4. SEGMENT
INFORMATION
Below is
the financial information related to the Company’s segments:
|
|
|
FOR THE THREE MONTHS
ENDED
JUNE 30,
|
|
|
FOR
THE NINE MONTHS
ENDED
JUNE 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Club
operations
|
|
$
|
15,901,904
|
|
|
$
|
8,254,798
|
|
|
$
|
41,977,002
|
|
|
$
|
22,488,664
|
|
|
Media
|
|
|
182,452
|
|
|
|
--
|
|
|
|
182,452
|
|
|
|
--
|
|
|
Internet
websites
|
|
|
194,105
|
|
|
|
191,553
|
|
|
|
537,606
|
|
|
|
557,033
|
|
|
|
|
$
|
16,278,461
|
|
|
$
|
8,446,351
|
|
|
$
|
42,697,060
|
|
|
$
|
23,045,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Club
operations
|
|
$
|
4,246,597
|
|
|
$
|
1,969,896
|
|
|
$
|
12,187,457
|
|
|
$
|
4,369,195
|
|
|
Media
|
|
|
(123,588
|
)
|
|
|
--
|
|
|
|
(123,588
|
)
|
|
|
--
|
|
|
Internet
websites
|
|
|
31,573
|
|
|
|
22,601
|
|
|
|
61,219
|
|
|
|
53,701
|
|
|
Corporate
expenses
|
|
|
(1,189,382
|
)
|
|
|
(875,911
|
)
|
|
|
(3,115,450
|
)
|
|
|
(2,461,346
|
)
|
|
Income
taxes
|
|
|
(1,135,996
|
)
|
|
|
(84,859
|
)
|
|
|
(2,791,782
|
)
|
|
|
(84,859
|
)
|
|
|
|
$
|
1,829,204
|
|
|
$
|
1,031,727
|
|
|
$
|
6,217,856
|
|
|
$
|
1,876,691
|
|
5. LONG-TERM
DEBT
On
November 9, 2006, the Company entered into convertible debentures with three
shareholders for a principal sum of $600,000. The term is for two
years and the interest rate is 12% per annum. At the election of the
holders, the holders have the right at any time to convert all or any portion of
the principal or interest amount of the debentures into shares of the Company’s
common stock at a rate of $7.50 per share, which was higher than the closing
price of the Company’s stock on November 9, 2006. The debentures
provide, absent shareholder approval, that the number of shares of the Company’s
common stock that may be issued by the Company or
RICK'S
CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2008
5. LONG-TERM
DEBT - continued
acquired
by the holders upon conversion of the debentures shall not exceed 19.99% of the
total number of issued and outstanding shares of the Company’s common
stock. The proceeds of the debentures were used for the acquisition
of a 51% ownership interest of Playmates Gentlemen’s Club LLC.
On
October 12, 2007, the Company borrowed $1,000,000 from an investment company
under terms of a 10% convertible debenture. Interest only is payable
quarterly until the principal plus accrued interest is due in nine equal
quarterly payments beginning in October 2008. The debenture is
subject to optional redemption at any time after 366 days from the date of
issuance at 100% of the principal face amount plus accrued
interest. The debenture plus any outstanding convertible interest is
convertible by the holder into shares of our common stock at any time prior to
the maturity date at the conversion price of $12 per share. The value
of the embedded beneficial conversion feature on the note payable was calculated
using the EITF Issue No. 98-5,
Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios
. For the nine months ended June 30, 2008,
interest expense related to the value of the embedded beneficial conversion
feature was not significant.
In
November 2007, the holder of a convertible debenture elected to convert $713,136
of principal and interest owed into 150,134 shares of the Company’s restricted
common stock.
On
November 30, 2007, in connection with the acquisition of Miami Gardens Square
One, Inc., (see Note 9), the Company entered into two secured promissory notes
in the amount of $5,000,000 each to the sellers (the "Notes"). The Notes bear
interest at the rate of 14% per annum with the principal payable in one lump sum
payment on November 30, 2010. Interest on the Notes is payable monthly, in
arrears, with the first payment due thirty (30) days after the closing of the
transaction, which occurred on November 30, 2007. 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.
Effective
February 1, 2008, the Company borrowed $1,000,000 from a lender. The
funds were utilized to pay off certain other Company debt in the amount of
$1,797,529. The new debt bears interest at 9% and interest is payable
monthly until February 1, 2013 at which time the principal is due in
full. The note is collateralized by certain Company-owned property in
Minneapolis, Minnesota.
In
January 2008 and in April 2008, the holder of a convertible debenture converted
$21,918 and $24,932 of interest owed into 1,826 and 2,078 shares of restricted
common stock, respectively.
In
February 2008, the Company borrowed $1,561,500 from a lender. The
funds were used to purchase an aircraft. The debt bears interest at
6.15% with monthly principal and interest payments of $11,323 beginning March
12, 2008. The note matures on February 12, 2028.
In
connection with the acquisition of the real estate in Dallas related to the
acquisition of Hotel Development Ltd., on April 11, 2008 (Note 9), the Company
issued a $3,640,000 five-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%), and is guaranteed by the Company and Eric Langan,
the
RICK'S
CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2008
5. LONG-TERM
DEBT - continued
Company’s
Chief Executive Officer, individually.
In April
2008, the holders of convertible debentures converted $825,000 of principal into
125,953 shares of the Company’s restricted common stock.
On May 5,
2008, the Company issued $150,000 in two 10% convertible debentures with
identical terms. The debentures are payable interest only in
quarterly payments and the entire principal and accrued interest is due in one
year. The holder of the debenture has the right to convert all or any
portion of the principal and any accrued but unpaid interest into shares of the
Company’s common stock at a conversion price of $25.32 per share.
On June
18, 2008, in connection with the acquisition of the assets of the Platinum
Club II in Dallas, Texas (Note 9), the Company’s wholly owned subsidiary RCI
Holdings, Inc. (“RCI”) also acquired the Real Property from Wire Way, LLC, a
Texas limited liability company. Pursuant to a Real Estate Purchase
and Sale 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.
6. TEMPORARY
EQUITY
Through
June 30, 2008, 215,000 shares of the Company’s common stock valued at $1,450,000
were reclassified from temporary equity to permanent equity, as the holders of
the put option sold such shares on the open market.
In
connection with the acquisition of The End Zone, Inc., owner and operator of the
Company’s Philadelphia club on March 31, 2008, the Company issued 195,000 common
shares with a put option at $23.00 per share (see Note 9).
In
connection with the acquisition of the remaining 49% of Playmates Gentlemen’s
Club LLC, operator of the Company’s Rick’s Austin club on March 31, 2008, the
Company issued 35,000 common shares with a put option at $20.00 per share (see
Note 9).
In
connection with the acquisition of Hotel Development Ltd., operator of the
Company’s Rick’s Dallas club on April 11, 2008, the Company issued 210,000
common shares with a put option at $25.00 per share (see Note 9).
In
connection with the acquisition of three entities to form the Company’s new
media division on April 15, 2008, the Company issued 21,740 common shares with a
put option at $23.00 per share (see Note 9).
RICK'S
CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2008
7. COMMON
STOCK
On
November 19, 2007, the Company completed a private placement of equity
securities solely to accredited investors. Pursuant to the private
placement, the Company issued 1,165,000 shares of the Company’s restricted
common stock at a price of $14.00 per share for a total gross offering price of
$16,310,000 with net proceeds of approximately $15,000,000 to the Company after
expenses. Pursuant to the terms of the transaction, the Company filed
a registration statement on February 14, 2008, which became effective on
February 27, 2008. The offer and sale of the common stock was made
pursuant to exemptions from the registration requirements of the Act pursuant to
Section 4(2) and Rule 506 of Regulation D promulgated thereunder. All of the
offers and sales of the common stock were made exclusively to “accredited
investors” (as such term is defined in Rule 501(a) of Regulation D) in offers
and sales not involving a public offering. The purchasers purchased
the securities for their own account and not with a view towards or for resale.
The private placement was conducted without general solicitation or
advertising.
During
the nine months ended June 30, 2008, the holder of a convertible debenture
converted $759,986 of principal and interest owed into 154,038 shares of
restricted common stock.
In April
2008, the holders of convertible debentures converted $825,000 of principal into
125,953 shares of the Company’s restricted common stock.
On June
12, 2008, the Company completed the private placement of 672,000 shares of our
restricted common stock to institutional investors at a price of $20.00 per
share for gross proceeds of $13,440,000 with net proceeds of approximately
$12,375,000 to the Company after expenses. The common stock was sold
under the exemption from registration provided by Section 4(2) of the
Securities Act of 1933 and the rules and regulations promulgated
thereunder. All of the offers and sales of the common stock were made
exclusively to “accredited investors” (as such term is defined in Rule 501(a) of
Regulation D) in offers and sales not involving a public offering. The
purchasers in the private placement purchased the securities for their own
account and not with a view towards or for resale. The private placement was
conducted without general solicitation or advertising.
8. EARNINGS
PER SHARE (EPS)
The
Company computes earnings per share in accordance with Statement of Financial
Accounting Standards (“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, options and convertible debentures were converted into
common stock that then shared in the Company’s earnings (as adjusted for
interest expense, that would no longer occur if the debentures were
converted).
Net
earnings applicable to common stock and the weighted – average number of shares
used for basic and diluted earnings per share computations are summarized in the
table that follows:
RICK'S
CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2008
8. EARNINGS
PER SHARE (EPS) - continued
|
|
|
FOR
THE THREE MONTHS
ENDED
JUNE 30,
|
|
|
FOR
THE NINE MONTHS
ENDED
JUNE 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Basic
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings applicable to common stockholders
|
|
$
|
1,829,204
|
|
|
$
|
1,031,727
|
|
|
$
|
6,217,856
|
|
|
$
|
1,876,691
|
|
|
Average
number of common shares outstanding
|
|
|
8,240,914
|
|
|
|
6,112,678
|
|
|
|
7,536,104
|
|
|
|
5,539,923
|
|
|
Basic
earnings per share
|
|
$
|
0.22
|
|
|
$
|
0.17
|
|
|
$
|
0.83
|
|
|
$
|
0.34
|
|
|
Diluted
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings applicable to common stockholders
|
|
$
|
1,829,204
|
|
|
$
|
1,031,727
|
|
|
$
|
6,217,856
|
|
|
$
|
1,876,691
|
|
|
Adj.
to net earnings from assumed conversion of debentures (1)
|
|
|
19,800
|
|
|
|
43,148
|
|
|
|
113,400
|
|
|
|
59,400
|
|
|
Adj.
net earnings for diluted EPS computation
|
|
$
|
1,849,004
|
|
|
$
|
1,074,875
|
|
|
$
|
6,331,256
|
|
|
$
|
1,936,091
|
|
|
Average
number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares outstanding
|
|
|
8,240,914
|
|
|
|
6,112,678
|
|
|
|
7,536,104
|
|
|
|
5,539,923
|
|
|
Potential
dilutive shares resulting from exercise of warrants and options
(2)
|
|
|
399,785
|
|
|
|
280,049
|
|
|
|
401,990
|
|
|
|
284,475
|
|
|
Potential
dilutive shares resulting from conversion of debentures
(3)
|
|
|
220,000
|
|
|
|
396,920
|
|
|
|
300,000
|
|
|
|
220,000
|
|
|
Total
average number of common shares outstanding used for
dilution
|
|
|
8,860,699
|
|
|
|
6,789,647
|
|
|
|
8,238,094
|
|
|
|
6,044,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.21
|
|
|
$
|
0.16
|
|
|
$
|
0.77
|
|
|
$
|
0.32
|
|
(1) Represents
interest expense on dilutive convertible debentures, that would not occur if
they were assumed converted.
(2) All
outstanding warrants and options were considered for the EPS
computation.
(3)
Convertible debentures (principal and accrued interest) outstanding at June 30,
2008 and 2007 totaling $2,410,000 and $2,895,621, respectively, were convertible
into common stock at a price from $3.00 to $25.32 per share in 2008 and $3.00 to
$7.50 per share in 2007, respectively, and resulted in additional
common shares (based on average balances outstanding). Potential
dilutive shares of 166,979 and 80,137 for the three and nine months ended June
30, 2008, respectively, have been excluded from earnings per share due to being
anti-dilutive.
9. ACQUISITIONS
AND DISPOSITIONS
On
October 11, 2006, the Company sold its properties in Wise County for $165,000,
which was the value of the properties included in the Company’s balance sheet at
September 30, 2006 after recording an impairment charge of $68,134 in September
2006.
On
November 10, 2006, the Company purchased a 51% ownership interest of Playmates
Gentlemen’s Club LLC, an operator of an adult nightclub in Austin,
Texas. The club is located at 8110 Springdale Street. The
purchase price of $1,533,750 was paid $500,000 cash at closing and 125,000
shares of the Company’s restricted common stock, valued at $8.27 per share in
accordance with EITF 99-12,
Determination of the Measurement
Date for the Market Price of Acquirer Securities Issued in a Purchase Business
Combination
. The club has been converted to a Rick’s
Austin. As part of the agreement, twelve months after the closing
date, the seller has the right, but not the obligation, to have the Company buy
the shares at a price of $8.00 per share at a rate of no more than 5,000 shares
per month until such time as the seller receives a total of $1,000,000 from the
sale of such shares. Alternatively, the seller has the option to sell such
shares in the open market. The transaction was the result of
arms-length negotiations between the parties.
RICK'S
CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2008
9. ACQUISITIONS
AND DISPOSITIONS-continued
The
following information summarizes the allocation of fair values assigned to the
assets and liabilities at
the
acquisition
|
Property
and equipment
|
|
$
|
633,411
|
|
|
Non-compete
agreement
|
|
|
175,000
|
|
|
Goodwill
|
|
|
725,339
|
|
|
Net
assets acquired
|
|
$
|
1,533,750
|
|
The
results of operations of this acquired entity, from November 10, 2006, are
included in the Company’s results of operations, with minority interest
offsetting such results in the accompanying balance sheet until such minority
interest was acquired by the Company as disclosed below.
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 April
23, 2007, the Company completed a transaction for the purchase of 100% of the
outstanding common stock of W.K.C., Inc., a Texas corporation (the "Business"),
which owned and operated an adult entertainment cabaret known as New Orleans
Nights ("New Orleans Nights") located in Fort Worth, Texas. Pursuant
to the stock purchase agreement, the Company acquired the Business for a total
cash purchase price of $4,900,000. As part of the transaction, the
seller entered a five-year covenant not to compete with the Company or the
Business. In addition, RCI Holdings, Inc., the Company’s wholly owned
subsidiary ("RCI"), entered into an assignment of that certain real estate sales
contract between the owner of the property and W.K.C., Inc. for the purchase of
the real property located at 7101 Calmont, Fort Worth, Texas 76116 (the "Real
Property") where New Orleans Nights is located for a total purchase price of
$2,500,000, which consisted of $100,000 in cash and $2,400,000 payable in a six
year promissory note to the sellers which will accrue interest at the rate of
7.25% for the first two years, 8.25% for years three and four and 9.25%
thereafter (the "Promissory Note"). The Promissory Note is secured by
a deed of trust and security agreement. Further, RCI entered into an
assignment and assumption of lease agreement with the sellers to assume the
lease agreement for the Real Property. The Company also incurred
$121,825 in costs.
The
following information summarizes the allocation of fair values assigned to the
assets and liabilities at the acquisition date.
|
Net
current assets
|
|
$
|
30,489
|
|
|
Property
and equipment
|
|
|
2,968,126
|
|
|
Non-compete
agreement
|
|
|
100,000
|
|
|
Goodwill
|
|
|
1,636,588
|
|
|
SOB
licenses
|
|
|
4,423,210
|
|
|
Deferred
tax liability
|
|
|
(1,636,588
|
)
|
|
Net
assets acquired
|
|
$
|
7,521,825
|
|
The
results of operations of this acquired entity are included in the Company’s
results of operations since April 24, 2007.
RICK'S
CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2008
9. ACQUISITIONS
AND DISPOSITIONS - continued
The
following unaudited pro forma information presents the results of operations as
if the acquisition had occurred as of October 1, 2006. The pro forma
information is not necessarily indicative of what would have occurred had the
acquisition been made as of such periods, nor is it indicative of future results
of operations. The pro forma amounts give effect to appropriate
adjustments for the fair value of the assets acquired, amortization of
intangibles and interest expense.
|
|
|
For Three Months Ended
June
30, 2007
|
|
|
For Nine Months Ended
June
30, 2007
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
8,770,081
|
|
|
$
|
25,764,478
|
|
|
Net
income
|
|
$
|
1,049,917
|
|
|
$
|
2,425,876
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share – basic
|
|
$
|
0.15
|
|
|
$
|
0.39
|
|
|
Net
income per share - diluted
|
|
$
|
0.15
|
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – basic
|
|
|
6,787,678
|
|
|
|
6,214,923
|
|
|
Weighted
average shares outstanding – diluted
|
|
|
7,464,647
|
|
|
|
6,719,398
|
|
On May
10, 2007, the Company entered into a Licensing Agreement with Rick’s Buenos
Aires Sociedad Anonima (“Licensee”), a corporation organized under the laws of
Argentina. The Company agreed to grant Licensee a license for use and
exploitation of the Company’s logos, trademarks and service marks for the
operation of an adult entertainment facility in the city of Buenos Aires,
Argentina, and Latin America. Pursuant to the agreement, Licensee
agreed to pay the Company a royalty fee equal to 10% of gross revenues of
Licensee’s business, net of any value added tax. No club has
opened as of this time, but plans are for a location to open for business by the
end of calendar year 2008.
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
RICK'S
CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2008
9. ACQUISITIONS
AND DISPOSITIONS – continued
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 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
|
|
$
|
390,000
|
|
|
Property
and equipment and other assets
|
|
|
4,919,000
|
|
|
Non-compete
agreement
|
|
|
200,000
|
|
|
Goodwill
|
|
|
7,546,240
|
|
|
SOB
licenses
|
|
|
20,152,000
|
|
|
Deferred
tax liability
|
|
|
(7,546,240
|
)
|
|
Net
assets acquired
|
|
$
|
25,661,000
|
|
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 as
if the acquisition had occurred as of the beginning of the immediate preceding
period. The pro forma information is not necessarily indicative of
what would have occurred had the acquisition been made as of such periods, nor
is it indicative of future results of operations. The pro forma
amounts give effect to appropriate adjustments for the fair value of the assets
acquired, amortization of intangibles and interest expense.
RICK'S
CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2008
9. ACQUISITIONS
AND DISPOSITIONS – continued
|
|
|
FOR THE THREE MONTHS
ENDED
JUNE 30,
|
|
|
FOR THE NINE MONTHS
ENDED
JUNE 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
16,278,461
|
|
|
$
|
12,680,176
|
|
|
$
|
45,663,714
|
|
|
$
|
35,747,172
|
|
|
Net
income
|
|
$
|
1,829,204
|
|
|
$
|
1,874,176
|
|
|
$
|
6,579,348
|
|
|
$
|
4,404,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share – basic
|
|
$
|
0.22
|
|
|
$
|
0.26
|
|
|
$
|
0.87
|
|
|
$
|
0.66
|
|
|
Net
income per share - diluted
|
|
$
|
0.21
|
|
|
$
|
0.24
|
|
|
$
|
0.81
|
|
|
$
|
0.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – basic
|
|
|
8,240,914
|
|
|
|
7,277,678
|
|
|
|
7,536,104
|
|
|
|
6,704,923
|
|
|
Weighted
average shares outstanding – diluted
|
|
|
8,860,699
|
|
|
|
7,954,647
|
|
|
|
8,238,094
|
|
|
|
7,209,398
|
|
The
following unaudited pro forma information presents the results of operations as
if the acquisitions of W.K.C., Inc. and Miami Gardens Square One, Inc. had
occurred as of the beginning of the immediate preceding period. The
pro forma information is not necessarily indicative of what would have occurred
had the acquisition been made as of such periods, nor is it indicative of future
results of operations. The pro forma amounts give effect to
appropriate adjustments for the fair value of the assets acquired, amortization
of intangibles and interest expense.
|
|
|
FOR THE THREE MONTHS
ENDED
JUNE 30,
|
|
|
FOR THE NINE MONTHS
ENDED
JUNE 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
16,278,461
|
|
|
$
|
13,003,906
|
|
|
$
|
45,663,714
|
|
|
$
|
38,465,953
|
|
|
Net
income
|
|
$
|
1,829,204
|
|
|
$
|
1,892,366
|
|
|
$
|
6,579,348
|
|
|
$
|
4,953,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share – basic
|
|
$
|
0.22
|
|
|
$
|
0.24
|
|
|
$
|
0.87
|
|
|
$
|
0.67
|
|
|
Net
income per share - diluted
|
|
$
|
0.21
|
|
|
$
|
0.22
|
|
|
$
|
0.81
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – basic
|
|
|
8,240,914
|
|
|
|
7,952,678
|
|
|
|
7,536,104
|
|
|
|
7,379,923
|
|
|
Weighted
average shares outstanding - diluted
|
|
|
8,860,699
|
|
|
|
8,629,647
|
|
|
|
8,238,094
|
|
|
|
7,884,398
|
|
RICK'S
CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2008
9. ACQUISITIONS
AND DISPOSITIONS – continued
On March
31, 2008, the Company’s wholly owned subsidiary, RCI Entertainment
(Philadelphia), Inc. (the “Purchaser”) completed the acquisition of 100% of the
issued and outstanding shares of common stock (the “TEZ Shares”) of The End
Zone, Inc., a Pennsylvania corporation (the “Corporation”) which owns and
operates “Crazy Horse Too Cabaret” (the “Club”) located at 2908 South Columbus
Blvd., Philadelphia, Pennsylvania 19148 (the “Real Property”) from
Vincent Piazza (the “Seller”). As part of the transaction, the
Company’s wholly owned subsidiary, RCI Holdings, Inc. (“RCI Holdings”) acquired
from the Piazza Family Limited Partnership (the “Partnership Seller”) 51% of the
issued and outstanding partnership interest (the “Partnership Interests”) in TEZ
Real Estate, LP, a Pennsylvania limited partnership (the “Partnership”) and 51%
of the issued and outstanding membership interest (the “Membership Interests”)
in TEZ Management, LLC, a Pennsylvania limited liability company, which is the
general partner of the Partnership (the “General Partner”). The
Partnership owns the Real Property where the Club is located. At
closing, the Company paid a purchase price of $3,500,000 in cash for the
Partnership Interests and Membership Interests, and issued 195,000 shares of the
Company’s restricted common stock (the “Rick’s Shares”) valued at $23 per share
for the TEZ Shares.
As part
of the transaction, 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 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 June 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 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.
RICK'S
CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2008
9. ACQUISITIONS
AND DISPOSITIONS – continued
|
Property
and equipment and other assets
|
|
$
|
3,882,885
|
|
|
Non-compete
agreement
|
|
|
100,000
|
|
|
Goodwill
|
|
|
1,480,783
|
|
|
SOB
licenses
|
|
|
4,002,115
|
|
|
Deferred
tax liability
|
|
|
(1,480,783
|
)
|
|
Net
assets acquired
|
|
$
|
7,985,000
|
|
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.
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 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 June 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.
RICK'S
CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2008
9. ACQUISITIONS
AND DISPOSITIONS – continued
On 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 in accordance with EITF
99-12 at $23.30 per share ($3,544,119) and $46,490 in cash. As
consideration for the purchase of the Real Property, RCI paid total
consideration of $5,599,721, which was paid (i) $4,250,000, payable $610,000 in
cash and $3,640,000 through the issuance of a five year promissory note (the
"Promissory Note") and (ii) the issuance of 57,918 shares of the Company’s
restricted common stock (the "Rick's Real Property Shares") to be valued at
$23.30 per share ($1,349,721). The Promissory Note bears interest at a varying
rate at the greater of (i) two percent (2%) above the Prime Rate or (ii) seven
and one-half percent (7.5%), and is guaranteed by Rick's and Eric Langan,
individually. At Closing, the Parties entered into an Amendment to Purchase
Agreement solely to provide for the Sellers to set aside 10,500 Rick's Club
Shares under an Escrow Agreement for the offset of certain liabilities of the
Partnership. The Company also incurred costs in the amount of
$37,848, which was paid in cash.
At
Closing, 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 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 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
RICK'S
CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2008
9. ACQUISITIONS
AND DISPOSITIONS – continued
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 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
|
|
$
|
34,445
|
|
|
Property
and equipment and other assets
|
|
|
6,264,850
|
|
|
Non-compete
agreement
|
|
|
300,000
|
|
|
Goodwill
|
|
|
972,687
|
|
|
SOB
licenses
|
|
|
2,628,883
|
|
|
Deferred
tax liability
|
|
|
(972,687
|
)
|
|
Net
assets acquired
|
|
$
|
9,228,178
|
|
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.
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 RCI Media 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; and
(iii) The
issuance of 8,696 shares of restricted common stock valued at $17.01 per share
(the "Closing Shares") in accordance with EITF 99-12.
RICK'S
CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2008
9. ACQUISITIONS
AND DISPOSITIONS – continued
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
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 RCI
Media
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 $17.01 per share (the "Rick's TEEZE Shares") in accordance with EITF
99-12.
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
RICK'S
CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2008
9. ACQUISITIONS
AND DISPOSITIONS – continued
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.
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 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
|
|
$
|
532,773
|
|
|
Non-compete
agreement
|
|
|
100,000
|
|
|
Goodwill
|
|
|
503,730
|
|
|
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.
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
RICK'S
CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2008
9. ACQUISITIONS
AND DISPOSITIONS – continued
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 $69,998 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
|
|
$
|
34,078
|
|
|
Property
and equipment and other assets
|
|
|
6,000,000
|
|
|
Non-compete
agreement
|
|
|
100,000
|
|
|
Goodwill
|
|
|
1,392,420
|
|
|
Other
assets
|
|
|
43,500
|
|
|
Net
assets acquired
|
|
$
|
7,569,998
|
|
The full
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.
10. INCOME
TAXES
Income
tax expense for the years 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 and nine months ended June 30, 2008
and 2007 as a result of the following:
RICK'S
CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2008
10. INCOME
TAX - continued
|
|
|
FOR THE THREE MONTHS
ENDED
JUNE 30,
|
|
|
FOR THE NINE MONTHS
ENDED
JUNE 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computed
expected tax expense
|
|
$
|
1,008,154
|
|
|
$
|
379,639
|
|
|
$
|
3,063,276
|
|
|
$
|
666,927
|
|
|
State
income taxes
|
|
|
88,955
|
|
|
|
33,497
|
|
|
|
270,289
|
|
|
|
58,846
|
|
|
Stock
option disqualifying dispositions and other permanent
differences
|
|
|
10,942
|
|
|
|
(230,374
|
)
|
|
|
(301,734
|
)
|
|
|
(543,011
|
)
|
|
Net
operating loss carryforwards
|
|
|
92,709
|
|
|
|
(97,903
|
)
|
|
|
(191,786
|
)
|
|
|
(97,903
|
)
|
|
Other
|
|
|
(64,764
|
)
|
|
|
--
|
|
|
|
(48,263
|
)
|
|
|
--
|
|
|
Total
income tax expense
|
|
$
|
1,135,996
|
|
|
$
|
84,859
|
|
|
$
|
2,791,782
|
|
|
$
|
84,859
|
|
Included
in the Company’s deferred tax liabilities at June 30, 2008 is approximately
$14,400,000 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 or impaired.
11. LITIGATION
SEXUALLY
ORIENTED BUSINESS ORDINANCE OF HOUSTON, TEXAS
In
January 1997, the City Council of the City of Houston passed a comprehensive new
Ordinance regulating the location of and the conduct within Sexually Oriented
Businesses (the “Ordinance”). The Ordinance established new minimum
distances that Sexually Oriented Businesses may be located from schools,
churches, playgrounds and other sexually oriented businesses. There
were no provisions in the Ordinance exempting previously permitted sexually
oriented businesses from the effect of the new Ordinance.
The
Ordinance provided that a business which was denied a renewal of its operating
permit due to changes in distance requirements under the Ordinance would be
entitled to continue in operation for a period of time (the “Amortization
Period”) if the owner were unable to recoup, by the effective date of the
Ordinance, its investment in the business that was incurred through the date of
the passage and approval of the Ordinance. The Company’s nightclub in
the Company’s south Houston location had a valid temporary
permit/license. The permits for the Company’s north Houston location
and our Bering Drive location have expired.
In May
1997, the City of Houston agreed to defer implementation of the Ordinance until
the constitutionality of the entire Ordinance was decided by court
trial. In February 1998, the U.S. District Court for the Southern
District of Texas, Houston Division, struck down certain provisions of the
Ordinance, including the provision mandating a 1,500 foot distance between a
club and schools, churches and other sexually oriented businesses, lleaving
intact the provision of the 750 foot distance as it existed prior to the
Ordinance. The City of Houston appealed the District Court’s rulings
with the Fifth Circuit Court of Appeals.
In
November 2003, a three judge panel from the Fifth Circuit Court of Appeals
published their Opinion which affirmed the Trial Court’s ruling regarding
lighting levels, customer and dancer separation distances and licensing of
dancers and staff. The Court of Appeals, however, did not follow the
Trial Court’s ruling regarding
RICK'S
CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2008
11. LITIGATION
– continued
the
distance from which a club may be located from a church or
school. The Court of Appeals held that a distance measurement of
1,500 feet would be upheld upon a showing by the City of Houston that its claims
that there were alternative sites available for relocating clubs could be
substantiated.
The case was
remanded for trial on the issues of the alternative sites.
The trial
commenced on December 4, 2006 and concluded on December 12, 2006. The
Trial Court rendered its judgment in favor of the City of Houston on January 31,
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 businesses in 1997. The Trial Court found the 1997 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 on August 7, 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. Neither
relief nor any indication of the Supreme Court’s position on the appeal has been
received to date.
Additionally,
the Company 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 on April 23 and
24, 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 affected
clubs. An appeal of the amortization review by the Harris County
District Court is being prepared. The clubs are currently seeking a stay of
enforcement during the appeal. 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. In such event, the Company presently
intends to clothe the Company’s entertainers in a manner to eliminate the need
for licenses and to take such steps as to not be subject to SOB ordinance
compliance which we have in three of our locations. Approximately
10.6% of the Company’s club operation’s revenues for the nine months ended June
30, 2008 were in Houston, Texas. The ruling could have a material
adverse impact on the Company’s operations, but it is unknown at this
time.
Texas
State Patron Tax
Beginning
January 1, 2008, the Company’s Texas clubs became subject to a new state law
requiring each club to collect a $5 surcharge for every club
visitor. A lawsuit was filed by the Texas Entertainment Association,
an organization to which the Company is 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
RICK'S
CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2008
11. LITIGATION
– continued
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
appeal. The Company has paid the tax for the first two calendar
quarters under protest and expensed the tax in the accompanying financial
statements. The Company has filed a lawsuit against the State to
demand repayment of the taxes.
12. POTENTIAL
ACQUISITION
Las
Vegas Club Acquisition
On April
17, 2008, the Company entered into an Asset Purchase Agreement (the "Asset
Purchase Agreement") pursuant to the terms of which the Company’s subsidiary,
RCI Entertainment (Las Vegas), Inc. (the "Purchaser"), will acquire 100% of the
assets (the "Purchased Assets") of DI Food and Beverage of Las Vegas, LLC, a
Nevada limited liability company ("DI Food" or the "Seller") owned by it which
are associated or used in connection with the operation of an adult
entertainment cabaret known as "SCORES" (the "Club"), located at 3355 Procyon
Street, Las Vegas, Nevada 89102 (the "Real Property"). As part of the
transaction, the Purchaser and DI Food will also enter into an Option Agreement
(the "Option Agreement") pursuant to which either party may exercise the option
to purchase the Real Property.
On June
30, 2008, the Company entered into a Second Amendment to Asset Purchase
Agreement (the “Second Amendment”) to change the structure of the Purchase
Price, to change the closing date and to change the termination
date. Pursuant to the terms of the Second Amendment, the Purchase
Price shall be paid as follows:
|
|
(i)
|
$12,000,000
payable by cashier’s check, certified funds or wire
transfer;
|
|
|
(ii)
|
$4,000,000
pursuant to a promissory note (the “Rick’s Promissory Note”), executed by
and obligating the Company, bearing interest at eight percent (8%) per
annum with a five (5) year amortization, with monthly payments of
principal and interest to commence upon the first of the month following
the Closing, 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.
|
|
|
(iii)
|
$5,000,000
as evidenced by a Convertible Debenture of Rick’s bearing simple interest
of four percent (4%) per annum (the “Convertible
Debenture”). The Convertible Debenture shall be payable
commencing seven (7) months after the Closing Date (as defined herein) as
follows: Twenty-five (25) equal monthly principal payments of
$200,000 in cash or by the conversion of 10,000 shares of the Company’s
common stock, par value $0.01, at the option of the holder of the
Convertible Debenture, plus interest payable in
cash.
|
The (i)
$12,000,000 cash payment, (ii) the Rick’s Promissory Note, and (iii) the
Convertible Debenture are collectively referred to as the “Purchase
Price.”
Further,
pursuant to the terms of the Second Amendment, the Closing shall take place the
later of (i) July 25, 2008 or (ii) five (5) days following (x) the approval and
issuance to Purchaser of the licenses and authorizations and (y) receipt of the
assignment of the Lease (the “Closing Date”).
RICK'S
CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
2008
13. SUBSEQUENT
EVENT
In July
2008, the holder of convertible debentures converted his warrants and debentures
of $660,000 into 50,000 and 220,000 shares of the Company’s restricted common
stock, respectively.