UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2008


£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-26958

RICK’S CABARET INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

Texas
76-0458229
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

10959 Cutten Road
Houston, Texas 77066
(Address of principal executive offices) (Zip Code)

( 281) 397-6730
(Registrant’s telephone number, including area code)

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 T   No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Large accelerated filer £ Accelerated filer £ Non-accelerated filer £ Smaller reporting company T

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes £ No T


As of February 2, 2009, 9,344,325 shares of the Registrant’s Common Stock were outstanding.
 
 
 
R IC K'S CABARET INTERNATIONAL, INC.
TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
     
 
1
     
 
3
     
 
4
     
 
6
     
Item 2.
23
     
Item 4T.
31
     
PART II
OTHER INFORMATION
 
     
Item 1.
32
     
Item 2.
33
     
Item 6.
33
     
 
34
 
 
PART I                      FINANCIAL INFORMATION

Item 1.
Financial Statements.

R IC K'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

ASSETS

   
DECEMBER 31, 2008
   
SEPTEMBER 30, 2008
 
   
(UNAUDITED)
   
 
 
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 2,978,133     $ 5,602,645  
Accounts receivable
               
Trade, net
    785,558       637,035  
Other, net
    199,537       230,298  
Inventories
    2,050,885       1,717,237  
Prepaid expenses and other current assets
    557,424       568,599  
Total current assets
    6,571,537       8,755,814  
                 
PROPERTY AND EQUIPMENT:
               
Buildings, land and leasehold improvements
    44,538,122       44,239,727  
Furniture and equipment
    14,045,908       13,731,346  
                 
      58,584,030       57,971,073  
Accumulated depreciation
    8,714,434       7,932,809  
                 
Total property and equipment, net
    49,869,596       50,038,264  
                 
                 
OTHER ASSETS:
               
Goodwill and indefinite lived intangibles
    76,506,045       76,457,694  
Definite lived intangibles, net
    1,247,240       1,335,509  
Other
    570,450       481,525  
Total other assets
    78,323,735       78,274,728  
Total assets
  $ 134,764,868     $ 137,068,806  

See accompanying notes to consolidated financial statements.


RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY

   
DECEMBER 31, 2008
   
SEPTEMBER 30, 2008
 
   
(UNAUDITED)
   
 
 
CURRENT LIABILITIES:
           
Accounts payable – trade
  $ 845,669     $ 1,203,555  
Accrued liabilities
    2,873,587       4,579,918  
Current portion of long-term debt
    2,245,532       2,644,541  
Total current liabilities
    5,964,788       8,428,014  
                 
Deferred tax liability
    17,115,054       16,894,256  
Other long-term liabilities
    563,925       537,967  
Long-term debt, less current portion
    30,239,192       30,312,865  
Long-term debt-related parties
    -       600,000  
Total liabilities
    53,882,959       56,773,102  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
MINORITY INTERESTS
    3,356,596       3,358,096  
                 
TEMPORARY EQUITY – Common stock, subject to put rights (611,740 shares)
    13,935,020       13,935,020  
                 
PERMANENT STOCKHOLDERS' EQUITY:
               
Preferred stock, $.10 par, 1,000,000 shares authorized; none issued and outstanding
    -       -  
Common stock, $.01 par, 15,000,000 shares authorized; 9,689,315 shares issued
    96,893       96,893  
Additional paid-in capital
    53,968,216       53,948,172  
Accumulated other comprehensive income
    -       (13,347 )
Retained earnings
    11,055,482       10,264,650  
Less 956,730 and 908,530 shares of common stock held in treasury, at cost, respectively
    (1,530,298 )     (1,293,780 )
Total permanent stockholders’ equity
    63,590,293       63,002,588  
                 
Total liabilities and stockholders’ equity
  $ 134,764,868     $ 137,068,806  

See accompanying notes to consolidated financial statements.

 
R IC K'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

   
FOR THE THREE MONTHS
ENDED DECEMBER 31,
 
             
   
2008
   
2007
 
   
(UNAUDITED)
 
             
Revenues:
           
Sales of alcoholic beverages
  $ 6,736,310     $ 4,195,192  
Sales of food and merchandise
    1,429,385       1,060,332  
Service revenues
    8,195,202       5,023,497  
Internet revenues
    176,763       170,789  
Media revenues
    183,636       -  
Other
    589,875       504,528  
Total revenues
    17,311,171       10,954,338  
                 
Operating expenses:
               
Cost of goods sold
    2,269,588       1,341,831  
Salaries and wages
    4,297,117       2,586,476  
Stock-based compensation
    20,044       39,270  
Other general and administrative:
               
Taxes and permits
    2,353,491       1,235,793  
Charge card fees
    339,699       198,710  
Rent
    963,362       464,455  
Legal and professional
    509,049       293,373  
Advertising and marketing
    1,177,311       360,832  
Insurance
    243,047       201,396  
Utilities
    442,698       209,735  
Impairment of nightclub assets
    221,563       -  
Depreciation and amortization
    869,893       511,339  
Other
    1,447,174       939,231  
Total operating expenses
    15,154,036       8,382,441  
Income from operations
    2,157,135       2,571,897  
                 
Other income (expense):
               
Interest income
    5,734       43,069  
Interest expense
    (833,471 )     (461,883 )
Minority interests
    (73,500 )     177,911  
Income before income taxes
    1,255,898       2,330,994  
Income taxes
    465,066       547,722  
Net income
  $ 790,832     $ 1,783,272  
Basic and diluted earnings per share:
               
Net income, basic
  $ 0.08     $ 0.26  
Net income, diluted
  $ 0.08     $ 0.24  
Weighted average number of common  shares outstanding:
               
Basic
    9,366,033       6,806,234  
Diluted
    9,599,954       7,635,326  

Comprehensive income for the three months ended December 31, 2008 and 2007 was $790,832 and $1,767,700, respectively. This includes the changes in available-for-sale securities and net income.

See accompanying notes to consolidated financial statements.

 
R IC K'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
FOR THE THREE MONTHS
ENDED DECEMBER 31,
 
   
2008
   
2007
 
   
(UNAUDITED)
   
(UNAUDITED)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 790,832     $ 1,783,272  
Adjustments to reconcile net income to cash provided by (used in) operating activities:
               
Depreciation and amortization
    869,893       511,339  
Impairment of nightclub assets
    221,563       -  
Deferred taxes
    220,085       (52,828 )
Amortization of note discount
    -       8,888  
Beneficial conversion
    5,695       4,488  
Minority interests
    73,500       (177,911 )
Deferred rents
    25,958       29,388  
Writeoff of comprehensive income charge
    13,347       -  
Common stock issued for interest payment
    -       21,448  
Stock compensation expense
    20,044       39,270  
Changes in operating assets and liabilities
    (2,816,599 )     90,975  
Cash provided by (used in) operating activities
    (575,682 )     2,258,329  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from sale of property
    -       36,000  
Additions to property and equipment
    (612,958 )     (570,019 )
Acquisition of businesses, net of cash acquired
    (48,351 )     (15,486,370 )
Payments from notes receivable
    2,374       62,943  
Cash used in investing activities
    (658,935 )     (15,957,446 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from sale of common stock
    -       14,976,700  
Proceeds from stock options exercised
    -       161,700  
Proceeds from long-term debt
    -       1,000,000  
Distributions to minority interests
    (75,000 )     -  
Purchase of treasury stock
    (236,518 )     -  
Payments on long-term debt
    (1,078,377 )     (404,741 )
Cash provided by (used in) financing activities
    (1,389,895 )     15,733,659  
                 
NET INCREASE (DECREASE) IN CASH
    (2,624,512 )     2,034,542  
CASH AT BEGINNING OF PERIOD
    5,602,645       2,998,758  
CASH AT END OF PERIOD
  $ 2,978,133     $ 5,033,300  
CASH PAID DURING PERIOD FOR:
               
Interest
  $ 755,763     $ 297,814  
Taxes
  $ 1,655,000     $ 460,488  

See accompanying notes to consolidated financial statements.

 
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Non-cash transactions:

On November 30, 2007, the Company purchased Tootsie’s Cabaret in Florida for $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, plus estimated transaction costs of $125,000.

In November 2007, the holder of a convertible debenture converted $713,807 of principal and interest owed into 150,134 shares of restricted common stock.


R IC K'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
(UNAUDITED)
 
1.
BASIS OF PRESENTATION

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 SX.  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.  In the opinion of management, all adjustments considered necessary for a fair presentation, consisting solely of normal recurring adjustments, have been made.  Operating results for the three months ended December 31, 2008 are not necessarily indicative of the results that may be expected for the year ending September 30, 2009.

2.
RECENT ACCOUNTING STANDARDS AND PRONOUNCEMENTS

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards 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 Statement of Financial Accounting Standards 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 financial statements.

In December 2006, the FASB issued Statement of Financial Accounting Standards 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 will require 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. 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 157 did not have a material effect on the Company’s financial condition or results of operations.  However, the Company is still in the process of evaluating this standard with respect to its effect on non-financial assets and liabilities and therefore has not yet determined the impact that it will have on the Company’s consolidated financial statements upon full adoption.

 
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008

2.
RECENT ACCOUNTING STANDARDS AND PRONOUNCEMENTS   – continued

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 quarter ended December 31, 2008.

3.
STOCK OPTIONS AND STOCK-BASED EMPLOYEE COMPENSATION

Below is the summary of common stock options outstanding as of December 31, 2008:

Employee and Director Stock Option Plan:
 
Options Authorized
   
Options Outstanding
   
Options Vested
   
Available for Grant
 
1999 Stock Option Plan
    1,500,000       420,000       410,000       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 December 31, 2008, 438,000 shares of common stock were available for future grants under the Plan.

The compensation cost recognized for the three months ended December 31, 2008 and 2007 was $20,044 and $39,270, respectively.  There were 35,000 stock option exercises for the three months ended December 31, 2007.  There were no stock option grants for the three month periods ended December 31, 2008 and 2007.

 
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008

3.
STOCK OPTIONS AND STOCK-BASED EMPLOYEE COMPENSATION - continued
 
Stock Option Activity

The following is a summary of all stock option transactions for the three months ended December 31, 2008:

   
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
    -       -              
Exercised
    -       -              
Outstanding as of December 31, 2008
    420,000     $ 3.86       1.00     $ 488,050  
Options exercisable as of December 31, 2008
    410,000     $ 3.73       .93     $ 488,050  


4.
SEGMENT INFORMATION

Below is the financial information related to the Company’s segments:

   
FOR THE THREE MONTHS
ENDED DECEMBER 31,
 
   
2008
   
2007
 
REVENUES
           
Club operations
  $ 16,950,773     $ 10,783,549  
Media
    183,636       -  
Internet websites
    176,762       170,789  
    $ 17,311,171     $ 10,954,338  
                 
                 
NET INCOME
               
Club operations
  $ 2,753,070     $ 3,248,672  
Media
    (216,277 )     -  
Internet websites
    34,731       14,170  
Corporate expenses
    (1,780,692 )     (1,479,570 )
    $ 790,832     $ 1,783,272  
 
 
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008

5.
LONG-TERM DEBT

During November 2008, $600,000 of related party debt matured and was paid in cash by the Company.  The Company also made $478,377 in payments on other long-term debt.

6.
COMMON STOCK

During the quarter ended December 31, 2008, the Company purchased 48,200 shares of Company common stock for its treasury at an aggregate cost of $236,518.

7.
EARNINGS PER SHARE (EPS)

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.  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:

   
FOR THE THREE MONTHS ENDED DECEMBER 31,
 
   
2008
   
2007
 
   
(UNAUDITED)
   
(UNAUDITED)
 
Basic earnings per share:
           
             
Net earnings applicable to common stockholders
  $ 790,832     $ 1,783,272  
Average number of common shares outstanding
    9,366,033       6,806,234  
Basic earnings per share
  $ 0.08     $ 0.26  
                 
Diluted earnings per share:
               
Net earnings applicable to common stockholders
  $ 790,832     $ 1,783,272  
Adj. to net earnings from assumed conversion of  debentures (1)
    -       62,550  
Adj. net earnings for diluted EPS computation
  $ 790,832     $ 1,845,822  
                 
Average number of common shares outstanding:
               
Common shares outstanding
    9,366,033       6,806,234  
Potential dilutive shares resulting from exercise of warrants and options (2)
    233,921       403,138  
Potential dilutive shares resulting from conversion of debentures (3)
    -       425,954  
Total average number of common shares outstanding used for dilution
    9,599,954       7,635,326  
                 
Diluted earnings per share
  $ 0.08     $ 0.24  
 
 
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008

7.
EARNINGS PER SHARE – (EPS) - continued

(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 December 31, 2008 and 2007 totaling $960,582 and $3,074,639, respectively, were convertible into common stock at a price from $12.00 to $25.32 per share in 2008 and $3.00 to $12.00 per share in 2007 and resulted in additional common shares (based on average balances outstanding).  Potential dilutive shares of 89,257 and 72,463 for the three months ended December 31, 2008 and 2007, respectively, have been excluded from earnings per share due to being anti-dilutive.

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. 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.

 
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008

8.
ACQUISITIONS AND DISPOSITIONS - continued

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  

The results of operations of this acquired entity are included in the Company’s results of operations since December 1, 2007.

The following unaudited pro forma information presents the results of operations for the quarter ended December 31, 2007 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.

Revenues
  $ 13,960,992  
Net income
  $ 2,126,997  
         
Net income per share – basic
  $ 0.29  
Net income per share – diluted
  $ 0.26  
         
Weighted average shares outstanding     – basic
    7,439,387  
         
Weighted average shares outstanding – diluted
    8,268,479  

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.

 
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008

8.
ACQUISITIONS AND DISPOSITIONS - continued

As part of the transaction, 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 5,000 Rick’s Shares per month (the “Monthly Shares”), calculated at a price per share equal to $23.00 (“Value of the Rick’s Shares”).  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 September 30, 2008, 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 .

Additionally, at closing, the Seller and the Partnership Seller entered a five-year agreement not to compete with the Company 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%.

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.

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  

The results of operations of this acquired entity are included in the Company’s results of operations since March 31, 2008.

Proforma results of operations have not been provided, as the amounts were not deemed material to the consolidated financial statements. The transaction follows the Company’s growth strategy.

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.  The investment has been assigned to goodwill.

 
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008

8.
ACQUISITIONS AND DISPOSITIONS - continued

Pursuant to the terms of the Purchase Agreement, 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 5,000 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 September 30, 2008, 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 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.
 
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.

 
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008

8.
ACQUISITIONS AND DISPOSITIONS - continued
 
At Closing, 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 3,621 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") 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.
 
Additionally, at Closing, 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 1,379 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") 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. 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
    977,082  
SOB licenses
    2,640,763  
Deferred tax liability
    (977,082 )
Net assets acquired
  $ 9,240,058  

The results of operations of this entity are included in the Company’s results of operations since April 11, 2008.

Proforma results of operations have not been provided, as the amounts were not deemed material to the consolidated financial statements. The transaction follows the Company’s growth strategy.

 
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008

8.
ACQUISITIONS AND DISPOSITIONS - continued

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”).

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 initial 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 results of operations of this entity are included in the Company’s results of operations since June 18, 2008.

Proforma results of operations have not been provided, as the amounts were not deemed material to the consolidated financial statements. The transaction follows the Company’s growth strategy.

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

 
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008

8.
ACQUISITIONS AND DISPOSITIONS - continued

operated an adult entertainment cabaret known as “Scores” (the “Club”), located at 3355 Procyon Street, Las Vegas, Nevada 89102 (the “Real Property”).

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, 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 6,250 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”). 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.

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.

 
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008

8.
ACQUISITIONS AND DISPOSITIONS - continued

The Company incurred $367,580 in costs in connection with the acquisition.

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.  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
    16,022,298  
Net assets acquired
  $ 18,188,248  

The results of operations of this acquired entity are included in the Company’s results of operations since September 5, 2008.

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.

   
2007
 
       
Revenues
  $ 15,404,160  
Net income
  $ 2,001,316  
         
Net income per share – basic
  $ 0.26  
Net income per share – diluted
  $ 0.24  
         
Weighted average shares outstanding – basic
    7,678,234  
         
Weighted average shares outstanding – diluted
    8,507,326  

The following unaudited pro forma information presents the results of operations for the quarter ended December 31, 2007 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
DECEMBER 31, 2008

8.
ACQUISITIONS AND DISPOSITIONS - continued

Revenues
  $ 18,370,814  
Net income
  $ 2,345,041  
         
Net income per share – basic
  $ 0.28  
Net income per share – diluted
  $ 0.26  
         
Weighted average shares outstanding – basic
    8,311,387  
         
Weighted average shares outstanding – diluted
    9,140,479  
 
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").

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 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

 
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008

8.
ACQUISITIONS AND DISPOSITIONS - continued
 
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
DECEMBER 31, 2008

8.
ACQUISITIONS AND DISPOSITIONS - continued

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.

Proforma results of operations have not been provided, as the amounts were not deemed material to the consolidated financial statements. The transaction follows the Company’s growth strategy.

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 for the three months ended December 31, as a result of the following:

   
2008
   
2007
 
             
Computed expected tax expense
  $ 427,005     $ 792,538  
State income taxes
    37,393       23,310  
Stock option disqualifying dispositions and other permanent differences
    668       (268,126 )
Total income tax expense
  $ 465,066     $ 547,722  


Included in the Company’s deferred tax liabilities at December 31, 2008 is approximately $14,200,000 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.

 
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008

10.
IMPAIRMENT OF NIGHTCLUB ASSETS

The Company’s San Antonio nightclub, “Encounters” is currently for sale.  The accompanying financial statements as of and for the quarter ended December 31, 2008 include an impairment for the estimated loss on the sale of $221,563.

11.
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 the Company’s 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.  The Trial Court found that the City of Houston met its burden that there were sufficient alternate sites available to relocate all of the existing sexually oriented businesses in Houston in 1997.  The Trial Court found the Ordinance constitutional and enforceable. Post-trial motions were heard and the relief sought, a stay against enforcement, was denied by the Trial Court.  An appeal to the Fifth Circuit Court of Appeals was timely filed. The Fifth Circuit granted a stay pending appeal Oral argument was held before the Fifth Circuit Court of Appeals in August 2007.  The Fifth Circuit Court of Appeals ruled in favor of the City of Houston in September 2007.  Pleadings were filed seeking a stay against enforcement of the provisions of the Ordinance with the United States Supreme Court in conjunction with the request that the United States Supreme Court hear an appeal of the Fifth Circuit Court of Appeals ruling.  The United States Supreme Court refused to hear the matter.

Additionally, the Company filed on behalf of three of the Company’s club locations in Houston state court lawsuits seeking judicial review of the results of the amortization process contained within the Ordinance.  The amortization process was abated in 1998 due to the possible multiplicity of court actions.  The final order by the Trial Court resulted in the termination of the abatement and allowed the amortization process to continue as provided in the Ordinance.  Trial on the amortization cases was held in April 2008.  At the conclusion of the trial, 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 form of judgment has been entered by the Court. The amortization award periods have already expired for the Company’s affected clubs.  An appeal of the amortization review by the Harris County District Court was filed.  A stay sought by the clubs during the appeal was denied.  In the event all efforts to stop enforcement activity fail and the City of Houston elects to enforce the judgment, the Company, as well as every other similarly situated sexually oriented business located within the incorporated area of Houston, Texas, will have to either cease providing nude or semi-nude entertainment or develop alternate methods of operating.  We have already taken steps to clothe the Company’s entertainers in a manner to eliminate the need for licenses and not to be subject to the Ordinance.  Approximately 7.6% of the Company’s club operation’s revenues and 1.8% of income before income taxes for the three months ended December 31, 2008 were in Houston, Texas.  It is unknown at this time whether this will have a material effect on the Company’s operations.

 
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008

11.
COMMITMENTS AND CONTINGENCIES - continued

Other Legal Matters

Beginning January 1, 2008, our Texas clubs became subject to a new state law requiring each club to collect pay a $5 surcharge for every club visitor.  A lawsuit was filed by the Texas Entertainment Association, 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 has 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.  The Texas Third Court of Appeals heard oral argument in this case on February 11, 2009, however no decision is expected in the immediate future. In the meantime, we have paid the tax for the first four 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.  The Company ’ s Texas clubs have filed a separate lawsuit against the State to demand repayment of the taxes.

For all the above legal matters, no contingent reserves as liabilities have been recorded in the accompanying balance sheets as such potential losses are not deemed probable or estimable.

 
I te m 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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


FORWARD LOOKING STATEMENT AND INFORMATION

The Company is including the following cautionary statement in this Form 10-Q 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, or on behalf of, the Company.  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-Q 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.  The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties, but there can be no assurance that management's expectation, beliefs or projections will result, be achieved, or be accomplished.  In addition to other factors and matters discussed elsewhere herein, the following are important factors that, in the view of the Company, could cause material adverse effects on the Company's financial condition and results of operations: the risks and uncertainties relating to our Internet operations, the impact and implementation of the sexually oriented business ordinances in the jurisdictions where our facilities operate, competitive factors, the timing of the openings of other clubs, the availability of acceptable financing to fund corporate expansion efforts, and the dependence on key personnel.  The Company has no obligation to update or revise these forward-looking statements to reflect the occurrence of future events or circumstances.

GENERAL

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 and restaurant and bar operations.  Through our subsidiaries, we currently own and/or operate a total of nineteen adult nightclubs that offer live adult entertainment and restaurant and bar operations.  Seven 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 that operated as “Encounters” closed in January 2009, one club operates as “Tootsie’s” and one club operates as “Divas Latinas” (formerly an Onyx). 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.

 
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.

 
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.

 
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.

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.

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 operations of the respective period.

 
Goodwill and Intangible Assets

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangibles Assets , which addresses the accounting for goodwill and other intangible assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized, but reviewed on an annual basis for impairment. The Company adopted SFAS No. 142 effective October 1, 2001. The Company’s annual evaluation was performed as of September 30, 2008, 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, 2008. 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.

Revenue Recognition

The Company recognizes revenue from the sale of alcoholic beverages, food and merchandise 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 Staff Accounting Bulletin No. 104, 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 EITF 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement .  Total sales and liquor taxes aggregated $1,073,166 and $740,032 for the three months ended December 31, 2008 and 2007, 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 operations.


Income Taxes

Deferred income taxes are determined using the liability method in accordance with SFAS No. 109, 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.

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income Taxes (FIN 48), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company has adopted FIN 48 as of October 1, 2007, as required.  The adoption of FIN 48 has had no effect on the Company's consolidated financial position, results of operations or cash flows. There are no unrecognized tax benefits to disclose in the notes to the financial statements.

Stock Options

The compensation cost recognized for the three months ended December 31, 2008 and 2007 was $20,044 and $39,270, respectively.  There were 35,000 stock option exercises for the three months ended December 31, 2007.  There were no stock options exercises for the three months ended December 31, 2008.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2008 AS COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 2007

For the three months ended December 31, 2008, we had consolidated total revenues of $17,311,171 compared to consolidated total revenues of $10,954,338 for the three months ended December 31, 2007, an increase of $6,356,833 or 58.0%.  The increase in total revenues was primarily attributable to the increase in revenues generated by our new media division and new clubs in Miami Gardens, Florida, Dallas, Texas, Philadelphia, Pennsylvania, and Las Vegas, Nevada, in the amount of $6,360,179.   Total revenues for same-location-same-period of club operations decreased 0.1% to $8,767,438 for the three months ended December 31, 2008 from $8,772,902 for the same period ended December 31, 2007.
 
 
Following is a comparison of the Company’s income statement for the quarters ended December 31, 2008 and 2007 with percentages compared to total revenue:
 
   
2008
   
%
   
2007
   
%
 
                         
Sales of alcoholic beverages
    6,736,310       38.9 %     4,195,192       38.3 %
Sales of food and merchandise
    1,429,385       8.3 %     1,060,332       9.7 %
Service Revenues
    8,195,202       47.3 %     5,023,497       45.9 %
Internet Revenues
    176,763       1.0 %     170,789       1.6 %
Media
    183,636       1.1 %     -       0.0 %
Other
    589,875       3.4 %     504,528       4.6 %
                                 
Total Revenues
    17,311,171       100.0 %     10,954,338       100.0 %
                                 
                                 
                                 
Cost of Goods Sold
    2,269,588       13.1 %     1,341,831       12.2 %
Salaries & Wages
    4,297,117       24.8 %     2,586,476       23.6 %
Stock  Base Compensation
    20,044       0.1 %     39,270       0.4 %
                                 
Taxes and permits
    2,353,491       13.6 %     1,235,793       11.3 %
Credit card fees
    339,699       2.0 %     198,710       1.8 %
Rent
    963,362       5.6 %     464,455       4.2 %
Legal & professional
    509,049       2.9 %     293,373       2.7 %
Advertising and marketing
    1,177,311       6.8 %     360,832       3.3 %
Insurance
    243,047       1.4 %     201,396       1.8 %
Utilities
    442,698       2.6 %     209,735       1.9 %
Impairment Expense
    221,563       1.3 %     -       0.0 %
Depreciation and amortization
    869,893       5.0 %     511,339       4.7 %
Other
    1,447,174       8.4 %     939,231       8.6 %
                                 
Total operating expenses
    15,154,036       87.5 %     8,382,441       76.5 %
Income from operations
    2,157,135       12.5 %     2,571,897       23.5 %
                                 
Interest income
    5,734       0.0 %     43,069       0.4 %
Interest expense
    (833,471 )     -4.8 %     (461,883 )     -4.2 %
Minority interests
    (73,500 )     -0.4 %     177,911       1.6 %
Income taxes
    (465,066 )     -2.7 %     (547,722 )     -5.0 %
                                 
                                 
Net Income
    790,832       4.6 %     1,783,272       16.3 %
 
Following is an explanation of significant variances in the above amounts.

The increase in the cost of goods sold as a percentage of revenues for the three months ended December 31, 2008 was due primarily   to the addition of our media operation and its related cost of goods which is significantly higher as a percentage of revenues compared to the nightclub operation.  Media cost of goods amounted to $98,220 for the quarter ended December 31, 2008.  The cost of goods sold for the club operations for the three months ended December 31, 2008 was 12.8% compared to 12.4% for the three months ended December 31, 2007.  The cost of goods sold from our internet operations for the three months ended December 31, 2008 was 1.7% compared to 4.6% for the three months ended December 31, 2007.  The cost of goods sold for same-location-same-period of club operations for the three months ended December 31, 2008 was 12.2%, compared to 12.6% for the same period ended December 31, 2007.

The increase in payroll and related costs, stated as “Salaries & Wages” above, was primarily due to the addition of the new clubs.   The increase in percentage to total revenues is principally due to the new clubs in Dallas and Philadelphia which had significantly higher manager payrolls and also the addition of a general manager and a manager in Miami and the change to salaried personnel for maintenance and landscaping in Miami from an outsourced company.   Payroll for same-location-same-period of club operations decreased to $1,879,663 for the three months ended December 31, 2008 from $1,886,657 for the same period ended December 31, 2007.  Management currently believes that its labor and management staff levels are appropriate.

 
The increase in the percentage of taxes and permits to total revenues is principally due to the patron tax in our nightclubs in Texas which was instituted in January 2008 and amounted to $437,000 during the quarter ended December 31, 2008.

The increase in the percentage of advertising and marketing to total revenue is principally due to the rebranding of the Club Onyx in Philadelphia and the addition of our new club in Las Vegas.

Rent expense increased principally due to significant new leases in Las Vegas and Philadelphia.

The increase in legal and professional expense is principally due to contesting of labor lawsuits in Minnesota and New York.

Impairment expense of nightclub assets relates to the impairment of the assets of our nightclub, “Encounters”, which is for sale at the current time.  Encounters experienced a loss of approximately $44,000 before income taxes for the quarter ended December 31, 2008.

The increase in interest expense was attributable to our obtaining new debt during the year ended September 30, 2008 to finance the purchase of the new clubs and related real estate.  As of December 31, 2008, the balance of long-term debt was $32,484,724 compared to $24,304,285 a year earlier.

The significant change in minority interests is due to the purchase, effective March 31, 2008, of the remaining 49% of our Austin Rick’s Cabaret location and the purchase, effective the same day, of 51% of the partnership owning the real estate for our Philadelphia location.

Income taxes, as a percentage of income before taxes was 37% and 23.5% for the quarters ended December 31, 2008 and 2007, respectively.  The increase in 2008 is due to the lack of significant permanent difference deductions in 2008 compared to 2007, principally related to exercised stock options and also to the increased significance of state taxes in 2008.

The decrease in net income was primarily due to the increase in expenses detailed above and losses in our new operations in Dallas, Philadelphia and Las Vegas.   Income before income taxes (exclusive of corporate overhead) for same-location-same-period of club operations decreased to $1,974,984 for the three months ended December 31, 2008 from $2,295,644 for same period ended December 31, 2007, or by 14.0%.

Losses, before income taxes, at clubs losing money during the quarter ended December 31, 2008 exceeded $1.9 million.  The significant losing clubs include Rick’s Cabarets in Austin, Las Vegas, Dallas and Philadelphia and Club Onyx in Dallas.  Following is an explanation of the steps management has taken or is in the process of taking to remedy these losses:

The Rick’s Cabaret in Dallas lost $323,000 before income taxes during the quarter ended December 31, 2008.  In January 2009, we have converted the location to XTC Cabaret Dallas.  Early results are very encouraging and we expect to at least break even for the quarter ended March 31, 2009 and become profitable after that.

The Rick’s Cabaret in Austin lost $240,000 before income taxes during the quarter ended December 31, 2008.  We have negotiated lower rent, discontinued day shift and all kitchen and food operations and are currently considering re-concepting this location.

The Rick’s Cabaret in Philadelphia lost $276,000 before income taxes during the quarter ended December 31, 2008.  We have converted the location to Club Onyx Philadelphia in January 2009 and the club has already turned a slight profit in January 2009.  We expect continued profitability in 2009 going forward.

Club Onyx Dallas did not have a liquor license during the quarter ended December 2008 until December 5, 2008 and lost $188,000 before income taxes during the quarter.  January is already profitable and we expect ongoing profits in this location.

 
Rick’s Cabaret Las Vegas lost approximately $678,000 before income taxes for the quarter ended December 31, 2008.   Due to the economy in Las Vegas, we will continue to lose money at this location until the Las Vegas economy improves, but we have made expense reductions in this location subsequent to December 31, 2008 and hope to see better results in the subsequent quarters.

LIQUIDITY AND CAPITAL RESOURCES

Working Capital and Cash Flows

At December 31, 2008, we had working capital of $606,749 compared to $327,800 at December 31, 2007.

Net cash used by operating activities in the three months ended December 31, 2008 was $575,682 compared to cash provided of $2,258,329 for the three months ended December 31, 2007.  The decrease in cash provided by operating activities was primarily due to the payment of income taxes and accounts payable during the quarter ended December 31, 2008.

We used $658,935 of cash in investing activities during the three months ended December 31, 2008 compared to $15,957,446 during the three months ended December 31, 2007.  The decrease was principally due to the acquisition of the new club in Miami Gardens, Florida on November 30, 2007.  Cash of $1,389,895 was used by financing activities during the three months ended December 31, 2008 compared to $15,733,659 cash provided during the three months ended December 31, 2007.  The decrease in cash provided by financing activities is primarily the result of common stock issuances to raise capital for acquiring the new Florida club in 2007.

We require capital principally for construction or 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.

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.

The maximum obligation that could be owed if our stock were valued at zero is $13,935,020 and is recorded in our balance sheet at September 30, 2008 as Temporary Equity. We consider this type of financing transaction to be similar to interest-free debt. 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 and Stockholders’ Equity and will have no income statement effect. Following is a schedule of the annual obligation we would have if our stock price remains in the future at the closing market price on February 2, 2009 of $4.00 per share, of which there can be no assurance:

 
For the Year Ended September 30:
     
2009
  $ 2,670,336  
2010
    3,702,724  
2011
    3,000,000  
2012
    2,115,000  
         
Total
  $ 11,488,060  

Each $1.00 per share movement of our stock price has an aggregate effect of $611,740 on the total obligation.

Other Liquidity and Capital Resources

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.

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 three months ended December 31, 2008, we purchased 48,200 shares of common stock in the open market at prices ranging from $3.54 to $5.95.

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 sexually oriented business industry is required in all states to convert dancers who are now independent contractors into employees.

The sexually oriented business industry is highly competitive with respect to price, service and location, as well as the professionalism of the entertainment.  Although management believes that we are well-positioned to compete successfully in the future, there can be no assurance that we will be able to maintain our high level of name recognition and prestige within the marketplace.

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 to date indicates that there does not appear to be a seasonal fluctuation 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 careful market research, (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 acquisitions of the clubs in Austin and Fort Worth, Texas, Miami Gardens, Florida,  Philadelphia, Pennsylvania, and Las Vegas, Nevada, (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, (e) to acquire real estate in connection with club operations, although some clubs may be in leased premises, and/or (f) to enter into licensing agreements in strategic locations, as is the case with the license agreement with Rick’s Buenos Aires Sociedad Anonima in Argentina.

On November 30, 2007, we purchased one night club operation for $25,486,000 (which includes inventory and other assets).  The acquisition was funded by the issuance of 1,165,000 shares of our restricted common stock and $10,000,000 in debt.  For the three months ended December 31, 2008, this nightclub operation had total revenues of approximately $5,721,000 and income before income taxes of approximately $2,267,000, compared to approximately $2,001,000 and $954,000, respectively, for the month of December 2007 after purchase in the previous year.

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.

We also expect to continue to grow our Internet profit centers. 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. 

The acquisition of additional clubs and/or internet operations 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.

I te m 4T. Controls and Procedures.

Disclosure Controls and Procedures. We maintain "disclosure controls and procedures," as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

There were no changes in our internal control over financial reporting during our first quarter ended December 31, 2008, that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

 
PART II—OTHER INFORMATION

I te m 1. Legal Proceedings.

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.  The Trial Court found that the City of Houston met its burden that there were sufficient alternate sites available to relocate all of the existing sexually oriented businesses in Houston in 1997.  The Trial Court found the Ordinance constitutional and enforceable.  Post-trial motions were heard and the relief sought, a stay against enforcement, was denied by the Trial Court.  An appeal to the Fifth Circuit Court of Appeals was timely filed.    The Fifth Circuit granted a stay pending appeal.  Oral argument was held before the Fifth Circuit Court of Appeals in August 2007.  The Fifth Circuit Court of Appeals ruled in favor of the City of Houston in September 2007.  Pleadings were filed seeking a stay against enforcement of the provisions of the Ordinance with the United States Supreme Court in conjunction with the request that the United States Supreme Court hear an appeal of the Fifth Circuit Court of Appeals ruling.  The United States Supreme Court refused to hear the matter.

Additionally, we filed on behalf of three of our club locations in Houston state court lawsuits seeking judicial review of the results of the amortization process contained within the Ordinance.  The amortization process was abated in 1998 due to the possible multiplicity of court actions.  The final order by the Trial Court resulted in the termination of the abatement and allowed the amortization process to continue as provided in the Ordinance.  Trial on the amortization cases was held in April 2008.  At the conclusion of the trial, 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 form of judgment has been entered by the Court. The amortization award periods have already expired for our affected clubs.  An appeal of the amortization review by the Harris County District Court was filed.  A stay sought by the clubs during the appeal was denied.  In the event all efforts to stop enforcement activity fail and the City of Houston elects to enforce the judgment, we, as well as every other similarly situated sexually oriented business located within the incorporated area of Houston, Texas, will have to either cease providing nude or semi-nude entertainment or develop 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 7.6% of our club operation’s revenues and 1.8% of income before income taxes for the three months ended December 31, 2008 were in Houston, Texas.  It is unknown at this time whether this will have a material effect on our operations.

OTHER LEGAL MATTERS

Beginning January 1, 2008, our Texas clubs became subject to a new state law requiring each club to collect pay a $5 surcharge for every club visitor.  A lawsuit was filed by the Texas Entertainment Association, 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 has 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.  The Texas Third Court of Appeals heard oral argument in this case on February 11, 2009, however no decision is expected in the immediate future. In the meantime, we have paid the tax for the first four 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.  The Company ’ s Texas clubs have filed a separate lawsuit against the State to demand repayment of the taxes.
 
 
I te m 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the three months ended December 31, 2008, we purchased 48,200 shares of common stock in the open market at prices ranging from $3.54 to $5.95.  Following is a summary of our purchases by month:

Period:
(a)
(b)
(c)
(d)
         
Month Ending
Total Number of Shares (or Units) Purchased
Average Price Paid per Share
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
October 31, 2008
-
-
-
$5,000,000
November 30, 2008
46,500
$4.94
46,500
$4,953,500
December 31, 2008
1,700
$4.03
1,700
$4,951,800
         
Total
48,200
$4.91
48,200
$4,951,800


I te m 6. Exhibits.

Exhibit 31.1 – Certification of Chief Executive Officer of Rick’s Cabaret International, Inc. required by Rule 13a – 14(1) or Rule 15d – 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2 – Certification of Chief Financial Officer of Rick’s Cabaret International, Inc. required by Rule 13a – 14(1) or Rule 15d – 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1 -- Certification of Chief Executive Officer of Rick’s Cabaret International, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. 63.

Exhibit 32.2 -- Certification of Chief Financial Officer of Rick’s Cabaret International, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. 63.


SI GN ATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 
RICK'S CABARET INTERNATIONAL, INC.
   
   
Date:  February 17, 2009
By:  /s/ Eric S. Langan
 
Eric S. Langan
 
Chief Executive Officer and President

   
   
Date:  February 17, 2009
By:  /s/ Phillip K. Marshall
 
Phillip K. Marshall
 
Chief Financial Officer and Principal Accounting Officer
 
 
34
E XH IBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE
 
SARBANES-OXLEY ACT OF 2002

I, Eric S. Langan, Chief Executive Officer and President of Rick’s Cabaret International, Inc., certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Rick’s Cabaret International, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;

4.
The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the issuer's internal control over financial reporting that occurred during the issuer's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the issuer's internal control over financial reporting; and

5.
The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer's independent registered public accounting firm and the audit committee of the issuer's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal control over financial reporting.

Date: February 17, 2009
By:     /s/ Eric S. Langan
 
Eric S. Langan
 
Chief Executive Officer and President
 
 
EX HI BIT 31.2
 
CERTIFICATION PURSUANT TO SECTION 302 OF THE
 
SARBANES-OXLEY ACT OF 2002

I, Phillip K. Marshall, Chief Financial Officer of Rick’s Cabaret International, Inc., certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Rick’s Cabaret International, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;

4.
The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the issuer's internal control over financial reporting that occurred during the issuer's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the issuer's internal control over financial reporting; and

5.
The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer's independent registered public accounting firm and the audit committee of the issuer's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal control over financial reporting.

Date: February 17, 2009
By:     /s/ Phillip K. Marshall
 
Phillip K. Marshall
 
Chief Financial Officer and Principal Accounting Officer
 
 
EX HI BIT 32.1

CERTIFICATION PURSUANT TO RULE 13a-14(b) OR
RULE 15d-14(b) and 18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Rick’s Cabaret International, Inc. (the "Company") on Form 10-Q for the quarter ended December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Eric S. Langan, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)           The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: February 17, 2009
By:     /s/ Eric S. Langan
 
Eric S. Langan
 
Chief Executive Officer and President

 
EX HI BIT 32.2

CERTIFICATION PURSUANT TO RULE 13a-14(b) OR
RULE 15d-14(b) and 18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Rick’s Cabaret International, Inc. (the "Company") on Form 10-Q for the quarter ended December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Phillip K. Marshall, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)           The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)           The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Date: February 17, 2009
By:     /s/ Phillip K. Marshall
 
Phillip K. Marshall
 
Chief Financial Officer  and Principal Accounting Officer