RCI Hospitality Holdings Inc (RICK) 2013 Q4 法說會逐字稿

Greetings and welcome to the Rick's Cabaret International fourth quarter 2013 and year-end earnings conference call and webcast. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions).

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Allan Priaulx, investor and media relations for Rick's Cabaret International.

Thank you, Doug. I just want to remind everybody that our Safe Harbor statement is posted at the beginning of our PowerPoint presentation, which is available at www.RicksInvestor.com or on Investor Calendar.

This statement reminds you that you may hear or see forward-looking statements that involve a number of risks and uncertainties. I won't go into the entire document on this call, but I do urge you to read it as well as the explanation of non-GAAP and adjusted EBITDA measurements that we use and that were included at the bottom of our PowerPoint.

I would also like to remind you that our press release and the 10-K, that's the press release for the earnings and for our guidance for 2014, they are posted on our website at www.RicksInvestor.com, as is the presentation that Eric Langan will give.

Finally, I would like to invite anyone who is in the New York City area to stop by Rick's Cabaret tonight at 6 PM. We are at 50 W. 33rd St. between Fifth and Broadway, for a due diligence event. It's a great time to get to see firsthand how we operate our club, to get taken behind the scenes and see how our flagship club operates.

Now it's my pleasure to present you to our President and CEO, Eric Langan. Eric?

Thank you, Allan. And thanks, everyone, for joining the call today. If you will please turn to slide 3, we will start with a quick review of our fourth-quarter and full-year results including our income statements, balance sheets and cash flow.

We will talk about our new project status, review our shareholder value strategies, how we think we stand in the rollup of our industry, and the discussion of the expansion in the restaurants and the guidance for 2014. Then we will have a question and answer session at the end for anything we don't cover.

If you turn to slide 4, we will go fourth quarter 2013 revenues. Overall for the fourth quarter we generated double-digit year-over-year increases in revenues and EPS, as we continue to emerge from the recession and the strong position in most of our markets around the country.

Keep in mind the fourth quarter is typically one of our softer quarters during the year. But during this fourth quarter ended September 30, total revenues increased 17.4% year-over-year to $28 million. New units acquired in the last two years and recently opened units during that time were the primary contributors to our increases. That includes the Jaguars chain, which is primarily in Texas, and our new restaurant concepts that we opened in the Dallas/Fort Worth market.

As a whole, our existing club revenues were down slightly. That reflects the purposeful and gradual move away from our recessionary strategies to our recovery strategies. I'm specifically talking about how we offered lower drink prices to attract customers in the past few years, and now we are shifting back to more normalized pricing as our better-spending customers are beginning to return to our business.

Overall, we are also benefiting from a significant presence in Texas, where there has been strong job growth and population influx. We also see Minneapolis and New York as strong growth areas for the Company.

Turning to slide 5, income from operations, during the fourth quarter income from operations increased 19.2% year-over-year to $4.4 million. On the upside, operating margin expanded 224 basis points to 15.5%, largely due to increased operating leverage. This more than offset costs associated with our restaurant rollouts, our opening of the Vivid Cabaret in Los Angeles and the Vivid Cabaret in New York which is opening the next quarter, and our temporary high rent for the Rick's Cabaret in New York City during the quarter, which I will explain more about later.

Turning to slide 6, for the fourth quarter 2013 GAAP and non-GAAP net income, going further down the income statement, interest expense increased to $1.8 million versus $1.3 million. The year-over-year difference reflects the Jaguars debt for the full quarter versus a year ago, plus other acquisition-related debt in 2013. As a percentage of revenue, interest expense increased to 6.4% versus 5.3% a year ago, which is well within our range of acceptable interest expense ratio.

The tax rate was 35% versus 39.8%. This reflects a permanent difference represented by the nondeductible stock-based compensation, which was much higher in 2012.

As a result, GAAP net income increased 10.3% to $1.6 million. On a per-share basis that equates to $0.17 compared to $0.15 a year ago. On a non-GAAP basis net income was $2.5 million versus $3 million. Per-share data on that is $0.27 versus $0.31.

The main difference between the fourth quarter's and last year's non-GAAP basis was the ramp up in operating cost associated with new units. We did not add these costs back in as part of the non-GAAP.

Switching to slide 7, with our fourth-quarter performance we generated another year of good growth in fiscal 2013. Highlights include total revenue increase of 17.8% to a record $112.2 million. Income from operations increased 33.9% to $22.1 million.

Operating margin expanded 19.7% -- or to 19.7% from 17.3%. Non-GAAP net income increased 8.9% to $13.4 million and non-GAAP EPS increased 10.2% to $1.40 per share.

Switching to slide 8, we will update our balance sheet. Turning to September 30 balance sheet, cash nearly doubled to $10.7 million from a year ago. We ended the year with $78.6 million of long-term debt.

Of that, $38.7 million is real estate-related debt. $29.2 million is subsidiary level debt from club acquisitions, which is collateralized by the loans on the businesses that we actually acquired. Parent company level debt was $7.2 million.

Our current portion of long-term debt is $8.8 million, which we are paying off -- which means we are paying off approximately $2 million a quarter on our long-term debt. The Tootsie's debt, which is our 14% debt, now stands at $5.3 million. We continue to work on accelerating and paying down that debt as quickly as possible, which would turn our overall debt reduction for 2014 to about $10.8 million.

We are also continuing to explore ways to deleverage our real estate debt generally. We will discuss more of this -- in more detail in a little bit later in the call.

Switching to slide 9, I will talk about our growth strategy. The key to our growth is maximizing our existing adult club licenses and properties, continuing to acquire new adult clubs and [willing] out our restaurants. As of right now we have 41 locations open, five in various stages of active development and three under active consideration, not including the acquisitions.

Switching to slide 10, we opened two new adult clubs during the fourth quarter. We opened Temptations in Beaumont in late September. We opened first as a BYOB, but we now have our liquor license. And though it is early, it seems to be getting better each month.

We also opened the Vivid Cabaret in Los Angeles. We did our soft opening in Los Angeles late in the fourth quarter and then a hard opening in the first quarter of fiscal 2014. We are still in the process of building our customer base there, but we are working on some new marketing strategies such as adding major directional billboards to help people find the location and direct traffic to it.

Our new locations that we have planned for the first quarter -- or opened in the first quarter of 2014 are the Jaguar's in Houston. As we mentioned in the last quarter call, we closed the original Rick's Cabaret site there in Houston and reopened it in December as Jaguar's. This location is part of an agreement that we reached with the City of Houston that basically grandfathers this location, allowing an adult entertainment exemption from the 1997 ordinance.

We also opened the newly acquired club in Dallas and renamed it the Black Orchid. And we had our grand opening for this club in late November as DFW's newest hip-hop party spot after it was acquired.

We have two new locations that will open in the second quarter of 2014. We are currently on track to open these locations, which is the Vivid Cabaret in New York -- we are getting close to finishing construction at -- which will be our second Vivid location. And we are planning a soft opening in early January with the grand opening during Super Bowl week.

We are also going to open the Bombshells in Webster, which will be our second Bombshells location. We expect to also open that location on January 29 in time for Super Bowl weekend.

We have three locations that are in the works right now for either the second or third quarters, which include the Rick's Odessa, which we are basically waiting for at this point is a public water supply permit which will allow us to dig the water well. We will be opening this location with a full liquor kitchen and we suspect it will do very well at its location. The Odessa market is really booming right now with the growth in the oil industry there.

We will also open the Bombshells in Austin. Right now we are on track to have our permits some time in this quarter, and we expect to open it either in the second or during the third quarter, depending on how long those permits take to get.

We are also looking at a possible site in Beaumont which we have purchased the real estate on, and trying to decide whether it is going to be economically viable for us to build a Bombshells on that location.

Switching to slide 11 and our new locations for the balance of fiscal 2014, adult clubs, with regard to the adult clubs we continue to look at several acquisition targets. We aren't just looking to go out and acquire anything at this point. We want to make sure that we get a very good return on our cash.

We also are trying to buy properties when we can. We are conservative and make sure that we are not getting ourselves into any long-term leases where we are just going to have the rents jacked up at sometime in the future. We believe that there are 500 clubs within our acquisition universe and we own less than 10% of them, which means there is significant potential to grow in this market.

With regard to our restaurants, we are looking at those to complement, not to replace the acquisition of adult clubs, and to leverage our existing skill set and smooth out our growth trends. Our target is to have 10 Bombshells locations open or in the works by the end of fiscal 2014. We have currently got the one open in Dallas, the one in Webster opening in January, the Austin one coming online, and we are seriously looking at three or four locations that are in the Houston, Beaumont, Miami Gardens and San Diego.

The restaurant benefits -- the nice thing about this sports bar/restaurant/live music venue is that we can lease the buildings. If our landlords come in and increase our rent, we can move down the street or move to another part of town, something we can't do because of the strict zoning of our adult clubs. We can also open multiple locations in a market and better predict the revenue and earnings growth. Most of the venues we are working on are going to do around $3 million in annualized revenue with profit margins between 15% and 25%, depending on volumes.

What we really like about the sports bar/restaurant/live music venue is the combination is proving very promising, based on those that we have opened. The three-in-one concept allows us to keep the restaurant filled throughout the day, the night and into the early morning hours, serving different patron demographics and maximizing our liquor sales, which have the highest margins for us.

On to slide 12, we are looking to unlock our real estate value. We continue to work hard on finding ways to unlock this value. In the adult club market the licenses go with the properties because of zoning. They can't be moved. So the real estate is essential.

As you look at the New York transaction, we are very excited that we are able to enter into this property for 50 W. 33rd St., as that location generates strong revenue and is very profitable. In October we entered into a contract to buy the land and building for $10 million and replace the original $23 million contract. Simultaneous, we sold our air rights for the property for $8 million to a third-party. This enabled us to reduce our lease on the three-story building to $100,000 a month for the next five years, rather than the $180,000 per month called for in the original agreement.

The transactions are part of the previously announced purchase of the land and building for $23 million. The terms of the new agreement are far more favorable to us, giving us more flexibility but also assuring us that we retain control over the property.

We are also very excited about our new REIT concept that we have begun exploring to help monetize our real estate property. We are still in the planning stages, but we currently intend to form a privately held REIT for similar investment vehicle that will own the real properties on which are venues operate.

We anticipate that Rick's will hold a minority equity interest in the REIT, and the remaining interest will be held by private investors. A subsidiary of Rick's will manage the REIT's asset portfolio.

It is intended that the REIT will acquire some property that we currently hold as well as other properties of the new venues that we acquire in the future. We are continuing to analyze our options with the REIT, but we hope to begin moving forward with the concept at the beginning of 2014 calendar year. The private REIT concept evolved from our earlier considerations of a public REIT, which we eventually rejected because our property holdings weren't quite extensive enough to merit a public REIT at this time.

Moving to slide 13, we will go into our fiscal 2014 year guidance. Our revenue -- we continue to look for a 20% to perhaps 30% growth, depending on circumstances. This will come from our existing clubs, new clubs and restaurants that were open in fiscal 2013, and planned rollout of new clubs and restaurants in fiscal 2014.

One great opportunity for us in the second and third quarters of this year is the number of major sporting events in our markets. They have the potential to drive significant traffic increase into our clubs, and should help our same-store sales.

In February the Super Bowl is at the MetLife Stadium just outside of New York City, where we have one of our biggest Rick's Cabarets and our new Vivid Cabaret opening before the Super Bowl this year. In March the Big East tournament at Madison Square Garden. New York City will be the final Big East tournament, and we expect a lot of alumni to attend. This will be a very big tournament this year for the Big East.

And then in April we have the Final Four in Dallas. Combined Dallas/Fort Worth is our single largest market with 11 current locations open. In addition, unlike last year, we have the professional hockey, which started on time this year, which should benefit us in particular in the New York, the Dallas/Fort Worth and the Minneapolis markets.

We expect our operating margins to continue to expand. We also expect greater operating efficiencies to improve purchasing as a result of our larger base, which would include our restaurants.

The end result is that we expect non-GAAP EPS to be approximately $1.70 per share and GAAP EPS (technical difficulty) [20] per share.

If you will switch to slide 14, (technical difficulty) our investor conferences. Because of our renewed [growth] (technical difficulty) going out and meeting with more investors. In early September we were at the Rodman investment conference in New York City. In early December we were at the LD Micro Cap conference in Los Angeles. In early January we will be at the Noble Financial Equity Conference in Port St. Lucie, Florida.

If anyone has other suggestions of conferences that we should attend, please email IR at Ricks.com and let them know of those conferences, and we will look into those as well.

We are also proud of the fact that we have been attracting more institutional investors and our stock has outperformed the Dow year to date and for the last five years and the last 10 years.

With that, I would like to take questions and answers -- session at this time.

(Operator Instructions) Howard Rosencrans, Value Advisory. Please proceed with your question.

In terms of -- I have a bunch of questions, but I will keep them short. When do you expect the comps to start turning?

I think we will see it in this quarter, the October to December quarter. We did have a little bit of ice for a week in Texas and it has been a little cold. So we lost a -- well, I say a weekend, we lost about half a weekend, I guess, in the Dallas market.

So that would be a few hundred thousand off of the gross revenues compared to what we normally do. But I think we will make that up in the strong with all the Christmas parties and whatnot. In October and November we are looking very good for comps. So I think we are there now.

What was the comp for Q4? I apologize; I don't see it in here.

You know, I don't -- I know, for the year, it was, I think, just under 2.4% negative. But I don't have in front of me; I'm sorry.

And you mentioned -- and can you give us a ballpark on what startup costs were? And since you don't exclude them from non-GAAP, give us a ballpark on what startup costs were in Q4 and for the year.

Oh, gosh, off the top of my head probably in the $400,000 range. But I would have to have Phil run some hard numbers.

For the fourth quarter or for the full year?

Oh, for the fourth quarter. With New York and L.A. opening, and we opened, of course, the Ricky Bobby location in that quarter as well.

And in terms of the -- where do you have maintenance CapEx? Where do you feel that runs now on the Company?

Here, let me open up the spreadsheet real quick.

Eric, do you want me to comment on that?

You got that handy? If you've got that handy, you bet. I've got it here on the --

It approximately -- every year it runs between $1 million and $1.4 million, $1.5 million.

And in terms of the leap, what is your confidence level that we get it done in, say, the first six months of 2014? It has certainly been -- you know, I mean (multiple speakers) from a public to a private, but you have been talking about it for a long time.

Yes, well, we've tried to find a way to actually do it and raise the money and do it properly. And we just weren't big enough to do the public side of it. But looking at the private REIT, with us owning about 9.9% and with us having the management of it, it will allow us to still control the Company and control the real estate, which is our big concern.

We don't want to end up in a position where we would lose control of our real estate, which has our licenses, and hurt the operating Company. So we believe this is a way to basically take our real estate and basically move it off balance sheet, put us into a lease position for the Company so we can grow faster, have faster growth rates for the Company, move the depreciation expenses into the private REIT and allow the earnings per share of Rick's operating Company to grow much faster.

And, (multiple speakers) capitalize it, we are about $40 million in cash.

It certainly makes a tremendous amount of sense. I'm just trying to understand your confidence level that it is going to get done, say, in the first half.

Doing it private is much simpler. We are talking with several people to help us basically form it, set it up, and fund it. That's -- the real key is funding it.

We have talked with a few basically family groups that manage money, and they are very interested in looking at the dividend yield of it. I think probably with the first six months we will have a good start on it. When we get all -- when we do it all, probably take a year to 18 months to basically move all of the real estate.

My goal is to get it done by the end of fiscal 2014, if we could, which -- about the next nine months would be great, so that we can basically have a $40 million in our warchest to go out here and acquire businesses with and not have to acquire the real estate side of it.

If you look at -- we looked at a classic of the XTC in Dallas that we bought, where we paid $3 million for the club and $3.5 million for the real estate -- or $5.5 million for the real estate and the club is making a couple million dollars a year. But instead of making a couple million dollars a year on a $3.5 million investment, it's an $8.5 million investment because we bought the real estate as well. Well, if we can take that real estate and just pay the rent on the $5.5 million, the return on our investment from the operating side is much, much bigger.

Daniel McCoy (sic) from Brean Murray. I'm sorry, Danielle McCoy from Brean Murray.

A few questions -- I know you are trying to get those two stores in New York City opened before the Super Bowl. Are there any other things you guys are doing to gear up for that?

Promotion stuff we are doing -- we just put out a billboard on the Long Island Expressway for the month of January, February and March, for the Vivid. Of course, Vivid is going to -- during Super Bowl is going to launch their radio station, so that will be done from the club. There's going to be a lot of Vivid girls in town, which I think will draw a lot of the Super Bowl attendees that week to our locations.

So I think that's going to be pretty positive launch of that location, put it on the map a lot faster than we did the original Rick's.

Okay, great. And how is the Los Angeles club doing? And is there any knowledge from that club that you have applied to the New York City Vivid?

No, New York and L.A. are totally different markets. We are still learning in the L.A. market. The laws out there are a little different.

The site, while it is in a major freeway area, is little more difficult to get to than we originally anticipated. So we are starting to put up some directional billboards that tell people which exit to take and to turn right or left to get to our location. We are hoping that will help and take off some of the confusion from the location.

Del Amo is a really large, long road that breaks up and goes all through LA. So when you put it into like your Google Maps, about six different ones come up. So it has been a little bit more difficult directing people directly to the locations. So, like I said, we're going to put up some billboards and we are doing some other marketing to help with that problem.

But it's doing okay; it's just not doing the numbers we think it will do. The New York location is a much different location. We believe it will do very, very well from the very beginning.

Okay. And then just lastly, I know you guys are switching from the promotional pricing that you guys did during the recession. Have you been saying any of the big spenders returning?

Yes, the big spenders have been back for a little bit. They come and go. But more consistency in the big spending -- it's the middle spender that we are really focused on right now, the guy that is going to come and -- he's not going to go out and blow it out in VIP, but he's going to come on a regular basis.

He's not there for cheap drinks. He's there for entertainment, and therefore he doesn't really care what he pays for his drinks. He cares more that we have a quality entertainment that we have in that regard.

And he wants to be in a place that is hip and busy, but not that's crowded to the walls like we get when we do the -- we are more of a nightclub when we do the $2 drinks and the discount. We fill up the bottle areas with discounted bottles and VIP discounts. We've really stopped a lot of the bottle and VIP discounts is what we have really stopped.

Igor Novgorodtsev from Lares Capital.

Hello, Eric. A couple of questions -- I know that there was a minor setback with the lawsuit in New York with the minimum wage. Was there any impact from this quarter or is it going to be any impact, do you expect, for the next quarter?

No. It's all still pending. The ruling changed a few things, but we had already changed things in our operation. So basically, on a go forward basis it's really whatever we work out in the liability of this lawsuit.

There's still a lot of open issues. And I don't want to comment too much on current pending litigation. But the reality is, it's not a lot has changed at this point. It's still going on.

We also intend to appeal some of the rulings in this deal, but we have got to go through the trial, get to the end, and then you can appeal. So we will see. Basically, we are in the same mode we've been in before. It's hurry up and wait.

We've got, like I said, a few more rulings. There are some state claims that are being dealt with right now, and we have to see what the rulings are on those claims before we can move to the next step on that.

[Did you set] any additional liabilities because you may feel that it's on your balance sheet because you may feel it may not result in a ruling in your favor or (multiple speakers)?

No, not at this point. I don't think there's -- nothing that has been ruled is overly significant at this point.

Okay.

We are going to wait and see where it goes from here. If it looks, at some point, like the attorneys think that we need to address that, then we will address potential liabilities and whatnot. But at this point we are just in a wait-and-see mode still. We still think that we can prevail on a lot of our claims.

And also I assume there is no additional movement on the [SP] from Texas, right?

Nothing on the [Baker tax] at this point.

Okay. My other question -- in your guidance, which is very strong, obviously, do you assume just the (inaudible) you are going to be opening, since you already announced the new schedule? Or do you assume there is going to be some additional acquisitions or buildout for the next year?

No. Those are -- only the 41 existing and the five that are under construction that we mentioned in the call. So basically, the 46 existing locations that we are already working on are included in that guidance. Nothing else is.

Just in general, as a strategy, how many clubs do you look to acquire or to build out in the year, like a long-term? What is your expectations (multiple speakers)?

I don't really look at it as a number of clubs. It's more of an amount of revenue. We want to grow our revenue at about 20% to 30%.

If we can buy -- depending on the level of clubs we buy or restaurants that we have to open, a typical restaurant is doing about $3 million in annualized sales right now for the two locations that we have open. And we would like to see, as we open the rest of them, we think they are going to be pretty much in those lines, in that line of that $3 million plus range. So that gives us a pretty steady idea of the growth from restaurants.

As far as buying more nightclub revenue, we are really watching what's out there. We are looking for some multi-club acquisitions where we can buy a three- to five-club chain, basically that's in a demographical area that we are already operating in or one that we are not operating in, of that size, but where the clubs that we acquire are clustered together is what we are looking for.

So basically we want to buy -- right now I think we do $130 million pretty easily. For a 20% growth this year we need to be at about $134.8 million. So like to buy at least another $5 million in revenue for this fiscal year. And if we can buy more than that, we certainly would. But we are going to look to buy at least probably another $5 million in nightclub revenue, adult nightclub revenue, one club or three clubs.

And my last question, hopefully very short -- as far as the REIT, private REIT, at what stage are you in right now? Because you said you are going to be -- you are expecting some movements early next year.

Yes, sure.

Do you already have a sense to send like a private IRS letter, [sort of loading those rates]? Or (multiple speakers)?

No. I think the way it works, we do that after the first year. You have to set it up, you have to have 100 investors. We are going through all the steps.

Right now we are setting up the management company. We are in the process of setting up the management company first and setting up the partnership agreements and putting all the partnership agreements together. So we are going to have the lawyers working on that through January. And hopefully we can get all that together by the end of January.

And then it's really a matter of who we choose to basically help us raise the money and put together the private placement memorandum and those types of things. So -- (multiple speakers)

Right, but you have to have permission from IRS to set it up as a REIT. You have to send them a private letter.

Yes, yes. Like I said, the attorneys are handling all that. That's what we are paying them for. They know what they are doing (multiple speakers).

But you have a high confidence that the IRS will allow you to do the REIT. Right?

Yes, certainly. There's no reason -- and all it's going to own is real estate. I don't know why there would be any problem with it. (Multiple speakers) own over 10%.

There were a couple of companies which were denied lease permits (multiple speakers).

Right, but this is going to be a private -- it's not actually going to be a public REIT.

Steven Martin, Slater Capital Management.

So what is going on? Talk about the holiday party environment this year versus last year.

In New York it has been unbelievable, especially with the Garden. The Garden events have been fantastic this year. Hockey has been great for us. Basketball has been really good. The Knicks have been -- I don't know what the big draw is. I don't know if they are winning a lot, but they are drawing a lot of people down to the Garden, at least.

They are not winning a whole lot of home games.

Yes, well, but they are bringing the people. And for us that's what matters. As long as they bring in the people -- I think the renovation of the Garden -- a lot of people come and see the renovations of the Garden, now that they are complete.

So it has been good. Same-store sales in New York are fantastic, which gives me a lot of hope that that the Vivid location is going to open up way ahead of our expectations. Originally I expect it to open up around $6 million to $7 million, which is a similar to what we opened the Rick's location at. But due to the timing of the Super Bowl and the publicity and the Vivid name and the Vivid radio launching and some other things that come into play for us, I think that location is going to open up maybe a lot stronger than that, maybe even open up in the $10 million range for the first year.

By the way, you didn't mention it, but the NCAA divisional with the regionals -- one of the regionals is at the Garden and one of the regionals is in Anaheim in California.

Yes. And Indiana, too.

And Indiana, too.

Yes.

Legal and professional fees were down a lot this quarter.

Yes, and for the year, too.

Yes, and for the year, too. Can you talk about that and what it looks like for next year?

Sure. Well, the discovery -- we are through with the discovery phases in the New York case, which -- depositions and lots and lots of motions and those types of things, which really raise your cost up of that suit. So I'm hoping that this year we will see a similar percentage of revenues.

I think we dropped from about 6% of revenues down -- here it is right here. We dropped from about -- for the last four years we have been at about 4.8% of our revenues. And for this year we dropped down to 1.92% of the revenues, just on legal fees. So that was good. And then our total accounting and legal went from 6.2% to 2.95%.

When you look at the rest of the country, the rest of your markets, what else is out there that you are spending legal on right now?

Oh, gosh. Well, of course, being public are included in those fees.

No, no. I meant on the -- that's going to be a recurring item always.

Right. Of course.

But I'm talking about the nonrecurring stuff.

You know, we've got some -- we have some discrimination cases from waitresses and whatnot around the country here and there, just -- and then I think that's really about it. We've got one lawsuit on an acquisition that we did that's very minor and we are not spending much money on it. I don't see any significant risk on that deal.

That's really about it. And of course, we had that telecommunications case a couple years ago that was pretty high in legal as well. But that's all settled. We got most of that kind of stuff behind us, I think.

We did change our insurance up in October and went with a self-insured risk premium on some of our liability stuff to give us more control of our cases and help keep our insurance costs down, because insurance costs in our industry are creeping up. But other than that, I don't see much that -- all of our other costs are pretty much staying pretty steady.

And since you haven't been doing a whole lot of acquisitions, you haven't had a whole lot of legal and professional related to those?

Exactly. We have done more new stuff and building, so there has been very little legal on those.

And on the slide, and maybe I missed it, you talked about the temporarily higher rent at the Rick's New York City.

Correct.

So when is that or was that, and when does it come --

I believe it went into effect June 1. It might have been July 1. I think it was June 1. I think we paid it for four months and then, starting October, it dropped back down to $100,000.

Okay. I think that's it. So I appreciate it. Thank you very much.

[Alex Hardman], a private investor.

Yes, I had another question about the New York location. Previously, in 10-K's, when you used to report that you had reached the amounts, it was a fixed rate up until like 2024 of like $40,000 increasing up by 3% a year. What happened there that got you guys up to $180,000, I guess, for both the (inaudible) of acquiring the properties?

Yes. There is a clause in the lease that allowed the landlord, if you got an offer for someone to build rent-controlled housing, to buy the property, that he could terminate the lease with six months' notice. He received an offer. We had the right of first refusal, which we exercised, which is how we got another contract for the $23 million, to begin with.

We had I forgot how many days to closing. We had a certain amount of time to close, at which point we originally -- the owner was going to finance the property for us. But when you finance property in New York City there's a 2.4% mortgage tax, which would cost us another $250,000. And so the lawyers basically came up with a way to structure it as a lease, continued the lease. So we basically changed the lease over and agreed to lease for $180,000.

While we were in those negotiations, we got an offer from a third party to purchase the air rights for $8 million. And then it's only the residential air rights. We still control the commercial air rights. We still have the rights to add about 10,000 -- just under 10,000 feet, I believe, we can add. I'd have to go look at the documents.

But we can add on to the building, still, at this point for the commercial space. But we sold the [FIR] for the residential air rights, and we sold those for $8 million, about $200 per square foot.

Is it actually feasible for you guys to actually add on to that building with the (multiple speakers)?

No, because the problem with adding on to the building, which is why we sold the air rights, is we take a risk. If we are closed for two consecutive years without operation --

You lose the business license?

We lose the license. Right. And so therefore it didn't make sense to us. We had talked to some hotel developers. We originally talked about building a hotel there and trying to figure out a way to do it without closing the club and those types of things.

At the end of the day, when we had somebody come into buy these air rights from us, we realized that there was a lot less risk in just selling those air rights, basically selling them for $8 million, paying $15 million for our land and building an our five FIR commercial and moving on. We are making $7.5 million a year out of the location, so --.

Yes, of course, you don't want to lose it.

Exactly.

Then following up on, I guess, the labor lawsuit out there, in the press you have gotten a lot of people that kind of, once they saw that it got a lot of press attention, once they saw that you got some follow-on lawsuits and stuff. What is the risk of that (multiple speakers)?

We have changed the -- we had changed the way we operated back in February of 2010 and updated our contracts as well, at that time. We have already had a couple of additional lawsuits in the Dallas market, in Texas. Those lawsuits were basically dismissed and sent to arbitration, per our new agreements with our entertainers.

And sure, from time to time we will probably be in arbitration in different markets. But it will be with individuals, we think, instead of an opt-out class. And that's really what we are concerned with his staying out of is these opt-out class-action lawsuits.

(inaudible) if they do succeed, then what is the liability to other clubs down the road? Or is it just a New York thing there?

Well, I think the New York -- well, the New York class -- the judge has already ruled the New York class ended, I believe, October of this year. So that class is done. That class is basically like a closed class, I think, at this point. I am not 100% familiar with all the ins and outs of it, but that's my understanding of it at this time.

And we are not overly worried about any more lawsuits. It's getting through this one that we are with, limiting the liability to this particular club, which we have already successfully done, we believe, and getting to the end of it. Probably it could take another year or two years to get to that point, where we know enough about what we are really liable for and not liable for, whether -- the state case is the big case.

There's motions and briefings on all that right now that are under consideration. So until those are done, it's really hard to see. Otherwise, it's -- the federal cases and often-in case, and there's 40-some girls in that case. And the other case could have up to 1900 girls in the case. But we don't know how many will make claims, you know.

So it's very difficult to know. And we don't even know at this point what we owe and what we don't owe, but we would owe. None of that has really been decided. That will go to the jury and the jury will have to decide most of those things. So, like I say, we are probably, I would guess, at least a year from knowing anything on that.

Okay. And then my last question is, basically, I was wondering if you could expand upon -- in the last couple of months you have done a lot of convertibles to raise cash. And considering the fact that basically the terms of these convertibles -- you see a lot with companies that are on the verge of bankruptcy or illiquidity issues and stuff like that, whereas you guys don't have those issues.

What is the logic? Obviously, I know you have issues to go into the market and raising debt. What is the -- why do this versus just letting your (multiple speakers)?

I actually thought our converts were pretty decent. The last one was 9%, so we lowered the interest rates a little bit. The convert was almost 20% above market. This is the way funding was done before 2006, 2007. All of our deals in early 2007 were all done that way.

While it's -- you may see companies like GE that can go out and borrow 3% money. You are not seeing small-cap companies borrow money. I think our rates are great.

We talked to -- hard money lenders are running 14% to 16% right now. We actually got one to loan us some money at 13% with no collateral or very little collateral. There's not as much liquidity out there as people want everyone to believe. The big banks don't loan to adult clubs.

And I understand that. I'm just wondering what -- versus this (multiple speakers) --

Well, the reason we borrow the money is, A, we had to close on this New York real estate. And we have the construction going on; that's a $4 million project in New York that we did. We did the restaurant project, which we totaled about $5 million investment in.

And, of course, the Black Orchid acquisition -- which was very small but still there. And the Jaguar's acquisition, which we spent $4 million cash on in September, plus another $1 million or so in upgrading those properties and bringing them up to our standards of the interiors and exteriors.

More of the concern is just using (inaudible) and cash flow to do that versus maybe (multiple speakers).

I think we are to that point now. It was just close. We had a big IRS payment due, so we paid the IRS, which some of our cash went out on.

Like I said, the New York location is $5 million, $4 million for the Jaguar's acquisition last September. If you look over the course of the year, we had quite a bit of money go out, plus we bought some other real estate, especially with our acquisition at the L.A. club and the restaurant.

So I think right now, at this point, I don't see us doing any more capital raises in the near future. And we are hoping -- right now, if you look, we have -- with the stock above $10, we have about $5 million in convertibles that will convert out that we won't have to pay back. So that will give us a lot stronger cash flow.

We paid off the convertible last year, the first convertible that we did. That was a convertible we paid off; it was about a $7.4 million convertible. All that was paid back. None of it converted. So $7.1 million of our cash went out there.

This year we are at $8.8 million in debt that we will be paying off, probably pay an additional $2 million on the Tootsie's debt as well.

(Operator Instructions) Howard Rosencrans from Value Advisory.

Just a couple of follow-ups -- I didn't entirely -- I think, Eric, you provided a range of guidance for 2014.

Well, we put a chart on there that is required that gives the range. And I will tell you where I am at with it. I am at $1.20 on GAAP and I am at $1.70 on the non-GAAP.

And let me tell you the reason why I'm -- such a big difference in there is, when we do the SEC-required chart that you see on there, we're not allowed to take into any one-time expenses. Now, the one-time expenses do not affect the non-GAAP number because they get added back in. However, those one-time expenses hit our GAAP number.

And so that's why I chose the lower range of the GAAP number and the upper range of the non-GAAP number, because I think without any one-time expenses we will be at the upper range of the GAAP number as well. However, knowing our history and some of the things that we have out there if we can settle the lawsuit and get out of it at the right price, we probably would consider doing that. And so I just wanted to have that leeway.

In terms of the -- what sort of legal do you have, are you assuming in your guidance?

You're talking about legal expenses?

Yes.

Very similar to what we had this year. I think our legal will stay in these -- in this area. Our legal fees will stay in the $2 million to $3 million range.

I didn't do the math. Hopefully, you guys did, in terms of what you can pay off. Is it fair to assume even -- we would really love to get rid of this 14% debt. And I see you got a little 13% debt due in March 2016. Do you think -- (multiple speakers)

A lot of it has to do --

-- you can (multiple speakers) make it a priority to get rid of both the 14% and 13% this year, as opposed to being so aggressive with acquisitions?

Well, where we will be at with that really depends on what our stock price is at. If our stock price stays high enough and we convert out, so we don't have to pay the cash out on the converts, then we will more than likely take that cash and use it to pay off the high-interest debt. Unless, of course, we have a big acquisition that comes up or something that we can do.

We are not really actively searching for large acquisitions right now. Not meaning we won't find one or one won't find us, but we are not out there really hunting them, chasing them at this point for this year. I think we've got our growth built-in for this year.

I would like to see us, like I said, buy at least another $5 million in revenue, which I think we can do out of cash flow or owner financing. And I would like to see us absorb and settle this year, build out some of the restaurants. We are building the restaurants out of cash flow right now. We can build a restaurant; it takes about four months to build it. It takes about $1.2 million to build it, so a couple hundred thousand a month, $300,000 a month to do the restaurants.

We can get those open and get them going without too much problem right out of our own cash flow. We won't need to raise money to do restaurants.

On the Vivid property in New York that you are opening, when did you start paying -- I'm a little confused -- the $23 million had to do with the current Rick's property? Or is that on the Vivid?

Well, the $23 million is on the current Rick's property. And that's what other people don't -- that's the other thing I should point out. If you look at our interest expenses, our interest expenses are pretty much in here running at about 6.3% for the year 2013.

We borrowed a lot of that money early in the year. While some of it came in later in the year, most of it was borrowed earlier in the year. And you had no New York City revenue.

So as the New York City club opened, we had all that revenue. That as a percentage of revenue is going to go down because we have already borrowed all that money. We have already spent it all, but we don't have any of it coming back in yet. So -- and that's going to help (multiple speakers) --

And when did you start paying rent, or have you, on the New York (multiple speakers)?

I believe we started paying rent in February of -- we started paying rent. And that rent is about $35,000 a month.

That's $35,000 a month. And how much do you think you will have -- it seems like the New York property, the Vivid property, has gotten off to a little bit of a late start. Right?

Well, we originally thought we could open in November. We had some steel issues and then we had an issue with the front facade of the building. We had an issue with that. We had to make some changes, some architectural changes which took a little bit longer.

And then we could probably open -- we originally were going to open on December 19. And then we started six days before Christmas, all new staff. We decided to let our staff go ahead and spend the holidays with their families and push the opening to the first week of January.

Okay, but that's hard. Right? That's really going to happen the first week of January. Right?

Yes, yes. Well, the final inspections, I believe, for the temporary CO -- I don't know if it's final, but the temporary CO inspection or basically the license to open inspection is on the 20th. We moved it to the 20th of this month, so this Friday that will be in.

Provided we don't have anything major, we will get it then. If we have some minor things they have got to fix, they will fix them real quick. And we still expect to have it -- we will have the right to open well before January 2, we believe.

Have you been absorbing startup expenses associated with that facility? And how much have they run?

Not really startup, just basically rent, of course the construction. Cash wise, we have put out about $3.8 million, I think, so far. I think we still owe couple hundred thousand more.

Right, but that is capitalized. What about your (multiple speakers)?

It is capitalized, but I'm talking from a cash basis. From an expense basis, the rents, of course; insurance, those types of things are being expensed, so electric bills, water bills, that type of stuff.

Okay, so there's nothing, really?

Probably $50,000 a month would be my guess. And it's just February. So I wouldn't say -- it's not -- it's a few hundred thousand bucks, $300,000, $400,000.

But that includes all the rent of $35,000 a month?

Yes, exactly.

Okay, I will second the prior caller's vote for staying away from the converts and let's also get all that rent (multiple speakers) --

Yes. You know, even the last convert, the last convert we basically -- we said, look, we were going to do the first convert. The stock price ran up in the middle of the convert, so we only raised $2.5 million when we were supposed to raise $7 million. So basically what we did is we waited.

The stock stabilized at a price. And we went out and raised the rest of that original raise at better prices and better interest rates. So it actually worked out okay for us.

But yes, we are -- at this point I think we are pretty much done taking on debt other than unless we buy something owner financed, where we are paying them with the cash flow from the business that we purchased. At this point I think we've got the growth built-in. These numbers are easily achievable for us, for 2014, which is pretty significant growth for us.

Now, as we convert to the REIT and if we start pulling off the real estate out and pulling large amounts of cash into the Company, which will clean up our balance sheet, right, it will take 30-some-million dollars, $38.7 million in real estate debt off of our balance sheet and put about $40 million cash into the Company in the conversion of moving that real estate into that REIT and blowing that cash in. At that point, then we will look for much more aggressive growth and looking for much larger purchase of adult clubs.

That will be a high-class problem. I look forward to it.

Exactly, exactly. I love those high-class problems myself. So -- and that's the real point is just to get that -- the market, for some reason, when we started looking at the restaurants and the people started comparing us to restaurants, we started getting a lot of people calling us, restaurant people calling us -- what is all this debt? What is all this debt? And so we started looking real hard at how could we move it off.

We thought we could do it through the public REIT, which I thought was the easiest way to do it. But it's not economically viable to do it that way. And now, like I said, as we have continued to expand it, it basically lets us move all the financing of the real estate into off-balance sheet financing.

We own the management company, so we get a management fee back on it, so we get some of our rents back. And really what I hope to do with the REIT at some point is move other adult club operators' real estate into the REIT as well, where Rick's would continue to get a management fee off of adult club real estate all around the country.

We would help capitalize and monetize other club owners' real estate, because they don't have any way to finance or do anything with their real estate, either. And we could enter and show them our long-term leases and show them how we do it with Rick's, and do the same thing for other adult clubs.

There are no further questions in the queue. I'd like to hand the call back over to Allan Priaulx for closing comments.

Thanks, Doug. And thank you, Eric. I just want to remind everybody that we do have a due diligence event at Rick's Cabaret this afternoon from 6 to 8 at 50 W. 33rd St.

I would also like to take a moment just to tell everybody that after 12 years with Rick's I'm going to retire from investor relations. And I will be turning my duties over to Gary Fishman and Steve Anreder of Anreder & Company. Gary has significant experience in the niche entertainment area. Steve is a former columnist for Barron's.

They are both first-class guys and you will enjoy working with them. I will continue to work with Eric and Gary and Steve on a consulting basis for the near future. And I wanted to take a moment to thank all of our investors, our portfolio managers, the analysts with whom I've worked for the past 12 years for your professionalism and, of course, your astuteness in choosing Rick's as an investment. Thanks.

Ladies and gentlemen, this does conclude today's teleconference and webcast. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.