NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
(UNAUDITED)
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q of Regulation S-X. They do not include all information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the financial statements for the year ended September 30, 2008 included in the Company's Annual Report on Form 10-KSB, as filed with the Securities and Exchange Commission. The interim unaudited financial statements should be read in conjunction with those financial statements included in
the Form 10-KSB for the year ended September 30, 2008. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting solely of normal recurring adjustments, have been made. Operating results for the three and nine months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending September 30, 2009. Certain prior period amounts in the accompanying consolidated financial statements have been
reclassified to conform to the current presentation.
2. RECENT ACCOUNTING STANDARDS AND PRONOUNCEMENTS
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141R, “Business Combinations,” (“SFAS 141R”). SFAS 141R requires most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business
combination to be recorded at full fair value. The Statement applies to all business combinations, including combinations among mutual entities and combinations by contract alone. Under SFAS 141R, all business combinations will be accounted for by applying the acquisition method. SFAS 141R is effective for fiscal years beginning on or after December 15, 2008 and will be effective for the Company beginning in fiscal 2010 for business combinations occurring after the effective date.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51,” (“SFAS 160”). SFAS 160 will require noncontrolling interests (previously referred to as minority interests) to be treated as a separate component of equity, not as a
liability or other item outside of permanent equity. The Statement applies to the accounting for noncontrolling interests and transactions with noncontrolling interest holders in consolidated financial statements. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 and is effective for the Company beginning in fiscal 2010. The Company does not expect that SFAS 160 will have a material impact on its consolidated financial statements.
In December 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”). SFAS 157 clarifies the definition of fair value, describes methods used to appropriately measure fair value, and expands fair value disclosure requirements, but does not change existing guidance as to whether or not an instrument
is carried at fair value. For financial assets and liabilities, SFAS 157 is effective for fiscal years beginning after November 15, 2007, which required the Company to adopt these provisions in fiscal 2009. For nonfinancial assets and liabilities, SFAS 157 is effective for fiscal years beginning after November 15, 2008, which will require the Company to adopt these provisions in fiscal 2010. The adoption of SFAS 157 did not have a material effect on the Company’s consolidated financial statements.
SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
o
Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
(UNAUDITED)
2. RECENT ACCOUNTING STANDARDS AND PRONOUNCEMENTS – continued
o
Level 2 – Include other inputs that are directly or indirectly observable in the marketplace.
o
Level 3 – Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company’s derivative liabilities have been measured principally utilizing Level 2 inputs.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” (“SFAS 159”). SFAS 159 provides companies with an option to report selected assets and liabilities at fair value. This statement contains financial statement
presentation and disclosure requirements for assets and liabilities reported at fair value as a consequence of the election and is effective for the Company beginning in fiscal 2009. The initial adoption of SFAS 159 did not have a material effect on the Company’s consolidated financial condition or results of operations.
The Staff of the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") 110 which expresses the views of the staff regarding the use of a "simplified" method, as discussed in SAB No. 107 ("SAB 107"), in developing an estimate of expected term of "plain vanilla" share options in accordance with Statement of Financial
Accounting Standards No. 123 (revised 2004), “Share-Based Payment”. In particular, the staff indicated in SAB 107 that it will accept a company's election to use the simplified method, regardless of whether the company has sufficient information to make more refined estimates of expected term. At the time SAB 107 was issued, the staff believed that more detailed external information about employee exercise behavior (e.g., employee exercise patterns by industry and/or other categories of companies)
would, over time, become readily available to companies. Therefore, the staff stated in SAB 107 that it would not expect a company to use the simplified method for share option grants after December 31, 2007. The staff understands that such detailed information about employee exercise behavior may not be widely available by December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. There were no option grants during
the nine months ended June 30, 2009.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), which establishes general standards of accounting for, and requires disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company adopted the
provisions of SFAS 165 as of June 30, 2009. The adoption of these provisions did not have a significant impact on the Company’s consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (“SFAS 168”). SFAS 168 will become the single source of authoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”),
superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”), and related accounting literature. SFAS 168 reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure. Also included is relevant Securities and Exchange Commission guidance organized using the same topical structure in separate sections. SFAS 168 will be effective
for financial statements issued for reporting periods that end after September 15, 2009. This will have an impact on the Company’s
consolidated financial statements since all future references to authoritative accounting literature will be references in accordance with SFAS 168.
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
3.
STOCK OPTIONS AND STOCK-BASED EMPLOYEE COMPENSATION
Below is the summary of common stock options outstanding as of June 30, 2009:
|
Employee and Director Stock Option Plan:
|
|
Options Authorized
|
|
|
Options Outstanding
|
|
|
Options Vested
|
|
|
Available for Grant
|
|
|
1999 Stock Option Plan
|
|
1,500,000
|
|
|
410,000
|
|
|
400,000
|
|
|
438,000
|
|
Employee and Director Stock Option Plans
In August 1999, the Company adopted the 1999 Stock Option Plan (“the Plan”). The options granted under the Plan may be either incentive stock options or non-qualified options. The Plan is administered
by the Board of Directors
or by a compensation committee of the Board of Directors. The Board of Directors has the exclusive power to select individuals to receive grants, to establish the terms of the options granted to each participant, provided that all options granted shall be granted at an exercise price equal to at least 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 Plan. The options are subject to termination
of employment and generally expire five years from the date of grant. Employee options generally vest in installments over two years. As of June 30, 2009, 438,000 shares of common stock were available for future grants under the Plan. The compensation cost recognized for the nine months ended June 30, 2009 and 2008 was $60,132 and $117,810, respectively. There were zero and 40,000 stock options exercised for the nine months ended June 30, 2009 and 2008, respectively. There
were no stock options granted for the nine month periods ended June 30, 2009 and 2008.
The following is a summary of all stock option transactions for the nine months ended June 30, 2009:
|
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term (years)
|
|
|
Aggregate Intrinsic Value
|
|
|
Outstanding as of September 30, 2008
|
|
|
420,000
|
|
|
$
|
3.86
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Cancelled or expired
|
|
|
10,000
|
|
|
|
2.49
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Outstanding as of June 30, 2009
|
|
|
410,000
|
|
|
$
|
3.89
|
|
|
|
.50
|
|
|
$
|
1,148,250
|
|
|
Options exercisable as of June 30, 2009
|
|
|
400,000
|
|
|
$
|
3.76
|
|
|
|
.44
|
|
|
$
|
1,148,250
|
|
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
4. GOODWILL AND OTHER INTANGIBLES
Following are the changes in the carrying amounts of goodwill and licenses for the nine months ended June 30, 2009 and 2008:
|
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
|
|
|
Licenses
|
|
|
Goodwill
|
|
|
Licenses
|
|
|
Goodwill
|
|
|
Beginning balance
|
|
$
|
39,298,343
|
|
|
$
|
35,404,831
|
|
|
$
|
12,174,092
|
|
|
$
|
6,250,998
|
|
|
Change in tax basis of assets
|
|
|
-
|
|
|
|
(673,728
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Intangibles acquired
|
|
|
-
|
|
|
|
48,351
|
|
|
|
26,804,676
|
|
|
|
13,287,809
|
|
|
Ending balance
|
|
$
|
39,298,343
|
|
|
$
|
34,779,454
|
|
|
$
|
38,978,768
|
|
|
$
|
19,538,807
|
|
During November 2008, $600,000 of related party debt matured and was paid in cash by the Company. The Company also made additional payments of $1,556,374 on other long-term debt during the nine months ended June 30, 2009.
On April 29, 2009, the Company entered into a modification to its two secured promissory notes with the former owners of Tootsie’s Cabaret in Miami Gardens, Florida, whereby the due date for the $5 million of principal due and payable by the Company under each note (an aggregate of $10 million) was extended by two years from November
2010 to November 2012. All other terms and conditions of the promissory notes remain the same. The Company previously issued these notes in November 2007 to the former owners of Tootsie’s Cabaret in connection with a purchase agreement for the adult cabaret. The Company paid a total of $150,000 to the holders of the notes as consideration for their agreement to extend the notes for two years through November 2012. The $150,000 paid will be amortized as an adjustment
of interest expense over the remaining life of the notes. The Company accounted for this transaction in accordance with EITF 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments”.
6
.
EARNINGS PER SHARE
The Company computes earnings per share in accordance with SFAS No. 128,
Earnings Per Share
. SFAS No. 128 provides for the calculation of basic and diluted earnings per share (“EPS”). 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 warrants and options (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 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).
Net earnings applicable to common stock and the weighted – average number of shares used for basic and diluted earnings per share computations are summarized in the table that follows:
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
6. EARNINGS PER SHARE - continued
|
|
|
FOR THE THREE MONTHS
ENDED JUNE 30,
|
|
|
FOR THE NINE MONTHS
ENDED JUNE 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1,894,698
|
|
|
$
|
2,035,955
|
|
|
$
|
4,522,787
|
|
|
$
|
6,938,315
|
|
|
Loss from discontinued operations, net of income taxes
|
|
$
|
(110,205
|
)
|
|
|
(206,751
|
)
|
|
$
|
(1,107,991
|
)
|
|
$
|
(720,459
|
)
|
|
Net income
|
|
$
|
1,784,493
|
|
|
$
|
1,829,204
|
|
|
$
|
3,414,796
|
|
|
$
|
6,217,856
|
|
|
Average number of common shares outstanding
|
|
|
9,185,758
|
|
|
|
8,240,914
|
|
|
|
9,288,536
|
|
|
|
7,536,104
|
|
|
Basic earnings per share - income from continuing operations
|
|
$
|
0.21
|
|
|
$
|
0.25
|
|
|
$
|
0.49
|
|
|
$
|
0.92
|
|
|
Basic earnings per share - discontinued operations
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.10
|
)
|
|
Basic earnings per share - net income
|
|
$
|
0.19
|
|
|
$
|
0.22
|
|
|
$
|
0.37
|
|
|
$
|
0.83
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1,894,698
|
|
|
$
|
2,035,955
|
|
|
$
|
4,522,787
|
|
|
$
|
6,938,315
|
|
|
Adj. to net earnings from assumed conversion of debentures (1)
|
|
|
-
|
|
|
|
19,800
|
|
|
|
-
|
|
|
|
113,400
|
|
|
Adjusted income from continuing operations
|
|
|
1,894,698
|
|
|
|
2,055,755
|
|
|
|
4,522,787
|
|
|
|
7,051,715
|
|
|
Discontinued operations
|
|
|
(110,205
|
)
|
|
|
(206,751
|
)
|
|
|
(1,107,991
|
)
|
|
|
(720,459
|
)
|
|
Adjusted net income
|
|
$
|
1,784,493
|
|
|
$
|
1,849,004
|
|
|
$
|
3,414,796
|
|
|
$
|
6,331,256
|
|
|
Average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding
|
|
|
9,185,758
|
|
|
|
8,240,914
|
|
|
|
9,288,536
|
|
|
|
7,536,104
|
|
|
Potential dilutive shares resulting from exercise of warrants and options (2)
|
|
|
223,804
|
|
|
|
399,785
|
|
|
|
210,479
|
|
|
|
401,990
|
|
|
Potential dilutive shares resulting from conversion of debentures (3)
|
|
|
-
|
|
|
|
220,000
|
|
|
|
-
|
|
|
|
300,000
|
|
|
Total average number of common shares outstanding used for dilution
|
|
|
9,409,562
|
|
|
|
8,860,699
|
|
|
|
9,499,015
|
|
|
|
8,238,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share - income from continuing operations
|
|
$
|
0.20
|
|
|
$
|
0.23
|
|
|
$
|
0.48
|
|
|
$
|
0.86
|
|
|
Diluted earnings per share - discontinued operations
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.09
|
)
|
|
Diluted earnings per share - net income
|
|
$
|
0.19
|
|
|
$
|
0.21
|
|
|
$
|
0.36
|
|
|
$
|
0.77
|
|
(1) Represents interest expense on dilutive convertible debentures, that would not occur if they were assumed converted.
(2) All outstanding warrants and options were considered for the EPS computation.
(3) Convertible debentures (principal and accrued interest) outstanding at June 30, 2009 and 2008 totaling $691,165 and $2,410,000, respectively, were convertible into common stock at a price of
$
12 per share in 2009 and $3.00 to $25.32 per share in 2008, respectively, and resulted
in additional common shares (based on average balances outstanding) in 2008. Potential dilutive shares of 166,979 and 80,137 for the three and nine months ended June 30, 2008 have been excluded from earnings per share due to being anti-dilutive.
*
EPS may not foot due to rounding.
During the nine months ended June 30, 2009, the Company purchased 269,549 shares of Company common stock for its treasury at an aggregate cost of $1,218,033. These and all other treasury shares were cancelled during the three months ended June 30, 2009 in the amount of $2,511,813.
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
8. ACQUISITIONS AND DISPOSITIONS
On November 30, 2007, the Company 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 Garden 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, the Company acquired the Stellar Stock and the MGSO Stock from Norman Hickmore ("Hickmore") and Richard Stanton ("Stanton") for a total purchase price of $25,486,000 (which includes inventory and other assets), payable to the sellers $15,486,000 in cash, $10,000,000 pursuant
to two secured promissory notes in the amount of $5,000,000 each to Stanton and Hickmore (the "Notes"), plus estimated transaction costs of $175,000. The Notes will bear interest at the rate of 14% per annum with the principal payable in one lump sum payment on November 30, 2010 (extended to November 30, 2012 in April 2009). 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. The Company cannot pre-pay the Notes during
the first twelve (12) months; thereafter, the Company may prepay the Notes, in whole or in part, provided that (i) any prepayment by the Company 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. As
part of the Transaction, Hickmore and Stanton entered into five-year covenants not to compete with the Company. Additionally, as part of the Transaction, the Company 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 the Company 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.
The following information summarizes the allocation of fair values assigned to the assets and liabilities at the acquisition date.
|
Net current assets
|
|
$
|
390,000
|
|
|
Property and equipment and other assets
|
|
|
4,823,020
|
|
|
Non-compete agreement
|
|
|
200,000
|
|
|
Other assets
|
|
|
96,000
|
|
|
Goodwill
|
|
|
7,044,050
|
|
|
SOB licenses
|
|
|
20,125,856
|
|
|
Deferred tax liability
|
|
|
(7,044,050
|
)
|
|
Net assets acquired
|
|
$
|
25,634,876
|
|
This acquisition was made to further the Company’s growth objective of acquiring nightclubs that will quickly contribute to the Company’s earnings per share. Goodwill in the acquisition represents the offset to the deferred tax liability recorded as a result of the difference in the basis of the net assets for tax
and financial purposes. The results of operations of this acquired entity are included in the Company’s consolidated results of operations since December 1, 2007.
The following unaudited pro forma information presents the results of operations for the nine months ended June 30, 2008 as if the acquisition had occurred as of the beginning of the immediate preceding period. The pro forma information is not necessarily indicative of what would have occurred had the acquisition been made as
of such periods, nor is it indicative of future results of operations. The pro
forma amounts give effect to appropriate adjustments for the fair value of the assets acquired, amortization of intangibles and interest expense.
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
8. ACQUISITIONS AND DISPOSITIONS - continued
|
|
|
For the Nine
Months Ended
|
|
|
|
|
June 30, 2008
|
|
|
Revenues
|
|
$
|
44,742,417
|
|
|
Net income
|
|
$
|
6,579,348
|
|
|
Net income per share - basic
|
|
$
|
0.87
|
|
|
Net income per share - diluted
|
|
$
|
0.81
|
|
|
Weighted average shares outstanding - basic
|
|
|
7,536,104
|
|
|
Weighted average shares outstanding - diluted
|
|
|
8,238,094
|
|
On March 31, 2008, the Company’s 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 operates “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, the Company’s 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, the Company paid a purchase
price of $3,500,000 in cash for the Partnership Interests and Membership Interests, and issued 195,000 shares of the Company’s restricted common stock (the “Rick’s Shares”) valued at $23 per share for the TEZ Shares.
As part of the transaction and as amended in April 2009, the Company 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 the Company’s election during any given month, the Company may either buy the Monthly Shares or, if the Company elects 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 the Company within three (3) business days of the date of sale of the Monthly Shares during that particular month. The Company’s 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 June 30, 2009, the 195,000 shares of restricted common stock were classified on the consolidated balance sheet as temporary equity in accordance with EITF Topic D-98,
Classification and Measurement of Redeemable Securities
. In April 2009, the Company renegotiated the terms of these put options. Under the new terms, the Company has extended payback and reduced the number of shares that can be put back to the Company.
No consideration was required by the Company to renegotiate the terms of the put options.
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
8. ACQUISITIONS AND DISPOSITIONS - continued
The full results of operations of this entity are included in the Company’s results of operations since March 31, 2008.
Additionally, at closing, the Seller and the Partnership Seller entered into a five-year agreement not to compete with the Company within a twenty 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 years (“Original Term”)
with an option for an additional nine years 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 year period shall be 15%.
The following information summarizes the allocation of fair values assigned to the assets and liabilities at the acquisition date.
|
Property and equipment and other assets
|
|
$
|
3,882,885
|
|
|
Non-compete agreement
|
|
|
100,000
|
|
|
Goodwill
|
|
|
1,458,583
|
|
|
SOB licenses
|
|
|
4,207,770
|
|
|
Deferred tax liability
|
|
|
(1,458,583
|
)
|
|
Net assets acquired
|
|
$
|
8,190,655
|
|
Goodwill in the acquisition represents the offset to the deferred tax liability recorded as a result of the difference in the basis of the net assets for tax and financial purposes. The results of operations of this acquired entity are included in the Company’s consolidated results of operations since June 30, 2008. This
acquisition was made to further the Company’s growth objective of acquiring nightclubs that will quickly contribute to the Company’s earnings per share. Proforma results of operations have not been provided, as the amounts were not deemed material to the consolidated financial statements.
On March 31, 2008, the Company’s 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 the Company of RCI. Playmates
owns an adult entertainment cabaret 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 the Company’s restricted common stock valued at $20.00 per share (the “Shares”). For accounting
purposes, the Company’s investment is only $751,000, due to the previous losses of the minority interest which have been expensed. This acquisition was made to give the Company complete control over this entity. Therefore, the investment has been assigned to goodwill as the operating license was acquired separately from the acquisition of the business.
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 the Company 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 the Company during any given month of its election to “Put” the Monthly Shares to the Company during that particular month. At the Company’s election during any given month, the Company may either buy the Monthly Shares or, if the Company elects 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 the Company within three (3) business days of the date of sale of the Monthly Shares during that particular month. The Company’s 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 June 30, 2009,
the 35,000 shares of restricted common stock were classified on the consolidated balance sheet as temporary equity in accordance with EITF Topic D-98,
Classification and Measurement of Redeemable Securities.
In April 2009, the Company renegotiated the terms of these and other put options. No consideration was required by the Company to renegotiate the terms of these put options. Under the new terms, the Company has extended
payback and reduced the number of shares that can be put back to the Company. In the event the Seller elects not to “Put” the Shares to the Company, 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 the Company’s results of operations since
March 31, 2008.
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
8. ACQUISITIONS AND DISPOSITIONS - continued
In April 11, 2008, the Company’s 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 known as "The Executive Club" (the "Club"), located at 8550 North Stemmons Freeway, Dallas, Texas 75247 (the "Real Property"). As part of the transaction, the Company’s wholly owned subsidiary, RCI Holdings,
Inc. ("RCI"), also acquired the Real Property from DPC Holdings, LLC, a Texas limited liability company ("DPC"). At closing, the Company 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 the Company’s 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 the Company’s 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. 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. The Company 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 the Company’s election during any given month, the Company may either buy the Monthly Club Shares or, if the Company elects 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 the Company within three (3) business days of the date of sale of the Monthly Club Shares during that particular month. The Company’s 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.
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
8. ACQUISITIONS AND DISPOSITIONS - continued
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 the Company’s election during any given month, the Company may either buy the Monthly Real Estate Shares or, if the Company elects 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 the Company within three (3) business days of the date of sale of the Monthly Real Estate Shares during that particular month. The Company’s 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.
The only consideration required by the Company in the amendment of the terms of these put options was the granting of a second lien on the related club property in Dallas, Texas. The granting of the second lien for the “Dallas sellers” put options necessitates derivative liability accounting, as required by paragraph
32 of EITF 00-19 and SFAS 133. These put options have been transferred from temporary equity to derivative liabilities, measured at fair value, effective as of the date of the modifications. The liabilities will continue to be recognized each quarter at fair value and the change in fair value recognized in the statement of income.
Finally, at Closing each of the Sellers entered a five year Non-Competition Agreement with the Company pursuant to which they agreed not to compete with the Company in Dallas County or any adjacent county.
The following information summarizes the allocation of fair values assigned to the assets and liabilities at the acquisition date based on a preliminary valuation. Subsequent adjustments may be recorded upon the completion of the valuation and the final determination of the purchase price allocation.
|
Net current assets
|
|
$
|
34,445
|
|
|
Property and equipment and other assets
|
|
|
6,264,850
|
|
|
Non-compete agreement
|
|
|
300,000
|
|
|
Goodwill
|
|
|
303,354
|
|
|
SOB licenses
|
|
|
2,640,763
|
|
|
Deferred tax liability
|
|
|
(303,354
|
)
|
|
Net assets acquired
|
|
$
|
9,240,058
|
|
Goodwill in the acquisition represents the offset to the deferred tax liability recorded as a result of the difference in the basis of the net assets for tax and financial purposes. The results of operations of this entity are included in the Company’s consolidated results of operations since April 11, 2008. This acquisition
was made to further the Company’s growth objective of acquiring nightclubs that will quickly contribute to the Company’s earnings per share. Proforma results of operations have not been provided, as the amounts were not deemed material to the consolidated financial statements.
On June 18, 2008, the Company’s 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”).
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
8. ACQUISITIONS AND DISPOSITIONS - continued
At closing, the Company 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, the Company’s 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 the Company and by Eric Langan, the Company’s Chief Executive Officer, individually. The Company also incurred
$77,599 in costs, which was paid in cash.
The following information summarizes the allocation of fair values assigned to the assets and liabilities at the acquisition date based on a preliminary valuation. Subsequent adjustments may be recorded upon the completion of the valuation and the final determination of the purchase price allocation.
|
Net current assets
|
|
$
|
151,784
|
|
|
Property and equipment and other assets
|
|
|
6,000,000
|
|
|
Non-compete agreement
|
|
|
100,000
|
|
|
Goodwill
|
|
|
1,410,571
|
|
|
Other assets
|
|
|
43,500
|
|
|
Net assets acquired
|
|
$
|
7,705,855
|
|
The main factor that contributes to goodwill in the transaction is the Company’s ability to rebrand this operation as a Club Onyx to produce more revenues. The results of operations of this entity are included in the Company’s consolidated results of operations since June 18, 2008. This acquisition was
made to further the Company’s growth objective of acquiring nightclubs that will quickly contribute to the Company’s earnings per share.
Proforma results of operations have not been provided, as the amounts were not deemed material to the consolidated financial statements.
On September 5, 2008, the Company’s 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 known as “Scores” (the “Club”), located at 3355 Procyon Street, Las Vegas, Nevada 89102 (the “Real Property”).
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
8. ACQUISITIONS AND DISPOSITIONS - continued
At Closing, Purchaser paid Seller an aggregate amount as follows (the “Purchase Price”):
|
|
(i)
|
$12,000,000 payable by wire transfer;
|
|
|
(ii)
|
$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
|
|
|
(iii)
|
200,000 shares of restricted common stock, par value $0.01 of Rick’s (the “Rick’s Shares”) issued to the Seller, valued at $13.77 per share.
|
As part of the transaction and as amended in April 2009, the Company 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”):
|
|
o
|
from April 5, 2009 until May 4, 2009, up to a total of 15,000 shares;
|
|
|
o
|
from May 5, 2009 until November 5, 2009 at a rate of 3,000 shares per month;
|
|
|
o
|
from November 5, 2009 until May 4, 2010 at a rate of 4,000 shares per month;
|
|
|
o
|
from May 5, 2010 until November 4, 2010 at a rate of 5,000 shares per month; and
|
|
|
o
|
from November 5, 2010 until October 4, 2011 at a rate of 6,000 shares per month.
|
At the Company’s election during any given month, the Company may either buy the Monthly Shares or, if the Company elects 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. The Company’s 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. No consideration was required by the Company to renegotiate the terms of these put options.
Upon closing of the transaction, the Company 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. The Company agreed to pay DeGori cash consideration of $66,667 for entering into the Non-Competition Agreement. Additionally, at Closing, the Company 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, the Company 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. The Company incurred $367,580 in costs in connection with the acquisition.
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
8. ACQUISITIONS AND DISPOSITIONS - continued
The following information summarizes the allocation of fair values assigned to the assets and liabilities at the acquisition date based on a preliminary valuation. Subsequent adjustments may be recorded upon the completion of the valuation and the final determination of the purchase price allocation.
|
Net current assets
|
|
$
|
112,885
|
|
|
Property and equipment and other assets
|
|
|
1,953,065
|
|
|
Non-compete agreement
|
|
|
100,000
|
|
|
Goodwill
|
|
|
16,022,098
|
|
|
Net assets acquired
|
|
$
|
18,188,048
|
|
The main factor that contributes to goodwill in the transaction is the Company’s ability to rebrand this operation as a Rick’s Cabaret to produce more revenues. The results of operations of this acquired entity are included in the Company’s consolidated results of operations since September 5, 2008. This
acquisition was made to further the Company’s growth objective of acquiring nightclubs that will quickly contribute to the Company’s earnings per share.
The following unaudited pro forma information presents the results of operations as if the acquisition had occurred as of the beginning of the immediate preceding period. The pro forma information is not necessarily indicative of what would have occurred had the acquisition been made as of such periods, nor is it indicative of
future results of operations. The pro forma amounts give effect to appropriate adjustments for the fair value of the assets acquired, amortization of intangibles and interest expense.
|
|
|
For the Three
Months Ended
|
|
|
For the Nine
Months Ended
|
|
|
|
|
June 30, 2008
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
21,631,537
|
|
|
$
|
55,143,607
|
|
|
Net income
|
|
$
|
2,383,139
|
|
|
$
|
7,121,091
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share - basic
|
|
$
|
0.27
|
|
|
$
|
0.85
|
|
|
Net income per share - diluted
|
|
$
|
0.25
|
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
8,972,606
|
|
|
|
8,361,335
|
|
|
Weighted average shares outstanding - diluted
|
|
|
9,592,391
|
|
|
|
9,063,325
|
|
The following unaudited pro forma information presents the results of as if the acquisitions of Miami Gardens Square One, Inc. and DI Food and Beverage of Las Vegas, LLC had occurred as of the beginning of the immediate preceding period. The pro forma information is not necessarily indicative of
what
would have occurred had the acquisition been made as of such periods, nor is it indicative of future results of operations. The pro forma amounts give effect to appropriate adjustments for the fair value of the assets acquired, amortization of intangibles and interest expense.
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
8. ACQUISITIONS AND DISPOSITIONS - continued
|
|
|
For the Three
Months Ended
|
|
|
For the Nine
Months Ended
|
|
|
|
|
June 30, 2008
|
|
|
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
21,631,537
|
|
|
$
|
58,110,261
|
|
|
Net income
|
|
$
|
2,383,139
|
|
|
$
|
7,514,082
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share - basic
|
|
$
|
0.27
|
|
|
$
|
0.90
|
|
|
Net income per share - diluted
|
|
$
|
0.25
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
8,972,606
|
|
|
|
8,361,335
|
|
|
Weighted average shares outstanding - diluted
|
|
|
9,592,391
|
|
|
|
9,063,325
|
|
Media Acquisitions
On April 15, 2008, the Company’s 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.
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"), the Company 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 (paid); 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".
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
8. ACQUISITIONS AND DISPOSITIONS - continued
At Closing, Waitt entered into a Lock-Up/Leak-Out Agreement with the Company 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 the Company’s election during any given month, the Company may either buy the Monthly Shares or, if the Company elects 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 the Company within three (3) business days of the date of sale of the Monthly Shares during that particular month. The Company’s 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).
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 the Company for salaried employees. Under the terms of the Employment Agreement, Mr. Waitt is bound to a confidentiality provision and cannot compete with the Company upon the expiration of the Employment Agreement.
TEEZE/Adult Store Buyers Magazine LLC
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"), the Company 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 the Company’s election during any given month, the Company may either buy the Rick's TEEZE Shares or, if the Company elects 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 the Company within three (3) business days of the date of sale of the Rick's TEEZE Shares during that particular month. The Company’s 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.
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
8. ACQUISITIONS AND DISPOSITIONS - continued
In April 2009, the Company renegotiated the terms of its purchase agreements with the former owners of ED Publications, Teeze and Adult Store Buyer 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. The Company 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, Cornetta entered a five year Non-Competition Agreement with the Company pursuant to which he agreed not to compete with the Company 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.
The following information summarizes the initial allocation of fair values assigned to the assets and liabilities at the acquisition date based on a preliminary valuation for the ED Publications, Inc., Adult Store Buyers Magazine LLC, and TEEZE International, Inc. acquisitions. Subsequent adjustments may be recorded upon the
completion of the valuation and the final determination of the purchase price allocation.
|
Net current assets
|
|
$
|
469,378
|
|
|
Non-compete agreement
|
|
|
100,000
|
|
|
Goodwill
|
|
|
567,125
|
|
|
Net current liabilities
|
|
|
(66,749
|
)
|
|
Net assets acquired
|
|
$
|
1,069,754
|
|
The results of operations of these entities are included in the Company’s results of operations since April 15, 2008. This acquisition was made to create new marketing synergies with major industry product suppliers and new national advertising opportunities and also provides the Company with additional diversification
of revenue and income streams while remaining within the Company’s core competency. The ability to create additional cash flows from the marketing synergies is the main factor contributing to goodwill in the transaction. Proforma results of operations have not been provided, as the amounts were not deemed material to the consolidated financial statements.
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
9. INCOME TAXES
Income tax expense for the periods presented differs from the “expected” federal income tax expense computed by applying the U.S. federal statutory rate of 34% to earnings before income taxes, including discontinued operations, for the three and nine months ended June 30, as a result of the following:
|
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Computed expected tax expense
|
|
$
|
949,476
|
|
|
$
|
1,008,154
|
|
|
$
|
1,831,172
|
|
|
$
|
3,063,276
|
|
|
State income taxes
|
|
|
47,780
|
|
|
|
88,955
|
|
|
|
114,962
|
|
|
|
270,289
|
|
|
Stock option disqualifying dispositions and other permanent differences
|
|
|
10,827
|
|
|
|
10,942
|
|
|
|
24,870
|
|
|
|
(301,734
|
)
|
|
Net operating loss carryforwards
|
|
|
-
|
|
|
|
92,709
|
|
|
|
-
|
|
|
|
(191,786
|
)
|
|
Effect of rate increase on deferred tax liability
|
|
|
-
|
|
|
|
(64,764
|
)
|
|
|
-
|
|
|
|
(48,263
|
)
|
|
Total income tax expense
|
|
$
|
1,008,083
|
|
|
$
|
1,135,996
|
|
|
$
|
1,971,004
|
|
|
$
|
2,791,782
|
|
Included in the Company’s deferred tax liabilities at June 30, 2009 is approximately $13,150,000 representing the tax effect of indefinite lived intangible assets from club acquisitions which are not deductible for tax purposes. These deferred tax liabilities will remain in the Company’s balance sheet until the related
clubs are sold.
10. DISCONTINUED OPERATIONS
The accompanying financial statements reflect the following as discontinued operations as of and for the period ended June 30, 2009.
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 also has put its Rick’s Cabaret nightclub in Austin, Texas up for sale. 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 June 30, 2009, recognized in the consolidated statement of income
as loss from sale of discontinued operations.
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
10. DISCONTINUED OPERATIONS - continued
Following is summarized information regarding these discontinued operations:
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Rick's Austin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(169,546
|
)
|
|
$
|
(258,128
|
)
|
|
$
|
(587,884
|
)
|
|
$
|
(957,880
|
)
|
|
Loss on sale of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(823,090
|
)
|
|
|
-
|
|
|
Income tax benefit - discontinued operations
|
|
|
59,341
|
|
|
|
90,345
|
|
|
|
493,841
|
|
|
|
335,258
|
|
|
Encounters, San Antonio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
(59,950
|
)
|
|
|
(67,453
|
)
|
|
|
(150,519
|
)
|
|
Loss on sale of discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(226,175
|
)
|
|
|
-
|
|
|
Income tax - discontinued operations
|
|
|
-
|
|
|
|
20,982
|
|
|
|
102,770
|
|
|
|
52,682
|
|
|
Total loss from discontinued operations, net of tax
|
|
$
|
(110,205
|
)
|
|
$
|
(206,751
|
)
|
|
$
|
(1,107,991
|
)
|
|
$
|
(720,459
|
)
|
Major classes of assets and liabilities included as assets and liabilities of discontinued operations as of:
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Rick's Austin:
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
83,846
|
|
|
$
|
117,851
|
|
|
Property and equipment
|
|
|
1,080,391
|
|
|
|
1,212,127
|
|
|
Other assets
|
|
|
1,013,097
|
|
|
|
1,862,437
|
|
|
Current liabilities
|
|
|
(79,046
|
)
|
|
|
(166,885
|
)
|
|
Long-term liabilities
|
|
|
(277,954
|
)
|
|
|
(277,954
|
)
|
|
Net assets (liabilities)
|
|
$
|
1,820,334
|
|
|
$
|
2,747,576
|
|
|
|
|
|
|
|
|
|
|
|
|
Encounters, San Antonio:
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
-
|
|
|
$
|
42,584
|
|
|
Property and equipment
|
|
|
-
|
|
|
|
245,035
|
|
|
Other assets
|
|
|
-
|
|
|
|
41,000
|
|
|
Current liabilities
|
|
|
-
|
|
|
|
(20,737
|
)
|
|
Long-term liabilities
|
|
|
-
|
|
|
|
-
|
|
|
Net assets (liabilities)
|
|
$
|
-
|
|
|
$
|
307,882
|
|
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
11. SEGMENT INFORMATION
Below is the financial information related to the Company’s segments:
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Business segment sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Night clubs
|
|
$
|
20,544,779
|
|
|
$
|
15,563,449
|
|
|
$
|
55,101,199
|
|
|
$
|
41,055,705
|
|
|
Other
|
|
|
390,054
|
|
|
|
376,557
|
|
|
|
1,200,414
|
|
|
|
720,058
|
|
|
|
|
$
|
20,934,833
|
|
|
$
|
15,940,006
|
|
|
$
|
56,301,613
|
|
|
$
|
41,775,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business segment operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Night clubs
|
|
$
|
4,748,770
|
|
|
$
|
4,967,868
|
|
|
$
|
12,589,214
|
|
|
$
|
14,112,331
|
|
|
Other
|
|
|
(54,831
|
)
|
|
|
(74,866
|
)
|
|
|
(233,397
|
)
|
|
|
(21,219
|
)
|
|
General corporate
|
|
|
(725,841
|
)
|
|
|
(875,519
|
)
|
|
|
(2,483,529
|
)
|
|
|
(2,383,698
|
)
|
|
|
|
$
|
3,968,098
|
|
|
$
|
4,017,483
|
|
|
$
|
9,872,288
|
|
|
$
|
11,707,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business segment capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Night clubs
|
|
$
|
408,634
|
|
|
$
|
16,467,228
|
|
|
$
|
1,290,716
|
|
|
$
|
28,393,058
|
|
|
Other
|
|
|
1,449
|
|
|
|
1,091
|
|
|
|
5,049
|
|
|
|
3,039
|
|
|
General corporate
|
|
|
22,553
|
|
|
|
37,514
|
|
|
|
36,166
|
|
|
|
86,148
|
|
|
|
|
$
|
432,636
|
|
|
$
|
16,505,833
|
|
|
$
|
1,331,931
|
|
|
$
|
28,482,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business segment depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Night clubs
|
|
$
|
614,132
|
|
|
$
|
449,968
|
|
|
$
|
1,840,325
|
|
|
$
|
1,325,159
|
|
|
Other
|
|
|
8,417
|
|
|
|
10,661
|
|
|
|
25,422
|
|
|
|
21,592
|
|
|
General corporate
|
|
|
186,274
|
|
|
|
123,598
|
|
|
|
558,733
|
|
|
|
259,250
|
|
|
|
|
$
|
808,823
|
|
|
$
|
584,227
|
|
|
$
|
2,424,480
|
|
|
$
|
1,606,001
|
|
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
12. COMMITMENTS AND CONTINGENCIES
Sexually Oriented Business Ordinance of 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. Approximately 1.9% of our club operation’s revenues for the nine months ended June 30, 2009 were in Houston, Texas and those clubs lost approximately 1.4% of the Company’s income before taxes for that period.
Other Legal Matters
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. The Company has 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 the Company is accruing and expensing the liability. For the quarter ended June 30, 2009, as a result of the Third Court’s decision, the Company accrued the fee, but did not pay the State. 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.
For all the above legal matters, no contingent reserves for liabilities have been recorded in the accompanying consolidated balance sheets as such potential losses are not deemed probable or estimable.
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
13. 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 Emerging Issues Task Force (“EITF’) No. 00-19, “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, EITF No. 00-19 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 EITF No. 00-19
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.
The fair value of the derivative liabilities when the securities became derivatives were estimated to be $3,751,192 in accordance with SFAS No. 157, using a Black-Scholes option-pricing model using the following weighted average assumptions:
The fair value of the derivative liabilities as of June 30, 2009 were estimated to be $3,765,666 in accordance with SFAS 157, using a Black-Scholes option-pricing model using the following weighted average assumptions:
The loss for the three months ended June 30, 2009, recognized in earnings amounted to $121,904.
14. SUBSEQUENT EVENTS
The following events have occurred after June 30, 2009, which the Company considers necessary to disclose in order to keep these financial statements from being misleading. Subsequent events have been evaluated through August 12, 2009, the date the financial statements were issued.
The Company’s Board of Directors approved the issuance of stock options to the Board of Directors and the Company’s General Counsel on July 22, 2009. Each non-officer Director and the General Counsel received 10,000 options (total of 50,000 options) and the two Officer Directors received 5,000 each. The
options vest in one year, expire after two years and are exercisable at $8.75 per share.
On August 6, 2009, the Company completed the sale of an aggregate of $7.2 million in 10% convertible debentures that will be used to make future acquisitions. The three-year debentures bear interest at 10 percent and can be convertible into common shares of the Company’s stock at $8.75 per share. The debentures are redeemable by the
Company at any time if the closing price of the Company’s stock is at least $11.50 for 20 consecutive days. Other terms of the debentures are available in the Company’s 8-K filing with the SEC.
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
14. SUBSEQUENT EVENTS - continued
On August 10, 2009, a wholly owned subsidiary of the Company sold approximately 338 acres of land in Brazoria County, Texas and associated equipment for a cash payment of $775,000. As a result of the sale, the Company anticipates a gain of approximately $200,000.