RICKS CABARET INTERNATIONAL INC, 10KSB, 1999-12-28

RICKS CABARET INTERNATIONAL INC
10KSB, 1999-12-28
EATING & DRINKING PLACES

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the Fiscal Year Ended: SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-26958
RICK'S CABARET INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Texas 76-0458229
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
505 North Belt, Suite 630
Houston, Texas 77060
(Address of principal executive offices, including zip code)
(281) 820-1181
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class N/A
Name of Each Exchange on which Registered N/A
Securities registered pursuant to 12(g) of the Exchange Act:
Title of Each Class
Common Stock, $.01 par value
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (ii) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Issuer's revenues for the year ended September 30, 1999 were $10,381,427.
The aggregate market value of Common Stock held by non-affiliates of the
registrant at December 20, 1999, based upon the last reported sales prices on
the Nasdaq SmallCap Market, was $5,910,015. As of December 20, 1999, there were
3,613,678 shares of Common Stock outstanding.

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<TABLE>
<CAPTION>
TABLE OF CONTENTS

<S> <C> <C>
PART I

Item 1. Business 3

Item 2. Properties 11

Item 3. Legal Proceedings 13

Item 4. Submission of Matters to a Vote of Security Holders 15

PART II

Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 16

Item 6. Management's Discussion and Analysis
of Financial Condition and Results of Operations 17

Item 7. Financial Statements 22

Item 8. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure 22

PART III

Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a)
of The Exchange Act 22

Item 10. Executive Compensation 25

Item 11. Security Ownership of Certain Beneficial Owners
And Management 28

Item 12. Certain Relationships and Related Transactions 30

Item 13. Exhibits and Reports on Form 8-K 32
</TABLE>

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PART I
ITEM 1. BUSINESS

INTRODUCTION

Rick's Cabaret International, Inc. currently owns and operates premiere
adult entertainment Internet web sites at www.DancerDorm.com and
www.AmateurDan.com. These web sites contain our exclusive adult content.
DancerDorm.com features exclusive live adult entertainment, and AmateurDan.com
features exclusive adult photo entertainment. These web sites were launched in
October,1999.

We also own and operate adult nightclubs under the names "Rick's Cabaret"
and "XTC Cabaret" which offer live topless or nude adult entertainment, and bar
and restaurant dining. References to us in this Form 10-KSB include our
100%-owned subsidiaries, and our 93%-owned subsidiary, Taurus Entertainment
Companies, Inc. We own and operate our Internet content production studio and
web site operations center, and two adult nightclubs in Houston, Texas. We
also own and operate adult nightclubs in Austin and San Antonio, Texas, and
Minneapolis, Minnesota. We also operate another adult nightclub in Houston,
Texas through a management agreement. We also own a facility in south Houston
presently being renovated after fire damage for reopening as an XTC Cabaret.

Our company was organized as a Texas corporation in 1994 and became the
successor to a private business that operated Rick's Cabaret since the 1980's.

HISTORY

Until 1996, we had one adult nightclub location and one dance club location
in Houston, Texas. In February, 1996, we purchased a facility in New Orleans,
Louisiana where we opened a new adult nightclub, which we subsequently sold in
March,1999. In January, 1997, we purchased a facility in Minneapolis,
Minnesota, where we opened a new adult nightclub, which began operations in
1998. In August, 1998, we acquired approximately 93% of the outstanding common
stock of Taurus Entertainment Companies, Inc., a Colorado corporation ("Taurus")
in a private stock exchange transaction with certain principal stockholders of
Taurus. The Stock Exchange Agreement provided that we exchange one share of our
common stock for each three and one-half shares of Taurus common stock owned by
certain principal shareholders of Taurus. As a result of the Exchange, we
exchanged a total of 571,713 (post-reverse-split) shares of our common stock for
approximately 4,002,006 shares of common stock of Taurus, giving us control of
Taurus. The terms and conditions of the Exchange were determined by the parties
through arms length negotiations. However, no appraisal was conducted. The
financial results of Taurus have been consolidated into our financial statements
since the date of acquisition.

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Taurus is a publicly owned company traded on the OTCBB under the symbol
"TAUR". In a transaction simultaneous to the acquisition of Taurus, we acquired
certain real estate in San Antonio, Texas from one of the principal stockholders
of Taurus. We acquired the property from a principal stockholder of Taurus for
the same price that the principal stockholder paid for the property. We
financed the purchase of the property by the issuance of a six year $366,000
Convertible Debenture, secured by the real estate acquired.

In a transaction simultaneous to the acquisition of Taurus, Taurus acquired
certain real estate in Houston, Texas from Mr. Ralph McElroy. Taurus acquired
the property from Mr. McElroy for the same price that Mr. McElroy paid for the
property. Taurus financed the purchase of the property by the issuance of a six
year $286,744 Convertible Debenture, secured by the real estate acquired. We
are a guarantor of this Convertible Debenture. The Convertible Debenture is
convertible into our shares at any time prior to maturity at the Conversion
Price of $5.50.

On March 29, 1999, Robert L. Watters, our Director, purchased RCI
Entertainment Louisiana, Inc. ("RCI Louisiana"), our subsidiary, for the
purchase price of $2,200,000 consisting of $1,057,327 in cash, the endorsement
over to us of a $652,744 secured promissory note (the "McElroy Note"),a
guaranteed promissory note in the amount of $326,773 made by Mr. Watters (the
"Watters Note"), and the cancellation by Mr. Watters of our $163,156
indebtedness to him. The McElroy Note, which is due July 31, 2004, bears
interest at the rate of twelve percent (12%) per annum with interest being paid
monthly. The principal of the McElroy Note is due in one lump sum payment. The
McElroy Note is secured by (i) our convertible debenture in the original
principal amount of $366,000, which we issued on August, 11, 1998, in favor of
Mr. McElroy (the "Convertible Debenture") and (ii) a promissory note of Taurus
Entertainment Companies, Inc. (our subsidiary) and guaranteed by us (which has a
conversion feature) in the original principal amount of $286,744.61, dated
August 11, 1998, in favor of Mr. McElroy, (the "Convertible Promissory Note").
Both the Convertible Debenture and the Convertible Promissory Note are secured
by certain real estate holdings of us or our subsidiaries. The Watters Note is
guaranteed by RCI Louisiana, which operates a Rick's Cabaret in New Orleans,
Louisiana. In connection with the acquisition of the stock of RCI Louisiana,
Mr. Watters also assumed RCI Louisiana's liabilities of approximately
$1,400,000. As a condition of this transaction, Mr. Watters arranged for the
release by a lender of our liability of $763,199 owed to the lender by RCI
Louisiana, which we had guaranteed. We obtained an opinion from Chaffe &
Associates, Inc., a New Orleans investment banking firm, stating that the
purchase price paid by Mr. Watters for RCI Louisiana was fair from a financial
point of view to our shareholders. The terms of this transaction were the
result of arms length negotiations between us and Mr. Watters. In connection
with the sale of RCI Louisiana, Mr. Watters, and Erich Norton White, our former
director, entered into agreements with us to terminate their Employment
Agreements and to cancel all stock options on our common stock which they held.
Further, in connection with the sale of RCI Louisiana, we entered into an
Exclusive Licensing Agreement with Mr. Watters which granted Mr. Watters the
right to the use of the name "Rick's Cabaret" and all logos, trademarks and
service marks attendant thereto for use in the states of Louisiana, Florida,
Mississippi and Alabama.

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In March, 1999, we had a 2:1 reverse stock split.

BUSINESS ACTIVITIES--INTERNET WEB SITES

In October,1999, we began operations of our premiere adult Internet web
sites at www.DancerDorm.com and www.AmateurDan.com. DancerDorm.com features
live web cam feeds of our dancers who reside in our dormitory. There are 32 web
cams in the dormitory which provide voyeuristic views of the lives of our
dancers. DancerDorm.com also features an interactive online "chat and look"
experience for our members to chat with our dancers. Members may also visit our
nightclubs to meet our dancers in person. Our members pay a monthly fee to
visit our DancerDorm.com. We own the DancerDorm.com Internet production
facility, which contains 8,000 square feet of studio and production space. Our
AmateurDan.com web site is also a pay site that features exclusive photos of our
dancers in provocative poses and activities.

Our e-commerce includes our efforts to generate Internet traffic to our web
sites. Internet traffic is generated through the purchase of traffic from
third-party adult web sites or Internet domain owners and the purchase of banner
advertisements or "key word" searches from Internet search engines.

There are numerous adult web sites on the Internet. Our web sites feature
exclusive live adult entertainment and photos. Many of our competitors feature
non-live, non-exclusive entertainment.

BUSINESS STRATEGY--NIGHTCLUBS

Prior to Rick's Cabaret opening in 1983 in Houston, Texas, 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
customary for performers to alternate between dancing and watering. 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,
we designed Rick's Cabaret to target the businessmen's segment of the market by
providing a unique quality entertainment environment. The following summarize
our areas of operation which distinguish us:

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FEMALE ENTERTAINMENT. We have followed a policy of maintaining high
standards in the areas of both personal appearance and personality of the
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. We prefer that the
performers we hire are experienced dancers. We make a determination as to
whether a particular applicant is suitable based on such factors of appearance,
attitude, dress, communication skills and demeanor.

MANAGEMENT. We recruit staff from both inside and outside the topless
industry, in the belief that management with vast years of experience in the
adult entertainment industry adds to our ability to grow and attract top
entertainers from within the industry. Management with experience is able to
train our new recruits from outside the industry with skills that can only be
learned through long term hands on experience in our industry.

COMPLIANCE POLICIES. We have a policy of ensuring that our business is
carried on in conformity with local, state and federal laws. In particular, we
have a "no tolerance" policy as to illegal drug use in or around the premises.
Posters placed throughout the nightclubs reinforce this policy, as do periodic
unannounced searches of the 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. We continually monitors the behavior of
entertainers, waitresses and customers to ensure that proper standards of
behavior are observed.

We also review all credit card charges made by our customers.
Specifically, we have 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. We believe that a key to the success of a premiere adult
nightclub is a quality, first-class bar and restaurant operation to compliment
our adult entertainment. We employ service managers who are in charge of
recruiting and training a professional waitress staff and ensuring that each
customer receives prompt and courteous service. We employs chefs with
restaurant experience and bar managers, who are in charge of ordering inventory
and scheduling of bar staff. We believe that the operation of a first class
restaurant is a necessary component to the operation of a premiere adult
cabaret, as is the provision of premium wine, liquor and beer in order to ensure
that the customer perceives and obtains good value. Our restaurant operations
in all of the topless cabarets are full service operations 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.

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CONTROLS. Operational and accounting controls are essential to the
successful operation of a cash intensive nightclub and bar business. We have
implemented internal procedures and controls designed to ensure the integrity of
our operational and accounting records. We separate management personnel from
all cash handling to ensure that management is isolated from and does not handle
any cash. We use a combination of accounting and physical inventory control
mechanisms to ensure a high level of integrity in our 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, we review on a daily
basis (i) cash and credit card summaries which tie together all cash and credit
card transactions occurring at the front door, the bars in the club and the
cashier station, (ii) a summary of the daily bartenders' check-out reports, and
(iii) a daily cash requirements analysis which reconciles the previous day's
cash on hand to the requirements for the next day's operations. These daily
computer reports alert management of any variances from expected financial
results based on historical norms. Further, we conduct, on a monthly basis, an
independent overview of our financial condition and have engaged independent
accountants to conduct an annual audit and to review and advise us relating to
our internal controls.

ATMOSPHERE. We maintain a high design standard in our facilities and
decor. The furniture and furnishings in the nightclubs are designed to create
the feeling of an upscale restaurant. The sound system is designed to provide
quality sound at levels where conversations can 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 our emphasis on serving the upper-end of the
business market, some of our nightclubs include a VIP room, which is open to
individuals who purchase memberships. A VIP room provides a higher level of
service and luxury.

ADVERTISING AND PROMOTION. Our marketing philosophy towards customers is
to portray Rick's Cabarets as premiere cabarets 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 the Rick's Cabaret name is kept before the
public.

Rick's Cabaret has received a significant amount of media exposure over the
years. Television segments about Rick's Cabaret have appeared on television
talk shows. In addition, Penthouse magazine produced a nine page article on the
club and Playboy magazine covered our 1993 golf tournament. In the past, we
have sponsored golf tournaments and outings that have generated significant
interest and tradition. Articles about Rick's Cabaret have appeared in Glamour
Magazine and The Ladies Home Journal. Rick's Cabaret has been mentioned in an
inside cover story in Time Magazine as well as being mentioned on numerous
occasions in local newspapers and in Texas Monthly Magazine. In 1993 Rick's
produced the Girls of Rick's video, a 90 minute video feature, which was aired
as a Pay-per-View show on Warner Cable Television. This video was reviewed in
several local newspapers as well as the Hollywood Variety magazine. Rick's
Cabaret has provided entertainers for other Pay-Per-View features as well.

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We received extensive national coverage of our Initial Public Offering of
stock, our PI, 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."

NIGHTCLUB LOCATIONS

We have two Rick's Cabaret locations in Houston, Texas and one Rick's
Cabaret in Minneapolis, Minnesota. We also own one nightclub in San Antonio,
Texas that operates under the name XTC. Our 93%-owned subsidiary, Taurus, owns
a nightclub in Austin, Texas also under the name XTC. One of the locations of
our Houston nightclubs is owned by Taurus. We operate one other nightclub in
Houston, Texas called "Caligula" under a management agreement.

We sold our New Orleans nightclub in March, 1999. We have not yet reopened
one XTC location in Houston following a fire in 1998. We are continually
looking at expansion opportunities to open more nightclubs throughout the U.S.

COMPETITION

The adult topless club entertainment business is highly competitive with
respect to price, service and location, as well as the professionalism of our
entertainment product. All of our nightclubs compete with a number of
locally-owned adult cabarets, some of whose names may enjoy recognition that
equals that of Rick's Cabaret or XTC. While there may be restrictions on the
location of a so-called "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" and "XTC Cabaret" are proprietary. For example, there are
approximately 50 adult cabarets located in the Houston area of which
approximately 10 are in direct competition with us. In Minneapolis, Rick's is
favorably located downtown and is a short walk from the Metrodome Stadium and
the Target Center. There is only one cabaret in Minneapolis in direct
competition with the us. We believe that the combination of our existing name
recognition and the distinctive entertainment environment that we have created ,
will allow us to effectively compete within the industry and within the cities
in which we operate. Although the we believe that we are well-positioned to
compete successfully, there can be no assurance that we will be able to maintain
our high level of name recognition and prestige within the marketplace.

GOVERNMENTAL REGULATIONS

We are subject to various federal, state and local laws affecting our
business activities. In particular, in Texas the authority to issue a permit to
sell alcoholic beverages is governed by the Texas Alcoholic Beverage Commission
(the "ABC"), which has the authority, in its discretion, to issue the
appropriate permits. We presently hold a Mixed Beverage Permit and a Late Hours

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Permit (the "Permits"). These Permits are subject to annual renewal, provided
we have complied with all rules and regulations governing the permits. Renewal
of a permit is subject to protest, which may be made by a law enforcement agency
or by the public. In the event of a protest, the ABC may hold a hearing at
which time the views of interested parties are expressed. The ABC has the
authority after such hearing not to issue a renewal of the protested alcoholic
beverage permit. Rick's has never been the subject of a protest hearing against
the renewal of Permits. Minnesota has similar laws that may limit the
availability of a permit to sell alcoholic beverages or that may provide for
suspension or revocation of a permit to sell alcoholic beverages in certain
circumstances. Prior to expanding into any new market, we will take steps to
ensure compliance with all licensing and regulatory requirements for the sale of
alcoholic beverages as well as the sale of food.

In addition to various regulatory requirements affecting the sale of
alcoholic beverages, in Houston, and in many other cities, location of a topless
cabaret is subject to restriction by city ordinance. Topless nightclubs in
Houston, Texas are 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.

In January 1997, the City Council of the City of Houston passed a
comprehensive new Ordinance regulating the location of and the conduct within
Sexually Oriented Businesses. The new Ordinance established new minimum
distances that Sexually Oriented Businesses may be located from schools,
churches, playgrounds and other sexually oriented businesses. There were no
provisions in the Ordinance exempting previously permitted sexually oriented
businesses from the effect of the new Ordinance. In 1997, we were informed that
one of our Houston locations at 3113 Bering Drive failed to meet the
requirements of the Ordinance and accordingly the renewal of our Business
License at that location was denied.

The Ordinance provided that a business which was denied a renewal of its
operating permit due to changes in distance requirements under the Ordinance
would be entitled to continue in operation for a period of time (the
"Amortization Period") if the owner were unable to recoup, by the effective date
of the Ordinance, its investment in the business that was incurred through the
date of the passage and approval of the Ordinance.

We filed a request with the City of Houston requesting an extension of time
during which operations at our north Houston facility could continue under the
Amortization Period provisions of the Ordinance since we were unable to recoup
our investment prior to the effective date of the Ordinance. An administrative
hearing was held by the City of Houston to determine the appropriate
Amortization Period to be granted to us. At the Hearing, we were granted an
amortization period that has since been reached. We have the right to appeal
any decision of the Hearing official to the district court in the State of
Texas.

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In May, 1997, the City of Houston agreed to defer implementation of the
Ordinance until the constitutionality of the entire Ordinance was decided by
court trial. In February 1998 the U.S. District Court for the Southern District
of Texas, Houston, Division, struck down certain provisions of the Ordinance,
including the provision mandating a 1,500 foot distance between a club and
schools, churches and other sexually oriented business, leaving intact the
provision of the 750 foot distance as it existed in the prior Houston, Texas
Ordinance.

The City of Houston has appealed the District Court's rulings with the
Fifth Circuit Court of Appeals, and the Company filed a brief with the Fifth
Circuit. In the event that the City of Houston is successful in the appeal, the
Company's Bering Drive location could be out of compliance. Such an outcome
could have an adverse impact on the Company's future.

There are other provisions in the Houston, Texas Ordinance, such as
provisions governing the level of lighting in a sexually oriented business, the
distance between a customer and dancer while the dancer is performing in a state
of undress and provisions regarding the licensing of dancers that were upheld
which may be detrimental to our business. We, in concert with other sexually
oriented businesses, are appealing these aspects of the Houston, Texas
Ordinance. In the event that our court appeal is unsuccessful, such an outcome
could have an adverse impact on us.

In 1998, the City of Houston began enforcing certain portions of the
Ordinance, including the distance requirement between a customer and a dancer
while dancing, and the requirement that dancers be licensed. The City of
Houston's enforcement of the recently implemented provisions of the Ordinance
could have an adverse impact on the Rick's locations in Houston, Texas. The
current requirement of a three foot distance between a dancer and a customer
could reduce customer satisfaction and could result in fewer customers at the
Houston location. The requirement that a dancer be licensed may result in fewer
dancers working, which could have an adverse impact on the Houston locations.
It is unknown what future impact the enforcement of the Ordinance may have on
our Houston locations.

In Minneapolis, we are required to be in compliance with state and city
liquor licensing laws. Our location in Minneapolis is presently zoned to enable
the operation of a topless cabaret.

In San Antonio and Austin we are required to be in compliance with city or
county sexually oriented business ordinances.

TRADEMARKS

Our rights to the trademarks "Rick's" and "Rick's Cabaret" are established
under common law, based upon our substantial and continuous use of these
trademarks in interstate commerce since at least as early as 1987. We have
registered our service mark, 'RICK'S AND STARS DESIGN", with the United States
Patent and Trademark Office. We have also obtained service mark registrations
from the Patent and Trademark Office for the our "RICK'S CABARET" service mark.
There can be no assurance that the steps we have taken to protect our service
marks will be adequate to deter misappropriation.

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EMPLOYEES AND INDEPENDENT CONTRACTORS

As of September 30, 1999, we had approximately 400 full-time employees, of
which 40 are in management positions, including corporate and administrative
operations, and approximately 360 are engaged in entertainment, food and
beverage service, including bartenders and waitresses. None of our employees
are represented by a union and we consider our employee relations to be good.

Additionally, we have independent contractor relationships with over 600
entertainers, who are self-employed and perform at our locations on a
non-exclusive basis as independent contractors. Performers in Minneapolis,
Minnesota act as commissioned employees.

ITEM 2. PROPERTIES

Our principal executive offices are co-located at 505 North Belt, Houston,
Texas 77060 with our subsidiary, Taurus in leased facilities consisting of a
total of 1,200 square feet. We pay rent of approximately $1,100 per month for
this space. We believe that our offices are adequate for our present needs
and that suitable space will be available to accommodate our future needs.

We own the locations of our Internet production studio and DancerDorm
(formerly occupied by our dance club called "Tantra"), the three locations of
Rick's Cabaret (two in Houston and one in Minneapolis) and the two locations of
XTC (one in Austin and one in San Antonio).

The Rick's Cabaret located on Bering Drive in Houston has aggregate 12,300
square feet of space. The balance as of September 30, 1999 that we owe on the
mortgage is $502,027 and the interest rate is 9.75%. We pay $8,122 in monthly
mortgage payments. The last mortgage payment is due in December, 2001 with a
balloon payment of $370,000.

The Rick's Cabaret located on Northbelt Drive in Houston has 12,000 square
feet of space, and is owned by our 93%-owned subsidiary, Taurus. The balance as
of September 30, 1999 that we owe on the mortgage is $411,478 and the interest
rate is 10%. We pay $13,758 in monthly mortgage payments. The last mortgage
payment is due in April, 2002.

The Rick's Cabaret located in Minneapolis has 15,400 square feet of space.
The balance as of September, 1999 that we owe on the mortgage is $2,449,511 and
the interest rate is 9%. We pay $22,732 in monthly mortgage payments. The last
mortgage payment is due in 2018.

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The XTC nightclub in Austin has 6,800 square feet of space, which sits on
1.2 acres of land. The balance as of September, 1999 that we owe on the mortgage
is $547,464 and the interest rate is 10%. We pay $5,380 in monthly mortgage
payments. The last mortgage payment is due in July, 2003 with a balloon payment
of $432,682.

The XTC nightclub in San Antonio has 7,800 square feet of space. We
acquired the property from Mr. Ralph McElroy for the same price that Mr. McElroy
paid for the property. We financed the purchase of the property by the issuance
of a six year $366,000 Convertible Debenture, secured by the real estate
acquired. The principal balance of the Convertible Debenture is due in July,
2004, in one lump sum payment. Interest is due and payable monthly, with the
first interest payment beginning in September, 1998. The Convertible Debenture
is subject to redemption at our option, in whole or in part, at 100% of the
principal face amount of the Convertible Debenture redeemed plus any accrued and
unpaid interest on the redemption date, at any time and from time to time, upon
not less than 30 nor more than 60 days notice, if the Closing Price of our
common stock shall have equaled or exceeded $17.00 per share of common stock for
ten (10) consecutive trading days. The Convertible Debenture is convertible
into shares of Common Stock at any time prior to maturity (unless earlier
redeemed) at the Conversion Price of $5.50. See, Certain Relationships and
Related Transactions.

Our Internet production studio has 8,000 square feet of space, and had been
used as our Tantra dance hall prior to the closing of Tantra. The balance as of
September 30, 1999 that we owe on the mortgage is $60,500 and the interest rate
is 10%. We pay $1,203 in monthly mortgage payments. The last mortgage payment
is due in January, 2000 with a balloon payment of $59,355.

Taurus also owns a 12,000 square foot building in Houston, Texas which was
purchased from Ralph McElroy, one of our principal stockholders, and this
property is presently being renovated after fire damage for reopening as an XTC
Cabaret. We acquired the property from Mr. McElroy for the same price that Mr.
McElroy paid for the property. We financed the purchase of the property by the
issuance of a six year $286,744 Convertible Debenture, secured by the real
estate acquired. We are a guarantor of this Convertible Debenture. The
principal balance of the Convertible Debenture is due in July, 2004, in one lump
sum payment. Interest is due and payable monthly, with the first interest
payment beginning in September, 1998. The Convertible Debenture is convertible
into shares of our common stock at any time prior to maturity at the Conversion
Price of $5.50 per share. See, Certain Relationships and Related Transactions.

Taurus and its subsidiaries own a 350 acre ranch in Brazoria County, Texas,
and approximately 50 acres of raw land in Wise County, Texas.

12
<PAGE>
The balance as of September 30, 1999 that we owe on the Brazoria County
ranch mortgage is $308,202 and the interest rate is 9.25%. We pay $2,573 in
monthly mortgage payments. The last mortgage payment is due in 2006 with a
balloon payment of $287,920.

The balance as of September 30, 1999 that we owe on the Wise County raw
land mortgage is $147,439 and the interest rate is 12%. We pay $1,537 in
monthly mortgage payments. The last mortgage payment is due in March, 2026.

ITEM 3. LEGAL PROCEEDINGS

In November, 1998, LMTD, Inc. initiated litigation against a subsidiary of
one of our subsidiaries, Citation Land, LLC ("Citation"), in a case styled LMTD,
Inc. v. Texas Warehouse Company, Inc., et al. in Cause No. 98-12570, in the
200th Judicial District Court of Travis County, Texas. The suit seeks specific
performance and damages against Texas Warehouse Company, Inc. regarding a
Purchase Option Agreement. Plaintiff also alleges a tortuous interference claim
against Citation in the amount of $540,000. Counsel for Citation filed a
counterclaim. Counsel for Citation believes that the exposure to Citation is
minimal. We intend to vigorously defend ourselves in this matter and to deny
all allegations.

On October 15, 1998, All City Beverage and Entertainment, Inc. initiated
litigation against one of our subsidiaries in a case styled All City Beverage
and Entertainment, Inc. v. Taurus Entertainment Companies, Inc.("Taurus") in
Cause No. 98-49119, in the 61st Judicial District Court of Harris County, Texas.
The suit sought damages in the amount of $25,000 and 175,000 shares of common
stock of Taurus in connection with an Asset Purchase Agreement between All City
Beverage and Entertainment, Inc. and Taurus. Taurus filed a counter-claim
asserting that there were undisclosed obligations that Taurus was required to
pay. The counter-claim sought damages in an amount in excess of $25,000. This
matter was dismissed for want of prosecution.

On April 20, 1999 we were served as a defendant in litigation that was
filed on February 23, 1999. The lawsuit is styled John M. Skora and Robert
Martin v. Trumps, Inc., Rick's Cabaret International, Inc., RCI Entertainment
(Texas), Inc., and Robert L. Watters, Cause No. 1999-09394, in the 11th Judicial
District Court of Harris County, Texas. The plaintiffs claim that they
purchased a dance from one of the dancers at our nightclubs and paid for the
dance by the use of their credit card. The plaintiffs assert that we violated
the Texas Finance Code by imposing a surcharge for credit card use. We have
denied this allegation. The plaintiffs seek reimbursement for all alleged
surcharges, plus statutory penalties, attorney fees and interest as may be
allowed by law. We intend to vigorously defend ourselves in this matter.

In January, 1999, the Company was named as a defendant in McGill v. RCI
Entertainment (Minnesota) Inc., No. 98-2742, U.S. District Court, Minnesota. The
plaintiffs have asserted claims for under federal and state civil rights acts
for discrimination and harassment. The case is in the discovery stage. We intend
to vigorously defend ourselves in this matter.

13
<PAGE>
In June, 1999, the Company was named as defendant in Hubka v. RCI
Entertainment (Minnesota). Inc., No. CT 99-009560, Hennepin County District
Court. The plaintiff has asserted claims under the Minnesota Human Rights Act
and for negligence. The case is in the discovery stage. We intend to vigorously
defend ourselves in this matter and to deny all allegations.

SEXUALLY ORIENTED BUSINESS ORDINANCE OF HOUSTON, TEXAS

In May, 1997, the City of Houston agreed to defer implementation of the
Ordinance until the constitutionality of the entire Ordinance was decided by
court trial. In February, 1998 the U.S. District Court for the Southern
District of Texas, Houston, Division, struck down certain provisions of the
Ordinance, including the provision mandating a 1,500 foot distance between a
club and schools, churches and other sexually oriented business, leaving intact
the provision of the 750 foot distance as it existed prior to the Houston, Texas
Ordinance.

14
<PAGE>
There are other provisions in the Houston, Texas Ordinance, such as
provisions governing the level of lighting in a sexually oriented business, the
distance between a customer and dancer while the dancer is performing in a state
of undress and provisions regarding the licensing of dancers that were upheld by
the court which may be detrimental to our business. We, in concert with other
sexually oriented businesses, are appealing these aspects of the Houston, Texas
Ordinance. In the event that our court appeal is unsuccessful, such an outcome
could have an adverse impact on us.

In 1998, the City of Houston began enforcing certain portions of the
Ordinance, including the distance requirement between a customer and a dancer
while dancing, and the requirement that dancers be licensed. The City of
Houston's enforcement of the recently implemented provisions of the Ordinance
could have an adverse impact on the Rick's locations in Houston, Texas. The
current requirement of a three foot distance between a dancer and a customer
could reduce customer satisfaction and could result in fewer customers at the
Houston locations. The requirement that a dancer be licensed may result in fewer
dancers working, which could have an adverse impact on the Houston locations. It
is unknown what future impact the enforcement of the Ordinance may have on our
Houston locations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We held our annual meeting of shareholders on August 4, 1999. The shareholders
elected the following five persons as directors.

<TABLE>
<CAPTION>
Votes For
---------
<S> <C>
Eric S. Langan 2,697,736
Robert L. Watters 2,687,666
Michael S. Thurman 2,697,741
Alan Bergstrom 2,697,741
Travis Reese 2,697,741
</TABLE>

The shareholders approved the 1999 Stock Option Plan:
2,669,481 Votes For The 1999 Stock Option Plan
23,310 Votes Against
957 Votes Abstaining

The shareholders ratified the selection of Jackson & Rhodes, P.C., as the
Company's independent auditors:
2,698,742 Votes For The Ratification
8,087 Votes Against Ratification
457 Votes Abstaining

15
<PAGE>
PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Our common stock is quoted 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.

<TABLE>
<CAPTION>
COMMON STOCK PRICE RANGE

HIGH LOW
<S> <C> <C>
1998
First Quarter $ 3-3/16 $ 2-1/4
Second Quarter $ 3-3/16 $2-1/16
Third Quarter $ 4-3/8 $ 2-1/8
Fourth Quarter $ 3-3/16 $ 1/2
1999 (*)
First Quarter $ 9/16 $ 5/16
Second Quarter $ 15/16 $ 7/16
Third Quarter $ 1-7/8 $5-1/16
Fourth Quarter $ 4-11/16 $2-9/16
<FN>
_________________
(*) In March, 1999, we had a 2:1 reverse stock split.
</TABLE>

On December 20, 1999, the last sales price for the common stock as reported
on the Nasdaq SmallCap Market was $2-13/16. On December 20, 1999, there were
approximately 408 stockholders of record of the common stock.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company, 40 Wall Street, 46th Floor, NY, NY 10005, (718)
921-8275.

DIVIDEND POLICY

We have not paid, and do not currently intend to pay cash dividends on our
common stock in the foreseeable future. Our current policy is to retain all
earnings, if any, to provide funds for operation and expansion of our business.
The declaration of dividends, if any, will be subject to the discretion of the
Board of Directors, which may consider such factors as our results of operation,
financial condition, capital needs and acquisition strategy, among others.

16
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES

During the quarter ended September 30, 1999, we entered into the following
transactions and sold unregistered shares of our common stock in reliance upon
exemptions from registration under the Securities Act of 1933 as amended (the
"Act") as provided in Section 4(2) of the Act. Each certificate issued for
unregistered securities contained a legend stating that the securities have not
been registered under the Act and setting forth the restrictions on the
transferability and the sale of the securities. No underwriter participated in,
nor did we pay any commissions or fees to any underwriter in connection with any
of these transactions. None of the transactions involved a public offering.

In August and September, 1999 the Company sold a total of 312,500 shares of
common stock to four investors for consideration of $2.00 cash per share.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our financial
statements for the fiscal years ended September 30, 1999 and 1998.

FORWARD LOOKING STATEMENT AND INFORMATION

The Company is including the following cautionary statement in this Form
10-KSB to make applicable and take advantage of the safe harbor provision of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statements made by, or on behalf of, the Company. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance and underlying assumptions and other statements which are
other than statements of historical facts. Certain statements in this Form
10-KSB are forward-looking statements. Words such as "expects", "anticipates"
and "estimates" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially from those projected. Such risks and
uncertainties are set forth below. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis, including without limitation, management's examination of
historical operating trends, data contained in the Company's records and other
data available from third parties, but there can be no assurance that
management's expectation, beliefs or projections will result, be achieved, or be

17
<PAGE>
accomplished. In addition to other factors and matters discussed elsewhere
herein, the following are important factors that, in the view of the Company,
could cause material adverse affects on the Company's financial condition and
results of operations: the risks and uncertainties relating to our Internet
operations, the impact and implementation of the sexually oriented business
ordinance in the City of Houston, competitive factors, the timing of the
openings of other clubs, the integration of operations of Taurus Entertainment
Companies, Inc with our operations and management, the availability of
acceptable financing to fund corporate expansion efforts, competitive factors,
and the dependence on key personnel. The Company has no obligation to update or
revise these forward-looking statements to reflect the occurrence of future
events or circumstances.

GENERAL

We currently own and operate two premiere Internet web sites at
www.DancerDorm.com and www.AmateurDan.com. These web sites were launched in
October, 1999. We also own and operate adult nightclubs under the name "Rick's
Cabaret" and "XTC" which offer live adult entertainment and restaurant and bar
operations. We own and operate our Internet content production studio and web
site operations center, and two adult nightclubs in Houston, Texas. We also
own and operate adult nightclubs in Austin and San Antonio, Texas, and
Minneapolis, Minnesota. We also operate another adult nightclub in Houston,
Texas through a management agreement.

In July, 1999, we opened a nightclub in San Antonio. In March, 1999,
we sold our New Orleans location and closed the location of XTC in Houston.

Our revenues are derived from the sale of liquor, beer, wine and food, and
charges to the entertainers, cover charges and other income. We anticipate
significant revenue from Internet operations to begin during fiscal 2000. Our
fiscal year end is September 30.

RESULTS OF OPERATIONS

YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEAR ENDED SEPTEMBER 30, 1998.

For the 1999 fiscal year, we had consolidated total revenues of
$10,381,427, an increase of 32% or an increase of $2,549,896 above fiscal 1998
revenues of $7,831,531. Taurus Entertainment Companies, Inc. group contributed
16% of our gross revenues in 1999.

18
<PAGE>
Costs of goods sold were 26 % and 24% of sales of alcoholic beverages and
food for fiscal 1999 and 1998, respectively.

Salaries and wages increased 37 % or $984,079 from fiscal 1998 due to the
addition of management and employees at new locations.

Other general and administrative expenses increased 23% or $998,333 from
fiscal 1998 to fiscal 1999. Charge card fees increased $26,954 largely due to
increased sales. Legal and accounting fees increased $361,359 as a result of
continued business expansion and other legal matters.

Advertising and promotion increased by $97,246 due to the opening of new
locations. Permits and tax expenses increased by $576,727 due to the opening of
new locations. Other costs increased $36,097 during fiscal 1999 due to the
opening of new locations. Interest expense increased by $161,792 during fiscal
1999 as a result of increased mortgage costs.

We experienced a net loss of $40,572 for fiscal 1999 compared to a net loss
of $604,864 for fiscal 1998.

YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO YEAR ENDED SEPTEMBER 30, 1997.

For the 1998 fiscal year, we had consolidated total revenues of $7,831,531,
an increase of 25% or $1,553,952 above fiscal 1997 revenues of $6,277,579.
Revenues in New Orleans surpassed revenues in Houston for the first time, with
New Orleans contributing 51% of our gross revenues, Houston 28%, Tantra 6% and
Minneapolis (which was only open for approximately one-half of the fiscal year)
11%. Taurus Entertainment Companies, Inc. group contributed, for the period
from August 11, 1998 to September 30, 1998, 4% of our gross revenues. In 1999,
we sold the facility in New Orleans, Louisiana.

Costs of goods sold were 24% and 32% of sales of alcoholic beverages and
food for fiscal 1998 and 1997, respectively. This decrease is due steps taken
by management to achieve continuing improvements in cost of goods sold. We
continue a program to improve margins from liquor and food sales and food
service efficiency.

Salaries and wages increased 25% or $530,427 from fiscal 1997 due to the
addition of management personnel in Minneapolis, as a result of our policy in
Minneapolis of treating the entertainers as employees and the acquisition of
Taurus Entertainment Companies, Inc. Management staffing was increased in order
to have adequately trained personnel to assist with the planning and pre-opening
activities of other locations.

19
<PAGE>
Other general and administrative expenses increased 7% or $270,069 from
fiscal 1997 to fiscal 1998. Charge card fees increased $38,150 largely due to
increased sales. Legal and accounting fees increased $48,148 as a result of the
cost of the acquisition and opening of the store in Minneapolis, Minnesota and
the acquisition of Taurus Entertainment Companies, Inc.

Advertising and promotion decreased by $286,324 reflecting a change in our
policy regarding advertising expenditures surrounding the opening of new stores.

Other costs increased $290,694 during fiscal 1998 as a result of increased
travel and lodging costs incurred by staff involved with the New Orleans and
Minneapolis locations and the review of the Taurus Entertainment Companies, Inc.
acquisition and of other potential acquisitions.

We experienced a net loss of $604,864 for fiscal 1998 compared to a net
loss of $1,293,330 for fiscal 1997.

Interest expense increased to $384,037 during fiscal 1998 as a result of
the acquisition of the land and building in Minneapolis, Minnesota and inclusion
of the debt of Taurus Entertainment Companies, Inc.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1999 we had working capital of $15,709, compared to a
working capital deficit of $(887,833) at the end of fiscal 1998. The increase
in working capital is primarily due to the proceeds received from an insurance
company for fire damage, the issuance of stock, and the proceeds received from
the sale of the Company's subsidiary.

During the last quarter of fiscal 1999, we took our 350 acre ranch off the
real estate re-sale market. During the time this property was listed for sale,
we had carried it as a current asset. During the last half of fiscal 1999, we
entered the adult Internet market place and we invested heavily in Internet
technologies and related costs for our web sites.

In our opinion, working capital is not a good indicator of our financial
status due to the short cash liquidity cycle that results in the realization of
cash within no more than five days after the culmination of a transaction.

20
<PAGE>
Net cash used by operating activities in fiscal 1999 was $(543,347)
compared to net cash provided by operating activities of $427,172 in fiscal
1998. The increase in cash used by operating activities was due primarily to
our paying off accounts payable.

Net cash provided by investing activities was $343,453 in 1999 compared to
net cash used by investing activities of $(307,465) in 1998. This increase was
due primarily to the sale of our Louisiana subsidiary.

Net cash used by financing activities was $(19,589) in 1999 compared to net
cash provided by financing activities of $120,527 in 1998. This increased in
cash used was primarily due to a decrease in cash raised from the sale of common
stock and repayments of long term debt.

We have not established lines of credit other than the existing debt.
There can be no assurance that we will be able to obtain additional financing on
reasonable terms, if at all. However, we have developed numerous contacts with
professionals who have expertise in raising capital through private placement of
securities and we will look to the marketplace to find the resources necessary
to continue our planned expansion.

Because of the large volume of cash we handle, stringent cash controls have
been implemented. In the event the topless club industry is required in all
states to convert the entertainers who perform from independent contractor to
employee status, we have prepared alternative plans that we believe will protect
our profitability. We believe that the industry standard of treating the
entertainers as independent contractors provides sufficient safe harbor
protection to preclude any payroll tax assessment for prior years.

The adult topless club entertainment business is highly competitive with
respect to price, service and location, as well as the professionalism of the
entertainment. We compete with a number of locally-owned adult cabarets, some
of whose names enjoy recognition that equals that of Rick's Cabaret. Although
we believe that we are well-positioned to compete successfully in the future,
there can be no assurance that we will be able to maintain our high level of
name recognition and prestige within the marketplace.

SEASONALITY

We are significantly affected by seasonal factors. Typically, Rick's
Cabaret has experienced reduced revenues from May through September. We have
historically experienced our strongest operating results during October through
April.

21
<PAGE>
YEAR 2000

We believe that we do not have any significant exposure to uncertainties
nor material anticipated costs related to Year 2000 issues including internal,
vendor and customer issues. Our current systems and any anticipated upgrades
are Year 2000 compliant.

ITEM 7. FINANCIAL STATEMENTS

The information required hereunder is included in this report as set forth
in the "Index to Financial Statements" on page F-1.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There have been no changes in accountants since our incorporation in 1994,
nor have there been any disagreements with accountants on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

DIRECTORS AND EXECUTIVE OFFICERS.

Directors are elected annually and hold office until the next annual
meeting of our stockholders 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 our
directors and executive officers. Our Board of Directors consists of five
persons.

<TABLE>
<CAPTION>
Name Age Position
- ------------------ --- ----------------------------------------------------
<S> <C> <C>
Eric Langan 31 Director, CEO, President and Chief Financial Officer
Michael S. Thurman 39 Director, COO and V.P.-Director of Operations.
Travis Reese 29 Director and V.P.-Director of Technology
Robert L. Watters 48 Director
Alan Bergstrom 53 Director
</TABLE>

22
<PAGE>
Eric S. Langan has been our Director since 1998 and our President since
March, 1999. Mr. Langan is also our acting Chief Financial Officer. He has
been involved in the adult entertainment business since 1989. Mr. Langan has
also served as the President and Director of Taurus Entertainment Companies,
Inc. since November, 1997. Taurus is our public subsidiary. From January 1997
through the present, he has held the position of President with XTC Cabaret,
Inc., which was subsequently acquired by Taurus. From November 1992 until
January 1997, Mr. Langan was the President of Bathing Beauties, Inc. Since
1989, Mr. Langan has exercised managerial control over the grand openings and
operations of more than twelve adult entertainment businesses. Through these
activities, Mr. Langan has acquired the knowledge and skills necessary to
successfully operate adult entertainment businesses.

Robert L. Watters is the founder and has been our director since 1986. Mr.
Watters was our president and our chief executive officer from 1991 until March,
1999. 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 our full time
management. 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.

Michael S. Thurman became our Director and our V.P.- Director of Operations
in 1999. He has been employed in the bar and restaurant industry since 1982 for
several operators of bars and restaurants. He has served in various management
positions. From 1986 through 1989 Mr. Thurman worked as the controller of a
multi-location bar and restaurant chain with annual sales in 1989 of
approximately $6,000,000. Beginning in 1989, Mr. Thurman worked in managerial
capacities for adult entertainment businesses located in Houston, Texas
including the Colorado Bar & Grill, the Gold Club, Rick's, and Caligula XXI.
From 1994 until 1997, Mr. Thurman was employed as the chief financial officer of
XTC Group and the XTC Cabaret, businesses now owned and operated by Taurus
Entertainment Companies, Inc., which became our subsidiary in 1998. During 1997
until mid-1998, Mr. Thurman was a director of Taurus Entertainment Companies,
Inc.,

Alan Bergstrom became our Director in 1999. Since 1997, Mr. Bergstrom has
been the Chief Operating Officer of Eagle Securities which is an investment
consulting firm. Mr. Bergstrom is also a registered stock broker with Rhodes
Securities, Inc. From 1991 until 1997, Mr. Bergstrom was a vice
president--investments with Principal Financial Securities, Inc. Mr. Bergstrom
holds a B.B.A. Degree in Finance, 1967, from the University of Texas.

23
<PAGE>
Travis Reese became our Director and our V.P.-Director of Technology in
1999. From 1997 through the present, Mr. Reese has been a senior network
administrator at St. Vincent's Hospital in Sante Fe, New Mexico. During 1997,
Mr. Reese was a computer systems engineer with Deloitte & Touche. From 1995
until 1997, Mr. Reese was a vice-president with Digital Publishing Resources,
Inc., an internet service provider. From 1994 until 1995, Mr. Reese was a pilot
with Continental Airlines. From 1992 until 1994, Mr. Reese was a pilot with
Hang On, Inc., an airline company. Mr. Reese has an Associates Degree in
Aeronautical Science from Texas State Technical College.

COMMITTEES OF THE BOARD OF DIRECTORS

We have no compensation committee and no nominating committee. Decisions
concerning executive officer compensation for 1999 were made by the full Board
of Directors. Eric S. Langan, Michael S. Thurman and Travis Reese are our only
directors who are also our officers.

We have an Audit Committee of independent directors whose members are
Robert L. Watters and Alan Bergstrom. The primary purpose of the Audit
Committee is to oversee our financial reporting process on behalf of the Board
of Directors. The Audit Committee will meets privately with our Chief
Accounting Officer and with our independent public accountants and evaluates the
responses by the Chief Accounting Officer both to the facts presented and to the
judgments made by the outside independent accountants. The Audit Committee
reports its activities to the full Board after each such meeting so that the
Board is kept informed of its activities on a current basis. In addition, the
activities and responsibilities of the Audit Committee include the nomination or
selection of the independent auditors, review of the results of the audit and a
detailed review of the overall Company and the adequacy of our internal
controls.

The Board of Directors held six meetings and took action by consent on six
occasions during the fiscal year ended September 30, 1999.

There is no family relationship between or among any of our directors and
executive officers.

CERTAIN SECURITIES FILINGS

We believe that all persons subject to Section 16(a) of the Exchange Act in
connection with their relationship with us have complied on a timely basis.

24
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION

The following table reflects all forms of compensation for services to us
for the fiscal years ended September 30, 1999, 1998 and 1997 of certain
executive officers. No other executive officer of ours received compensation
that exceeded $100,000 during 1999.

<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE

Annual Compensation Long Term Compensation
Awards Payouts
Other Securities
Name and Annual Restricted Underlying Other All
Principal Compen- Stock Options/ LTIP Compens-
Position Year Salary Bonus sation (1) Awards SARs Payouts sation
- --------- ---- -------- ----- ---------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Eric 1999 $155,000 (2)-0- -0- -0- 85,000 -0- -0-
Langan 1998 -0- -0- -0- -0- 50,000 -0- -0-
Director, 1997 -0- -0- -0- -0- -0- -0- -0-
President and Acting CFO
and CFO

Robert L.(3)1999 $137,500 -0- -0- -0- 10,000 -0- -0-
Watters 1998 $325,000 -0- -0- -0- 20,000 -0- -0-
Director 1997 $325,000 -0- -0- -0- -0- -0- -0-
<FN>
__________________________________
(1) We provide certain executive officers 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.
(2) We paid Mr. Langan $155,000 as compensation in fiscal 1999, of which
$52,000 was allocated to our subsidiary, Taurus Entertainment Companies,
Inc.
(3) Mr. Watters is a director of the Company. However, Mr. Watters ceased
being an executive officer of the Company in March, 1999.
</TABLE>

25
<PAGE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)

Number of Percent of Total
Securities Options/SARs
Underlying Granted To
Options/SARs Employees In Exercise of Expiration
Name Granted Fiscal Year Base Price Date
- ----------- ------------ ----------------- ------------ --------------
<S> <C> <C> <C> <C>

Eric Langan 85,000 70 % $ 2.70 August 4, 2004

Robert L. 10,000 8% $ 2.70 August 4, 2004
Watters
</TABLE>

<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES

Number Of
Unexercised Value of
Securities Unexercised
Underlying In-The-Money
Options/SARs Options/SARs
Shares At FY-End At FY-End
Acquired On Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
- ----------- ------------ -------- --------------- -------------
<S> <C> <C> <C> <C>
Eric Langan -0- (1) -0- 130,000 / 5,000 -0- / -0-

Robert L. -0- (1) -0- 5,000 / 5,000 -0- / -0-
Watters
<FN>
____________________
(1) Mr. Langan and Mr. Watters did not exercise any options during the last
fiscal year.
</TABLE>

DIRECTOR COMPENSATION

We do not currently pay any cash directors' fees, but we pay the expenses
of our directors in attending board meetings. In August, 1999, we issued 10,000
options to each present Director. These options have a strike price of $2.70 per
share and expire in August, 2009. Half of these options were immediately
exercisable and half will become exercisable in August, 2000.

26
<PAGE>
EMPLOYEE STOCK OPTION PLANS

While we have been successful in attracting and retaining qualified
personnel, we believe that our future success will depend in part on our
continued ability to attract and retain highly qualified personnel. We pay
wages and salaries that we believe are competitive. We also believe that equity
ownership is an important factor in our ability to attract and retain skilled
personnel. We have adopted Stock Option Plans for employee and directors. The
purpose of the Plans is to further our interests, our subsidiaries and our
stockholders by providing incentives in the form of stock options to key
employees and directors who contribute materially to our success and
profitability. The grants recognize and reward outstanding individual
performances and contributions and will give such persons a proprietary interest
in us, thus enhancing their personal interest in our continued success and
progress. The Plans also assist us and our subsidiaries in attracting and
retaining key employees and directors. Plans are administered by the Board of
Directors. The Board of Directors has the exclusive power to select the
participants in the Plans, to establish the terms of the options granted to each
participant, provided that all options granted shall be granted at an exercise
price equal to at least 85% of the fair market value of the common stock covered
by the option on the grant date and to make all determinations necessary or
advisable under the Plans.

In 1995 we adopted the 1995 Stock Option Plan. A total of 300,000 shares
may be granted and sold under the 1995 Plan. As of June 17, 1999, a total of
142,500 stock options had been granted and are outstanding under the Plan,
none of which have been exercised. The Company does not plan to issue
any additional options under the 1995 Plan.

In August, 1999 we adopted the 1999 Stock Option Plan. A total of 500,000
shares may be granted and sold under the 1999 Plan. As of September 30, 1999, a
total of 50,000 stock options had been granted and are outstanding under the
Plan, none of which have been exercised.

EMPLOYMENT AGREEMENT

We have a three year employment agreement with Eric S. Langan (the "Langan
Agreement"). The Langan Agreement extends through August 11, 2001 and provides
for an annual base salary of $171,600. In April, 1999, Mr. Langan took a
voluntary salary reduction for the remainder of fiscal year 1999 of 20% for a
reduction of $34,320. The Langan Agreement also provides for participation in
all benefit plans maintained by us for salaried employees. Mr. Langan's
Agreement contains a confidentiality provision and an agreement by Mr. Langan
not to compete with us upon the expiration of the Langan Agreement. We have not
established long term incentive plans or defined benefit or actuarial plans.
Pursuant to the Langan Agreement, Mr. Langan has received options to purchase
125,000 (post-reverse split) of our shares at an exercise price of $1.87 per
share, vesting in August, 1999.

27
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information at December 20, 1999,
with respect to the beneficial ownership of shares of Common Stock by (i) each
person known to us who owns beneficially more than 5% of the outstanding shares
of Common Stock, (ii) each of our directors, (iii) each of our executive
officers and (iv) all of our executive officers and directors as a group.
Unless otherwise indicated, each stockholder has sole voting and investment
power with respect to the shares shown. As of December 20, 1999, there were
3,610,493 shares of Common Stock outstanding.

<TABLE>
<CAPTION>
Name and Number of Title of Percent
Address Shares Class of Class
- ----------------------------- ----------- ------------ ---------
<S> <C> <C> <C>
Eric S. Langan
505 North Belt, Suite 630
Houston, Texas 77060 916,038 (1) Common Stock 25%

Robert L. Watters
315 Bourbon Street
New Orleans, Louisiana 70130 5,000 (2) Common Stock .1%

Michael S. Thurman
505 North Belt, Suite 630
Houston, Texas 77060 18,572 (3) Common Stock .5%

Travis Reese
505 North Belt, Suite 630
Houston, Texas 77060 5,100 (2) Common Stock .1%

Alan Bergstrom 10,000 (2) Common Stock .3%
707 Rio Grande, Suite 200
Austin, Texas 78701

28
<PAGE>
E. S. Langan. L.P.
505 North Belt, Suite 630
Houston, Texas 77060 578,632 Common Stock 16.1%

Ralph McElroy 817,147(4) Common Stock 22%
1211 Choquette
Austin, Texas, 78757

Steve Wadley 190,917 Common Stock 5.3%
1491 Oak Springs Drive
Marietta, Georgia 30066

All directors, officers,
(five persons) 954,710 Common Stock 25.3%
<FN>
___________________
(1) This amount includes shares owned indirectly through E. S. Langan, L.P.
Mr. Langan is the general partner of E. S. Langan, L.P. Mr. Langan has sole
voting and investment power for 207,406 shares that he owns directly. Mr.
Langan has shared voting and investment power for 578,632 shares that he owns
indirectly through E. S. Langan, L.P. This amount also includes options to
purchase 130,000 shares of common stock that are presently exercisable.
(2) Includes options to purchase 5,000 shares of common stock that are
presently exercisable
(3) Includes options to purchase 10,000 shares of common stock which are
presently exercisable.
(4) Includes 66,545 shares of common stock which would be issuable upon
conversion of a convertible debenture held by Mr. McElroy. Also includes
52,135 shares of common stock which would be issuable upon conversion of a
convertible promissory note held by Mr. McElroy.
</TABLE>

29
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Our Board of Directors has adopted a policy that our affairs will be
conducted in all respects by standards applicable to publicly held corporations
and that we will not enter into any future transactions and/or loans between the
us and our 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 our independent and disinterested directors. In our
view, all of the transactions described below meet this standard.

In August, 1998, we acquired approximately 93% of the outstanding common
stock of Taurus Entertainment Companies, Inc. ("Taurus") in a private stock
exchange transaction with the certain principal stockholders of Taurus, among
whom were Eric S. Langan and Ralph McElroy. The Stock Exchange Agreement
provided that we exchange one share of our common stock for each three and
one-half shares of Taurus common stock owned by certain principal shareholders
of Taurus. As a result of the Exchange, Mr. Langan received 402,146 shares of
our common stock, and Mr. McElroy received 393,389 shares of our common stock.
The terms and conditions of the Exchange were determined by the parties through
arms length negotiations.

In a transaction simultaneous to the acquisition of Taurus, we acquired
certain real estate in San Antonio, Texas from Mr. McElroy. We acquired the
property from Mr. McElroy for the same price that Mr. McElroy paid for the
property. We financed the purchase of the property by the issuance of a six
year $366,000 Convertible Debenture, secured by the real estate acquired. The
Convertible Debenture bears interest at the rate of 12% per annum, with interest
payable monthly. Interest payments began in September, 1998. The principal
balance of the Convertible Debenture is due in one lump sum payment in July,
2004. The Convertible Debenture is subject to redemption at our option, in
whole or in part, at 100% of the principal face amount of the Convertible
Debenture redeemed plus any accrued and unpaid interest on the redemption date,
at any time and from time to time, upon not less than 30 nor more than 60 days
notice, if the closing price of our common stock shall have equaled or exceeded
$8.50 per share of common stock for ten (10) consecutive trading days. The
Convertible Debenture is convertible into shares of Common Stock at any time
prior to maturity (unless earlier redeemed) at the Conversion Price of $2.75 per
share. In the event that we file a Registration Statement to register shares of
our Common Stock with the Securities and Exchange Commission on Form S-3 or
other similar form (except for Form S-8 or Form S-4) than we will undertake to
use our best efforts to register for resale all of Mr. McElroy's shares into
which the Convertible Debenture may be converted under the same Registration
Statement.

In a transaction simultaneous to the acquisition of Taurus, Taurus
refinanced a mortgage on one of its real estate holdings in Houston, Texas by
extinguishing this mortgage and replacing it with a Convertible Debenture
secured by this real estate. The mortgagee was Mr. McElroy and Mr. McElroy
received the Convertible Debenture. Taurus had purchased the property from Mr.
McElroy for the same price that Mr. McElroy paid for the property. We
refinanced the purchase of the property on terms more favorable to Taurus by the
issuance of a six year $286,744 Convertible Debenture, secured by the real
estate acquired. We are a guarantor of this Convertible Debenture. The
Convertible Debenture bears interest at the rate of 12% per annum, with interest

30
<PAGE>
payable monthly. Interest payments began in September, 1998. The principal
balance of the Convertible Debenture is due in one lump sum payment in July,
2004. The Convertible Debenture is convertible into shares of our common stock
at any time prior to maturity at the Conversion Price of $2.75 per share. In
the event that we file a Registration Statement to register shares of our Common
Stock with the Securities and Exchange Commission on Form S-3 or other similar
form (except for Form S-8 or Form S-4) than we will undertake to use our best
efforts to register for resale all of Mr. McElroy's shares into which the
Convertible Debenture may be converted under the same Registration Statement.

On March 29, 1999, Robert L. Watters, our Director, purchased RCI
Entertainment Louisiana, Inc. ("RCI Louisiana"), our subsidiary, for the
purchase price of $2,200,000 consisting of $1,057,327 in cash, the endorsement
over to us of a $652,744 secured promissory note (the "McElroy Note"),a
guaranteed promissory note in the amount of $326,773 made by Mr. Watters (the
"Watters Note"), and the cancellation by Mr. Watters of our $163,156
indebtedness to him. The McElroy Note, which is due July 31, 2004, bears
interest at the rate of twelve percent (12%) per annum with interest being paid
monthly. The principal of the McElroy Note is due in one lump sum payment. The
McElroy Note is secured by (i) our convertible debenture in the original
principal amount of $366,000, which we issued on August, 11, 1998, in favor of
Mr. McElroy (the "Convertible Debenture") and (ii) a promissory note of Taurus
Entertainment Companies, Inc. (our subsidiary) and guaranteed by us(which has a
conversion feature) in the original principal amount of $286,744.61, dated
August 11, 1998, in favor of Mr. McElroy, (the "Convertible Promissory Note").
Both the Convertible Debenture and the Convertible Promissory Note are secured
by certain real estate holdings of us or our subsidiaries. The Watters Note is
guaranteed by RCI Louisiana, which operates a Rick's Cabaret in New Orleans,
Louisiana. In connection with the acquisition of the stock of RCI Louisiana,
Mr. Watters also assumed RCI Louisiana's liabilities of approximately
$1,400,000. As a condition of this transaction, Mr. Watters arranged for the
release by a lender of our liability of $763,199 owed to the lender by RCI
Louisiana, which we had guaranteed. We obtained an opinion from Chaffe &
Associates, Inc., a New Orleans investment banking firm, stating that the
purchase price paid by Mr. Watters for RCI Louisiana was fair from a financial
point of view to our shareholders. The terms of this transaction were the
result of arms length negotiations between us and Mr. Watters. In connection
with the sale of RCI Louisiana, Mr. Watters, and Erich Norton White, our former
director, entered into agreements with us to terminate their Employment
Agreements and to cancel all stock options on our common stock which they held.
Further, in connection with the sale of RCI Louisiana, we entered into an
Exclusive Licensing Agreement with Mr. Watters which granted Mr. Watters the
right to the use of the name "Rick's Cabaret" and all logos, trademarks and
service marks attendant thereto for use in the states of Louisiana, Florida,
Mississippi and Alabama.

31
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit No. Identification of Exhibit
3.1 * The Company's Articles of Incorporation, which are incorporated by
reference to the Company's Form SB-2 Exhibit 3.1 as effective with
the Commission on October 12, 1995.

3.2 * The Company's By-laws, which are incorporated by reference to the
Company's Form SB-2 Exhibit 3.2 as effective with the Commission
on October 12, 1995.

4.1 ** Specimen of the Company's common stock certificate.

4.2 * Instruments defining the rights of security holders, which are
incorporated by reference to the Company's Form SB-2 Exhibit 4.2 as
effective with the Commission on October 12, 1995.

4.3 * Form of Debenture, which is incorporated by reference to the
Company's Form 8-K dated August 11, 1998.

10.1 * Form of Stock Exchange Agreement With Certain Taurus Holders, which
is incorporated by reference to the Company's Form 8-K.

10.2 * Employment Agreement with Eric Langan, which is incorporated by
reference to the Company's Form 8-K dated August 11, 1998.

21.1 * Subsidiaries, which is incorporated by reference to the Company's
Form 10-KSB for the year ended September 30, 1998.

27.1 ** Financial Data Schedule
______________________
* Incorporated by reference
** Filed herewith

(b) Reports on Form 8-K.

No Reports on Form 8-K were filed during the quarter ended September 30,
1999.

32
<PAGE>
SIGNATURES

In accordance with the requirements of Section 13 of 15(d) of the Exchange
Act, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on December 20, 1999.

Rick's Cabaret International, Inc.
By: /s/ Eric Langan
------------------------------
Eric Langan, Director, CEO, President and
Chief Financial Officer

Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons in the capacities and on the dates
indicated:

Signature Title Date
- --------- ----- ----
/s/ Eric Langan December 20, 1999
- ---------------------- Director, CEO, President
Eric Langan and Chief Financial Officer

/s/ Michael S. Thurman December 20, 1999
- ---------------------- Director, COO and
Michael S. Thurman V.P.-Director of Operations

/s/ Travis Reese December 20, 1999
- ---------------------- Director and
Travis Reese V.P.-Director of Technology

/s/ Robert L. Watters December 20, 1999
- ---------------------- Director
Robert L. Watters

/s/ Alan Bergstrom December 20, 1999
- ---------------------- Director
Alan Bergstrom

33
<PAGE>
<TABLE>
<CAPTION>
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES

AUDITED FINANCIAL INFORMATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----
<S> <C>
Independent Auditor's Report F-2

Consolidated Balance Sheets for the years ended
September 30, 1999 and 1998 F-3

Consolidated Statements of Operations for the years ended
September 30, 1999 and 1998 F-4

Consolidated Statements of Changes in Stockholders' Equity
for the years ended September 30, 1999 and 1998 F-5

Consolidated Statements of Cash Flows for the years ended
September 30, 1999 and 1998 F-6

Notes to Consolidated Financial Statements F-7
</TABLE>

F-1
<PAGE>
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, 1999 and 1998, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Rick's
Cabaret International, Inc. and subsidiaries as of September 30, 1999 and 1998,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.

/s/ Jackson & Rhodes P.C.

Dallas, Texas
December 1, 1999

F-2
<PAGE>
<TABLE>
<CAPTION>
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998

ASSETS
1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 378,161 $ 597,644
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . 225,565 58,023
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . 115,773 94,633
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . 102,031 34,876
Land held for sale . . . . . . . . . . . . . . . . . . . . . . . 200,000 569,069
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . 1,021,530 1,354,245
------------ ------------
Property and equipment:
Buildings, land and leasehold improvements . . . . . . . . . . . 8,324,297 9,851,798
Furniture and equipment. . . . . . . . . . . . . . . . . . . . . 1,569,767 1,609,031
------------ ------------
9,894,064 11,460,829
Less accumulated depreciation. . . . . . . . . . . . . . . . . . (1,340,343) (1,213,557)
------------ ------------
8,553,721 10,247,272
------------ ------------
Other assets:
Goodwill, less accumulated amortization of $386,066 and $91,924. 2,839,745 3,154,804
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223,141 112,025
------------ ------------
3,062,886 3,266,829
------------ ------------
$12,638,137 $14,868,346
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current portion of long-term debt (Note 5) . . . . . . . . . . . $ 375,622 $ 718,636
Accounts payable - trade . . . . . . . . . . . . . . . . . . . . 514,447 1,179,410
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . 115,752 344,032
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . . . . . 1,005,821 2,242,078
Long-term debt, less current portion (Note 5). . . . . . . . . . . 4,282,777 6,015,903
------------ ------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 5,288,598 8,257,981
------------ ------------
Commitments and contingencies (Note 8) . . . . . . . . . . . . . . - -
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . 34,247 11,896
Stockholders' equity (Notes 1 and 10):
Preferred stock - $.10 par, authorized
1,000,000 shares; none issued. . . . . . . . . . . . . . . . . - -
Common stock - $.01 par, authorized
15,000,000 shares; issued 3,613,678 and 3,233,677 shares. . . 36,137 32,337
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 9,727,309 8,973,714
Retained earnings (deficit). . . . . . . . . . . . . . . . . . . (2,448,154) (2,407,582)
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . 7,315,292 6,598,469
------------ ------------
$12,638,137 $14,868,346
============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>
<TABLE>
<CAPTION>
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998

1999 1998
------------ -----------
<S> <C> <C>
Revenues:
Sales of alcoholic beverages . . . . . . . . $ 4,511,205 $4,028,988
Sales of food. . . . . . . . . . . . . . . . 1,035,178 515,821
Service revenues . . . . . . . . . . . . . . 4,229,426 3,010,999
Other. . . . . . . . . . . . . . . . . . . . 605,618 275,723
------------ -----------

10,381,427 7,831,531
------------ -----------

Operating expenses:
Cost of goods sold . . . . . . . . . . . . . 1,437,553 1,102,556
Salaries and wages . . . . . . . . . . . . . 3,637,637 2,653,558
Other general and administrative:
Taxes and permits. . . . . . . . . . . . . 1,408,115 831,388
Charge card fees . . . . . . . . . . . . . 187,428 160,474
Rent . . . . . . . . . . . . . . . . . . . 264,988 395,038
Legal and accounting . . . . . . . . . . . 716,545 355,186
Advertising. . . . . . . . . . . . . . . . 585,470 488,224
Other. . . . . . . . . . . . . . . . . . . 2,102,031 2,065,934
------------ -----------

10,339,767 8,052,358
------------ -----------

Income (loss) from operations. . . . . . . . . 41,660 (220,827)

Other income (expense)
Interest expense . . . . . . . . . . . . . . (545,829) (384,037)
Gain on sale of subsidiary . . . . . . . . . 169,955 -
Excess of insurance proceeds over fire loss. 290,769 -
Loss on lease termination. . . . . . . . . . (219,780) -
Other. . . . . . . . . . . . . . . . . . . . 222,653 -
------------ -----------

Net loss . . . . . . . . . . . . . . . . . . . $ (40,572) $ (604,864)
============ ===========

Basic loss per common share. . . . . . . . . . $ (0.01) $ (0.28)
------------ -----------
Weighted average shares outstanding. . . . . . 3,355,969 2,169,017
============ ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>
<TABLE>
<CAPTION>
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998

Common Stock Additional Retained
------------------
Number of Paid-in Earnings
Shares Amount Capital (Deficit) Total
--------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1997 . . . . . . . 2,057,461 $20,575 $ 5,960,880 $(1,802,718) $4,178,737

Acquisition of Taurus Entertainment
Companies, Inc.. . . . . . . . . . . 721,713 7,217 2,000,533 - 2,007,750

Acquisition of Minnesota property . . . . 73,816 738 181,405 - 182,143

Shares issued for accounts payable. . . . 22,000 220 59,483 - 59,703

Sales of common stock for cash. . . . . . 358,687 3,587 771,413 - 775,000

Net income (loss) . . . . . . . . . . . . - - - (604,864) (604,864)
--------- ------- ----------- ------------ -----------

Balance, September 30, 1998 . . . . . . . 3,233,677 32,337 8,973,714 (2,407,582) 6,598,469

Sales of common stock for cash. . . . . . 312,501 3,125 621,877 - 625,002

Issuance of common stock for services . . 67,500 675 63,065 - 63,740

Stock options issued for future services. - - 30,000 - 30,000

Stock options issued as compensation. . . - ` 38,653 - 38,653

Net income (loss) . . . . . . . . . . . . - - - (40,572) (40,572)
--------- ------- ----------- ------------ -----------

Balance, September 30, 1999 . . . . . . . 3,613,678 $36,137 $ 9,727,309 $(2,448,154) $7,315,292
========= ======= =========== ============ ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>
<TABLE>
<CAPTION>
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998

1999 1998
------------ ------------
<S> <C> <C>
Net loss . . . . . . . . . . . . . . . . . . . . . . . $ (40,572) $ (604,864)

Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Depreciation and amortization. . . . . . . . . . . . 630,001 440,055
Issuance of common stock for services. . . . . . . . 63,740 -
Stock options issued as compensation . . . . . . . . 38,653 -
Loss on lease termination. . . . . . . . . . . . . . 219,780 -
Minority interest. . . . . . . . . . . . . . . . . . 22,351 (6,826)
Gain on sale of subsidiary . . . . . . . . . . . . . (169,955) -
Excess of insurance proceeds over fire loss. . . . . (290,769) -
Loss on sale of land . . . . . . . . . . . . . . . . - 33,650
Other. . . . . . . . . . . . . . . . . . . . . . . . - 15,169
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . (520,169) (56,975)
Inventories. . . . . . . . . . . . . . . . . . . . (56,866) (31,935)
Prepaid expenses and other assets. . . . . . . . . (68,981) 126,620
Accounts payable and accrued liabilities . . . . . (370,560) 512,278
Income taxes payable/receivable. . . . . . . . . . -
------------
Net cash provided (used) by operating activities (543,347) 427,172
------------ ------------

Cash flows from investing activities:
Additions to property and equipment and goodwill . . (1,038,600) (1,089,467)
Insurance proceeds -- fire damage. . . . . . . . . . 496,625 -
Cash in subsidiary sold. . . . . . . . . . . . . . . (171,899) -
Proceeds from sale of subsidiary . . . . . . . . . . 1,057,327 -
Proceeds from sale of land . . . . . . . . . . . . . - 782,002
------------ ------------
Net cash provided (used) by investing activities 343,453 (307,465)
------------ ------------

Cash flows from financing activities:
Common stock issued, less offering costs . . . . . . 625,002 775,000
Increase in long-term debt . . . . . . . . . . . . . 9,057 -
Payments on long-term debt . . . . . . . . . . . . . (653,648) (654,473)
------------ ------------
Net cash provided (used) by financing activities (19,589) 120,527
------------ ------------

Net increase (decrease) in cash. . . . . . . . . . . . (219,483) 240,234

Cash at beginning of year. . . . . . . . . . . . . . . 597,644 357,410
------------ ------------

Cash at end of year. . . . . . . . . . . . . . . . . . $ 378,161 $ 597,644
============ ============

Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . $ 501,864 $ 380,560
============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998

1. ORGANIZATION

Rick's Cabaret International, Inc. (the "Company") was formed in December 1994,
to acquire all the outstanding capital stock of Trumps Inc. ("Trumps"), a
company owned 100% by the Company's sole stockholder. On October 13, 1995, the
Company completed its public offering of 1,840,000 shares of common stock. The
proceeds from the sale of stock amounted to approximately $4,270,000 net of
underwriting discounts, commissions and expenses of the offering. The Company
originally owned a premiere adult nightclub offering topless entertainment and
restaurant and bar operations and a non-sexually oriented bar in Houston, Texas.
The Company opened another premier adult nightclub in leased facilities on
Bourbon Street in New Orleans, Louisiana in January 1997 (sold in 1999 - see
Note 4), and during the year ended September 30, 1998, the Company opened
another premier adult nightclub in a facility purchased in Minneapolis,
Minnesota. Also during the year ended September 30, 1998, the Company acquired
approximately 93% of the outstanding common stock of Taurus Entertainment
Companies, Inc. ("Taurus"), a publicly held company which also owns adult
nightclubs (see Note 3). In December 1998, the Company opened another premier
adult nightclub in north Houston, located near George Bush Intercontinental
Airport in premises leased from a subsidiary of Taurus.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. All significant intercompany balances and
transactions are eliminated in consolidation.

Net Loss Per Common Share

In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 provides a different method of calculating earnings per share than was
formerly used in APB Opinion 15. SFAS 128 provides for the calculation of basic
and diluted earnings per share. Basic earnings per share includes no dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Dilutive
earnings per share reflects the potential dilution of securities that could
share in the earnings of the Company. The Company was required to adopt this
standard in the fourth quarter of calendar 1997. Because the Company's
potential dilutive securities are antidilutive, the accompanying presentation is
only of basic loss per share. All share and per share information in the
accompanying financial statements has been retroactively adjusted to reflect the
effects of a 1-for-2 reverse split of the Company's common shares in March 1999.

F-7
<PAGE>
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Use of Estimates and Assumptions

Preparation of the Company's financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.

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:

Building and improvements 31 years
Equipment 5-7 years
Leasehold improvements 40 years

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.

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.

F-8
<PAGE>
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Advertising Costs

During 1997, the Company deferred costs of approximately $101,000 which
represents expenditures incurred to develop a new advertising campaign which
will be used in other locations during the next eighteen months. These costs
are for logo design, artwork and ad layouts, a photographic library and the
associated creative fees. These costs are being amortized over eighteen months.
Amortization amounted to approximately $49,000 during the year ended September
30, 1998.

3. ACQUISITION

On August 11, 1998, the Company acquired approximately 93% of the outstanding
common stock of Taurus Entertainment Companies, Inc. ("Taurus") for 1,143,426
shares of common stock. This acquisition has been accounted for using the
purchase method of accounting. Accordingly, the accompanying financial
statements include the operations of Taurus from the date of acquisition. Under
purchase accounting, the total purchase price was allocated to the tangible and
intangible assets and liabilities of Taurus based upon their respective
estimated fair values as of the closing date based upon valuations and other
analyses. The estimated purchase price and preliminary adjustments to the
historical book value of Taurus are as follows:

<TABLE>
<CAPTION>
<S> <C>
Purchase price, based on value
of common stock issued (including 300,000
shares issued as a commission on the transaction) $2,007,750
Book value of net assets acquired . . . . . . . . . . (174,176)
-----------

Purchase price in excess of net assets acquired . . . $1,833,574
===========

Allocation of purchase price in excess of
net assets acquired:

Increase in property, plant and equipment to
fair market value . . . . . . . . . . . . . . . . $1,031,000
Goodwill. . . . . . . . . . . . . . . . . . . . . . . 802,574
-----------

Total . . . . . . . . . . . . . . . . . . . . . . . . $1,833,574
===========
</TABLE>

The following unaudited pro forma consolidated information for the years ended
September 30, 1998 gives effect to the transaction as if it had occurred at the
beginning of that year. The unaudited pro forma consolidated information is
presented for informational purposes only and is not necessarily indicative of
the results

F-9
<PAGE>
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. ACQUISITION (CONTINUED)

of operations that would have been achieved had the transaction been completed
as of the beginning of each year, nor are they indicative of the Company's
future results of operations.

<TABLE>
<CAPTION>
1998
------------
<S> <C>
Revenues . . . . . . . . . . . . $10,947,305
------------
Loss before cumulative effect of
accounting change. . . . . . $(1,166,340)
------------
Net loss . . . . . . . . . . . . $(1,166,340)
------------
Net loss per common share. . . . $ (0.23)
------------
</TABLE>

A facility in downtown Minneapolis, Minnesota was purchased in November 1997,
and renovated. The facility cost approximately $3,000,000: $200,000 cash at
closing, 95,000 shares of Company common stock, a 10% note payable of $200,000
due in eighteen months and the balance of $2,500,000 in a 10% note with a
twenty-year amortization, maturing in 2007 (see Note 4). The acquisition
resulted in recording goodwill in the amount of approximately $2,423,000. The
Company also issued 52,632 shares for related costs. The Company opened the
location for business in March 1998. The Minneapolis facility had previously
been operated as an adult entertainment venue. Because the Company did not buy
a business in the transaction, no pro forma information is available.

4. SALE OF SUBSIDIARY

On March 29, 1999 an investment partnership, headed by Eric Langan, President of
the Company, and another investor, acquired all of Robert Watters' outstanding
share of stock of the Company. At the same time, the Company sold one of its
subsidiaries, RCI Entertainment Louisiana, Inc, which operates a Rick's Cabaret
in New Orleans, Louisiana, to Mr. Watters for the purchase price of $2,200,000,
consisting of $1,057,327 in cash, a $652,744 secured promissory note made by one
of the purchasers of Mr. Watters' stock, a $326,773 secured promissory note made
by Mr. Watters, and the cancellation by Mr. Watters of the Company's $163,156
debt to him. The Company recorded a $169,955 gain on the sale.

5. LONG-TERM DEBT

Following is a summary of long-term debt at September 30:

<TABLE>
<CAPTION>
1999 1998
----- --------
<S> <C> <C>
Note payable to a bank, payable $10,000 per month,
plus interest at 8.5%, subsidiary sold in 1999 . . $ - $117,749
</TABLE>

F-10
<PAGE>
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. LONG-TERM DEBT (CONTINUED)

<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Note payable to a bank, payable $9,919 per month,
including interest at 8.5%, matures July 2002,
Subsidiary sold in 1999. . . . . . . . . . . . . . . . . . . . $ - $ 740,427
Note payable to a bank, payable $8,122 per month,
including interest at the prime rate plus 1%, matures
December 2001, collateralized by land and building
in Houston, Texas. . . . . . . . . . . . . . . . . . . . . . . 502,027 562,308
12% convertible debenture, payable monthly (interest
only) until maturity July 2004. See Note 9. . . . . . . . . . - 364,000
10% note payable to an individual, payable $12,314
per month, including interest, matured August 1999.. . . . . . - 128,922
9% notes payable to an individual, monthly payments
aggregating $22,732, including interest, maturing in
2018. Collateralized by real estate in Minneapolis,
Minnesota. See Note 3.. . . . . . . . . . . . . . . . . . . . 2,449,511 2,499,364
Note payable to partnership maturing March 2026,
due in monthly installments of $576 including principal
and interest at 12%; collateralized by real estate. . . . . . 55,169 55,443
Note payable to partnership maturing July 2007,
due in monthly installments of $653 including principal
and interest at 12%; collateralized by real estate. . . . . . 62,557 62,868
Note payable to corporation maturing December 2000,
due in monthly principal installments of $2,000 plus
interest at 9%; collateralized by real estate.. . . . . . . . - 147,854
Note payable to individual maturing July 2004,
due in monthly installments of $2,868 including principal
and interest at 12%; collateralized by real estate. . . . . . - 286,745
Note payable to individual maturing March 2006,
due in monthly installments of $2,573, plus interest at
9.25%; collateralized by real estate. . . . . . . . . . . . . 308,202 310,455
</TABLE>

F-11
<PAGE>
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. LONG-TERM DEBT (CONTINUED)

<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Note payable to corporation maturing April 2002,
due in monthly installments of $13,758 including
principal and interest at 10%; collateralized by real estate. $ 411,478 $ 528,970
Note payable to a financing company maturing
August 2003, due in monthly installments of $5,380,
including interest at 10%, collateralized by real estate. . . 547,464 556,566
Various notes, at interest rates ranging from 6% to 12%,
payable in monthly installments, including interest,
aggregating approximately $8,500, collateralized by
real estate.. . . . . . . . . . . . . . . . . . . . . . . . . 321,991 372,868
----------- -----------
4,658,399 6,734,539
Less current maturities . . . . . . . . . . . . . . . . . . . (375,622) (718,636)
----------- -----------
$4,282,777 $6,015,903
=========== ===========
</TABLE>

Substantially all the Company's assets are pledged to secure the above debt.
The prime rate was 8.5% at September 30, 1999. Following are the maturities of
long-term debt for the years ending September 30:

2000. . . . $ 375,622
2001. . . . 300,716
2002. . . . 301,859
2003. . . . 605,804
2004. . . . 294,878
Thereafter. 2,779,520
----------
$4,658,399
==========

F-12
<PAGE>
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. INCOME TAXES

Income tax expense (benefit) consisted of current taxes for 1999 and 1998.
Following is a reconciliation of income taxes (benefit) at the U.S. Federal tax
rate to the amounts recorded by the Company for the years ended September 30:

<TABLE>
<CAPTION>
1999 1998
--------- ----------
<S> <C> <C>
Tax credit on loss before income
taxes at the statutory rate. . . . . $(13,000) $(384,996)
Separate return limitation - unavailable
loss carrybacks. . . . . . . . . . . 13,000 384,996
--------- ----------
$ - $ -
========= ==========
</TABLE>

The components of the net deferred tax asset/liability are as follows at
September 30:

<TABLE>
<CAPTION>
<S> <C> <C>
Operating loss carryforwards . . . . . $(1,140,000) $(1,139,000)
Deferred tax asset valuation allowance 1,140,000 1,139,000
------------ ------------
$ - $ -
============ ============
</TABLE>

For tax purposes, the Company has a net operating loss carryforward amounting to
approximately $3,425,000 which will expire, if not utilized, beginning in 2012.

7. RELATED PARTY TRANSACTIONS

During 1998, the Company paid $33,000 for accounting services to an accounting
firm in which a director of the Company was a principal.

8. COMMITMENTS AND CONTINGENCIES

Leases

The Company leases corporate office facilities. Following is a schedule of
minimum lease payments for the years ending September 30:

2000. . . . $ 13,536
2001. . . . 13,536
2002. . . . 14,382
2003. . . . 15,228

Concentration of Credit Risk

The Company invests its cash and certificates of deposit primarily in deposits
with major banks. Certain deposits may be in excess of federally insured
limits. The Company has not incurred losses related to its cash on deposit with
banks.

F-13
<PAGE>
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Litigation

In November, 1998, LMTD, Inc. initiated litigation against a subsidiary of one
of the Company's subsidiaries, Citation Land, LLC ("Citation"), in a case styled
LMTD, Inc. v. Texas Warehouse Company, Inc., et al. Cause No. 98-12570, in the
200th Judicial District Court of Travis County, Texas. The suit seeks specific
performance and damages against Texas Warehouse Company, Inc. regarding a
Purchase Option Agreement. Plaintiff also alleges a tortious interference claim
against Citation in the amount of $540,000. Counsel for Citation intends to
file a counterclaim and or cross action at the time that its answer is due.
Counsel for Citation believes that the exposure to Citation is minimal. The
Company intends to vigorously defend itself in this matter and to deny all
allegations.

On October 15, 1998, All City Beverage and Entertainment, Inc. initiated
litigation against one of the Company's subsidiaries in a case styled All City
Beverage and Entertainment, Inc. v. Taurus Entertainment Companies,
Inc.("Taurus"), Cause No. 98- 49119, in the 61st Judicial District Court of
Harris County, Texas. The suit seeks damages in the amount of $25,000 and
175,000 shares of common stock of Taurus in connection with an Asset Purchase
Agreement between All City Beverage and Entertainment, Inc. and Taurus. Taurus
has filed a counter-claim asserting that there were undisclosed obligations
which Taurus was required to pay. The counter-claim sought damages in an amount
in excess of $25,000. This matter was dismissed for want of prosecution.

On April 20, 1999 the Company was served as a defendant in litigation that was
filed on February 23, 1999. The lawsuit is styled John M. Skora and Robert
Martin v. Trumps, Inc., Rick's Cabaret International, Inc., RCI Entertainment
(Texas), Inc., and Robert L. Watters, Cause No. 1999-09394, in the 11th Judicial
District Court of Harris County, Texas. The plaintiffs claim that they
purchased a dance from one of the dancers at one of the Company's nightclubs and
paid for the dance by the use of their credit card. The plaintiffs assert that
the Company violated the Texas Finance Code by imposing a surcharge for credit
card use. The Company has denied this allegation. The plaintiffs seek
reimbursement for all alleged surcharges, plus statutory penalties, attorney
fees and interest as may be allowed by law. The Company intends to vigorously
defend itself in this matter.

In January, 1999, the Company as named as a defendant in McGill v. RCI
Entertainment (Minnesota) Inc., No. 98-2742, U.S. District Court, Minnesota. The
plaintiffs have asserted claims for under federal and state civil rights acts
for discrimination and harassment. The case is in the discovery stage. The
Company intends to vigorously defend itself.

In June, 1999, the Company was named as defendant in Hubka v. RCI Entertainment
(Minnesota). Inc., No. CT 99-009560, Hennepin County District Court. The
plaintiff has

F-14
<PAGE>
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Litigation (Continued)

asserted claims under the Minnesota Human Rights Act and for negligence. The
case is in the discovery stage. The Company intends to vigorously defend
itself.

The Company is also the subject of other routine legal matters in the ordinary
course of business. The Company does not believe that the ultimate resolution
of the above matters will have a material impact on the Company's financial
position or results of operations.

Sexually Oriented Business Ordinance of Houston, Texas

In January 1997, the City Council of the City of Houston passed a comprehensive
new Ordinance regulating the location of and the conduct within Sexually
Oriented Businesses. The new Ordinance established new distances that Sexually
Oriented Businesses may be located to schools, churches, playgrounds and other
sexually oriented businesses. There were no provisions in the Ordinance
exempting previously permitted sexually oriented businesses from the effect of
the new Ordinance. In 1997, the Company was informed that Rick's Cabaret at its
location at 3113 Bering Drive failed to meet the requirements of the Ordinance
and accordingly the renewal of the Company's Business License at that location
was denied. The location in north Houston opened in December, 1998 similarly
failed to meet the requirements of the Ordinance as passed.

The Company filed a written request with the City of Houston requesting an
extension of time during which the Company could continue operations at its
original location under the Amortization Period provisions of the Ordinance
since the Company was unable to recoup its investment prior to the effective
date of the Ordinance. An administrative hearing (the "Hearing") was held by
the City of Houston to determine the appropriate Amortization Period to be
granted to the Company. At the Hearing, the Company was granted an amortization
period through July 1998. The Company has the right to appeal any decision of
the Hearing official to the district court in the State of Texas.

In May, 1997, the City of Houston agreed to defer implementation of the
Ordinance until the constitutionality of the entire Ordinance was decided by
court trial. In February 1998 the U.S. District Court for the Southern
District of Texas, Houston, Division, struck down certain provisions of the
Ordinance, including the provision mandating a 1,500 foot distance between a
club and schools, churches and other

F-15
<PAGE>
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Sexually Oriented Business Ordinance of Houston, Texas (Continued)

sexually oriented business, leaving intact the provision of the 750 foot
distance as it existed in the prior Houston, Texas Ordinance.

There are other provisions in the Houston, Texas Ordinance, such as provisions
governing the level of lighting in a sexually oriented business, the distance
between a customer and dancer while the dancer is performing in a state of
undress and provisions regarding the licensing of dancers that were upheld which
may be detrimental to the business by the Company. The Company, in concert with
other sexually oriented businesses, is appealing these aspects of the Houston,
Texas Ordinance.

The City of Houston has appealed the District Court's rulings with the Fifth
Circuit Court of Appeals, and the Company filed a brief with the Fifth Circuit.
In the event that the City of Houston is successful in an appeal, the Company's
Bering Drive location could be out of compliance. Such an outcome could have an
adverse impact on the Company's future.

On April 1, 1998, the City of Houston began enforcing certain portions of the
Ordinance, including the distance requirement between a customer and a dancer
while dancing, and the requirement that dancers be licensed. The City of
Houston's enforcement of the recently implemented provisions of the Ordinance
could have an adverse impact on the Rick's location in Houston, Texas. The
current requirement of a three foot distance between a dancer and a customer
could reduce customer satisfaction and could result in fewer customers at the
Houston location. The requirement that a dancer be licensed may result in fewer
dancers working, which could have an adverse impact on the Houston location. It
is unknown what future impact the enforcement of the Ordinance may have on the
Company's Houston locations.

Fair Value of Financial Instruments

The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, Disclosures about Fair
Value of Financial Instruments. The estimated fair value amounts have been
determined by the Company, using available market information and appropriate
valuation methodologies.

The fair value of financial instruments classified as current assets or
liabilities including cash and cash equivalents and notes and accounts payable
approximate carrying value due to the short-term maturity of the instruments.
The fair value of short-term and long-term debt approximate carrying value base
on their effective interest rates compared to current market rates.

F-16
<PAGE>
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Other

The Company presently has a three year employment agreement with Eric Langan
(the "Agreement") to serve as its President and Chief Executive Officer. The
Agreement, which extends through 2001, provides for an annual base salary of
$171,600. The Agreement also allows for an annual bonus, at the discretion of
the Board of Directors (excluding Mr. Langan), 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. The Agreement contains
a confidentiality provision and an agreement by Mr. Langan not to compete with
the Company upon the expiration of the Agreement.

Uncertainty Due to the Year 2000 Issue

The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 issue may be experienced before, on, or
after January 1, 2000 and, if not addressed, the impact on operations and
financial reporting may range from minor errors to significant systems failure
which could impact the Company's ability to conduct normal business operations.
It is not possible to be certain that all aspects of the Year 2000 issue
affecting the Company will be fully resolved.

9. EMPLOYEE STOCK OPTION PLAN

In 1995 the Company adopted the 1995 Stock Option Plan (the "1995 Plan") for
employees and directors. In August 1999 the Company adopted the 1999 Stock
Option Plan (the "1999 Plan") (collectively, "the Plans"). The options granted
under the Plans maybe 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 Plans are 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 Plans, to establish the terms of the
options granted to each participant, provided that all options granted shall be
granted at an exercise price equal to at least 85% of the fair market value of
the Common Stock covered by the option on the grant date and to make all
determinations necessary or advisable under the Plan. A total of 300,000 shares
could be optioned and sold under the 1995 Plan and 500,000 shares under the 1999
Plan. The Company does not plan to issue any other options under the 1995 Plan.

F-17
<PAGE>
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. EMPLOYEE STOCK OPTION PLAN (CONTINUED)

During the year ended September 30, 1999 and 1998, options were granted as
follows:

<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Exercise Exercise
1999 Price 1998 Price
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 300,000 $ 2.23 105,000 $ 2.50
Granted. . . . . . . . . . . . . 125,000 $ 2.04 230,000 $ 2.23
Expired. . . . . . . . . . . . . (232,500) $ 2.23 (35,000) $ 2.50
Exercised. . . . . . . . . . . . - -
Outstanding at end of year . . . 192,500 $ 2.15 300,000 $ 2.23
--------- --------
Exercisable at end of year . . . 167,500 $ 2.06 50,000 $ 2.08
--------- --------
</TABLE>

SFAS 123

In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
123, "Accounting for Stock-Based Compensation." SFAS 123 defines a fair value
based method

of accounting for an employee stock option or similar equity instrument and
encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. Under the fair value based method,
compensation cost is measured at the grant date based on the value of the award.
However, SFAS 123 also allows an entity to continue to measure compensation cost
for those plans using the intrinsic value based method of accounting prescribed
by APB Opinion No. 25, "Accounting for Stock Issued to Employees."

Under the intrinsic value based method, compensation cost is the excess, if any,
of the quoted market price of the stock at grant date or other measurement date
over the amount an employee must pay to acquire the stock. Entities electing to
remain with the accounting in Opinion 25 must make pro forma disclosures of net
income and earnings per share as if the fair value based method of accounting
had been applied. The pro forma disclosure requirements are effective for
financial statements for fiscal years beginning after December 15, 1995. The
Company has elected to measure compensation cost, including options issued,
under Opinion 25. Under this method, compensation expense amounted to $10,890
for the year ended September 30, 1999. The Company recorded an additional
$27,763 in expense for 1999 under SFAS 123 for options issued to non-employees.

Pro forma disclosures as required by SFAS 123 for the fiscal years ended
September 30, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Pro forma net loss . . . . . $(176,374) $(634,407)
---------- ----------
Pro forma net loss per share $ (0.05) $ (0.15)
---------- ----------
</TABLE>

F-18
<PAGE>
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. EMPLOYEE STOCK OPTION PLAN (CONTINUED)

The fair value of the awards was estimated at the grant date using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1999: risk-free interest rate of 4.5%; volatility factor of
374%; and an expected life of the awards of one year. The weighted average
assumptions for 1998 were: risk-free interest rate of 4.4%; volatility factor
of 127%; and an expected life of the awards of one to four years. The weighted
average contractual life of the outstanding options at September 30, 1999 was
4.1 years.

10. STOCKHOLDERS' EQUITY

The Company has outstanding 160,000 warrants to purchase its common stock as a
result of its public offering. The warrants are exercisable at $4.35 per share
until October 2000.

The Company acquired certain real estate in San Antonio, Texas under terms of a
12% subordinated convertible debenture (Note 4). The debenture is payable
monthly, interest only, until maturity in July 2004. The Company has the option
to redeem the debenture, in whole or in part, at its option if the closing price
of the Company's common stock should equal or exceed $8.50 per share for a
period of ten days. The holder of the debenture has the option to convert any
portion of the debenture to common shares of the Company at the conversion price
of $2.75 per share. The debentures are subordinated to the Company's bank debt
and other "Senior Debt", as defined. The debentures are collateralized by the
acquired real estate.

Taurus purchased real estate in Houston, Texas from Ralph McElroy, a principal
stockholder of the Company, where Taurus operates an XTC Cabaret. The Company
acquired the property from Mr. McElroy for the same price that Mr. McElroy paid
for the property. The Company financed the purchase of the property by the
issuance of a six-year $286,744 Convertible Debenture, secured by the real
estate acquired. The Company is a guarantor of this Convertible Debenture. The
principal balance of the Convertible Debenture is due in July, 2004, in one lump
sum payment. Interest is due and payable monthly, with the first interest
payment beginning in September 1998. The Convertible Debenture is convertible
into shares of Common Stock of the Company at any time prior to maturity at the
Conversion Price of $2.75 per share.

In connection with the sale of the Company's subsidiary in 1999 (Note 4), the
Company received a note receivable from the holder of the two debentures above
which is equal in amount and rate to the debentures above. The Company has
offset these notes receivable and payable in the accompanying balance sheet at
September 30, 1999.

F-19
<PAGE>
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. ACCOUNTING DEVELOPMENTS

SFAS 130

Statement of Financial Accounting Standards (SFAS) 130, "Reporting Comprehensive
Income", establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from investments
by owners and distributions to owners. Among other disclosures, SFAS 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Results of operations and financial position are
unaffected by implementation of this new standard.

SFAS 131

SFAS 131, "Disclosure about Segments of a Business Enterprise", establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products
and services, geographic areas and major customers. SFAS 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. This accounting pronouncement has not had an effect on the
Company's financial statements, since the Company presently only operates in one
segment of business, the operation of adult night clubs.

SFAS 132

Statement of Financial Accounting Standards (SFAS) 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits," revises standards for
disclosures regarding pensions and other postretirement benefits. It also
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis. This statement
does not change the measurement or recognition of the pension and other
postretirement plans. The financial statements are unaffected by implementation
of this new standard.

SFAS 133

Statement of Financial Accounting Standards (SFAS) 133, "Accounting for
Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes

F-20
<PAGE>
RICK'S CABARET INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. ACCOUNTING DEVELOPMENTS (CONTINUED)

SFAS 133 (Continued)

in the fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of a net investment
in a foreign operation, an unrecognized firm commitment, an available-for sale
security, or a foreign-currency-denominated forecasted transaction. Because the
Company has no derivatives, this accounting pronouncement has no effect on the
Company's financial statements.

F-21
<PAGE>

RICKS
CABARET INTERNATIONAL, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS

----------------
Is the owner of

THIS IS TO CERTIFY THAT

FULLY PAID AND NON-ASSESSABLE SHARES, NO PAR VALUE, OF THE COMMON STOCK, PAR
VALUE $0.01, OF RICKS CABARET INTERNATIONAL, INC. (HEREINAFTER CALLED THE
CORPORATION), TRANSFERABLE ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF
IN PERSON OR BY DULY AUTHORIZED ATTORNEY UPON SURRENDER OF THIS CERTIFICATE
PROPERLY ENDORSED. THIS CERTIFICATE AND THE SHARES REPRESENTED HEREBY ARE
ISSUED AND SHALL BE HELD SUBJECT TO ALL THE PROVISIONS OF THE RESTATED
CERTIFICATE OF INCORPORATION OF THE CORPORATION, AS AMENDED, TO ALL OF WHICH THE
HOLDER, BY ACCEPTANCE HEREOF, ASSENTS. THIS CERTIFICATE IS NOT VALID UNTIL
COUNTERSIGNED BY THE TRANSFER AGENT.

WITNESS THE FACSIMILE SEAL OF THE CORPORATION AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.

Dated
-----------

Ricks Cabaret
International, Inc.

----------------- [Corporate SEAL] -----------------
Secretary President

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