% |
|
|
801,215 |
|
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
2,548,127 |
|
|
|
3.4 |
% |
|
|
2,153,979 |
|
|
|
3.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
75,149,596 |
|
|
|
100.0 |
% |
|
|
57,907,727 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
8,773,312 |
|
|
|
11.7 |
% |
|
|
6,539,189 |
|
|
|
11.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
& wages
|
|
|
16,135,304 |
|
|
|
21.5 |
% |
|
|
12,963,804 |
|
|
|
22.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-
based compensation
|
|
|
96,171 |
|
|
|
0.1 |
% |
|
|
157,080 |
|
|
|
0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
and permits
|
|
|
9,172,484 |
|
|
|
12.2 |
% |
|
|
7,021,950 |
|
|
|
12.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
card fees
|
|
|
1,603,044 |
|
|
|
2.1 |
% |
|
|
1,048,903 |
|
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent
|
|
|
3,415,557 |
|
|
|
4.5 |
% |
|
|
2,051,019 |
|
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal
& professional
|
|
|
2,947,033 |
|
|
|
3.9 |
% |
|
|
1,619,284 |
|
|
|
2.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
and marketing
|
|
|
8,091,745 |
|
|
|
10.8 |
% |
|
|
2,231,005 |
|
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
3,205,205 |
|
|
|
4.3 |
% |
|
|
2,222,960 |
|
|
|
3.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
|
|
|
1,084,729 |
|
|
|
1.4 |
% |
|
|
820,088 |
|
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities
|
|
|
1,594,600 |
|
|
|
2.1 |
% |
|
|
1,153,068 |
|
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
5,618,430 |
|
|
|
7.5 |
% |
|
|
4,856,213 |
|
|
|
8.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
61,737,614 |
|
|
|
82.2 |
% |
|
|
42,684,563 |
|
|
|
73.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
13,411,982 |
|
|
|
17.8 |
% |
|
|
15,223,164 |
|
|
|
26.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
16,384 |
|
|
|
0.0 |
% |
|
|
134,156 |
|
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(3,416,911 |
) |
|
|
-4.5 |
% |
|
|
(2,640,987 |
) |
|
|
-4.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on change in fair value of derivative instruments
|
|
|
145,374 |
|
|
|
0.2 |
% |
|
|
- |
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
(294,000 |
) |
|
|
-0.4 |
% |
|
|
(147,000 |
) |
|
|
-0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of assets and other
|
|
|
180,506 |
|
|
|
0.2 |
% |
|
|
(73,896 |
) |
|
|
-0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes
|
|
$ |
10,043,335 |
|
|
|
13.4 |
% |
|
$ |
12,495,437 |
|
|
|
21.6 |
% |
Following
is an explanation of significant variances in the above amounts.
Other
revenues include ATM commissions earned, video games and other vending and
certain promotion fees charged to our entertainers. The Company
recognizes 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 year ended September 30, 2009 was 11.5% compared to
11.3% for the year ended September 30, 2008. The cost of goods sold
from our internet operations for the year ended September 30, 2009 was 1.5%
compared to 2.6% for the year ended September 30, 2008. The cost of
goods sold from our media operations for the year ended September 30, 2009 was
23.5%, compared to 15.7% for the year ended September 30, 2008. The
cost of goods sold for same-location-same-period of club continuing operations
for the year ended September 30, 2009 was 11.6%, compared to 11.7% for the same
period ended September 30, 2008.
The
increase in payroll and related costs, stated as “Salaries & Wages” above,
was primarily due to the addition of the new clubs in
mid-2008. The decrease in percentage to total revenues is
principally due to management’s continued monitoring of payroll costs in 2009
during these tougher economic times. Payroll for
same-location-same-period of club continuing operations decreased to $6,601,640
for the year ended September 30, 2009 from $6,796,784 for the previous
year. Management currently believes that its labor and management
staff levels are appropriate.
Taxes and
permits consists principally of payroll taxes, property taxes, sales and alcohol
taxes, licenses and permits and the patron tax in our nightclubs in
Texas. Patron taxes amounted to $1,685,000 and $1,293,075 for the
years ended September 30, 2009 and 2008, respectively.
The
increase in the percentage to revenues of credit card fees relates to increased
chargebacks from certain credit card companies in 2009.
Rent
expense increased principally due to significant new leases in Las Vegas and
Philadelphia.
Legal and
professional expenses increased principally due to addition of new clubs and
costs related to litigation involving claims under the Fair Labor Standards
Act.
The
increase in the percentage of advertising and marketing to total revenue is
principally due to the addition of our new club in Las Vegas and increases in
our overall marketing campaign to attempt to increase volume of customer traffic
to all locations..
Depreciation
and amortization increased approximately $982,000 from the year ended September
30, 2008, due to the new clubs purchased during the 2008 fiscal
year.
The
increase in interest expense was attributable to our obtaining new debt during
the year ended September 30, 2009 and 2008 to finance the purchase of the new
clubs and related real estate. As of September 30, 2009, the balance
of long-term debt was $38,321,806 compared to $33,557,406 a year earlier, but a
substantial portion of the new debt was entered into during the quarter ended
September 30, 2009.
See
“Derivative Financial Instrument” above for information on the Company’s
derivative financial instrument at September 30, 2009.
Losses,
before income taxes, at clubs losing money during the year ended September 30,
2009 approximated $3,200,000, compared to $1,100,000 for the year ended
September 30, 2008. These clubs do not include discontinued
operations. The significant losing club in 2009 was Rick’s Cabaret in
Las Vegas. Subsequent to December 31, 2008, the Company took the
following steps to remedy losses in certain clubs:
The
Rick’s Cabaret in Minneapolis lost approximately $420,000 in 2009 after a profit
in 2008 as a result of the legal fees and settlement amounting to approximately
$600,000 in the lawsuit mentioned above.
The
Rick’s Cabaret in Dallas lost $418,000 before income taxes during the period
before the location was changed to XTC during 2009 and lost $452,000 during the
period ended September 30, 2008 after its purchase in April 2008. In
January 2009, we converted the location to XTC Cabaret Dallas. This
location, as XTC Cabaret Dallas, made a $423,000 pretax profit for the year
ended September 30, 2009.
The
Rick’s Cabaret in Philadelphia lost $276,000 before income taxes during the
quarter ended December 31, 2008 and lost $385,000 during the period ended
September 30, 2008 after its purchase on March 31, 2008. We have
converted the location to Club Onyx Philadelphia in January 2009 and the club
made a profit of $195,000 for the balance of the year ended September 30,
2009.
Club Onyx
Dallas did not have a liquor license during the quarter ended December 31, 2008
until December 5, 2008 and lost $188,000 before income taxes during the
quarter. This location made a profit of $47,000 for the remainder of
the year ended September 30, 2009.
Rick’s
Cabaret Las Vegas lost approximately $2,018,000 before income taxes for the year
ended September 30, 2009. Due to the economy in Las Vegas, we
expect to continue to lose money at this location until the Las Vegas economy
improves, but we have made expense reductions and modifications to our marketing
campaign in this location subsequent to March 31, 2009 and we have seen a large
improvement in operations since that time, resulting in a loss before income
taxes of $700,000 for the six months ended September 30, 2009.
The
accompanying consolidated financial statements reflect the following as
discontinued operations as of and for the year ended September 30,
2009.
The
Rick’s Cabaret in Austin was held for sale beginning in the first quarter of our
2009 fiscal year and is included in discontinued operations. A sale
of the club was scheduled in May 2009, but the sale was never
closed. The Company recognized an impairment of the net assets of the
club of $823,090 as of March 31, 2009. The club is still held for sale at this
time.
The
Company sold one of its nightclubs, Encounters in San Antonio, on March 1, 2009
for $40,000, including $5,000 in cash and a $35,000 note payable monthly for one
year. The Company recognized an impairment of $221,563 for this club
during the quarter ended December 31, 2008. The actual loss at date
of sale was $226,175.
The
Company closed its Divas Latinas club in Houston during September
2009. This club is also recognized in discontinued
operations.
Following
is summarized information regarding the discontinued operations:
|
|
|
Year
Ended
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Loss
from discontinued operations
|
|
$ |
(1,089,902 |
) |
|
$ |
(1,394,792 |
) |
|
Loss
on sale of discontinued operations
|
|
|
(1,049,265 |
) |
|
|
- |
|
|
Income
tax - discontinued operations
|
|
|
718,663 |
|
|
|
433,607 |
|
|
Total
loss from discontinued operations, net of tax
|
|
$ |
(1,420,504 |
) |
|
$ |
(961,185 |
) |
Major
classes of assets and liabilities included as assets and liabilities of
discontinued operations as of:
|
|
|
September
30,
2009
|
|
|
September
30,
2008
|
|
|
Current
assets
|
|
$ |
176,331 |
|
|
$ |
250,900 |
|
|
Property
and equipment
|
|
|
1,181,378 |
|
|
|
1,641,247 |
|
|
Other
assets
|
|
|
1,007,995 |
|
|
|
1,907,296 |
|
|
Current
liabilities
|
|
|
(129,142 |
) |
|
|
(237,448 |
) |
|
Long-term
liabilities
|
|
|
(277,954 |
) |
|
|
(255,176 |
) |
|
Net
assets (liabilities)
|
|
$ |
1,958,608 |
|
|
$ |
3,306,819 |
|
LIQUIDITY
AND CAPITAL RESOURCES
As of
September 30, 2009, we had working capital of $6,686,047 compared to working
capital of $3,597,074 as of September 30, 2008. Because of the large volume of
cash we handle, stringent cash controls have been implemented. The increase in
working capital was primarily due to working capital provided by operations and
financing activities, net of uses of working capital for investing purposes. At
September 30, 2009, our cash and cash equivalents were $12,751,423 compared to
$5,429,219 at September 30, 2008.
Our
depreciation for the year ended September 30, 2009 was $2,899,130 compared to
$2,006,884 for the year ended September 30, 2008. Our amortization for the year
ended September 30, 2009 was $306,075 compared to $216,076 for the period ended
September 30, 2008.
The
following table presents a summary of our cash flows from operating, investing,
and financing activities:
|
|
|
Years
ended September 30,
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$ |
8,926,330 |
|
|
$ |
14,769,249 |
|
Net
cash used in investing activities
|
|
|
(3,808,597 |
) |
|
|
(38,711,804 |
) |
Net
cash provided by financing activities
|
|
|
2,204,471 |
|
|
|
26,496,424 |
|
Net
increase in cash and cash equivalents
|
|
$ |
7,322,204 |
|
|
$ |
2,553,869 |
|
The
decrease in cash provided by operating activities was primarily due to the
decrease in net income and from paying more liabilities in 2009 due to the cash
levels in the business. The decrease in cash used in investing activities and
cash provided by financing activities relates primarily to acquisitions of
businesses.
We
require capital principally for the acquisition of new clubs, renovation of
older clubs and investments in technology. We may also utilize capital to
repurchase our common stock as part of our share repurchase
program.
Debt
Financing:
On
October 12, 2007, we borrowed $1,000,000 from an investment company under terms
of a 10% convertible debenture. Interest only is payable quarterly until the
principal plus accrued interest is due in nine equal quarterly payments
beginning in October 2008. The debenture is subject to optional redemption at
any time after 366 days from the date of issuance at 100% of the principal face
amount plus accrued interest. The debenture plus any outstanding convertible
interest is convertible by the holder into shares of our common stock at any
time prior to the maturity date at the conversion price of $12 per
share.
On
November 30, 2007, we entered into a Stock Purchase Agreement for the
acquisition of 100% of the issued and outstanding common stock of Stellar
Management Corporation, a Florida corporation (the "Stellar Stock") and 100% of
the issued and outstanding common stock of Miami Gardens Square One, Inc., a
Florida corporation (the "MGSO Stock") which owns and operates an adult
entertainment cabaret known as "Tootsie’s Cabaret" ("Tootsie’s") located at 150
NW 183rd Street, Miami Gardens, Florida 33169 (the "Transaction"). Pursuant to
the Stock Purchase Agreement, we acquired the Stellar Stock and the MGSO Stock
from Norman Hickmore ("Hickmore") and Richard Stanton ("Stanton") for a total
purchase price of $25,000,000 payable $15,000,000 in cash and payable
$10,000,000 pursuant to two Secured Promissory Notes in the amount of $5,000,000
each to Stanton and Hickmore (the "Notes"). The Notes bear interest at the rate
of 14% per annum with the principal payable in one lump sum payment on November
30, 2010 (amended to November 30, 2012). Interest on the Notes will be payable
monthly, in arrears, with the first payment being due thirty (30) days after the
closing of the Transaction. We cannot pre-pay the Notes during the first twelve
(12) months; thereafter, we may prepay the Notes, in whole or in part, provided
that (i) any prepayment by us from December 1, 2008 through November 30, 2009,
shall be paid at a rate of 110% of the original principal amount and (ii) any
prepayment by the Company after November 30, 2009, may be prepaid without
penalty at a rate of 100% of the original principal amount. The Notes are
secured by the Stellar Stock and MGSO Stock under a Pledge and Security
Agreement.
Effective
February 1, 2008, the Company borrowed $1,000,000 from a lender. The funds were
utilized to pay off certain other Company debt in the amount of $1,797,529. The
new debt bears interest at 9% and interest is payable monthly until February 1,
2013 at which time the principal is due in full. The note is collateralized by
certain Company-owned property in Minneapolis, Minnesota.
In
February 2008, the Company borrowed $1,561,500 from a lender. The funds were
used to purchase an aircraft. The debt bears interest at 6.15% with monthly
principal and interest payments of $11,323 beginning March 12, 2008. The note
matures on February 12, 2028.
As part
of the acquisition of the Executive Club in Dallas, we acquired the related Real
Property from DPC Holdings, LLC, a Texas limited liability company ("DPC"). As
consideration for the purchase of the Real Property, RCI paid total
consideration of $5,599,721, which was paid (i) $4,250,000, payable $610,000 in
cash and $3,640,000 through the issuance of a five year promissory note (the
"Promissory Note") and (ii) the issuance of 57,918 shares of our restricted
common stock (the "Rick's Real Property Shares") to be valued at $23.30 per
share ($1,349,721). The Promissory Note bears interest at a varying rate at the
greater of (i) two percent (2%) above the Prime Rate or (ii) seven and one-half
percent (7.5%), and is guaranteed by Rick's and Eric Langan,
individually.
As part
of the acquisition of the Platinum Club II in Dallas, we acquired the Real
Property from Wire Way, LLC, a Texas limited liability company (“Wire Way”).
Pursuant to a Real Estate Purchase and Sale Agreement (the “Real Estate
Agreement”) dated May 10, 2008, we paid total consideration of $6,000,000, which
was paid $1,650,000 in cash and $4,350,000 through the issuance of a five (5)
year promissory note (the “Promissory Note”). The Promissory Note bears interest
at a varying rate at the greater of (i) two percent (2%) above the Prime Rate or
(ii) seven and one-half percent (7.5%), which is guaranteed by the Company and
by Eric Langan, the Company’s Chief Executive Officer,
individually.
As part
of the acquisition of the Las Vegas club, part of the purchase price was
$3,000,000 pursuant to a promissory note (“the Rick’s Promissory Note”),
executed by and obligating Rick’s, bearing interest at eight percent (8%) per
annum with a five (5) year amortization, with monthly payments of principal and
interest, with the initial monthly payment due in April 2009 with a balloon
payment of all then outstanding principal and interest due upon the expiration
of two (2) years from the execution of the Promissory Note.
In May
2008, we borrowed $150,000 from two unrelated individuals under terms of a 10%
convertible debenture. Interest only is payable quarterly beginning in August
2008 and the note matured and was paid in May 2009.
On August
6, 2009, we completed the sale of an aggregate of $7.2 million in 10%
Convertible Debentures (the “Debentures”) to certain accredited investors (the
“Holders”). The Debentures bear interest at the rate of 10% per annum
and mature on August 4, 2012. The Debentures are payable with one
initial payment of interest only due February 4, 2010, and, thereafter in ten
equal quarterly principal payments, plus accrued interest thereon. At
the option of the Holders, the Debentures may be converted into shares of the
Company’s common stock at $8.75 per share. The Debentures are
redeemable by us at any time if the closing price of its common stock for 20
consecutive trading days is at least $11.50 per share. The Debentures
provide that an event of default occurs if: we should fail to pay any principal
or interest when due; we should fail to convert any Debenture when required; we
should fail to observe or perform any covenant or agreement contained within the
Debenture; there are cross defaults to other indebtedness in excess of
$1,000,000; there is a reorganization, liquidation, voluntary or involuntary
bankruptcy or insolvency proceedings or other bankruptcy default; or a final
unsatisfied judgment not covered by insurance aggregating an excess of
$1,000,000 occurs against us and is not stayed, bonded or discharged within
seventy-five days.
In
connection with the sale of the Debentures, we also issued an aggregate of
164,569 warrants (the “Warrants”) to the Holders, on a pro-rata
basis. We issued each Holder a number of Warrants equal to 20% of the
number of shares of common stock into which each Holder’s Debenture is
convertible. The Warrants have an exercise price of $8.75 and expire
on August 5, 2012. The Warrants provide that we have the right to
require exercise of the Warrants if the closing price of our common stock for 20
consecutive trading days is at least $12.25.
The
proceeds from the sale of the Debentures and Warrants are intended to be
utilized to make future acquisitions, and may be utilized for working capital
and general corporate purposes.
Contractual obligations and
commitments:
We have
long term contractual obligations primarily in the form of operating leases and
debt obligations. The following table summarizes our contractual obligations and
their aggregate maturities as well as future minimum rent
payments. Future interest payments related to variable interest rate
debt were estimated using the interest rate in effect at September 30,
2009.
|
|
|
Payments Due by Period
|
|
|
|
|
Total
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
$ |
38,321,806 |
|
|
$ |
6,058,231 |
|
|
$ |
4,738,852 |
|
|
$ |
3,752,690 |
|
|
$ |
19,638,415 |
|
|
$ |
422,928 |
|
|
$ |
3,710,690 |
|
|
Interest
payments
|
|
|
11,178,324 |
|
|
|
3,551,864 |
|
|
|
3,082,787 |
|
|
|
2,687,090 |
|
|
|
1,202,793 |
|
|
|
344,317 |
|
|
|
309,473 |
|
|
Operating
leases
|
|
|
22,338,149 |
|
|
|
3,721,845 |
|
|
|
2,744,549 |
|
|
|
2,450,136 |
|
|
|
2,443,162 |
|
|
|
2,238,207 |
|
|
|
8,740,250 |
|
Put
Options
As part
of certain of our acquisition transactions, we have entered into
Lock-Up/Leak-Out Agreements with the sellers pursuant to which, on or after a
contractual period after the closing date, the seller shall have the right, but
not the obligation, to have us purchase from seller a certain number of our
shares of common stock issued in the transactions in an amount and at a rate of
not more than a contractual number of the shares per month (the “Monthly
Shares”) calculated at a price per share equal to a contractual value per share
(“Value of the Rick’s Shares”). At our election during any given month, we may
either buy the Monthly Shares or, if we elect not to buy the Monthly Shares from
the seller, then the seller shall sell the Monthly Shares in the open market.
Any deficiency between the amount which the seller receives from the sale of the
Monthly Shares and the value of the shares shall be paid by us within three (3)
business days of the date of sale of the Monthly Shares during that particular
month. Our obligation to purchase the Monthly Shares from the Seller shall
terminate and cease at such time as the seller has received a contractual amount
from the sale of the Rick’s Shares and any deficiency. Under the terms of the
Lock-Up/Leak-Out Agreements, the seller may not sell more than a contractual
number of our shares per 30-day period, regardless of whether the seller “Puts”
the shares to us or sells them in the open market or otherwise.
During
April and May 2009, we completed renegotiation of terms of certain of our long
term debt and a significant portion of outstanding put
options. Before the renegotiation, the maximum obligation that could
be owed if our stock were valued at zero was $13,935,020 and was recorded in our
consolidated balance sheet as Temporary Equity. After the
renegotiation, the maximum obligation that could be owed if our stock were
valued at zero is $11,671,000 at September 30, 2009. If we are
required to buy back any of these put options, the buy-back transaction will be
purely a balance sheet transaction, affecting only Temporary Equity or
Derivative Liability and Stockholders’ Equity and will have no income statement
effect. The only income statement effect from these put options is
the “mark to market” valuation quarterly of the derivative liability as
explained in Note B of Notes to Consolidated Financial Statements. Following is
a schedule of the annual obligation (after the renegotiation) we would have if
our stock price remains in the future at the closing market price on September
30, 2009 of $8.60 per share, of which there can be no assurance: (This includes
the derivative financial instruments recognized in our consolidated balance
sheet at September 30, 2009.)
|
For
the Year Ended September 30:
|
|
|
|
|
$ |
2,397,600 |
|
|
|
|
|
2,820,000 |
|
|
|
|
|
1,945,810 |
|
|
|
|
|
130,190 |
|
|
|
|
|
|
|
|
|
|
$ |
7,293,600 |
|
Each
$1.00 per share movement of our stock price has an aggregate effect of $509,000
on the total obligation.
We are
not aware of any other event or trend that would potentially affect liquidity.
In the event such a trend develops, we believe our working capital and capital
expenditure requirements will be adequately met by cash flows from operations.
In our opinion, working capital is not a true indicator of our financial status.
Typically, businesses in our industry carry current liabilities in excess of
current assets because businesses in our industry receive substantially
immediate payment for sales, with nominal receivables, while inventories and
other current liabilities normally carry longer payment terms. Vendors and
purveyors often remain flexible with payment terms, providing businesses in our
industry with opportunities to adjust to short-term business down turns. We
consider the primary indicators of financial status to be the long-term trend of
revenue growth, the mix of sales revenues, overall cash flow, profitability from
operations and the level of long-term debt.
The
following table presents a summary of such indicators:
|
|
|
|
|
|
Increase
|
|
|
|
|
|
Increase
|
|
|
|
|
|
Year
Ended September 30,
|
|
2009
|
|
|
(Decrease)
|
|
|
2008
|
|
|
(Decrease)
|
|
|
2007
|
|
|
Sales
of alcoholic beverages
|
|
$ |
28,298,098 |
|
|
|
33.68 |
% |
|
$ |
21,168,798 |
|
|
|
74.78 |
% |
|
$ |
12,111,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of food and merchandise
|
|
|
6,174,763 |
|
|
|
22.43 |
% |
|
|
5,043,526 |
|
|
|
58.33 |
% |
|
|
3,185,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
revenues
|
|
|
36,083,703 |
|
|
|
28.76 |
% |
|
|
28,024,450 |
|
|
|
88.30 |
% |
|
|
14,883,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internet
revenues
|
|
|
640,667 |
|
|
|
-10.49 |
% |
|
|
715,759 |
|
|
|
-2.04 |
% |
|
|
730,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media
revenues
|
|
|
1,404,238 |
|
|
|
75.26 |
% |
|
|
801,215 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
2,548,127 |
|
|
|
18.30 |
% |
|
|
2,153,979 |
|
|
|
95.24 |
% |
|
|
1,103,264 |
|
|
Total
revenues
|
|
$ |
75,149,596 |
|
|
|
29.77 |
% |
|
$ |
57,907,727 |
|
|
|
80.88 |
% |
|
$ |
32,013,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$ |
8,926,330 |
|
|
|
-39.56 |
% |
|
$ |
14,769,249 |
|
|
|
236.96 |
% |
|
$ |
4,383,121 |
|
|
Net
income
|
|
$ |
5,208,097 |
|
|
|
-32.02 |
% |
|
$ |
7,660,667 |
|
|
|
150.77 |
% |
|
$ |
3,054,899 |
|
|
Long-term
debt
|
|
$ |
38,321,806 |
|
|
|
16.28 |
% |
|
$ |
32,957,406 |
|
|
|
129.07 |
% |
|
$ |
14,387,339 |
|
We have
not established lines of credit or financing other than the above mentioned
notes payable and our existing debt. There can be no assurance that we will be
able to obtain additional financing on reasonable terms in the future, if at
all, should the need arise.
Share
repurchase
On
September 29, 2008, our Board of Directors authorized us to repurchase up to
$5,000,000 worth of our common stock. During the fiscal year ending September
30, 2008, no shares were purchased under this program. During the fiscal year
ended September 30, 2009, we purchased 303,959 shares of common stock in the
open market at prices ranging from $2.64 to $8.60.
IMPACT
OF INFLATION
We have
not experienced a material overall impact from inflation in our operations
during the past several years. To the extent permitted by competition, we have
managed to recover increased costs through price increases and may continue to
do so. However, there can be no assurance that we will be able to do so in the
future.
SEASONALITY
Our
nightclub operations are affected by seasonal factors. Historically, we have
experienced reduced revenues from April through September with the strongest
operating results occurring during October through March. Our experience
indicates that there are no seasonal fluctuations in our Internet
activities.
GROWTH
STRATEGY
We
believe that our nightclub operations can continue to grow organically and
through careful entry into markets and demographic segments with high growth
potential. Our growth strategy is: (a) to open new clubs after market analysis,
(b) to acquire existing clubs in locations that are consistent with our growth
and income targets and which appear receptive to the upscale club formula we
have developed, as is the case with the acquisition of the New York club and
clubs in Charlotte, South Houston, Dallas/Fort Worth, San Antonio,
Austin and Miami, (c) to form joint ventures or partnerships to reduce start-up
and operating costs, with us contributing equity in the form of our brand name
and management expertise, (d) to develop new club concepts that are consistent
with our management and marketing skills, and/or (e) to acquire real estate in
connection with club operations, although some clubs may be in leased
premises.
During
fiscal 2008, we acquired a media division for a total cost of $1,069,754. This
acquisition was funded primarily through issuance of our restricted common stock
valued at $369,754, and $700,000 in cash. This media operation had total
revenues of approximately $1,404,000 and $801,000 for fiscal years 2009 and
2008, respectively and net losses of approximately $242,000 and
$28,000.
During
fiscal 2008, we acquired five existing nightclub operations and 49% of an
existing nightclub operation for a total cost of $69,768,925, including real
property of $14,761,766. These acquisitions were funded primarily through
indebtedness of $20,990,000, including real property debt of $7,990,000,
issuance of our restricted common stock valued at $12,964,465, $701,711 in debt
forgiveness, and $35,461,116 in cash. These nightclub operations had total
revenues of approximately $40,674,000 and $22,554,000 for fiscal years 2009 and
2008, respectively and net income of approximately$6,708,000 and
$7,413,000.
During
fiscal 2009, we acquired one nightclub operation for cash of approximately
$2,385,000.. The closing occurred on September 30, 2009; therefore,
there are no operations of the acquired company in the accompanying consolidated
statement of operations.
We
continue to evaluate opportunities to acquire new nightclubs and anticipate
acquiring new locations that fit our business model as we have done in the past.
The acquisition of additional clubs will require us to obtain additional debt or
issuance of our common stock, or both. There can be no assurance that we will be
able to obtain additional financing on reasonable terms in the future, if at
all, should the need arise. An inability to obtain such additional financing
could have an adverse effect on our growth strategy.
In our
Internet division, we plan to focus on high-margin Internet activities that
leverage our marketing skills while requiring a low level of start-up cost and
ongoing operating costs and refine and tune our Internet sites for better
positioning in organic search rankings amongst the major search providers. We
will restructure affiliate programs to provide higher incentives to our current
affiliates to better promote our Internet sites, while actively seeking new
affiliates to send traffic to our Internet sites.
In
addition to their strong cash flow, the acquisition of the Media Division will
enable us to create new marketing synergies with major industry product
suppliers and new national advertising opportunities. It also provides us with
additional diversification of our revenue and income streams while remaining
within our core competency.
Item 8. Financial Statements and Supplementary Data.
The
information required by this Item begins on Page 34.
RICK’S
CABARET INTERNATIONAL, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
Years
Ended September 30, 2009 and 2008
Table
of Contents
|
|
34
|
|
|
|
|
Audited
Consolidated Financial Statements:
|
|
|
|
|
|
|
35
|
|
|
|
|
|
36
|
|
|
|
|
|
37
|
|
|
|
|
|
38
|
|
|
|
|
|
41
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and Stockholders of
Rick’s
Cabaret International, Inc.
We have
audited the accompanying consolidated balance sheets of Rick’s Cabaret
International, Inc. and subsidiaries, as of September 30, 2009 and 2008, and the
related consolidated statements of income, changes in permanent stockholders’
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Rick’s Cabaret
International, Inc. and subsidiaries, as of September 30, 2009 and 2008, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/
Whitley Penn LLP
Dallas,
Texas
December
17, 2009
RICK'S CABARET INTERNATIONAL, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses and other current assets
|
|
|
|
|
|
|
|
|
Assets
of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
and indefinite lived intangibles
|
|
|
|
|
|
|
|
|
Definite
lived intangibles, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Texas
patron tax liability
|
|
|
|
|
|
|
|
|
Current
portion of derivative liabilities
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
|
|
|
|
|
|
|
Liabilities
of discontinued operations
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
long-term liabilities
|
|
|
|
|
|
|
|
|
Long-term
debt-related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities at fair value, less current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Temporary
equity - Common stock, subject to put rights 317,000 and 611,740 shares,
respectively
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Permanent
stockholders' equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $.10 par, 1,000,000 shares authorized, none
outstanding
|
|
|
|
|
|
|
|
|
Common
stock, $.01 par, 20,000,000 shares authorized, 8,879,566 and 9,689,315
shares issued, respectively
|
|
|
|
|
|
|
|
|
Additional
paid-in capital
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
908,530 shares of common stock held in treasury in 2008, at
cost
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
|
|
|
|
$ |
|
|
See
accompanying notes to consolidated financial statements.
RICK'S CABARET INTERNATIONAL, INC.
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
Year
Ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Sales
of alcoholic beverages
|
|
$ |
28,298,098 |
|
|
$ |
21,168,798 |
|
Sales
of food and merchandise
|
|
|
6,174,763 |
|
|
|
5,043,526 |
|
|
|
|
|
36,083,703 |
|
|
|
28,024,450 |
|
|
|
|
|
640,667 |
|
|
|
715,759 |
|
|
|
|
|
1,404,238 |
|
|
|
801,215 |
|
|
|
|
|
2,548,127 |
|
|
|
2,153,979 |
|
|
|
|
|
75,149,596 |
|
|
|
57,907,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,773,312 |
|
|
|
6,539,189 |
|
|
|
|
|
16,135,304 |
|
|
|
12,963,804 |
|
|
|
|
|
96,171 |
|
|
|
157,080 |
|
Other
general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
9,172,484 |
|
|
|
7,021,950 |
|
|
|
|
|
1,603,044 |
|
|
|
1,048,903 |
|
|
|
|
|
3,415,557 |
|
|
|
2,051,019 |
|
|
|
|
|
2,947,033 |
|
|
|
1,619,284 |
|
Advertising
and marketing
|
|
|
8,091,745 |
|
|
|
2,231,005 |
|
Depreciation
and amortization
|
|
|
3,205,205 |
|
|
|
2,222,960 |
|
|
|
|
|
1,084,729 |
|
|
|
820,088 |
|
|
|
|
|
1,594,600 |
|
|
|
1,153,068 |
|
|
|
|
|
5,618,430 |
|
|
|
4,856,213 |
|
|
|
|
|
61,737,614 |
|
|
|
42,684,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,411,982 |
|
|
|
15,223,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,384 |
|
|
|
134,156 |
|
|
|
|
|
(3,416,911
|
) |
|
|
(2,640,987 |
) |
Gain
on change in fair value of derivative instruments
|
|
|
145,374 |
|
|
|
- |
|
|
|
|
|
(294,000
|
) |
|
|
(147,000 |
) |
Gain
on sale of property and other
|
|
|
180,506 |
|
|
|
(73,896 |
) |
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income taxes
|
|
|
10,043,335 |
|
|
|
12,495,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,414,734 |
|
|
|
3,873,585 |
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
6,628,601 |
|
|
|
8,621,852 |
|
Loss
from discontinued operations, net of income taxes of $718,663 and
$433,607
|
|
|
(1,420,504
|
) |
|
|
(961,185 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,208,097 |
|
|
$ |
7,660,667 |
|
|
Basic
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.72 |
|
|
$ |
1.09 |
|
|
Loss
from discontinued operations
|
|
|
(0.15
|
) |
|
|
(0.12 |
) |
|
Net
income
|
|
$ |
0.56 |
|
|
$ |
0.97 |
|
|
Diluted
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
0.70 |
|
|
$ |
1.02 |
|
|
Loss
from discontinued operations
|
|
|
(0.15
|
) |
|
|
(0.11 |
) |
|
Net
income
|
|
$ |
0.55 |
|
|
$ |
0.91 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,265,784 |
|
|
|
7,931,121 |
|
|
Diluted
|
|
|
9,427,397 |
|
|
|
8,413,183 |
|
See
accompanying notes to consolidated financial statements.
RICK'S CABARET INTERNATIONAL, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN PERMANENT STOCKHOLDERS' EQUITY
Years
Ended September 30, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid-In Capital
|
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
Retained
Earnings
|
|
|
Number
of Shares
|
|
|
Amount
|
|
|
Total
Stockholders’ Equity
|
|
Balance
at September 30, 2007
|
|
|
6,903,354 |
|
|
$ |
69,034 |
|
|
$ |
22,643,596 |
|
|
$ |
20,021 |
|
|
$ |
2,603,983 |
|
|
|
908,530 |
|
|
$ |
(1,293,780 |
) |
|
$ |
24,042,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,182,701 |
|
|
|
31,827 |
|
|
|
43,560,815 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
43,592,642 |
|
Change
in temporary equity
|
|
|
(396,740 |
) |
|
|
(3,968 |
) |
|
|
(12,481,652 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(12,485,620 |
) |
|
|
|
|
- |
|
|
|
- |
|
|
|
68,333 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
68,333 |
|
|
|
|
|
- |
|
|
|
- |
|
|
|
157,080 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
157,080 |
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,660,667 |
|
|
|
- |
|
|
|
- |
|
|
|
7,660,667 |
|
Change
in available-for-sale securities
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(33,368 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(33,368 |
) |
|
|
|
|
- |