<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 16, 1996
REGISTRATION NO. 33-88372
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST EFFECTIVE AMENDMENT TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
RICK'S CABARET INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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TEXAS 5813 76-0037324
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
3113 BERING DRIVE ROBERT L. WATTERS
HOUSTON, TEXAS 77057 CHIEF EXECUTIVE OFFICER
(713) 785-0444 3113 BERING DRIVE
(ADDRESS, INCLUDING ZIP CODE, AND HOUSTON, TEXAS 77057
TELEPHONE NUMBER, INCLUDING AREA CODE, (713) 785-0444
OR REGISTRANT'S PRINCIPAL EXECUTIVE (NAME, ADDRESS, INCLUDING ZIP CODE,
OFFICES AND PLACE OF BUSINESS) AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE OF PROCESS)
</TABLE>
Copy to:
ROBERT D. AXELROD, ESQ.
AXELROD, SMITH & KIRSHBAUM
5300 MEMORIAL DRIVE, STE. 700
HOUSTON, TEXAS 77007
(713) 961-2221
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
1
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RICK'S CABARET INTERNATIONAL, INC.
Cross-Reference Sheet
showing location in the Prospectus of
Information Required by Items of Form SB-2
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<CAPTION>
FORM SB-2 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
- --------------------------------- ----------------------
<S> <C> <C>
1. Front of Registration Statement and
Outside Front Cover of Prospectus . . . . . . . . Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus . . . . . . . . . . . . . . . Inside Front Cover Page; Outside Back
Cover Page
3. Summary Information and Risk Factors . . . . . . . . . . . Prospectus Summary; Risk Factors
4. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . Use of Proceeds
5. Determination of Offering Price . . . . . . . . . . . . . Outside Front Cover Page
6. Dilution . . . . . . . . . . . . . . . . . . . . . . . . . *
7. Selling Security-Holders . . . . . . . . . . . . . . . . . *
8. Plan of Distribution . . . . . . . . . . . . . . . . . . . Plan of Distribution; Outside Front
Cover Page
9. Legal Proceedings . . . . . . . . . . . . . . . . . . . . Business-Litigation
10. Directors, Executive Officers, Promoters
and Control Persons . . . . . . . . . . . . . . . Management; Executive Compensation;
Principal Stockholders; Certain
Transactions
11. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . Principal Stockholders
12. Description of Securities . . . . . . . . . . . . . . . . Description of Securities
13. Interest of Named Experts and Counsel . . . . . . . . . . Experts
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities . . . . . . . . . . . . . . . . . . . *
15. Organization Within Last Five Years . . . . . . . . . . . Business
16. Description of Business . . . . . . . . . . . . . . . . . Business
17. Management's Discussion and Analysis
or Plan of Operation . . . . . . . . . . . . . . . Management's Discussion and Analysis
of Financial Condition and Results of
Operations
18. Description of Property . . . . . . . . . . . . . . . . . Business
19. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . . . . Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . Price Range of Common Stock; Risk
Factors; Description of Securities;
Shares Eligible for Future Sale
21. Executive Compensation . . . . . . . . . . . . . . . . . . Executive Compensation
22. Financial Statements . . . . . . . . . . . . . . . . . . . Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . *
</TABLE>
____________________________________
(*) None or Not Applicable
2
<PAGE> 3
PROSPECTUS
- --------------------------------------------------------------------------------
RICK'S CABARET INTERNATIONAL, INC.
920,000 Shares of Common Stock issuable upon exercise of
920,000 Redeemable Common Stock Purchase Warrants
160,000 Shares of Common Stock issuable upon exercise of
160,000 Representative's Warrants
80,000 Shares of Common Stock issuable upon exercise of
80,000 Underlying Warrants
- --------------------------------------------------------------------------------
This Prospectus relates to an Offering (the "Offering") by Rick's
Cabaret International, Inc., a Texas corporation ("Ricks" or the "Company") of
1,160,000 shares of Common Stock, $.01 par value per share of the Company
("Common Stock") consisting of: (i) 920,000 shares of Common Stock underlying
920,000 Redeemable Common Stock Purchase Warrants (the "Warrants"); (ii)
160,000 shares of Common Stock underlying 160,000 Representative Warrants
("Representative's Warrants"); and (iii) 80,000 shares of Common Stock issuable
upon the exercise of the Underlying Warrants ("Underlying Warrants"). Each
Warrant entitles the holder to purchase one share of Common Stock for $3.00 per
share, subject to adjustment under certain circumstances, until October 12,
1998. The Warrants are not exercisable unless, at the time of exercise, the
Company has a current Prospectus covering the shares of Common Stock issuable
upon exercise of the Warrants. The Warrants may be redeemed by the Company at
$.05 per Warrant, at any time prior to their expiration, on not less than
thirty (30) days written notice, if the closing price of the Common Stock for a
period of thirty (30) consecutive trading days equals of exceeds $6.00 per
share, subject to adjustment, provided that such notice is mailed not later
than ten (10) days after the end of such period. The Company has agreed to use
its best efforts to have a current Registration Statement in effect with
respect to the Common Stock underlying the Warrants at any time when the
holders thereof may exercise their Warrants.
Each Representative's Warrant entitles the holder to purchase one
share of Common Stock for $4.35 per share. The Representative's Warrants are
exercisable until October 12, 2000. The Underlying Warrants entitle the holder
to purchase one share of Common Stock at an exercise price of $4.35 per share.
The Underlying Warrants are exercisable until October 12, 1998.
The outstanding Warrants were initially issued in connection with an
October, 1995, public offering of the Company's securities (the "Public
Offering"), and the Representative's Warrants and Underlying Warrants were sold
to the Representative of the several underwriters of the Public Offering. The
Company will receive the proceeds from the exercise of the Warrants, the
Representative's Warrants and the Underlying Warrants.
The Company's Common Stock and Warrants are traded on The NASDAQ
SmallCap Market ("NASDAQ") under the symbols "RICK" and "RICKW", respectively.
On July 8, 1996, the last trade prices for the Common Stock and Warrants as
reported on NASDAQ were $5 3/8 per share and $2 9/16 per warrant, respectively.
3
<PAGE> 4
-------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE
LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS."
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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====================================================================================================================
EXERCISE UNDERWRITING PROCEEDS
PRICE DISCOUNTS AND TO COMPANY
PER SHARE COMMISSIONS (1)
- --------------------------------------------------------------------------------------------------------------------
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Redeemable Common Stock
Purchase Warrants . . . . . . . . . . . . $ 3.00 ----- $2,760,000
- --------------------------------------------------------------------------------------------------------------------
Representative Warrants . . . . . . . . . $ 4.35 ----- 696,000
- --------------------------------------------------------------------------------------------------------------------
Underlying Warrants . . . . . . . . . . . $ 4.35 ----- 348,000
- --------------------------------------------------------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . $3,804,000
====================================================================================================================
</TABLE>
(1) Before deducting expenses estimated at $12,000, payable by the
Company.
-------------
THE DATE OF THIS PROSPECTUS IS JULY 16, 1996
4
<PAGE> 5
No dealer, salesperson representative, or other person has been
authorized to give any information or to make any representations other than
those contained in this Prospectus, and if given or made, such information or
representations must not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer to sell or solicitation
of an offer to buy any securities other than securities offered by this
Prospectus or an offer to sell, or a solicitation of an offer to buy any
securities by, any person in any jurisdiction in which such offer or
solicitation is unlawful. Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, imply that the information
contained herein is correct as of any time subsequent to the date of this
Prospectus.
-------------
TABLE OF CONTENTS
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Page
No.
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Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Initial Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Price Range of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . 24
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Principal Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Description of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Shares Eligible for Future Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Index to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F1
</TABLE>
-------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). Reports, proxy statements, and
other information filed by the Company with the Commission pursuant to
informational requirements of the Exchange Act may be inspected and copied, at
prescribed rates, at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington
D.C. 20549, and at the following Regional Offices of the Commission: New York
Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048;
and Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661.
5
<PAGE> 6
The Company has filed with the Commission a Registration Statement on
Form SB-2 ("Registration Statement") under the Securities Act of 1933, as
amended, with respect to the securities offered by this Prospectus. This
Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete and, where the contract or other document has been filed
as an exhibit to the Registration Statement, each such statement is qualified
in all respects by reference to the applicable document filed with the
Commission. Copies of the Registration Statement may be inspected, without
charge, at the offices of the Commission, or obtained at prescribed rates from
the Public Reference Section of the Commission, at the address set forth above.
6
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Each prospective investor is
urged to read this Prospectus in its entirety. All dollar amounts in this
Prospectus are stated in U.S. dollars.
THE COMPANY
The Company was organized in 1994 to acquire all of the outstanding
capital stock of Trumps, Inc. ("Trumps"), a Texas corporation formed in 1982,
from Robert L. Watters, its sole stockholder. This acquisition was authorized
and approved by the Board of Directors of the Company in December, 1994, and
was consummated in February, 1995. Since 1983, Trumps has operated Rick's
Cabaret ("Rick's"), a premiere adult nightclub offering topless entertainment
in Houston, Texas. Rick's Cabaret has sought to develop a clientele base which
includes professionals, business executives and other individuals with
disposable income who seek adult entertainment in an attractive, upscale, yet
discreet environment.
Trumps has operated Rick's Cabaret since 1983. Mr. Watters acquired a
10% stock ownership interest in Trumps from a shareholder in November, 1987,
becoming one of three stockholders in Trumps. Mr. Watters' ownership interest
in Trumps increased to 50% of the outstanding stock in 1989 with another
purchase of stock from a shareholder. Mr. Watters became the sole stockholder
of Trumps in 1993 through a series of business transactions with the then
remaining former stockholder of Trumps. In August, 1995, the Board of
Directors of the Company authorized the acquisition from Mr. Watters of his
wholly owned companies, Tantric Enterprises, Inc., Tantra Dance, Inc., and
Tantra Parking, Inc. (hereinafter collectively referred to as "Tantra") which
own and operate Tantra, a non-sexually oriented discotheque and billiard club
in Houston, Texas. See "Business--History."
In February, 1996, the Company formed RCI Entertainment, Louisiana,
Inc., a Louisiana corporation, for the purpose of administering, operating,
managing and leasing its new location in New Orleans, Louisiana. The Company
presently anticipates that it will open its new facility in New Orleans in
November, 1996. In addition, the Company formed RCI Entertainment (Texas),
Inc. in June, 1996, for the purpose of acquiring 1.13 acres of land in Houston,
Texas. The Company plans to build a new adult oriented nightclub at this
location within the next twelve to eighteen months.
The Rick's Cabaret adult nightclub located in Houston, Texas is
presently the Company's only currently operating location.
RICK'S CABARET
The key elements of Rick's operating strategy are as follows:
Female Entertainment. Management of the Company has a policy of
maintaining high standards of both personal appearance and personality for its
topless entertainers and waitresses. Though this policy has the effect of
limiting the number of topless entertainers who are permitted to perform at
Rick's Cabaret, management believes that its policy of maintaining these high
standards is in the best interest of its long-term market position.
7
<PAGE> 8
Management. The Company has recruited its management staff from
outside the topless entertainment industry. The Company believes that this
practice results in a management team characterized by the highest standards of
integrity. This practice of training management without prior adult club
experience could result in a delay in the Company's anticipated growth plans
due to the time required to attract qualified managers.
Food and Drink. Management of the Company believes a key to the
success of a premiere adult nightclub is a quality, first-class bar and
restaurant operation to compliment its adult entertainment. Rick's Cabaret
currently employs a chef with approximately 28 years experience and a bar
manager with five years experience. It offers an extensive and varied menu, as
well as selections of premiere wine, liquor and beer.
Controls. Management of the Company believes that operational and
accounting controls are essential to the successful operation of a
cash-intensive business such as a nightclub, restaurant and bar. For example,
the Company separates management personnel from all cash handling and uses a
combination of accounting and physical inventory control devices to insure a
high level of security in its accounting practices. Deposits of cash and
credit card receipts are reconciled each day to a daily income report. In
addition, daily computer reports alert management of any variances from
expected financial results based on historical norms.
Compliance Policies. The management of Rick's Cabaret has a policy of
ensuring that its business is carried on in conformity with local, state and
federal laws. In particular, the Company's management has a "no tolerance"
policy as to illegal drug use in or around the premises. Posters placed
throughout the nightclub reinforce this policy as do periodic unannounced
searches of the entertainer's lockers. Entertainers and waitresses who arrive
for work are not allowed to leave the premises without the permission of
management. Once an entertainer does leave the premises, she is not allowed to
return to work until the next day. Management continually monitors the
behavior of entertainers, waitresses and customers to ensure that proper
standards of behavior are observed. The Company's management has the power to
levy fines on entertainers for breaches of the Company's rules. In the event
an entertainer is fined three times by management, the entertainer is barred
from future performances at Rick's Cabaret.
Management also reviews all credit card charges made by customers
while at Rick's. Specifically, management has in place a formal policy which
provides that all credit card charges must be approved, in writing, by
management before any charges are accepted. Management is particularly trained
to review credit card charges to ensure that the only credit card charges
approved for payment are for food, drink and entertainment at Rick's Cabaret.
Atmosphere. Rick's Cabaret maintains high standards in its facility
and its decor. The environment of music selection, employee appearance and
demeanor and all aspects of customer service are carefully monitored on a
continuous basis.
Advertising and Promotion. The Company's marketing philosophy is to
portray Rick's Cabaret as the premier topless cabaret in the markets it serves,
providing adult entertainment in an enjoyable, yet discreet, environment.
8
<PAGE> 9
TANTRA
The Company owns and operates Tantra, a non-sexually oriented
discotheque and billiard club in Houston, Texas. The Company intends to
evaluate opening a nightclub similar or identical to Tantra in each city into
which it expands its adult nightclub operations, subject to acceptable site
location and adequate financing.
Unless otherwise indicated, references to the Company include Trumps
and Tantra, its wholly-owned subsidiaries. The offices of the Company are
located at 3113 Bering Drive, Houston, Texas 77057 and its telephone number is
(713) 785-0444.
THE OFFERING
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Securities Offered 1,160,000 shares of Common Stock consisting of: (i) 920,000 shares of Common Stock
underlying 920,000 Warrants; (ii) 160,000 shares of Common Stock underlying 160,000
Representative's Warrants; and (iii) 80,000 shares of Common Stock issuable upon
exercise of the underlying Warrants. Each Warrant entitles the holder to purchase one
share of Common Stock at $3.00 per share, subject to adjustment, at any time prior to
October 12, 1998. The Warrants are subject to redemption by the Company at $.05 per
Warrant under certain circumstances. Prior to the first anniversary of the date of
this Prospectus, the Warrants will not be redeemable by the Company without the
written consent of the Representative. Each Representative's Warrant and each
Underlying Warrant entitle the holder to purchase one share of Common Stock for $4.35
per share, exercisable until October 12, 2000 and October 12, 1998, respectively. See
"Description of Securities."
Common Stock outstanding
before the Offering(1) 3,723,333
Common Stock outstanding
after the Offering(1) 4,883,333
Use of Proceeds The Company intends to use the net proceeds of this Offering for working capital and
general corporate purposes. The Company may also utilize the proceeds for expansion
of its business through acquisition. See "Use of Proceeds."
Risk Factors The securities offered hereby are speculative and involve a high degree of risk and
should not be purchased by anyone who cannot afford the loss of such person's
investment. See "Risk Factors."
Nasdaq Symbols Common Stock--RICK
Warrants--RICKW
</TABLE>
- -----------------------------
(1) Does not include 300,000 shares of Common Stock reserved for issuance upon
the exercise of options under the Company's Stock Option Plan, of which
105,000 options have been granted as of the date of this Prospectus but
none have been exercised. See "Executive Compensation--Employee Stock
Option Plan," "Description of Securities."
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SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from the
financial statements appearing elsewhere in this Prospectus. Such information
should be read in conjunction with such financial statements, including the
notes thereto.
<TABLE>
<CAPTION>
HISTORICAL
AS ADJUSTED -----------------------------------------------------
FOR PROCEEDS SIX MONTHS ENDED
------------ MARCH 31, YEAR ENDED SEPTEMBER 30,
MARCH 31, ------------------------- ------------------------
1996(2) 1996 1995 1995 1994
------------ ---------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
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STATEMENT OF INCOME DATA:
Revenues
Sale of alcoholic beverages $1,196,006 $1,191,293 $2,286,157 $2,381,250
Sale of food 137,729 109,566 213,537 196,773
Service revenues 912,330 833,717 1,700,133 1,730,653
Other 127,944 149,946 334,879 258,617
---------- ----------- ---------- ----------
Total Revenues 2,369,009 2,284,522 4,534,706 4,567,293
Income (loss) from operations (163,353) 172,031 593,670 348,017
Income (loss) before income taxes (78,992) 155,369 553,427 292,041
Net income (loss) (83,792) 95,069 359,427 191,041
Net income (loss) per common share (0.02) 0.05 0.20 0.11
Weighted average shares outstanding 3,640,000 1,800,000 1,800,000 1,800,000
========== ========== ========== ==========
BALANCE SHEET DATA:
Total assets $9,930,844 $5,226,844 $1,355,422 $1,449,458 $ 629,755
Working capital (deficit) 7,980,510 3,276,510 785,420 (741,220) (448,445)
Total liabilities 823,451 823,451 1,402,554 1,232,232 771,956
Stockholders' equity (deficit)(1) 9,107,726 4,403,393 (47,132) 217,226 (142,201)
</TABLE>
(1) The Company's negative stockholder equity at the end of 1994 is a
result of stock repurchases by the Company in prior years, and is not
the result of operating losses of the Company.
(2) Assumes issuance of (i) 920,000 shares of Common Stock issuable upon
exercise of the Warrants, and (ii) 240,000 shares of Common Stock
issuable upon the exercise of the Representative's Warrants and the
Underlying Warrants. Also assumes issuance of 200,000 shares relating
to Consultants's Warrants at an exercise price of $4.50 per share of
Common Stock previously registered pursuant to Form S-8, of which
50,000 were exercised on July 8, 1996. There can be no assurance that
any other warrants will be exercised. An additional 200,000 shares of
Consultants Warrants are not included, as they have not vested.
10
<PAGE> 11
INITIAL PUBLIC OFFERING
In October, 1995, the Company completed an offering of 1,840,000
shares of Common Stock and 920,000 Redeemable Common Stock Purchase Warrants
("Warrants") pursuant to a Registration Statement filed under the Securities
Act of 1933, as amended (the "IPO"). Barron Chase Securities, Inc. (the
"Representative") served as the Underwriter in the IPO. Since the date of the
IPO and through the date of this Prospectus, no Warrants sold in the IPO have
been exercised to purchase shares of Common Stock. 920,000 shares of Common
Stock are hereby offered by the Company pursuant to the terms of the
outstanding Warrants. For a more complete description of the terms of the
Warrants, see "Description of Securities."
As a portion of the consideration paid to the Representative in the
IPO, the Company issued to the Representative, Representative's Warrants to
purchase 160,000 shares of Common Stock at an exercise price of $4.35 per share
and 80,000 Underlying Warrants to purchase 80,000 shares of Common Stock at an
exercise price of $4.35 per share. For a complete description of the terms of
the Representative's Warrants and the Underlying Warrants, see "Description of
Securities."
RISK FACTORS
The Shares of Common Stock offered hereby are speculative and involve
a high degree of risk. In addition to the other information set forth in this
Prospectus each prospective investor should carefully consider the following
risk factors before making an investment decision.
RISK OF ADULT NIGHTCLUB OPERATIONS
Historically, the adult entertainment, restaurant and bar industry has
been an extremely volatile industry. The industry tends to be extremely
sensitive to the general local economy, in that when economic conditions are
prosperous, entertainment industry revenues increase, and when economic
conditions are unfavorable, entertainment industry revenues decline. Coupled
with this economic sensitivity is the trendy personal preferences of the
customers who frequent adult cabarets. The Company continuously monitors
trends in its customers' tastes and entertainment preferences so that, if
necessary, it can make appropriate changes which will allow it to remain one of
the premiere adult cabarets. However, any significant decline in general
corporate conditions or uncertainties regarding future economic prospects that
affect consumer spending could have a material adverse effect on the Company's
business. In addition, Rick's has historically catered to a clientele base
from the upper end of the market. Accordingly, further reductions in the
amounts of entertainment expenses allowed as deductions from income under the
Internal Revenue Code of 1954, as amended, could adversely affect sales to
customers dependent upon corporate expense accounts.
FINANCIAL CONTROLS
A significant part of the revenues earned by the Company through its
adult nightclub operations will be collected in cash by full and part-time
employees. Comprehensive financial controls are required to minimize the
potential loss of revenue through theft or misappropriation of cash. To the
extent that these controls are not structured or executed properly, significant
cash revenues could be lost and profitability of the Company impaired. The
Company believes that it has implemented significant cash controls, including
separating management personnel from actually
11
<PAGE> 12
handling cash and utilizing a combination of accounting and physical inventory
control devices to deter theft and to ensure a high level of security within
its accounting practices and procedures. See "Business--Business
Strategy--Controls."
COMPETITION
The adult topless club entertainment business is highly competitive
with respect to price, service and location, as well as the professionalism of
the entertainment. Rick's Cabaret in Houston competes with a number of
locally-owned adult cabarets, some of whose names may enjoy recognition that
equals that of Rick's. There are approximately 50 adult cabarets located in
the Houston area of which approximately 10 are in direct competition with the
Company. In the past year, Rick's has been the sixth highest adult nightclub
in the Houston area in alcoholic beverage sales, according to the information
made available by the Texas Alcoholic Beverage Commission. In the year prior
thereto, Rick's was the fourth highest adult nightclub in alcoholic beverage
sales in the Houston area. Although the Company believes that it is
well-positioned to compete successfully, there can be no assurance that Rick's
will be able to maintain its high level of name recognition and prestige within
the marketplace. See "Business--Competition."
DEPENDENCE ON AND AVAILABILITY OF MANAGEMENT; MANAGEMENT OF GROWTH
The success of the Company is substantially dependent upon the time,
talent, and experience of Robert Watters, its President and Chief Executive
Officer. In 1995, the Company entered into a three-year employment agreement
with Mr. Watters. Additionally, the Company has obtained key-man life
insurance on the life of Mr. Watters in the amount of $3,000,000. The loss of
the services of Mr. Watters would have a material adverse impact on the Company
and its business. In the event of Mr. Watters' unavailability or in the event
that he should become temporarily disabled, the Company believes that it
presently has in place management systems and controls which are sufficiently
strong to enable it to run efficiently and effectively until Mr. Watters'
return or until a replacement could be found. No assurance can be given,
however, that a replacement for Mr. Watters could be located in the event of
his unavailability. Further, in order for the Company to expand its business
operations, it must continue to improve and expand the level of expertise of
its personnel and must attract, train and manage qualified managers and
employees to oversee and manage the expanded operations. The Company's
practice of training management without prior adult topless club experience
could result in a delay in the Company's anticipated growth plans due to the
time required to attract and train such qualified managers and employees. See
"Business--Business Strategy--Management."
KEY EMPLOYEES AND ENTERTAINERS
The Company's success depends on maintaining a high quality of female
entertainers and waitresses. Competition for topless entertainers in the adult
entertainment business is intense. The lack of availability of quality,
personable, attractive entertainers or the Company's inability to attract and
retain other key employees, such as kitchen personnel and bartenders, could
adversely impact the business of the Company.
12
<PAGE> 13
ABILITY TO MANAGE GROWTH
It is the intention of the Company to expand its existing business
operations by opening additional topless nightclubs in other metropolitan areas
under the trade name "Rick's Cabaret." The opening of additional topless
nightclubs will subject the Company to a variety of risks associated with
rapidly growing companies. In particular, the Company's growth may place a
significant strain on its accounting systems and internal controls and personal
overview of its day-to-day operations. Although management intends to ensure
that its internal controls remain adequate to meet the demands of further
growth, there can be no assurance that its systems, controls or personnel will
be sufficient to meet these demands. Inadequacies in these areas could have a
material adverse effect on Rick's business, financial condition and results of
operations.
PERMITS RELATING TO THE SALE OF ALCOHOL
Rick's derives a significant portion of its revenues from the sale of
alcoholic beverages. In Texas, the authority to issue a permit to sell
alcoholic beverages is governed by the Texas Alcoholic Beverage Commission (the
"TABC"), which has the authority, in its discretion, to issue the appropriate
permits. Rick's presently holds a Mixed Beverage Permit and a Late Hours
Permit (the "Permits"). These Permits are subject to annual renewal, provided
Rick's has complied with all rules and regulations governing the permits.
Renewal of a permit is subject to protest, which may be made by a law
enforcement agency or by a member of the general public. In the event of a
protest, the TABC may hold a hearing at which time the views of interested
parties are expressed. The TABC has the authority after such hearing not to
issue a renewal of the protested alcoholic beverage permit. While Rick's has
never been subject to a protest hearing against the renewal of its Permits,
there can be no assurance that such a protest could not be made in the future,
nor can there be any assurance that the Permits would be granted in the event
such a protest was made. Other states may have similar laws which may limit
the availability of a permit to sell alcoholic beverages or which may provide
for suspension or revocation of a permit to sell alcoholic beverages in certain
circumstances. The temporary or permanent suspension or revocations of either
of the Permits or the inability to obtain permits in areas of expansion would
have a material adverse effect on the revenues, financial condition and results
of operations of the Company. See "Business--Governmental Regulations."
NECESSARY PERMITS
In Houston, Texas, where Rick's is located, and in many other cities,
location of a topless cabaret is subject to restriction by city ordinance.
Rick's is subject to "The Sexually Oriented Business Ordinance" (the
"Ordinance") which contains prohibitions on the location of an adult cabaret.
The prohibitions deal generally with distance from other sexually oriented
businesses and from schools and churches, and contain restrictions based on the
percentage of residences within the immediate vicinity of the sexually oriented
business. The granting of a Sexually Oriented Business Permit ("Business
Permit") is not subject to discretion; the Business Permit must be granted if
the proposed operation satisfies the requirements of the Ordinance. Rick's has
held a Business Permit since passage of the Ordinance in 1986. The Business
Permit, which is transferable, is valid for a period of one year and is
renewable by application of the permit holder. The permit holder for Rick's
Cabaret is Robert Watters who, prior to this offering, was the sole stockholder
of the Company. In the event of the failure by Mr. Watters to renew the
Business Permit, it is likely that a new Business Permit would not be granted
for the location of Rick's Cabaret, because of the location of another
13
<PAGE> 14
sexually oriented business enterprise within the prohibited distance from
Rick's Cabaret. The loss of the Business Permit would have a material adverse
effect on Rick's business, financial condition and results of operations. See
"Business--Governmental Regulations."
A dancehall permit is required for the operation of a discotheque in
the city of Houston. The dancehall permit is not a discretionary permit, but
must be granted by the city if the provisions of the applicable ordinance are
satisfied. A dancehall permit may be revoked or renewal may be refused if
certain criminal activities occur on the premises or if the person listed as
the applicant has committed certain named offenses. Tantra's dancehall permit
is held by Mr. Watters. The Company believes that it could obtain a new
dancehall permit if for any reason Mr. Watters failed to renew or was refused
the renewal of the dancehall permit.
STATUS OF ENTERTAINERS AS INDEPENDENT CONTRACTORS
The Company believes its entertainers to be independent contractors
and not employees for federal income tax purposes and that the entertainers
should be treated as self-employed independent contractors under the income tax
withholding provisions of the Internal Revenue Code and under the Federal
Insurance Contributions Act and the Federal Unemployment Tax Act. In addition,
the Company believes the entertainers are independent contractors for purposes
of regulations administered by the United States Department of Labor. However,
the status of the entertainers as independent contractors is not free from
doubt. The Company has sought neither a ruling from either the Internal
Revenue Service or the Department of Labor nor an opinion of counsel as to the
status of its entertainers as independent contractors. After consultation with
counsel, the Company does not believe that it could obtain an opinion on this
issue at a cost which the Company would find acceptable. Moreover, the Company
believes that any such opinion, if obtained, would be of very limited value,
given the inherently factual nature of the issue. To the extent that a
determination were made that the entertainers are not independent contractors,
but rather are employees for tax or labor purposes, and a similar determination
were not made as to other adult cabarets, the Company could be at a competitive
disadvantage with other adult cabarets. Moreover, such a determination could
result in the imposition of penalties against the Company for its prior
treatment, the effect of which could be material. The Company is a member of
the Texas Entertainment Association, an organization composed of the largest
adult cabarets in Texas. One of the objectives of the Texas Entertainment
Association has been to keep the membership informed of changes in the law
relating to the status of entertainers as independent contractors and to
coordinate the policies of the major adult cabarets in an effort to ensure that
changes in the policies and procedures relating to the employment status of
entertainers are made uniformly by the entire adult industry in Texas. The
Company presently intends to change its treatment of its entertainers from
independent contractors to employees in the near future. The Company is
working cooperatively with the Texas Entertainment Association in an effort to
achieve an orderly transition within the entire industry.
EXISTING LITIGATION; POSSIBLE MATERIAL ADVERSE EFFECTS
The Company and Mr. Watters are presently involved in certain
litigation (the "Zu Lawsuit") with a former stockholder of the Company (the
"Defendant") which, if decided unfavorably, could have a material adverse
effect on the Company. See Business--Litigation. The litigation, which was
initiated by Mr. Watters, seeks to compel the Defendant to convey to Mr.
Watters all of its ownership interest in Zu Corporation, which is the lessor to
the Company of the land and building where Rick's is located. The Defendant
joined the Company as a party to the lawsuit, claiming that
14
<PAGE> 15
the Company had breached its lease agreement due to the alleged late payment of
rent for one month. The case was tried in August, 1992, and judgment was
rendered in favor of Mr. Watters and the Company. The Defendant, however,
appealed this decision and in an opinion rendered in August 1995 the Texas
Court of Appeals reversed and remanded the decision of the District Court. Upon
a re-hearing of this case, the Court of Appeals, in an opinion rendered
February 1, 1996, from which one of three Justices dissented, reversed and
rendered judgment against Mr. Watters and the Company. The Company filed a
motion for rehearing of the decision of the Court of Appeals, which was denied
on May 2, 1996.
The Company intends to file an Application for Writ of Error with the
Texas Supreme Court. Based on the reasoning of the dissenting opinion to the
decision of the Court of Appeals, counsel to the Company believes that there is
a likelihood that the Supreme Court will grant the Company's Application for
Writ of Error. Counsel has advised the Company that this appellate process is
likely to require from four to thirty months depending upon whether the Texas
Supreme Court grants the Company's Application for Writ of Error. During this
time, the Company anticipates that it will continue to operate in its present
location.
If the Company is unsuccessful in overturning the decision of the
Court of Appeals and is unable to successfully renegotiate a new lease, it will
be necessary for the Company to relocate Rick's. While the Company believes
that it could relocate Rick's to an equally desirable location, and, in fact,
has recently completed the acquisition of a tract of land in Houston, Texas,
upon which to build a new facility, such a move could have a material adverse
impact on the Company. While the Company would extensively advertise its new
location, it is possible that some customers would be lost to other competing
clubs in the vicinity of Rick's present location. It is likely that a change
in location would result in some decline in revenue for a period until goodwill
could be established at the new location. Other adverse effects of a change of
location could include the cost of the move and the lost revenue during any
period that Rick's would be unable to operate during such move. See "Business
- -- Litigation."
The Company and Mr. Watters are also presently involved in certain
litigation (the "Young Lawsuit") which was initiated in 1989 when one of the
former stockholders of the Company was sued over his ownership interest in the
Company. Mr. Watters and the Company were joined in the litigation based on
allegations that they had improperly transferred certain assets to the Company
from another corporation that had previously operated Rick's. In June, 1993,
summary judgment was rendered by the district court in favor of the Company and
Mr. Watters. Subsequent to an appeal by the parties suing the former
stockholder, the Texas Court of Appeals, 8th Judicial District, reversed the
summary judgment and remanded the case to the trial court. The Company filed
an application for a Writ of Error with the Texas Supreme Court. This Writ was
denied and the case was remanded to the district court for trial. The Company
and Mr. Watters recently mediated this matter and pursuant to such mediation,
entered into a settlement agreement with the Plaintiff, Mr. Young. The
settlement agreement provides that the litigation will be dismissed, with
prejudice, as to the Company, Mr. Watters and all other entities with which Mr.
Watters is or was associated. The documents evidencing this settlement
agreement are presently being prepared by legal counsel. If, for any reason,
this settlement is not consummated, the Company believes, after consultation
with counsel that it has substantial defenses to the claims being asserted
against it and that the risk of material financial exposure to the Company is
remote. There can be no assurance, however, that the Company will be
successful in asserting its defenses or that any judgment that may be rendered
against the Company will not be material. See "Business -- Litigation."
15
<PAGE> 16
CONFLICTS OF INTEREST; CERTAIN TRANSACTIONS
In 1991 Mr. Watters exercised an option to purchase all of the
outstanding shares of capital stock of Zu Corporation which owns the land on
which the present operation of Rick's Cabaret is located. The seller of Zu
Corporation has protested the validity of the exercise of this option and Mr.
Watters initiated litigation. Trumps, Inc.'s lease with Zu Corporation expired
in February, 1996, and Trumps exercised its option to renew the lease for an
additional term of 10 years. The Seller of Zu Corporation has, likewise,
protested the validity of the exercise of this renewal option. See "Risk
Factors--Litigation" and "Business--Litigation." Although the terms and
conditions of the lease between Trumps, Inc. and Zu Corporation were not the
result of arm's length negotiations, management believes that the terms are
comparable to or better than those that would be available from unaffiliated
parties. See "Certain Transactions."
UNINSURED RISKS
The Company maintains insurance in amounts it considers adequate for
personal injury and property damage to which the business of the Company may be
subject. Because of what the Company deems to be prohibitively expensive
premium costs, however, the Company does not maintain any personal injury
liquor liability insurance. Therefore, the Company may be exposed to potential
uninsured liabilities which may be imposed pursuant to the Texas "Dram Shop"
statute or similar "Dram Shop" statutes or common law theories of liability in
other states where the Company may expand. The Texas "Dram Shop" statute
provides a person injured by an intoxicated person the right to recover damages
from an establishment that wrongfully served alcoholic beverages to such person
if it was apparent to the server that the individual being sold, served or
provided with an alcoholic beverage was obviously intoxicated to the extent
that he presented a clear danger to himself and others. An employer is not
liable for the actions of its employee who overserves if (i) the employer
requires its employees to attend a seller training program approved by the
TABC; (ii) the employee has actually attended such a training program; and
(iii) the employer has not directly or indirectly encouraged the employee to
violate the law. It is the policy of Rick's to require that all servers of
alcohol working at Rick's be certified as servers under a training program
approved by the TABC, which certification gives statutory immunity to the
sellers of alcohol from damage caused to third parties by those who have
consumed alcoholic beverages at such establishment pursuant to the Texas
Alcoholic Beverage Code. There can be no assurance, however, that uninsured
liabilities may not arise which could have a material adverse effect on the
Company. In 1993, the Company was sued by the relatives of a deceased car
accident victim who alleged that one of the Company's employees wrongfully
caused the death of the accident victim. The Company recently settled this
litigation making a nominal payment of less than $4,000 to the Plaintiffs. See
"Business--Litigation."
BROAD DISCRETION IN APPLICATION OF PROCEEDS
The Company is allocating all of the net proceeds of this Offering for
working capital and general corporate purposes, including the opening of adult
cabarets in the format and bearing the name "Rick's Cabaret" in cities other
than Houston, Texas. Accordingly, management will retain broad discretion in
the use of proceeds. In addition, the Company may, when and if the opportunity
arises, acquire other businesses involved in the topless entertainment
business. Accordingly, a prospective investor will not have an opportunity to
evaluate the precise locations where the Company will expand or to review and
evaluate the financial condition of any other entity involved
16
<PAGE> 17
in the topless entertainment business which the Company may acquire.
Consequently, prospective investors will be relying upon the judgment of
management of the Company for such decisions. Investors should consider such
broad discretion in the application of proceeds of the offering prior to making
a determination to purchase the securities offered hereby. See "Use of
Proceeds," "Business--Future Expansion" and "Management."
CONTROL BY MANAGEMENT
The Chief Executive Officer and Chairman of the Board of the Company
owns approximately 49% of the outstanding Common Stock of the Company. As a
result, management, as a practical matter, will be able to elect all directors
and otherwise control the affairs of the Company for the foreseeable future.
However, the Company has agreed with the Representative to appoint, for a
period of three years ending October, 1998, two persons to the Board of
Directors, who shall not be affiliated with the Company. See "Principal
Stockholders."
LIMITATIONS ON PROTECTION OF SERVICE MARKS
Rights of the Company to the tradenames "Rick's" and "Rick's Cabaret"
are established under the common law, based upon the Company's substantial and
continuous use of these trademarks in interstate commerce since at least as
early as 1987. "RICK'S AND STARS DESIGN" logo was registered through service
mark registrations issued by the United States Patent and Trademark Office
("PTO") in 1989. Due to an oversight, these registrations were canceled by the
PTO for failure of the Company to file a required affidavit with the PTO
setting forth that the service mark was still in use in commerce. Applications
for service mark registration have been filed to re-register the Company's
RICK'S AND STARS DESIGN logo service mark with the PTO. These applications
were published for opposition on May 28, 1996 and June 4, 1996. If an
opposition or request for extension of time to file an opposition is not filed
within 30 days of the corresponding date of publication, the registrations
should issue within six months following publication.
Applications for service mark registration for the Company's RICK'S
CABARET service mark have also been filed. These applications were published
for opposition on May 28, 1996. If an opposition or request for extension of
time to file an opposition is not filed within 30 days of the date of
publication, the registrations should issue within about six months following
publication.
There can be no assurance that these steps taken by the Company to
protect its service marks will be adequate to deter misappropriation of its
protected intellectual property rights. Litigation may be necessary in the
future to protect the Company's rights from infringement, which may be costly
and time consuming. The loss of the intellectual property rights owned or
claimed by the Company could have a material adverse affect on the Company.
POSSIBLE VOLATILITY OF COMMON STOCK PRICE
The market price of the Common Stock may be highly volatile, as has
been the case with the securities of many other small capitalization companies.
Additionally, in recent years, the securities markets have experienced a high
level of price and volume volatility and the market prices of securities for
many companies, particularly small capitalization companies, have experienced
wide fluctuations which have not necessarily been related to the operating
performances or underlying asset values of such companies.
17
<PAGE> 18
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, assuming the exercise of the
Warrants, the Representative's Warrants, and the Underlying Warrants, the
Company will have outstanding 4,883,333 shares of Common Stock, of which
3,083,333 shares will be freely tradeable without restriction or further
registration under the Securities Act, except for any shares purchased by an
"affiliate" of the Company (in general, a person who has a control relationship
with the Company).
There are 1,800,000 shares of Common Stock outstanding, which are
owned by Mr. Watters and, which are deemed to be "restricted securities" as
that term is defined under Rule 144 of the Securities Act ("Rule 144"), in that
such shares were issued in private transactions not involving a public
offering.
In addition to the limitations placed on the sale of restricted
securities pursuant to Rule 144, Mr. Watters has entered into a letter
agreement with the Representative not to sell or otherwise dispose of any
securities of the Company prior to April 12, 1997, without the prior written
consent of the Representative. Further, Mr. Waters has entered into an
agreement at the request of the Securities Commissioner of Texas which places
further restrictions on the sale and transfer of 1,600,000 of his shares of
Common Stock.
No prediction can be made as to the effect, if any, that sales of
shares of Common Stock or the availability of such shares for sale will have on
the market prices prevailing from time to time. Nevertheless, the possibility
that substantial amounts of Common Stock may be sold in the public market would
likely have a material adverse effect on prevailing market prices for the
Common Stock and could impair the Company's ability to raise capital through
the sale of its equity securities. See "Shares Eligible for Future Sale."
NO CASH DIVIDENDS
The Company has never paid cash dividends on its Common Stock and the
Board of Directors does not anticipate paying cash dividends in the foreseeable
future. It currently intends to retain future earnings to finance the growth
of its business. See "Dividend Policy."
ANTI-TAKEOVER EFFECTS OF ISSUANCE OF PREFERRED STOCK
The Board of Directors has the authority to issue up to 1,000,000
shares of Preferred Stock, $.10 par value per share, in one or more series, to
fix the number of shares constituting any such series, and to fix the rights
and preferences of the shares constituting any series, without any further vote
or action by the stockholders. The issuance of Preferred Stock by the Board of
Directors could adversely affect the rights of the holders of Common Stock.
For example, such issuance could result in a class of securities outstanding
that would have preferences with respect to voting rights and dividends and in
liquidation over the Common Stock, and could (upon conversion or otherwise)
enjoy all of the rights appurtenant to Common Stock. The Board's authority to
issue Preferred Stock could discourage potential takeover attempts and could
delay or prevent a change in control of the Company through merger, tender
offer, proxy contest or otherwise by making such attempts more difficult to
achieve or more costly. There are no issued and outstanding shares of
Preferred Stock; there are no agreements or understandings for the issuance of
Preferred Stock, and the Board of Directors has no present intention to issue
Preferred Stock.
18
<PAGE> 19
INABILITY TO EXERCISE WARRANTS
No Warrants will be exercisable unless at the time of exercise the
Company has a current prospectus effective with the SEC covering shares of
Common Stock issuable upon exercise of such Warrants and such shares have been
registered or qualified or deemed to be exempt under the securities laws of the
state of residence of the holder. The Company will use its best efforts to
have all such shares so registered or qualified on or before the exercise date
and to maintain a current prospectus relating thereto until the expiration of
the Warrants, although there is no assurance that it will be able to do so.
See "Description of Securities--Public Warrants."
POTENTIAL ADVERSE EFFECTS OF REDEMPTION OF WARRANTS
The Warrants may be redeemed by the Company, at any time prior to the
expiration, at a price of $0.05 per Warrant upon at least 30 days' notice
mailed within 10 days after the market value of the Common Stock has equaled or
exceeded $6.00 per share for a period of 30 consecutive trading days. The
Company may only redeem the Warrants if at the time of redemption the Company
has a current prospectus effective with the SEC covering the shares of Common
Stock issuable upon exercise of such Warrants and such shares have been
registered or qualified or deemed to be exempt under the securities laws of the
state of residence of the holder. Redemption of the Warrants could force the
holders to exercise the Warrants and to pay the exercise price at a time when
it may be disadvantageous for the holders to do so, to sell the Warrants at the
then-current market price when they might otherwise wish to hold the Warrants,
or to accept the redemption price, which is likely to be substantially less
than the market value of the Warrants at the time of redemption. The Warrants
are not redeemable by the Company prior to the first anniversary of the
effective date of this Prospectus without the written consent of the
Representative. See "Description of Securities--Public Warrants."
LIMITATION ON DIRECTOR LIABILITY
The Company's Articles of Incorporation provide, as permitted by
governing Texas law, that a director of the Company shall not be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, with certain exceptions. These provisions may
discourage stockholders from bringing suit against a director for breach of
fiduciary duty and may reduce the likelihood of derivative litigation brought
by stockholders on behalf of the Company against a director. See
"Management--Limitation on Directors' Liability; Indemnification."
19
<PAGE> 20
USE OF PROCEEDS
In the event that shares of Common Stock are issued upon exercise of
all of the Warrants, the Representative's Warrants and the Underlying Warrants
described herein, the Company will receive as net proceeds, a maximum of
$3,792,000, after deducting estimated offering expenses. The Company expects
to use the net proceeds, if and when available, for working capital and general
corporate purposes. As there are no commitments from the holders of the
Warrants, the Representative's Warrants or the Underlying Warrants to so
exercise such securities and purchase Common Stock, there can be no assurance
that any Warrants, Representative's Warrants or Underlying Warrants will be
exercised.
The Company reserves the right to change its use of proceeds when and
if market conditions or unexpected changes in operating conditions or results
occur. In addition, the Company may, when and if the opportunity arises,
acquire other businesses involved in activities which are compatible with the
Company's business. If such an opportunity arises, the Company may use a
portion of the proceeds of this offering for that purpose. The Company has no
specific plans, arrangements, agreements or understanding with respect to any
acquisition in which these funds would be used, and there is no assurance that
any acquisitions will be made.
The Company believes that the cash flow from operations, together with
the proceeds from the IPO will be sufficient to meet operating requirements and
capital expenditures for at least 12 months. Proceeds not immediately required
for the purposes described above will be invested principally in U.S.
government securities or money market funds.
20
<PAGE> 21
PRICE RANGE OF COMMON STOCK
Since October 13, 1995, the Company's Common Stock has been traded on
The NASDAQ SmallCap Market under the symbol "RICK." The following table sets
forth the quarterly high and low last sales prices per share for the Common
Stock, as reported by NASDAQ.
<TABLE>
<CAPTION>
Common Stock Price Range
----------------------------
High Low
--------- -----------
<S> <C> <C> <C>
1995
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . $ 5 $ 3 7/8
1996
First Quarter . . . . . . . . . . . . . . . . . . . . . . . $ 5 $ 3 15/16
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . $ 5 3/4 $ 4 1/2
Third Quarter (through July 8, 1996) . . . . . . . . . . . . $ 5 3/8 $ 5 1/4
</TABLE>
On July 8, 1996, the last sales price for the Common Stock as reported
by The NASDAQ SmallCap Market was $5 3/8 per share. On July 8, 1996, there
were approximately 300 stockholders of record of the Common Stock.
DIVIDEND POLICY
The Company has never declared a cash dividend on its Common Stock.
The Board of Directors presently intends to retain all earnings for use in the
Company's business, and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. The declaration of dividends, if any, in
the future will be subject to the discretion of the Board of Directors, which
may consider such factors as the Company's results of operations, financial
condition, capital needs and acquisition strategy, among others. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
21
<PAGE> 22
CAPITALIZATION
The following table sets forth the capitalization of the Company at
March 31, 1996, and as adjusted to reflect the exercise of the 920,000 Warrants
at $3.00 per share and 240,000 Representative's Warrants and Underlying
Warrants at an exercise price of $4.35 per share of Common Stock. The table
should be read in conjunction with the Company's financial statements and notes
thereto that are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
AS
HISTORICAL ADJUSTED (1)
---------- ------------
<S> <C> <C>
Stockholders' Equity:
Common Stock--$.01 par value; 15,000,000 shares
authorized 3,640,000 shares issued and outstanding $ 36,400 $ 50,333
Additional Paid In Capital 4,251,559 8,941,959
Retained earnings 115,434 115,434
---------- ----------
Total Stockholders' Equity $4,403,393 $9,107,726
========== ==========
Total Capitalization $4,403,393 $9,107,726
========== ==========
</TABLE>
(1) Assumes issuance of (i) 920,000 shares issuable upon exercise of the
Warrants, and (ii) 240,000 shares of Common Stock issuable upon the
exercise of the Representative's Warrants and the Underlying Warrants.
Also assumes issuance of 200,000 shares relating to Consultant's
Warrants at an exercise price of $4.50 per share of Common Stock
previously registered pursuant to Form S-8, of which 50,000 were
exercised on July 8, 1996. There can be no assurance that any other
warrants will be exercised. An additional 200,000 shares of Consultants
Warrants are not included, as they have not vested.
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<PAGE> 23
SELECTED FINANCIAL DATA
The selected combined financial data presented below for each of the
two-years ended September 30, 1995, and 1994, have been derived from the
audited financial statements of the Company. The selected combined financial
data for the six months ended March 31, 1996, and 1995 have not been audited
but in management's opinion includes all adjustments consisting only of normal
recurring adjustments necessary to present fairly the financial data for and at
the end of such periods. The data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and with the Company's financial statements, related
notes and other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS ADJUSTED
FOR PROCEEDS HISTORICAL
------------ --------------------------------------------------------
SIX MONTHS SIX MONTHS ENDED
ENDED MARCH 31, YEAR ENDED SEPT. 30,
MARCH 31, ------------------------- ------------------------
1996(2) 1996 1995 1995 1994
------------ ---------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues
Sale of alcoholic beverages $1,196,006 $1,191,293 $2,286,157 $2,381,250
Sale of food 137,729 109,566 213,537 196,773
Service revenues 912,330 833,717 1,700,133 1,730,653
Other 127,944 149,946 334,879 258,617
---------- ----------- ---------- ----------
Total Revenues 2,369,009 2,284,522 4,534,706 4,567,293
Income (loss) from operations (163,353) 172,031 593,670 348,017
Income (loss) before income taxes (78,992) 155,369 553,427 292,041
Net income (loss) (83,792) 95,069 359,427 191,041
Net income (loss) per common share (0.02) 0.05 0.20 0.11
Weighted average shares outstanding 3,640,000 1,800,000 1,800,000 1,800,000
========== ========== ========== ==========
BALANCE SHEET DATA:
Total assets $9,930,844 $5,226,844 $1,355,422 $1,449,458 $ 629,755
Working capital (deficit) 7,980,510 3,276,510 785,420 (741,220) (448,445)
Total liabilities 823,451 823,451 1,402,554 1,232,232 771,956
Stockholders' equity (deficit)(1) 9,107,726 4,403,393 (47,132) 217,226 (142,201)
</TABLE>
(1) The Company's negative stockholders' equity at the end of 1994 is a
result of stock repurchases by the Company in prior years, and is not
the result of operating losses of the Company.
(2) Assumes issuance of (i) 920,000 shares of Common Stock issuable upon
exercise of the Warrants, and (ii) 240,000 shares of Common Stock
issuable upon the exercise of the Representative's Warrants and the
Underlying Warrants. Also assumes issuance of 200,000 shares relating
to Consultant's Warrants at an exercise price of $4.50 per share of
Common Stock previously registered pursuant to Form S-8, of which
50,000 were exercised on July 8, 1996. There can be no assurance that
any other warrants will be exercised. An additional 200,000 shares of
Consultants Warrants are not included, as they have not vested.
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<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements appearing in the Company's Annual Report on Form 10-KSB
filed with the Securities and Exchange Commission for the fiscal year ending
September 30, 1995 and the unaudited financial statements appearing in the
Company's Quarterly Reports on Form 10-QSB for the quarters ending December
31, 1995 and March 31, 1996.
GENERAL
The Company was formed in December 1994 to acquire all of the
outstanding capital stock of Trumps, Inc., a Texas corporation ("Trumps")
formed in 1982. Since 1983, Trumps has operated Rick's Cabaret, a premier
adult nightclub offering topless entertainment in Houston, Texas. In 1995, the
Company acquired Tantra, a non-sexually oriented discotheque and billiard club
also located in Houston, Texas from Robert L. Watters, the principal
shareholder. Tantra became operational during the second quarter of fiscal
1995. The Company's fiscal year end is September 30.
Revenues are derived from the sale of liquor, beer, wine and food,
which comprises approximately 60% of total revenues, and charges to the
entertainers and cover charges which comprise approximately 38% of total
revenues for the second quarter of fiscal 1996 revenues. For the second
quarter of fiscal 1995, these percentages were 56% and 36%, respectively. The
remaining revenues are derived from the sale of memberships, merchandise, and
miscellaneous other revenue sources. Membership sales are for access to Rick's
VIP Room, and range in price from $550 to $1,200 for a lifetime membership.
Additional benefits include waiver of cover charges, 10% to 15% discount on
drink prices, complimentary drink tickets and miscellaneous other benefits
depending on the type of membership purchased. Membership sales were $9,550
and $14,850, which represented sales of 12 and 18 memberships, respectively,
for the second quarter of fiscal years 1996 and 1995.
RESULTS OF OPERATIONS
Six Months Ended March 31, 1996 compared to the Six Months Ended March
31, 1995. For the six months March 31, 1996, the Company had consolidated net
revenues of $2,369,009, an increase of $84,487 from the net revenues of
$2,284,522 for the six months ended March 31, 1995. Single location revenues
of Rick's Cabaret declined 7% as compared to the first six months of fiscal
1995 or approximately $134,000. The decline at Rick's Cabaret is offset by
Tantra revenues of $373,581 during the six months ended March 31, 1996.
Cost of goods sold were 33% and 26% of sales of alcoholic beverages
and food for the first six months of fiscal 1996 and 1995, respectively.
Renovations to the kitchen area at Rick's Cabaret during the months of November
and December, 1995 required the Company to use outside sources for catering
lunch and dinner meals which resulted in limited menu offerings at higher
costs.
Salaries and wages increased 26% or $164,976 from the first six months
of fiscal 1995 due to the addition of Tantra ($46,716) and the addition of
management personnel and staff in anticipation of opening additional
locations.
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<PAGE> 25
Other general and administrative expenses increased 14% or $162,038
from the first six months of fiscal 1995. Taxes and permits increased 9% from
the first six months of fiscal 1995 due to the acquisition and opening of
Tantra. Charge card fees decreased $30,605 largely due to increased cash
sales during fiscal 1996. Rent declined due to the acquisition of a parking
lot which was previously leased and is currently used extensively with the
Tantra operation. Advertising and promotion increased by $167,633 as the
Company started and extensive outdoor and radio advertising campaign.
Management believes the positive effects of advertising for the Company are
often deferred for a period of several months. During fiscal year 1995, the
Company engaged an advertising and public relations firm to assist with the
placement of advertising. Other costs increased as result of increased travel
and lodging costs incurred by staff involved with the opening of the New
Orleans location and the review of other potential acquisitions.
Interest income increased to $92,943 for the six months ended March
31, 1996 as a result of investing the proceeds of the Company's public
offering. Interest expense was reduced to $8,582 from $17,101 during the six
months of fiscal 1996 due to a reduction in the average amount of bank and
lease financing debt outstanding.
The Company experienced a net loss for the six months ended March 31,
1996 of ($83,792) compared to net income of $95,069 for the six months of
fiscal 1995. Management anticipates that the Company may also experience
losses for the third and fourth quarters of fiscal 1996 until revenue growth
from acquisitions and the opening of new locations is realized.
Year Ended September 30, 1995 compared to Year Ended September 30,
1994. For the 1995 fiscal year, the Company had consolidated total revenues of
$4,534,706, a decrease of $32,587 from fiscal 1994 revenues of $4,567,293.
Single location revenues for Rick's Cabaret declined 11% from fiscal 1994 or
approximately $489,000. The decline at Rick's Cabaret is offset by the
addition and opening of Tantra during the second quarter of fiscal 1995 which
provided revenues of $490,000. The overall decline in revenues is attributable
to the increased level of competition in the Houston, Texas area and a decline
in advertising expenditures during early fiscal 1995. Additionally, management
time and working capital which otherwise would have been invested by the
Company in advertising was committed to the successful completion in October
1995 of the Company's initial public offering. During the later quarters of
fiscal 1995 and after completing the initial public offering, management has
increased advertising expenditures and has retained the services of an
advertising and public relations firm.
Cost of goods sold were 28% and 27% of sales of alcoholic beverages
and food for fiscal 1995 and 1994, respectively. This increase is believed to
be attributable to a slight increase in food sales which carries a higher cost
than beverage sales.
Salaries and wages decreased 3% or $39,891 from fiscal 1994 due to a
reduction in the bonus accrued to the Chief Executive Officer and a reduction
in management staffing, offset by $122,281 in Tantra salaries for fiscal 1995.
Other general and administrative expenses decreased 23% or $251,035
from fiscal 1994 to fiscal 1995. Decreases occurred in all general and
administrative expense categories except Taxes and Permits which increased 4%
from 1994 due to the acquisition and opening of Tantra. Charge card fees
decreased $25,746 due to the decrease in sales noted above. Legal and
accounting decreased $29,047 due to a lower level of activity relating to the
defense of lawsuits. Advertising
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<PAGE> 26
and promotion was lower by $109,746 at Rick's Cabaret as the Company reduced
advertising during the early quarters of fiscal 1995 due to increased working
capital needs in preparation for its initial public offering, offset by $96,627
in Tantra advertising. Additionally, the amortization of a non-compete
agreement ($48,000) was completed in 1994 with no corresponding expense in
1995. Management believes that the reductions in all categories, in addition
to the reasons stated above, are attributable to additional management controls
instituted at the beginning of fiscal year 1995.
Interest expense was reduced to $55,976 from $129,377 due to a
reduction in the average amount of bank and lease financing debt outstanding
during the year.
Net income increased for fiscal 1995 by $168,386 or 88% as compared
to fiscal 1994.
For the Years Ended September 30, 1994 and September 30, 1993. For
the year ended September 30, 1994 ("1994"), the Company had revenues of
$4,567,293 compared with $4,551,775 for the year ended September 30, 1993
("1993"), an increase of $15,518. Overall revenues remained flat due to (1)
the effects of the 1993 tax increase which primarily affected the high revenue
customers of the club, (2) the reduction in the deductible percentage of
entertainment expenses, (3) the increased level of competition in the Houston,
Texas area, as well as (4) the under funding of advertising in the fiscal years
ending September 30, 1993 and 1992. In addition, the Company changed several
policies regarding charges to the entertainers which reduced revenue from
services from $1,819,213 to $1,730,653 and resulted in a larger portion of the
overall revenues of the Company being derived from the sale of food and
beverages. These policy changes related to a decrease in the facility fee
charged to entertainers for day shifts to encourage entertainers to perform
during the day and early evening.
Costs of goods sold of food and beverages increased from $583,795 to
$686,944, or from 23% to 27% of total revenues in part as a result of the
increase in the percentage of sales attributable to beverages and food as
compared with total revenues. Additionally, food costs increased by $83,307
from 1993 to 1994. This increase was due to the Company pursuing the lunch
market by means of lunch buffets. The Company believes that this market has
developed sufficiently to allow adjustment to its marketing plans and has since
reduced food cost in comparison to revenues. Cost of goods sold as a
percentage of sales of alcoholic beverages remained consistent from year to
year. Salaries and wages decreased from $1,458,000 in 1993 to $1,311,095 in
1994, a decrease of 10%, primarily as a result of a reduction in management
salaries. The individual components of other general and administrative
expenses remained consistent from 1993 to 1994 except for advertising, rent,
and other expenses. Advertising increased $252,401 to $311,159 in 1994.
Management believes that advertising was under funded in the prior two fiscal
years and that the effect was not felt until the 1994 fiscal year due to the
time delay in benefits from advertising expenditures. Rent increased from
$273,435 to $326,563, or $53,128. This increase was primarily due to the
increase in the monthly rent due on the principal location of the Company.
Rent is calculated on a percentage of alcohol sales which increased in 1994.
Legal and accounting expenses were $135,618 and $127,360 in 1994 and 1993
respectively, or an increase of $8,258. The remaining increase in other
general and administrative costs was a result of general increases in various
operating expenses.
Interest expense was reduced from $129,377 to $55,976 or a decrease of
57%. This reduction from 1993 to 1994 was due to the elimination by the
Company of $300,000 of debt.
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<PAGE> 27
The Company had income before income taxes of $292,041 in 1994
compared with $570,510 for 1993. As noted above, this was the result of an
increase in advertising, rent, and other general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996 the Company had working capital of $3,276,510 as a
result of the successful completion of the Company's initial public offering.
Funds available to the Company (after deducting underwriting commissions and
expenses associated with the offering) approximated $4,270,000 and will be used
for capital improvements to the original Houston location, opening two
additional locations, and for general corporate working capital purposes.
At September 30, 1995 the Company had a working capital deficit of
$741,220, compared to a working capital deficit of $448,445 at the end of
fiscal 1994. The increase in negative working capital is primarily due to the
provision of working capital from operations less equipment and leasehold
improvements acquired. This decrease in working capital was offset during
October 1995 when the Company completed its initial public offering by selling
1,840,000 common shares to the public market.
In the opinion of management, working capital is not a true indicator
of the status of the Company due to the short cycle to liquidity, which results
in the realization of cash within no more than five (5) days after the
culmination of a transaction. In addition, trade payables are comprised of
more than $100,000 in legal fees that are paid on extended terms, and other
charges related to the initial public offering that will be paid from the
proceeds of the offering. These legal fees resulted from litigation concluded
in 1992 and the Company does not anticipate incurring legal fees to this extent
in the future. The Company had negative stockholder's equity of $142,201 at
the end of 1994 as a result of agreements by the Company to repurchase shares
representing the entire ownership of previous shareholders, not from operating
losses. These shares were subsequently canceled by the Company.
Net cash provided by operating activities increased to $756,827 in
1995 from $193,796 in 1994. The reason for the net increase in cash provided
by operating activities was due to the increase in net income of $168,386, an
increase in accounts payable and accrued liabilities of $188,652 and an
increase in income taxes payable of $140,319. Net cash used in investing
activities was $416,082 in 1995 and was due to investments in property and
equipment almost totally accounted for by the acquisition of Tantra. Cash used
by financing activities in 1995 was used primarily to finance the costs
associated with the initial public offering of the Company.
The Company has established a line of credit with its bank, Sunbelt
National Bank -- Houston, Texas which has been used on an "as-needed" basis to
fund various improvements. As of September 30, 1995, the Company's maximum
borrowing limit was $120,000 with an outstanding balance of $110,000.
Repayment of the note began in August 1995, with monthly payments of principle
of $10,000 plus interest at bank prime plus 1% (10.75% at September 30, 1995).
This note is secured by accounts receivable, furniture and equipment, and a
certificate of deposit owned by the current shareholder.
Although the Company has not established lines of credit other than
the existing debt, there can be no assurance that the Company will be able to
obtain additional financing on reasonable
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<PAGE> 28
terms, if at all. Management believes, however, that proceeds from this
offering will provide adequate liquidity to meet the expansion plans and
working capital needs of the Company for the next 12 months. The Company has
no material capital commitments as of September 30, 1995.
Because of the large volume of cash handled by the company, stringent
cash controls have been implemented by the Company. These procedures have been
improved over the life of the Company, to take advantage of improvements in
technology. Management believes that it will be able to duplicate the
financial controls that exist at its current location at future locations, and
that these controls will provide sufficient safeguards to protect the interests
of the Company. In the event the topless club industry is required to convert
the entertainers who perform from independent contractor to employee status,
the Company has prepared alternative plans that Management believes will
protect the profitability of the Company. In addition, Management believes
that the industry standard of treating the entertainers as independent
contractors provides sufficient safe harbor protection to preclude any tax
assessment for prior years payroll taxes.
The adult topless club entertainment business is highly competitive
with respect to price, service and location, as well as the professionalism of
the entertainment. Rick's Cabaret in Houston competes with a number of
locally-owned adult cabarets, some of whose names enjoy recognition that equals
that of Rick's. Although the Company believes that it is well-positioned to
compete successfully in the future, there can be no assurance that Rick's will
be able to maintain its high level of name recognition and prestige within the
marketplace.
SEASONALITY
The Company is significantly affected by seasonal factors. Typically,
Rick's has experienced reduced revenues from May through September. The
Company has historically experienced its strongest operating results during
October through April.
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BUSINESS
The Company currently owns and operates Rick's Cabaret, a premiere
adult nightclub offering topless entertainment and restaurant and bar
operations in Houston, Texas. Rick's Cabaret, which caters primarily to
businessmen, has developed a clientele base which includes professionals,
business executives and other individuals who tend to entertain more frequently
than the average person and who tend to have greater disposable income. From
its inception, the Company's objective was to provide a first-class
entertainment environment for the business consumer. To achieve this goal and
reach its target market, Rick's created an attractive, yet discreet
environment, complimented by a first-class bar and restaurant operation
conducive to attracting businessmen and out-of-town convention clientele. The
Company also currently owns and operates Tantra, a non-sexually oriented
discotheque and billiard club in Houston, Texas.
HISTORY
The Company was organized as a Texas corporation in 1994 to acquire
all of the outstanding capital stock of Trumps, Inc., a Texas corporation
("Trumps") from Robert L. Watters, its sole stockholder. As a result of this
transaction, Trumps became a wholly owned subsidiary of the Company.
Trumps was incorporated in 1982 and has operated Rick's Cabaret since
1983. Mr. Watters initially became a 10% stockholder of Trumps in November,
1987, becoming one of three stockholders in Trumps. Mr. Watters' ownership
interest in Trumps increased to 50% of the outstanding stock in 1989. Mr.
Watters became the sole stockholder of Trumps in 1993 through a series of
business transactions with the only other then remaining stockholder.
In September, 1995, the Company acquired all of the capital stock of
Tantric Enterprises, Inc., Tantra Dance, Inc., and Tantra Parking, Inc.
(collectively "Tantra") from Mr. Watters. The Tantra companies own and operate
Tantra, a non- sexually oriented discotheque and billiard club in Houston,
Texas.
In February, 1996, the Company formed RCI Entertainment, Louisiana,
Inc., a Louisiana corporation, for the purpose of administering, operating,
managing and leasing its new location in New Orleans, Louisiana. The Company
presently anticipates that it will open its new facility in New Orleans in
November, 1996. In addition, the Company formed RCI Entertainment (Texas),
Inc. in June, 1996, for the purpose of acquiring 1.13 acres of land in Houston,
Texas. The Company plans to build a new adult oriented nightclub at this
location within the next twelve to eighteen months.
BUSINESS STRATEGY
Prior to Rick's opening in 1983, the topless nightclub business was
characterized by small establishments generally managed by their owner. Such
establishments were often dimly lit and the standards for performers' personal
appearance and personality were not maintained. It was
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customary for performers to alternate between dancing and waitressing. The
quantity and quality of bar service was low and food was not frequently
offered. Music was usually "hard" rock and roll, played at a loud level by a
disc jockey who frequently interrupted the music to make general announcements.
Usually, only cash was accepted and businessmen felt uncomfortable in such an
environment. Recognizing a void in the market for a first-class adult cabaret,
the Company designed Rick's and targeted the businessmen's segment of the
market by providing a unique quality entertainment environment. The following
summarize the areas of operation of Rick's which management believe distinguish
it from its competitors.
Female Entertainment. Management of the Company has followed a policy
of maintaining high standards in the areas of both personal appearance and
personality of its topless entertainers and waitresses. Though a performer's
physical appearance is very important, of equal importance is her ability to
present herself attractively and to converse intelligently with customers.
Management insists that the performers it hires are experienced dancers.
Prospective performers are initially interviewed by the Company's management
personnel. Management makes a determination as to whether a particular
applicant is suitable based on such factors of appearance, attitude, dress,
communication skills and demeanor. If an applicant is found to be suitable,
she is given an identification card and a computer number. New performers are
given a brief orientation to the club and the applicable rules and regulations
which govern each performer's conduct. The Company charges each performer a
facility fee ranging from $17.00 per shift for day shifts, to $27.00 per shift
for evening and night shifts. Each entertainer retains 100% of all cash
payments made to her by customers for any dance performed. If a customer
desires to pay by credit card, the Company processes the credit card charge and
pays the entertainer 80% of any performance charged to a credit card. All
credit card charges made by customers while at Rick's must be approved, in
writing, by management before any charge is accepted.
The performers dance on the main stage or on smaller stages throughout
the club. While their performances include topless dancing, management insists
that they be elegantly attired when not performing, as opposed to being
scantily dressed as in many other adult cabarets. Full nudity is never
permitted in the club. Management will not hire any performers who have
tattoos and the performers who are hired are provided guidelines as to the
manner of dress, hairstyle, makeup and general demeanor, in an effort to
maintain a high standard of professionalism amongst the performers and to
ensure that they maintain a pleasant, congenial demeanor at all times.
Further, management evaluates each performer's appearance and performance on a
nightly basis and advises performers if their dress, makeup, hairstyle, general
appearance or demeanor do not meet the standards which Rick's sets forth.
Rick's has had 18 entertainers who have performed at Rick's featured as
centerfolds in the country's leading men's entertainment magazines. Though
these policies have the effect of limiting the number of performers who are
permitted to dance or serve as waitresses at Rick's Cabaret, the Company
believes that its policy of maintaining these high standards is in its best
interest of long-term market position.
Management. It is common practice in the adult cabaret industry to
allow its day-to-day operational management to receive the bulk of their income
directly from the performers in the form
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of cash tips. Rick's, however, was the first cabaret, to its knowledge, to
place managers on a salary and to prohibit managers from receiving cash tips.
The Company has recruited its management staff exclusively from outside of the
topless industry, in the belief that management which has not been exposed to
operating practices prevalent in the topless industry and with diverse
management backgrounds will produce a management team that operates with a high
level of integrity. This practice of training management without adult
nightclub experience may cause the Company to experience a shortage of
qualified management necessary to fulfill its anticipated growth plans due to
the additional time required to train such personnel.
Compliance Policies. The management of Rick's Cabaret has a policy of
ensuring that its business is carried on in conformity with local, state and
federal laws. In particular, the Company's management has a "no tolerance"
policy as to illegal drug use in or around the premises. Posters placed
throughout the nightclub reinforce this policy as do periodic unannounced
searches of the entertainer's lockers. Entertainers and waitresses who arrive
for work are not allowed to leave the premises without the permission of
management. Once an entertainer does leave the premises, she is not allowed to
return to work until the next day. Management continually monitors the
behavior of entertainers, waitresses and customers to ensure that proper
standards of behavior are observed. The Company's management has the power to
levy fines on entertainers for breaches of the Company's rules. In the event
an entertainer is fined three times by management, the entertainer is barred
from future performances at Rick's Cabaret.
Management also reviews all credit card charges made by customers
while at Rick's. Specifically, management has in place a formal policy which
provides that all credit card charges must be approved, in writing, by
management before any charges are accepted. Management is particularly trained
to review credit card charges to ensure that the only credit card charges
approved for payment are for food, drink and entertainment at Rick's Cabaret.
Food and Drink. The Company believes a key to the success of a
premiere adult nightclub is a quality, first-class bar and restaurant operation
to compliment its adult entertainment. The Company employs a full-time Service
Manager who is in charge of recruiting and training a professional waitress
staff and ensuring that each customer receives prompt and courteous service.
Rick's employs a Chef with approximately 28 years experience and a Bar Manager,
who is in charge of ordering inventory and scheduling of bar staff, with five
years experience. The Company believes that the operation of a first class
restaurant is a necessary component to the operation of a premiere adult
cabaret, as is the provision of premium wine, liquor and beer in order to
ensure that the customer perceives and obtains good value. The Company's
restaurant operation is a full service operation which provides business lunch
buffets and a full-scale lunch and dinner menu service offering hot and cold
appetizers, salads, seafood, steak and lobster. An extensive selection of
premiere wines are offered to compliment any customer's lunch or dinner
selection. Drinks are provided to customers in large glasses with a generous
measure of alcohol.
Controls. Operational and accounting controls are essential to the
successful operation of a cash intensive nightclub and bar business. The
Company has implemented internal procedures and
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controls designed to ensure the integrity of its operational and accounting
records. The Company separates management personnel from all cash handling to
ensure that management is isolated from and does not handle any cash. The
Company uses a combination of accounting and physical inventory control
mechanisms to ensure a high level of integrity in its accounting practices.
Computers play a significant role in capturing and analyzing a variety of
information to provide management with the information necessary to efficiently
manage and control the nightclub. Deposits of cash and credit card receipts
are reconciled each day to a daily income report. In addition, management
reviews on a daily basis (i) cash and credit card summaries which tie together
all cash and credit card transactions occurring at the front door, the bars in
the club and the cashier station, (ii) a summary of the daily bartenders'
check-out reports, and (iii) a daily cash requirements analysis which
reconciles the previous day's cash on hand to the requirements for the next
day's operations. These daily computer reports alert management of any
variances from expected financial results based on historical norms. Further,
the Company conducts, on a monthly basis, an independent overview of its
financial condition and has engaged independent accountants to conduct an
annual audit and to review and advise the Company relating to its internal
controls.
Atmosphere. Rick's maintains a high standard in its facility and in
its decor. The furniture and furnishings in the club area were designed to
create the feeling of an upscale restaurant. The sound system was designed to
provide quality sound at levels where conversations could still take place.
This environment is carefully monitored, in terms of maintenance, music
selection, entertainer and waitress appearance and all aspects of customer
service on a continuous basis.
VIP Room. In keeping with Rick's emphasis on serving the upper-end of
the business market, Rick's opened its VIP room in 1987, which is open only to
individuals who purchase memberships. This room is approximately 3,000 square
feet in size and memberships are sold which give access to the room and
discounts on food and drinks. The VIP room provides a higher level of luxury
in its decor and services. Membership in Rick's VIP room requires a joining
membership fee which ranges from $250 for a non-resident individual membership
to $550 for an individual resident membership and $1,200 for a corporate
membership. Additionally, a non-member may use the VIP room for a one-night
admission fee of $100. Membership in Rick's VIP room will also entitle members
to access to other VIP rooms at all other locations opened by the Company.
Advertising and Promotion. Rick's marketing philosophy towards
customers is to portray Rick's as a premiere cabaret providing topless
entertainment in a fun, yet discreet, environment. Hotel publications, local
radio, cable television, newspapers, billboards, taxi-cab reader boards as well
as a variety of promotional campaigns ensure that Rick's name is kept before
the public.
Rick's has received a significant amount of media exposure over the
years. Mr. Watters has appeared twice on the talk show "Geraldo" talking about
Rick's and was featured in an episode of "Lifestyles of the Rich and Famous"
focusing on the topless industry. In addition, Penthouse magazine produced a
nine page article on the club and Playboy magazine covered Rick's spring 1993
golf tournament in a recent article. For the past 12 years, Rick's has
sponsored a semi-annual golf tournament and outing which has generated
significant interest and tradition. Articles covering the
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nightclub have appeared in Glamour magazine as well as Ladies Home Journal.
The nightclub has been mentioned in an inside cover story in Time magazine as
well as being mentioned on numerous occasions in both the Houston Chronicle and
the Houston Post and in a recent 1995 article published in Texas Monthly. In
1993 Rick's produced the Girls of Rick's, a 90 minute video feature, which was
aired as a Pay-per-View feature on Warner cable. The video was reviewed in
several local newspapers as well as the Hollywood Variety magazine. In
December, 1994, Rick's provided entertainers for a Pay-Per-View feature
produced by a local radio station.
Rick's received extensive national coverage of its IPO and articles
appeared in The Wall Street Journal, Los Angeles Times, Houston Business
Journal, and numerous other regional newspapers. The television program
"Extra" ran a short feature on Rick's as did the program "Inside Edition."
TANTRA
The Company owns and operates Tantra, a non-sexually oriented
discotheque and billiard club in Houston, Texas. Tantra is located in a 6,500
square foot building and incorporates separate areas for bar service, dancing
and playing billiards. The billiard area of the club is also designed to
accommodate occasional live performances by local and national acts. Tantra is
designed to appeal to an audience of people between the ages of 21 through 40
who wish to dance to music which may be categorized as modern dance music.
Tantra is designed to appeal to both couples and single men and women. The
Company intends to evaluate opening a nightclub similar or identical to Tantra
in each city in which it expands its adult nightclub operations, subject to
acceptable site location and adequate financing. Tantra is seen as a separate,
but complimentary, business activity to Rick's Cabaret and is part of the
Company's business philosophy to diversify into a broader based entertainment
company.
RECENT DEVELOPMENTS
On July 11, 1996, the Company entered into a Stock Purchase Agreement
(the "Agreement") to acquire all of the outstanding shares of capital stock of
Classic Affairs, Inc., a Minnesota corporation, d/b/a Schiek's Palace Royale
("Palace Royale"). Palace Royale, a first class cabaret featuring an adult
entertainment restaurant and bar, is located in downtown Minneapolis,
Minnesota. The Company believes that Palace Royale, which has been in
existence for eight years, is currently the premiere adult cabaret in
Minneapolis, Minnesota. Palace Royale is situated in a historic landmark
building which once housed the Federal Reserve Bank in Minneapolis. The
Company's plans for the facility include minor interior refurbishing and
expansion of the kitchen facilities. The Company intends to offer a first
class menu to complement the outstanding adult entertainment presently offered
by Palace Royale. The Agreement with Palace Royale is subject to the
completion of due diligence and approval of regulatory authorities.
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<PAGE> 34
FUTURE EXPANSION
It is the Company's intention to open adult cabarets in the format and
bearing the name "Rick's Cabaret" in other cities. Construction has commenced
on its newly acquired location in New Orleans, Louisiana, which is located at
315 Bourbon Street in the New Orleans celebrated French Quarter. The Company's
lease for the New Orleans' location commenced on May 7, 1996, and has a term of
39 1/2 years. The lease is a triple net lease with tenant paying taxes,
maintenance and insurance. The club will occupy 16,200 square feet in a three
story building. The club will be comprised of two entertainment venues, the
first being a cabaret in the format of Rick's Cabaret in Houston, Texas, which
will occupy the bottom floor. The second venue and format will occupy the
second floor of the building and will be a theater, seating 250 patrons. Live
choreographed shows will take place twice a night with a cast separate from the
cabaret facilities. Rent is based on a fixed minimum payment with a percentage
supplement in the event that gross sales exceed certain numbers.
Additionally, a one acre tract of land has been purchased on U.S.
Highway 59 in Houston, Texas, to serve as a new location for Rick's Cabaret in
Houston, Texas. Management believes that the new site is superior in many
respects to its existing location. There are over 250,000 cars per day which
will view the new facility and the location is convenient to the three main
business districts in Houston, Texas, including the downtown business district.
It is also in close proximity to Houston's main sports facilities. The Company
plans to build the new club at this location within the next twelve months.
The Company also will consider the acquisition of adult cabarets in
other cities. In determining which cities will be prime locations for a
"Rick's Cabaret" a variety of factors will be considered. The current
regulatory environment will be one of such factors. The city must presently
permit alcoholic beverages to be sold in a topless cabaret and must permit
table dancing in the table-side style similar to Rick's present location in
Houston, Texas. Another factor which will be considered is the availability of
sites. The city must have available a number of sites suitable for conversion
to a Rick's style cabaret, located in high traffic commercial areas. The
Company also will review potential competition in the area and will attempt to
analyze the current market conditions and profitability of other adult cabarets
in the city. The proximity to Houston of a particular city will also be
considered. In the early years of expansion the city must be within easy
commuting distance by air of Houston. This will facilitate the training of
management in Houston and enable the participation of Houston-based management
in the construction and opening of the new enterprise. It is anticipated that
a significant number of personnel from the Houston operation will be used to
ensure that the same operational systems and controls used at its location in
Houston will be implemented and maintained at its new locations. The existing
business climate will also be of critical importance. The city must have a
significant population of indigenous businessmen, be a recognized tourist
destination and have a well developed convention business.
COMPETITION
The adult topless club entertainment business is highly competitive
with respect to price, service and location, as well as the professionalism of
its entertainment. Rick's Cabaret in Houston competes with a number of
locally-owned adult cabarets, some of whose names may enjoy recognition that
equals that of Rick's. While there are restrictions on the location of a
so-called
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<PAGE> 35
"sexually oriented business" there are no barriers to entry into the adult
cabaret entertainment market and only the name "Rick's" and "Rick's Cabaret"
are proprietary. There are approximately 50 adult cabarets located in the
Houston area of which approximately 10 are in direct competition with the
Company. The Company believes that the combination of its existing name
recognition and the entertainment environment that it has created which is
distinctive and unique will allow the Company to effectively compete within the
industry. In the past year, Rick's has been the fourth highest adult nightclub
in the Houston area in alcoholic beverage sales, according to the information
made available by the Texas Alcoholic Beverage Commission. In the two years
prior thereto, Rick's was either the second or third highest adult nightclub in
alcoholic beverage sales in the Houston area. Although the Company believes
that it is well-positioned to compete successfully, there can be no assurance
that Rick's will be able to maintain its high level of name recognition and
prestige within the marketplace.
GOVERNMENTAL REGULATIONS
The Company is subject to various federal, state and local laws
affecting its business activities. In particular, in Texas the authority to
issue a permit to sell alcoholic beverages is governed by the Texas Alcoholic
Beverage Commission (the "TABC"), which has the authority, in its discretion,
to issue the appropriate permits. Rick's presently holds a Mixed Beverage
Permit and a Late Hours Permit (the "Permits"). These Permits are subject to
annual renewal, provided Rick's has complied with all rules and regulations
governing the permits. Renewal of a permit is subject to protest, which may be
made by a law enforcement agency or by a member of the general public. In the
event of a protest, the TABC may hold a hearing at which time the views of
interested parties are expressed. The TABC has the authority after such
hearing not to issue a renewal of the protested alcoholic beverage permit.
Rick's has never been the subject of a protest hearing against the renewal of
its Permits. Other states may have similar laws which may limit the
availability of a permit to sell alcoholic beverages or which may provide for
suspension or revocation of a permit to sell alcoholic beverages in certain
circumstances. Prior to expanding into any new market, the Company will take
all steps necessary to ensure compliance with all licensing and regulatory
requirements for the sale of alcoholic beverages as well as the sale of food.
Various groups have increasingly advocated certain restrictions on
"happy hour" and other promotions involving alcoholic beverages. The Company
feels its entertainment value, admittance charge beginning after normal "happy
hours" and its policy of not discounting drink prices are effective tools in
promoting its business. The Company cannot predict whether additional
restrictions on the promotion of sales of alcoholic beverages will be adopted,
or if adopted, the effect of such restrictions on its business.
In addition to various regulatory requirements affecting the sale of
alcoholic beverages, in Houston, and in many other cities, location of a
topless cabaret is subject to restriction by city ordinance. Rick's is subject
to "The Sexually Oriented Business Ordinance" (the "Ordinance") which contains
prohibitions on the location of an adult cabaret. The prohibitions deal
generally with distance from schools, churches, and other sexually oriented
businesses and contain restrictions based on the percentage of residences
within the immediate vicinity of the sexually oriented business. The granting
of a Sexually Oriented Business Permit ("Business Permit") is not subject to
discretion; the Business Permit must be granted if the proposed operation
satisfies the requirements of the Ordinance. Rick's has held a Business Permit
since passage of the city ordinance
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<PAGE> 36
in 1986. The Business Permit, which is transferable, is valid for a period of
one year and is renewable by application of the permit holder. The permit
holder for Rick's Cabaret is Robert Watters who, prior to the Company's recent
public offering, was the sole stockholder of the Company. In the event of the
failure by Mr. Watters to renew the Business Permit it is likely that a new
Business Permit would not be granted for the location of Rick's Cabaret,
because of the location of another sexually oriented business enterprise within
the prohibited distance to Rick's Cabaret.
The Company is also required to have a dancehall permit for the
operation of a discotheque in the city of Houston. The dancehall permit is not
a discretionary permit, but must be granted by the city if the provisions of
the applicable ordinance are satisfied. A dancehall permit may be revoked or
renewal may be refused if certain criminal activities occur on the premises or
the person listed as the applicant has committed certain named offenses.
Tantra's dancehall permit is presently held by Mr. Watters. The Company
believes that it could obtain a new dancehall permit if for any reason Mr.
Watters failed to renew or was refused the renewal of the dancehall permit.
Prior to expanding into any new market, the Company will take all steps
necessary to obtain any required dancehall permits and to comply with any other
related regulatory requirements within that market.
LITIGATION
In Dallas Fontenot and Robert L. Watters v. Casa El Sol--Acapulco,
S.A. and Zu Corporation, Cause No. 91-09194 in the 125th District Court of
Harris County, Texas (the "Zu Lawsuit"), filed in 1991, Mr. Watters and a
former stockholder of the Company (the "Plaintiffs") filed suit against another
former stockholder of the Company (the "Defendant"). The suit sought to compel
the Defendant to convey to the Plaintiffs all of its ownership interest in two
entities, one of which, Zu Corporation, owns the land and building where Rick's
is located and which is leased by the Company. The Defendant joined the
Company as a party to the lawsuit, claiming that the Company had breached its
lease agreement due to the alleged late payment of rent for one month. The
case was tried in August, 1992 and judgment was rendered in favor of the
Plaintiffs and the Company. The Defendant appealed this decision to the Texas
Court of Appeals 14th Judicial District. The Court of Appeals, in an opinion
rendered in August, 1995, reversed and remanded the case for a new trial in the
District Court. Upon a re-hearing of this case, the Court of Appeals, in an
opinion rendered February 1, 1996, from which one of three Justices dissented,
reversed and rendered judgment against Mr. Watters and the Company. The
Company filed a motion for rehearing of the decision of the Court of Appeals,
which was denied on May 2, 1996.
The Company intends to file an Application for Writ of Error with the
Texas Supreme Court. Based on the reasoning of the dissenting opinion to the
decision of the Court of Appeals, counsel to the Company believes that there is
a likelihood that the Supreme Court will grant the Company's Application for
Writ of Error. Counsel has advised the Company that this appellate process is
likely to require from four to thirty months depending upon whether the Texas
Supreme Court grants the Company's Application for Writ of Error. During this
time, the Company anticipates that it will continue to operate in its present
location.
If the Company is unsuccessful in overturning the decision of the
Court of Appeals and is unable to successfully renegotiate a new lease, it will
be necessary for the Company to relocate Rick's. While the Company believes
that it could relocate Rick's to an equally desirable location,
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<PAGE> 37
and, in fact, has recently completed the acquisition of a tract of land in
Houston, Texas, upon which to build a new facility, such a move could have a
material adverse impact on the Company. While the Company would extensively
advertise its new location, it is possible that some customers would be lost to
other competing clubs in the vicinity of Rick's present location. It is likely
that a change in location would result in some decline in revenue for a period
until goodwill could be established at the new location. Other adverse effects
of a change of location could include the cost of the move and the lost revenue
during any period that Rick's would be unable to operate during such move. See
"Business -- Litigation."
In Vernon Young, Jr. v. Dallas J. Fontenot, Jr., Trumps, Inc. and
Robert Lewis Watters, Cause No. 87-33344 in the 11th District Court of Harris
County, Texas (the "Young Lawsuit"), filed in 1987, Dallas Fontenot, one of the
former stockholders of the Company was sued over his ownership interest in the
Company. Mr. Watters and the Company were joined in the litigation based on
allegations that they had improperly transferred certain assets to the Company
from another corporation that had previously operated Rick's. In June, 1993,
Summary Judgment was rendered in favor of the Company and Mr. Watters by the
District Court. Subsequent to an appeal by the party suing the former
stockholder, the Texas Court of Appeals, 8th Judicial District reversed the
summary judgment and remanded the case to the trial court. The Company filed
an application for Writ of Error with the Texas Supreme Court. This Writ was
denied and the case was remanded to the district court for trial. The Company
and Mr. Watters recently mediated this matter and pursuant to such mediation,
entered into a settlement agreement with the Plaintiff, Mr. Young. The
settlement agreement provides that the litigation will be dismissed, with
prejudice, as to the Company, Mr. Watters and all other entities with which Mr.
Watters is or was associated. The documents evidencing this settlement
agreement are presently being prepared by legal counsel. If, for any reason,
this settlement is not consummated, the Company believes, after consultation
with counsel, that it has substantial defenses to the claims being asserted
against it, and that the risk of material financial exposure to the Company is
remote. There can be no assurance, however, that the Company will be
successful in asserting its defenses or that any judgment that may be rendered
against the Company will not be material. In 1989, the 11th District Court
appointed Scott C. Mitchell as Receiver of the Company for the limited purpose
of reviewing the receipt and disbursement of revenues of the Company. The
District Court terminated the receivership in March, 1993. Mr. Mitchell's firm
has continued to provide accounting services for the Company subsequent to the
termination of the receivership. Mr. Mitchell is currently a Director of the
Company.
In Richard Ball, Cynthia Ball, Eric Ward, Malia Gurney, as next friend
of Jonathan Ward and Joshua Ward, minors, Wayne Ward and Frances Ward v.
Trumps, Inc., d/b/a Rick's Cabaret and 3113 Bering Corporation d/b/a Rick's
Cabaret, Cause No. 93-060776 (the "Ball Lawsuit"), filed in 1993, the Company
was sued by the relatives of a deceased car accident victim. This suit, filed
in the 190th District Court of Harris County, Texas, alleged that one of the
Company's employees wrongfully caused the death of the accident victim. The
suit alleged that an employee of the Company had become intoxicated at Rick's
and subsequently was involved in an automobile accident in which the victim was
killed. The Company answered the Original Complaint and denied all of the
allegations. The Company recently settled this litigation making a nominal
payment of less than $4,000 to the Plaintiffs.
In Dallas J. Fontenot v. Trumps, Inc. and Robert L. Watters, Cause
No. 94-057144 in the 127th District Court of Harris County, Texas (the
"Fontenot Lawsuit"), Mr. Fontenot sued the
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Company and Mr. Watters for alleged breaches of an Agreement entered into in
April, 1993 among Mr. Fontenot, the Company and Mr. Watters. Mr. Fontenot
alleges that Mr. Watters and the Company have breached this Agreement, but does
not indicate the manner in which the breach has occurred. The Company believes
that it has fully complied with its obligations under this Agreement. The
litigation is in its initial stages and no trial date has been set. The
Company believes, after consultation with counsel, that it has substantial
defenses to the claims being asserted against it and that the risk of material
financial exposure to the Company is remote.
TRADEMARKS
Rights of the Company to the tradenames "Rick's" and "Rick's Cabaret"
are established under common law, based upon the Company's substantial and
continuous use of these trademarks in interstate commerce since at least as
early as 1987. "RICK'S AND STARS DESIGN" logo was registered by the United
States Patent and Trademark Office ("PTO") in 1989. Due to an oversight, these
registrations were canceled by the PTO for failure of the Company to file a
required affidavit with the PTO setting forth that the service mark was still
in use in commerce. Applications for service mark registration have been filed
to re-register the Company's RICK'S AND STARS DESIGN logo service mark with the
PTO. These applications were published for opposition on May 28, 1996 and June
4, 1996. If an opposition or request for extension of time to file an
opposition is not filed within 30 days of the corresponding date of
publication, the registrations should issue within about six months following
publication.
Applications for service mark registration for the Company's RICK'S
CABARET service mark have also been filed. These applications were published
for opposition on May 28, 1996. If an opposition or request for extension of
time to file an opposition is not filed within 30 days of the date of
publication, the registrations should issue within about six months following
publication.
EMPLOYEES AND INDEPENDENT CONTRACTORS
As of June 30, 1996, the Company had approximately 135 full-time
employees, of which 10 are in management positions, including corporate and
administrative operations and approximately 125 are engaged in food and
beverage service, including bartenders and waitresses. None of the Company's
employees are represented by a union and the Company considers its employee
relations to be good.
Additionally, the Company has independent contractor relationships
with over 400 entertainers, who are self-employed and work with the Company on
a non-exclusive basis as independent contractors.
FACILITIES
The Company leases the premises where Rick's Cabaret is located in
Houston, Texas. The cabaret contains an aggregate 12,300 square feet, divided
into two separate club areas and executive and administrative offices. The
main club area and the VIP club area together contain 10,500 square feet and
seat approximately 300 people. The executive and administrative offices
comprise 1,800 square feet. In addition, a woman's apparel boutique leases
approximately 300 square feet at the same location. SRD Vending Company, Inc.
("SRD"), a Texas Corporation wholly-owned by
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Mr. Watters also occupies 120 square feet at the same location. SRD provides
and maintains the cigarette vending machines located at Rick's Cabaret. See
"Certain Transactions."
The Company presently owns a 6,500 square foot building in which
Tantra is located. The building incorporates separate areas for bar service,
dancing and playing billiards. The building is currently leased to Tantra,
pursuant to a ten year lease agreement which expires on August 1, 2004. The
lease agreement provides for lease payments of the greater of (i) $1,500 per
month or (ii) 5% of Tantra's gross receipts per month until such time as the
Company has received $250,000 of rental income.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert L. Watters 45 Chairman of the Board, President and Chief Executive
Officer
Erich Norton White 26 Director, Vice-President and Secretary
Scott C. Mitchell 42 Director
Martin Sage 45 Director
Robert Gary White 41 Chief Financial Officer
</TABLE>
Directors are elected annually and hold office until the next annual
meeting of the stockholders of the Company or until their successors are
elected and qualified. Officers are elected annually and serve at the
discretion of the Board of Directors. There is no family relationship between
or among any of the directors and executive officers of the Company. The
Company has agreed with the Representative to appoint for a period of three
years ending October, 1998, two persons to the Company's Board of Directors who
shall not be affiliated with the Company.
Robert Watters has been a director of the Company since 1986, and has
been the sole stockholder of the Company since March 1993. Mr. Watters has
been president and chief executive officer of the Company since 1991. He was
also a founder in 1989 and operator until 1993 of the Colorado Bar & Grill, an
adult cabaret located in Houston, Texas and in 1988 performed site selection,
negotiated the property purchase and oversaw the design and permitting for the
cabaret that became the Cabaret Royale, in Dallas, Texas. Mr. Watters
practiced law as a solicitor in London, England and is qualified to practice
law in New York state. Mr. Watters worked in the international tax group of
the accounting firm of Touche, Ross & Co. (now succeeded by Deloitte & Touche)
from 1979 to 1983 and was engaged in the private practice of law in Houston,
Texas from 1983 to 1986, when he became involved in the full-time management of
the Company. Mr. Watters graduated from the London School of Economics and
Political Science, University of London, in 1973 with a Bachelor of Laws
(Honours) degree and in 1975 with a Master of Laws degree from Osgoode Hall Law
School, York University.
Erich Norton White, vice president and secretary has served as a
director of the Company since July, 1995. Mr. White joined the Company in
January, 1993 as a night manager and from May, 1995 until November, 1995 was
its General Manager. From October, 1989, until joining the Company in 1993,
Mr. White worked in the hospitality industry for the Bennigan's restaurant
chain. Mr. White completed the Bennigan's Restaurant Management Training
Program in 1992.
Scott C. Mitchell has served as a director of the Company since
December, 1994. Mr. Mitchell has been a certified public accountant in private
practice since 1976 and has been a principal of his own firm since 1981. Mr.
Mitchell's current firm Mitchell & Cavallo, P.C. serves
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<PAGE> 41
a wide range of business and individual clients. Mr. Mitchell has been
licensed since 1980 to practice law in the State of Texas and since 1986 has
been admitted to practice before the Tax Court of the United States. Further,
Mr. Mitchell has been appointed by various District Courts as a receiver and
special master of business entities under court jurisdiction. Mr. Mitchell was
appointed a Receiver of the Company in September, 1989 with limited authority
to oversee and review the receipt and disbursement of revenues of the Company.
Mr. Mitchell, however, had no authority over the management of the Company.
The receivership was terminated in March, 1993.
Martin Sage has served as a director of the Company since July, 1995.
Mr. Sage is the founder and director of Sage Productions, Inc., which is
involved in the development of applying advanced learning theory to business.
The Sage Learning Method enables individuals to build innovative approaches to
management, leadership and team building. The Sage Learning Method works to
create dynamic relationships which motivate and create synergy between
individuals and the businesses where they work. For the past 16 years, Mr.
Sage has served as a consultant to businesses throughout the United States
bringing his innovative approach to business to many organizations and
corporations.
Robert Gary White, Chief Financial Officer, has been with the Company
since February, 1996. A CPA in the state of Texas since 1979, Mr. White was
previously an audit manager with Jackson & Rhodes, P.C., an accounting firm
located in Dallas, Texas, from 1994 to 1996, where he was responsible for the
Rick's Cabaret International, Inc. engagement. He has additional experience in
managing his own accounting practice and consulting with entertainment
companies, which he did from 1992 to 1994. Additionally, from 1989 through
1991, Mr. White was an officer of International Broadcast Systems, Ltd., a
NASDAQ listed entertainment company, becoming a director in 1990. Prior
thereto, he was with Deloitte Touche L.L.P. (formerly Touche Ross & Co.) for
twelve and one half years. He is a 1977 graduate of the University of Texas at
Austin with a B.B.A. in accounting.
LIMITATION ON DIRECTORS' LIABILITY; INDEMNIFICATION
Texas law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. The Articles of the
Company limit the liability of directors of the Company (in their capacity as
directors but not in their capacity as officers) to the Company or its
stockholders to the fullest extent permitted by Texas law. Specifically,
directors of the Company will not be personally liable for monetary damages for
breach of a director's fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Article 2.41
under the Texas Business Corporation Act ("TBCA"), or (iv) for any transactions
from which the director derived an improper personal benefit, whether or not
the benefit resulted from an action taken in the person's official capacity.
Section 2.41 of the TBCA relates to directors' liability for unlawful dividends
and stock issuances.
The inclusion of this provision in the Articles may have the effect of
reducing the likelihood of derivative litigation against directors, and may
discourage or deter stockholders or management from bringing a lawsuit against
directors for breach of their duty of care, even though such an action, if
successful, might otherwise have benefited the Company and its stockholders.
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The Company's Articles provide for the indemnification of its
executive officers and directors, and the advancement to them of expenses in
connection with any proceedings and claims, to the fullest extent permitted by
the TBCA law. The Articles include related provisions meant to facilitate the
indemnitees' receipt of such benefits. These provisions cover, among other
things: (i) specification of the method of determining entitlement to
indemnification and the selection of independent counsel that will in some
cases make such determination, (ii) specification of certain time periods by
which certain payments or determinations must be made and actions must be
taken, and (iii) the establishment of certain presumptions in favor of an
indemnitee. Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that, in
the opinion of the SEC, such indemnification is against public policy as
expressed in the Act and is therefore unenforceable.
KEY MAN INSURANCE
The Company has obtained "key man" insurance on the life of Robert L.
Watters in the amount of $3,000,000. The loss, incapacity or unavailability of
Mr. Watters at the present time or in the foreseeable future, before a
qualified replacement is found, could have a material, adverse effect on the
Company's operations. See "Risk Factors--Dependence on and Availability of
Management; Management of Growth."
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EXECUTIVE COMPENSATION
The following table reflects all forms of compensation for services to
the Company for the fiscal years ended September 30, 1995, 1994 and 1993 of the
chief executive officer of the Company. No executive officer (other than the
chief executive officer) of the Company received compensation which exceeded
$100,000 during 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------- ---------------------- ALL
RESTRICTED STOCK OTHER
STOCK OPTIONS COMPEN-
NAME & PRINCIPAL POSITION YEAR SALARY BONUS OTHER(1) AWARDS (SHARES) SATION
- ------------------------- ---- ------ ----- ----- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert L. Watters
Chief Executive Officer 1995 $298,000 -0- -0- -0- -0- -0-
1994 $382,970 -0- -0- -0- -0- -0-
1993 $514,125 -0- -0- -0- -0- -0-
</TABLE>
_____________________
(1) The Company provides Mr. Watters certain personal benefits. Since
the value of such benefits does not exceed the lesser of $50,000 or 10% of
annual compensation, the amounts are omitted.
DIRECTOR COMPENSATION
The Company does not currently pay any cash directors' fees, but it
pays the expenses of its directors in attending board meetings. Scott C.
Mitchell, Martin Sage and Erich N. White, directors of the Company were granted
stock options on October 12, 1995 for services provided to the Company as
directors. Messrs. Mitchell, Sage and White were each granted 5,000 stock
options, all at an exercise price of $3.00 per share until January, 2005. The
options are exercisable only as to one-fourth of the total number of shares
covered by each grant of options during each 12-month period commencing 12
months after the grant date.
EMPLOYEE STOCK OPTION PLAN
While the Company has been successful in attracting and retaining
qualified personnel, the Company believes that its future success will depend
in part on its continued ability to attract and retain highly qualified
personnel. The Company pays wages and salaries which it believes are
competitive. The Company also believes that equity ownership is an important
factor in its ability to attract and retain skilled personnel, and in 1995
adopted a Stock Option Plan (the "Plan") for employees and directors.
The purpose of the Plan is to further the interest of the Company, its
subsidiaries and its stockholders by providing incentives in the form of stock
options to key employees and directors who contribute materially to the success
and profitability of the Company. The grants will recognize and reward
outstanding individual performances and contributions and will give such
persons a proprietary interest in the Company, thus enhancing their personal
interest in the Company's continued success and progress. This Plan will also
assist the Company and its subsidiaries in
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attracting and retaining key employees and directors. The options granted
under this Plan may be either Incentive Stock Options, as that term is defined
in Section 422A of the Internal Revenue Code of 1986, as amended, or
nonstatutory options taxed under Section 83 of the Internal Revenue Code of
1986, as amended. 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 the participants in the Plan, 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. A total of
300,000 shares may be optioned and sold under the Company's Stock Option Plan.
As of June 30, 1996, 105,000 stock options had been granted under the Plan,
none of which have been exercised.
EMPLOYMENT AGREEMENT
The Company presently has a three year employment agreement with
Robert L. Watters (the "Agreement") to serve as its President and Chief
Executive Officer. The Agreement, which extends through December 31, 1997,
provides for an annual base salary of $300,000. The Agreement also allows for
an annual bonus, in the discretion of the Board of Directors (excluding Mr.
Watters), based upon the financial performance, including evaluation of the
income and earnings of the Company during the year. The Agreement also
provides for participation in all benefit plans maintained by the Company for
salaried employees. Mr. Watters' Agreement contains a confidentiality
provision and an agreement by Mr. Watters not to compete with the Company upon
the expiration of the Agreement. The Company has not established, nor does it
provide for, long-term incentive plans or defined benefit or actuarial plans.
CERTAIN TRANSACTIONS
Prior to the Company's reorganization, the Company, as a
privately-held company engaged in certain business transactions with Mr.
Watters, its sole stockholder. These transactions are described below. The
Board of Directors of the Company has adopted a policy that Company affairs
will be conducted in all respects by standards applicable to publicly-held
corporations and that the Company will not enter into any future transactions
and/or loans between the Company and its officers, directors and 5%
shareholders unless the terms are no less favorable than could be obtained from
independent, third parties and will be approved by a majority of the
independent, disinterested directors of the Company. In the Company's view,
all of the transactions described below involving the Company meet this
standard.
The Company was organized in 1994 to acquire all of the outstanding
common stock of Trumps, Inc.("Trumps"), a Texas corporation formed in 1982,
from Robert L. Watters, its sole stockholder. The Company issued to Mr.
Watters 1,750,000 shares of its common stock in exchange for the common stock
of Trumps. This exchange, which resulted in Trumps becoming a wholly owned
subsidiary of the Company, was consummated in February 1995. The transaction
was entered as part of a corporate reorganization, the result of which was to
create the Company as a holding company for Trumps.
44
<PAGE> 45
In August, 1995, the Board of Directors of the Company authorized the
acquisition from Mr. Watters of all of the capital stock of Tantric
Enterprises, Inc., Tantra Dance, Inc., and Tantra Parking, Inc. (collectively
"Tantra"). The Company issued to Mr. Watters 50,000 shares of its common stock
in exchange for the stock of Tantra. The exchange was consummated in
September, 1995. The Tantra companies own and operate Tantra, a non-sexually
oriented discotheque and billiard club in Houston, Texas. The Board of
Directors determined that the combination of the business operations of Tantra
and the Company will create a synergy which will enhance the profitability of
both businesses. Moreover, the diversification of the Company's operations
into the business of Tantra is anticipated to enhance the public image of the
Company. The Board of Directors has received an opinion of an independent
third-party appraiser that the terms of the transaction are fair and reasonable
to the Company and are at least as favorable to the Company as would be the
case between unrelated parties. Mr. Watters had no cost basis in the stock of
Tantra.
In 1986, the Company entered into a lease agreement with Zu
Corporation, a Texas corporation ("Zu"), for the land and building where Rick's
Cabaret is located. In 1991, Mr. Watters exercised an option to purchase all
of the outstanding shares of capital stock of Zu. The seller, however,
contested the validity of the exercise of this option and Mr. Watters initiated
litigation. See "Risk Factors--Existing Litigation; Possible Material Adverse
Effects" and "Business--Litigation."
The lease agreement provided for lease payments equal to the greater
of $10,000 per month or 8% of gross receipts per month. The lease was amended
in September, 1989, to reduce the monthly rent to the greater of $10,000 or 5%
of the gross receipts. The lease payments to Zu for 1994 and 1995 were
$224,996 and $175,652, respectively. The lease expired in February, 1996 and
Trumps exercised its option to renew the lease for an additional term of 10
years. The lease provides that the Company is obligated to pay for any
maintenance to the premises, to maintain adequate insurance on the building and
to pay all utilities and taxes.
As of September 30, 1993, SRD Vending Company, Inc. ("SRD"), a company
wholly-owned by Robert L. Watters, had advanced the Company $60,501. This
amount was increased during the Company's 1994 fiscal year to $69,722. During
November, 1994, the Company converted these advances, which were demand
obligations of the Company, to a promissory note bearing interest at the rate
of 9% per annum in favor of SRD in the amount of $69,722. The balance
outstanding at September 30, 1995, was $46,279. The promissory note was due on
November 30, 1995, at which time it was paid in full.
SRD has provided and maintained the cigarette vending machines at
Rick's Cabaret since 1986. SRD's revenues are generated from the sale of
cigarettes from vending machines located at Rick's Cabaret. SRD is responsible
(i) to service the vending machines to ensure that they are in good working
order and (ii) to maintain an adequate supply of cigarettes in the vending
machines. The Company has agreed with SRD that any revenues received from the
vending machines after December 31, 1994 will be split equally between the
Company and SRD. During 1994 and 1995, SRD received less than $25,000 per year
from the vending machines.
During 1995 and 1994, the Company paid $16,560 and $29,172,
respectively for accounting services to accounting firms in which Mr. Mitchell,
a director of the Company, was a principal.
45
<PAGE> 46
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of June 30,
1996, with respect to the beneficial ownership of shares of Common Stock by (i)
each person who owns beneficially more than 5% of the outstanding shares of
Common Stock, (ii) each director of the Company, (iii) each executive officer
of the Company and (iv) all executive officers and directors of the Company as
a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
-----------
NUMBER OF SHARES SHARES OF COMMON STOCK
NAME AND ADDRESS OF BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER(1) OWNED OFFERING OFFERING
------------------- ----- -------- --------
<S> <C> <C> <C>
Robert L. Watters
3113 Bering
Houston, Texas 77057 1,800,000 49% 37.25%
Erich Norton White
3113 Bering
Houston, Texas 77057 13,425(2) .43% .33%
Scott C. Mitchell
820 Gessner
Suite 1380
Houston, Texas 77024 10,000(3) .27% .20%
Martin Sage
100 Congress Ave., Ste. 2100
Austin, Texas 78701 -0-(3) 0% 0%
Robert Gary White
3113 Bering
Houston, Texas 77057 -0-(4) 0% 0%
All directors and officers as a
group (5) persons 1,823,425 49.70% 37.78%
- ------------------------------
</TABLE>
(1) Messrs. Watters, White and Mitchell have sole voting and investment
power with respect to the shares shown as beneficially owned by them.
(2) Includes options to purchase 12,500 shares at an exercise price of
$3.00 per share, which are presently exercisable; and does not include
options to purchase an additional 17,500 shares at an exercise price
of $3.00 per share, none of which will become exercisable within the
next 60 days.
(3) Does not include options to purchase 5,000 shares, none of which will
become exercisable within the next 60 days.
(4) Does not include options to purchase 25,000 shares at an exercise
price of $4 3/4 per share, none of which are exercisable within the
next 60 days.
46
<PAGE> 47
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 15,000,000
shares of Common Stock, $.01 par value, and 1,000,000 shares of preferred stock
$.10 par value ("Preferred Stock"). As of the date of this Prospectus, the
Company has outstanding 3,723,333 shares of Common Stock and there are no
shares of Preferred Stock outstanding.
The following summary description of the securities of the Company is
qualified in its entirety by reference to the Articles of Incorporation
("Articles") of the Company, a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. See "Additional
Information."
COMMON STOCK
The holders of Common Stock are entitled to one vote per share with
respect to all matters required by law to be submitted to stockholders of the
Company. The holders of Common Stock have the sole right to vote, except as
otherwise provided by law or by the Company's Articles of Incorporation,
including provisions governing any Preferred Stock. The Common Stock does not
have any cumulative voting, preemptive, subscription or conversion rights.
Election of directors and other general stockholder action requires the
affirmative vote of a majority of shares represented at a meeting in which a
quorum is represented. The outstanding shares of Common Stock are, and the
shares of Common Stock offered hereby will be, upon payment therefor as
contemplated herein, validly issued, fully paid and non-assessable.
Subject to the rights of any outstanding shares of Preferred Stock,
the holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. In
the event of liquidation, dissolution or winding up of the affairs of the
Company, the holders of Common Stock are entitled to share ratably in all
assets remaining available for distribution to them after payment or provision
for all liabilities and any preferential liquidation rights of any Preferred
Stock then outstanding.
PUBLIC WARRANTS
General. The 920,000 Warrants offered and sold by the Company during
the IPO were issued in registered form pursuant to the terms of a warrant
agreement ("Warrant Agreement") dated October 12, 1995, between the Company
and American Stock Transfer and Trust Company, as warrant agent ("Warrant
Agent"). The following statements and summaries of certain provisions of the
Warrant Agreement are subject to the more detailed provisions of the Warrant
Agreement, copies of which may be examined at the principal offices of the
Warrant Agent and a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part.
Rights to Purchase Shares of Common Stock. Each Warrant entitles the
registered holder to purchase from the Company one share of Common Stock at an
exercise price of $3.00 per share during the three-year period commencing on
October 12, 1995.
47
<PAGE> 48
Exercise. Each holder of the Warrant may exercise such Warrant by
surrendering the certificate evidencing such Warrant, with the form of election
to purchase on the reverse side of such certificate properly completed and
executed, together with payment of the exercise price to the Warrant Agent. No
Warrants may be exercised unless at the time of exercise there is a current
prospectus covering the shares of Common Stock issuable upon the exercise of
such Warrants under an effective registration statement. The Company is
required either to maintain the effectiveness of this Registration Statement or
to file a new registration statement with respect to the Common Stock
underlying the Warrants prior to the exercise or redemption of the Warrants.
The Company has agreed to use its best efforts to have a current registration
statement in effect with respect to the Common Stock underlying the Warrants at
any time when the holders thereof may exercise their Warrants. While it is the
Company's intention to do so, there can be no assurance that it will be able to
do so.
The exercise price shall be payable in cash or by certified or
official bank check payable to the Company. Subject to certain limited
exceptions, no adjustment as to any dividends with respect to the shares of
Common Stock of the Company will be made upon any exercise of Warrants. If
less than all of the Warrants evidenced by a warrant certificate are exercised,
a new certificate will be issued for the remaining number of Warrants.
Certificates evidencing the Warrants may be exchanged for new certificates of
different denominations by presenting the Warrant certificate at the office of
the Warrant Agent.
Adjustments. The exercise price and the number of shares of Common
Stock purchasable upon exercise of any Warrants and the number of Warrants are
subject to adjustment upon the occurrence of certain events, including stock
dividends, reclassifications, reorganizations, consolidations, mergers and
certain issuances and redemptions of Common Stock and securities convertible
into or exchangeable for Common Stock. No adjustment in the exercise price
will be required to be made with respect to the Warrants until cumulative
adjustments amount to $.05. In the event of any capital reorganization,
certain reclassification of the Common Stock, any consolidation or merger
involving the Company (other than a consolidation or merger which does not
result in any reclassification or change in the outstanding shares of Common
Stock), or sale of the properties and assets of the Company, as, or
substantially as, an entirety to any other corporation, Warrants would
thereupon become exercisable only for the number of shares of stock or other
securities, assets or cash to which a holder of the number of shares of Common
Stock of the Company purchasable (at the time of such reorganization,
reclassification, consolidation, merger or sale) upon exercise of such Warrants
would have been entitled upon such reorganization, reclassification,
consolidation, merger or sale.
Other Rights. In the event of an adjustment in the number of shares
of Common Stock issuable upon exercise of the Warrants, the Company will not be
required to issue fractional shares of Common Stock upon exercise of the
Warrants. In lieu of fractional shares of Common Stock, there will be paid to
the holder of the Warrants at the time of such exercise an amount in cash equal
to the same fraction of the closing bid price of the Common Stock on the last
trading day prior to the exercise date.
Warrant holders do not have voting or any other rights of stockholders
of the Company and are not entitled to dividends.
48
<PAGE> 49
Redemption of Warrants. If the closing price of the Common Stock
shall have equalled or exceeded $6.00 per share for a period of 30 consecutive
trading days at any time, the Company may redeem the Warrants by paying holders
$.05 per Warrant; provided that such notice is mailed not later than 10 days
after the end of such period and prescribes a redemption date at least 30 days
thereafter. Warrant holders will be entitled to exercise Warrants at any time
up to the business day next preceding the redemption date. The Warrants are
not redeemable by the Company prior to the first anniversary of the effective
date of this Prospectus without the prior written consent of the
Representative.
Modification of the Warrant Agreement. The Warrant Agreement contains
provisions permitting the Company and the Warrant Agent, without the consent of
the Warrant holders, to supplement or amend the Warrant Agreement in order to
cure any ambiguity, and to correct or supplement any provisions contained
therein which may be to cure any ambiguity, and to correct or supplement any
provision contained therein which may be defective or inconsistent with any
other provision therein, or to make any other provision in regard to matters or
questions arising thereunder which the Company and the Warrant Agent may deem
necessary or desirable and which does not adversely affect the interests of the
Warrant holders.
PREFERRED STOCK
The Board of Directors is authorized, without action by the holders of
the Common Stock, to provide for the issuance of the Preferred Stock in one or
more series, to establish the number of shares to be included in each series
and to fix the designations, powers, preferences and rights of the shares of
each such series and the qualifications, limitations or restrictions thereof.
This includes, among other things, voting rights, conversion privileges,
dividend rates, redemption rights, sinking fund provisions and liquidation
rights which shall be superior to the Common Stock. The Company will not issue
shares of Preferred Stock which are convertible into shares of Common Stock at
a price less than the then current market price of the Common Stock. The
issuance of one or more series of the Preferred Stock could adversely affect
the voting power of the holders of the Common Stock and could have the effect
of discouraging or making more difficult any attempt by a person or a group to
attain control of the Company. The Company has no present plans to issue any
additional shares of Preferred Stock.
REPRESENTATIVE'S WARRANTS
At the closing of the Company's IPO, the Company issued to Barron
Chase Securities, Inc. (the "Representative"), Representative's Warrants to
purchase 160,000 shares of Common Stock at an exercise price of $4.35 per
share, exercisable for a five year period ending October 12, 2000, and issued
to the Representative 80,000 Underlying Warrants to purchase one share of
Common Stock at an exercise price of $4.35 per share for a three year period
ending October 12, 1998.
The Representative's Warrants contain provisions providing for
appropriate adjustment in the event of any merger, consolidation,
recapitalization, reclassification, stock dividend, stock split or similar
transaction. The Representative's Warrants contain net issuance provisions
permitting the holder thereof to elect to exercise the Representative's
Warrants in whole or in part and instruct the Company to withhold from the
shares issuable upon exercise a number of shares, valued at the current fair
market value on the date of exercise, to pay the exercise price. Such net
exercise
49
<PAGE> 50
provision has the effect of requiring the Company to issue shares of Common
Stock without a corresponding increase in capital. A net exercise of the
Representative's Warrants will have the same dilutive effect on the interests
of the Company's stockholders as will a cash exercise. The Representative's
Warrants do not entitle the Representative to any rights as a stockholder of
the Company until such Representative's Warrants are exercised and the
Representative's Shares are purchased thereunder.
TRANSFER AGENT AND REGISTRAR; WARRANT AGENT
The transfer agent and registrar for the Common Stock and the Warrant
Agent for the Warrants will be American Stock Transfer and Trust Company. Its
address is 40 Wall Street, New York, New York 10005.
PLAN OF DISTRIBUTION
The 920,000 shares of Common Stock issuable upon exercise of the
Warrants, are being offered hereby by the Company and are distributable when
and as such Warrants are exercised by the Warrant holders. No underwriters are
employed with respect to the exercise of any of the Warrants, nor will the
Company pay any fees upon their exercise. The Company will receive the
exercise price upon exercise of the aforesaid Warrants as proceeds.
The Company has been informed that each of the holders of the
Representative's Warrants and Underlying Warrants (the "Holders") has a direct
or indirect business relationship with Barron Chase Securities, Inc., the
underwriter of the Company's IPO. To the best of the Company's knowledge,
there is no other material relationship between any of the Holders and the
Company.
The 240,000 shares of Common Stock issuable upon the exercise of the
outstanding Representative Warrants and Underlying Warrants will be offered for
sale by the Holders from time to time in the public marketplace or otherwise.
The Holders are not restricted as to the prices at which they may sell their
shares and sales of such shares at less than the market price may depress the
market price of the Common Stock. It is anticipated that none of the
securities offered by the Holders are being offered through underwriters and no
arrangements have been made with any outside broker, dealer or underwriter for
the resale of such securities, all of which may be offered for sale from time
to time through the NASDAQ system or otherwise. The Holders currently intend
to publicly offer and sell the securities underlying the Representative's
Warrants and Underlying Warrants through customary brokerage channels either
through broker-dealers acting as agents or brokers for the seller, or through
broker-dealers acting as principals, who may then resell the shares in the
over-the-counter market, or in a private sale in the over-the-counter market or
otherwise, at negotiated prices or at prevailing market prices at the time of
the sales, or by a combination of such methods. Thus, the period for sale of
such securities by the Holders may occur over an extended period of time. The
Company will receive the exercise price upon exercise of the Representative's
Warrants and Underlying Warrants, but will not receive any proceeds from the
sale of such securities after exercise.
50
<PAGE> 51
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, assuming the exercise of the
Warrants, the Representative's Warrants and the Underlying Warrants, the
Company will have outstanding 4,883,333 shares of Common Stock, of which
3,083,333 shares will be freely tradeable without restriction or further
registration under the Securities Act, except for any shares purchased by an
"affiliate" of the Company (in general, a person who has a control relationship
with the Company).
There are 1,800,000 shares of Common Stock outstanding, which are
owned by Mr. Watters and, which are deemed to be "restricted securities" as
that term is defined under Rule 144 of the Securities Act ("Rule 144"), in that
such shares were issued in private transactions not involving a public
offering.
Rule 144 governs resales of "restricted securities" for the account of
any person (other than an issuer), and restricted and unrestricted securities
for the account of an "affiliate" of the issuer. Restricted securities
generally include any securities acquired directly or indirectly from an issuer
or its affiliates which were not issued or sold in connection with a public
offering registered under the Securities Act. An affiliate of the issuer is
any person who directly or indirectly controls, is controlled by, or is under
common control with, the issuer. Affiliates of the Company may include its
directors, executive officers, and persons directly or indirectly owning 10% or
more of the outstanding Common Stock. Under Rule 144 unregistered resales of
restricted Common Stock cannot be made until it has been held for two years
from the later of its acquisition from the Company or an affiliate of the
Company. Thereafter, shares of Common Stock may be resold without registration
subject to Rule 144's volume limitation, aggregation, broker transaction,
notice filing requirements, and requirements concerning publicly available
information about the Company ("Applicable Requirements"). Resales by the
Company's affiliates of restricted and unrestricted Common Stock are subject to
the Applicable Requirements. The volume limitations provide that a person (or
persons who must aggregate their sales) cannot, within any three-month period,
sell more than the greater of (i) one percent of the then outstanding shares,
or (ii) the average weekly reported trading volume during the four calendar
weeks preceding each such sale. A person who is not deemed an "affiliate" of
the Company and who has beneficially owned shares for at least three years
would be entitled to sell such shares under Rule 144 without regard to the
Applicable Requirements.
In addition to the foregoing restrictions on resale of "restricted
securities", Mr. Watters has agreed not to sell, contract to sell or otherwise
transfer, pledge or dispose of any securities of the Company prior to April 12,
1997, without the prior written consent of the Representative. After the
expiration of such agreement, 1,750,000 shares of Common Stock held by Mr.
Watters will be eligible for sale, subject to the applicable requirements of
Rule 144 and 50,000 shares will be eligible for sale in September, 1997,
subject to the applicable requirements of Rule 144. Further, 1,600,000 shares
of the Common Stock owned by Mr. Watters are subject to further restrictions on
their resale and transfer imposed under an agreement between Mr. Watters, the
Company, and the Securities Commissioner of Texas under the Texas Securities
Act.
51
<PAGE> 52
LEGAL MATTERS
Certain legal matters with respect to the securities offered hereby
will be passed upon for the Company by Axelrod, Smith & Kirshbaum, Houston,
Texas.
EXPERTS
The financial statements of Rick's Cabaret International, Inc. at
September 30, 1995 and 1994, appearing in this Prospectus and Registration
Statement have been audited by Jackson & Rhodes P.C., independent auditors, as
set forth in their report thereon appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such reports, given
upon the authority of such firm as experts in accounting and auditing.
52
<PAGE> 53
RICK'S CABARET INTERNATIONAL, INC.
AND SUBSIDIARIES
AUDITED FINANCIAL INFORMATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
- --------------------------------------------------------------------------------
<S> <C>
Independent Auditors' Report ............................................. F-2
Consolidated Balance Sheets at September 30, 1995 and
September 30, 1994 and March 31, 1996 (unaudited) ................... F-3
Consolidated Statements of Operations for the years ended
September 30, 1995 and September 30, 1994 and six
months ended March 31, 1996 and 1995 (unaudited) .................... F-4
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the years ended September 30, 1995 and
September 30, 1994 and six months ended March 31, 1996
(unaudited) ......................................................... F-5
Consolidated Statements of Cash Flows for the years ended
September 30, 1995 and September 30, 1994 and six months
ended March 31, 1996 and 1995 (unaudited) ........................... F-6
Notes to Consolidated Financial Statements ............................... F-7
</TABLE>
F-1
<PAGE> 54
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Rick's Cabaret International, Inc.
We have audited the accompanying consolidated balance sheets of Rick's Cabaret
International, Inc. and subsidiaries, as of September 30, 1995 and 1994, and
the related consolidated statements of operations, changes in stockholders'
equity (deficit) and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rick's Cabaret International,
Inc. and subsidiaries as of September 30, 1995 and 1994, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
Jackson & Rhodes P.C.
Dallas, Texas
November 15, 1995
F-2
<PAGE> 55
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION> SEPTEMBER 30,
MARCH 31, -------------------------------
1996 1995 1994
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ 3,838,769 $ 195,112 $ 113,630
Accounts receivable 21,723 - 15,947
Inventories 31,606 31,612 25,291
Prepaid expenses 56,684 51,455 -
------------- ------------- -------------
Total current assets 3,948,782 278,179 154,868
------------- ------------- -------------
Property and equipment:
Buildings, land and leasehold improvements 949,090 664,902 378,692
Furniture and equipment 731,597 486,447 358,442
------------- ------------- -------------
1,680,687 1,151,349 737,134
Less accumulated depreciation (464,537) (408,717) (299,347)
------------- ------------- -------------
1,216,150 742,632 437,787
------------- ------------- -------------
Other assets:
Deferred offering costs (Note 1) - 389,680 -
Other 61,912 38,967 37,100
------------- ------------- -------------
$ 5,226,844 $ 1,449,458 $ 629,755
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt (Note 3) $ 117,703 $ 193,139 $ 106,524
Accounts payable - trade (Note 5) 338,542 501,012 337,321
Accrued expenses 169,532 97,753 72,292
Income taxes payable 46,495 227,495 87,176
------------- ------------- -------------
Total current liabilities 672,272 1,019,399 603,313
Long-term debt, less current portion (Note 3) 151,179 212,833 168,643
------------- ------------- -------------
Total liabilities 823,451 1,232,232 771,956
------------- ------------- -------------
Commitments and contingencies (Note 6) - - -
Stockholders' equity (deficit) (Note 1):
Preferred stock - $.10 par, authorized
1,000,000 shares; none issued - - -
Common stock - $.01 par, authorized 15,000,000 shares;
issued 3,640,000 and 1,800,000 36,400 18,000 18,000
Additional paid in capital 4,251,559 - -
Retained earnings (deficit) 115,434 199,226 (160,201)
------------- ------------- -------------
Total stockholders' equity (deficit) 4,403,393 217,226 (142,201)
------------- ------------- -------------
$ 5,226,844 $ 1,449,458 $ 629,755
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 56
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
MARCH 31, SEPTEMBER 30,
---------------------------------- -------------------------------
1996 1995 1995 1994
--------------- --------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Sales of alcoholic beverages $ 1,196,006 $ 1,191,293 $ 2,286,157 $ 2,381,250
Sales of food 132,729 109,566 213,537 196,773
Service revenues 912,330 833,717 1,700,133 1,730,653
Other 127,944 149,946 334,879 258,617
--------------- --------------- -------------- -------------
2,369,009 2,284,522 4,534,706 4,567,293
--------------- --------------- -------------- -------------
Operating expenses:
Cost of goods sold 435,692 342,835 699,630 686,944
Salaries and wages 794,928 629,952 1,271,204 1,311,095
Other general and administrative:
Taxes and permits 304,340 279,715 541,214 522,179
Charge card fees 37,540 68,145 149,176 174,922
Rent 148,200 204,819 294,592 326,563
Legal and accounting 39,573 57,335 106,571 135,618
Advertising 323,943 156,310 298,040 311,159
Other 448,146 373,380 580,609 750,796
--------------- --------------- -------------- -------------
2,532,362 2,112,491 3,941,036 4,219,276
--------------- --------------- -------------- -------------
Income (loss) from operations (163,353) 172,031 593,670 348,017
Other income (expense)
Interest income 92,943 439 0 0
Interest expense (8,582) (17,101) (40,243) (55,976)
--------------- --------------- -------------- -------------
84,361 (16,662) (40,243) (55,976)
--------------- --------------- -------------- -------------
Income (loss) before income taxes (78,992) 155,369 553,427 292,041
Income taxes 4,800 60,300 194,000 101,000
--------------- --------------- -------------- -------------
Net income (loss) $ (83,792) $ 95,069 $ 359,427 $ 191,041
=============== =============== ============== =============
Net income (loss) per common share $ (0.02) $ 0.05 $ 0.20 $ 0.11
=============== =============== ============== =============
Weighted average shares outstanding 3,640,000 1,800,000 1,800,000 1,800,000
=============== =============== ============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 57
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ ADDITIONAL
NUMBER OF PAID IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, October 1, 1993 1,750,000 $ 17,500 $ - $ (351,242) $ (333,742)
Acquisition of Tantra (Note 1) 50,000 500 - - 500
Net income - - - 191,041 191,041
--------- ------------ -------------- ------------ ------------
Balance, September 30, 1994 1,800,000 18,000 - (160,201) (142,201)
Net income - - - 359,427 359,427
--------- ------------ -------------- ------------ ------------
Balance, September 30, 1995 1,800,000 18,000 - 199,226 217,226
Sale of Common stock, net of offering
costs of $564,491 1,840,000 18,400 4,251,559 0 4,269,959
Net loss - - - (83,792) (83,792)
--------- ------------ -------------- ------------ ------------
Balance, March 31, 1996 3,640,000 $ 36,400 $ 4,251,559 $ 115,434 $ 4,403,393
========= ============ ============== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 58
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
MARCH 31, SEPTEMBER 30,
---------------------------- ---------------------------
1996 1995 1995 1994
----------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net (loss) income $ (83,792) $ 95,069 $ 359,427 $ 191,041
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation 55,820 45,550 110,258 72,696
Amortization of deferred interest - - - 48,000
Deferred taxes - - - 84,700
Changes in assets and liabilities:
Accounts receivable (21,723) (13,137) 15,947 (13,675)
Inventories 6 (12,226) (6,321) (1,138)
Prepaid expenses and other assets (5,229) - (51,455) 10,288
Accounts payable and accrued liabilities (90,691) (74,676) 188,652 (186,063)
Income taxes payable (181,000) 20,000 140,319 (12,053)
----------- ---------- ---------- -----------
Net cash (used in) provided by operating activities (326,609) 60,580 756,827 193,796
----------- ---------- ---------- -----------
Cash flows from investing activities:
Additions to property and equipment (529,338) (86,533) (439,609) (131,930)
Retirements of fully depreciated assets - - 25,394 -
Increase in other assets (22,945) (1,054) (1,867) -
Investment in film - - - (3,400)
----------- ---------- ---------- -----------
Net cash used in investing activities (552,283) (87,587) (416,082) (134,930)
----------- ---------- ---------- -----------
Cash flows from financing activities:
Proceeds from the sale of common stock 4,834,450 1,777 - -
Proceeds from borrowing - 161,137 133,526 109,221
Payments on long-term debt (137,090) - (3,109) (430,136)
Increase in deferred financing costs (174,811) (150,043) (389,680) -
----------- ---------- ---------- -----------
Net cash provided by (used in) financing activities 4,522,549 12,871 (259,263) (320,915)
----------- ---------- ---------- -----------
Net increase (decrease) in cash 3,643,657 (14,136) 81,482 (262,049)
Cash at beginning of period 195,112 113,630 113,630 375,679
----------- ---------- ---------- -----------
Cash at end of period $ 3,838,769 $ 99,494 $ 195,112 $ 113,630
=========== ========== ========== ===========
Cash paid during the period for:
Interest $ 8,582 $ 10,505 $ 34,083 $ 55,976
=========== ========== ========== ===========
Income taxes $ 181,000 $ 20,000 $ 53,681 $ 70,000
=========== ========== ========== ===========
Non-cash transaction:
On December 29, 1994, the Company acquired certain land with a $95,000 note.
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 59
RICK'S CABARET INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995 AND
SEPTEMBER 30, 1995 AND 1994
1. ORGANIZATION
Rick's Cabaret International, Inc. (the "Company") was formed in December
1994, to acquire all the outstanding common stock of Trumps Inc. ("Trumps"),
a company owned 100% by the Company's sole stockholder. The transaction has
been accounted for as a reorganization of Trumps; therefore, the transaction
has been given retroactive effect whereby Trumps has been deemed as the
reporting entity. The accompanying consolidated financial statements
represent the financial position and results of operations of Trumps until
December 1994, except the common stock information and net income per share
represents that of the Company. The Company intends to raise equity funds
in the public market and has filed a registration statement with the
Securities and Exchange Commission (Note 7). Rick's Cabaret is a premiere
adult nightclub offering topless entertainment in Houston, Texas.
Effective August 1, 1995, the Company acquired Tantric Enterprises, Inc. and
two related companies, Tantra Dance, Inc. and Tantra Parking, Inc.
(collectively, "Tantra") from Mr. Watters (the "Combination") for 50,000
shares of the Company's common stock. The Tantra companies were
incorporated on August 1, 1994 but had no operations until December 1994.
The acquisition has been accounted for in a manner similar to the
pooling-of-interests method due to Mr. Watter's control of the respective
companies. Accordingly, the Company has presented, in the accompanying
financial statements, the combination of the companies as if the acquisition
had occurred upon the inception of Tantra. Outstanding common shares at
September 30, 1995 and 1994 are represented by the Company's outstanding
shares plus the 50,000 shares issued for Tantra.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Information
The accompanying financial information as of March 31, 1996 and for the six
month periods ended March 31, 1996 and 1995 has been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. The financial statements reflect all
adjustments, consisting of normal recurring accruals, which are, in the
opinion of management, necessary to fairly present such information in
accordance with generally accepted accounting principles.
F-7
<PAGE> 60
RICK'S CABARET INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries and Tantra, as explained in Note 1. All significant
intercompany balances and transactions are eliminated in consolidation.
Net Income Per Common Share
Net income per common share is computed by dividing net income by the
weighted average number of shares outstanding during the years, after giving
retroactive effect to the reorganization transaction and the Combination
(Note 1).
Inventories
Inventories, consisting principally of liquor and food products, are stated
at the lower of cost or market (first-in, first-out method).
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Cost of property renewals and
betterments are capitalized; costs of property maintenance and repairs are
charged against operations as incurred.
Depreciation is computed using the straight-line method over the estimated
useful lives of the individual assets, as follows:
<TABLE>
<S> <C>
Building and improvements 31 years
Equipment 5-7 years
Leasehold improvements 5-7 years
</TABLE>
Revenue Recognition
The Company recognizes all revenues at point-of-sale upon receipt of cash,
check or charge sale. This includes VIP Room Memberships, since the
memberships are non-refundable and the Company has no material obligation
for future performance.
F-8
<PAGE> 61
RICK'S CABARET INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards No. 109, which reflects an asset and
liability approach in accounting for income taxes. The objective of the
asset and liability method is to establish deferred tax assets and
liabilities for the temporary differences between the financial reporting
basis and the tax basis of the Company's assets and liabilities at enacted
tax rates expected to be in effect when such amounts are realized or
settled.
3. LONG-TERM DEBT
Following is a summary of long-term debt:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
--------- -----------------------
1996 1995 1994
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to a bank, due in
monthly installments of
approximately $1,700, including
interest at 9.75%, unsecured $ -- $ -- $ 24,085
Note payable to a bank, due in
monthly installments of $1,800,
including interest at 10%, matures
October 1996, secured by the
Company's land and building 83,572 94,372 106,360
Note payable to a bank, due in
monthly installments of $8,333 plus
interest at 9.25%, secured by the
Company's accounts receivable,
inventory and furniture and
fixtures -- -- 75,000
Notes payable to affiliated
companies owned by the Company's
sole stockholder, interest at 9% and
principal due November 30, 1995 -- 46,279 69,722
Note payable to a bank, payable
$10,000 per month plus interest at
the prime rate plus 1%, matures
August 24, 1996, collateralized by
accounts receivable, inventory,
furniture and fixtures of the
Company 50,000 110,000 --
</TABLE>
F-9
<PAGE> 62
RICK'S CABARET INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
---------- ------------------------
1996 1995 1994
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to a bank, payable $1,000
per month plus interest at the prime
rate plus 1%, matures December 29, 1996,
collateralized by the Company's accounts
receivable, inventory, furniture,
fixtures and equipment and a second lien
on real estate $ 25,000 $ 31,000 $ --
Note payable to a bank, payable $1,500
per month plus interest at the prime
rate plus 1%, matures October 28, 1996,
collateralized by the Company's accounts
receivable, inventory, furniture, fixtures
and equipment and a second lien on real
estate 26,137 32,930 --
9% note payable to individuals, payable
$1,203 per month, including interest,
until maturity on January 15, 2000,
collateralized by a first lien on real
estate 84,173 91,391 --
---------- ---------- ----------
268,882 405,972 275,167
Less current portion (117,703) (193,139) (106,524)
---------- ---------- ----------
Long-term debt $ 151,179 $ 212,833 $ 168,643
========== ========== ==========
</TABLE>
Substantially all the Company's assets are pledged to secure the above debt.
Following are the maturities of long-term debt:
<TABLE>
<CAPTION>
YEARS ENDING YEARS ENDING
MARCH 31, SEPTEMBER 30,
------------ -------------
<S> <C> <C>
1996 $ -- $193,139
1997 117,703 134,607
1998 81,894 7,751
1999 6,957 8,879
2000 7,950 61,596
2001 54,378 --
</TABLE>
F-10
<PAGE> 63
RICK'S CABARET INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INCOME TAXES
Income tax expense consisted of the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
MARCH 31, SEPTEMBER 30,
------------------- -------------------
(UNAUDITED)
1996 1995 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Current $ 4,800 $ 60,300 $194,000 $ 16,300
Deferred -- -- -- 84,700
-------- -------- -------- --------
$ 4,800 $ 60,300 $194,000 $101,000
======== ======== ======== ========
</TABLE>
Deferred tax expense and the deferred tax asset in each year result from
differences in the timing of deductions of certain tort claims for tax and
financial purposes.
Following is a reconciliation of income taxes at the U.S. Federal tax rate to
the amounts recorded by the Company:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
MARCH 31, SEPTEMBER 30,
------------------- -------------------
(UNAUDITED)
1996 1995 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Taxes on income before income
taxes at the statutory rate $ 4,800 $ 60,300 $188,200 $ 99,300
Other differences -- -- 5,800 1,700
-------- -------- -------- --------
$ 4,800 $ 60,300 $194,000 $101,000
======== ======== ======== ========
</TABLE>
5. RELATED PARTY TRANSACTIONS
The Company leases its nightclub space from a company whose ownership is
subject to litigation. Ownership is claimed by the Company's sole
stockholder, Mr. Robert Watters, and by a former Company stockholder (Note
6). Lease payments are equal to the larger of $10,000 per month or 5% of
gross receipts per month. The lease provides that the Company is obligated
to pay for any maintenance to the premises, to maintain adequate insurance
on the building and to pay all utilities and taxes. Rental expense amounted
to $175,652 and $224,996 for the years ended September 30, 1995 and 1994,
respectively and $119,555 and $138,959 for the six months ended March 31,
1996 and 1995, respectively.
F-11
<PAGE> 64
RICK'S CABARET INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. RELATED PARTY TRANSACTIONS (Continued)
As of September 30, 1994, SRD Vending Company, Inc. ("SRD"), a company
wholly-owned by Mr. Watters, had advanced the Company $69,722. During
November 1994, the Company converted these advances, which were demand
obligations of the Company, to promissory notes in favor of SRD in the
amount of $69,722. The promissory note, which bears interest at the rate of
9% per annum, is due in full on November 30, 1995. The balance outstanding
at September 30, 1995 was $46,279. The obligations were subsequently paid
and at March 31, 1996 there was no balance outstanding.
SRD has provided and maintained the cigarette vending machines at Rick's
Cabaret since 1986. During 1994, SRD received less than $25,000 per year
from the vending machines. The Company agreed with SRD that any revenues
received from the vending machines after December 31, 1994 will be split
equally between the Company and SRD.
During 1995 and 1994, the Company paid $16,550 and $29,172, respectively,
for accounting services to an accounting firm in which a director of the
Company was a principal. During the six months ended March 31, 1996, the
Company paid $4,100 to that same firm for services.
Included in accounts payable at September 30, 1995 and 1994 and March 31,
1996 and 1995, is a $100,000 liability to a former stockholder for the
purchase of treasury stock under terms of a settlement agreement with the
former stockholder.
6. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases the nightclub space from a company whose ownership is
subject to litigation, under terms of an operating lease (Note 5).
During February 1996, the Company entered into a lease for existing
facilities located in New Orleans, Louisiana. The lease is for a period of
thirty nine and one-half years and contains provisions for percentage rent
at the rate of 5% of gross sales.. Future minimum rental payments for the
fiscal year ending September 30, 1996 is $46,000. Minimum rental payments
for the next five years are $180,000 per year. Total minimum rental
payments due over the term of the lease aggregate approximately $7,100,000.
Rent expense amounted to approximately $265,000 and $311,000 for the years
ended September 30, 1995 and 1994, and approximately $134,000 and $188,000
for each of the six month periods ended March 31, 1996 and 1995.
F-12
<PAGE> 65
RICK'S CABARET INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Employment Agreement
The Company presently has a three year employment agreement with Robert L.
Watters ("the Agreement") to serve as its President and Chief Executive
Officer. The Agreement, which extends through December 31, 1997, provides
for an annual base salary of $300,000. The Agreement also allows for an
annual bonus, at the discretion of the Board of Directors (excluding Mr.
Watters), based upon the financial performance, including evaluation of
income and earnings of the Company during the year. The Agreement also
provides for participation in all benefit plans maintained by the Company
for salaried employees. The Agreement contains a confidentiality provision
and an agreement by Mr. Watters not to compete with the Company upon
expiration of the Agreement.
Concentration of Credit Risk
The Company invests its cash and certificates of deposit primarily in
deposits with major banks. Certain deposits are in excess of federally
insured limits. The Company has not incurred losses related to its cash on
deposit with banks.
Litigation
In 1991, Mr. Watters and a former stockholder of the Company (the
"Plaintiffs") filed suit against another former stockholder of the Company
(the "Defendant"). The suit sought to compel the Defendant to convey to the
Plaintiffs all of its ownership interest in two entities, one of which, Zu
Corporation, owns the land where Rick's is located and which is leased by
the Company. The Defendant joined the Company as a party to the lawsuit,
claiming that the Company had breached its lease agreement due to the
alleged late payment of rent for one month. The case was tried in August,
1992 and judgment was rendered in District Court in favor of the Plaintiffs
and the Company. The Defendant has appealed this decision to the Texas Court
of Appeals, and in an opinion made in August 1995, the Court of Appeals
reversed and remanded the decision of the District Court. Upon a re-hearing
of this case, the Court of Appeals, in a opinion rendered February 1, 1996,
from which one of the three justices dissented, reversed and rendered
judgment against Mr. Watters and the Company. The Company filed a motion for
re-hearing of the decision of the Court of Appeals, which was denied on May
2, 1996. The Company intends to file an Application for Writ of Error with
the Texas Supreme Court. Based on the reasoning of the dissenting opinion to
the decision of the Court of Appeals, counsel to the Company believes that
there is a likelihood that the Supreme Court will grant the Company's
Application for Writ of Error. Counsel has advised the Company that this
appellate process is likely to require from four to thirty months depending
on whether the Texas Supreme Court grants the Company's Application for Writ
of Error. During this time, the Company anticipates that it will continue to
operate in its present location. If the Company is unsuccessful in
overturning the decision of the Court of Appeals and is unable to
successfully renegotiate a new lease, it will be necessary for the Company
to relocate Rick's in Houston. While the Company believes that it could
relocate to an equally desirable location and, and in fact, has recently
completed the acquisition of a tract
F-13
<PAGE> 66
RICK'S CABARET INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
of land in Houston, Texas, upon which to build a new facility, such a move
could have a material adverse impact on the Company.
In 1989, one of the former stockholders of the Company was sued over his
ownership interest in the Company. Mr. Watters and the Company were joined
in the litigation based on allegations that they had improperly transferred
certain assets to the Company from another corporation that had previously
operated Rick's. In 1992, Summary Judgment was rendered in favor of the
Company and Mr. Watters. Subsequent to an appeal, the Texas Court of Appeals
remanded the case to the trial court. As of June 1996, the Company and Mr.
Watters mediated this matter and pursuant to such mediation, entered into a
settlement agreement with the plaintiff. The settlement provides that the
litigation will be dismissed, with prejudice, as to the Company, Mr. Watters
and all other entities with which Mr. Watters is or was associated. The
documents evidencing this settlement are currently being prepared by legal
counsel. The Company believes, after consultation with counsel, that the
risk of material financial exposure to the Company is remote.
A former Company stockholder has sued the Company and Mr. Watters for
alleged breaches of an Agreement entered into in April 1993 among the
stockholder, the Company and Mr. Watters. The stockholder alleges that Mr.
Watters and the Company have breached this Agreement, but does not indicate
the manner in which this breach has occurred. The Company believes that it
has fully complied with its obligations under this Agreement. The litigation
is in its initial stages and no trial date has been set. The Company
believes, after consultation with counsel, that it has substantial defenses
to the claims being asserted against it and that the risk of material
financial exposure is remote.
The Company has been sued by the relatives of a deceased car accident
victim. This suit alleges that one of the Company's employees wrongfully
caused the death of the accident victim. The suit alleges that an employee
of the Company had become intoxicated at Rick's and subsequently was
involved in an automobile accident in which the victim was killed. The
Company answered the original complaint and denied all of the allegations.
The Company recently settled this litigation making a nominal payment of
less than $4,000 to the plaintiffs. The Company does not, however, carry
liquor liability insurance against this type of claim.
7. SUBSEQUENT EVENT
In October 13, 1995, the Company successfully completed its initial public
offering by selling 1,840,000 common shares to the public market. Funds
available to the Company (after deducting underwriting commissions and
expenses associated with the offering) approximate $4,400,000 and will be
used for capital improvements to the existing Houston location, for opening
two additional locations and for general corporate working capital purposes.
F-14
<PAGE> 67
RICK'S CABARET INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. EMPLOYEE STOCK OPTION PLAN
The Company has adopted a Stock Option Plan (the "Plan") for employees and
directors. The options granted under this Plan may be either Incentive Stock
Options, as that term is defined in Section 422A of the Internal Revenue
Code of 1986 as amended, or nonstatutory options taxed under Section 83 of
the Internal Revenue Code of 1986, as amended. 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 the
participants in the Plan, 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. A total of 300,000 shares may be
optioned and sold under the Company's Stock Option Plan. As of March 31,
1996, 105,000 options have been granted under the Plan.
F-15
<PAGE> 68
PART II
INFORMATION REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation of the Company ("Articles") provide for
indemnification of Directors and Officers in accordance with the Texas Business
Corporation Act. Article Eight of the Articles provides as follows:
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of the law, or for which the person is found liable to the
Corporation, (iii) under Article 2.41 of the Texas Business Corporation Act, or
(iv) for any transaction from which the director derived an improper personal
benefit, whether or not the benefit resulted from an action taken in the
person's official capacity.
Article Nine of the Articles provides as follows:
Section 9.1 The Corporation shall indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending, or
completed action, suit or proceeding, whether civil, criminal, administrative,
or investigative (other than an action by or in the right of the Corporation)
by reason of the fact that he is or was a director, officer employee or agent
of the corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement, actually and reasonably incurred by him in connection with such
action, suit or proceeding, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit, or proceeding by judgment, order, settlement, conviction or upon
a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interest of the
Corporation and with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
Section 9.2 The Corporation shall indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best
II-1
<PAGE> 69
interests of the Corporation and except that no indemnification shall be made
in respect of any claim, issue, or matter as to which such person shall have
been adjudged to be liable to the Corporation unless and only to the extent
that the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which such court shall deem proper.
Section 9.3 To the extent that a director, officer, employee or agent
of the Corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in Sections 9.1 and 9.2., or in
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
Section 9.4 Any indemnification under Sections 9.1 and 9.2 of this
Article Nine (unless ordered by a court) shall be made by the Corporation only
as authorized in the specific case upon a determination that indemnification of
the director, officer, employee or agent is proper in the circumstances because
he has met the applicable standard of conduct set forth in Section 9.1 and 9.2.
Such determination shall be made (1) by the Board of Directors by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding, or (2) if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (3) by the shareholders in a vote that
excludes the shares held by directors who are parties to such action, suit or
proceeding.
Section 9.5 Expenses incurred in defending a civil or criminal
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding as authorized by the Board
of Directors upon receipt of an undertaking by or on behalf of the director,
officer, employee or agent of his good faith belief that he has met the
standard of conduct necessary for indemnification under Sections 9.1 and 9.2
and a written undertaking to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the Corporation as
authorized in this Article Nine.
Section 9.6 The indemnification and advancement of expenses provided
by, or granted pursuant to, the other paragraphs of this Article Nine shall not
be deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to acting in another capacity while holding such
office.
II-2
<PAGE> 70
Section 9.7 The Corporation shall have the power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the Corporation would have
the power to indemnify him against such liability under the provisions of this
Article Nine.
Section 9.8 For the purpose of this Article Nine, references to "the
Corporation" shall include, in addition to the resulting Corporation, any
constituent corporation (including any constituent of a constituent) absorbed
in a consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers and
employees or agents, so that any person who is or was a director, officer,
employee or agent of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under the provisions of this
Article Nine with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate existence had
continued.
Section 9.9 For purposes of this Article Nine, referenced to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director, officer, employee or agent of the
Corporation which imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to in
this Article Nine.
Section 9.10 The indemnification and advancement of expenses provided
by, or granted pursuant to, this Article Nine shall, unless otherwise provided
when authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
Section 9.11 The provisions of this Article Nine: (i) are for the
benefit of, and may be enforced by, each person entitled to indemnification
hereunder, the same as if set forth in their entirety in a written instrument
duly executed and delivered by the Corporation and such person; and (ii)
constitute a continuing offer to all present and future persons entitled to
indemnification hereunder. The Corporation, by its filing of these Articles of
Incorporation: (a) acknowledges and agrees that each person entitled to
indemnification hereunder has relied upon and will continue to rely upon the
provisions of this Article Nine in accepting and serving in any of the
capacities entitling such person to indemnification hereunder; (b) waives
reliance upon, and all notices of acceptance of, such provisions by such
persons; and (c) acknowledges and agrees that no present
II-3
<PAGE> 71
or future person entitled to indemnification hereunder shall be prejudiced in
such person's right to enforce the provisions of this Article Nine in
accordance with their terms by any act or failure to act on the part of the
Corporation.
Section 9.12 No amendment, modification, or repeal of this Article
Nine or any provision hereof shall in any manner terminate, reduce, or impair
the right of any past, present or future person entitled to indemnification
hereunder to be indemnified by the Corporation, nor the obligation of the
Corporation to indemnify any such person, under and in accordance with the
provisions of this Article Nine as in effect immediately prior to such
amendment, modification, or repeal with respect to claims arising from or
relating to matters occurring, in whole or in part, prior to such amendment,
modification, or repeal, regardless of when such claims may arise or be
asserted.
The foregoing discussion of the Company's Articles and of the Texas
Business Corporation Act is not intended to be exhaustive and is qualified in
its entirety by such Articles and statutes, respectively.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred
in connection with the distribution of the securities being registered. The
expenses shall be paid by the Registrant.
<TABLE>
<S> <C>
SEC Registration Fee . . . . . . . . . . . . . . . . . . . $0.00
NASD Fee . . . . . . . . . . . . . . . . . . . . . . . . . 0.00
Nasdaq Application and Listing Fee . . . . . . . . . . . . 0.00
Printing and Engraving Expenses . . . . . . . . . . . . . . 3,000.00
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . 6,000.00
Accounting Fees and Expenses . . . . . . . . . . . . . . . 3,000.00
Blue Sky Fees and Expenses . . . . . . . . . . . . . . . . 0.00
Transfer Agent Fees . . . . . . . . . . . . . . . . . . . . 0.00
Financial Advisory Fees . . . . . . . . . . . . . . . . . . 0.00
Non-Accountable Expense Allowance . . . . . . . . . . . . . 0.00
Total . . . . . . . . . . . . . . . . . . . . . . . . . $12,000.00
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On December 9, 1994, the Company issued 1,750,000 shares of Common
Stock to Robert L. Watters in exchange for all of the shares of outstanding
Common Stock of Trump's, Inc., a Texas corporation pursuant to Section 351 of
the Internal Revenue Code, as amended. The transaction was effected in
reliance upon an exemption from the registration under the Securities Act of
1933, as amended (the "Act"), provided in Section 4(2) thereof. The
certificate for shares
II-4
<PAGE> 72
of common stock issued to Mr. Watters contained a legend stating that the
securities had not been registered under the Act in setting forth the
restrictions on their transferability and sale. No underwriter participated in
nor did the registrant pay any commissions or fees to any underwriter in
connection with this transaction.
In August, 1995, the Board of Directors of the Company authorized the
acquisition from Mr. Watters of all of the capital stock of Tantric
Enterprises, Inc., Tantra Dance, Inc., and Tantra Parking, Inc. (collectively
"Tantra") in exchange for 50,000 shares of common stock of the Company pursuant
to Section 351 of the Internal Revenue Code, as amended. The exchange was
consummated in September, 1995. The transaction was effective in reliance upon
an exemption from the registration under the Act, provided in Section 4(2)
thereof. The certificate for shares of common stock to be issued to Mr.
Watters will contain a legend stating that the securities had not been
registered under the Act in setting forth the restrictions on their
transferability and sale. No underwriter participated in nor will the
Registrant pay any commissions or fees to any underwriter in connection with
this transaction.
Trumps, Inc. has not issued any securities within the past three
years.
ITEM 27. EXHIBITS
The following exhibits are filed as part of this Registration
Statement:
Exhibit No. Identification of Exhibit
- ----------- -------------------------
2.1(1) - Consent of the Directors of Registrant
2.2(2) - Consent of the Directors of Registrant relating to acquisition
of Tantric Enterprises, Inc., Tantra Dance, Inc. and Tantra
Parking, Inc.
3.1(1) - Certificate of Incorporation of the Registrant
3.2(1) - Bylaws of the Registrant
4.1(3) - Common Stock specimen
4.2(1) - See Exhibits 3.1 and 3.2 for provisions of the Articles of
Incorporation and Bylaws of the Registrant defining rights of
holders of common stock of the Registrant
4.3(2) - Form of Representative's Warrant Agreement and Form of Warrant
Certificate
4.4(2) - Warrant Agreement and Warrant Specimen
5.1(4) - Opinion of Axelrod, Smith & Kirshbaum, including Consent
10.1(1) - Letter of Intent between Robert L. Watters and Edson C. Tung
relating to the lease of premises located at 315-21 Bourbon
Street, New Orleans, Louisiana dated November 9, 1994
10.2(1) - Lease Agreement between Zu Corporation as Lessor and Trump's,
Inc., as Lessee, dated February 28, 1986
10.3(1) - Amendment to Lease Agreement between Zu Corporation, Lessor
and Trump's, Inc., Lessee, dated September 10, 1989
II-5
<PAGE> 73
10.4(1) - Lease Agreement between Trump's, Inc., as Lessor and Tantric
Enterprises, Inc., as Lessee dated December 1, 1994
10.5(1) - Agreement between Trump's, Inc., and SRD Vending Company, Inc.
10.6(2) - Form of Financial Advisory Agreement between Barron Chase
Securities, Inc. and Registrant
10.7(2) - Form of Merger and Acquisition Agreement between Barron Chase
Securities, Inc. and the Registrant
10.8(3) - Employee Stock Option Plan
10.9(1) - Employment Agreement between the Registrant and Robert L.
Watters
23.1(4) - Consent of Axelrod, Smith & Kirshbaum (included in Exhibit
5.1)
23.2(4) - Consent of Jackson & Rhodes, P.C.
24.1(4) - Power of Attorney with respect to certain signatures in the
Registration Statement (contained on signature page of this
Registration Statement)
____________________
(1) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 33-88372).
(2) Previously filed as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form SB-2 dated August 24, 1995. (No.
33-88372).
(3) Previously filed as an exhibit to Amendment No. 2 to the Company's
Registration Statement on Form SB-2 dated September 28, 1995. (No.
33-88372).
(4) Filed herewith.
ITEM 28. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offer or sales are being
made, a post-effective amendment to this registration
statement:
i. To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
ii. To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and
iii. To include any additional or changed material information with
respect to the plan of distribution.
II-6
<PAGE> 74
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(4) To provide to the underwriter at the closing specified in the
underwriting agreements certificates in such denominations and
registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
(5) i. That, for the purpose of determining liability under the
Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4), or 497(h) under the Securities Act
of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
ii. That, for the purpose of determining liability under the
Securities Act of 1933, each post-effective amendment
that contains a form of prospectus shall be deemed to be
a new registration statement relating to the securities
offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide
offering thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-7
<PAGE> 75
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Houston, State of Texas, on July 11, 1996.
RICK'S CABARET INTERNATIONAL, INC.
By: /s/ Robert L. Watters
-----------------------------------
Robert L. Watters, Chairman of the
Board and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Rick's Cabaret International,
Inc., and each of its undersigned officers and directors hereby constitutes and
appoints Robert L. Watters its true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution for his and in his name, place
and stead, in any and all capacities, to sign all or any amendments (including
post-effective amendments) of and supplements to this Registration Statement on
Form SB-2 and to the same; with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto such attorney-in-fact and agent full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises, to all intents and purposes and as fully as said Corporation
itself and each said officer or director might or could do in person, hereby
ratifying and confirming all that such attorney-in-fact and agent, or his
substitutes, may lawfully do or cause to be done by virtue hereof.
II-8
<PAGE> 76
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Robert L. Watters Chairman of the Board, July 11, 1996
- -------------------------- Chief Executive Officer
Robert L. Watters and Director
/s/ Erich Norton White Director and Executive July 11, 1996
- -------------------------- Vice President
Erich Norton White
/s/ Scott C. Mitchell Director July 10, 1996
- --------------------------
Scott C. Mitchell
Director July __, 1996
- --------------------------
Martin Sage
/s/ Robert Gary White Chief Financial Officer and July 11, 1996
- -------------------------- Principal Accounting Officer
Robert Gary White
</TABLE>
II-9
<PAGE> 77
EXHIBIT INDEX
Exhibit No. Identification of Exhibit
- ----------- -------------------------
2.1(1) - Consent of the Directors of Registrant
2.2(2) - Consent of the Directors of Registrant relating to acquisition
of Tantric Enterprises, Inc., Tantra Dance, Inc. and Tantra
Parking, Inc.
3.1(1) - Certificate of Incorporation of the Registrant
3.2(1) - Bylaws of the Registrant
4.1(3) - Common Stock specimen
4.2(1) - See Exhibits 3.1 and 3.2 for provisions of the Articles of
Incorporation and Bylaws of the Registrant defining rights of
holders of common stock of the Registrant
4.3(2) - Form of Representative's Warrant Agreement and Form of Warrant
Certificate
4.4(2) - Warrant Agreement and Warrant Specimen
5.1(4) - Opinion of Axelrod, Smith & Kirshbaum, including Consent
10.1(1) - Letter of Intent between Robert L. Watters and Edson C. Tung
relating to the lease of premises located at 315-21 Bourbon
Street, New Orleans, Louisiana dated November 9, 1994
10.2(1) - Lease Agreement between Zu Corporation as Lessor and Trump's,
Inc., as Lessee, dated February 28, 1986
10.3(1) - Amendment to Lease Agreement between Zu Corporation, Lessor
and Trump's, Inc., Lessee, dated September 10, 1989
10.4(1) - Lease Agreement between Trump's, Inc., as Lessor and Tantric
Enterprises, Inc., as Lessee dated December 1, 1994
10.5(1) - Agreement between Trump's, Inc., and SRD Vending Company, Inc.
10.6(2) - Form of Financial Advisory Agreement between Barron Chase
Securities, Inc. and Registrant
10.7(2) - Form of Merger and Acquisition Agreement between Barron Chase
Securities, Inc. and the Registrant
10.8(3) - Employee Stock Option Plan
10.9(1) - Employment Agreement between the Registrant and Robert L.
Watters
23.1(4) - Consent of Axelrod, Smith & Kirshbaum (included in Exhibit
5.1)
23.2(4) - Consent of Jackson & Rhodes, P.C.
24.1(4) - Power of Attorney with respect to certain signatures in the
Registration Statement (contained on signature page of this
Registration Statement)
27(4) - Financial Data Schedule
____________________
(1) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 33-88372).
(2) Previously filed as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form SB-2 dated August 24, 1995. (No.
33-88372).
(3) Previously filed as an exhibit to Amendment No. 2 to the Company's
Registration Statement on Form SB-2 dated September 28, 1995. (No.
33-88372).
(4) Filed herewith.
<PAGE> 1
EXHIBIT 5.1(4)
July 10, 1996
Robert L. Watters, President
Rick's Cabaret International, Inc.
3113 Bering Drive
Houston, Texas 77057
Dear Mr. Watters:
As counsel for Rick's Cabaret International, Inc., a Texas corporation
("Company"), you have requested our firm to render this opinion in connection
with the registration statement of the Company on Form SB-2 ("Registration
Statement") under the Securities Act of 1933, as amended (the "Act"), filed
with the Securities and Exchange Commission relating to the registration of the
issuance of up to 1,160,000 shares of common stock, par value $.01 per share
(the "Common Stock"), consisting of (i) 920,000 shares of Common Stock
underlying 920,000 Redeemable Common Stock Purchase Warrants (the "Warrants")
of the Company, (ii) 160,000 shares of Common Stock underlying 160,000
Representative's Warrants ("Representative's Warrants") and (iii) 80,000 shares
of Common Stock issuable upon the exercise of the Underlying Warrants
("Underlying Warrants"). The Warrants, Representative's Warrants and the
Underlying Warrants are referred to collectively herein as "Warrants."
We are familiar with the Registration Statement and the registration
contemplated thereby. In giving this opinion, we have reviewed the
Registration Statement and such other documents and certificates of public
officials and of officers of the Company with respect to the accuracy of the
factual matters contained therein as we have felt necessary or appropriate in
order to render the opinions expressed herein. In making our examination, we
have assumed the genuineness of all signatures, the authenticity of all
documents presented to us as originals, the conformity to original documents of
all documents presented to us as copies thereof, and the authenticity of the
original documents from which any such copies were made, which assumptions we
have not independently verified.
<PAGE> 2
Robert L. Watters
Page 2
July 10, 1996
- --------------------
Based upon the foregoing, we are of the opinion that:
1. The Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Texas.
2. The shares of Common Stock underlying the Warrants to be
issued upon exercise of such Warrants are validly authorized
and, upon exercise of the Warrants in accordance with their
terms, will be validly issued, fully paid and nonassessable.
We consent to the use in the Registration Statement of the reference
to Axelrod, Smith, & Kirshbaum under the heading "LEGAL MATTERS."
This opinion is conditioned upon the Registration Statement being
declared effective by the Securities and Exchange Commission and upon
compliance by the Company with all applicable provisions of the Act and such
state securities rules, regulations and laws as may be applicable.
Very truly yours,
Axelrod, Smith & Kirshbaum
<PAGE> 1
EXHIBIT 23.2(4)
The Board of Directors
Rick's Cabaret International, Inc.
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
Jackson & Rhodes P.C.
Dallas, Texas
July 15, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 3,838,769
<SECURITIES> 0
<RECEIVABLES> 21,723
<ALLOWANCES> 0
<INVENTORY> 31,606
<CURRENT-ASSETS> 3,948,782
<PP&E> 1,680,687
<DEPRECIATION> (464,537)
<TOTAL-ASSETS> 5,226,844
<CURRENT-LIABILITIES> 672,272
<BONDS> 0
<COMMON> 36,400
0
0
<OTHER-SE> 4,366,993
<TOTAL-LIABILITY-AND-EQUITY> 5,226,844
<SALES> 2,369,009
<TOTAL-REVENUES> 2,369,009
<CGS> 435,692
<TOTAL-COSTS> 2,096,670
<OTHER-EXPENSES> 2,096,670
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,528
<INCOME-PRETAX> (78,992)
<INCOME-TAX> 4,800
<INCOME-CONTINUING> (83,792)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (83,792)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> 0
</TABLE>
