RCI Hospitality Holdings Inc (RICK) 2008 Q4 法說會逐字稿

Greetings, and welcome to the Rick's Cabaret International fiscal year-end conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow formal presentation. (Operator instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Allan Priaulx, investor relations for Rick's Cabaret. Thank you, you may begin.

Thank you very much, good afternoon. I am Allan Priaulx, investor relations counsel for Rick's Cabaret International, Inc. Welcome to our fiscal year 2008 conference call and webcast. In a moment I will turn the call over to our CEO Eric Langan and to our CFO Phil Marshall who will present our '08 results and then answer any questions you might have.

Before we begin, I would like to call your attention to our Safe Harbor Statement which is included as slide two of our PowerPoint presentation available on our website and at PrecisionIR.com. Please take a good look at the statement as this conference call may contain forward-looking information within the meaning of Section 21-E of the Securities and Exchange Act of 1934.

Later this week, a complete transcript of this call will be available on seekingalpha.com. I would also like to remind you that Rick's Cabaret files reports and other documents with the Securities and Exchange Commission, and all of them are available at our website www.Rick's.com. The website is temporarily down, but it should be up in a matter of hours. And now I would like to turn our call over to Eric Langan.

Thank you, Allan. For you that are looking for our website, you can also if you need it immediately, you can download it from the SEC's website, EDGAR database. One of our database servers crashed and blue-screened today, so they are in there frantically trying to get it back up.

I will start today's presentation with an overview. We're going to review the fiscal 2008 results. We're going to look at the key drivers of our record revenue and income and we're going to review the fourth quarter of 2008. We're going to talk about our acquisition strategy, review the effect of the put option on our cash flow and take a look at how 2009 is shaping up for us so far.

To begin the highlights of 2008, we had record revenues of $59.9 million compared to $32 million in 2007, a total revenue increase of 87%. Same-store club revenues were up 14.6%. Net income increased to $7.66 million versus $3.05 million last year. Earnings per share were $0.91 on a fully diluted basis. Cash flow from operations were $14.8 million.

Our key revenue drivers were the strong performance of our Rick's Cabaret in New York City which had another record year and continues to grow. We had some of our contribution from 5.5 acquisitions that were made in 2008, plus our media division.

The strong same-club sales of 14.6% -- we're very, very pleased with how our same (technical difficulty) sales growth is going across the country. We do have certain locations that we're working on, but overall in 2008 our same (technical difficulty) sales were very strong.

Our alcoholic beverage sales were $22.28 million versus $12 million in 2007 and our service revenues were $28.67 million, up from $14.88 million, up nearly 93%. And as you know, our service revenues have little to no associated costs with them. So we always look to grow our service revenues.

Key '08 income factors were the strong margin contributions from New York City, Miami and our Fort Worth location, all contributing very highly to our margins.

Our improved operating margin increased to 22.9% versus 12.8% in 2007, while our payroll, general accounting and our interest expense were all higher due to acquisitions and an increase in the minimum wage in this year. We also became a full income taxpayer for the full year of 2008, unlike 2007 where we were -- had tax loss carryforwards.

To summarize the '08 fourth quarter, revenue was $17.23 million versus $8.97 million in 2007. Net income was $1.44 million versus $1.18 million in '07. The fully diluted earnings per share were $0.15 versus $0.18 in 2007. This was due mainly to having a lot more shares outstanding in 2008 than in 2007 due to some of the acquisitions. New clubs are underperforming from our original projection, and I want to talk a little bit about what we're doing about that.

In Philadelphia, we've converted the Rick's Cabaret into a Club Onyx. We are currently looking at what we're going to do with the Rick's in Dallas, as it is underperforming. What we're seeing in the markets right now are flight to quality. If you're number one in a market, our business is increasing, as in New York and Miami. Our business in Charlotte and Minnesota are still strong. And in some of our Dallas clubs, like the Club Onyx, we had a slight problem there with licensing and from -- transferring the license from the previous owner to our -- us became a problem with the local TABC. We do believe that a lot of it has to do with the same problems that we're having at the Rick's in Dallas with the TABC up there. The Dallas market is the only market at this time that won't have any problems with the state liquor licensing. So we're going to try to work those issues out in the next couple of weeks and maybe make some changes at that Rick's in Dallas. It really depends on what we're able to accomplish with the TABC and our negotiations.

The other thing we're doing is we are building a market share at our strong clubs. For example, in New York City, those of you that have been there. I don't know if you have been to 49th and 7th, but we just took a huge billboard out in time for the New Year's Eve celebration down there. That billboard will be up for a couple of months. We've also got another billboard going up on the [inter]-midtown tunnel that we believe will drive more traffic to our New York City location which had a record week the week before Christmas and exceeded our $300,000 in revenues that we thought would be the cap. So, hopefully, we'll continue to see growth at that location. We're going to continue to make plans and build market share in that location -- at that market for sure, as well as in our other markets.

Our acquisition strategy will remain the same in that we're looking for clubs in major metropolitan areas with high business convention traffic and tourists. We'll continue to look at the three to five times earnings. We're going to be very selective. We'll be looking to use cash and debt because we will not be issuing stock at these current prices.

We have no interest in giving up any equity at this time with our stock price where it's at.

I want to take a look at the put options. I've gotten a lot of phone calls. I know there's a lot of concern out there about how these put options are going to affect us. If you look in the 10-K, we put a full disclosure of exactly what those are. I will let you know, we are in negotiations to extend those put options out to longer period of time which will lower our immediate cash out on -- for this year and maybe next year, until the economy recovers.

But the nice thing about the put option, they have a long-term [leak-up] lockout agreement which stops the sellers from dumping large amounts of stock into the market and putting additional pressure. The seller has the right but not the obligation to have us purchase the shares, so we can easily extend that right to a longer period of time allowing the shareholder to hold that stock and allowing us to keep our cash in the company for a longer period of time. They also have a limited number of shares that can be put to us in any 30-day period, so it's not like we're going to have the whole $13.9 million that has to come out of the Company at one time. It's actually over a four-year period, and that breakdown is in the 10-K. It equates to about $2.9 million in 2009.

We look at the put options as similar to an interest-free debt. Yes, it's a cash that we're going to have to pay out, but we're not paying any interest on that $13.9 million while we're carrying it. And we're getting the use of the assets that we purchased with them.

As you can see, the total application, if the stock were valued at zero, is $13,935,020. It's considerably less than that obviously with the stock at $5. I think every dollar -- I'm sorry, we put it on the next page here.

The annual obligation for 2009 is $2.5 million. Each dollar movement in our stock price has an aggregate effect of $611,000 on the total obligation. So as you can see, we're about at $5, or $4.87, we're already saving our cash out would be about $3 million less than if the stock were zero.

Currently, we have a stock repurchase plan. The Board has authorized us to buy up to $5 million worth of our common stock. We have purchased 48,200 shares in the open market at prices ranging from $3.54 to $5.95 and we may continue to buy at certain levels, depending on our cash position and what opportunities are available to us.

Looking at 2009 so far, October was a very strong month. We were very excited the last couple of weeks of September. We really have seen kind of the markets -- the business kind of slowing down a little bit. I think people were really concerned as Lehman failed and other things were happening in September. Then, October seemed to come back real strong. November and December were both slightly weaker. However, our New York City club does continue its strong growth. We are projected to have a record first quarter and we continue to see that club growing. With our billboard plans, like I said, we're also doing other marketing in that market, as well other ones.

Our biggest problem in 2009 so far has been our Las Vegas acquisition. I take personal responsibility for that in that we closed that transaction and maybe we shouldn't have. We are looking at how to -- as the convention business comes back in January, how to capitalize on that.

I think our timing was a little off, but it was very hard to predict what would happen. We took the club over, we were doing about $250,000 a week in sales. We did that for the first two weeks. In December, it's much less than that. So we are going to have some problems with that Las Vegas market and we're going to be addressing those over the next few months. And hopefully, we'll see, when we give our next quarter results, we'll see that with the convention business coming back in January, that our numbers are back up there. We have also converted the Philadelphia club to a Club Onyx and we're looking at building the number one brands in markets, whether it's Onyx, XTC or the Rick's. Whatever we can do to have the number one brand in that class of entertainment, that is what we're looking to do. We feel that that's the current trend in our industry right now, is that flight to quality.

Our goal for 2009 is to continue to focus on our strong organic growth, try to continue to build our same-store sales. It is very difficult out there right now. We're getting an increase in customer accounts I think at some of the clubs, but people are spending less money. There's more concern with the economy right now, and hopefully in 2009 we get a new President and some stimulus package. Maybe we will see some of that in our results. With our increased number of people through the door, then hopefully they will start spending more money as well.

We're going to continue to build our management structure and try to draw in some more good people. With a lot of the big restaurants closing down, some of the big restaurant change chains closing down, and we're hoping to maybe attract some regional management, some good regional management from some of those operations.

We're going to continue to pay down our debt and we're going to build our cash position. We really want to take the chance, or I mean, we really want to build our own -- take advantage of our -- of this flight to quality in levering our market strengths and investing and building our market share. We're going to take strong defenses in '09 by taking steps to stop losses at certain clubs. We may even close a couple of clubs or sell a couple of locations that are underperforming for us. We're also going to be able to achieve legal and accounting savings by not doing as many acquisitions this year as we did last year, and we have also had some litigation that was in a very expensive phases here in the last six months or so, and so we're hoping that those will now enter into a much less expensive phase -- excuse me -- and we do believe that we will win those suits in the end.

It's important -- I believe it's important to reserve our strong cash position so we are going to do things that build that cash up. And I'm optimistic that if the economy recovers, that we will emerge a stronger and better positioned than our competitors to take advantage as we come out of this, and that the prices that we pay for clubs in 2009 and 2010 will be much less than we had to pay in the past.

Given an outlook and guidance for 2009 due to the uncertain economic conditions we don't have a strong enough level of confidence on how all of our locations are going to perform in some of our newer locations, especially Las Vegas. So we're not going to give an actual number for guidance on a going-forward basis. We do feel that we will exceed our 2008 revenues and our earnings per share. So we do feel we will earn more than the $0.91 that we earned this year out of $7.66 million that we earned this year. We're just not comfortable in this quarter with saying exactly how that's going to be. We want to kind of see the economy going into January. It's either going to get a whole lot better or a whole lot worse. We're hoping that it's going to get better, but we want to wait and see before we give you actual guidance going forward.

At this time I will end the formal presentation, go into question and answers. I'd like to thank you for being on the call this far and ask you to please visit one of our locations soon. And I will take questions at this time.

(Operator Instructions) Eric Wold, Merriman Curhan Ford.

I apologize for the noise in the background, I'm at the airport. A couple of questions. I guess the first one, you mentioned looking into a couple of things at some of the clubs to obviously correct them or stem losses. How many clubs are actually losing money?

Three that are our major concern right now -- our Austin location and two of our rather small locations, one in Houston and one in San Antonio, are the main problems.

Okay. I guess a couple of thoughts on specific markets. New York City, what your thoughts there going into this year with Sapphire allegedly taking over the Scores West or any of them looking at taking over Scores East, and how much of --?

Both of those clubs are 4000 square-foot clubs. They're pretty insignificant. Yes, they put out flashy press releases, but the reality of it is, they're operating at 60/40 on the east side. I don't know how much money they're going to spend on that. Eventually that lawsuit is going to come to -- that phase of that lawsuit is going to come to a close, so I don't know how much money they're willing to risk. With the opportunity that they may have to close some day, that loophole goes away. But we're not really concerned with Sapphire right now. We're more concerned with Hustler and Penthouse, the other two major competitors in that market. They're the ones that have 10,000 square feet. But I believe there's enough business in New York City for everyone. Our business is continuing to grow. We're getting market share, we're gaining market share every month. Some of our big customers aren't spending as much money, but we're getting so many more customers and that's why we have decided the opportunity to (technical difficulty) unbelievable (technical difficulty) for two months.

Basically it leaked out in March, but they didn't have anybody for these two months so it was hard for them to get a big (technical difficulty). We're happy to do it for the two months (technical difficulty) pick up a billboard just over on the Long Island Expressway coming into the Midtown Tunnel, which will hopefully get us some more of that bridge and tunnel business on the weekends and build our weekends up. Those are the days when we have the most capacity at the clubs are like Friday nights and Saturday nights, Sunday nights. So we're doing things to build those nights up, get more tourists in there on the weekends.

Last question on Vegas, I heard some reports that some clubs in the Vegas market down as much as 50% in recent months from where they were earlier this year. Are you willing to say kind of how much Vegas is down? What change with the recently with the taxi cab payments and kind of what -- (multiple speakers)

Taxi cab payments (multiple speakers) we just can't get the war to end. Our -- there's some clubs I believe are down 100% because they're closing or have closed, especially the regular nightclubs. It's pretty brutal in Vegas right now, especially these last two weeks. The casinos have been very slow, the people that are out there aren't spending any money, the people that are coming to the clubs. We're getting some headcount through the door, but nothing significant, nothing to really give us any hope at this point. But the convention schedule in January is a very heavy convention schedule. We've booked two major parties through a couple of the conventions. One is on a Tuesday night with 800 people. So I think we're going to see a big increase in January, and hopefully we'll see more recovery by March. It's just really a matter of survival I think right now for a lot of the clubs out there. I hear clubs are down as much as 70%. We are in that 50% to 70% range off year-over-year. It's, like I said, it's pretty brutal out there.

In hindsight, if we could have known, obviously we wouldn't have done the transaction. We are in it, we're going to survive it and it's just a matter of getting past the holidays and getting the convention season started back up and getting out there and building. The nice thing is, everybody is going to be building because everybody is hurt out there right now. So all the clubs are going to have to be out there and be at the top of their game to rebuild after this.

I appreciate that. Last, final question, on the put option, and I have not read the whole thing (inaudible). If you to extend some of these put options out a year or two, are there any penalties or anything else you have to pay in addition to what is already on the table with them?

We haven't negotiated anything like that. What we're asking for now is favors. A couple of our friends have agreed, so we are waiting to see what happens. I know definitely in 2009, at least two of the holders will extend probably, allowing us to pay about half of what they would've gotten during that time period. So instead of putting 5000, maybe they'll put 3000 or 2000 options to us a month for 2009. And then, we're going to see how the Company's cash position is and how we're positioned after that point as to how we want to move forward. And that's basically what we're trying to do right now, is preserve our cash and let our cash build up, make sure that whatever comes our way in the next two quarters, that we're prepared for it.

And, even if no one negotiates, it's only $2.5 million. As you can see, at the end of the quarter, we had $5.6 million in cash on hand. We can pay these put options. It's not an issue. We have the current cash on hand. We have cash flow, you know, $14.8 million operations. Even if we get a 50% reduction in cash flow from operations, we're still going to have enough money to pay for these put options. And I don't see us having that type of decline in revenue at all. I actually anticipate that our year-over-year revenue will continue to increase, as we have seen.

Jamie Clement, Sidoti & Co.

Just one quick bookkeeping question, and just a couple of other things. The diluted share count for the quarter -- do you have that in front of you?

We're going to pull it up real quick.

And then maybe while we wait for that, Eric -- oh, I'm sorry.

I think it was either 9.3 or 9.4 for the quarter. What was it for the quarter? 9,378,000.

All right, great, thanks. In looking at your other general and administrative costs, you're pushing $8 million for the quarter, if my math is correct. That basically costs you maybe close to $0.10 or so versus the third quarter. Can you get those costs down back into the $6 million range where you had been the prior two quarters? Because I know on the third quarter call, you talked about having some excess costs related to some of the new clubs and that sort of thing. What's going on, on the cost side? And looking to fiscal 2009, what are your goals there?

Well, we are definitely looking to keep our costs down. We've gotten rid of some marketing and -- some marketing staff. We've gotten rid of -- we've changed out some of our management, upper management. We've restructured a little bit and moved some of our guys that were in regional management, down into GM or lower spots a little bit and extended some of our -- so basically took six guys' jobs and turned them into four jobs, four guys basically doing that job now, which seems to be saving us some money. Other than that, we did have -- the minimum wage increase. We have a lot of employees that are in that area, or guys that we paid a little bit more than minimum wage. Well, with minimum wage increases (technical difficulty) give the minimum wage employees increase, we have to give the other guys a little increase. So we did have some increase from that as well. And a lot of it is legal expense. We had a lot of legal expenses especially in that quarter. We're going to have a little bit more of that from the Minnesota case in October, October, November, and probably in December. The judge, however, they tried to extend discovery. The judge denied their extension of discovery, so the discovery phase is over. That phase probably cost us $150,000 in depositions and what not a quarter for the last couple of quarters, or for this quarter that we're in right now and for the last quarter.

So I think as we move into 2009, those expenses will be much less than we have seen.

Scott Coleman, Credence Capital Corp.

Hi, guys, a few questions, one on Houston, Austin and San Antonio. What do you think you can do there? Do you own the land in those properties? And, what is your basic way about attacking what's going on at these locations? And then, net income of about 1.44 I think you said for the fourth quarter. That's about half of what we were projecting about six months ago per quarter. Or, is it that the fourth quarter, your fourth quarter, calendar third quarter, is a little slower than the rest of the months? Thanks.

The fourth quarter is typically our weakest quarter. July, August, September are our weakest quarters typically every year because of the summer months and school starting back up again. I don't think our projections were at 1.44 -- or, were at 2.8 or whatever. We weren't double. We're trying to pull them of now, see where we had our projections out.

Like I was saying, it could be (multiple speakers) million a year.

A little less than we thought, but I think we're only about a couple hundred thousand less than I thought we were going to come in, about 1.7. We just a had 9.3 million shares outstanding in the fully diluted count for the quarter. That was the big (technical difficulty). And we didn't close Vegas in time. We closed Vegas basically the second week of September, or first week of September. So I guess -- yes, you're right. You're right; we did have our projections much higher than the 1.44. I'm going to have to dig into that a little bit more and figure out exactly where the difference is. I know a lot of it was our legal expenses were much higher.

Okay (multiple speakers)

If you look at our legal, our legal was about $550,000 higher than the previous year.

Okay. And then on the poor-acting locations?

And that's the other part of it was our new locations that we just closed out. We hired, Phil was just showing me, that the new locations we project the earnings from the new locations we're projecting much higher than they actually came in at. And that's where we're really getting hit at. That's why we have converted Philadelphia. We're working on the Rick's in Dallas location right now and on coming up with a solution so we can actually spend the money and make it work because we know we're not going to have any problems with the liquor license or to basically give the liquor license up and convert it into an XTC and do a BYOB club at that location. Those are the two choices we have there. The Onyx location we have worked out. We have the liquor license back at the Onyx. The Onyx location is building, it's doing strong numbers again.

Which city is that?

In Dallas.

In Dallas, okay -- onyx in Dallas, right, okay. And then Austin, Houston and San Antonio which you said (multiple speakers)

Houston is a very small part of our stuff now. The Houston Rick's location is doing very good, which I really thought it would be affected more with business travel down because it's so close to the airport here. But it's actually doing pretty good. We have a decent management team in there and it's doing well. The Rick's in San Antonio is doing okay, not fantastic. We did get the new sign up in November, which I believe is starting to help. We are seeing people -- it's easy to find now. We had no freeway frontage. We're actually just a little off the freeway and so people couldn't really see us, but now we have a sign right on the freeway that's helping the Rick's location. The San Antonio location is doing fine there. The other club there, the Encounters, a little club we have there, we're probably going to sell or get rid of that location in this next quarter. We're just --

In Austin?

It's too small -- in San Antonio. The Rick's in Austin, basically what we have done there, we have negotiated with the landlord to lower the rent and we have basically cut our cost down. We have gotten rid of the kitchens. We closed the day shift. We're doing more of a lower end than the higher end Rick's location. We're bringing our costs down there and we're going to try to ride that out or maybe sell that location as well. We may put that location on the market as well if we can't curb the expenses there.

Got you. So in the three real problem locations that you brought up, you don't own the land in any of those three locations?

In Dallas, we do.

Oh, in Dallas, okay.

Our worst-case, if you want to look at a worst-case scenario, we could basically lock the leases, close the places down, basically those subsidiaries -- basically get rid of those subsidiaries. I guess the landlord would have rights to maybe see that subsidiary. But the parent company is guaranteed (technical difficulty) of those leases. So I don't think there's much parent company liability. Or, we could do some kind buyout of the leases which is what we would prefer; just do a buyout if we're going to lock the lease in, and just pay the landlord a cash settlement to let him sublease to someone else or something along those lines.

And pardon me if I missed this. You said 2009 is quite cloudy, which many companies are saying that, so it's hard to put out guidance.

I mean, how do I guess what's going to happen in the next -- ?

Absolutely, but what about the quarter we're in, which we're almost finished with now?

I don't have the hard numbers from December yet. December is weak, October was really good. So I am hoping that -- what I'm hoping is that the strength in October outweighs the weakness in December. November was about average so --

Earlier, you said that November was a little weak. Was it average?

Compared to October -- it was weak compared to October. I don't remember the net number -- I mean, the gross number offhand, but it wasn't -- it wasn't horrible. It wasn't scary. December right now, I mean we still have a few days left. I don't have this week's sales in. I have the last seven days sales to get in and get my report for. But with Christmas in there, I don't expect it to be fantastic, and it's definitely going to be weaker. December was definitely weaker than November, which is not normal. Normally, November is the weaker month. So, like I said, I'm hoping that people trend back. I think people are spending money on Christmas presents and what not and tightening everything up. But gas is back down under $2.00 a gallon, so I expect a lot of our lower and blue-collar clubs will [be doing] much better as we move into January, February and March.

Okay great, thanks.

[Michael Silverman], private investor.

A couple of calls ago, I believe in the spring, you had talked about some initiatives that you were looking into related to (technical difficulty) with some beverage manufacturers. Is that still happening?

I'm sorry, you broke up. Can you ask the question again?

(inaudible) looking at some co-branding and co-marketing ideas with some alcohol vendors. Is that still happening?

We have talked with them. We haven't had anybody -- obviously, everybody, even the alcohol companies now are cutting back their budgets and what not. You know we're talking with people, but we haven't really got anything solid at this (technical difficulty).

Okay, well that was the only thing I was curious about. Thank you.

David Fore, Montgomery Street Research.

What's kind of a good ballpark monthly cash flow number for you guys right now, or maybe as of November?

Good question. We're probably still around $1 million. It's hard to tell. We paid off some debt and we paid our income taxes, so we're trying to -- we're really trying to sort through all that ourselves right now as well. We're still gaining cash. We probably don't have $5.6 million on hand because of the debt repayments that we paid. We paid off a couple of convertible debentures and we paid our income taxes. So our income tax -- we made a $1.5 million estimated income tax payment, which is probably a little higher than what we are going to owe. But being the first year that we paid, we did not want to pay under. We know we can always take the credit in the next quarter, which we're going to have to pay anyway, so -- I would say it's around $1 million, still.

And the $1.5 million, that's all for the Texas poll tax?

No, no, no, that's our federal income tax.

Sorry -- what would be the Texas poll tax? I think you're (multiple speakers)

The Texas poll tax is now paid in a little over $2 million. The legislature is going to meet in this session. Our sources tell us they are going to take this issue up. They're probably going to try to do a new bill. I know that the nonprofits are going to submit a bill through their representatives. Our organization is going to try to submit a bill as well, but it's something -- we would like to see something we think our industry can live with as well as the state can live with to meet their funding needs and something that would be constitutional, versus the $5 tax and the way it's structured right now is unconstitutional. So we have hope. We would like to see -- Rick's is a company that's asking that, at a minimum, that all taxes that were paid be issued -- all taxpayers that had paid the tax be issued a credit. Not all the companies and clubs in the state have paid. We have. We have expensed that. I know that one of our competitors is not expensing that, that they are actually taking that on their balance sheet as a credit, money that is going to be owed back to them. We did pay under protest, we filed our protest letters. We're hoping to resolve that before the -- to do a full tax protest and be refunded a tax protest could take years. We're hoping that we can have -- come up with -- the legislator will come up with something that works for everyone, and we can get rid of these law suits and get back to making money and running our business.

Whenever that does happen, obviously since we have expensed all that money, we will have a credit come back. If you take that $2 million and credit it back in, it's a very considerable percentage of our earnings per share. So, you'll see it footnoted in the 10-K on how we're handling that. If you want detailed information, you can see exactly how we have expensed it, why we have expensed it and what we intend to do should we prevail in court and be issued the credit or a refund of that money.

If we're refunded the money, we'll probably take it all back in a single quarter. If we're issued credits, we're going to be looking at other ways of incoming it in as we are able to recoup it from future taxes.

So I do believe it will be a future revenue, that we basically have a $2 million savings account with the state right now, is how I look at it. We're just waiting for a confirmation of that from the state or from the lawyers or the judges.

And then another question. On the put option analysis in the 10-K, does the 611,000 shares reflect any renegotiation so far, or is that kind of the all-in-all number?

No, no. We have not -- we have negotiated, we haven't signed the actual extension and deals because of Christmas. We have been a little busy and it was difficult to get a hold of a couple of the people. And, since we're asking for favors, obviously we can't be too pushy. We just kind of have to wait until we can get the agreements done. There's lawyers and what not that we're on vacation this week and last week. So I'm hoping that, in early January, as we sign those agreements, and we'll probably do a press release and let the market know so that you can adjust your cash flow models.

[Michael Toledano], Gilder, Gagnon, Howe & Co.

Hey, guys, a couple of quick questions. CapEx requirement for next year, without any acquisitions or anything, what were you guys kind of thinking?

Very minor. I don't know -- do you know what we spent this year, a couple million? Probably $100,000, $200,000 a month max. I don't think we spend much more than that. Basically, we have to replace some carpets and chairs. We did do some signs and some extra stuff in this year. I don't see us doing a whole lot of extraordinary stuff in 2009. I think we're going to try to just ride it out and be defensive. Obviously we will repair everything that needs repair to keep our clubs in working order. But I don't see us making any -- we're not going to do any additions like we did last year at Fort Worth where we did a $400,000 add-on to the VIP room and what not. I don't think we have any of those plans at this time. We may do some stuff in Miami, a few hundred thousand in Miami, but that would probably be about the only thing that I'm looking at, at this point.

And, you mentioned your market share in New York City. What is, do you think, your market share in New York City? I'm kind of curious.

I don't have -- obviously other clubs' numbers aren't public. I can only go by rumors. But I think we're number two in the city right now. I think Hustler Club outdoes us because of their weekend business. We're just not strong on the weekends. We're strong Tuesday, Wednesday, Thursday; they are strong Friday, Saturdays. They do big business on Friday and Saturday; Thursday, Friday and Saturday. Everybody is pretty much busy on Thursdays. I think we have taken some market share from the Penthouse Club there, and I think they're probably number three now. I know that before we opened, their rumors were that they were doing about $20 million a year.

Was it Penthouse or Hustler?

Hustler -- no, I mean Penthouse. I believe Hustler is doing somewhere in the $22 million to $25 million range right now. We're probably -- we're getting close to the $15 million range. So if we can start picking up that weekend business, which we're hoping some of these billboards and some of our other marketing -- we're going to start marketing some of the other boroughs instead of just in the city, and we're going to see. If we can build that weekend business up at Rick's as well -- we do have the deck. We opened the outside deck. Of course it's wintertime, so not getting a lot of use out of it right now. But as we get to the spring, we'll have the outdoor smoking deck so you can drink and smoke, which is something very rare in New York City, you can do both at the same time unless you're at home. So we're hoping that's going to continue to build our business.

And we believe we just have -- you know, in New York City, we just have the greatest location in the city there at 33rd and Broadway; such easy access to all the trains, it's easy to get cabs, Penn Station is a block away, the Garden, the Empire State Building. I do believe that we can grow that location. I used to think that $300,000 was the cap, but I think we can do $0.5 million a week at that location now, I really do.

And I guess one last question. All in, and assuming the worst-case scenario with the put option. Let's for argument's sake, equity goes to zero, what would be your -- how much in debt are you going to pay this coming year, provided no renegotiations in a worst-case scenario?

Well, $2.5 million on the put. Do you know what our other current portion of long-term debt is? (multiple speakers) it's right here, let me look. The current portion of long-term debt, another $2.6 million -- so we will pay about $5.5 million of our debt of this year.

Okay, and so you have about that in cash, plus whatever your cash flow is this year, is basically almost all (multiple speakers)?

Exactly. There is no -- we did not have a liquidity problem. I have had people call and question, and I know there's rumors out there that we're going bankrupt. I mean, we made $7.6 million. I don't think -- if we were going to go bankrupt, we would have went bankrupt years ago when we were losing $3 million a year, not while we're making $7 million. From a cash a standpoint, we are in a good position. From a liquidity standpoint, we are fine. We still have sources of credit available to us. I have talked to a lot of people. I just -- I'm reluctant to borrow a bunch of money right now. I'm just reluctant to do anything until we get to March.

I totally agree. thank you very much.

It doesn't make any sense, in this environment not knowing what's going to happen with the new President, what he's going to do, what the stimulus package is going to be. There's just so many unknowns at this time that I think the best thing we can do is hunker down, build up our cash, strengthen every market, any place we can get market share and build from our competitors to do that at this time. I think that is the smartest thing to do.

Sorry, actually about that, the hunkering down. It seems to me just one of the best uses of the excess cash would be buying back more shares. I know you had the authorization for 5 million, but (multiple speakers).

You know, we actually bought some stock at $5.95. We bought stock about $5 -- I'd say we probably bought 15,000 shares -- I don't have the exact -- probably about a third about $5. We've probably bought a few shares between $4 and $5. But the majority of the stock I believe was bought under $4. When I see it down that cheap, it's so hard not to buy it, believe me. I come to Phil, I say how much cash have we got? What are we going to do? All right, well spend another $100,000 with the broker and let's pick up some more stock. And that's really what we're going to do. We're going to look at our cash, we're going to see where we're at, we are going to look at where cash is coming up. We have some cash going out in January for our property taxes, so we've got a bunch of cash that's going to go out in January. We'll probably send it out about the 21st. It's due on the 31st. So we'll pay all of our property taxes, we'll sit back and look at our cash. Basically, this quarter's income tax are already paid due to the overpayment, we believe.

So, all in all, we should be in strong shape. And like I said, if the stock stays at these prices, yes, we are going to buy it. I mean, what else would we buy? We're buying our own stock. It made $0.91 last year, so -- and at $4.50, we're paying five times. So I just think that is cheaper than we're buying anything else out in the market right now, as far as other clubs. And we know what our clubs are going to do. And we also know that if we get rid of a couple of clubs that are losing money, yes, we would take a onetime hit to our income statement, but then our earnings would go up because we're currently funding that with our cash flow. So we would increase our cash flow by getting rid of a couple of locations. It's something we're going to seriously look at as we get into March if we don't see things getting better at some of those locations and we can't reconcept or we don't -- we don't have a plan for them. The plan is going to be to get rid of them.

Great, thank you so much.

Larry Schumacher, Oppenheimer & Co.

A couple of questions. Can you guys quantify the decline in like corporate business at the bigger clubs, I guess? And totally unrelated, any issues with the economy and with the downturn in business with the performers, finding or having enough, or is it just plenty because of (multiple speakers)?

We get more. We're actually getting a lot of applications.

Can the girls still make enough money, or --?

Yes, the girls -- I mean, some locations, the girls are obviously -- it just depends on the market and what grade of club it is. Christmas has been pretty hard for some of the girls in some of the markets. The reports I'm getting from Miami are, the girls are still doing great. New York, the girls are doing very well. It's different business. They're doing more $20 dancers and less $400 an hour rooms.

However, when I was up in New York before Christmas, I had a friend come to the club and said, hey, come to me and said, hey, can you get me a room? I said yes, sure, come on. So I went to take to get him a room, there was an hour wait. And keep in mind, we have added three more rooms. So we now have 16 rooms, I believe or maybe 17 -- we have 16 or 17 rooms in a location. I don't know if they turned the one into -- they were going to turn the one room into two, but I don't know if they actually did it or if they left the one bigger room still, off the top of my head. I didn't actually go into the rooms because they were all occupied the whole time I was at the club.

The corporate business was more [important]?

You know, corporate business, it's hard to explain what is really happening from the corporate business. Like I said, what we're seeing, we're seeing -- certain clubs, we're seeing more visits, more frequent visits. What we're seeing, we're still seeing that same trend as before. The guy that used buy a $500 bottle of champagne is buying a $200 bottle of champagne. The guy that is buying a bottle is buying his drinks by the glass and the guy that, you know, is coming in and buying four drinks is only buying three or two. But I think with gas prices coming down, I'm hoping that we're going to see a little difference in that trend. It's just really hard to tell right now.

I think the biggest problem, and I find myself doing it as well, you're conscious of every decision you're making when you're spending money right now. And I think that affects -- and I think that's the biggest effect in Vegas. That's why people aren't in Vegas. They're not out there gambling and going crazy because they're just so conscious of every decision. Every dollar they're spending, they're conscience of, and they're watching it and keeping an eye on it more. So we're not getting the guys that come in and go crazy. They're very conscious of what they're doing. We still get the guys that are celebrating business transactions. There are still business transactions going down in New York City, believe it or not, and we're getting those guys that are coming and celebrating in those transactions. In a market where cash is king, the guys with the cash are out there making deals and making money, and they're celebrating. They don't celebrate as crazy as the Wall Street broker or a trader who makes a whole bunch of money trading stocks in one day. They're a little more cautious. So it's just a different type of spending. We have to create more value so customer service is much more important. And that's like I said, we're seeing that flight to quality and just in the way people think.

Eric Wold, Merriman Curhan Ford.

Just a follow-up question kind of on the question I guess two ago, talked about how you could eliminate or close some of these money-losing clubs, obviously a onetime hit and earnings would be better. I know you're not giving guidance for '09, but you're looking for net income, obviously [EPI], I guess net income to be higher in '09 than '08. Looking at the past two quarters, it would be tough. So maybe you could break down looking at Q4 how much of the EPS was -- loss was from clubs, how much would you consider onetime kind of legal that maybe a quarter or so from now won't be there. Kind of get us to what you (multiple speakers).

Well, we know it's $525,000 in the third quarter. I didn't really do a breakdown on this quarter. We have been so busy with the auditors because this was a K. The audit, and with all the Sarbanes-Oxley, because of our size we're really pushing on a lot more compliance issues and getting everything compliant. So I didn't have time to have Phil really get in and break that stuff down. But, yes, it is something we can definitely do.

To get above to $0.91 or somewhere around there, you'd have to say at least $0.07, $0.08 per quarter would be onetime-ish, or a loss [related].

Right. I think it's possible. Like I said, I just haven't dug into it. I know the legal has been hell, because I know I've spent a lot of time reading depositions in Minnesota. This law firm in Minnesota has just been having a heyday trying to -- I call it a fishing expedition, because that's really what they have been doing. They have been trying to get more and more and more information. They don't really have anything. They're suing us saying we didn't pay minimum wage. Well, we have records through the IRS that we have paid everybody minimum wage. So I just don't understand -- and they've got those records. So hopefully, like I said, we'll see these (technical difficulty) to an end here soon, and -- or at least the cost. I know the discovery process is over, so that's been the biggest cost. We do have the lawsuit in Minnesota -- or in New York, but it's a single -- they only have one defendant there, but trying to get a class with one defendant. Our lawyer is optimistic that, hopefully, that one will go away sooner than the Minnesota one did, but it's just hard to tell.

I think that we are the -- we're the test case for them. They're going to try to beat Rick's. If they can beat Rick's, then they are going to try to go after the industry and go after this independent contractor status deal. I don't know how it's all going to work out, but it's crazy for us, because in Minnesota they're suing us where the girls are employees, and then they are trying to sue us in New York because they aren't employees. So they are not happy if they're employees, they're not happy if they're independent contractors. It's like basically what they're saying is they don't want to girls to strip. Well, that's -- I don't know how we're going to deal with those issues. We'll just have to work through them, but we're very confident. The attorneys are on the case are very confident that our liability on it's very limited.

So let me ask this to try to (inaudible) in a conservative way. So if you look at the legal side, what the conservatively (multiple speakers).

If you took everything -- I mean I think (technical difficulty) Austin probably cost us $1 million last year, more than $1 million, Phil says a little more than $1 million. So Austin alone is a little more than $1 million. We have made some major cuts there that are probably -- lowered those expenses by $600,000 already with a reduction in rent and some of the other changes we have made. So I mean Austin alone is going to be $500,000, $600,000 plus in losses I think (technical difficulty). The Philadelphia clubs cost us some money, but with the new concept going, it has only been a few weeks but we're getting very positive results. We just had a record Saturday night, the Saturday after Christmas. It's really catching on. We have had a lot of major athletes come in in the past few weeks right before Christmas and now after Christmas for a couple of parties.

The Onyx concept seems to be very well for us. We got the liquor license back in Dallas, which was just a total pain. What happened was, we got a letter from the state saying we could operate for 60 days at the same time, but the license of the operator -- the underlying license for that letter expired November 11th -- is that the right day, I think? Yes, in November, sometime in November. So we were out of a license for six weeks because what happened is when the underlying license expired, then they said well the letter is no good. We said, well, we want to renew the license then. We'll just pay the fee, it's like $3500. They said, well, you can't renew the fee because you have a 60-day letter. You have to renew before you get the 60-day letter because you can't renew a license that's in transfer. So basically, they pulled a quick one on us, but that has been resolved. The license is issued, the club is open, it's doing very, very well. And as you know, that was probably one of the best acquisitions we made (technical difficulty) $7.5 million for the location, for the club. And it's doing -- it's back up to like $50,000-$70,000 during Christmas. So, I think in January we'll get those numbers back into the $100,000 a month range, or $100,000 a week range that they were at. So I mean, that club is doing $5 million in revenues and we paid $1.5 million for it.

One last final question. Where, accounting wise, where do the, when you make a payment to a cab driver, where does that go in the expense line?

Transportation expenses, right? Do we have it on here? Do you know where it went on this one? You're talking about in the K. Let's see, that's a very good question. I don't know where that went into cost.

(inaudible) advertising and marketing kicked up (inaudible) and I always heard that goes in there, but --.

Yes, I bet it did.

I can't remember.

Marketing went to $1.2 million. The problem is, it's only for three weeks so it's going to be real hard to pick it out. We will look that up and figure it out. It either went into advertising and marketing, or it went into other. I'm not sure which, we will have to look that up. I know we labeled it internally on the club's financial, the transportation costs, but I don't know where it went at -- (multiple speakers) in which category it broke down into in the K. I'll get that information for you, though (multiple speakers).

Ross Haberman, Haberman Fund.

I have got just two quick questions. How much in operating income for the year did New York and Miami do in calendar in your fiscal '08, if you break it down?

You think 55%, operating income from New York (multiple speakers)

Yes, all of the 13.7 in total --

(inaudible).

You're opening a (expletive) can of worms.

Yes, I don't know, probably about 60%.

60%? 60% of the 13.7? Okay.

I'm guessing, I don't know offhand. I don't have it in front of me, I'm just guessing that -- they're about 60% of revenue, so I am assuming they're -- they're a large portion of our income, for sure.

Maybe I can ask it a different way. How much did your losing locations lose in total for fiscal '08 as in -- I guess in dollars?

I don't have that in front of me, so I don't know off the top of my head. I know that Austin was our biggest loser, and it was a little over $1 million. We have a couple of small clubs that are losing a couple hundred thousand a year. Is that actual? Okay, so it's about $2.4 million, total.

$2.4 million, so you're saying the income from operations would have been about 16.1 without those losses?

14.8, so it would have been 14.8 and 2.4. So, 17-point-something -- yes, 17.3.

Okay, thank you, sir.

Reid Ellison, [M.D.] Witter.

Going back a little bit to some of these underperforming clubs, when you are saying they are losing, is that -- are you talking about that on a cash flow basis or just on a GAAP basis?

It's more of a GAAP basis but there is depreciation (technical difficulty) back in. So yes (multiple speakers) that's a GAAP basis.

They're still losing money, though.

Yes, they're still losing cash -- yes, they're still losing money on a cash basis as well, but that is GAAP. It will be a little less under than -- obviously we don't -- there's non-cash expenses in there.

Certainly, and then if we are -- I guess the reason for the underperformance I guess is decreased top line over the last couple of months then, right?

It's the decreased top line and I guess some expenses. They're just knew clubs. New clubs are a little fickle. When you're in this economy it has been tough because people don't want to try new things. That's what we're seeing out there. They're going to the club they know. I mean, take our Philly location. Facility-wise, it is the absolute best location in Philadelphia. The problem is, is the club -- Delilah's has been there for 15 years and they're the known name, the known quality club. And even though our facility is better, getting people to leave what they already know and what they already expect has been very difficult. So we decided this free concept. We did the demographic studies in Philly and found that the African-American market is way underserved and we converted the club over and it's doing fantastic.

Perfect. I guess if you were thinking about your total portfolio of nightclubs, what number would you say are the number one in each location? I guess I'm trying to figure out the number that might be sensitive to I guess you know --.

Miami is our strongest location, New York is our second strongest location. After that, Vegas should be -- actually, Vegas was coming in higher than New York when we purchased it, but in the current market I don't think it's going to beat New York. I think we're going to struggle there for at least a couple more months. And we could struggle through the summer. It's just so hard to say when the Vegas market is going to come back. Fort Worth is a very strong club for us. Charlotte, Minnesota are both good revenue. Minnesota doesn't make the net income because the costs are a little higher up there to operate. But then our Austin [FTC] location is one of our top income producers. Those are the big income producers, and then the rest are kind of mediocre; they contribute. Then we have our three or four locations that are really costing us money right now.

Okay, and then when talking about disposing of those clubs, what do you think you could get for those locations on a -- thinking about the multiples I guess of (multiple speakers) sales -- ?

Yes, I mean, we wouldn't get any of them multiple. There's no multiple, there's no earnings. Basically what you would be doing is selling a business license or the right to do business there, current leases, that type of stuff. We [backed] around, we shopped around, we got the people that are interested. If we carry paper, we'll get a much higher price. If we demand cash, we'll get a lower price. So it really just depends on the buyer. We've talked to a couple of larger chains that might be interested in the Austin location. It's a fantastic facility. I think it's just too early. If you have got the wherewithal to sit there and lose money for another year or so. If the building is -- if the economy is continued and the building is continued, and they're -- basically they're building about 3.8 million in retail space right down the street from us, they're building 9000 homes. Samsung just opened their new flat-panel television factory right there with 9000 jobs that they added. And the area right there where we are at is growing or was growing huge. And I think in the next year or so, it would have been great. I don't know how long that buildout is going to be. There's still construction going on in Austin. I've driven by it, I've spent some time around there. But it's much slower pace than it was a year ago.

I don't know if I want to sit there and hold a location for three years unless we can get there. We can open up eight hours a day or ten hours a day during the prime business night hours. We got the rent reduced and we can sit there and stop losing the money we are losing, get it to break even or much lower losses. Maybe we would hold onto it and see what happens for another year or two. If we can't, then we are going to have to look at other options. There are people out there still buying clubs. There is a lot of smaller operators that want to grow into bigger clubs. They may trade up to a couple of our locations if we finance for them. Those are the options. There is options out there, it's just right now we are weighing what the best thing to do is.

Okay, perfect. And then thinking, I guess switching the topic a little bit towards your use of debt or your use of cash now, the repaying of debt or repurchasing your stock. How do you think about that, especially now with credit availability the way it is?

Our debt, we're not in a hurry to pay off any debt. We've paid off some converts, A, because one of them came due, so we paid it off. Our debt is not that bad. It's about 7% to 9%. We have a 14% debt on Miami, but we can't even pay it off I think until next year, anyway, right, two years?

Yes, we can't even make prepayments on that right now. So we're not real concerned with that. In fact, I have already talked to one of the principles there; they're trying to get me to extend the debt already. Are you sure you don't want a couple more years? They love the interest payments they're making on it. What are they going to invest right now to make that guaranteed interest? And while it's not the best interest rate in the world, it's definitely one that we can afford to pay out of that location.

So, would you extend out at 14% if given the option?

Oh, yes, certainly. You know, if we need to. If we have the cash, we'll pay it off, obviously (inaudible). It just depends on what is available to us at the time. I'm not -- the 14% debt on that particular $10 million doesn't scare me at all. Basically what we were able to do at that location was go and buy $8 million in EBITDA for $15 million and let them keep $1.4 million of it, and then we turn it into $11.5 million in EBITDA. So that location has been very good to us.

Okay, perfect. And then, if you're looking at -- when you're thinking of your debt, do you have a specific net debt to EBITDA target?

I don't want to get over 2.5 to 1. If you look at where we are at right now, we're probably -- with the put options, we're probably a little over that, but we're still under three, I think. Actually I think we're still considerably -- what's our total there, 34? Long-term debt 30, plus (inaudible). So we are about 34 -- well, 32. We're about $32 million in long-term debt, add another 13, that's 45, $14.8 million in operating cash flow. So I think we are (technical difficulty) $13.7 million [income] operations.

So we are not in -- we're not pushing it yet. And we can still, like I said, we can still negotiate on a lot of those put options. We can still negotiate the debt. Most of our debt is mortgage debt. We can go get new 30-year mortgages, or new 20-year mortgages and lower our payments. A lot of our mortgages are still less than that, the ten years or five years. We have some other mortgages I think that's three years, three-year debt so we're making higher payments. I think the New York location gets paid off a few more months, too. I think our last payment in New York is -- well, it should be in the next few months, because if they exercise the puts, it won't be the full time period.

So, we have a lot of cash saved. We just paid off the first -- or the second lien in San Antonio was paid off. That was a $30,000-some a month payment. That was recently paid off in the last quarter. So as we continue to move forward, we're going to try to take our debt and put it on those longest-term schedules we can. We had much better interest rates than we did in the past. Our last two notes were 7.5%. So, yes, we own 300 and we're paying 70, so we've got five months. So we only have until five more payments on New York, $70,000 a month, and that's going to free up. So in May, we have another $70,000 cash flow that's been going out in the past that's not going to go out for [pack] debt. So you can take that and convert that over to some of the put options.

So we're fine from a liquidity standpoint. It's really a matter of how we want to manage our debt and manage the real estate. The other option we always have, if we need cash or we have to have cash, we can always do sale leasebacks. We own our real estate and we have $15 million in net real estate equity. Our worst-case scenario for the company would be to sell that real estate and lease it back.

Okay perfect, well thank you very much.

Peter [Mork], Mork Capital Management.

Just real quick on -- when you're talking about net income being $0.91 cents or higher next year, does that include any acquisitions?

No, absolutely not.

Okay, so that would just -- that would add to it, and it sounds like you're on hold in the short run here, the next couple of months at least. But it's something second half '09, you would be looking at?

I'm sorry, I lost you there for a second. Can you say that last part again?

Yes, just when -- you had the slide about the acquisition strategies. Are these things you see happening in the second half of '09?

Yes, I don't see anything happening before March, I will tell you that. I'm not even looking at acquisitions right now. If something comes up that's just, I get a broker who calls and says, I've got the steal of the century for you. We get another Onyx like the Onyx in Dallas where you buy a club that's doing $5 million in revenue and we can buy it for $1.5 million. Yes, I'm going to go look. But unless it's just something that is just almost too good to be true, and then I check it out and it's true, then maybe. But I'm trying to keep our costs down, we're keeping our travel down right now. We're just tightening up for at least the next three months. I really thought that we would start seeing changes by the time the election was over in November, but it hasn't happened yet. So we're going to sit back and wait. When we see the economy starting to recover, we start seeing business pick up, then we will get aggressive again. But I don't think it makes a lot of sense to be really aggressive right now.

With the economy, are people looking to sell clubs and cash out or [force] the cash out?

You know, I still get e-mails and I still get phone calls from time to time, guys that are saying, would you be interested in buying. I've had a couple of people trying to -- we've had a guy trying to buy one of -- buy our New York club. We've had a guy try to buy our Miami club. In the last three months, everybody thinking -- there's just talk out there that Rick's is in so much trouble because of these puts because people just didn't understand the puts. That's why we really tried to make sure that when this 10-K that we explained those puts that people understand, it's $2.5 million this year. It's insignificant in the overall liquidity of the Company. And hopefully that will squash all those rumors and all those questions that people have so that they understand.

There no further questions in queue. I would like to turn the call back over to management for closing remarks.

Thank you. That's really all we have. We're going to continue to work hard and try to increase our revenues, cut our costs back and look for opportunities out there. As we build our cash position, I believe opportunities will arise, whether it's our own stock because the market doesn't have the faith that the economy is going to recover. Obviously, we think the economy is going to recover. We're positioned very well, we're doing very strong in certain markets. In markets we're struggling in, we're going to make changes and we're going to keep those costs down and we're going to lower our losses in those markets. Vegas is our biggest uncertainty. We're going to continue to work at it. We're hoping that the convention business comes in January, February and March. If not, we'll start looking at how to reduce our costs even more in that market and ride out the storm.

Thanks for your time and talk to you again in a few months. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.