UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-K
 
 x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the
fiscal year ended September 30, 2009
 
 o
              Transition
      report under Section 13 or 15(d) of the Securities Exchange Act of
      1934
 
 Commission
file number: 001-13992
 
 RICK'S
CABARET INTERNATIONAL, INC.
 (Exact
name of registrant as specified in its charter)
 
 Texas
 State or
other jurisdiction of (I.R.S. Employer incorporation or organization
Identification No.)
 
 10959
Cutten Road, Houston, Texas 77066
 (Address
of principal executive offices)
 
 (281)
397-6730
 Registrant’s
telephone number, including area code
 
 Securities
registered pursuant to Section 12(b) of the Act:
 
 n/a
 Title of
each class
 
 NASDAQ
 Name of
each exchange on which registered
 
 Securities
registered pursuant to section 12(g) of the Act:
 
 Common
Stock, $.01 Par Value
 (Title of
class)
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
 Yes o  No x
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
 Yes o  No x
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x  No o
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§2323.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such
files.  Yes x  No o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.   Large
accelerated filer o   Accelerated
filer o   Non-accelerated
filer o
 Smaller
reporting company x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.): Yes o No x
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o  No o  NOT
APPLICABLE
  The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold as of the last business day of the registrant’s most recently
completed second fiscal quarter was $30,653,690.
 
 As of
December 3, 2009, there were approximately 9,365,670 shares of Common Stock
outstanding (excluding treasury shares).
  
 
 
 
 TABLE OF CONTENTS
 
 
 PART
      I
              
              Page
      No.Item
      1.
              Business
              3Item
      1A
              Risk
      Factors
              11Item
      2.
              Properties
              16Item
      3.
              Legal
      Proceedings
              18Item
      4.
              Submission of Matters to a Vote
      of Security Holders
              18PART
      IIItem
      5.
              Market for Registrant’s Common
      Equity, Related Stockholder Matters and Issuer Purchases Of Equity
      Securities
              18Item
      6.
              Selected Financial
      Data
              21Item
      7.
              Management's Discussion and Analysis of Financial
      Condition and Results of Operations
              21Item
      8.
              Financial Statements and
      Supplementary Data
              32Item
      9
              Changes in and Disagreements with
      Accountants on Accounting and Financial
      Disclosures
              75Item
      9A(T)
              Controls and
      Procedures
              75Item
      9B.
              Other
      Information
              75PART
      IIIItem
      10.
              Directors, Executive Officersand Corporate
      Governance
              76Item
      11.
              Executive
      Compensation
              78Item
      12.
              Security Ownership of Certain
      Beneficial Owners and Management and Related Stockholder
      Matters
              79Item
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              80Item
      14.
              Principal Accounting Fees and
      Services
              81PART
      IVItem
      15.
              Exhibits, Financial Statement
      Schedules
              82Signatures
              83
 2
 Table of Contents
  PART
I
 Item 1. Business.
 
 INTRODUCTION
 
 Our name
is Rick's Cabaret International, Inc. Through our subsidiaries, we currently own
and/or operate a total of nineteen adult nightclubs that offer live adult
entertainment, restaurant and bar operations. Six of our clubs operate under the
name "Rick's Cabaret"; four operate under the name “Club Onyx”, upscale venues
that welcome all customers but cater especially to urban professionals,
businessmen and professional athletes; five operate under the name "XTC
Cabaret"; one club that operates as “Tootsie’s Cabaret” and one that operates as
“Cabaret North”. Our nightclubs are in Houston, Austin, San Antonio, Dallas and
Fort Worth, Texas; Charlotte, North Carolina; Minneapolis, Minnesota; New York,
New York; Miami Gardens, Florida; Philadelphia, Pennsylvania and Las Vegas,
Nevada. In April 2008, we acquired a media division, including the leading trade
magazine serving the multi-billion dollar adult nightclubs industry. As part of
the transaction we also acquired two industry trade shows, two other industry
trade publications and more than 25 industry websites.
 
 We also
own and operate premiere adult entertainment Internet websites. Our online
entertainment sites are, CouplesTouch.com, NaughtyBids.com and xxxpassword.com.
CouplesTouch.com is a personals site for those in the swinging lifestyle.
Naughtybids.com is our online adult auction site. It contains consumer-initiated
auctions for items such as adult videos, apparel, photo sets, adult
paraphernalia and other erotica. There are typically approximately 10,000 active
auctions at this site at any given time. We charge the seller a fee for each
successful auction. The site xxxPassword.com features adult content licensed
through Voice Media, Inc. Most of our sites use proprietary software platforms
written by us to deliver the best experience to the user without being
constrained by off-the-shelf software solutions.
 
 Our
website address is www.Ricks.com. Upon
written request, we make available free of charge our Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all
amendments to those reports as soon as reasonably practicable after such
material is electronically filed with the SEC under Securities Exchange Act of
1934, as amended. Information contained in the website shall not be construed as
part of this Form 10-K.
 
 References
to “us,” “Rick’s” or the “Company” are to Rick’s Cabaret International, Inc. and
include our 100%-owned, 85%-owned and 51%-owned consolidated
subsidiaries.
 
 BUSINESS
ACTIVITIES--NIGHTCLUBS
 
 Prior to
the opening of the first Rick's Cabaret in 1983 in Houston, Texas, the topless
nightclub business was characterized by small establishments generally managed
by their owner. Operating policies of these establishments were often lax, the
sites were generally dimly lit, standards for performers' personal appearance
and personality were not maintained and it was customary for performers to
alternate between dancing and waiting tables. The quantity and quality of bar
service was low and food was not frequently offered. Music was usually "hard"
rock and roll, played at a loud level by a disc jockey. Usually, only cash was
accepted. Many businessmen felt uncomfortable in such environments. Recognizing
a void in the market for a first-class adult nightclub, we designed Rick's
Cabaret to target the more affluent customer by providing a unique quality
entertainment environment. The following summarizes our areas of operation that
distinguish us:
 
 Female Entertainers.
Our policy is to maintain high standards for both personal appearance and
personality for the entertainers and waitresses. Of equal importance is a
performer's ability to present herself attractively and to talk with customers.
We prefer that performers who work at our clubs be experienced entertainers. We
make a determination as to whether a particular applicant is suitable based on
such factors of appearance, attitude, dress, communication skills and demeanor.
At all clubs, except for our Minnesota location, the entertainers are
independent contractors. We do not schedule their work hours.
 
 Management. We often
recruit staff from inside the topless industry, as well as from large restaurant
and club chains, in the belief that management with experience in the sector
adds to our ability to grow and attract quality entertainers. Management with
experience is able to train new recruits from outside the industry.
 
 Compliance
Policies/Employees. We have a policy of ensuring that our business is
operated in conformity with local, state and federal laws. In particular, we
have a "no tolerance" policy as to illegal drug use in or around the premises.
Posters placed throughout the nightclubs reinforce this policy, as do periodic
unannounced searches of the entertainers' lockers. Entertainers and waitresses
who arrive for work are not allowed to leave the premises without the permission
of management. If an entertainer does leave the premises, she is not allowed to
return to work until the next day. We continually monitor the behavior of
entertainers, waitresses and customers to ensure that proper standards of
behavior are observed.
  3
 Table of Contents
  Compliance Policies/Credit
Cards. We review all credit card charges made by our customers. We have
in place a formal policy requiring that all credit card charges must be
approved, in writing, by management before any charges are
accepted.  Management is trained to review credit card charges to
ensure that the only charges approved for payment are for food, drink and
entertainment.
 
 Food and Drink. We
believe that a key to the success of our branded adult nightclubs is a quality,
first-class bar and restaurant operation to compliment our adult entertainment.
We employ service managers who recruit and train professional wait staff and
ensure that each customer receives prompt and courteous service. We employ chefs
with restaurant experience. Our bar managers order inventory and schedule bar
staff. We believe that the operation of a first class restaurant is a necessary
component to the operation of a premiere adult cabaret, as is the provision of
premium wine, liquor and beer in order to ensure that the customer perceives and
obtains good value. At most locations, our restaurant operations provide
business lunch buffets and full lunch and dinner menu service with hot and cold
appetizers, salads, seafood, steak, and lobster. An extensive selection of
quality wines is available at most locations.
 
 Controls. Operational
and accounting controls are essential to the successful operation of a cash
intensive nightclub and bar business. At each location, we have designed and
implemented internal procedures and controls to ensure the integrity of our
operational and accounting records. Wherever practicable, we separate management
personnel from all cash handling so that management is isolated from and does
not handle any cash. We use a combination of accounting and physical inventory
control mechanisms to maintain a high level of integrity in our accounting
practices. Information technology plays a significant role in capturing and
analyzing a variety of information to provide management with the information
necessary to efficiently manage and control each nightclub. Deposits of cash and
credit card receipts are reconciled each day to a daily income report. In
addition, we review on a daily basis (i) cash and credit card summaries which
tie together all cash and credit card transactions occurring at the front door,
the bars in the club and the cashier station, (ii) a summary of the daily
bartenders' check-out reports, and (iii) a daily cash requirements analysis
which reconciles the previous day's cash on hand to the requirements for the
next day's operations. These daily computer reports alert local management of
any variances from expected financial results based on historical norms. We
conduct a monthly overview of our financial condition and operating
results.
 
 Atmosphere. We
maintain a high design standard in our facilities and decor. The furniture and
furnishings in the nightclubs create the feeling of an upscale restaurant. The
sound system provides quality sound at levels at which conversations can still
take place. The environment is carefully monitored for music selection,
entertainer and waitress appearance and all aspects of customer service on a
continuous basis.
 
 VIP Room. In keeping
with our emphasis on serving the upper-end of the businessmen's market, some of
our nightclubs include a VIP room, which is open to individuals who purchase
memberships. A VIP room provides a higher level of service and
luxury.
 
 Advertising and
Promotion. Our consumer marketing strategy is to position our “Rick's
Cabaret” brand clubs as premiere entertainment facilities that provide
exceptional topless entertainment in a fun, yet discreet, environment. We use a
variety of highly targeted methods to reach our customers including hotel
publications, local radio, cable television, newspapers, billboards, taxi-cab
reader boards, and the Internet, as well as a variety of promotional campaigns.
These campaigns ensure that the Rick's Cabaret name is kept before the
public.
 
 Rick's
Cabaret has received a significant amount of media exposure over the years in
national magazines such as Playboy, Penthouse, Glamour Magazine, The Ladies Home
Journal, Time Magazine, Time Out New York, and Texas Monthly Magazine. Segments
about Rick's have aired on national and local television programs such as
“20/20”, "Extra" and "Inside Edition", and we have provided entertainers for
Pay-Per-View features as well. Business stories about Rick's Cabaret have
appeared in Forbes, Newsweek, The Wall Street Journal, The New York Times, The
New York Post, Los Angeles Times, Houston Business Journal, and numerous other
national and regional publications.
 
 NIGHTCLUB
LOCATIONS
 
 We
currently operate clubs under the name “Rick's Cabaret” in Houston, San Antonio
and Fort Worth, Texas; Minneapolis, Minnesota; New York, New York; and Las
Vegas, Nevada. We also own a Rick's Cabaret in Austin, Texas which is currently
listed for sale.  We also operate a similar nightclub under the name
“Tootsie’s Cabaret” in Miami Gardens, Florida. We also operate a total of four
nightclubs (one in Houston, one in Dallas, one in Charlotte, North Carolina and
one in Philadelphia, Pennsylvania), as “Club Onyx”, upscale venues that welcome
all customers but cater especially to urban professionals, businessmen and
professional athletes. Additionally, we own five nightclubs that operate as “XTC
Cabaret” in San Antonio, Austin, Dallas, and two in Houston, Texas. We sold our
New Orleans, Louisiana nightclub in March 1999, but it continues to use the name
“Rick’s Cabaret” under a licensing agreement.
  4
 Table of Contents
  RECENT
NIGHTCLUB TRANSACTIONS
 
 1.
              On
      November 30, 2007, we entered into a Stock Purchase Agreement for the
      acquisition of 100% of the issued and outstanding common stock of Stellar
      Management Corporation, a Florida corporation (the "Stellar Stock") and
      100% of the issued and outstanding common stock of Miami Gardens Square
      One, Inc., a Florida corporation (the "MGSO Stock") which owns and
      operates an adult entertainment cabaret known as "Tootsie’s Cabaret"
      ("Tootsie’s") located at 150 NW 183rd Street, Miami Gardens, Florida 33169
      (the "Transaction"). Pursuant to the Stock Purchase Agreement, we acquired
      the Stellar Stock and the MGSO Stock from Norman Hickmore ("Hickmore") and
      Richard Stanton ("Stanton") for a total purchase price of $25,000,000
      payable $15,000,000 in cash and payable $10,000,000 pursuant to two
      Secured Promissory Notes in the amount of $5,000,000 each to Stanton and
      Hickmore (the "Notes"). The Notes will bear interest at the rate of 14%
      per annum with the principal payable in one lump sum payment on November
      30, 2012, as amended. Interest on the Notes will be payable monthly, in
      arrears, with the first payment being due thirty (30) days after the
      closing of the Transaction. We cannot pre-pay the Notes during the first
      twelve (12) months; thereafter, we may prepay the Notes, in whole or in
      part, provided that (i) any prepayment by us from December 1, 2008 through
      November 30, 2009, shall be paid at a rate of 110% of the original
      principal amount and (ii) any prepayment by us after November 30, 2009,
      may be prepaid without penalty at a rate of 100% of the original principal
      amount. The Notes are secured by the Stellar Stock and MGSO Stock under a
      Pledge and Security Agreement. Additionally, as part of the Transaction,
      we entered into Assignment to Lease Agreements with the landlord for the
      property where Tootsie’s is located. The underlying Lease Agreements for
      the property provide for an original lease term through June 30, 2014,
      with two option periods which give us the right to lease the property
      through June 30, 2034. The terms and conditions of the transaction were
      the result of extensive arm's length negotiations between the
      parties.
 
 2.
              On
      March 31, 2008, our wholly owned subsidiary, RCI Entertainment
      (Philadelphia), Inc. (the “Purchaser”) completed the acquisition of 100%
      of the issued and outstanding shares of common stock (the “TEZ Shares”) of
      The End Zone, Inc., a Pennsylvania corporation (the “Corporation”) which
      owns and operated a nightclub previously known as “Crazy Horse Too
      Cabaret” (the “Club”) located at 2908 South Columbus Blvd., Philadelphia,
      Pennsylvania 19148 (the “Real Property”) from Vincent Piazza (the
      “Seller”). As part of the transaction, our wholly owned subsidiary, RCI
      Holdings, Inc. (“RCI Holdings”) acquired from the Piazza Family Limited
      Partnership (the “Partnership Seller”) 51% of the issued and outstanding
      partnership interest (the “Partnership Interests”) in TEZ Real Estate, LP,
      a Pennsylvania limited partnership (the “Partnership”) and 51% of the
      issued and outstanding membership interest (the “Membership Interests”) in
      TEZ Management, LLC, a Pennsylvania limited liability company, which is
      the general partner of the Partnership (the “General Partner”). The
      Partnership owns the Real Property where the Club is located. At closing,
      we paid a purchase price of $3,500,000 in cash for the Partnership
      Interests and Membership Interests, and issued 195,000 shares of our
      restricted common stock (the “Rick’s Shares”) valued at $23 per share for
      the TEZ Shares.
 
 As part
of the transaction and as amended in April 2009, we entered into a
Lock-Up/Leak-Out Agreement with the Seller pursuant to which, on or after one
year after the closing date, the Seller shall have the right, but not the
obligation, to have Rick’s purchase from Seller not more than 3,000 Rick’s
Shares per month (the “Monthly Shares”), calculated at a price per share equal
to $23.00 (“Value of the Rick’s Shares”) until March 31, 2010 and at the rate of
5,000 shares per month thereafter until the Seller has
received  $4,485,000 from the sale of the shares.  At our
election during any given month, we may either buy the Monthly Shares or,
if  we elect not to buy the Monthly Shares from the Seller, then the
Seller shall sell the Monthly Shares in the open market.  Any
deficiency between the amount which the Seller receives from the sale of the
Monthly Shares and the Value of the Rick’s Shares shall be paid by us within
three (3) business days of the date of sale of the Monthly Shares during that
particular month.  Our obligation to purchase the Monthly Shares from
the Seller shall terminate and cease at such time as the Seller has received a
total of $4,485,000 from the sale of the Rick’s Shares and any
deficiency.  As of September 30, 2009, the 177,000 shares of
restricted common stock were classified on the consolidated balance sheet as
temporary equity in accordance with ASC Topic 480, Classification and Measurement of
Redeemable Securities.  In April 2009, we renegotiated the
terms of these put options. Under the new terms, we have extended payback and
reduced the number of shares that can be put back to us.  No
consideration was required by us to renegotiate the terms of the put
options.
 
 Additionally,
at closing, the Seller and the Partnership Seller entered a five-year agreement
not to compete with us within a twenty (20) mile radius of the Club. Finally,
the Corporation entered into a new lease agreement with the Partnership giving
it the right to lease the Real Property for twenty (20) years (“Original Term”)
with an option for an additional nine (9) years eleven (11) eleven months
(“Option Term”) with rent payable at the rate of (i) $50,000 per month, subject
to adjustment for increases in the Consumer Price Index (CPI) every five years
during the Original Term and the Option Term, or (ii) 8% of gross sales,
whichever is higher. The maximum increase in the CPI for any five (5) year
period shall be 15%.
 
 3.
              On
      March 31, 2008, our subsidiary, RCI Entertainment (Austin), Inc. (“RCI”),
      completed the acquisition of 49% of the membership interest of Playmates
      Gentlemen’s Club, LLC (“Playmates”) from Behzad Bahrami (“Seller”),
      resulting in 100% ownership by us of RCI. Playmates owns an adult
      entertainment cabaret previously known as “Playmates” (the “Club”) located
      at 8110 Springdale Road, Austin, Texas 78724 (the “Premises”). Under the
      terms of the Purchase Agreement, RCI paid a total purchase price of
      $1,401,711 which was paid $701,711 in cash and debt forgiveness at the
      time of closing and the issuance of 35,000 shares of our restricted common
      stock valued at $20.00 per share (the “Shares”). For accounting purposes,
      our investment in 2008 is only $751,000, due to the previous losses of the
      minority interest which have been expensed. The investment has been
      assigned to goodwill.
  5
 Table of Contents
  Pursuant
to the terms of the Purchase Agreement and as amended in April 2009, on or after
one year after the closing date, the Seller shall have the right, but not the
obligation to have us purchase from Seller not more than 2,500 Shares per month
(the “Monthly Shares”), calculated at a price per share equal to $20.00 (“Value
of the Shares”).  Seller shall notify us during any given month of its
election to “Put” the Monthly Shares to us during that particular
month.  At our election during any given month, we may either buy the
Monthly Shares or, if we elect not to buy the Monthly Shares from the Seller,
then the Seller shall sell the Monthly Shares in the open market.  Any
deficiency between the amount which the Seller receives from the sale of the
Monthly Shares and the Value of the Shares shall be paid by us within three (3)
business days of the date of sale of the Monthly Shares during that particular
month.  Our obligation to purchase the Monthly Shares from the Seller
shall terminate and cease at such time as the Seller has received a total of
$700,000 from the sale of the Shares.  As of September 30, 2009, the
20,000 shares of restricted common stock were classified on the consolidated
balance sheet as temporary equity in accordance with ASC Topic 480, Classification and Measurement of
Redeemable Securities.  In April 2009, we renegotiated the
terms of these and other put options.  No consideration was required
by us to renegotiate the terms of these put options.  Under the new
terms, we have extended payback and reduced the number of shares that can be put
back to us.  In the event the Seller elects not to “Put” the Shares to
us, the Seller shall not sell more than 10,000 Shares during any 90-day period
in the open market, provided that Seller complies with Rule 144 of the
Securities Act of 1933, as amended, in connection with his sale of the
Shares.  The full results of operations of this entity are included in
our results of operations since March 31, 2008.
 
 4.
              On
      April 11, 2008, our wholly owned subsidiary, RCI Entertainment (Dallas),
      Inc., completed the acquisition of 100% of the issued and outstanding
      partnership interest (the "Partnership Interest") of Hotel Development -
      Texas, Ltd, a Texas limited partnership (the "Partnership") and 100% of
      the issued and outstanding membership interest (the "Membership Interest")
      of HD-Texas Management, LLC, a Texas limited liability company, the
      general partner of the Partnership (the "General Partner") from Jerry
      Golding, Kenneth Meyer, and Charles McClure (the "Sellers"). The
      Partnership owns and operates an adult entertainment cabaret previously
      known as "The Executive Club" (the "Club"), located at 8550 North Stemmons
      Freeway, Dallas, Texas 75247 (the "Real Property"). As part of the
      transaction, our wholly owned subsidiary, RCI Holdings, Inc. ("RCI"), also
      acquired the Real Property from DPC Holdings, LLC, a Texas limited
      liability company ("DPC").
 
 At
closing, we paid a total purchase price of $3,590,609 for the Partnership
Interest and Membership Interest, which was paid through the issuance of 50,694
shares of our restricted common stock to each of Messrs. Golding, Meyer and
McClure, for an aggregate total of 152,082 shares (collectively, the "Rick's
Club Shares") to be valued at $23.30 per share ($3,544,119) and $46,490 in cash.
As consideration for the purchase of the Real Property, RCI paid total
consideration of $5,599,721, which was paid (i) $4,250,000, payable $610,000 in
cash and $3,640,000 through the issuance of a five year promissory note (the
"Promissory Note") and (ii) the issuance of 57,918 shares of our restricted
common stock (the "Rick's Real Property Shares") to be valued at $23.30 per
share ($1,349,721). The Promissory Note bears interest at a varying rate at the
greater of (i) two percent (2%) above the Prime Rate or (ii) seven and one-half
percent (7.5%), and is guaranteed by Rick's and Eric Langan, our Chief Executive
Officer, individually. At Closing, the Parties entered into an Amendment to
Purchase Agreement solely to provide for the Sellers to set aside 10,500 Rick's
Club Shares under an Escrow Agreement for the offset of certain liabilities of
the Partnership.  We also incurred costs in the amount of $37,848,
which was paid in cash.
 
 At
Closing and as amended in May 2009, the Sellers entered into Lock-Up/Leak-Out
Agreements pursuant to which on or after one year after the closing date, the
Sellers shall have the right, but not the obligation to have Rick's purchase
from Sellers not more than an aggregate of 2,172 Shares per month (the "Monthly
Club Shares"), calculated at a price per share equal to $25.00 per share ("Value
of the Rick's Club Shares") from April 11, 2009 until April 11, 2010, at the
rate of 4,347 shares per month from April 11, 2010 until April 11, 2012 and
thereafter at the rate of 3,621 shares per month until each of the individual
Sellers has received a total of $1,267,350 from the sale of the Rick's Club
Shares. At our election during any given month, we may either buy the Monthly
Club Shares or, if we elect not to buy the Monthly Club Shares from the Sellers,
then the Sellers shall sell the Monthly Club Shares in the open market. Any
deficiency between the amount, which the Sellers receive from the sale of the
Monthly Club Shares and the Value of the Rick's Club Shares shall be paid by us
within three (3) business days of the date of sale of the Monthly Club Shares
during that particular month.  Our obligation to purchase the Monthly
Club Shares from the Sellers shall terminate and cease at such time as the
Sellers have received an aggregate total of $3,802,050 from the sale of the
Rick's Club Shares and any deficiency.
 
 Additionally,
at Closing and as amended in May 2009, DPC entered into a Lock-Up/Leak-Out
Agreement pursuant to which on or after one year after the closing date, DPC
shall have the right, but not the obligation to have Rick's purchase from DPC
not more than 828 Shares per month (the "Monthly Real Estate Shares"),
calculated at a price per share equal to $25.00 per share ("Value of the Rick's
Real Estate shares") from April 11, 2009 until April 11, 2010, at the rate of
1,653 shares per month from April 11, 2010 until April 11, 2012 and thereafter
at the rate of 1,379 shares per month until DPC has received a total of
$1,447,950 from the sale of the Rick's Real Estate Shares. At our election
during any given month, we may either buy the Monthly Real Estate Shares or, if
we elect not to buy the Monthly Real Estate Shares from DPC, then DPC shall sell
the Monthly Real Estate Shares in the open market. Any deficiency between the
amount which DPC receives from the sale of the Monthly Real Estate Shares and
the Value of the Rick's Real Estate Shares shall be paid by us within three (3)
business days of the date of sale of the Monthly Real Estate Shares during that
particular month. Our obligation to purchase the Monthly Real Estate Shares from
DPC shall terminate and cease at such time as DPC has received an aggregate
total of $1,447,950 from the sale of the Rick's Real Estate Shares and any
deficiency.
  6
 Table of Contents
  Finally,
at Closing each of the Sellers entered a five year Non-Competition Agreement
with us pursuant to which they agreed not to compete with us in Dallas County or
any adjacent county.
 
 5.
              On
      June 18, 2008, our wholly owned subsidiary RCI Entertainment (Northwest
      Highway), Inc. (the “Purchaser”) completed the acquisition of certain
      assets (the “Purchased Assets”) of North by East Entertainment, Ltd., a
      Texas limited partnership (the “Seller”) by and through its general
      partner, Northeast Platinum, LLC, a Texas limited liability company (the
      “General Partner”) pursuant to an Asset Purchase Agreement dated May 10,
      2008. The Seller owned and operated an adult entertainment cabaret known
      as “Platinum Club II” (the “Club”), located at 10557 Wire Way (at
      Northwest Highway), Dallas, Texas 75220 (the “Real
    Property”).
 
 At
closing, we paid a total purchase price of $1,500,000 cash for the Purchased
Assets. At Closing, the principal of the Seller entered into a five-year
agreement not to compete with the Club by operating an establishment with an
urban theme that both serves liquor and provides live female nude or semi-nude
adult entertainment in Dallas County, Tarrant County, Texas or any of the
adjacent counties thereto.
 
 As part
of the transaction, our wholly owned subsidiary RCI Holdings, Inc. (“RCI”) also
acquired the Real Property from Wire Way, LLC, a Texas limited liability company
(“Wire Way”). Pursuant to a Real Estate Purchase and Sale Agreement (the “Real
Estate Agreement”) dated May 10, 2008, RCI paid total consideration of
$6,000,000, which was paid $1,650,000 in cash and $4,350,000 through the
issuance of a five (5) year promissory note (the “Promissory Note”). The
Promissory Note bears interest at a varying rate at the greater of (i) two
percent (2%) above the Prime Rate or (ii) seven and one-half percent (7.5%),
which is guaranteed by us and by Eric Langan, our Chief Executive Officer,
individually. We also incurred $69,998 in costs, which was paid in
cash.
 
 6.
              On
      September 5, 2008, our wholly owned subsidiary RCI Entertainment (Las
      Vegas), Inc. (the “Purchaser”) completed the acquisition of certain assets
      (the “Purchased Assets”) of DI Food & Beverage of Las Vegas, LLC, a
      Nevada limited liability company (the “Seller”) pursuant to a Third
      Amended Asset Purchase Agreement (the “Third Amendment”) between
      Purchaser, Rick’s Cabaret International, Inc. (“Rick’s”), Seller, and
      Harold Danzig (“Danzig”), Frank Lovaas (“Lovaas”) and Dennis DeGori
      (“DeGori”) who are all members of Seller. The Seller owned and operated an
      adult entertainment cabaret previously known as “Scores” (the “Club”),
      located at 3355 Procyon Street, Las Vegas, Nevada 89102 (the “Real
      Property”).
 
 At
Closing, Purchaser paid Seller an aggregate amount as follows (the “Purchase
Price”):
 
 (i)
              $12,000,000
      payable by wire transfer;
 
 (ii)
              $3,000,000
      pursuant to a promissory note (“the Rick’s Promissory Note”), executed by
      and obligating Rick’s, bearing interest at eight percent (8%) per annum
      with a five (5) year amortization, with monthly payments of principal and
      interest, with the initial monthly payment due in April 2009 with a
      balloon payment of all then outstanding principal and interest due upon
      the expiration of two (2) years from the execution of the Rick’s
      Promissory Note; and
 
 (iii)
              200,000
      shares of restricted common stock, par value $0.01 of Rick’s (the “Rick’s
      Shares”) issued to the Seller.
 
 As part
of the transaction and as amended in April 2009, we entered into a
Lock-Up/Leak-Out Agreement with the Seller pursuant to which, on or after seven
(7) months after the closing date, the Seller shall have the right, but not the
obligation, to have Rick’s purchase from Seller a total of 150,000 of the Rick’s
Shares (“Rick’s Put Share”) in an amount and at a rate of not more than the
following number of the Rick’s Put Shares per month (the “Monthly Shares”)
calculated at a price per share equal to $20.00 per share (“Value of the Rick’s
Shares”):
 
 o
              from
      April 5, 2009 until May 4, 2009, up to a total of 15,000
      shares;
 o
              from
      May 5, 2009 until November 5, 2009 at a rate of 3,000 shares per
      month;
 o
              from
      November 5, 2009 until May 4, 2010 at a rate of 4,000 shares per
      month;
 o
              from
      May 5, 2010 until November 4, 2010 at a rate of 5,000 shares per month;
      and
 o
              from
      November 5, 2010 until October 4, 2011 at a rate of 6,000 shares per
      month.
 
 At our
election during any given month, we may either buy the Monthly Shares or, if we
elect not to buy the Monthly Shares from the Seller, then the Seller shall sell
the Monthly Shares in the open market. Any deficiency between the amount which
the Seller receives from the sale of the Monthly Shares and the Value of the
Rick’s Shares shall be paid by us within three (3) business days of the date of
sale of the Monthly Shares during that particular month. Our obligation to
purchase the Monthly Shares from the Seller shall terminate and cease at such
time as the Seller has received a total of $3,000,000 from the sale of the
Rick’s Shares and any deficiency. Under the terms of the Lock-Up/Leak-Out
Agreement, Seller may not sell more than 25,000 Rick’s Shares per 30-day period,
regardless of whether the Seller “Puts” the Rick’s Put Shares to Rick’s or sells
them in the open market or otherwise.
  7
 Table of Contents
  Upon
closing of the transaction, we entered a two-year Non-Compete Agreement with
DeGori (the “DeGori Non-Compete Agreement”) pursuant to which DeGori agreed not
to compete with the Club by operating an establishment serving liquor and
providing live female nude or semi-nude adult entertainment in Clark County,
Nevada or in a radius of 25 miles of Clark County, Nevada; provided, however,
that the Non-Competition Agreement specifically excluded the Penthouse Club and
the Bada Bing Club located in Clark County, Nevada. We agreed to pay DeGori cash
consideration of $66,667 for entering into the Non-Competition Agreement.
Additionally, at Closing, we also entered into a 12-month Consulting Agreement
with DeGori (the “Consulting Agreement”) for a total aggregate of $133,333 in
consulting fees payable in eighteen (18) equal monthly payments of $7,407.38 per
month with the first payment due October 15, 2008.
 
 Upon
closing of the transaction, we entered a one-year Non-Compete Agreement with
Lovaas (the “Lovaas Non-Compete Agreement”) pursuant to which Lovaas agreed not
to compete with the Club by operating an establishment serving liquor and
providing live female nude or semi-nude adult entertainment in Clark County,
Nevada, or any of its surrounding counties; provided, however, that this
Non-Competition Agreement shall specifically exclude the Penthouse Club and the
Bada Bing Club located in Clark County, Nevada.
 
 2009
Acquisition
 
 7.
              On
      September 30, 2009, the Company’s subsidiary, RCI Entertainment (North
      FW), Inc. (the “Purchaser”), purchased 100% of the outstanding common
      shares of Cabaret North, Inc., a Texas corporation (“CNI”).  CNI
      owns and operates an adult entertainment cabaret known as “Cabaret North”
      (the “Club”), located at 5316 Superior Parkway, Fort Worth, Texas
      76106.  The Company paid the Sellers total aggregate
      consideration of $2,300,000 (the “Purchase Price”).  The
      Purchase Price was payable as
follows:
 
 (i)
              $140,000
      directly to CNI to be used for the payment of outstanding
      liabilities;
 
 (ii)
              $2,000,000
      to the Sellers; and
 
 (iii)
              $160,000
      to be held in an escrow account to pay any liabilities or obligations of
      CNI which were incurred but unpaid as of Closing and to be held in
      connection with the outcome of certain pending
  litigation.
 
 Also, at
closing, each of the sellers entered into a five year Non-Competition Agreement,
and CNI obtained a consent from its landlord to the sale of the Shares of CNI by
the sellers to the purchaser and entered into an addendum to the lease agreement
by and between the CNI and the landlord of the premises where the Club is
located.
 
 RECENT
MEDIA ACQUISITIONS
 
 8.
              On
      April 15, 2008, our wholly owned subsidiary, RCI Entertainment (Media
      Holdings), Inc., a Texas corporation ("RCI Media"), acquired 100% of the
      issued and outstanding common stock (the "ED Stock") of ED Publications,
      Inc., a Texas corporation ("ED"), 100% of the issued and outstanding
      common stock (the "TEEZE Stock") of TEEZE International, Inc., a Delaware
      corporation ("TEEZE") and 100% of the issued and outstanding membership
      interest (the "Membership Interest") of Adult Store Buyers Magazine, LLC,
      a Georgia limited liability
company.
 
 ED Publications,
Inc.
 
 Under the
terms of a Purchase Agreement between Don Waitt ("Waitt"), RCI Media and Rick's
Cabaret International, Inc. ("Rick's") dated April 15, 2008 (the "ED Purchase
Agreement"), we agreed to pay Waitt the following consideration for the purchase
of the ED Stock:
 (i)
$300,000 cash at closing;
 (ii)
$200,000 cash payable in 6 months; and
 (iii) The
issuance of 8,696 shares of restricted common stock valued at $23.00 per share
(the "Closing Shares").
 (See the
explanation below of the subsequent renegotiation of these terms).
 
 Additionally,
during the three (3) year period following the Closing Date (the "Earn Out
Period"), Waitt shall be entitled to earn additional consideration (the
"Additional Consideration") of up to $2,000,000 (the "Maximum Amount")
consisting of $500,000 cash (the “Cash”) and 65,217 shares of restricted common
stock valued at $23.00 per share (the "Earn Out Shares"), based upon the
earnings before income tax, depreciation and amortization ("EBITDA") of RCI
Media. RCI Media will pay the Maximum Amount of the Additional Consideration to
the Seller if RCI Media's EBITDA during the three (3) year period following the
Closing Date totals an aggregate of $2,400,000. At the end of each twelve (12)
month period after the Closing Date, RCI Media shall determine its EBITDA and
shall pay to Waitt any such portion of the Additional Consideration as has been
earned. The Closing Shares and Earn Out Shares are collectively referred to as
the "Rick's Shares".
  8
 Table of Contents
  At
Closing, Waitt entered into a Lock-Up/Leak-Out Agreement with us pursuant to
which on or after one year after the closing date with respect to the Closing
Shares, or on or after seven (7) months from the date of issuance with respect
to the Earn Out Shares, if any, Waitt shall have the right, but not the
obligation to have with respect to the Earn Out Shares, if any, Waitt shall have
the right, but not the obligation to have Rick's purchase from Waitt 5,000
Rick's Shares per month (the "Monthly Shares"), calculated at a price per share
equal to $23.00 per share ("Value of the Rick's Shares") until Waitt has
received an aggregate of $1,700,000 (i) from the sale of the Rick's Shares sold
in the open market or in a private transaction or otherwise, and (ii) the
payment of any deficiency (as defined in the ED Purchase Agreement) by Rick's.
At our election during any given month, we may either buy the Monthly Shares or,
if we elect not to buy the Monthly Shares from Waitt, then Waitt shall sell the
Monthly Shares in the open market. Any deficiency between the amount which Waitt
receives from the sale of the Monthly Shares and the Value of the Rick's Shares
shall be paid by us within three (3) business days of the date of sale of the
Monthly Shares during that particular month.  Our obligation to
purchase the Monthly Shares from Waitt shall terminate and cease at such time as
Waitt has received an aggregate total of $1,700,000 from the sale of the Rick's
Shares and any deficiency (as defined in the ED Purchase
Agreement).
 
 In April
2009, we renegotiated the terms of its purchase agreements with the former
owners of ED Publications, Teeze and Adult Store Buyer (“ASB”) publications. The
new agreement with the former owner of ED Publications provides for the
execution of a $200,000 promissory note payable over two years with interest at
4% per annum in lieu of the issuance of 8,696 shares. We simultaneously
purchased 6,522 shares that had been issued in connection with the Teeze
transaction by means of a $150,000 promissory note payable over two years with
interest at 4% per annum.
 
 At
Closing, Waitt also entered a three (3) year Employment Agreement with RCI Media
(the "Employment Agreement") pursuant to which he will serve as President. The
Employment Agreement extends through April 15, 2011, and provides for an annual
base salary of $250,000. Pursuant to the Employment Agreement, Mr. Waitt is also
eligible to participate in all benefit plans maintained by our salaried
employees. Under the terms of the Employment Agreement, Mr. Waitt is bound to a
confidentiality provision and cannot compete with us upon the expiration of the
Employment Agreement.
 
 TEEZE/ADULT STORE
BUYER
 
 Under the
terms of a Purchase Agreement between John Cornetta ("Cornetta"), Waitt, RCI
Media and Rick's dated April 15, 2008 (the "TEEZE/ASB Purchase Agreement"), we
agreed to pay the following consideration to Cornetta and Waitt for the purchase
of the TEEZE Stock and the Membership Interest:
 
 (i) an
aggregate of $200,000 cash at closing; and
 
 (ii) the
issuance of 6,522 shares of restricted common stock to each of Messrs. Waitt and
Cornetta, for an aggregate of 13,044 shares of restricted common stock to be
valued at $23.00 per share (the "Rick's TEEZE Shares").
 
 Pursuant
to the TEEZE/ASB Purchase Agreement, on or after one year after the closing
date, each of Messrs. Waitt and Cornetta shall have the right, but not the
obligation to have Rick's purchase the Rick's TEEZE Shares calculated at a price
per share equal to $23.00 per share ("Value of the Rick's TEEZE Shares") until
Messrs. Waitt and Cornetta have each received $150,000 (i) from the sale of the
Rick's TEEZE Shares sold by them, regardless of whether sold to Rick's, sold in
the open market or in a private transaction or otherwise, and (ii) the payment
of any deficiency (as defined in the TEEZE/ASB Purchase Agreement) by Rick's. At
our election during any given month, we may either buy the Rick's TEEZE Shares
or, if we elect not to buy the Rick's TEEZE Shares, then Cornetta and/or Waitt
shall sell the Rick's TEEZE Shares in the open market. Any deficiency between
the amount which Cornetta or Waitt receives from the sale of the Rick's TEEZE
Shares and the Value of the Rick's TEEZE Shares shall be paid by us within three
(3) business days of the date of sale of the Rick's TEEZE Shares during that
particular month.  Our obligation to purchase the Rick's TEEZE Shares
shall terminate and cease at such time as Waitt and Cornetta have each received
$150,000 from the sale of the Rick's TEEZE Shares and any
deficiency.
 
 At
Closing, Cornetta entered a five year Non-Competition Agreement with us pursuant
to which he agreed not to compete with us either directly or indirectly with
TEEZE, ASB, RCI Media, Rick's or any of their affiliates by publishing any
sexually oriented industry trade print publications, with the exception of a
publication known as "Xcitement" which is currently owned and operated by
Cornetta.
 
 BUSINESS
ACTIVITIES--INTERNET ADULT ENTERTAINMENT WEB SITES
 
 In 1999,
we began adult Internet website operations. Our xxxPassword.com website features
adult content licensed through Voice Media, Inc. We added CouplesTouch.com in
2002 as a dating site catering to those in the swinging lifestyle. In 2005 we
purchased CouplesClick.net, a competing site of our CouplesTouch.com site, in
order to broaden our membership throughout the United States. As part of this
transaction, we organized RCI Dating Services, Inc., which operates as an
addition to our internet operations, to acquire CouplesClick.net from
ClickMatch, LLC. We transferred our ownership in CouplesTouch.com to RCI Dating
and, as a result of the transaction, we obtained an 85% interest in RCI Dating,
with the remaining 15% owned by ClickMatch.
  9
 Table of Contents
  Our
Internet traffic is generated through the purchase of traffic from third-party
adult sites or Internet domain owners and the purchase of banner advertisements
or "key word" searches from Internet search engines. In addition, the bulk of
our traffic now comes from search engines on which we don’t pay for preferential
listings. There are numerous adult entertainment sites on the Internet that
compete with our sites.
 
 BUSINESS
ACTIVITIES--INTERNET ADULT AUCTION WEB SITES
 
 Our adult
auction site features erotica and other adult materials that are purchased in a
bid-ask method. We charge the seller a fee for each successful auction. Where
previously we operated six individual auctions sites, now we have combined these
into one main site, NaughtyBids.com, to maximize our brand name recognition of
this site. The site contains new and used adult oriented consumer initiated
auctions for items such as adult videos, apparel, photo sets and adult
paraphernalia. NaughtyBids.com has approximately 10,000 items for sale at any
given time. NaughtyBids.com offers third party webmasters an opportunity to
create residual income from web surfers through the NaughtyBids Affiliate
Program, which pays third party webmasters a percentage of every closing auction
sale in which the buyer originally came from the affiliate webmaster's site.
There are numerous auction sites on the Internet that offer adult products and
erotica.
 
 BUSINESS
ACTIVITIES – MEDIA GROUP
 
 Our Media
Group is the leading trade magazine serving the multi-billion dollar adult
nightclubs industry. It also owns two industry trade shows, two other industry
trade publications and more than 25 industry websites.   Founded
in 1991, Exotic Dancer is the only national business magazine serving the 3,800
adult nightclubs in North America, which have annual revenues in excess of $2
billion, according to AVN Media Network. ED Publications currently publishes the
Annual VIP Guide of adult nightclubs, touring entertainers and industry vendors,
and "Club Bulletin", a bimonthly news
magazine for the owners and operators of adult nightclubs. ED Publications also
produces the annual Gentlemen's Club Owners
Expo, the only national convention for the adult nightclub and feature
entertainment industries, and offers the exclusive ED VIP Club Card honored at more than 850 adult
nightclubs.
 
 COMPETITION
 
 The adult
topless club entertainment business is highly competitive with respect to price,
service and location. All of our nightclubs compete with a number of locally
owned adult clubs, some of whose names may have name recognition that equals
that of ours. While there may be restrictions on the location of a so-called
"sexually oriented business", there are low barriers to entry into the adult
cabaret entertainment market. The names "Rick's" and "Rick's Cabaret",
“Tootsie’s Cabaret”, "XTC Cabaret" and “Club Onyx” are proprietary. We believe
that the combination of our existing brand name recognition and the distinctive
entertainment environment that we have created will allow us to compete
effectively in the industry and within the cities where we operate. The sexually
oriented business industry is highly competitive with respect to price, service
and location, as well as the professionalism of the entertainers. Although we
believe that we are well positioned to compete successfully, there can be no
assurance that we will be able to maintain our high level of name recognition
and prestige within the marketplace.
 
 GOVERNMENTAL
REGULATIONS
 
 We are
subject to various federal, state and local laws affecting our business
activities. In particular, in Texas the authority to issue a permit to sell
alcoholic beverages is governed by the Texas Alcoholic Beverage Commission
(“TABC”), which has the authority, in its discretion, to issue the appropriate
permits. We presently hold a Mixed Beverage Permit and a Late Hour Permit.
Previously subject to annual renewal, the TABC recently changed to a renewal
every two years, provided we have complied with all rules and regulations
governing the permits. Renewal of a permit is subject to protest, which may be
made by a law enforcement agency or by the public. In the event of a protest,
the TABC may hold a hearing at which time the views of interested parties are
expressed. The TABC has the authority after such hearing not to issue a renewal
of the protested alcoholic beverage permit. Rick's has never been the subject of
a protest hearing against the renewal of Permits. Minnesota, North Carolina,
Nevada, Pennsylvania, Florida, and New York have similar laws that may limit the
availability of a permit to sell alcoholic beverages or that may provide for
suspension or revocation of a permit to sell alcoholic beverages in certain
circumstances. It is our policy, prior to expanding into any new market, to take
steps to ensure compliance with all licensing and regulatory requirements for
the sale of alcoholic beverages as well as the sale of food.
 
 In
addition to various regulatory requirements affecting the sale of alcoholic
beverages, in many cities where we operate, the location of a topless cabaret is
subject to restriction by city ordinance. For example, topless nightclubs in
Houston, Texas are subject to "The Sexually Oriented Business Ordinance", which
contains prohibitions on the location of an adult cabaret (see “Legal
Proceedings" herein). The prohibitions deal generally with distance from
schools, churches, and other sexually oriented businesses and contain
restrictions based on the percentage of residences within the immediate vicinity
of the sexually oriented business. The granting of a Sexually Oriented Business
Permit is not subject to discretion; the Business Permit must be granted if the
proposed operation satisfies the requirements of the Ordinance. In all states
where we operate, management believes we are in compliance with applicable city,
county, state or other local laws governing the sale of alcohol and sexually
oriented businesses.
  10
 Table of Contents
  TRADEMARKS
 
 Our
rights to the tradenames "Rick's", "Rick's Cabaret", “Tootsie’s Cabaret”, “Club
Onyx” and “XTC Cabaret” are established under common law, based upon our
substantial and continuous use of these tradenames in interstate commerce since
at least as early as 1987. We have registered our service mark, “RICK'S AND
STARS DESIGN", with the United States Patent and Trademark Office. We have also
obtained service mark registrations from the Patent and Trademark Office for the
"RICK'S CABARET", “CLUB ONYX” and “XTC CABARET” service marks. We also own the
rights to numerous tradenames associated with our media division. There can be
no assurance that the steps we have taken to protect our service marks will be
adequate to deter misappropriation.
 
 EMPLOYEES
AND INDEPENDENT CONTRACTORS
 
 As of
September 30, 2009, we had approximately 1,000 employees, of which approximately
100 are in management positions, including corporate and administrative and
Internet operations and approximately 900 of which are engaged in entertainment,
food and beverage service, including bartenders, waitresses, and entertainers.
None of our employees are represented by a union. We consider our employee
relations to be good. Additionally, as of September 30, 2009, we had independent
contractor relationships with approximately 2,500 entertainers, who are
self-employed and conduct business at our locations on a non-exclusive basis as
independent contractors. Our entertainers in Minneapolis, Minnesota act as
commissioned employees. We believe that the adult entertainment industry
standard of treating entertainers as independent contractors provides us with
safe harbor protection to preclude payroll tax assessment for prior years. We
have prepared plans that we believe will protect our profitability in the event
that the sexually oriented business industry is required in all states to
convert entertainers who are now independent contractors into
employees.
 
 SHARE
REPURCHASES
 
 On
September 29, 2008, our Board of Directors authorized us to repurchase up to
$5,000,000 worth of our common stock. During the fiscal year ending September
30, 2008, no shares were purchased under this program. During the fiscal year
ended September 30, 2009, we purchased 303,959 shares of common stock in the
open market at prices ranging from $2.64 to $8.60.  Under the Board's
authority, we have $4,171,425 remaining to purchase additional
shares.
 
 Item 1A. Risk Factors.
 
 An
investment in our Common Stock involves a high degree of risk. You should
carefully consider the risks described below before deciding to purchase shares
of our Common Stock. If any of the events, contingencies, circumstances or
conditions described in the risks below actually occurs, our business, financial
condition or results of operations could be seriously harmed. The trading price
of our Common Stock could, in turn, decline and you could lose all or part of
your investment.
 
 Our Business Operations are
Subject to Regulatory Uncertainties Which May Affect Our Ability to Continue
Operations of Existing Nightclubs, Acquire Additional Nightclubs or Be
Profitable
 
 Adult
entertainment nightclubs are subject to local, state and federal regulations.
Our business is regulated by local zoning, local and state liquor licensing,
local ordinances and state and federal time place and manner restrictions. The
adult entertainment provided by our nightclubs has elements of speech and
expression and, therefore, enjoys some protection under the First Amendment to
the United States Constitution. However, the protection is limited to the
expression, and not the conduct of an entertainer. While our nightclubs are
generally well established in their respective markets, there can be no
assurance that local, state and/or federal licensing and other regulations will
permit our nightclubs to remain in operation or profitable in the
future.
 
 As
discussed in the section entitled “Legal Proceedings” herein, we are subject to
litigation regarding our Sexually Oriented Business licenses in Houston, Texas.
In 1997, the City of Houston passed a comprehensive new ordinance regulating the
location of and the conduct within sexually oriented businesses (the
“Ordinance”), which became the subject of litigation which affects our Sexually
Oriented Business licenses in Houston, Texas. After extensive litigation, the
Trial Court in Houston rendered its judgment in favor of the City of Houston in
January, 2007.  After a lengthy series of court battles, the
Fifth Circuit Court of Appeals ruled in favor of the City of Houston in
September 2007.  Despite efforts for further appeal, the United States
Supreme Court refused to hear the matter.
 
 Additionally,
on behalf of three of our club locations in Houston, we filed state court
lawsuits seeking judicial review of the results of the amortization process
contained within the Ordinance.  At the conclusion of the trial for
this matter, the Court ruled that the amortization awards were proper and
requested that findings of fact and conclusions of law be submitted to the Court
as well as a judgment in the case. A stay sought by the clubs during the appeal
was denied.  As a result, we, as well as every other similarly
situated sexually oriented business located within the incorporated area of
Houston, Texas, has either ceased providing nude or semi-nude entertainment or
developed alternate methods of operating.  We have already taken steps
to clothe our entertainers in a manner to eliminate the need for licenses and
not to be subject to the Ordinance.  The Company’s four Houston clubs
had revenues of approximately $4.1 million and a loss before income taxes of
approximately $10,000 for the twelve months ended September 30, 2009. It is
unknown at this time whether this will have a material effect on the Company’s
operations.
  11
 Table of Contents
  Beginning
January 1, 2008, our Texas clubs became subject to a new state law requiring
each club to collect and pay a $5 surcharge for every club visitor.  A
lawsuit was filed by the Texas Entertainment Association (“TEA”), an
organization to which we are a member, alleging the fee amounts to be an
unconstitutional tax.  On March 28, 2008, a State District Court Judge
in Travis County, Texas ruled that the new state law violates the First
Amendment to the United States Constitution and is therefore
invalid.  The judge’s order enjoined the State from collecting or
assessing the tax.  The State appealed the Court’s
ruling.  In Texas, when cities or the State give notice of appeal, it
supersedes and suspends the judgment, including the
injunction.  Therefore, the judgment of the District Court cannot be
enforced until the appeals are completed.  Given the suspension of the
judgment, the State has opted to collect the tax pending the outcome of its
appeal.  In June 2009, the Texas Third Court of Appeals upheld the
judgment that the surcharge is unconstitutional.  The State has
appealed the judgment to the Texas Supreme Court.  We have paid the
tax for the first five calendar quarters under protest and expensed the tax in
the accompanying financial statements, except for two locations in Dallas where
the taxes have not been paid, but we are accruing and expensing the
liability.  For the quarters ended June 30, 2009 and September 30,
2009, as a result of the Third Court’s decision, the Company accrued the fee,
but did not pay the State.  As of September 30, 2009, we have
approximately $1.16 million in accrued liabilities for this tax.  We
have paid more than $2 million to the State of Texas since the inception of the
tax.  The Company’s Texas clubs have filed a separate lawsuit against
the State to demand repayment of the taxes.  If the State’s appeal
ultimately fails, the Company’s current amount paid under protest would be
repaid or applied to future admission tax and other Texas state tax
liabilities.
 
 Our Business has been, and
may Continue to be, Adversely Affected by Conditions in the U.S. Financial
Markets and Economic Conditions Generally
 
 Our
nightclubs are often acquired with a purchase price based on historical EBITDA.
This results in certain nightclubs carrying a substantial amount of intangible
value, mostly allocated to licenses and goodwill. Generally accepted accounting
principles require an annual impairment review of these indefinite lived assets.
If difficult market and economic conditions continue over the next year and/or
we experience a decrease in revenue at one or more nightclubs, we could incur a
decline in fair value of one or more of our nightclubs. This could result in
future impairment charges of up to the total value of the indefinite lived
intangible assets.
 
 We May Need Additional
Financing or Our Business Expansion Plans May Be Significantly
Limited
 
 If cash
generated from our operations is insufficient to satisfy our working capital and
capital expenditure requirements, we will need to raise additional funds through
the public or private sale of our equity or debt securities. The timing and
amount of our capital requirements will depend on a number of factors, including
cash flow and cash requirements for nightclub acquisitions. If additional funds
are raised through the issuance of equity or convertible debt securities, the
percentage ownership of our then-existing shareholders will be reduced. We
cannot assure you that additional financing will be available on terms favorable
to us, if at all. Any future equity financing, if available, may result in
dilution to existing shareholders, and debt financing, if available, may include
restrictive covenants. Any failure by us to procure timely additional financing
will have material adverse consequences on our business operations.
 
 There is Substantial
Competition in the Nightclub Entertainment Industry, Which May Affect Our
Ability to Operate Profitably or Acquire Additional Clubs
 
 Our
nightclubs face competition. Some of these competitors may have greater
financial and management resources than we do. Additionally, the industry is
subject to unpredictable competitive trends and competition for general
entertainment dollars. There can be no assurance that we will be able to remain
profitable in this competitive industry.
 
 Risk of Adult Nightclubs
Operations
 
 Historically,
the adult entertainment, restaurant and bar industry has been an extremely
volatile industry. The industry tends to be extremely sensitive to the general
local economy, in that when economic conditions are prosperous, entertainment
industry revenues increase, and when economic conditions are unfavorable,
entertainment industry revenues decline. Coupled with this economic sensitivity
are the trendy personal preferences of the customers who frequent adult
cabarets. We continuously monitor trends in our customers' tastes and
entertainment preferences so that, if necessary, we can make appropriate changes
which will allow us to remain one of the premiere adult cabarets. However, any
significant decline in general corporate conditions or uncertainties regarding
future economic prospects that affect consumer spending could have a material
adverse effect on our business. In addition, we have historically catered to a
clientele base from the upper end of the market. Accordingly, further reductions
in the amounts of entertainment expenses allowed as deductions from income under
the Internal Revenue Code of 1954, as amended, could adversely affect sales to
customers dependent upon corporate expense accounts.
 
 Permits Relating to the Sale
of Alcohol
 
 We derive
a significant portion of our revenues from the sale of alcoholic beverages.
States in which we operate may have laws which may limit the availability of a
permit to sell alcoholic beverages or which may provide for suspension or
revocation of a permit to sell alcoholic beverages in certain circumstances. The
temporary or permanent suspension or revocations of any such permits would have
a material adverse effect on the revenues, financial condition and results of
operations of the Company. In all states where we operate, management believes
we are in compliance with applicable city, county, state or other local laws
governing the sale of alcohol.
  12
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  Activities or Conduct at our
Nightclubs may Cause us to Lose Necessary Business Licenses, Expose us to
Liability, or Result in Adverse Publicity, Which may Increase our Costs and
Divert Management’s Attention from our Business
 
 We are
subject to risks associated with activities or conduct at our nightclubs that
are illegal or violate the terms of necessary business licenses. Our nightclubs
operate under licenses for sexually oriented businesses and some protection
under the First Amendment to the U.S. Constitution. While we believe that the
activities at our nightclubs comply with the terms of such licenses, and that
the element of our business that constitutes an expression of free speech under
the First Amendment to the U.S. Constitution is protected, activities and
conduct at our nightclubs may be found to violate the terms of such licenses or
be unprotected under the U.S. Constitution. This protection is limited to the
expression and not the conduct of an entertainer. An issuing authority may
suspend or terminate a license for a nightclub found to have violated the
license terms. Illegal activities or conduct at any of our nightclubs may result
in negative publicity or litigation. Such consequences may increase our cost of
doing business, divert management’s attention from our business and make an
investment in our securities unattractive to current and potential investors,
thereby lowering our profitability and our stock price.
 
 We have
developed comprehensive policies aimed at ensuring that the operation of each
nightclub is conducted in conformance with local, state and federal laws. We
have a “no tolerance” policy on illegal drug use in or around the facilities. We
continually monitor the actions of entertainers, waitresses and customers to
ensure that proper behavior standards are met. However, such policies, no matter
how well designed and enforced, can provide only reasonable, not absolute,
assurance that the policies’ objectives are being achieved. Because of the
inherent limitations in all control systems and policies, there can be no
assurance that our policies will prevent deliberate acts by persons attempting
to violate or circumvent them. Notwithstanding the foregoing limitations,
management believes that our policies are reasonably effective in achieving
their purposes.
 
 Our Acquisitions may Result
in Disruptions in our Business and Diversion of Management’s
Attention
 
 We have
made and may continue to make acquisitions of complementary nightclubs,
restaurants or related operations. Any acquisitions will require the integration
of the operations, products and personnel of the acquired businesses and the
training and motivation of these individuals. Such acquisitions may disrupt our
operations and divert management’s attention from day-to-day operations, which
could impair our relationships with current employees, customers and partners.
We may also incur debt or issue equity securities to pay for any future
acquisitions. These issuances could be substantially dilutive to our
stockholders. In addition, our profitability may suffer because of
acquisition-related costs or amortization, or impairment costs for acquired
goodwill and other intangible assets. If management is unable to fully integrate
acquired business, products or persons with existing operations, we may not
receive the benefits of the acquisitions, and our revenues and stock trading
price may decrease.
 
 We Must Continue to Meet
NASDAQ Global Market Continued Listing Requirements or We Risk
Delisting
 
 Our
securities are currently listed for trading on the NASDAQ Global Market. We must
continue to satisfy NASDAQ’s continued listing requirements or risk delisting
which would have an adverse effect on our business. If our securities are ever
de-listed from NASDAQ, it may trade on the over-the-counter market, which may be
a less liquid market. In such case, our shareholders’ ability to trade or obtain
quotations of the market value of shares of our common stock would be severely
limited because of lower trading volumes and transaction delays. These factors
could contribute to lower prices and larger spreads in the bid and ask prices
for our securities. There is no assurance that we will be able to maintain
compliance with the NASDAQ continued listing requirements.
 
 In The Future, We Will Incur
Significant Increased Costs as a Result of Operating as a Public Company, and
Our Management Will Be Required to Devote Substantial Time to New Compliance
Initiatives
 
 In the
future, we will incur significant legal, accounting and other expenses. The
Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), as well as new rules
subsequently implemented by the SEC, have imposed various new requirements on
public companies, including requiring changes in corporate governance practices.
Our management and other personnel will need to devote a substantial amount of
time to these new compliance initiatives. Moreover, these rules and regulations
will increase our legal and financial compliance costs and will make some
activities more time-consuming and costly. For example, we expect these new
rules and regulations to make it more difficult and more expensive for us to
obtain director and officer liability insurance, and we may be required to incur
substantial costs to maintain the same or similar coverage.
 
 In
addition, the Sarbanes-Oxley Act requires, among other things, that we maintain
effective internal controls for financial reporting and disclosure controls and
procedures. In particular, commencing in fiscal 2008, we have been required to
perform system and process evaluation and testing on the effectiveness of our
internal controls over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act. Subsequently in fiscal 2010, our independent registered
public accounting firm will report on the effectiveness of our internal controls
over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act.
Our testing, or the subsequent testing by our independent registered public
accounting firm, may reveal deficiencies in our internal controls over financial
reporting that are deemed to be material weaknesses. Our compliance with Section
404 will require that we incur substantial accounting expense and expend
significant management efforts. We currently do not have an internal audit
group, and we will need to hire additional accounting and financial staff with
appropriate public company experience and technical accounting knowledge.
Moreover, if we are not able to comply with the requirements of Section 404 in a
timely manner, or if we or our independent registered public accounting firm
identifies deficiencies in our internal controls over financial reporting that
are deemed to be material weaknesses, the market price of our stock could
decline, and we could be subject to sanctions or investigations by the SEC or
other regulatory authorities, which would require additional financial and
management resources.
  13
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  Uninsured
Risks
 
 We
maintain insurance in amounts we consider adequate for personal injury and
property damage to which the business of the Company may be subject. However,
there can be no assurance that uninsured liabilities in excess of the coverage
provided by insurance, which liabilities may be imposed pursuant to the Texas
"Dram Shop" statute or similar "Dram Shop" statutes or common law theories of
liability in other states where we operate or expand. For example, the Texas
"Dram Shop" statute provides a person injured by an intoxicated person the right
to recover damages from an establishment that wrongfully served alcoholic
beverages to such person if it was apparent to the server that the individual
being sold, served or provided with an alcoholic beverage was obviously
intoxicated to the extent that he presented a clear danger to himself and
others. An employer is not liable for the actions of its employee who
over-serves if (i) the employer requires its employees to attend a seller
training program approved by the TABC; (ii) the employee has actually attended
such a training program; and (iii) the employer has not directly or indirectly
encouraged the employee to violate the law. It is our policy to require that all
servers of alcohol working at our clubs in Texas be certified as servers under a
training program approved by the TABC, which certification gives statutory
immunity to the sellers of alcohol from damage caused to third parties by those
who have consumed alcoholic beverages at such establishment pursuant to the
Texas Alcoholic Beverage Code. There can be no assurance, however, that
uninsured liabilities may not arise in the markets in which we operate which
could have a material adverse effect on the Company.
 
 Limitations on Protection of
Service Marks
 
 Our
rights to the tradenames "Rick's", "Rick's Cabaret", “Tootsie’s Cabaret”, “Club
Onyx”, and “XTC Cabaret” are established under the common law based upon our
substantial and continuous use of these tradenames in interstate commerce since
at least as early as 1987. "RICK'S AND STARS DESIGN" logo, "RICK'S CABARET",
“CLUB ONYX” and “XTC CABARET” are registered through service mark registrations
issued by the United States Patent and Trademark Office.  We also own
the rights to numerous tradenames associated with our media division. There can
be no assurance that these steps taken by the Company to protect its Service
Marks will be adequate to deter misappropriation of its protected intellectual
property rights. Litigation may be necessary in the future to protect our rights
from infringement, which may be costly and time consuming. The loss of the
intellectual property rights owned or claimed by us could have a material
adverse affect on our business.
 
 Anti-takeover Effects of
Issuance of Preferred Stock
 
 The Board
of Directors has the authority to issue up to 1,000,000 shares of Preferred
Stock in one or more series, to fix the number of shares constituting any such
series, and to fix the rights and preferences of the shares constituting any
series, without any further vote or action by the stockholders. The issuance of
Preferred Stock by the Board of Directors could adversely affect the rights of
the holders of Common Stock. For example, such issuance could result in a class
of securities outstanding that would have preferences with respect to voting
rights and dividends and in liquidation over the Common Stock, and could (upon
conversion or otherwise) enjoy all of the rights appurtenant to Common Stock.
The Board's authority to issue Preferred Stock could discourage potential
takeover attempts and could delay or prevent a change in control of the Company
through merger, tender offer, proxy contest or otherwise by making such attempts
more difficult to achieve or more costly. There are no issued and outstanding
shares of Preferred Stock; there are no agreements or understandings for the
issuance of Preferred Stock, and the Board of Directors has no present intention
to issue Preferred Stock.
 
 We Do Not Anticipate Paying
Dividends on Common Shares in the Foreseeable Future
 
 Since our
inception we have not paid any dividends on our common stock and we do not
anticipate paying any dividends in the foreseeable future. We expect that future
earnings, if any, will be used for working capital and to finance
growth.
 
 Future Sales of Our Common
Stock May Depress Our Stock Price
 
 The
market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market, or as a result of
the perception that these sales could occur. In addition, these factors could
make it more difficult for us to raise funds through future offerings of common
stock.
 
 Our Stock Price Has Been
Volatile and May Fluctuate in the Future
 
 The
trading price of our securities may fluctuate significantly. This price may be
influenced by many factors, including:
 
 ●
              our
      performance and prospects;
 ●
              the
      depth and liquidity of the market for our
  securities;
 ●
              sales
      by selling shareholders of shares issued or issuable in connection with
      certain convertible notes;
 ●
              investor
      perception of us and the industry in which we
  operate;
 ●
              changes
      in earnings estimates or buy/sell recommendations by
    analysts;
 ●
              general
      financial and other market conditions;
and
 ●
              domestic
      economic conditions.
  14
 Table of Contents
  Public
stock markets have experienced, and may experience, extreme price and trading
volume volatility. These broad market fluctuations may adversely affect the
market price of our securities.
 
 Our Management Controls a
Significant Percentage of Our Current Outstanding Common Stock and Their
Interests May Conflict With Those of Our Shareholders
 
 As of
December 3, 2009, our Directors and executive officers and their respective
affiliates collectively and beneficially owned approximately 14.0% of our
outstanding common stock, including all warrants exercisable within 60 days.
This concentration of voting control gives our Directors and executive officers
and their respective affiliates substantial influence over any matters which
require a shareholder vote, including, without limitation, the election of
Directors, even if their interests may conflict with those of other
shareholders. It could also have the effect of delaying or preventing a change
in control of or otherwise discouraging a potential acquirer from attempting to
obtain control of us. This could have a material adverse effect on the market
price of our common stock or prevent our shareholders from realizing a premium
over the then prevailing market prices for their shares of common
stock.
 
 We are Dependent on Key
Personnel
 
 Our
future success is dependent, in a large part, on retaining the services of Mr.
Eric Langan, our President and Chief Executive Officer. Mr. Langan possesses a
unique and comprehensive knowledge of our industry. While Mr. Langan has no
present plans to leave or retire in the near future, his loss could have a
negative effect on our operating, marketing and financial performance if we are
unable to find an adequate replacement with similar knowledge and experience
within our industry. We maintain key-man life insurance with respect to Mr.
Langan. Although Mr. Langan is under an employment agreement (as described
herein), there can be no assurance that Mr. Langan will continue to be employed
by us. The loss of Mr. Langan could have a negative effect on our operating,
marketing, and financing performance.
 
 Cumulative Voting is Not
Available to Stockholders
 
 Cumulative
voting in the election of Directors is expressly denied in our Articles of
Incorporation. Accordingly, the holder or holders of a majority of the
outstanding shares of our common stock may elect all of our Directors.
Management’s large percentage ownership of our outstanding common stock helps
enable them to maintain their positions as such and thus control of our business
and affairs.
 
 Our Directors and Officers
Have Limited Liability and Have Rights to Indemnification
 
 Our
Articles of Incorporation and Bylaws provide, as permitted by governing Texas
law, that our Directors and officers shall not be personally liable to us or any
of our stockholders for monetary damages for breach of fiduciary duty as a
Director or officer, with certain exceptions. The Articles further provide that
we will indemnify our Directors and officers against expenses and liabilities
they incur to defend, settle, or satisfy any civil litigation or criminal action
brought against them on account of their being or having been its Directors or
officers unless, in such action, they are adjudged to have acted with gross
negligence or willful misconduct.
 
 The
inclusion of these provisions in the Articles may have the effect of reducing
the likelihood of derivative litigation against Directors and officers, and may
discourage or deter stockholders or management from bringing a lawsuit against
Directors and officers for breach of their duty of care, even though such an
action, if successful, might otherwise have benefited us and our
stockholders.
 
 The
Articles provide for the indemnification of our officers and Directors, and the
advancement to them of expenses in connection with any proceedings and claims,
to the fullest extent permitted by Texas law. The Articles include related
provisions meant to facilitate the indemnitee's receipt of such benefits. These
provisions cover, among other things: (i) specification of the method of
determining entitlement to indemnification and the selection of independent
counsel that will in some cases make such determination, (ii) specification of
certain time periods by which certain payments or determinations must be made
and actions must be taken, and (iii) the establishment of certain presumptions
in favor of an indemnitee.
 
 Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, we have been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
 
 Other Risk Factors May
Adversely Affect Our Financial Performance
 
 Other
risk factors that could cause our actual results to differ materially from those
indicated in the forward-looking statements by affecting, among many things,
pricing, consumer spending and consumer confidence, include, without limitation,
changes in economic conditions and financial and credit markets, credit
availability, increased fuel costs and availability for our employees, customers
and suppliers, health epidemics or pandemics or the prospects of these events
(such as reports on avian flu), consumer perceptions of food safety, changes in
consumer tastes and behaviors, governmental monetary policies, changes in
demographic trends, terrorist acts, energy shortages and rolling blackouts, and
weather (including, major hurricanes and regional snow storms) and other acts of
God.
  15
 Table of Contents
  Item 2.
Properties.
 
 Our
principal executive office is located at 10959 Cutten Road, Houston, Texas
77066, and consists of a 9,000 square feet office/warehouse building. We
purchased this property in December 2004 for $512,739, payable with $86,279 cash
at closing and $426,460 in a promissory note carrying 7% interest and a 15 year
term. The monthly payment is $3,834. As of September 30, 2009, the balance of
the mortgage was $335,738. The last mortgage payment is due in 2019. We believe
that our offices are adequate for our present needs and that suitable space will
be available to accommodate our future needs.
 
 We own
the real property for four locations of Rick's Cabaret (in Houston, San Antonio,
Minneapolis and Fort Worth), three Club Onyx locations, one in Houston, one in
Dallas and one in Philadelphia and three locations of XTC (in Austin, Dallas and
San Antonio). In Houston, we own the property where we will open a club known as
“Club Q” in the first quarter of our 2010 fiscal year. We lease property for our
XTC South (Houston), XTC North (Houston), Rick’s Cabaret-New York and Las Vegas,
Club Onyx Charlotte, Rick’s Cabaret-Austin (currently closed and held for sale),
Cabaret North-Fort Worth and Tootsie’s Cabaret (Miami Gardens, Florida)
locations.
 
 ADDITIONAL
PROPERTIES WE OWN:
 
 1.
              Club
      Onyx, located on Bering Drive in Houston, has an aggregate 12,300 square
      feet of space. In December 2004, we paid off the old mortgage and obtained
      a new one with an initial balance of $1,270,000 and an interest rate of
      10% per annum over a 10 year term. The money received from this new note
      was used to finance the acquisition of the New York club. As of September
      30, 2009, the balance of the mortgage was $1,151,272. During fiscal year
      2009, we paid $12,256 in monthly principal and interest payments. The
      monthly payment is calculated based on a 20 year amortization schedule.
      The last mortgage payment is due in
2015.
 
 2.
              The
      Rick's Cabaret, located on North Belt Drive in Houston, has 12,000 square
      feet of space. In November 2004, we obtained a mortgage using this
      property as collateral. The principal balance of the new mortgage was
      $1,042,000, with an annual interest rate of 10% over a 10 year term. The
      money received from this new note was used to finance the acquisition of
      the New York club. As of September 30, 2009, the balance of the mortgage
      was $942,403. The monthly payment of principal and interest is $10,056.
      The monthly payment is calculated based on a 20 year amortization
      schedule. The last mortgage payment is due in
  2014.
 
 3.
              The
      Rick's Cabaret located in Minneapolis has 15,400 square feet of space. The
      balance, as of September 30, 2009, that we owe on the mortgage is
      $1,000,000 and the interest rate is 9%. We pay $7,500 in monthly interest
      payments. The last mortgage payment is due in
  2013.
 
 4.
              The
      property for our XTC Cabaret nightclub in Austin has 8,600 square feet of
      space, which sits on 1.2 acres of land. In August 2005, we restructured
      the mortgage by extending the term to 10 years. The balance of the this
      mortgage as of September 30, 2009 is $179,219 with an interest rate of 11%
      and monthly principal and interest payments of $3,445. We also have an
      additional mortgage on the property which we obtained in November 2004.
      The principal balance of the additional mortgage was $900,000, with an
      annual interest rate of 11% over a 10 year term. In June and July 2005, we
      obtained additional funds in the amount of $200,000, which we combined
      with the $900,000 mortgage, and in August 2005 we restructured this
      additional mortgage. The monthly principal and interest payment is
      $15,034. As of September 30, 2009, the balance of the additional mortgage
      was $782,062. The last payments for both mortgages are due in
      2015.
 
 5.
              We
      own the property for our XTC Cabaret nightclub in San Antonio, which has
      7,800 square feet of space. In November 2004, we obtained a mortgage using
      this property as collateral. The principal balance of the new mortgage was
      $590,000, with an annual interest rate of 10% over a 10 year term. The
      money received from this new note was used to finance the acquisition and
      renovation of the New York club. As of September 30, 2009, the balance of
      this mortgage was $533,606. The monthly principal and interest payment is
      $5,694. The last mortgage payment is due in
  2014.
 
 6.
              We
      own an 8,000 square foot Houston property which has been leased for $8,500
      per month through December 2012. In November 2004, this property, together
      with property in Austin, was used as additional collateral to secure the
      $900,000 mortgage referenced in paragraph 4
  above.
 
 7.
              On
      April 5, 2006, our wholly owned subsidiary, RCI Holdings, Inc. completed
      the acquisition of real property located at 9009 Airport Blvd., Houston,
      Texas where we previously operated Club Onyx South and Divas Latinas.
      Pursuant to the terms of the agreement, we paid a total sales price of
      $1,300,000, which consisted of $500,000 in cash and 160,000 shares of our
      restricted common stock.  This property is currently held for
      sale.
  16
 Table of Contents
  8.
              On
      August 24, 2006, our subsidiary, RCI Holdings, Inc. acquired 100% of the
      interest in the improved real property upon which our Rick’s-San Antonio
      is located. The total purchase price for the business and real property
      was $2,900,000. Under terms of the agreement, the Company paid the owners
      of the club and property $600,000 in cash at the time of closing and
      signed promissory notes for the remaining balance. As of September 30,
      2009, the balance of the promissory notes was $874,715.  This
      note matures in 2011.
 
 9.
              On
      April 23, 2007, RCI Holdings, Inc., our wholly owned subsidiary, acquired
      the real property located at 7101 Calmont, Fort Worth, Texas for a total
      purchase price of $2,500,000, which consisted of $100,000 in cash and
      $2,400,000 payable in a six year promissory note to the sellers which will
      accrue interest at the rate of 7.25% for the first two years, 8.25% for
      years three and four and 9.25% thereafter. The promissory note is secured
      by a Deed of Trust and Security Agreement. Further, RCI Holdings, Inc.
      entered into an Assignment and Assumption of Lease Agreement with the
      sellers to assume the lease agreement for the real property. We currently
      operate this property as Rick’s Cabaret. As of September 30, 2009, the
      balance of the promissory note was
$1,903,479.
 
 10.
              As
      part of the acquisition of The End Zone in Philadelphia, Pennsylvania, we
      acquired 51% of the issued and outstanding partnership interest of the
      partnership that owns the real property at 2908 S. Columbus Blvd.,
      Philadelphia, Pennsylvania. At closing, we paid a purchase price of
      $3,500,000 in cash for the partnership
  interests.
 
 11.
              As
      part of the transaction to acquire Hotel Development, Ltd. which operated
      the Executive Club in Dallas, RCI Holdings, Inc. acquired the related real
      property located at 8550 N. Stemmons Freeway, Dallas, Texas from DPC
      Holdings, LLC, a Texas limited liability company. As consideration for the
      purchase of the real property, RCI Holdings, Inc. paid total consideration
      of $5,599,721, which was paid (i) $4,250,000, payable $610,000 in cash and
      $3,640,000 through the issuance of a five year promissory note and (ii)
      the issuance of 57,918 shares of our restricted common stock to be valued
      at $23.30 per share ($1,349,721). The promissory note bears interest at a
      varying rate at the greater of (i) two percent (2%) above the Prime Rate
      or (ii) seven and one-half percent (7.5%), and is guaranteed by us and
      Eric Langan, our Chief Executive Officer, individually. As of September
      30, 2009, the balance of the promissory note was
    $3,526,096.
 
 12.
              As
      part of the acquisition of the Platinum Club II in Dallas, we acquired the
      real property located at 10557 Wire Way Place (at Northwest Highway),
      Dallas, Texas from Wire Way, LLC, a Texas limited liability company.
      Pursuant to a Real Estate Purchase and Sale Agreement dated May 10, 2008,
      we paid total consideration of $6,000,000, which was paid $1,650,000 in
      cash and $4,350,000 through the issuance of a five (5) year promissory
      note. The promissory note bears interest at a varying rate at the greater
      of (i) two percent (2%) above the Prime Rate or (ii) seven and one-half
      percent (7.5%), which is guaranteed by us and by Eric Langan, our Chief
      Executive Officer, individually. As of September 30, 2009, the balance of
      the promissory note was $4,232,111.
 
 PROPERTIES
WE LEASE:
 
 1.
              We
      lease the property in Houston, Texas, where our XTC North is located. The
      lease term was for five years, beginning March 2004, and is currently on a
      month-to-month lease. The monthly rent was $8,000 until August 31, 2006,
      at which time the monthly base rent increased to
  $9,000.
 
 2.
              We
      lease the property in New York City, New York, where our Rick’s Cabaret
      NYC is located. We assumed the existing lease, which will terminate in
      April 2023. The monthly rent is currently $45,645. Under the term of the
      existing lease, the base rent will increase by approximately 3% each
      year.
 
 3.
              We
      lease the property in Charlotte, North Carolina, where our Club Onyx
      Charlotte is located. We executed an amended lease in February 2007, which
      will terminate in February 2017. The monthly rent is $17,500 until
      February 2010, at which time the monthly base rent will increase to
      $18,500 until February 2013, at which time the rent will escalate to
      $20,000 until February 2017.
 
 4.
              We
      lease the property in South Houston, Texas, where our XTC South is
      located. The lease term is for 79 months, beginning May 1, 2006, and
      terminates in December 2022. The monthly rent is $3,000 until December
      2012, then $3,500 until December 2014 then $4,000 until December 2019 and
      $4,500 for the remaining three years of the
  lease
 
 5.
              We
      lease the property in Austin, Texas, where our Rick’s Cabaret Austin is
      located.  This club is currently closed and held for sale. The
      lease term is for 10 years, beginning November 10, 2006, with monthly
      payments of $29,000.  This lease was amended in February, 2009
      and the rent was decreased to $23,000 per month for twelve
      months.  We also have the option to renew for an additional ten
      years.
 
 6.
              We
      lease the property in Miami Gardens, Florida, where Tootsie’s Cabaret is
      located with monthly rent of $70,938. Under the Assignment of Lease, the
      original lease term continues through June 30, 2014, with two option
      periods which give us the right to lease the property through June 30,
      2034.
 
 7.
              We
      lease the property in Las Vegas, Nevada, where our new Rick’s Cabaret Las
      Vegas club is located with monthly rent of $100,000. The original lease
      term continues through January 1, 2011 with an option period beginning on
      that date through January 1, 2016 at $180,000 per month. We also have an
      option to acquire the property through January 1, 2016 for
      $23,000,000.
  17
 Table of Contents
  8.
              We
      acquired a club in Forth Worth, Texas on September 30,
      2009.  The property is leased from a third party for $30,000 per
      month until 2018. We also received an option to purchase the five-acre
      property on which the club sits within 19 months for approximately $2.4
      million.
 
 Item 3. Legal Proceedings.
 
 Beginning
January 1, 2008, our Texas clubs became subject to a new state law requiring
each club to collect and pay a $5 surcharge for every club visitor.  A
lawsuit was filed by the Texas Entertainment Association (“TEA”), an
organization to which we are a member, alleging the fee amounts to be an
unconstitutional tax.  On March 28, 2008, a State District Court Judge
in Travis County, Texas ruled that the new state law violates the First
Amendment to the United States Constitution and is therefore
invalid.  The judge’s order enjoined the State from collecting or
assessing the tax.  The State appealed the Court’s
ruling.  In Texas, when cities or the State give notice of appeal, it
supersedes and suspends the judgment, including the
injunction.  Therefore, the judgment of the District Court cannot be
enforced until the appeals are completed.  Given the suspension of the
judgment, the State has opted to collect the tax pending the outcome of its
appeal.  On June 5, 2009, the Court of Appeals for the Third
District (Austin) affirmed the District Court’s judgment that the Sexually
Oriented Business (“S.O.B.”) Fee violated the First Amendment to the U.S.
Constitution. The Attorney General of Texas has asked the Texas Supreme Court to
review the case. No mandate will be issued until the Supreme Court of Texas
either refuses the review or takes and decides the case. All parties are waiting
on the decision of the Supreme Court of Texas either to grant review or not. On
August 26, 2009, the Texas Supreme Court ordered both sides to submit
briefs on the merits, while not yet deciding whether to grant the State’s
Petition for review. The State’s brief was filed on September 25, 2009 and
the Texas Entertainment Association’s brief was filed on October 15,
2009.   We have paid the tax for the first five calendar quarters
under protest and expensed the tax in the accompanying financial statements,
except for two locations in Dallas where the taxes have not been paid, but we
are accruing and expensing the liability.  For the quarters ended June
30, 2009 and September 30, 2009, as a result of the Third Court’s decision, the
Company accrued the fee, but did not pay the State.  As of September
30, 2009, we have approximately $1.16 million in accrued liabilities for this
tax.  We have paid more than $2 million to the State of Texas since
the inception of the tax. The Company’s Texas clubs have filed a separate
lawsuit against the State to demand repayment of the taxes.  If the
State’s appeal ultimately fails, the Company’s current amount paid under protest
would be repaid or applied to future admission tax and other Texas state tax
liabilities.
 
 Item 4. Submission of Matters to a Vote of Security
Holders.
  We held
our Annual Meeting of Shareholders on August 18, 2009. Eric S. Langan, Robert L.
Watters, Steven L. Jenkins, Alan Bergstrom, Travis Reese and Luke Lirot were
nominated and elected as Directors with the following vote results at the
shareholder meeting:
 
 For
              
              
              WithheldEric
      S. Langan
              
              7,424,105
              
              
              658,660Robert
      L. Watters
              
              7,964,154
              
              
              118,611Steven
      L. Jenkins
              
              7,966,148
              
              
              116,617Alan
      Bergstrom
              
              7,202,619
              
              
              880,146Travis
      Reese
              
              7,405,563
              
              
              677,202Luke
      Lirot
              
              7,962,877
              
              
              119,888
 
 At the
Annual Meeting, the Shareholders ratified Whitley Penn LLP as the Company’s
Independent Registered Public Accounting Firm for the fiscal year ended
September 30, 2009, with the following vote results:
 
 7,960,490
              
              Votes
      FOR Ratification50,740
              
              Votes
      AGAINST Ratification71,533
              
              Votes
      ABSTAINING
 
 The
meeting was adjourned when all matters of business had been
discussed.
 
 PART
II
 
 
 Item 5. Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.
 
 Our
common stock is quoted on the NASDAQ Global Market under the symbol "RICK". The
following table sets forth the quarterly high and low of sales prices per share
for the common stock for the last two fiscal years.
  18
 Table of Contents
  COMMON
STOCK PRICE RANGE
 
 HIGH
              
              
              LOWFiscal Year Ended September
      30,  2009First
      Quarter
              
              $
              9.69
              
              
              $
              3.56Second
      Quarter
              
              $
              5.69
              
              
              $
              2.44Third
      Quarter
              
              $
              7.59
              
              
              $
              4.53Fourth
      Quarter
              
              $
              9.03
              
              
              $
              5.75Fiscal Year Ended September
      30,  2009First
      Quarter
              
              $
              29.79
              
              
              $
              11.01Second
      Quarter
              
              $
              27.47
              
              
              $
              19.00Third
      Quarter
              
              $
              26.74
              
              
              $
              14.80Fourth
      Quarter
              
              $
              18.14
              
              
              $
              9.64
 
 
 On
December 3, 2009, the last sales price for the common stock as reported on the
NASDAQ Global Market was $7.11. On December 3, 2009, there were approximately
211 stockholders of record of our common stock (excluding shares held by
shareholders in street name).
 
 TRANSFER
AGENT AND REGISTRAR
 
 The
transfer agent and registrar for our common stock is American Stock Transfer
& Trust Company, 59 Maiden Lane, New York, New York 10038.
 
 DIVIDEND
POLICY
 
 We have
not paid, and do not currently intend to pay cash dividends on our common stock
in the foreseeable future. Our current policy is to retain all earnings, if any,
to provide funds for operation and expansion of our business. The declaration of
dividends, if any, will be subject to the discretion of the Board of Directors,
which may consider such factors as our results of operation, financial
condition, capital needs and acquisition strategy, among others.
 
 PURCHASES
OF EQUITY SECURITIES BY THE ISSUER
 
 On
September 29, 2008, our board of directors authorized us to repurchase up to
$5,000,000 worth of our common stock. During the
fiscal year ending September 30, 2008, no shares were purchased under this
program. During the fiscal year ended September 30, 2009, we purchased 303,959
shares of common stock in the open market at prices ranging from $2.64 to
$8.60.
 
 During
the three months ended September 30, 2009, we purchased 34,500 shares of common
stock from put option holders at prices ranging from $6.68 to $8.60 per
share.  Following is a summary of our purchases by month:
 
 Period:
              (a)
              (b)
              (c)
              (d)Month
      Ending
              Total
      Number of Shares (or Units) Purchased
              Average
      Price Paid per Share
              Total
      Number of Shares (or Units) Purchased as Part of Publicly Announced Plans
      or Programs
              Maximum
      Number (or Approximate Dollar Value) of Shares (or Units) that May Yet be
      Purchased Under the Plans or ProgramsJul-09
              11,500
              $          7.17
              -
              $                         4,171,425Aug-09
              11,500
              $          8.07
              -
              $                         4,171,425Sept-09
              11,500
              $          8.08
              -
              $                        
      4,171,425Total
      for the three months ended Sept 30, 2009
              34,500
              $          7.77
              201,219
              $                         4,171,425
 19
 Table of Contents
  EQUITY
COMPENSATION PLAN INFORMATION
 
 The
following table sets forth all equity compensation plans as of September 30,
2009:
 
 Plan
      category
              Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
                (a)
              Weighted-average
      exercise price of outstanding options, warrants and rights
                (b)
              Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))
                (c)Equity
      compensation plans approved by security holders
              120,000
              $7.53
              378,000
 
 EMPLOYEE
STOCK OPTION PLANS
 
 While we
have been successful in attracting and retaining qualified personnel, we believe
that our future success will depend in part on our continued ability to attract
and retain highly qualified personnel. We pay wages and salaries that we believe
are competitive. We also believe that equity ownership is an important factor in
our ability to attract and retain skilled personnel. We have adopted stock
option plans (the “Plans”) for employees and directors. The purpose of the Plans
is to further our interests, our subsidiaries and our stockholders by providing
incentives in the form of stock options to key employees and directors who
contribute materially to our success and profitability. The grants recognize and
reward outstanding individual performances and contributions and will give such
persons a proprietary interest in us, thus enhancing their personal interest in
our continued success and progress. The Plans also assist us and our
subsidiaries in attracting and retaining key employees and directors. The Plans
are administered by the Board of Directors. The Board of Directors has the
exclusive power to select the participants in the Plans, to establish the terms
of the options granted to each participant, provided that all options granted
shall be granted at an exercise price equal to at least 85% of the fair market
value of the common stock covered by the option on the grant date and to make
all determinations necessary or advisable under the Plans.
 
 In August
1999, we adopted the 1999 Stock Option Plan (the “1999 Plan”) with 500,000
shares authorized to be granted and sold under the 1999 Plan. In August 2004,
shareholders approved an Amendment to the 1999 Plan (the “Amendment”) which
increased the total number of shares authorized to 1,000,000. In July 2007,
shareholders approved an Amendment to the 1999 Plan (the “Amendment”), which
increased the total number of shares authorized to 1,500,000. As of September
30, 2009, 120,000 stock options were outstanding under the 1999
Plan.
 
 RECENT
SALES OF UNREGISTERED SECURITIES
 
 During
the quarter ended September 30, 2009, we completed no transactions in reliance
upon exemptions from registration under the Securities Act of 1933, as amended
(the "Act") as provided in Section 4(2) thereof, except as follows:
 
 On August
6, 2009, the Company completed the sale of  an aggregate of $7.2
million in 10 % Convertible Debentures (the “Debentures”) to certain
accredited investors (the “Holders”).  The Debentures bear interest at
the rate of 10% per annum and mature on August 4, 2012.  The
Debentures are payable with one initial payment of interest only due February 4,
2010, and, thereafter in ten equal quarterly principal payments, plus accrued
interest thereon.  At the option of the Holders, the Debentures may be
converted into shares of the Company’s common stock at $8.75 per
share.  The Debentures are redeemable by the Company at any time if
the closing price of its common stock for 20 consecutive trading days is at
least $11.50 per share.  The Debentures provide that an event of
default occurs if: the Company should fail to pay any principal or interest when
due; the Company should fail to convert any Debenture when required; the Company
shall fail to observe or perform any covenant or agreement contained within the
Debenture; there are cross defaults to other indebtedness in excess of
$1,000,000; there is a reorganization, liquidation, voluntary or involuntary
bankruptcy or insolvency proceedings or other bankruptcy default; or a final
unsatisfied judgment not covered by insurance aggregating an excess of
$1,000,000 occurs against the Company and is not stayed, bonded or discharged
within seventy-five (75) days.
 
 In
connection with the sale of the Debentures, the Company also issued an aggregate
of 164,569 warrants (the “Warrants”) to the Holders, on a pro-rata
basis.  The Company issued each Holder a number of Warrants equal to
20% of the number of shares of common stock into which each Holder’s Debenture
is convertible.  The Warrants have an exercise price of $8.75 and
expire on August 5, 2012.  The Warrants provide that the Company has
the right to require exercise of the Warrants if the closing price of the
Company’s common stock for 20 consecutive trading days is at least
$12.25.
 
 The
proceeds from the sale of the Debentures and Warrants are intended to be
utilized to make future acquisitions, and may be utilized for working capital
and general corporate purposes.
  20
 Table of Contents
  Item 6. Selected Financial Data.
 
  The
following table sets forth certain of the Company’s historical financial data.
The selected historical consolidated financial data as of September 30, 2009 and
2008 and for the years ended September 30, 2009 and 2008 have been derived from
the Company’s audited consolidated financial statements and the related notes
included elsewhere herein. The selected historical consolidated financial data
as of September 30, 2007, 2006 and 2005 and for the years ended September 30,
2007, 2006 and 2005 have been derived from the Company’s audited financial
statements for such years, which are not included in this Annual Report on Form
10-K. The selected historical consolidated financial data set forth are not
necessarily indicative of the results of future operations and should be read in
conjunction with the discussion under the heading “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” and the historical
consolidated financial statements and accompanying notes included herein. The
historical results are not necessarily indicative of the results to be expected
in any future period.
  
 (In
      thousands, except per share information)Year Ended September 30,
              
              2009
              
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005Revenue
              
              $
              75,150
              
              
              $
              57,908
              
              
              $
              29,892
              
              
              $
              24,003
              
              
              $
              14,632Income
      (loss) from continuing operations
              
              $
              6,629
              
              
              $
              8,622
              
              
              $
              4,379
              
              
              $
              2,026
              
              
              $
              (361
              )Fully
      diluted income (loss) from continuingoperations per common
      share
              
              $
              0.70
              
              
              $
              1.02
              
              
              $
              0.70
              
              
              $
              0.40
              
              
              $
              (0.09
              )Total
      assets
              
              $
              145,077
              
              
              $
              137,069
              
              
              $
              42,588
              
              
              $
              29,743
              
              
              $
              24,750Total
      stockholders' equity
              
              $
              70,092
              
              
              $
              63,003
              
              
              $
              24,043
              
              
              $
              13,908
              
              
              $
              8,900Long-term
      debt
              
              $
              37,813
              
              
              $
              33,557
              
              
              $
              14,387
              
              
              $
              13,921
              
              
              $
              13,247
  Please
read the following selected consolidated financial data in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements and the related notes
appearing elsewhere in this Annual Report on Form 10-K for a discussion of
information that will enhance understanding of this data.
 
 Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
 
 The
following discussion should be read in conjunction with our audited consolidated
financial statements and the related notes to the financial statements included
in this Form 10-K.
 
 FORWARD
LOOKING STATEMENT AND INFORMATION
 
 We are
including the following cautionary statement in this Form 10-K to make
applicable and take advantage of the safe harbor provision of the Private
Securities Litigation Reform Act of 1995 for any forward-looking statements made
by us or on behalf of us. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements, which are other than statements
of historical facts. Certain statements in this Form 10-K are forward-looking
statements. Words such as "expects," "believes," "anticipates," "may," and
"estimates" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially from those projected. Such risks and
uncertainties are set forth below. Our expectations, beliefs and projections are
expressed in good faith and we believe that they have a reasonable basis,
including without limitation, our examination of historical operating trends,
data contained in our records and other data available from third parties. There
can be no assurance that our expectations, beliefs or projections will result,
be achieved, or be accomplished. In addition to other factors and matters
discussed elsewhere in this Form 10-K, the following are important factors that
in our view could cause material adverse affects on our financial condition and
results of operations: the risks and uncertainties related to our future
operational and financial results, the risks and uncertainties relating to our
Internet operations, competitive factors, the timing of the openings of other
clubs, the availability of acceptable financing to fund corporate expansion
efforts, our dependence on key personnel, the ability to manage operations and
the future operational strength of management, and the laws governing the
operation of adult entertainment businesses. We have no obligation to update or
revise these forward-looking statements to reflect the occurrence of future
events or circumstances.
 
 GENERAL
INFORMATION
 
 We
operate in three businesses in the adult entertainment industry:
 
 1.
              We
      own and/or operate upscale adult nightclubs serving primarily businessmen
      and professionals. Our nightclubs offer live adult entertainment,
      restaurant and bar operations. Through our subsidiaries, we currently own
      and/or operate a total of nineteen adult nightclubs that offer live adult
      entertainment, restaurant and bar operations. Six of our clubs operate
      under the name "Rick's Cabaret"; four operate under the name “Club Onyx”,
      upscale venues that welcome all customers but cater especially to urban
      professionals, businessmen and professional athletes; five clubs operate
      under the name "XTC Cabaret", one club operates as “Tootsie’s Cabaret”
      and, effective as of September 30, 2009, one club operates as “Cabaret
      North”. Our nightclubs are in Houston, Austin, San Antonio, Dallas and
      Fort Worth, Texas; Charlotte, North Carolina; Minneapolis, Minnesota; New
      York, New York; Miami Gardens, Florida; Philadelphia, Pennsylvania and Las
      Vegas, Nevada. No sexual contact is permitted at any of our
      locations.
  21
 Table of Contents
  2.
              We
      have extensive Internet activities.
 
 a)
              We
      currently own two adult Internet membership Web sites at
      www.CoupleTouch.com and www.xxxpassword.com. We acquire xxxpassword.com
      site content from wholesalers.
 
 b)
              We
      operate an online auction site www.NaughtyBids.com. This site provides our
      customers with the opportunity to purchase adult products and services in
      an auction format. We earn revenues by charging fees for each transaction
      conducted on the automated site.
 
 3.
              In
      April 2008, we acquired a media division, including the leading trade
      magazine serving the multi-billion dollar adult nightclubs industry. As
      part of the transaction we also acquired two industry trade shows, two
      other industry trade publications and more than 25 industry
      websites.
 
 Our
nightclub revenues are derived from the sale of liquor, beer, wine, food,
merchandise, cover charges, membership fees, independent contractors' fees,
commissions from vending and ATM machines, valet parking and other products and
services. Our Internet revenues are derived from subscriptions to adult content
Internet websites, traffic/referral revenues, and commissions earned on the sale
of products and services through Internet auction sites, and other activities.
Media revenues include sale of advertising content and revenues from an annual
Expo convention. Our fiscal year end is September 30.
 
 For
several years, we have greatly reduced our usage of promotional pricing for
membership fees for our adult entertainment web sites. This reduced our revenues
from these web sites.
 
 CRITICAL
ACCOUNTING POLICIES
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts in the financial
statements and accompanying notes. Estimates and assumptions are based on
historical experience, forecasted future events and various other assumptions
that we believe to be reasonable under the circumstances. Estimates and
assumptions may vary under different assumptions or conditions. We evaluate our
estimates and assumptions on an ongoing basis. We believe the accounting
policies below are critical in the portrayal of our financial condition and
results of operations.
 
 On July
1, 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Statement
of Financial Accounting Standards No. 168, FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles, which is included in FASB Accounting Standards Codification
(“ASC”) 105 Generally Accepted
Accounting Principles.  This new guidance approved the FASB ASC
as the single source of authoritative nongovernmental GAAP.  The FASB
ASC is effective for interim or annual periods ending after September 15,
2009.  All existing accounting standards have been superseded and all
other accounting literature not included in the FASB ASC will be considered
non-authoritative.  The ASC is a restructuring of GAAP designed to
simplify access to all authoritative literature by providing a topically
organized structure.  The adoption of FASB ASC did not impact the
Company’s financial condition or results of operations.  Technical
references to GAAP included in these notes to the Consolidated Financial
Statements are provided under the new FASB ASC structure.
 
 Accounts and Notes
Receivable
 
 Trade
accounts receivable for the nightclub operation is primarily comprised of credit
card charges, which are generally converted to cash in two to five days after a
purchase is made.  The media division’s accounts receivable is
primarily comprised of receivables for advertising sales and Expo registration.
The Company’s accounts receivable, other is comprised of employee advances and
other miscellaneous receivables. The long-term portion of notes receivable are
included in other assets in the accompanying consolidated balance sheets. The
Company recognizes interest income on notes receivable based on the terms of the
agreement and based upon management’s evaluation that the notes receivable and
interest income will be collected. The Company recognizes allowances for
doubtful accounts or notes when, based on management judgment, circumstances
indicate that accounts or notes receivable will not be collected.
 
 Inventories
 
 Inventories
include alcoholic beverages, food, and Company merchandise. Inventories are
carried at the lower of cost, average cost, which approximates actual cost
determined on a first-in, first-out (“FIFO”) basis, or market.
 
 Property and
Equipment
 
 Property
and equipment are stated at cost. Provisions for depreciation and amortization
are made using straight-line rates over the estimated useful lives of the
related assets and the shorter of useful lives or terms of the applicable leases
for leasehold improvements. Buildings have estimated useful lives ranging from
31 to 40 years. Furniture, equipment and leasehold improvements have estimated
useful lives between five and ten years. Expenditures for major renewals and
betterments that extend the useful lives are capitalized. Expenditures for
normal maintenance and repairs are expensed as incurred. The cost of assets sold
or abandoned and the related accumulated depreciation are eliminated from the
accounts and any gains or losses are charged or credited in the accompanying
consolidated statement of income of the respective period.
  22
 Table of Contents
  Goodwill and Intangible
Assets
 
 FASB ASC
350, Goodwill and Other
Intangibles Assets addresses the accounting for goodwill and other
intangible assets. Under FASB ASC 350, goodwill and intangible assets with
indefinite lives are no longer amortized, but reviewed on an annual basis for
impairment. All of the Company’s goodwill and intangible assets relate to the
nightclub segment, except for $567,000 related to the media
segment.  Definite lived intangible assets are amortized on a
straight-line basis over their estimated lives.  Fully amortized
assets are written-off against accumulated amortization.
 
 Impairment of Long-Lived
Assets
 
 The
Company reviews property and equipment and intangible assets with definite lives
for impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of these assets is
measured by comparison of its carrying amounts to future undiscounted cash flows
the assets are expected to generate. If property and equipment and intangible
assets with definite lives are considered to be impaired, the impairment to be
recognized equals the amount by which the carrying value of the asset exceeds
its fair value.  Assets are grouped at the lowest level for which
there are identifiable cash flows, principally at the club level, when assessing
impairment. Cash flows for our club assets are identified at the individual club
level.  The Company’s annual evaluation was performed as of September
30, 2009, based on a projected discounted cash flow method using a discount rate
determined by management to be commensurate with the risk inherent in the
current business model. The Company determined that there is no goodwill
impairment at September 30, 2009, except for the impairment taken in the second
quarter of fiscal 2009 relating to the discontinued operation in
Austin.
 
 Certain
of our recent acquisitions, specifically Las Vegas, Philadelphia and the Media
Group, have been underperforming, principally due to the recent general economic
downturn, especially in Las Vegas, but also due to certain specific operational
issues, such as the change of concept in Philadelphia and the cab fare marketing
issues in Las Vegas.  Our assumptions for the projected cash flows for
these units include a gradual recovery for the economy and gradual improvement
in the cab fare issue in Las Vegas.  With these assumptions, the cash
flows from these units are adequate to show no need for impairment at this
time.  We will continue to monitor these units in the future in case
our assumptions do not prove to be appropriate.
 
 Fair Value of Financial
Instruments
  The
Company calculates the fair value of its assets and liabilities which qualify as
financial instruments and includes this additional information in the notes to
consolidated financial statements when the fair value is different than the
carrying value of these financial instruments. The estimated fair value of
accounts receivable, accounts payable and accrued liabilities approximate their
carrying amounts due to the relatively short maturity of these instruments. The
carrying value of short and long-term debt also approximates fair value since
these instruments bear market rates of interest. None of these instruments are
held for trading purposes.
 
 Derivative Financial
Instruments
 
 The
Company accounts for financial instruments that are indexed to and potentially
settled in, its own stock, including stock put options, in accordance with the
provisions of FASB ASC 815, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in  a Company’s Own
Stock.  Under certain circumstances that would require the
Company to settle these equity items in cash, and without regard to probability,
FASB ASC 815 would require the classification of all or part of the item as a
liability and the adjustment of that reclassified amount to fair value at each
reporting date, with such adjustments reflected in the Company’s consolidated
statements of income.  The first instrument to meet the requirements
of FASB ASC 815 for derivative accounting occurred in the quarter ended June 30,
2009 when the Company renegotiated the payback terms of certain put options and
agreed to pledge as collateral to certain holders a second lien on certain
property.
 
 Revenue
Recognition
 
 The
Company recognizes revenue from the sale of alcoholic beverages, food and
merchandise, other revenues and services at the point-of-sale upon receipt of
cash, check, or credit card charge.
 
 The
Company recognizes revenue for VIP memberships in accordance with FASB ASC
605-25, Revenue
Recognition, by deferring membership revenue and recognizing over the
estimated membership usage period. Management estimates that the weighted
average useful lives for memberships are 12 and 24 months for annual and
lifetime memberships, respectively. The Company does not track membership usage
by type of membership, however it believes these lives are appropriate and
conservative, based on management’s knowledge of its client base and membership
usage at the clubs.
 
 The
Company recognizes Internet revenue from monthly subscriptions to its online
entertainment sites when notification of a new or existing subscription and its
related fee are received from the third party hosting company or from the credit
card company, usually two to three days after the transaction has occurred. The
monthly fee is not refundable. The Company recognizes Internet auction revenue
when payment is received from the credit card as revenues are not deemed
estimable nor collection deemed probable prior to that point.
  23
 Table of Contents
  Revenues
from the sale of magazines and advertising content are recognized when the issue
is published and shipped.  Revenues and external expenses related to
the Company’s annual Expo convention are recognized upon the completion of the
convention in August.
 
 Sales and Liquor
Taxes
 
 The
Company recognizes sales and liquor taxes paid as revenues and an equal expense
in accordance with FASB ASC 605, How Taxes Collected from Customers
and Remitted to Governmental Authorities Should Be Presented in the Income
Statement.  Total sales and
liquor taxes aggregated $4,544,160 and $3,815,648 for the year ended September
30, 2009 and 2008, respectively.
 
 Advertising and
Marketing
 
 Advertising
and marketing expenses are primarily comprised of costs related to public
advertisements and giveaways, which are used for promotional purposes.
Advertising and marketing expenses are expensed as incurred and are included in
operating expenses in the accompanying consolidated statements of
income.
 
 Income
Taxes
 
 Deferred
income taxes are determined using the liability method in accordance with FASB
ASC 740, Accounting for Income
Taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. In addition, a valuation allowance is
established to reduce any deferred tax asset for which it is determined that it
is more likely than not that some portion of the deferred tax asset will not be
realized.
 
 FASB ASC
740 creates a single model to address accounting for uncertainty in tax
positions by prescribing a minimum recognition threshold a tax position is
required to meet before being recognized in the financial statements. FASB ASC
740 also provides guidance on derecognition, measurement, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. There are no unrecognized tax benefits to disclose in the notes to
the consolidated financial statements.
 
 Put
Options
 
 In
certain situations, the Company issues restricted common shares as partial
consideration for acquisitions of certain businesses or
assets.  Pursuant to the terms and conditions of the governing
acquisition agreements, the holder of such shares has the right, but not the
obligation, to put a fixed number of the shares on a monthly basis back to the
Company at a fixed price per share.  The Company may elect during any
given month to either buy the monthly shares or, if management elects not to do
so, the holder can sell the monthly shares in the open market, and any
deficiency between the amount which the holder receives from the sale of the
monthly shares and the value of shares will be paid by the
Company.  The Company has accounted for these shares in accordance
with the guidance established by FASB ASC 480 as a reclassification of the value
of the shares from permanent to temporary equity.  As the shares
become due, the Company transfers the value of the shares back to permanent
equity, less any amount paid to the holder.  Also see “Derivative
Financial Instruments” above.
 
 Earnings Per Common
Share
 
 The
Company computes earnings per share in accordance with FASB ASC 260, Earnings Per Share. FASB ASC
260 provides for the calculation of basic and diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution of securities that could share in the earnings of the
Company.
 
 Potential
common stock shares consist of shares that may arise from outstanding dilutive
common stock options and warrants (the number of which is computed using the
“treasury stock method”) and from outstanding convertible debentures (the number
of which is computed using the “if converted method”). Diluted EPS considers the
potential dilution that could occur if the Company’s outstanding common stock
options, warrants and convertible debentures were converted into common stock
that then shared in the Company’s earnings (as adjusted for interest expense,
that would no longer occur if the debentures were converted).
 
 Stock
Options
 
 Effective
October 1, 2006, the Company adopted the fair value recognition provisions of
FASB ASC 718, Compensation—Stock
Compensation, using the modified prospective application
method.
  24
 Table of Contents
  The
compensation cost recognized for the year ended September 30, 2009 and 2008 was
$96,171 and $157,080, respectively.  There were 300,000 stock options
exercises for the year ended September 30, 2009.
 
 RESULTS
OF OPERATIONS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2009 AS COMPARED TO THE
FISCAL YEAR ENDED SEPTEMBER 30, 2008
 
 For the
fiscal year ended September 30, 2009, we had consolidated total revenues of
$75,149,596, compared to consolidated total revenues of $57,907,727 for the year
ended September 30, 2008. This was an increase of $17,241,869 or 29.8%. The
increase in total revenues was primarily due to revenues generated in our new
clubs and increases in revenues from certain of our existing clubs, especially
from our New York location. Revenues from nightclub operations for same-location
same-period decreased by 4.1% and for Internet businesses decreased by a
negligible amount.
 
 Our
operating margin (income from operations divided by total revenues) was 17.8%
for the year ended September 30, 2009 compared to 26.3% for the prior year. The
decrease was due principally to the poor U.S. economy in 2009 and the poor
results from our Las Vegas club, due to the steep dive in the Las Vegas
economy.
 
 Our
income from continuing operations before income taxes for the year ended
September 30, 2009 was $10,043,335 compared to $12,495,437 for the year ended
September 30, 2008. The decrease was primarily due to the same factors discussed
in the previous paragraph.  Our income from continuing nightclub
operations (excluding corporate overhead and before income taxes) was
$16,124,106 for the year ended September 30, 2009 compared with $18,556,590 for
the year ended September 30, 2008. Our income from operations for our Internet
businesses (excluding corporate overhead) was $162,071 for the year ended
September 30, 2009 compared with $148,194 for the year ended September 30, 2008.
Our income from operations for our nightclub operations for the
same-location-same-period decreased by 18.2%.
 
 Our cost
of goods sold for the year ended September 30, 2009 was 11.7% of total revenues
compared to 11.3% of related revenues for the year ended September 30,
2008.  Our cost of goods sold for the nightclub operations for the
year ended September 30, 2009 was 11.5% of our total revenues from club
operations compared to 11.3% for the year ended September 30, 2008. Cost of
goods sold for same-location-same-period decreased to 11.6% for the year ended
September 30, 2009 compared to 11.7% for the year ended September 30, 2008. We
continued our efforts to achieve reductions in cost of goods sold of the club
operations through improved inventory management. We are continuing a program to
improve margins from liquor and food sales and food service efficiency. Our cost
of sales from our Internet operations for the year ended September 30, 2009 was
1.5% compared to 2.6% of related revenues for the year ended September 30,
2008.  The overall increase in costs of goods sold as a % of revenues
was due to extended happy hours and overall price discounting to attract a
higher volume of customers. The Company believes it will continue these
practices into 2010.
 
 Our
payroll and related costs for the year ended September 30, 2009 were $16,135,304
compared to $12,963,804 for the year ended September 30, 2008. The increase was
primarily due to the increase in payroll in our new clubs and the increase in
the minimum wage. Our payroll for our nightclub operations for
same-location-same-period decreased by 2.9%. The decrease was primarily due to
more diligent review of our staffing by management. Our payroll for Internet
operations decreased by 7.7%.  We believe that our labor and
management staff levels are at appropriate levels.
 
 Our
interest expense for the year ended September 30, 2009 was $3,416,911 compared
to $2,640,987 for the year ended September 30, 2008. The increase was primarily
due to the increase in debt in relation to the purchase of new clubs during
mid-2008, including approximately $8 million in bank financing of real property
and the $7,200,000 in new convertible debt issued in July 2009. We have
increased our long term debt to $37,812,582 as of September 30, 2009 compared to
debt of $33,557,406 as of September 30, 2008.
 
 Our net
income was $5,208,097 for the fiscal year ended September 30, 2009 compared to
$7,660,667 for the previous year. The decrease in our net income was primarily a
result of the factors discussed in the paragraphs above.
  25
 Table of Contents
  Following
is a comparison of the Company’s income statement for the years ended September
30, 2009 and 2008 with percentages compared to total revenue:
 
 2009
              
              
              %
              
              
              2008
              
              
              %Sales
      of alcoholic beverages
              
              $
              28,298,098
              
              
              
              37.7
              %
              
              $
              21,168,798
              
              
              
              36.6
              %Sales
      of food and merchandise
              
              
              6,174,763
              
              
              
              8.2
              %
              
              
              5,043,526
              
              
              
              8.7
              %Service
      revenues
              
              
              36,083,703
              
              
              
              48.0
              %
              
              
              28,024,450
              
              
              
              48.4
              %Internet
      revenues
              
              
              640,667
              
              
              
              0.9
              %
              
              
              715,759
              
              
              
              1.2
              %Media
              
              
              1,404,238
              
              
              
              1.9
              %
              
              
              801,215
              
              
              
              1.4
              %Other
              
              
              2,548,127
              
              
              
              3.4
              %
              
              
              2,153,979
              
              
              
              3.7
              %Total
      revenues
              
              
              75,149,596
              
              
              
              100.0
              %
              
              
              57,907,727
              
              
              
              100.0
              %Cost
      of goods sold
              
              
              8,773,312
              
              
              
              11.7
              %
              
              
              6,539,189
              
              
              
              11.3
              %Salaries
      & wages
              
              
              16,135,304
              
              
              
              21.5
              %
              
              
              12,963,804
              
              
              
              22.4
              %Stock-
      based compensation
              
              
              96,171
              
              
              
              0.1
              %
              
              
              157,080
              
              
              
              0.3
              %Taxes
      and permits
              
              
              9,172,484
              
              
              
              12.2
              %
              
              
              7,021,950
              
              
              
              12.1
              %Credit
      card fees
              
              
              1,603,044
              
              
              
              2.1
              %
              
              
              1,048,903
              
              
              
              1.8
              %Rent
              
              
              3,415,557
              
              
              
              4.5
              %
              
              
              2,051,019
              
              
              
              3.5
              %Legal
      & professional
              
              
              2,947,033
              
              
              
              3.9
              %
              
              
              1,619,284
              
              
              
              2.8
              %Advertising
      and marketing
              
              
              8,091,745
              
              
              
              10.8
              %
              
              
              2,231,005
              
              
              
              3.9
              %Depreciation
      and amortization
              
              
              3,205,205
              
              
              
              4.3
              %
              
              
              2,222,960
              
              
              
              3.8
              %Insurance
              
              
              1,084,729
              
              
              
              1.4
              %
              
              
              820,088
              
              
              
              1.4
              %Utilities
              
              
              1,594,600
              
              
              
              2.1
              %
              
              
              1,153,068
              
              
              
              2.0
              %Other
              
              
              5,618,430
              
              
              
              7.5
              %
              
              
              4,856,213
              
              
              
              8.4
              %Total
      operating expenses
              
              
              61,737,614
              
              
              
              82.2
              %
              
              
              42,684,563
              
              
              
              73.7
              %Income
      from continuing operations
              
              
              13,411,982
              
              
              
              17.8
              %
              
              
              15,223,164
              
              
              
              26.3
              %Interest
      income
              
              
              16,384
              
              
              
              0.0
              %
              
              
              134,156
              
              
              
              0.2
              %Interest
      expense
              
              
              (3,416,911
              )
              
              
              -4.5
              %
              
              
              (2,640,987
              )
              
              
              -4.6
              %Gain
      on change in fair value of derivative instruments
              
              
              145,374
              
              
              
              0.2
              %
              
              
              -
              
              
              
              0.0
              %Minority
      interests
              
              
              (294,000
              )
              
              
              -0.4
              %
              
              
              (147,000
              )
              
              
              -0.3
              %Gain
      on sale of assets and other
              
              
              180,506
              
              
              
              0.2
              %
              
              
              (73,896
              )
              
              
              -0.1
              %Income
      from continuing operations before income taxes
              
              $
              10,043,335
              
              
              
              13.4
              %
              
              $
              12,495,437
              
              
              
              21.6
              %
 
 Following
is an explanation of significant variances in the above amounts.
 
 Other
revenues include ATM commissions earned, video games and other vending and
certain promotion fees charged to our entertainers.  The Company
recognizes revenue from other revenues and services at the point-of-sale upon
receipt of cash, check, or credit card charge.
 
 Cost of
goods sold includes cost of alcoholic and non-alcoholic beverages, food, cigars
and cigarettes, merchandise, media printing/binding, media postage and internet
traffic purchases and webmaster payouts.  The cost of goods sold for
the club operations for the year ended September 30, 2009 was 11.5% compared to
11.3% for the year ended September 30, 2008.  The cost of goods sold
from our internet operations for the year ended September 30, 2009 was 1.5%
compared to 2.6% for the year ended September 30, 2008.  The cost of
goods sold from our media operations for the year ended September 30, 2009 was
23.5%, compared to 15.7% for the year ended September 30, 2008.  The
cost of goods sold for same-location-same-period of club continuing operations
for the year ended September 30, 2009 was 11.6%, compared to 11.7% for the same
period ended September 30, 2008.
 
 The
increase in payroll and related costs, stated as “Salaries & Wages” above,
was primarily due to the addition of the new clubs in
mid-2008.   The decrease in percentage to total revenues is
principally due to management’s continued monitoring of payroll costs in 2009
during these tougher economic times.   Payroll for
same-location-same-period of club continuing operations decreased to $6,601,640
for the year ended September 30, 2009 from $6,796,784 for the previous
year.  Management currently believes that its labor and management
staff levels are appropriate.
  26
 Table of Contents
  Taxes and
permits consists principally of payroll taxes, property taxes, sales and alcohol
taxes, licenses and permits and the patron tax in our nightclubs in
Texas.  Patron taxes amounted to $1,685,000 and $1,293,075 for the
years ended September 30, 2009 and 2008, respectively.
 
 The
increase in the percentage to revenues of credit card fees relates to increased
chargebacks from certain credit card companies in 2009.
 
 Rent
expense increased principally due to significant new leases in Las Vegas and
Philadelphia.
 
 Legal and
professional expenses increased principally due to addition of new clubs and
costs related to litigation involving claims under the Fair Labor Standards
Act.
 
 The
increase in the percentage of advertising and marketing to total revenue is
principally due to the addition of our new club in Las Vegas and increases in
our overall marketing campaign to attempt to increase volume of customer traffic
to all locations..
 
 Depreciation
and amortization increased approximately $982,000 from the year ended September
30, 2008, due to the new clubs purchased during the 2008 fiscal
year.
 
 The
increase in interest expense was attributable to our obtaining new debt during
the year ended September 30, 2009 and 2008 to finance the purchase of the new
clubs and related real estate.  As of September 30, 2009, the balance
of long-term debt was $38,321,806 compared to $33,557,406 a year earlier, but a
substantial portion of the new debt was entered into during the quarter ended
September 30, 2009.
 
 See
“Derivative Financial Instrument” above for information on the Company’s
derivative financial instrument at September 30, 2009.
 
 Losses,
before income taxes, at clubs losing money during the year ended September 30,
2009 approximated $3,200,000, compared to $1,100,000 for the year ended
September 30, 2008.  These clubs do not include discontinued
operations.  The significant losing club in 2009 was Rick’s Cabaret in
Las Vegas.  Subsequent to December 31, 2008, the Company took the
following steps to remedy losses in certain clubs:
 
 The
Rick’s Cabaret in Minneapolis lost approximately $420,000 in 2009 after a profit
in 2008 as a result of the legal fees and settlement amounting to approximately
$600,000 in the lawsuit mentioned above.
 
 The
Rick’s Cabaret in Dallas lost $418,000 before income taxes during the period
before the location was changed to XTC during 2009 and lost $452,000 during the
period ended September 30, 2008 after its purchase in April 2008.  In
January 2009, we converted the location to XTC Cabaret Dallas.  This
location, as XTC Cabaret Dallas, made a $423,000 pretax profit for the year
ended September 30, 2009.
 
 The
Rick’s Cabaret in Philadelphia lost $276,000 before income taxes during the
quarter ended December 31, 2008 and lost $385,000 during the period ended
September 30, 2008 after its purchase on March 31, 2008.  We have
converted the location to Club Onyx Philadelphia in January 2009 and the club
made a profit of $195,000 for the balance of the year ended September 30,
2009.
 
 Club Onyx
Dallas did not have a liquor license during the quarter ended December 31, 2008
until December 5, 2008 and lost $188,000 before income taxes during the
quarter.  This location made a profit of $47,000 for the remainder of
the year ended September 30, 2009.
  Rick’s
Cabaret Las Vegas lost approximately $2,018,000 before income taxes for the year
ended September 30, 2009.   Due to the economy in Las Vegas, we
expect to continue to lose money at this location until the Las Vegas economy
improves, but we have made expense reductions and modifications to our marketing
campaign in this location subsequent to March 31, 2009 and we have seen a large
improvement in operations since that time, resulting in a loss before income
taxes of $700,000 for the six months ended September 30, 2009.
 
 The
accompanying consolidated financial statements reflect the following as
discontinued operations as of and for the year ended September 30,
2009.
 
 The
Rick’s Cabaret in Austin was held for sale beginning in the first quarter of our
2009 fiscal year and is included in discontinued operations.  A sale
of the club was scheduled in May 2009, but the sale was never
closed.  The Company recognized an impairment of the net assets of the
club of $823,090 as of March 31, 2009. The club is still held for sale at this
time.
 
 The
Company sold one of its nightclubs, Encounters in San Antonio, on March 1, 2009
for $40,000, including $5,000 in cash and a $35,000 note payable monthly for one
year.  The Company recognized an impairment of $221,563 for this club
during the quarter ended December 31, 2008.  The actual loss at date
of sale was $226,175.
  27
 Table of Contents
  The
Company closed its Divas Latinas club in Houston during September
2009.  This club is also recognized in discontinued
operations.
 
 Following
is summarized information regarding the discontinued operations:
 
 Year
      Ended
                September
      30,2009
              
              
              2008Loss
      from discontinued operations
              
              $
              (1,089,902
              )
              
              $
              (1,394,792
              )Loss
      on sale of discontinued operations
              
              
              (1,049,265
              )
              
              
              -Income
      tax - discontinued operations
              
              
              718,663
              
              
              
              433,607Total
      loss from discontinued operations, net of tax
              
              $
              (1,420,504
              )
              
              $
              (961,185
              )
 
 Major
classes of assets and liabilities included as assets and liabilities of
discontinued operations as of:
 September
      30,
                2009
              
              
              September
      30,
                2008Current
      assets
              
              $
              176,331
              
              
              $
              250,900Property
      and equipment
              
              
              1,181,378
              
              
              
              1,641,247Other
      assets
              
              
              1,007,995
              
              
              
              1,907,296Current
      liabilities
              
              
              (129,142
              )
              
              
              (237,448
              )Long-term
      liabilities
              
              
              (277,954
              )
              
              
              (255,176
              )Net
      assets (liabilities)
              
              $
              1,958,608
              
              
              $
              3,306,819
 
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 As of
September 30, 2009, we had working capital of $6,686,047 compared to working
capital of $3,597,074 as of September 30, 2008. Because of the large volume of
cash we handle, stringent cash controls have been implemented. The increase in
working capital was primarily due to working capital provided by operations and
financing activities, net of uses of working capital for investing purposes. At
September 30, 2009, our cash and cash equivalents were $12,751,423 compared to
$5,429,219 at September 30, 2008.
 
 Our
depreciation for the year ended September 30, 2009 was $2,899,130 compared to
$2,006,884 for the year ended September 30, 2008. Our amortization for the year
ended September 30, 2009 was $306,075 compared to $216,076 for the period ended
September 30, 2008.
 
 The
following table presents a summary of our cash flows from operating, investing,
and financing activities:
 
 Years
      ended September 30,2009
              
              
              2008Net
      cash provided by operating activities
              
              $
              8,926,330
              
              
              $
              14,769,249Net
      cash used in investing activities
              
              
              (3,808,597
              )
              
              
              (38,711,804
              )Net
      cash provided by financing activities
              
              
              2,204,471
              
              
              
              26,496,424Net
      increase in cash and cash equivalents
              
              $
              7,322,204
              
              
              $
              2,553,869
 
 The
decrease in cash provided by operating activities was primarily due to the
decrease in net income and from paying more liabilities in 2009 due to the cash
levels in the business. The decrease in cash used in investing activities and
cash provided by financing activities relates primarily to acquisitions of
businesses.
 
 We
require capital principally for the acquisition of new clubs, renovation of
older clubs and investments in technology. We may also utilize capital to
repurchase our common stock as part of our share repurchase
program.
 
 Debt
Financing:
 
 On
October 12, 2007, we borrowed $1,000,000 from an investment company under terms
of a 10% convertible debenture. Interest only is payable quarterly until the
principal plus accrued interest is due in nine equal quarterly payments
beginning in October 2008. The debenture is subject to optional redemption at
any time after 366 days from the date of issuance at 100% of the principal face
amount plus accrued interest. The debenture plus any outstanding convertible
interest is convertible by the holder into shares of our common stock at any
time prior to the maturity date at the conversion price of $12 per
share.
  28
 Table of Contents
  On
November 30, 2007, we entered into a Stock Purchase Agreement for the
acquisition of 100% of the issued and outstanding common stock of Stellar
Management Corporation, a Florida corporation (the "Stellar Stock") and 100% of
the issued and outstanding common stock of Miami Gardens Square One, Inc., a
Florida corporation (the "MGSO Stock") which owns and operates an adult
entertainment cabaret known as "Tootsie’s Cabaret" ("Tootsie’s") located at 150
NW 183rd Street, Miami Gardens, Florida 33169 (the "Transaction"). Pursuant to
the Stock Purchase Agreement, we acquired the Stellar Stock and the MGSO Stock
from Norman Hickmore ("Hickmore") and Richard Stanton ("Stanton") for a total
purchase price of $25,000,000 payable $15,000,000 in cash and payable
$10,000,000 pursuant to two Secured Promissory Notes in the amount of $5,000,000
each to Stanton and Hickmore (the "Notes"). The Notes bear interest at the rate
of 14% per annum with the principal payable in one lump sum payment on November
30, 2010 (amended to November 30, 2012). Interest on the Notes will be payable
monthly, in arrears, with the first payment being due thirty (30) days after the
closing of the Transaction. We cannot pre-pay the Notes during the first twelve
(12) months; thereafter, we may prepay the Notes, in whole or in part, provided
that (i) any prepayment by us from December 1, 2008 through November 30, 2009,
shall be paid at a rate of 110% of the original principal amount and (ii) any
prepayment by the Company after November 30, 2009, may be prepaid without
penalty at a rate of 100% of the original principal amount. The Notes are
secured by the Stellar Stock and MGSO Stock under a Pledge and Security
Agreement.
 
 Effective
February 1, 2008, the Company borrowed $1,000,000 from a lender. The funds were
utilized to pay off certain other Company debt in the amount of $1,797,529. The
new debt bears interest at 9% and interest is payable monthly until February 1,
2013 at which time the principal is due in full. The note is collateralized by
certain Company-owned property in Minneapolis, Minnesota.
 
 In
February 2008, the Company borrowed $1,561,500 from a lender. The funds were
used to purchase an aircraft. The debt bears interest at 6.15% with monthly
principal and interest payments of $11,323 beginning March 12, 2008. The note
matures on February 12, 2028.
 
 As part
of the acquisition of the Executive Club in Dallas, we acquired the related Real
Property from DPC Holdings, LLC, a Texas limited liability company ("DPC"). As
consideration for the purchase of the Real Property, RCI paid total
consideration of $5,599,721, which was paid (i) $4,250,000, payable $610,000 in
cash and $3,640,000 through the issuance of a five year promissory note (the
"Promissory Note") and (ii) the issuance of 57,918 shares of our restricted
common stock (the "Rick's Real Property Shares") to be valued at $23.30 per
share ($1,349,721). The Promissory Note bears interest at a varying rate at the
greater of (i) two percent (2%) above the Prime Rate or (ii) seven and one-half
percent (7.5%), and is guaranteed by Rick's and Eric Langan,
individually.
 
 As part
of the acquisition of the Platinum Club II in Dallas, we acquired the Real
Property from Wire Way, LLC, a Texas limited liability company (“Wire Way”).
Pursuant to a Real Estate Purchase and Sale Agreement (the “Real Estate
Agreement”) dated May 10, 2008, we paid total consideration of $6,000,000, which
was paid $1,650,000 in cash and $4,350,000 through the issuance of a five (5)
year promissory note (the “Promissory Note”). The Promissory Note bears interest
at a varying rate at the greater of (i) two percent (2%) above the Prime Rate or
(ii) seven and one-half percent (7.5%), which is guaranteed by the Company and
by Eric Langan, the Company’s Chief Executive Officer,
individually.
 
 As part
of the acquisition of the Las Vegas club, part of the purchase price was
$3,000,000 pursuant to a promissory note (“the Rick’s Promissory Note”),
executed by and obligating Rick’s, bearing interest at eight percent (8%) per
annum with a five (5) year amortization, with monthly payments of principal and
interest, with the initial monthly payment due in April 2009 with a balloon
payment of all then outstanding principal and interest due upon the expiration
of two (2) years from the execution of the Promissory Note.
 
 In May
2008, we borrowed $150,000 from two unrelated individuals under terms of a 10%
convertible debenture. Interest only is payable quarterly beginning in August
2008 and the note matured and was paid in May 2009.
 
 On August
6, 2009, we completed the sale of an aggregate of $7.2 million in 10%
Convertible Debentures (the “Debentures”) to certain accredited investors (the
“Holders”).  The Debentures bear interest at the rate of 10% per annum
and mature on August 4, 2012.  The Debentures are payable with one
initial payment of interest only due February 4, 2010, and, thereafter in ten
equal quarterly principal payments, plus accrued interest thereon.  At
the option of the Holders, the Debentures may be converted into shares of the
Company’s common stock at $8.75 per share.  The Debentures are
redeemable by us at any time if the closing price of its common stock for 20
consecutive trading days is at least $11.50 per share.  The Debentures
provide that an event of default occurs if: we should fail to pay any principal
or interest when due; we should fail to convert any Debenture when required; we
should fail to observe or perform any covenant or agreement contained within the
Debenture; there are cross defaults to other indebtedness in excess of
$1,000,000; there is a reorganization, liquidation, voluntary or involuntary
bankruptcy or insolvency proceedings or other bankruptcy default; or a final
unsatisfied judgment not covered by insurance aggregating an excess of
$1,000,000 occurs against us and is not stayed, bonded or discharged within
seventy-five days.
 
 In
connection with the sale of the Debentures, we also issued an aggregate of
164,569 warrants (the “Warrants”) to the Holders, on a pro-rata
basis.  We issued each Holder a number of Warrants equal to 20% of the
number of shares of common stock into which each Holder’s Debenture is
convertible.  The Warrants have an exercise price of $8.75 and expire
on August 5, 2012.  The Warrants provide that we have the right to
require exercise of the Warrants if the closing price of our common stock for 20
consecutive trading days is at least $12.25.
 
 The
proceeds from the sale of the Debentures and Warrants are intended to be
utilized to make future acquisitions, and may be utilized for working capital
and general corporate purposes.
  29
 Table of Contents
  Contractual obligations and
commitments:
 
 We have
long term contractual obligations primarily in the form of operating leases and
debt obligations. The following table summarizes our contractual obligations and
their aggregate maturities as well as future minimum rent
payments.  Future interest payments related to variable interest rate
debt were estimated using the interest rate in effect at September 30,
2009.
 
 Payments Due by PeriodTotal
              
              
              2010
              
              
              2011
              
              
              2012
              
              
              2013
              
              
              2014
              
              
              ThereafterLong-term
      debt
              
              $
              38,321,806
              
              
              $
              6,058,231
              
              
              $
              4,738,852
              
              
              $
              3,752,690
              
              
              $
              19,638,415
              
              
              $
              422,928
              
              
              $
              3,710,690Interest
      payments
              
              
              11,178,324
              
              
              
              3,551,864
              
              
              
              3,082,787
              
              
              
              2,687,090
              
              
              
              1,202,793
              
              
              
              344,317
              
              
              
              309,473Operating
      leases
              
              
              22,338,149
              
              
              
              3,721,845
              
              
              
              2,744,549
              
              
              
              2,450,136
              
              
              
              2,443,162
              
              
              
              2,238,207
              
              
              
              8,740,250
 
 
 Put
Options
 
 As part
of certain of our acquisition transactions, we have entered into
Lock-Up/Leak-Out Agreements with the sellers pursuant to which, on or after a
contractual period after the closing date, the seller shall have the right, but
not the obligation, to have us purchase from seller a certain number of our
shares of common stock issued in the transactions in an amount and at a rate of
not more than a contractual number of the shares per month (the “Monthly
Shares”) calculated at a price per share equal to a contractual value per share
(“Value of the Rick’s Shares”). At our election during any given month, we may
either buy the Monthly Shares or, if we elect not to buy the Monthly Shares from
the seller, then the seller shall sell the Monthly Shares in the open market.
Any deficiency between the amount which the seller receives from the sale of the
Monthly Shares and the value of the shares shall be paid by us within three (3)
business days of the date of sale of the Monthly Shares during that particular
month. Our obligation to purchase the Monthly Shares from the Seller shall
terminate and cease at such time as the seller has received a contractual amount
from the sale of the Rick’s Shares and any deficiency. Under the terms of the
Lock-Up/Leak-Out Agreements, the seller may not sell more than a contractual
number of our shares per 30-day period, regardless of whether the seller “Puts”
the shares to us or sells them in the open market or otherwise.
 
 During
April and May 2009, we completed renegotiation of terms of certain of our long
term debt and a significant portion of outstanding put
options.  Before the renegotiation, the maximum obligation that could
be owed if our stock were valued at zero was $13,935,020 and was recorded in our
consolidated balance sheet as Temporary Equity.   After the
renegotiation, the maximum obligation that could be owed if our stock were
valued at zero is $11,671,000 at September 30, 2009.  If we are
required to buy back any of these put options, the buy-back transaction will be
purely a balance sheet transaction, affecting only Temporary Equity or
Derivative Liability and Stockholders’ Equity and will have no income statement
effect.  The only income statement effect from these put options is
the “mark to market” valuation quarterly of the derivative liability as
explained in Note B of Notes to Consolidated Financial Statements. Following is
a schedule of the annual obligation (after the renegotiation) we would have if
our stock price remains in the future at the closing market price on September
30, 2009 of $8.60 per share, of which there can be no assurance: (This includes
the derivative financial instruments recognized in our consolidated balance
sheet at September 30, 2009.)
 
 For
      the Year Ended September 30:2010
              
              $
              2,397,6002011
              
              
              2,820,0002012
              
              
              1,945,8102013
              
              
              130,190Total
              
              $
              7,293,600
 
 Each
$1.00 per share movement of our stock price has an aggregate effect of $509,000
on the total obligation.
 
 We are
not aware of any other event or trend that would potentially affect liquidity.
In the event such a trend develops, we believe our working capital and capital
expenditure requirements will be adequately met by cash flows from operations.
In our opinion, working capital is not a true indicator of our financial status.
Typically, businesses in our industry carry current liabilities in excess of
current assets because businesses in our industry receive substantially
immediate payment for sales, with nominal receivables, while inventories and
other current liabilities normally carry longer payment terms. Vendors and
purveyors often remain flexible with payment terms, providing businesses in our
industry with opportunities to adjust to short-term business down turns. We
consider the primary indicators of financial status to be the long-term trend of
revenue growth, the mix of sales revenues, overall cash flow, profitability from
operations and the level of long-term debt.
  30
 Table of Contents
  The
following table presents a summary of such indicators:
 
 Increase
              
              
              
              
              
              IncreaseYear
      Ended September 30,
              
              2009
              
              
              (Decrease)
              
              
              2008
              
              
              (Decrease)
              
              
              2007Sales
      of alcoholic beverages
              
              $
              28,298,098
              
              
              
              33.68
              %
              
              $
              21,168,798
              
              
              
              74.78
              %
              
              $
              12,111,348Sales
      of food and merchandise
              
              
              6,174,763
              
              
              
              22.43
              %
              
              
              5,043,526
              
              
              
              58.33
              %
              
              
              3,185,494Service
      revenues
              
              
              36,083,703
              
              
              
              28.76
              %
              
              
              28,024,450
              
              
              
              88.30
              %
              
              
              14,883,205Internet
      revenues
              
              
              640,667
              
              
              
              -10.49
              %
              
              
              715,759
              
              
              
              -2.04
              %
              
              
              730,629Media
      revenues
              
              
              1,404,238
              
              
              
              75.26
              %
              
              
              801,215
              
              
              
              -
              
              
              
              -Other
              
              
              2,548,127
              
              
              
              18.30
              %
              
              
              2,153,979
              
              
              
              95.24
              %
              
              
              1,103,264Total
      revenues
              
              $
              75,149,596
              
              
              
              29.77
              %
              
              $
              57,907,727
              
              
              
              80.88
              %
              
              $
              32,013,940Net
      cash provided by operating activities
              
              $
              8,926,330
              
              
              
              -39.56
              %
              
              $
              14,769,249
              
              
              
              236.96
              %
              
              $
              4,383,121Net
      income
              
              $
              5,208,097
              
              
              
              -32.02
              %
              
              $
              7,660,667
              
              
              
              150.77
              %
              
              $
              3,054,899Long-term
      debt
              
              $
              38,321,806
              
              
              
              16.28
              %
              
              $
              32,957,406
              
              
              
              129.07
              %
              
              $
              14,387,339
 
 
 We have
not established lines of credit or financing other than the above mentioned
notes payable and our existing debt. There can be no assurance that we will be
able to obtain additional financing on reasonable terms in the future, if at
all, should the need arise.
 
 Share
repurchase
 
 On
September 29, 2008, our Board of Directors authorized us to repurchase up to
$5,000,000 worth of our common stock. During the fiscal year ending September
30, 2008, no shares were purchased under this program. During the fiscal year
ended September 30, 2009, we purchased 303,959 shares of common stock in the
open market at prices ranging from $2.64 to $8.60.
 
 IMPACT
OF INFLATION
 
 We have
not experienced a material overall impact from inflation in our operations
during the past several years. To the extent permitted by competition, we have
managed to recover increased costs through price increases and may continue to
do so. However, there can be no assurance that we will be able to do so in the
future.
 
 SEASONALITY
 
 Our
nightclub operations are affected by seasonal factors. Historically, we have
experienced reduced revenues from April through September with the strongest
operating results occurring during October through March. Our experience
indicates that there are no seasonal fluctuations in our Internet
activities.
 
 GROWTH
STRATEGY
 
 We
believe that our nightclub operations can continue to grow organically and
through careful entry into markets and demographic segments with high growth
potential. Our growth strategy is: (a) to open new clubs after market analysis,
(b) to acquire existing clubs in locations that are consistent with our growth
and income targets and which appear receptive to the upscale club formula we
have developed, as is the case with the acquisition of the New York club and
clubs in Charlotte, South Houston,  Dallas/Fort Worth, San Antonio,
Austin and Miami, (c) to form joint ventures or partnerships to reduce start-up
and operating costs, with us contributing equity in the form of our brand name
and management expertise, (d) to develop new club concepts that are consistent
with our management and marketing skills, and/or (e) to acquire real estate in
connection with club operations, although some clubs may be in leased
premises.
 
 During
fiscal 2008, we acquired a media division for a total cost of $1,069,754. This
acquisition was funded primarily through issuance of our restricted common stock
valued at $369,754, and $700,000 in cash. This media operation had total
revenues of approximately $1,404,000 and $801,000 for fiscal years 2009 and
2008, respectively and net losses of approximately $242,000 and
$28,000.
 
 During
fiscal 2008, we acquired five existing nightclub operations and 49% of an
existing nightclub operation for a total cost of $69,768,925, including real
property of $14,761,766. These acquisitions were funded primarily through
indebtedness of $20,990,000, including real property debt of $7,990,000,
issuance of our restricted common stock valued at $12,964,465, $701,711 in debt
forgiveness, and $35,461,116 in cash. These nightclub operations had total
revenues of approximately $40,674,000 and $22,554,000 for fiscal years 2009 and
2008, respectively and net income of approximately$6,708,000 and
$7,413,000.
  31
 Table of Contents
  During
fiscal 2009, we acquired one nightclub operation for cash of approximately
$2,385,000..  The closing occurred on September 30, 2009; therefore,
there are no operations of the acquired company in the accompanying consolidated
statement of operations.
 
 We
continue to evaluate opportunities to acquire new nightclubs and anticipate
acquiring new locations that fit our business model as we have done in the past.
The acquisition of additional clubs will require us to obtain additional debt or
issuance of our common stock, or both. There can be no assurance that we will be
able to obtain additional financing on reasonable terms in the future, if at
all, should the need arise. An inability to obtain such additional financing
could have an adverse effect on our growth strategy.
 
 In our
Internet division, we plan to focus on high-margin Internet activities that
leverage our marketing skills while requiring a low level of start-up cost and
ongoing operating costs and refine and tune our Internet sites for better
positioning in organic search rankings amongst the major search providers. We
will restructure affiliate programs to provide higher incentives to our current
affiliates to better promote our Internet sites, while actively seeking new
affiliates to send traffic to our Internet sites.
 
 In
addition to their strong cash flow, the acquisition of the Media Division will
enable us to create new marketing synergies with major industry product
suppliers and new national advertising opportunities. It also provides us with
additional diversification of our revenue and income streams while remaining
within our core competency.
 
 
 
 
 Item 8. Financial Statements and Supplementary Data.
 The
information required by this Item begins on Page 34.
  32
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 
 CONSOLIDATED
FINANCIAL STATEMENTS
 
 Years
Ended September 30, 2009 and 2008
 
 Table
of Contents
 
 
 Report of Independent Registered
      Public Accounting Firm
              34Audited
      Consolidated Financial Statements:Consolidated Balance
      Sheets
              35Consolidated Statements of
      Income
              36Consolidated Statements of Changes
      in Permanent Stockholders’ Equity
              37Consolidated Statements of Cash
      Flows
              38Notes to Consolidated Financial
      Statements
              41
 33
 Table of Contents
  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
 
 
 To the
Board of Directors and Stockholders of
 Rick’s
Cabaret International, Inc.
 
 
 We have
audited the accompanying consolidated balance sheets of Rick’s Cabaret
International, Inc. and subsidiaries, as of September 30, 2009 and 2008, and the
related consolidated statements of income, changes in permanent stockholders’
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Rick’s Cabaret
International, Inc. and subsidiaries, as of September 30, 2009 and 2008, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
 
 
 /s/
Whitley Penn LLP
 Dallas,
Texas
 December
17, 2009
  34
 Table of Contents
  RICK'S CABARET INTERNATIONAL, INC.
 CONSOLIDATED
BALANCE SHEETS
 
 September
      30,2009
              
              
              2008AssetsCurrent
      assets:Cash
      and cash equivalents
              
              $
              12,751,423
              
              
              $
              5,429,219Accounts
      receivable:Trade,
      net
              
              
              774,841
              
              
              
              625,005Other,
      net
              
              
              136,615
              
              
              
              227,622Inventories
              
              
              1,222,041
              
              
              
              1,668,533Prepaid
      expenses and other current assets
              
              
              839,786
              
              
              
              553,220Assets
      of discontinued operations
              
              
              2,365,704
              
              
              
              3,799,443Total
      current assets
              
              
              18,090,410
              
              
              
              12,303,042Property
      and equipment, net
              
              
              47,265,556
              
              
              
              48,398,332Other
      assets:Goodwill
      and indefinite lived intangibles
              
              
              77,399,484
              
              
              
              74,703,174Definite
      lived intangibles, net
              
              
              1,088,516
              
              
              
              1,194,592Other
              
              
              1,233,392
              
              
              
              469,666Total
      other assets
              
              
              79,721,392
              
              
              
              76,367,432Total
      assets
              
              $
              145,077,358
              
              
              $
              137,068,806Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts
      payable
              
              $
              784,575
              
              
              $
              1,161,240Accrued
      liabilities
              
              
              2,345,380
              
              
              
              3,966,633Texas
      patron tax liability
              
              
              1,125,985
              
              
              
              440,930Current
      portion of derivative liabilities
              
              
              885,600
              
              
              
              -Current
      portion of long-term debt
              
              
              5,855,727
              
              
              
              2,644,541Liabilities
      of discontinued operations
              
              
              407,096
              
              
              
              492,624Total
      current liabilities
              
              
              11,404,363
              
              
              
              8,705,968Deferred
      tax liability
              
              
              18,303,390
              
              
              
              16,616,302Other
      long-term liabilities
              
              
              641,800
              
              
              
              537,967Long-term
      debt-related parties
              
              
              -
              
              
              
              600,000Long-term
      debt
              
              
              31,956,855
              
              
              
              30,312,865Derivative
      liabilities at fair value, less current portion
              
              
              2,455,992
              
              
              
              -Total
      liabilities
              
              
              64,762,400
              
              
              
              56,773,102Commitments
      and contingenciesMinority
      interest
              
              
              3,352,096
              
              
              
              3,358,096Temporary
      equity - Common stock, subject to put rights 317,000 and 611,740 shares,
      respectively
              
              
              6,871,000
              
              
              
              13,935,020Permanent
      stockholders' equity:Preferred
      stock, $.10 par, 1,000,000 shares authorized, none
      outstanding
              
              
              -
              
              
              
              -Common
      stock, $.01 par, 20,000,000 shares authorized, 8,879,566 and 9,689,315
      shares issued, respectively
              
              
              88,796
              
              
              
              96,893Additional
      paid-in capital
              
              
              54,530,319
              
              
              
              53,948,172Accumulated
      other comprehensive income
              
              
              -
              
              
              
              (13,347
              )Retained
      earnings
              
              
              15,472,747
              
              
              
              10,264,65070,091,862
              
              
              
              64,296,368Less
      908,530 shares of common stock held in treasury in 2008, at
      cost
              
              
              -
              
              
              
              (1,293,780)Total
      stockholders' equity
              
              
              70,091,862
              
              
              
              63,002,588Total
      liabilities and stockholders' equity
              
              $
              145,077,358
              
              
              $
              137,068,806
 See
accompanying notes to consolidated financial statements.
  35
 Table of Contents
  RICK'S CABARET INTERNATIONAL, INC.
 CONSOLIDATED
STATEMENTS OF INCOME
 
 Year
      Ended September 30,2009
              
              
              2008Revenues:Sales
      of alcoholic beverages
              
              $
              28,298,098
              
              
              $
              21,168,798Sales
      of food and merchandise
              
              
              6,174,763
              
              
              
              5,043,526Service
      revenues
              
              
              36,083,703
              
              
              
              28,024,450Internet
      revenues
              
              
              640,667
              
              
              
              715,759Media
      revenues
              
              
              1,404,238
              
              
              
              801,215Other
              
              
              2,548,127
              
              
              
              2,153,979Total
      revenues
              
              
              75,149,596
              
              
              
              57,907,727Operating
      expenses:Cost
      of goods sold
              
              
              8,773,312
              
              
              
              6,539,189Salaries
      and wages
              
              
              16,135,304
              
              
              
              12,963,804Stock-based
      compensation
              
              
              96,171
              
              
              
              157,080Other
      general and administrative:Taxes
      and permits
              
              
              9,172,484
              
              
              
              7,021,950Charge
      card fees
              
              
              1,603,044
              
              
              
              1,048,903Rent
              
              
              3,415,557
              
              
              
              2,051,019Legal
      and professional
              
              
              2,947,033
              
              
              
              1,619,284Advertising
      and marketing
              
              
              8,091,745
              
              
              
              2,231,005Depreciation
      and amortization
              
              
              3,205,205
              
              
              
              2,222,960Insurance
              
              
              1,084,729
              
              
              
              820,088Utilities
              
              
              1,594,600
              
              
              
              1,153,068Other
              
              
              5,618,430
              
              
              
              4,856,213Total
      operating expenses
              
              
              61,737,614
              
              
              
              42,684,563Income
      from operations
              
              
              13,411,982
              
              
              
              15,223,164Other
      income (expense):Interest
      income
              
              
              16,384
              
              
              
              134,156Interest
      expense
              
              
              (3,416,911
              )
              
              
              (2,640,987
              )Gain
      on change in fair value of derivative instruments
              
              
              145,374
              
              
              
              -Minority
      interests
              
              
              (294,000
              )
              
              
              (147,000
              )Gain
      on sale of property and other
              
              
              180,506
              
              
              
              (73,896
              )Income
      from continuing operations before income taxes
              
              
              10,043,335
              
              
              
              12,495,437Income
      taxes
              
              
              3,414,734
              
              
              
              3,873,585Income
      from continuing operations
              
              
              6,628,601
              
              
              
              8,621,852Loss
      from discontinued operations, net of income taxes of $718,663 and
      $433,607
              
              
              (1,420,504
              )
              
              
              (961,185
              )Net
      income
              
              $
              5,208,097
              
              
              $
              7,660,667Basic
      earnings (loss) per share:Income
      from continuing operations
              
              $
              0.72
              
              
              $
              1.09Loss
      from discontinued operations
              
              
              (0.15
              )
              
              
              (0.12
              )Net
      income
              
              $
              0.56
              
              
              $
              0.97Diluted
      earnings (loss) per share:Income
      from continuing operations
              
              $
              0.70
              
              
              $
              1.02Loss
      from discontinued operations
              
              
              (0.15
              )
              
              
              (0.11
              )Net
      income
              
              $
              0.55
              
              
              $
              0.91Weighted
      average number of common shares outstanding:Basic
              
              
              9,265,784
              
              
              
              7,931,121Diluted
              
              
              9,427,397
              
              
              
              8,413,183
 See
accompanying notes to consolidated financial statements.
  36
 Table of Contents
  RICK'S CABARET INTERNATIONAL, INC.
 
 CONSOLIDATED
STATEMENTS OF CHANGES IN PERMANENT STOCKHOLDERS' EQUITY
 
 Years
Ended September 30, 2009 and 2008
 
 Common
      Stock
                
                
                
                
                
                
                
                
                
                
                
                Treasury
      StockNumber
      of Shares
                
                
                Amount
                
                
                Additional
      Paid-In Capital
                
                
                Accumulated
      Other Comprehensive Income (Loss)
                
                
                Retained
      Earnings
                
                
                Number
      of Shares
                
                
                Amount
                
                
                Total
      Stockholders’ EquityBalance
      at September 30, 2007
                
                
                6,903,354
                
                
                $
                69,034
                
                
                $
                22,643,596
                
                
                $
                20,021
                
                
                $
                2,603,983
                
                
                
                908,530
                
                
                $
                (1,293,780
                )
                
                $
                24,042,854Shares
      issued
                
                
                3,182,701
                
                
                
                31,827
                
                
                
                43,560,815
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                43,592,642Change
      in temporary equity
                
                
                (396,740
                )
                
                
                (3,968
                )
                
                
                (12,481,652
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (12,485,620
                )Beneficial
      conversion
                
                
                -
                
                
                
                -
                
                
                
                68,333
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                68,333Stock-based
      compensation
                
                
                -
                
                
                
                -
                
                
                
                157,080
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                157,080Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                7,660,667
                
                
                
                -
                
                
                
                -
                
                
                
                7,660,667Change
      in available-for-sale securities
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (33,368
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (33,368
                )Comprehensive
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                7,627,299Balance
      at September 30, 2008
                
                
                9,689,315
                
                
                
                96,893
                
                
                
                53,948,172
                
                
                
                (13,347
                )
                
                
                10,264,650
                
                
                
                908,530
                
                
                
                (1,293,780
                )
                
                
                63,002,588Stock
      options exercised
                
                
                300,000
                
                
                
                3,000
                
                
                
                744,745
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                747,745Change
      in temporary equity
                
                
                -
                
                
                
                -
                
                
                
                547,136
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                547,136Issuance
      of warrants
                
                
                -
                
                
                
                -
                
                
                
                539,178
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                539,178Purchase
      of treasury shares
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                303,959
                
                
                
                (1,486,208
                )
                
                
                (1,486,208
                )Retired
      treasury shares
                
                
                (1,109,749
                )
                
                
                (11,097
                )
                
                
                (2,768,891
                )
                
                
                -
                
                
                
                -
                
                
                
                (1,212,489
                )
                
                
                2,779,988
                
                
                
                -Stock-based
      compensation
                
                
                -
                
                
                
                -
                
                
                
                96,171
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                96,171Record
      derivative liability
                
                
                -
                
                
                
                -
                
                
                
                1,423,808
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,423,808Change
      in available-for-sale securities
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                13,347
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                13,347Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,208,097
                
                
                
                -
                
                
                
                -
                
                
                
                5,208,097Comprehensive
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                5,221,444Balance
      at September 30, 2009
                
                
                8,879,566
                
                
                $
                88,796
                
                
                $
                54,530,319
                
                
                $
                -
                
                
                $
                15,472,747
                
                
                
                -
                
                
                $
                -
                
                
                $
                70,091,862
 
 See
accompanying notes to consolidated financial
statements.
  37
 Table of Contents
  RICK'S CABARET INTERNATIONAL, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 FOR
      THE YEAR ENDED
                SEPTEMBER
      30,2009
              
              
              2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
              
              $
              5,208,097
              
              
              $
              7,660,667Loss
      from discontinued operations
              
              
              1,420,504
              
              
              
              961,185Income
      from continuing operations
              
              
              6,628,601
              
              
              
              8,621,852Adjustments
      to reconcile net income to cash provided by operating
      activities:Bad
      debts
              
              
              -
              
              
              
              83,206Depreciation
      and amortization
              
              
              3,205,205
              
              
              
              2,222,960Deferred
      taxes
              
              
              853,336
              
              
              
              1,170,518Gain
      on sale of assets
              
              
              (180,506
              )
              
              
              -Amortization
      of note discount
              
              
              29,954
              
              
              
              29,627Gain
      on change in fair value of derivative instruments
              
              
              (145,374
              )
              
              
              -Beneficial
      conversion
              
              
              22,777
              
              
              
              37,738Minority
      interests
              
              
              294,000
              
              
              
              147,000Deferred
      rents
              
              
              103,832
              
              
              
              117,552Common
      stock issued for interest payment
              
              
              -
              
              
              
              106,966Stock
      compensation expense
              
              
              96,171
              
              
              
              157,080Common
      stock issued for non-employee services
              
              
              -
              
              
              
              137,700Other
              
              
              13,347
              
              
              
              -Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (58,296
              )
              
              
              91,304Inventories
              
              
              470,269
              
              
              
              (870,489
              )Prepaid
      expenses and other assets
              
              
              (1,041,933
              )
              
              
              (248,430
              )Accounts
      payable and accrued liabilities
              
              
              (1,267,013
              )
              
              
              3,508,263Cash
      provided by operating activities of continuing operations
              
              
              9,024,370
              
              
              
              15,312,847Cash
      used in operating activities of discontinued operations
              
              
              (98,040
              )
              
              
              (543,598
              )Net
      cash provided by operating activities
              
              
              8,926,330
              
              
              
              14,769,249CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from sale of property
              
              
              728,806
              
              
              
              36,000Additions
      to property and equipment
              
              
              (2,114,654
              )
              
              
              (3,102,618
              )Acquisition
      of businesses, net of cash acquired
              
              
              (2,433,579
              )
              
              
              (35,613,120
              )Payments
      from notes receivable
              
              
              25,083
              
              
              
              63,991Cash
      used in investing activities of continuing operations
              
              
              (3,794,344
              )
              
              
              (38,615,747
              )Cash
      used in investing activities of discontinued operations
              
              
              (14,253
              )
              
              
              (96,057
              )Net
      cash used in investing activities
              
              
              (3,808,597
              )
              
              
              (38,711,804
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from sale of common stock
              
              
              -
              
              
              
              27,352,500Proceeds
      from stock options exercised
              
              
              747,745
              
              
              
              347,700Proceeds
      from long-term debt
              
              
              7,200,000
              
              
              
              2,150,000Purchase
      of put options and payments on derivative instrument
              
              
              (1,148,689
              )
              
              
              -Payments
      on long-term debt
              
              
              (2,808,377
              )
              
              
              (3,353,776
              )Purchase
      of treasury stock
              
              
              (1,486,208
              )
              
              
              -Proceeds
      from warrant conversion
              
              
              -
              
              
              
              150,000Distribution
      to minority interests
              
              
              (300,000
              )
              
              
              (150,000
              )Cash
      provided by financing activities of continuing operations
              
              
              2,204,471
              
              
              
              26,496,424NET
      INCREASE IN CASH
              
              
              7,322,204
              
              
              
              2,553,869CASH
      AT BEGINNING OF PERIOD
              
              
              5,429,219
              
              
              
              2,875,350CASH
      AT END OF PERIOD
              
              $
              12,751,423
              
              
              $
              5,429,219CASH
      PAID DURING PERIOD FOR:Interest
              
              $
              3,215,540
              
              
              $
              2,239,993Income
      taxes
              
              $
              2,832,974
              
              
              $
              171,036
 38
 Table of Contents
  Non-cash
transactions:
 
 In June
2009, the Company retired its treasury stock amounting to $2,779,988 by a charge
to additional paid-in capital.
 
 In April
2009, the Company acquired 15,218 of its shares subject to put options with
notes payable totaling $350,000.
 
 In April
2009, the Company transferred $5,175,000 from temporary equity and recorded the
fair value of the resulting derivative financial instrument of
$3,751,192.  The difference was recognized in additional paid-in
capital.
 
 In March
2009, the Company sold 100% of the common stock of Texas S&I which owned and
operated the Encounters nightclub for $40,000, including a note for
$35,000.
 
 In August
2009, the Company issued $7,200,000 in convertible debentures and issued common
stock warrants to the creditors.  The warrants were valued at $539,178
and the unamortized portion is recognized as a discount on the related debt in
the accompanying balance sheet.
 
 During
the year ended September 30, 2008, the Company purchased Stellar Management
Corporation and Miami Gardens Square One, Inc., owner/operator of Tootsie’s
Cabaret in Florida for $25,486,000 (which includes inventories and other
assets), payable to the sellers $15,486,000 in cash, $10,000,000 pursuant to two
secured promissory notes in the amount of $5,000,000 each, plus estimated
transaction costs of $175,000.
 
 During
the year ended September 30, 2008, the Company purchased an aircraft through the
issuance of a note payable of $1,561,500.
 
 During
the year ended September 30, 2008, in connection with the acquisition of the
remaining 49% of Playmates Gentlemen’s Club LLC, the Company issued 35,000
common shares valued at $700,000.
 
 During
the year ended September 30, 2008, the Company purchased The End Zone, Inc.,
owner/operator of Crazy Horse Too Cabaret in Philadelphia for $7,985,000 payable
to the sellers $3,500,000 in cash and $4,485,000 pursuant to the issuance of
195,000 shares of restricted common stock.
 
 During
the year ended September 30, 2008, the Company purchased Hotel Development Ltd.,
owner/operator of The Executive Club in Dallas, Texas for a total purchase price
of $3,590,609, which was paid through the issuance of 152,082 shares of the
Company’s restricted common stock and $46,490 in cash. The Company also
purchased the real property associated with the club, for a total consideration
of $5,599,721, which was paid (i) $4,250,000, payable $610,000 in cash and
$3,640,000 through the issuance of a five year promissory note and (ii) the
issuance of 57,918 shares of the Company’s restricted common stock to be valued
at $23.50 per share.
 
 During
the year ended September 30, 2008, the Company acquired three entities to form a
media division for a total consideration of $1,069,754, consisting of $700,000
in cash and 21,740 shares of restricted common stock.
 
 During
the year ended September 30, 2008, the holders of convertible debentures
converted $825,000 of principal into 125,953 shares of the Company’s restricted
common stock.
  39
 Table of Contents
  During
the year ended September 30, 2008, the holder of a convertible debenture
converted $784,922 of principal and interest into 156,116 shares of restricted
common stock.
 
 During
the year ended September 30, 2008, the Company purchased the assets of North by
East Entertainment Ltd., owner/operator of the Platinum Club II in Dallas, Texas
for a total purchase price of $1,500,000 cash. As part of the transaction, the
Company also acquired the real property associated with the club for a total
consideration of $6,000,000, which was paid $1,650,000 in cash and $4,350,000
through the issuance of a five-year promissory note. The Company also incurred
acquisition costs of $69,998, which was paid in cash.
 
 During
the year ended September 30, 2008, the Company purchased the assets of DI Food
& Beverage of Las Vegas, LLC, owner/operator of the Scores Club in Las
Vegas, Nevada for a total purchase price of $18,147,498, payable through the
issuance of a promissory note in the amount of $3,000,000, the issuance of
200,000 shares of the Company’s restricted common stock, and $12,066,667 in
cash. The Company also incurred acquisition costs of $326,830, which was paid in
cash.
 
 See
accompanying notes to consolidated financial statements.
  40
 Table of Contents
  RICK’SCABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 A.
              Nature
      of Business
 
 Rick’s
Cabaret International, Inc. (the “Company”) is a Texas corporation incorporated
in 1994. The Company currently owns and operates nightclubs that offer live
adult entertainment, restaurant, and bar operations. These nightclubs are
located in Houston, Austin, San Antonio, Dallas and Fort Worth, Texas, as well
as Minneapolis, Minnesota, Philadelphia, Pennsylvania, Charlotte, North
Carolina, New York, New York, Miami Gardens, Florida, and Las Vegas, Nevada. The
Company also owns and operates several adult entertainment Internet websites and
a media division. The Company’s corporate offices are located in Houston,
Texas.
 
 B.
              Summary
      of Significant Accounting Policies
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts in the financial
statements and accompanying notes. Estimates and assumptions are based on
historical experience, forecasted future events and various other assumptions
that we believe to be reasonable under the circumstances. Estimates and
assumptions may vary under different assumptions or conditions. We evaluate our
estimates and assumptions on an ongoing basis. We believe the accounting
policies below are critical in the portrayal of our financial condition and
results of operations.
 
 On July
1, 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Statement
of Financial Accounting Standards No. 168, FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles,”
which is included in FASB Accounting Standards Codification (“ASC”) 105 Generally Accepted Accounting
Principles.  This new guidance approved the FASB ASC as the
single source of authoritative nongovernmental GAAP.  The FASB ASC is
effective for interim or annual periods ending after September 15,
2009.  All existing accounting standards have been superseded and all
other accounting literature not included in the FASB ASC will be considered
non-authoritative.  The ASC is a restructuring of GAAP designed to
simplify access to all authoritative literature by providing a topically
organized structure.  The adoption of FASB ASC did not impact the
Company’s financial condition or results of operations.  Technical
references to GAAP included in these notes to the Consolidated Financial
Statements are provided under the new FASB ASC structure.
 
 Basis
of Accounting
 
 The
accounts are maintained and the consolidated financial statements have been
prepared using the accrual basis of accounting in accordance with accounting
principles generally accepted in the United States of America.
 
 Principles
of Consolidation
 
 The
consolidated financial statements include the accounts of the Company and its
subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation.
 
 Use
of Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts in the financial
statements and accompanying notes. Actual results could differ from these
estimates and assumptions.
 
 Cash
and Cash Equivalents
 
 The
Company considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.  At September 30, 2009 and
2008, the Company had no such investments.  The Company maintains deposits
in several financial institutions, which may at times exceed amounts covered by
insurance provided by the U.S. Federal Deposit Insurance Corporation
("FDIC").  The Company has not experienced any losses related to amounts in
excess of FDIC limits.
  41
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 B.
Summary of Significant Accounting Policies - continued
 
 Accounts
and Notes Receivable
 
 Trade
accounts receivable for the nightclub operation is primarily comprised of credit
card charges, which are generally converted to cash in two to five days after a
purchase is made.  The media division’s accounts receivable is
primarily comprised of receivables for advertising sales and Expo registration.
The Company’s accounts receivable, other is comprised of employee advances and
other miscellaneous receivables. The long-term portion of notes receivable are
included in other assets in the accompanying consolidated balance sheets. The
Company recognizes interest income on notes receivable based on the terms of the
agreement and based upon management’s evaluation that the notes receivable and
interest income will be collected. The Company recognizes allowances for
doubtful accounts or notes when, based on management judgment, circumstances
indicate that accounts or notes receivable will not be collected.
 
 Marketable
Securities
 
 Marketable
securities consist of common stock. FASB ASC 320, Accounting for Certain Investments
in Debt and Equity Securities, requires certain investments be recorded
at fair value or amortized cost. The securities were written down to zero at
September 30, 2008. The appropriate classification of the investments in
marketable equity is determined at the time of purchase and re-evaluated at each
balance sheet date. As of September 30, 2009 and 2008, the Company’s marketable
securities were classified as available-for-sale, which are carried at fair
value, with unrealized gains and losses reported as other comprehensive income
within the stockholders’ equity section of the accompanying consolidated balance
sheets. The cost of marketable equity securities sold is determined on a
specific identification basis. The fair value of marketable equity securities is
based on quoted market prices. There have been no realized gains or losses
related to marketable securities for the years ended September 30, 2009 or 2008.
Marketable securities held at September 30, 2009 and 2008 have a cost basis of
approximately $13,000. Due to lack of market transaction, the value of
marketable security was written off from the Company’s balance sheet as of
September 30, 2008.
 
 Inventories
 
 Inventories
include alcoholic beverages, food, and Company merchandise. Inventories are
carried at the lower of cost (on a first-in, first-out (“FIFO”) basis), or
market.
 
 Property
and Equipment
 
 Property
and equipment are stated at cost. Provisions for depreciation and amortization
are made using straight-line rates over the estimated useful lives of the
related assets and the shorter of useful lives or terms of the applicable leases
for leasehold improvements. Buildings have estimated useful lives ranging from
31 to 40 years. Furniture, equipment and leasehold improvements have estimated
useful lives between five and ten years. Expenditures for major renewals and
betterments that extend the useful lives are capitalized. Expenditures for
normal maintenance and repairs are expensed as incurred. The cost of assets sold
or abandoned and the related accumulated depreciation are eliminated from the
accounts and any gains or losses are charged or credited in the accompanying
consolidated statement of income of the respective period.
 
 Goodwill
and Intangible Assets and Impairment of Long-Lived Assets
 
 FASB ASC
350, Goodwill and Other
Intangibles Assets, addresses the accounting for goodwill and other
intangible assets. Under FASB ASC 350, goodwill and intangible assets with
indefinite lives are no longer amortized, but reviewed on an annual basis for
impairment, or sooner if there is an indication of impairment. The Company
reviews property and equipment and intangible assets with definite lives for
impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of these assets is
measured by comparison of its carrying amounts to future undiscounted cash flows
the assets are expected to generate. If property and equipment and intangible
assets with definite lives are considered to be impaired, the impairment to be
recognized equals the amount by which the carrying value of the asset exceeds
its fair value. Assets
are grouped at the lowest level for which there are identifiable cash flows when
assessing impairment, principally at the club level. Cash flows for our club
assets are identified at the individual club level.  The Company’s
annual evaluation was performed as of September 30, 2009, based on a projected
discounted cash flow method using a discount rate determined by management to be
commensurate with the risk inherent in the current business
model.  The Company determined that there is no impairment for the
year ended September 30, 2009, except for the impairment taken in the second
quarter of fiscal 2009 relating to the discontinued operation in Austin. All of
the Company’s goodwill and intangible assets relate to the nightclub segment,
except for $567,000 related to the acquisition of the media division. Definite
lived intangible assets are amortized on a straight-line basis over their
estimated lives. Fully amortized assets are written-off against accumulated
amortization.
  42
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 B.
Summary of Significant Accounting Policies – continued
  Fair
Value of Financial Instruments
 
 The
Company calculates the fair value of its assets and liabilities which qualify as
financial instruments and includes this additional information in the notes to
consolidated financial statements when the fair value is different than the
carrying value of these financial instruments. The estimated fair value of
accounts receivable, accounts payable and accrued liabilities approximate their
carrying amounts due to the relatively short maturity of these instruments. The
carrying value of short and long-term debt also approximates fair value since
these instruments bear market rates of interest. None of these instruments are
held for trading purposes.
 
 Derivative
Financial Instruments
 
 The
Company accounts for financial instruments that are indexed to and potentially
settled in, its own stock, including stock put options, in accordance with the
provisions of FASB ASC 815, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in  a Company’s Own
Stock.  Under certain circumstances that would require the
Company to settle these equity items in cash, and without regard to probability,
FASB ASC 815 would require the classification of all or part of the item as a
liability and the adjustment of that reclassified amount to fair value at each
reporting date, with such adjustments reflected in the Company’s consolidated
statements of income.  The first instrument to meet the requirements
of FASB ASC 815 for derivative accounting occurred in the quarter ended June 30,
2009 when the Company renegotiated the payback terms of certain put options and
agreed to pledge as collateral to certain holders a second lien on certain
property.
 
 The fair
value of the derivative liabilities when the securities became derivatives were
estimated to be $3,751,192 in accordance with FASB ASC 820, Fair Value Measurements and
Disclosures, using a Black-Scholes option-pricing model using the
following weighted average assumptions:
 
 Volatility
              73%Expected
      life
              3.42
      yearsExpected
      dividend yield
              -Risk
      free rate
              1.34%
 
 The
related put options were recognized in temporary equity in the amount of
$5,175,000 at the time they were issued.  The difference between that
amount and the value of the derivative of $3,751,192, amounting to $1,423,808,
was included in additional paid-in capital.
 
 The fair
value of the derivative liabilities as of September 30, 2009 were estimated to
be $3,341,592 in accordance with FASB ASC 820, using a Black-Scholes
option-pricing model using the following weighted average
assumptions:
 
 Volatility
              76%Expected
      life
              3.00
      yearsExpected
      dividend yield
              -Risk
      free rate
              1.45%
 43
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 B.
Summary of Significant Accounting Policies - continued
 
 Derivative
Financial Instruments - continued
 
 The gain
for the year ended September 30, 2009, recognized in earnings amounted to
$145,374.
 
 Comprehensive
Income
 
 The
Company reports comprehensive income in accordance with the provisions of FASB
ASC 220, Reporting
Comprehensive Income. Comprehensive income consists of net income and
gains (losses) on available-for-sale marketable securities and is presented in
the consolidated statements of changes in permanent stockholders’
equity.
 
 Revenue
Recognition
 
 The
Company recognizes revenue from the sale of alcoholic beverages, food and
merchandise, other revenues and services at the point-of-sale upon receipt of
cash, check, or credit card charge.
 
 The
Company recognizes revenue for VIP memberships in accordance with FASB ASC
605-25, Revenue
Recognition, by deferring membership revenue and recognizing over the
estimated membership usage period. Management estimates that the weighted
average useful lives for memberships are 12 and 24 months for annual and
lifetime memberships, respectively. The Company does not track membership usage
by type of membership, however it believes these lives are appropriate and
conservative, based on management’s knowledge of its client base and membership
usage at the clubs.
 
 The
Company recognizes Internet revenue from monthly subscriptions to its online
entertainment sites when notification of a new or existing subscription and its
related fee are received from the third party hosting company or from the credit
card company, usually two to three days after the transaction has occurred. The
monthly fee is not refundable. The Company recognizes Internet auction revenue
when payment is received from the credit card as revenues are not deemed
estimable nor collection deemed probable prior to that point.
 
 Revenues
from the sale of magazines and advertising content are recognized when the issue
is published and shipped.  Revenues and external expenses related to
the Company’s annual Expo convention are recognized upon the completion of the
convention in August.
 
 Sales
and Liquor Taxes
 
 The
Company recognizes sales and liquor taxes paid as revenues and an equal expense
in accordance with FASB ASC 605.  Total sales and liquor taxes
aggregated $4,544,160 and $3,815,648 for the years ended September 30, 2009 and
2008, respectively.
 
 Advertising
and Marketing
 
 Advertising
and marketing expenses are primarily comprised of costs related to public
advertisements and giveaways, which are used for promotional purposes.
Advertising and marketing expenses are expensed as incurred and are included in
operating expenses in the accompanying consolidated statements of
income.
 
 Income
Taxes
 
 Deferred
income taxes are determined using the liability method in accordance with FASB
ASC 740, Accounting for Income
Taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment
date. In addition, a valuation allowance is established to reduce any deferred
tax asset for which it is determined that it is more likely than not that some
portion of the deferred tax asset will not be realized.
  44
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 B.
Summary of Significant Accounting Policies - continued
 
 Income
Taxes - continued
  FASB ASC
740 creates a single model to address accounting for uncertainty in tax
positions by prescribing a minimum recognition threshold a tax position is
required to meet before being recognized in the financial statements. FASB ASC
740 also provides guidance on derecognition, measurement, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. There are no unrecognized tax benefits to disclose in the notes to
the consolidated financial statements.
 
 Put
Options
 
 In
certain situations, the Company issues restricted common shares as partial
consideration for acquisitions of certain businesses or
assets.  Pursuant to the terms and conditions of the governing
acquisition agreements, the holder of such shares has the right, but not the
obligation, to put a fixed number of the shares on a monthly basis back to the
Company at a fixed price per share.  The Company may elect during any
given month to either buy the monthly shares or, if management elects not to do
so, the holder can sell the monthly shares in the open market, and any
deficiency between the amount which the holder receives from the sale of the
monthly shares and the value of shares will be paid by the
Company.  The Company has accounted for these shares in accordance
with the guidance established by FASB ASC 480, Distinguishing Liabilities from
Equity as a reclassification of the value of the shares from permanent to
temporary equity.  As the shares become due, the Company transfers the
value of the shares back to permanent equity.  Also see “Derivative
Financial Instruments” above.
 
 Earnings
Per Common Share
 
 The
Company computes earnings per share in accordance with FASB ASC 260, Earnings Per Share. FASB ASC
260 provides for the calculation of basic and diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution of securities that could share in the earnings of the Company.
Potential common stock shares consist of shares that may arise from outstanding
dilutive common stock options and warrants (the number of which is computed
using the “treasury stock method”) and from outstanding convertible debentures
(the number of which is computed using the “if converted method”). Diluted EPS
considers the potential dilution that could occur if the Company’s outstanding
common stock options, warrants and convertible debentures were converted into
common stock that then shared in the Company’s earnings (as adjusted for
interest expense, that would no longer occur if the debentures were
converted).
  45
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 B.
Summary of Significant Accounting Policies - continued
 
 Earnings
Per Common Share - continued
 
 Net
earnings applicable to common stock and the weighted  average number
of shares used for basic and diluted earnings per share computations are
summarized in the table that follows:
 
 FOR
      THE YEAR ENDED
                SEPTEMBER
      30,2009
              
              
              2008Basic
      earnings per share:Income
      from continuing operations
              
              $
              6,628,601
              
              
              $
              8,621,852Loss
      from discontinued operations, net of income taxes
              
              
              (1,420,504
              )
              
              
              (961,185
              )Net
      income
              
              $
              5,208,097
              
              
              $
              7,660,667Average
      number of common shares outstanding
              
              
              9,265,784
              
              
              
              7,931,121Basic
      earnings per share - income from continuing operations
              
              $
              0.72
              
              
              $
              1.09Basic
      earnings per share - discontinued operations
              
              $
              (0.15
              )
              
              $
              (0.12
              )Basic
      earnings per share - net income
              
              $
              0.56
              
              
              $
              0.97Diluted
      earnings per share:Income
      from continuing operations
              
              $
              6,628,601
              
              
              $
              8,621,852Adj.
      to net earnings from assumed conversion of debentures (1)
              
              
              -
              
              
              
              -Adjusted
      income from continuing operations
              
              
              6,628,601
              
              
              
              8,621,852Discontinued
      operations
              
              
              (1,420,504
              )
              
              
              (961,185
              )Adjusted
      net income
              
              $
              5,208,097
              
              
              $
              7,660,667Average
      number of common shares outstanding:Common
      shares outstanding
              
              
              9,265,784
              
              
              
              7,931,121Potential
      dilutive shares resulting from exercise of warrants and options
      (2)
              
              
              161,613
              
              
              
              367,062Potential
      dilutive shares resulting from conversion of debentures
(3)
              
              
              -
              
              
              
              115,000Total
      average number of common shares outstanding used for
    dilution
              
              
              9,427,397
              
              
              
              8,413,183Diluted
      earnings per share - income from continuing operations
              
              $
              0.70
              
              
              $
              1.02Diluted
      earnings per share - discontinued operations
              
              $
              (0.15
              )
              
              $
              (0.11
              )Diluted
      earnings per share - net income
              
              $
              0.55
              
              
              $
              0.91
 
 (1)   Represents
interest expense on dilutive convertible debentures, that would not occur if
they were assumed converted.
 (2)   All
outstanding warrants and options were considered for the EPS
computation.
 (3)   Convertible
debentures (principal and accrued interest) outstanding at September 30, 2009
and 2008 totaling $7,892,940 and $1,100,694, respectively, were convertible into
common stock at a price of $8.75 and $12.00 in 2009 and $12.00 and $25.32 per
share in 2008. No debentures were dilutive in 2009 and debentures convertible
into 115,000 shares were dilutive in 2008 (based on average balances
outstanding).
 
 *EPS may
not foot due to rounding.
  46
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 B.
Summary of Significant Accounting Policies - continued
 
 Stock
Options
 
 At
September 30, 2009, the Company has stock options outstanding, which are
described more fully in Note I.  As of October 1, 2006, the
Corporation began accounting for these plans under the recognition and
measurement principles of fair value set forth in FASB ASC Topic 718, Compensation-Stock
Compensation, which replaced FASB No. 123R, and FASB ASC
Section 718-10-S99, Compensation-Stock
Compensation: Overall: SEC Materials, formerly SAB 107.  The
compensation cost recognized for the year ended September 30, 2009 and 2008 was
$96,171 and $157,080, respectively. There were 300,000 and 125,000 stock option
exercises for the years ended September 30, 2009 and 2008,
respectively.
 
 Impact
of Recently Issued Accounting Standards
 
 On July
1, 2009, the FASB issued Statement of Financial Accounting Standards No. 168,
FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles, which is included in FASB ASC 105 Generally Accepted Accounting
Principles.  This new guidance approved the FASB ASC as the
single source of authoritative nongovernmental GAAP.  The FASB ASC is
effective for interim or annual periods ending after September 15,
2009.  All existing accounting standards have been superseded and all
other accounting literature not included in the FASB ASC will be considered
non-authoritative.  The ASC is a restructuring of GAAP designed to
simplify access to all authoritative literature by providing a topically
organized structure.  The adoption of FASB ASC did not impact the
Company’s financial condition or results of operations.  Technical
references to GAAP included in these notes to the Consolidated Financial
Statements are provided under the new FASB ASC structure.
 
 In May
2009, the FASB issued SFAS No. 165, Subsequent Events(FASB ASC
Topic 855), which establishes general standards of accounting for, and requires
disclosure of, events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.  The
Company adopted the provisions of FASB ASC Topic 855 as of June 30,
2009.  The adoption of these provisions did not have a significant
impact on the Company’s consolidated financial statements.
 
 In
December 2006, the FASB issued SFAS No. 157 (ASC 820), Fair Value Measurements. SFAS
No. 157 clarifies the definition of fair value, describes methods used to
appropriately measure fair value, and expands fair value disclosure
requirements, but does not change existing guidance as to whether or not an
instrument is carried at fair value. For financial assets and liabilities, SFAS
No. 157 is effective for fiscal years beginning after November 15, 2007, which
required the Company to adopt these provisions in fiscal 2009. For nonfinancial
assets and liabilities, SFAS No. 157 is effective for fiscal years beginning
after November 15, 2008, which will require the Company to adopt these
provisions in fiscal 2010.
 
 SFAS No.
157 establishes a three-tier fair value hierarchy, which prioritizes the inputs
used in the valuation methodologies in measuring fair value:
 
 ·
              Level
      1 – Observable inputs that reflect quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.
 ·
              Level
      2 – Include other inputs that are directly or indirectly observable in the
      marketplace.
 ·
              Level
      3 – Unobservable inputs which are supported by little or no market
      activity.
 
 The fair
value hierarchy also requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair
value.
  47
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 B.
Summary of Significant Accounting Policies - continued
 
 Impact
of Recently Issued Accounting Standards - continued
 
 The
Company’s derivative liabilities have been measured principally utilizing Level
2 inputs.
 
 In
February 2007, the FASB issued SFAS No. 159 (ASC 805), The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of FASB Statement No.
115(ASC 825). The fair value option permits entities to choose to
measure eligible financial instruments at fair value at specified election
dates. The entity will report unrealized gains and losses on the items on which
it has elected the fair value option in earnings. SFAS 159 is effective
beginning in fiscal year 2008. The adoption of SFAS 159 did not have a material
impact on the Company’s financial position or results of
operations.  The Company does not expect that the adoption of these
standards would have a material impact on its financial statements.
 
 In
December 2007, the FASB issued Statement No. 141R, Business Combinations (“SFAS
141”), and Statement No. 160, Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS
160”), (ASC 805).  SFAS 141R modifies the accounting and disclosure
requirements for business combinations and broadens the scope of the previous
standard to apply to all transactions in which one entity obtains control over
another business. SFAS 160 establishes new accounting and reporting standards
for non-controlling interests in subsidiaries. The Company was required to apply
the provisions of the new standards in the first quarter of fiscal 2010. Early
adoption was not permitted for these new standards. The Company does not expect
that the adoption of these standards would have a material impact on its
financial statements.
 
 In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an Amendment of FASB Statement No. 133. SFAS No. 161 amends
SFAS No. 133 and requires entities to enhance their disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows. The adoption of this standard did not have a material
impact on the Company’s financial
statements.
 
 C.
              Reclassifications
 
 Certain
prior year amounts have been reclassified to conform to the current year
presentation, particularly in relation to discontinued
operations.
  48
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 D.
              Property
      and Equipment
 
 Property
and equipment consisted of the following:
 
 September
      30,2009
              
              
              2008Buildings
      and land
              
              $
              33,443,075
              
              
              $
              33,948,677Leasehold
      improvements
              
              
              9,909,702
              
              
              
              8,923,645Furniture
              
              
              2,170,354
              
              
              
              1,988,059Equipment
              
              
              11,802,438
              
              
              
              10,884,975Total
      property and equipment
              
              
              57,325,569
              
              
              
              55,745,356Less
      accumulated depreciation
              
              
              10,060,013
              
              
              
              7,347,024Property
      and equipment, net
              
              $
              47,265,556
              
              
              $
              48,398,332
 
 E.
              Goodwill
      and Intangible Assets
 
 Goodwill
and intangible assets consisted of the following:
 
 September
      30,2009
              
              
              2008Indefinite
      useful lives:Goodwill
              
              
              $
              36,139,690
              
              
              $
              35,404,831Licenses
              
              
              
              41,259,794
              
              
              
              39,298,343AmortizationPeriodDefinite
      useful lives:Discounted
      leases
              18
      & 6 years
              
              
              81,683
              
              
              
              99,759Unamortized
      non-compete agreements
              5
      years
              
              
              1,006,833
              
              
              
              1,094,833Total
      goodwill and intangible assets
              
              
              $
              78,488,000
              
              
              $
              75,897,766
 49
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 E.
              Goodwill
      and Intangible Assets - continued
 
 2009
              
              
              2008Licenses
              
              
              Goodwill
              
              
              Licenses
              
              
              GoodwillBeginning
      balance
              
              $
              39,298,343
              
              
              $
              35,404,831
              
              
              $
              12,323,954
              
              
              $
              7,130,317Change
      in tax basis of assets
              
              
              -
              
              
              
              686,508
              
              
              
              -
              
              
              
              10,301,174Intangibles
      acquired
              
              
              1,961,451
              
              
              
              48,351
              
              
              
              26,974,389
              
              
              
              17,973,340Ending
      balance
              
              $
              41,259,794
              
              
              $
              36,139,690
              
              
              $
              39,298,343
              
              
              $
              35,404,831
 
 
 Future
amortization expense related to definite lived intangible assets subject to
amortization at September 30, 2009 for each of the years in the five-year period
ending September 30, 2014 and thereafter is 2010 - $331,071, 2011 - $310,241,
2012 - $249,741, 2013 - $134,976, 2014 - $42,347, and thereafter -
$20,140.
 
 Goodwill
and indefinite lived intangible assets consist of sexually oriented business
licenses or goodwill, which were obtained as part of the acquisitions. These
licenses are the result of zoning ordinances, thus are valid indefinitely,
subject to filing annual renewal applications, which are done at minimal costs
to the Company. As cash flows are expected to continue indefinitely, in
accordance with FASB ASC 350, Goodwill and Other Intangible
Assets, the licenses are determined to have indefinite useful lives. The
discounted cash flow method of income approach was used in calculating the value
of these licenses in a business combination.
 
 Goodwill
of $931,430 and $1,754,520 attributable to discontinued operations is not
recognized in the above amounts as of September 30, 2009 and 2008,
respectively.
  50
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 F.
              Long-term
      Debt
 
 September 30,2009
                  
                  
                  2008Notes
      payable at 9-11%, mature August 2015
                  *
                  $
                  1,961,282
                  
                  
                  $
                  2,070,668Notes
      payable at 10%, mature December 2014 and January 2015
                  *
                  
                  2,627,281
                  
                  
                  
                  2,696,790Note
      payable at 7%, matures October 2012, collateralized by assets of RCI
      Entertainment North Carolina, Inc.
                  
                  
                  162,815
                  
                  
                  
                  208,528Note
      payable at 7.5%, matures August 2011
                  *
                  
                  874,715
                  
                  
                  
                  918,552Convertible
      note payable at 4%, matures May 2010, collateralized by assets of RCI
      Entertainment New York, Inc.
                  
                  
                  266,426
                  
                  
                  
                  1,023,965Note
      payable at 7%, matures December 2019
                  *
                  
                  335,738
                  
                  
                  
                  357,413Note
      payable at 4.9%, matures December 2010, collateralized by
      equipment
                  
                  
                  -
                  
                  
                  
                  16,560Note
      payable at 7.25%, matures May 2013
                  *
                  
                  1,903,479
                  
                  
                  
                  2,117,663Notes
      payable to related parties at 12%, mature November
    2009
                  
                  
                  -
                  
                  
                  
                  600,000Notes
      payable at 14%, mature November 30, 2010, collateralized by stocks of
      Miami Gardens Square One, Inc. and Stellar Management,
      Inc.
                  
                  
                  10,000,000
                  
                  
                  
                  10,000,000Note
      payable at 6.15%, matures February 2028, collateralized by an
      aircraft
                  
                  
                  1,497,889
                  
                  
                  
                  1,538,971Note
      payable at the greater of 2% above prime or 7.5%, (7.5% at September 30,
      2009), matures April 2013
                  *
                  
                  3,526,096
                  
                  
                  
                  3,606,683Note
      payable at the greater of 2% above prime or 7.5%, (7.5% at September 30,
      2009), matures June 2013
                  *
                  
                  4,232,111
                  
                  
                  
                  4,327,169Convertible
      notes payable at 10%, matured May 2009
                  
                  
                  -
                  
                  
                  
                  100,000Note
      payable at 8%, matures September 2010
                  
                  
                  2,894,441
                  
                  
                  
                  3,020,000Convertible
      note payable at 10%, matures October 2010
                  *
                  
                  560,162
                  
                  
                  
                  954,4444%
      notes payable converted from put options
                  
                  
                  279,370
                  
                  
                  
                  -10%
      convertible debentures
                  
                  
                  6,690,776
                  
                  
                  
                  -Total
      debt
                  
                  
                  37,812,582
                  
                  
                  
                  33,557,406Less
      current portion
                  
                  
                  5,855,727
                  
                  
                  
                  2,644,541Total
      long-term debt
                  
                  $
                  31,956,855
                  
                  
                  $
                  30,912,865
 *
Collateralized by real estate
 51
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 F.
              Long-term
      Debt - continued
 
 On July
22, 2005, the Company entered into a secured convertible debenture with a
greater than 10% shareholder for a principal sum of $660,000. The debenture was
convertible into 220,000 shares of the Company’s common stock at a conversion
price of $3.00 per share at the option of the holder (subject to certain
limitations). The term was for three years and interest rate is at 12% per
annum. The debenture was converted into 220,000 common shares in July 2008. The
Company also issued 50,000 detachable warrants at $3.00 per share in relation to
this debenture. The warrants were exercisable at any time within the period
beginning on July 22, 2005 and expiring on July 22, 2008 and were exercised in
July 2008. The value of the discount on note payable was estimated to be
$106,656 at the date of grant using a Black-Scholes option-pricing model with
the following assumptions:
 
 Volatility
              
              
              138%Expected
      life
              
              3
      yearsExpected
      dividend yield
              
              
              -Risk
      free rate
              
              
              4.31%
 
 For the
year ended September 30, 2008, the Company recorded $29,627 interest expense.
The debenture was secured by the Company’s ownership in Citation Land, LLC and
RCI Holdings, Inc.
 
 The
Company has accounted for this transaction under FASB ASC 470. The value of the
embedded beneficial conversion feature on the note payable was estimated to be
$53,856.  For the year ended September 30, 2008, the Company recorded
$14,960 of interest expense related to the value of the embedded beneficial
conversion feature.
 
 As a part
of the purchase of the New York club, the Company obtained a $5.125 million
promissory note bearing simple interest at the rate of 4.0% per annum with a
balloon payment at the end of five years.
 
 On August
24, 2006, as part of the purchase of a club in San Antonio, Texas (formerly
known as “Centerfolds”), the Company obtained three promissory notes: a $400,000
note bearing simple interest at the rate of 12% per annum and maturing March
2007, a $200,000 note bearing interest at the rate of 12% per annum maturing
February 2007, and a $1,700,000 note bearing interest at the rate of 7.5% with a
balloon payment at end of five years. These notes payable are secured by the
real estate.
 
 On
November 9, 2006, the Company entered into convertible debentures with three
shareholders for a principal sum of $600,000. The term is for two years and the
interest rate is 12% per annum. At the election of the holders, the holders have
the right to convert (subject to certain limitations) all or any portion of the
principal amount of the debentures into shares of the Company’s common stock at
a rate of $7.50 per share, which was higher than the closing price of the
Company’s stock on November 9, 2006. The debentures provide, absent shareholder
approval, that the number of shares of the Company’s common stock that may be
issued by the Company or acquired by the holders upon conversion of the
debentures shall not exceed 19.99% of the total number of issued and outstanding
shares of the Company’s common stock. The proceeds of the debentures were used
for the acquisition of a 51% ownership interest of Playmates Gentlemen’s Club
LLC. The debentures were paid in cash in November 2008.
 
 On April
23, 2007, RCI Holdings, Inc., the Company’s wholly owned subsidiary ("RCI"),
entered into an assignment of a certain real estate sales contract between the
owner of the property and W.K.C., Inc. for the purchase of the real property
located at 7101 Calmont, Fort Worth, Texas 76116 (the "Real Property") where the
club is located for a total purchase price of $2,500,000, which consisted of
$100,000 in cash and $2,400,000 payable in a six year promissory note to the
sellers which will accrue interest at the rate of 7.25% for the first two years,
8.25% for years three and four and 9.25% thereafter (the "Promissory Note"). The
Promissory Note is secured by a deed of trust and security agreement. Further,
the Company entered into an assignment and assumption of lease agreement with
sellers to assume the lease agreement for the Real Property.
 
 On
October 12, 2007, the Company borrowed $1,000,000 from an investment company
under terms of a 10% convertible debenture. Interest only is payable quarterly
until the principal plus accrued interest is due in nine equal quarterly
payments beginning in October 2008. The debenture is subject to optional
redemption at any time after 366 days from the date of issuance at 100% of the
principal face amount plus accrued interest. The debenture plus any
outstanding convertible interest is convertible by the holder into shares of the
Company’s common stock at any time prior to the maturity date at the conversion
price of $12 per share.
  52
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 F.
              Long-term
      Debt – continued
 
 In
connection with the acquisition of Tootsie’s Cabaret in Miami Gardens, Florida,
the Company entered into two Secured Promissory Notes for a total of $10,000,000
(the "Notes"). The Notes bear interest at the rate of 14% per annum with the
principal payable in one lump sum payment on November 30, 2010 (see below). The
Company cannot pre-pay the Notes during the first twelve (12) months;
thereafter, the Company may prepay the Notes, in whole or in part, provided that
(i) any prepayment by the Company from December 1, 2008 through November 30,
2009, shall be paid at a rate of 110% of the original principal amount and (ii)
any prepayment by the Company after November 30, 2009, may be prepaid without
penalty at a rate of 100% of the original principal amount. The Notes are
secured by the stock of the companies acquired under a Pledge and Security
Agreement.
 
 On April
29, 2009, the Company entered into a modification to its two secured promissory
notes in the previous paragraph, whereby the due date for the $5 million of
principal due and payable by the Company under each note was extended by two
years from November 2010 to November 2012.  All other terms and
conditions of the promissory notes remain the same.  The Company paid
a total of $150,000 to the holders of the notes as consideration for their
agreement to extend the notes for two years through November
2012.  The $150,000 paid will be amortized as an adjustment of
interest expense over the remaining life of the notes.  The Company
accounted for this transaction in accordance with FASB ASC 470.
 
 Effective
February 1, 2008, the Company borrowed $1,000,000 from a lender. The funds were
utilized to pay off certain other Company debt in the amount of $1,797,529. The
new debt bears interest at 9% and interest is payable monthly until February 1,
2013 at which time the principal is due in full. The note is collateralized by
certain Company-owned property in Minneapolis, Minnesota.
 
 In
February 2008, the Company borrowed $1,561,500 from a lender. The funds were
used to purchase an aircraft. The debt bears interest at 6.15% with monthly
principal and interest payments of $11,323 beginning March 12, 2008. The note
matures on February 12, 2028.
 
 In May
2008, the Company borrowed $150,000 from two unrelated individuals under terms
of 10% convertible debentures. Interest only is payable quarterly beginning in
August 2008 and the notes matured and were retired in May 2009.
 
 As part
of the acquisition of the Executive Club in Dallas, the Company acquired the
related Real Property from DPC Holdings, LLC, a Texas limited liability company
("DPC"). As part of the consideration for the purchase of the Real Property, the
Company entered into a $3,640,000 five year promissory note (the "Promissory
Note"). The Promissory Note bears interest at a varying rate at the greater of
(i) two percent (2%) above the Prime Rate or (ii) seven and one-half percent
(7.5%), and is guaranteed by the Company and Eric Langan, the Company’s Chief
Executive Officer, individually.
 
 As part
of the acquisition of the Platinum Club II in Dallas, the Company acquired the
Real Property from Wire Way, LLC, a Texas limited liability company (“Wire
Way”). Pursuant to a Real Estate Purchase and Sale Agreement (the “Real Estate
Agreement”) dated May 10, 2008, the Company paid total consideration of
$6,000,000, which was paid $1,650,000 in cash and $4,350,000 through the
issuance of a five (5) year promissory note (the “Promissory Note”). The
Promissory Note bears interest at a varying rate at the greater of (i) two
percent (2%) above the Prime Rate or (ii) seven and one-half percent (7.5%),
which is guaranteed by the Company and by Eric Langan, the Company’s Chief
Executive Officer, individually.
  53
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 F.
              Long-term
      Debt – continued
 
 On
September 5, 2008, as part of the purchase of a club in Las Vegas, Nevada
(formerly known as “Scores”), the Company obtained an unsecured promissory note
in the amount of $3,000,000 bearing simple interest at the rate of 8% per annum
with a five year amortization, with the initial monthly payment due in April
2009 and a balloon payment of all then outstanding principal and interest upon
the expiration of two (2) years from the execution of the note.
 
 On August
6, 2009, the Company completed the sale of an aggregate of $7.2
million in 10% Convertible Debentures (the “Debentures”) to certain
accredited investors (the “Holders”).  The Debentures bear interest at
the rate of 10% per annum and mature on August 4, 2012.  The
Debentures are payable with one initial payment of interest only due February 4,
2010, and, thereafter in ten equal quarterly principal payments, plus accrued
interest thereon.  At the option of the Holders, the Debentures may be
converted into shares of the Company’s common stock at $8.75 per
share.  The Debentures are redeemable by the Company at any time if
the closing price of its common stock for 20 consecutive trading days is at
least $11.50 per share.  The Debentures provide that an event of
default occurs if: the Company should fail to pay any principal or interest when
due; the Company should fail to convert any Debenture when required; the Company
should fail to observe or perform any covenant or agreement contained within the
Debenture; there are cross defaults to other indebtedness in excess of
$1,000,000; there is a reorganization, liquidation, voluntary or involuntary
bankruptcy or insolvency proceedings or other bankruptcy default; or a final
unsatisfied judgment not covered by insurance aggregating an excess of
$1,000,000 occurs against the Company and is not stayed, bonded or discharged
within seventy-five (75) days.
 
 In
connection with the sale of the Debentures, the Company also issued an aggregate
of 164,569 detachable warrants (the “Warrants”) to the Holders, on a pro-rata
basis.  The Company issued each Holder a number of Warrants equal to
20% of the number of shares of common stock into which each Holder’s Debenture
is convertible.  The Warrants have an exercise price of $8.75 and
expire on August 5, 2012.  The Warrants provide that the Company has
the right to require exercise of the Warrants if the closing price of the
Company’s common stock for 20 consecutive trading days is at least
$12.25.
 
 The fair
value of the warrants issued in the transaction were estimated to be $539,178 at
the date of grant using a Black-Scholes option-pricing model using the following
weighted average assumptions:
 
 Volatility
              90%Expected
      lives
              1.5
      yearsExpected
      dividend yield
              -Risk
      free rates
              1.62%
 
 The fair
value of the warrants has been recognized as a discount to the debt and is being
amortized as interest expense over the life of the debt.
 
 The
proceeds from the sale of the Debentures and Warrants are intended to be
utilized to make future acquisitions, and may be utilized for working capital
and general corporate purposes.
 
 Future
maturities of long-term debt consist of the following:
 
 2010
              
              $
              5,855,7272011
              
              
              4,559,1252012
              
              
              3,602,9182013
              
              
              19,638,4132014
              
              
              422,930Thereafter
              
              
              3,733,469Total
      maturities of long-term debt
              
              $
              37,812,582
 54
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 G.
              Income
      Taxes
 
 The
provision for income taxes on continuing operations consisted of the following
for the years ended September 30, 2009 and 2008:
 
 2009
              
              
              2008Current
              
              $
              2,561,398
              
              
              $
              2,703,067Deferred
              
              
              853,336
              
              
              
              1,170,518Total
      income tax expense
              
              $
              3,414,734
              
              
              $
              3,873,585
 
 Income
tax expense on continuing operations for the years presented differs from the
“expected” federal income tax expense computed by applying the U.S. federal
statutory rate of 34% to earnings before income taxes for the years ended
September 30, as a result of the following:
 
 2009
              
              
              2008Computed
      expected tax expense
              
              $
              3,414,734
              
              
              $
              4,248,449State
      income taxes
              
              
              153,282
              
              
              
              220,997Stock
      option disqualifying dispositions and other permanent
      differences
              
              
              (126,700
              )
              
              
              (346,344
              )Change
      in deferred tax valuation allowance
              
              
              -
              
              
              
              (154,679
              )Other
              
              
              (26,582
              )
              
              
              (94,838
              )Total
      income tax expense
              
              $
              3,414,734
              
              
              $
              3,873,585
 
 
 Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The significant components of the
Company’s deferred tax assets and liabilities at September 30 are as
follows:
 
 2009
              
              
              2008Deferred
      tax assets (liabilities):Bad
      debts allowance
              
              $
              96,819
              
              
              $
              96,819Goodwill
      and indefinite lived intangibles
              
              
              (14,545,208
              )
              
              
              (15,266,648
              )Property
      and equipment
              
              
              (3,982,812
              )
              
              
              (1,815,896
              )Other
              
              
              248,019
              
              
              
              217,705Net
      deferred tax liabilities
              
              $
              (18,183,182
              )
              
              $
              (16,768,020
              )
 
 The net
deferred tax liabilities are recorded in the balance sheets as
follows:
  2009
                  
                  
                  2008Current
      assets
                  
                  $
                  120,208
                  
                  
                  $
                  126,236Long-term
      liabilities
                  
                  
                  (18,303,390
                  )
                  
                  
                  (16,894,256
                  )Net
      deferred tax liabilities
                  
                  $
                  (18,183,182
                  )
                  
                  $
                  (16,768,020
                  )
  At
September 30, 2007, the Company had net operating loss carryforwards related to
a subsidiary not included in the Company’s consolidated income tax return of
approximately $442,000, which expire in 2027 and were fully reserved with a
valuation allowance due to uncertainty of the timing and amounts of future
taxable income of this subsidiary. During the year ended September 30, 2008, the
remaining 49% of this subsidiary was acquired and the carryforwards were
utilized.
  55
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  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 G.
              Income
      Taxes - continued
 
 As of
October 1, 2007, we adopted ASC 740-10 (formerly referenced as 
FIN 
 48, Accounting for Uncertainty in Income
Taxes — an interpretation of FASB Statement No. 109) to account
for uncertain tax positions. ASC 740-10 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. The
evaluation of a tax position in accordance with ASC 740-10 is a two-step
process. The first step is recognition — we determine whether it is
“more-likely-than-not” that a tax position will be sustained upon examination,
including resolution of any related appeals or litigation processes, based on
the technical merits of the position. In evaluating whether a tax position has
met the “more-likely-than-not” recognition threshold, we presume that the
position will be examined by the appropriate taxing authority that would have
full knowledge of all relevant information. The second step is
measurement — a tax position that meets the “more-likely-than-not”
recognition threshold is measured to determine the amount of benefit to
recognize in the financial statements. The tax position is measured at the
largest amount of benefit that is greater than 50 percent likely to be
realized upon ultimate settlement.
 
 The
Company recognizes interest accrued related to unrecognized tax benefits in
interest expense and penalties in operating expenses. During the years ended
September 30, 2009 and 2008, the Company recognized approximately $78,000 and
$46,000, respectively, in interest and penalties. The Company or one of its
subsidiaries files income tax returns in the U.S. federal jurisdiction, and
various states.  The last three years remain open to tax
examination.
 
 
 H.
              Put
      Options and Temporary Equity
 
 As part
of certain of our acquisition transactions, we have entered into
Lock-Up/Leak-Out Agreements with the sellers pursuant to which, on or after a
contractual period after the closing date, the seller shall have the right, but
not the obligation, to have us purchase from seller a certain number of our
shares of common stock issued in the transactions in an amount and at a rate of
not more than a contractual number of the shares per month (the “Monthly
Shares”) calculated at a price per share equal to a contractual value per share
(“Value of the Rick’s Shares”). At our election during any given month, we may
either buy the Monthly Shares or, if we elect not to buy the Monthly Shares from
the seller, then the seller shall sell the Monthly Shares in the open market.
Any deficiency between the amount which the seller receives from the sale of the
Monthly Shares and the value of the shares shall be paid by us within three (3)
business days of the date of sale of the Monthly Shares during that particular
month. Our obligation to purchase the Monthly Shares from the Seller shall
terminate and cease at such time as the seller has received a contractual amount
from the sale of the Rick’s Shares and any deficiency. Under the terms of the
Lock-Up/Leak-Out Agreements, the seller may not sell more than a contractual
number of our shares per 30-day period, regardless of whether the seller “Puts”
the shares to us or sells them in the open market or otherwise.
 
 During
April and May 2009, we completed renegotiation of terms of certain of our long
term debt and a significant portion of outstanding put
options.  Before the renegotiation, the maximum obligation that could
be owed if our stock were valued at zero is $13,935,020 and is recorded in our
consolidated balance sheet as Temporary Equity.   After the
renegotiation, the maximum obligation that could be owed if our stock were
valued at zero is $11,671,000 at September 30, 2009.  If we are
required to buy back any of these put options, the buy-back transaction will be
purely a balance sheet transaction, affecting only Temporary Equity or
Derivative Liability and Stockholders’ Equity and will have no income statement
effect.  The only income statement effect from these put options is
the “mark to market” valuation quarterly of the derivative liability as
explained in Note B of Notes to Consolidated Financial
Statements.
  56
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 
 H.
              Put
      Options and Temporary Equity -
continued
 
 Following
is a schedule of the annual obligation (after the renegotiation) we would have
if our stock price remains in the future at the closing market price on
September 30, 2009 of $8.60 per share, of which there can be no assurance: (This
includes the derivative financial instruments recognized in our balance sheet at
September 30, 2009.)
 
 
 For
      the Year Ended September 30:2010
              
              $
              2,397,6002011
              
              
              2,820,0002012
              
              
              1,945,8102013
              
              
              130,190Total
              
              $
              7,293,600
 
 Each
$1.00 per share movement of our stock price has an aggregate effect of $509,000
on the total obligation.
 
 I.
              Stock
      Options
 
 In 1995,
the Company adopted the 1995 Stock Option Plan (the “1995 Plan”) for employees
and directors. In August 1999, the Company adopted the 1999 Stock Option Plan
(the “1999 Plan”) (collectively, “the Plans”). The options granted under the
Plans may be either incentive stock options, or non-qualified options. The Plans
are administered by the Board of Directors or by a compensation committee of the
Board of Directors. The Board of Directors has the exclusive power to select
individuals to receive grants, to establish the terms of the options granted to
each participant, provided that all options granted shall be granted at an
exercise price equal to at least 85% of the fair market value of the common
stock covered by the option on the grant date and to make all determinations
necessary or advisable under the Plans.
 
 Following
is a summary of options for the years ended September 30, 2009 and
2008:
 
 Weighted
      Average Exercise Price
              
              
              Weighted
                Average
      Remaining Contractual Term (Years)
              
              
              Aggregate
                Intrinsic
      Value at September 30, 2009Outstanding
      at October 1, 2007
              
              
              545,000
              
              
              $
              3.60Granted
              
              
              -
              
              
              
              -Forfeited
              
              
              -
              
              
              
              -Exercised
              
              
              (125,000
              )
              
              
              2.78Outstanding
      at September 30, 2008
              
              
              420,000
              
              
              
              3.86Granted
              
              
              60,000
              
              
              
              8.75Forfeited
              
              
              (60,000
              )
              
              
              8.25Exercised
              
              
              (300,000
              )
              
              
              2.49Outstanding
      at September 30, 2009
              
              
              120,000
              
              
              $
              7.53
              
              
              
              1.82
              
              
              $
              153,000Exercisable
      at September 30, 2009
              
              
              60,000
              
              
              $
              6.32
              
              
              
              1.81
              
              
              $
              153,000
 
 As of
September 30, 2009, the range of exercise prices for outstanding options was
$2.80 - $9.40.
 
 In August
2007, the Company issued 10,000 stock options to each Director who is a member
of the Company’s Audit Committee and 5,000 options to the Company’s other
Directors. These options (50,000 in total) became exercisable on August 24,
2008, had a strike price of $9.40 per share and expired in August 2009. On the
same date, an officer received 20,000 options to purchase shares of the
Company’s common stock at an exercise price of $9.40.
  57
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 I.
              Stock
      Options - continued
 
 The stock
options, which expire on August 24, 2012, vest over two years with 10,000 stock
options becoming exercisable on August 24, 2008 and 10,000 stock options
becoming exercisable on August 24, 2009.
 
 In July
2009, the Company issued 10,000 stock options to each Director who is a member
of the Company’s Audit Committee, 5,000 options to the Company’s other Directors
and 10,000 options to an employee. These options (60,000 in total) become
exercisable on July 22, 2010, have a strike price of $8.75 per share and expire
in July 2011.
 
 The fair
value of options issued for the year ended September 30, 2009 were estimated to
be $176,143 at the date of grant using a Black-Scholes option-pricing model
using the following weighted average assumptions:
 
 Volatility
              90%Expected
      lives
              1.5
      yearsExpected
      dividend yield
              -Risk
      free rates
              1.47%
 
 The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.  The expected life of
awards granted represents the period of time that they are expected to be
outstanding. The Company determined the initial expected life based on a
simplified method in accordance with ASC 718 (also formerly SAB No. 110,Shared-Based
Payment),
giving consideration to the contractual terms, vesting schedules and pre-vesting
and post-vesting forfeitures.
 
 During
the years ended September 30, 2009 and 2008, the Company recorded $96,171 and
$157,080 of stock-based compensation, respectively. Total unamortized stock
compensation expense at September 30, 2009 was $146,785 and will be fully
expensed in fiscal year 2010.
 
 J.
              Commitments
      and Contingencies
 
 Leases
 
 The
Company leases certain equipment and facilities under operating leases, of which
rent expense was approximately $3,741,000 and $2,431,000 for the years ended
September 30, 2009 and 2008, respectively.  Rent expense for the
Company’s operating leases, which generally have escalating rentals over the
term of the lease, is recorded using the straight-line method over the initial
lease term whereby an equal amount of rent expense is attributed to each period
during the term of the lease, regardless of when actual payments are made.
Generally, this results in rent expense in excess of cash payments during the
early years of a lease and rent expense less than cash payments in the later
years. The difference between rent expense recognized and actual rental payments
is recorded as other long-term liabilities in the consolidated balance
sheets.
 
 Future
minimum annual lease obligations as of September 30, 2009 are as
follows:
 
 2010
              
              $
              3,721,8452011
              
              
              2,744,5492012
              
              
              2,450,1362013
              
              
              2,443,1622014
              
              
              2,238,207Thereafter
              
              
              8,740,250Total
      future minimum lease obligations
              
              $
              22,338,149
 58
 Table of Contents
 
 RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 J.
              Commitments
      and Contingencies - continued
 
 Legal
Matters
 
 Beginning
January 1, 2008, our Texas clubs became subject to a new state law requiring
each club to collect and pay a $5 surcharge for every club visitor.  A
lawsuit was filed by the Texas Entertainment Association (“TEA”), an
organization to which we are a member, alleging the fee amounts to be an
unconstitutional tax.  On March 28, 2008, a State District Court Judge
in Travis County, Texas ruled that the new state law violates the First
Amendment to the United States Constitution and is therefore
invalid.  The judge’s order enjoined the State from collecting or
assessing the tax.  The State appealed the Court’s
ruling.  In Texas, when cities or the State give notice of appeal, it
supersedes and suspends the judgment, including the
injunction.  Therefore, the judgment of the District Court cannot be
enforced until the appeals are completed.  Given the suspension of the
judgment, the State has opted to collect the tax pending the outcome of its
appeal.  On June 5, 2009, the Court of Appeals for the Third
District (Austin) affirmed the District Court’s judgment that the Sexually
Oriented Business (“S.O.B.”) Fee violated the First Amendment to the U.S.
Constitution. The Attorney General of Texas has asked the Texas Supreme Court to
review the case. No mandate will be issued until the Supreme Court of Texas
either refuses the review or takes and decides the case. All parties are waiting
on the decision of the Supreme Court of Texas either to grant review or not. On
August 26, 2009, the Texas Supreme Court ordered both sides to submit
briefs on the merits, while not yet deciding whether to grant the State’s
Petition for review. The State’s brief was filed on September 25, 2009 and
the Texas Entertainment Association’s brief was filed on October 15,
2009.   We have paid the tax for the first five calendar quarters
under protest and expensed the tax in the accompanying financial statements,
except for two locations in Dallas where the taxes have not been paid, but we
are accruing and expensing the liability.  For the quarters ended June
30, 2009 and September 30, 2009, as a result of the Third Court’s decision, the
Company accrued the fee, but did not pay the State. The Company’s Texas clubs
have filed a separate lawsuit against the State to demand repayment of the
taxes.  As of September 30, 2009, we have approximately $1.16 million
in accrued liabilities for this tax.  We have paid more than $2
million to the State of Texas since the inception of the tax.  If the
State’s appeal ultimately fails, the Company’s current amount paid under protest
would be repaid or applied to future admission tax and other Texas state tax
liabilities.
 
 For the
above legal matter, no contingent reserve as liabilities have been recorded in
the accompanying balance sheets as such potential losses are not deemed probable
or estimable.
 
 K.
              Segment
      Information
 
 The
following information is presented in accordance with FASB ASC 280, Segment Reporting. The
Company is engaged in adult nightclubs, adult entertainment websites
(“Internet”) and adult entertainment magazines and trade shows (“Media”). The
Company has identified such segments based on management responsibility and the
nature of the Company’s products, services and costs. There are no major
distinctions in geographical areas served as all operations are in the United
States. The Company measures segment profit as income from operations. Total
assets are those assets controlled by each reportable segment.
  59
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 K.
              Segment Information
      -
      continued
 
 The
following table sets forth certain information about each segment’s financial
information for the years ended September 30:
 
 2009
              
              
              2008Business
      segment sales:Night
      clubs
              
              $
              73,104,691
              
              
              $
              56,390,753Internet
              
              
              640,667
              
              
              
              715,759Media
              
              
              1,404,238
              
              
              
              801,215$
              75,149,596
              
              
              $
              57,907,727Business
      segment operating income:Night
      clubs
              
              $
              16,611,301
              
              
              $
              18,556,590Internet
              
              
              155,771
              
              
              
              141,894Media
              
              
              (241,637
              )
              
              
              (28,016
              )General
      corporate
              
              
              (3,113,453
              )
              
              
              (3,447,304
              )$
              13,411,982
              
              
              $
              15,223,164Business
      segment capital expenditures:Night
      clubs
              
              $
              2,141,554
              
              
              $
              10,956,469Internet
              
              
              5,049
              
              
              
              3,039General
      corporate
              
              
              155,774
              
              
              
              19,974,871$
              2,302,377
              
              
              $
              30,934,379Business
      segment depreciation and amortization:Night
      clubs
              
              $
              2,425,111
              
              
              $
              1,696,289Internet
              
              
              14,101
              
              
              
              15,539Media
              
              
              20,000
              
              
              
              10,000General
      corporate
              
              
              745,993
              
              
              
              501,132$
              3,205,205
              
              
              $
              2,222,960
 Business
      segment assets:Night
      clubs
              
              $
              124,277,033
              
              
              $
              120,763,535Internet
              
              
              204,866
              
              
              
              196,290Media
              
              
              903,221
              
              
              
              1,128,216General
      corporate
              
              
              17,326,534
              
              
              
              11,181,322Discontinued
      operations
              
              
              2,365,704
              
              
              
              3,799,443$
              145,077,358
              
              
              $
              137,068,806
 
 General
corporate expenses include corporate salaries, health insurance and social
security taxes for officers, legal, accounting and information technology
employees, corporate taxes and insurance, legal and accounting fees,
depreciation and other corporate costs such as automobile and travel
costs.  Management considers these to be non-allocable costs for
segment purposes.
 
 L.
              Common
      Stock
 
 During
the year ended September 30, 2008, the following common stock transactions
occurred:
  60
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 L.
              Common
      Stock - continued
 
 Stock
options totaling 125,000 shares were exercised by employees and directors for
proceeds of $347,700. Also, 1,837,000 shares of the Company’s common stock were
sold in two private transactions for $27,352,500, net of offering costs. The
Company also sold 611,740 shares subject to put rights for $13,448,594. The
Company issued 552,069 shares of common stock for $2,419,923 of principal and
interest owed on existing convertible debt. The Company also issued 60,000
shares in connection with the Las Vegas transaction which were accounted for as
a deduction from additional paid in capital of $108,300 due to the accounting
for the related put option shares.
 
 During
the year ended September 30, 2009, the following common stock transactions
occurred:
 
 Stock
options totaling 300,000 shares were exercised by employees and directors for
proceeds of $747,745.  The Company acquired 303,959 shares of common
stock for the treasury at a cost of $1,486,208.  These shares were
subsequently retired.
 
 M.
              Related
      Party Transactions
 
 On July
22, 2005, the Company entered into a secured convertible debenture with a
greater than 10% shareholder for a principal sum of $660,000. The debenture
matured on August 1, 2009 and bears interest at a rate of 12% per annum. The
debenture was converted to 220,000 shares of common stock in July 2008. The
Company also issued 50,000 detachable warrants at $3.00 per share in relation to
this debenture. The warrants were exercised in July 2008. The value of the
discount on note payable was estimated to be $106,656 at the date of grant using
a Black-Scholes option-pricing model with the following
assumptions:
 
 Volatility
              138%Expected
      life
              3
      yearsExpected
      dividend yield
              -Risk
      free rate
              4.31%
 
 For the
year ended September 30, 2008, the Company recorded $29,627 of interest expense.
The debenture was secured by the Company’s ownership in Citation Land, LLC and
RCI Holdings, Inc., both are wholly owned subsidiaries of the Company. The
Company has accounted for this transaction under FASB ASC 470, Application of Issue No. 98-5 to
Certain Convertible Instruments. The value of the embedded beneficial
conversion feature on the note payable was estimated to be $53,856. For the year
ended September 30, 2008, the Company recorded $14,960 of interest expense
related to the value of the embedded beneficial conversion feature.
 
 On April
28, 2006, the Company entered into convertible debentures with three
shareholders, one of which is a greater than 10% shareholder, for a principal
sum of $825,000. The debentures mature April 30, 2009 and bear interest at a
rate of 12% per annum. At the election of the holders, the holders had the right
to convert (subject to certain limitations) until April 30, 2008, all or any
portion of the principal amount of the debentures into shares of the Company’s
common stock at a rate of $6.55 per share, which approximates the closing price
of the Company’s stock on April 28, 2006. The shares were converted in April
2008 into 125,953 shares of common stock. The shares of Common Stock underlying
the principal amount of the debentures had piggyback registration rights and
were registered with the SEC in June 2006. The proceeds of the debentures were
used for the acquisition of Joint Ventures, Inc.
 
 On
November 9, 2006, the Company entered into convertible debentures with three
shareholders for a principal sum of $600,000. The term is for two years and the
interest rate is 12% per annum. At the election of the holders, the holders have
the right to convert (subject to certain limitations) all or any portion of the
principal amount of the debentures into shares of the Company’s common stock at
a rate of $7.50 per share, which was higher than the closing price of the
Company’s stock on November 9, 2006. The debentures provide, absent shareholder
approval, that the number of shares of the Company’s common stock that may be
issued by us or acquired by the holders upon conversion of the debentures shall
not exceed 19.99% of the total number of issued and outstanding shares of the
Company’s common stock. The proceeds of the debentures were used for the
acquisition of a 51% ownership interest of Playmates Gentlemen’s Club LLC. These
debentures matured and were paid in cash in November 2008.
  61
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 N.
              Employee
      Retirement Plan
 
 The
Company sponsors a Simple IRA plan (the “Plan”), which covers all of the
Company’s corporate employees. The Plan allows the corporate employees to
contribute up to the maximum amount allowed by law, with the Company making a
matching contribution of 3% of the employee’s salary. Expenses related to
matching contributions to the Plan approximated $47,000 and $44,000 for the
years ended September 30, 2009 and 2008, respectively.
 
 O.
              Acquisitions
      and Dispositions
 
 On
November 30, 2007, the Company entered into a Stock Purchase Agreement for the
acquisition of 100% of the issued and outstanding common stock of Stellar
Management Corporation, a Florida corporation (the "Stellar Stock") and 100% of
the issued and outstanding common stock of Miami Garden Square One, Inc., a
Florida corporation (the "MGSO Stock") which owns and operates an adult
entertainment cabaret known as "Tootsie’s Cabaret" ("Tootsie’s") located at 150
NW 183rd Street, Miami Gardens, Florida 33169 (the "Transaction"). Pursuant to
the Stock Purchase Agreement, the Company acquired the Stellar Stock and the
MGSO Stock from Norman Hickmore ("Hickmore") and Richard Stanton ("Stanton") for
a total purchase price of $25,486,000 (which includes inventory and other
assets), payable to the sellers $15,486,000 in cash, $10,000,000 pursuant to two
secured promissory notes in the amount of $5,000,000 each to Stanton and
Hickmore (the "Notes"), plus estimated transaction costs of $175,000. The Notes
will bear interest at the rate of 14% per annum with the principal payable in
one lump sum payment on November 30, 2010 (extended to November 30, 2012 in
April 2009). Interest on the Notes will be payable monthly, in arrears, with the
first payment being due thirty (30) days after the closing of the Transaction.
The Company cannot pre-pay the Notes during the first twelve (12) months;
thereafter, the Company may prepay the Notes, in whole or in part, provided that
(i) any prepayment by the Company from December 1, 2008 through November 30,
2009, shall be paid at a rate of 110% of the original principal amount and (ii)
any prepayment by the Company after November 30, 2009, may be prepaid without
penalty at a rate of 100% of the original principal amount. The Notes are
secured by the Stellar Stock and MGSO Stock under a Pledge and Security
Agreement.  As part of the Transaction, Hickmore and Stanton entered
into five-year covenants not to compete with the Company. Additionally, as part
of the Transaction, the Company entered into Assignment to Lease Agreements with
the landlord for the property where Tootsie’s is located. The underlying lease
agreements for the property provide for an original lease term through June 30,
2014, with two option periods which give the Company the right to lease
the property through June 30, 2034.  The terms and conditions of the
transaction were the result of extensive arm's length negotiations between the
parties.
 
 The
following information summarizes the allocation of fair values assigned to the
assets and liabilities at the acquisition date.
 
 Net
      current assets
              
              $
              390,000Property
      and equipment and other assets
              
              
              4,823,020Non-compete
      agreement
              
              
              200,000Other
      assets
              
              
              96,000Goodwill
              
              
              7,044,050SOB
      licenses
              
              
              20,125,856Deferred
      tax liability
              
              
              (7,044,050
              )Net
      assets acquired
              
              $
              25,634,876
 
 This
acquisition was made to further the Company’s growth objective of acquiring
nightclubs that will quickly contribute to the Company’s earnings per
share.  Goodwill in the acquisition represents the offset to the
deferred tax liability recorded as a result of the difference in the basis of
the net assets for tax and financial purposes.  The results of
operations of this acquired entity are included in the Company’s consolidated
results of operations since December 1, 2007.
  62
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  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 O.
              Acquisitions
      and Dispositions – continued
 
 The
following unaudited pro forma information presents the results of operations for
the nine months ended June 30, 2008 as if the acquisition had occurred as of the
beginning of the immediate preceding period.  The pro forma
information is not necessarily indicative of what would have occurred had the
acquisition been made as of such periods, nor is it indicative of future results
of operations.  The pro forma amounts give effect to appropriate
adjustments for the fair value of the assets acquired, amortization of
intangibles and interest expense.
 
 For
      the Year
                Ended
                September
      30, 2008Revenues
              
              $
              60,874,381Net
      income
              
              $
              8,021,729Net
      income per share - basic
              
              $
              1.01Net
      income per share - diluted
              
              $
              0.96Weighted
      average shares outstanding - basic
              
              
              7,931,121Weighted
      average shares outstanding - diluted
              
              
              8,417,187
 
 On March
31, 2008, the Company’s wholly owned subsidiary, RCI Entertainment
(Philadelphia), Inc. (the “Purchaser”) completed the acquisition of 100% of the
issued and outstanding shares of common stock (the “TEZ Shares”) of The End
Zone, Inc., a Pennsylvania corporation (the “Corporation”) which owns and
operates “Crazy Horse Too Cabaret” (the “Club”) located at 2908 South Columbus
Blvd., Philadelphia, Pennsylvania  19148 (the “Real Property”) from
Vincent Piazza (the “Seller”).  As part of the transaction, the
Company’s wholly owned subsidiary, RCI Holdings, Inc. (“RCI Holdings”) acquired
from the Piazza Family Limited Partnership (the “Partnership Seller”) 51% of the
issued and outstanding partnership interest (the “Partnership Interests”) in TEZ
Real Estate, LP, a Pennsylvania limited partnership (the “Partnership”) and 51%
of the issued and outstanding membership interest (the “Membership Interests”)
in TEZ Management, LLC, a Pennsylvania limited liability company, which is the
general partner of the Partnership (the “General Partner”).  The
Partnership owns the Real Property where the Club is located.  At
closing, the Company paid a purchase price of $3,500,000 in cash for the
Partnership Interests and Membership Interests, and issued 195,000 shares of the
Company’s restricted common stock (the “Rick’s Shares”) valued at $23 per share
for the TEZ Shares.
 
 As part
of the transaction and as amended in April 2009, the Company entered into a
Lock-Up/Leak-Out Agreement with the Seller pursuant to which, on or after one
year after the closing date, the Seller shall have the right, but not the
obligation, to have Rick’s purchase from Seller not more than 3,000 Rick’s
Shares per month (the “Monthly Shares”), calculated at a price per share equal
to $23.00 (“Value of the Rick’s Shares”) until March 31, 2010 and at the rate of
5,000 shares per month thereafter until the Seller has
received  $4,485,000 from the sale of the shares.  At the
Company’s election during any given month, the Company may either buy the
Monthly Shares or, if the Company elects not to buy the Monthly Shares from the
Seller, then the Seller shall sell the Monthly Shares in the open
market.  Any deficiency between the amount which the Seller receives
from the sale of the Monthly Shares and the Value of the Rick’s Shares shall be
paid by the Company within three (3) business days of the date of sale of the
Monthly Shares during that particular month.  The Company’s obligation
to purchase the Monthly Shares from the Seller shall terminate and cease at such
time as the Seller has received a total of $4,485,000 from the sale of the
Rick’s Shares and any deficiency.  As of September 30, 2009, the
177,000 shares of restricted common stock were classified on the consolidated
balance sheet as temporary equity in accordance with ASC 480, Classification and Measurement of
Redeemable Securities.  In April 2009, the Company renegotiated
the terms of these put options. Under the new terms, the Company has extended
payback and reduced the number of shares that can be put back to the
Company.  No consideration was required by the Company to renegotiate
the terms of the put options.
 
 The full
results of operations of this entity are included in the Company’s results of
operations since March 31, 2008.
  63
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  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 O.
              Acquisitions
      and Dispositions - continued
 
 Additionally,
at closing, the Seller and the Partnership Seller entered into a five-year
agreement not to compete with the Company within a twenty mile radius of the
Club. Finally, the Corporation entered into a new lease agreement with the
Partnership giving it the right to lease the Real Property for twenty years
(“Original Term”) with an option for an additional nine years eleven months
(“Option Term”) with rent payable at the rate of (i) $50,000 per month, subject
to adjustment for increases in the Consumer Price Index (CPI) every five years
during the Original Term and the Option Term, or (ii) 8% of gross sales,
whichever is higher.  The maximum increase in the CPI for any five
year period shall be 15%.
 
 The
following information summarizes the allocation of fair values assigned to the
assets and liabilities at the acquisition date.
 
 Property
      and equipment and other assets
              
              $
              3,882,885Non-compete
      agreement
              
              
              100,000Goodwill
              
              
              1,458,583SOB
      licenses
              
              
              4,207,770Deferred
      tax liability
              
              
              (1,458,583
              )Net
      assets acquired
              
              $
              8,190,655
 
 Goodwill
in the acquisition represents the offset to the deferred tax liability recorded
as a result of the difference in the basis of the net assets for tax and
financial purposes.  The results of operations of this acquired entity
are included in the Company’s consolidated results of operations since June 30,
2008.  This acquisition was made to further the Company’s growth
objective of acquiring nightclubs that will quickly contribute to the Company’s
earnings per share. Proforma results of operations have not been provided, as
the amounts were not deemed material to the consolidated financial
statements.
 
 On March
31, 2008, the Company’s subsidiary, RCI Entertainment (Austin), Inc. (“RCI”),
completed the acquisition of 49% of the membership interest of Playmates
Gentlemen’s Club, LLC (“Playmates”) from Behzad Bahrami (“Seller”), resulting in
100% ownership by the Company of RCI.  Playmates owns an adult
entertainment cabaret known as “Playmates” (the “Club”) located at 8110
Springdale Road, Austin, Texas 78724 (the “Premises”).  Under the
terms of the Purchase Agreement, RCI paid a total purchase price of $1,401,711
which was paid $701,711 in cash and debt forgiveness at the time of closing and
the issuance of 35,000 shares of the Company’s restricted common stock valued at
$20.00 per share (the “Shares”).  For accounting purposes, the
Company’s investment is only $751,000, due to the previous losses of the
minority interest which have been expensed.  This acquisition was made
to give the Company complete control over this entity.  Therefore, the
investment has been assigned to goodwill as the operating license was acquired
separately from the acquisition of the business.
 
 Pursuant
to the terms of the Purchase Agreement and as amended in April 2009, on or after
one year after the closing date, the Seller shall have the right, but not the
obligation to have the Company purchase from Seller not more than 2,500 Shares
per month (the “Monthly Shares”), calculated at a price per share equal to
$20.00 (“Value of the Shares”).  Seller shall notify the Company
during any given month of its election to “Put” the Monthly Shares to the
Company during that particular month.  At the Company’s election
during any given month, the Company may either buy the Monthly Shares or, if the
Company elects not to buy the Monthly Shares from the Seller, then the Seller
shall sell the Monthly Shares in the open market.  Any deficiency
between the amount which the Seller receives from the sale of the Monthly Shares
and the Value of the Shares shall be paid by the Company within three (3)
business days of the date of sale of the Monthly Shares during that particular
month.  The Company’s obligation to purchase the Monthly Shares from
the Seller shall terminate and cease at such time as the Seller has received a
total of $700,000 from the sale of the Shares.  As of September 30,
2009, the 20,000 shares of restricted common stock were classified on the
consolidated balance sheet as temporary equity in accordance with ASC 480. In
April 2009, the Company renegotiated the terms of these and other put
options.  No consideration was required by the Company to renegotiate
the terms of these put options.  Under the new terms, the Company has
extended payback and reduced the number of shares that can be put back to the
Company.  In the event the Seller elects not to “Put” the Shares to
the Company, the Seller shall not sell more than 10,000 Shares during any 90-day
period in the open market, provided that Seller complies with Rule 144 of the
Securities Act of 1933, as amended, in connection with his sale of the
Shares.  The full results of operations of this entity are included in
the Company’s results of operations since March 31,
2008.
  64
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  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 O.
              Acquisitions
      and Dispositions – continued
  In April
11, 2008, the Company’s wholly owned subsidiary, RCI Entertainment (Dallas),
Inc., completed the acquisition of 100% of the issued and outstanding
partnership interest (the "Partnership Interest") of Hotel Development - Texas,
Ltd, a Texas limited partnership (the "Partnership") and 100% of the issued and
outstanding membership interest (the "Membership Interest") of HD-Texas
Management, LLC, a Texas limited liability company, the general partner of the
Partnership (the "General Partner") from Jerry Golding, Kenneth Meyer, and
Charles McClure (the "Sellers"). The Partnership owns and operates an adult
entertainment cabaret known as "The Executive Club" (the "Club"), located at
8550 North Stemmons Freeway, Dallas, Texas 75247 (the "Real Property"). As part
of the transaction, the Company’s wholly owned subsidiary, RCI Holdings, Inc.
("RCI"), also acquired the Real Property from DPC Holdings, LLC, a Texas limited
liability company ("DPC"). At closing, the Company paid a total purchase price
of $3,590,609 for the Partnership Interest and Membership Interest, which was
paid through the issuance of 50,694 shares of the Company’s restricted common
stock to each of Messrs. Golding, Meyer and McClure, for an aggregate total of
152,082 shares (collectively, the "Rick's Club Shares") to be valued at $23.30
per share ($3,544,119) and $46,490 in cash. As consideration for the purchase of
the Real Property, RCI paid total consideration of $5,599,721, which was paid
(i) $4,250,000, payable $610,000 in cash and $3,640,000 through the issuance of
a five year promissory note (the "Promissory Note") and (ii) the issuance of
57,918 shares of the Company’s restricted common stock (the "Rick's Real
Property Shares") to be valued at $23.30 per share ($1,349,721). The Promissory
Note bears interest at a varying rate at the greater of (i) two percent (2%)
above the Prime Rate or (ii) seven and one-half percent (7.5%), and is
guaranteed by Rick's and Eric Langan, individually. At Closing, the Parties
entered into an Amendment to Purchase Agreement solely to provide for the
Sellers to set aside 10,500 Rick's Club Shares under an Escrow Agreement for the
offset of certain liabilities of the Partnership.  The Company also
incurred costs in the amount of $37,848, which was paid in cash.
 
 At
Closing and as amended in May 2009, the Sellers entered into Lock-Up/Leak-Out
Agreements pursuant to which on or after one year after the closing date, the
Sellers shall have the right, but not the obligation to have Rick's purchase
from Sellers not more than an aggregate of 2,172 Shares per month (the "Monthly
Club Shares"), calculated at a price per share equal to $25.00 per share ("Value
of the Rick's Club Shares") from April 11, 2009 until April 11, 2010, at the
rate of 4,347 shares per month from April 11, 2010 until April 11, 2012 and
thereafter at the rate of 3,621 shares per month until each of the individual
Sellers has received a total of $1,267,350 from the sale of the Rick's Club
Shares. At the Company’s election during any given month, the Company may either
buy the Monthly Club Shares or, if the Company elects not to buy the Monthly
Club Shares from the Sellers, then the Sellers shall sell the Monthly Club
Shares in the open market. Any deficiency between the amount, which the Sellers
receive from the sale of the Monthly Club Shares and the Value of the Rick's
Club Shares shall be paid by the Company within three (3) business days of the
date of sale of the Monthly Club Shares during that particular
month.  The Company’s obligation to purchase the Monthly Club Shares
from the Sellers shall terminate and cease at such time as the Sellers have
received an aggregate total of $3,802,050 from the sale of the Rick's Club
Shares and any deficiency.
 
 Additionally,
at Closing and as amended in May 2009, DPC entered into a Lock-Up/Leak-Out
Agreement pursuant to which on or after one year after the closing date, DPC
shall have the right, but not the obligation to have Rick's purchase from DPC
not more than 828 Shares per month (the "Monthly Real Estate Shares"),
calculated at a price per share equal to $25.00 per share ("Value of the Rick's
Real Estate shares") from April 11, 2009 until April 11, 2010, at the rate of
1,653 shares per month from April 11, 2010 until April 11, 2012 and thereafter
at the rate of 1,379 shares per month until DPC has received a total of
$1,447,950 from the sale of the Rick's Real Estate Shares. At the Company’s
election during any given month, the Company may either buy the Monthly Real
Estate Shares or, if the Company elects not to buy the Monthly Real Estate
Shares from DPC, then DPC shall sell the Monthly Real Estate Shares in the open
market. Any deficiency between the amount which DPC receives from the sale of
the Monthly Real Estate Shares and the Value of the Rick's Real Estate Shares
shall be paid by the Company within three (3) business days of the date of sale
of the Monthly Real Estate Shares during that particular month. The Company’s
obligation to purchase the Monthly Real Estate Shares from DPC shall terminate
and cease at such time as DPC
has received an aggregate total of $1,447,950 from the sale of the Rick's Real
Estate Shares and any deficiency.
  65
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 O.
              Acquisitions
      and Dispositions – continued
  The only
consideration required by the Company in the amendment of the terms of these put
options was the granting of a second lien on the related club property in
Dallas, Texas.  The granting of the second lien for the “Dallas
sellers” put options necessitates derivative liability accounting, as required
by FASB ASC 815.  These put options have been transferred from
temporary equity to derivative liabilities, measured at fair value, effective as
of the date of the modifications.  The liabilities will continue to be
recognized each quarter at fair value and the change in fair value recognized in
the statement of income.
  Finally,
at Closing each of the Sellers entered a five year Non-Competition Agreement
with the Company pursuant to which they agreed not to compete with the Company
in Dallas County or any adjacent county.
 
 The
following information summarizes the allocation of fair values assigned to the
assets and liabilities at the acquisition date based on a preliminary
valuation.  Subsequent adjustments may be recorded upon the completion
of the valuation and the final determination of the purchase price
allocation.
 
 Net
      current assets
              
              $
              34,445Property
      and equipment and other assets
              
              
              6,264,850Non-compete
      agreement
              
              
              300,000Goodwill
              
              
              303,354SOB
      licenses
              
              
              2,640,763Deferred
      tax liability
              
              
              (303,354
              )Net
      assets acquired
              
              $
              9,240,058
 
 Goodwill
in the acquisition represents the offset to the deferred tax liability recorded
as a result of the difference in the basis of the net assets for tax and
financial purposes.  The results of operations of this entity are
included in the Company’s consolidated results of operations since April 11,
2008. This acquisition was made to further the Company’s growth objective
of acquiring nightclubs that will quickly contribute to the Company’s earnings
per share.  Proforma results of operations have not been provided, as
the amounts were not deemed material to the consolidated financial
statements.
 
 On June
18, 2008, the Company’s wholly owned subsidiary RCI Entertainment (Northwest
Highway), Inc. (the “Purchaser”) completed the acquisition of certain assets
(the “Purchased Assets”) of North by East Entertainment, Ltd., a Texas limited
partnership (the “Seller”) by and through its general partner, Northeast
Platinum, LLC, a Texas limited liability company (the “General Partner”)
pursuant to an Asset Purchase Agreement dated May 10, 2008.  The
Seller owned and operated an adult entertainment cabaret known as “Platinum Club
II” (the “Club”), located at 10557 Wire Way (at Northwest Highway), Dallas,
Texas  75220 (the “Real Property”).
 
 At
closing, the Company paid a total purchase price of $1,500,000 cash for the
Purchased Assets.  At Closing, the principal of the Seller entered
into a five-year agreement not to compete with the Club by operating an
establishment with an urban theme that both serves liquor and provides live
female nude or semi-nude adult entertainment in Dallas County, Tarrant County,
Texas or any of the adjacent counties thereto.
 
 As part
of the transaction, the Company’s wholly owned subsidiary RCI Holdings, Inc.
(“RCI”) also acquired the Real Property from Wire Way, LLC, a Texas limited
liability company (“Wire Way”).  Pursuant to a Real Estate Purchase
and Sale Agreement (the “Real Estate Agreement”) dated May 10, 2008, RCI paid
total consideration of $6,000,000, which was paid $1,650,000 in cash and
$4,350,000 through the issuance of a five (5) year promissory note (the
“Promissory Note”).  The Promissory Note bears interest at a varying
rate at the greater of (i) two percent (2%) above the Prime Rate or (ii) seven
and one-half percent (7.5%), which is guaranteed by the Company and by Eric
Langan, the Company’s Chief Executive Officer, individually.  The
Company also incurred $77,599 in costs, which was paid in cash.
  66
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 O.
              Acquisitions
      and Dispositions - continued
 
 The
following information summarizes the allocation of fair values assigned to the
assets and liabilities at the acquisition date based on a preliminary
valuation.  Subsequent adjustments may be recorded upon the completion
of the valuation and the final determination of the purchase price
allocation.
 
 Net
      current assets
              
              $
              151,784Property
      and equipment and other assets
              
              
              6,000,000Non-compete
      agreement
              
              
              100,000Goodwill
              
              
              1,418,172Other
      assets
              
              
              43,500Net
      assets acquired
              
              $
              7,713,456
 
 The main
factor that contributes to goodwill in the transaction is the Company’s ability
to rebrand this operation as a Club Onyx to produce more
revenues.  The results of operations of this entity are included in
the Company’s consolidated results of operations since June 18,
2008.  This acquisition was made to further the Company’s growth
objective of acquiring nightclubs that will quickly contribute to the Company’s
earnings per share.
 
 Proforma
results of operations have not been provided, as the amounts were not deemed
material to the consolidated financial statements.
 
 On
September 5, 2008, the Company’s wholly owned subsidiary RCI Entertainment (Las
Vegas), Inc. (the “Purchaser”) completed the acquisition of certain assets (the
“Purchased Assets”) of DI Food & Beverage of Las Vegas, LLC, a Nevada
limited liability company (the “Seller”)  pursuant to a Third Amended
Asset Purchase Agreement (the “Third Amendment”) between Purchaser, Rick’s
Cabaret International, Inc. (“Rick’s”), Seller, and Harold Danzig (“Danzig”),
Frank Lovaas (“Lovaas”) and Dennis DeGori (“DeGori”) who are all members of
Seller.  The Seller owned and operated an adult entertainment cabaret
known as “Scores” (the “Club”), located at 3355 Procyon Street, Las Vegas,
Nevada  89102 (the “Real Property”).
 
 At
Closing, Purchaser paid Seller an aggregate amount as follows (the “Purchase
Price”):
 
 (i)
              $12,000,000
      payable by wire transfer;
 
 (ii)
              $3,000,000
      pursuant to a promissory note (“the Rick’s Promissory Note”), executed by
      and obligating Rick’s, bearing interest at eight percent (8%) per annum
      with a five (5) year amortization, with monthly payments of principal and
      interest, with the initial monthly payment due in April 2009 with a
      balloon payment of all then outstanding principal and interest due upon
      the expiration of two (2) years from the execution of the Rick’s
      Promissory Note; and
 
 (iii)
              200,000
      shares of restricted common stock, par value $0.01 of Rick’s (the “Rick’s
      Shares”) issued to the Seller, valued at $13.77 per
  share.
 
 As part
of the transaction and as amended in April 2009, the Company entered into a
Lock-Up/Leak-Out Agreement with the Seller pursuant to which, on or after seven
(7) months after the closing date, the Seller shall have the right, but not the
obligation, to have Rick’s purchase from Seller a total of 150,000 of the Rick’s
Shares (“Rick’s Put Share”) in an amount and at a rate of not more than the
following number of the Rick’s Put Shares per month (the “Monthly Shares”)
calculated at a price per share equal to $20.00 per share (“Value of the Rick’s
Shares”):
 
 o
              from
      April 5, 2009 until May 4, 2009, up to a total of 15,000
      shares;
 o
              from
      May 5, 2009 until November 5, 2009 at a rate of 3,000 shares per
      month;
 o
              from
      November 5, 2009 until May 4, 2010 at a rate of 4,000 shares per
      month;
 o
              from
      May 5, 2010 until November 4, 2010 at a rate of 5,000 shares per month;
      and
 o
              from
      November 5, 2010 until October 4, 2011 at a rate of 6,000 shares per
      month.
 
  67
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 O.
              Acquisitions
      and Dispositions – continued
 
 At the
Company’s election during any given month, the Company may either buy the
Monthly Shares or, if the Company elects not to buy the Monthly Shares from the
Seller, then the Seller shall sell the Monthly Shares in the open
market.  Any deficiency between the amount which the Seller receives
from the sale of the Monthly Shares and the Value of the Rick’s Shares shall be
paid by us within three (3) business days of the date of sale of the Monthly
Shares during that particular month.  The Company’s obligation to
purchase the Monthly Shares from the Seller shall terminate and cease at such
time as the Seller has received a total of $3,000,000 from the sale of the
Rick’s Shares and any deficiency.  Under the terms of the
Lock-Up/Leak-Out Agreement, Seller may not sell more than 25,000 Rick’s Shares
per 30-day period, regardless of whether the Seller “Puts” the Rick’s Put Shares
to Rick’s or sells them in the open market or otherwise.  No consideration
was required by the Company to renegotiate the terms of these put
options.
 
 Upon
closing of the transaction, the Company entered a two-year Non-Compete Agreement
with DeGori (the “DeGori Non-Compete Agreement”) pursuant to which DeGori agreed
not to compete with the Club by operating an establishment serving liquor and
providing live female nude or semi-nude adult entertainment in Clark County,
Nevada or in a radius of 25 miles of Clark County, Nevada; provided, however,
that the Non-Competition Agreement specifically excluded the Penthouse Club and
the Bada Bing Club located in Clark County, Nevada. The Company agreed to pay
DeGori cash consideration of $66,667 for entering into the
Non-Competition  Agreement. Additionally, at Closing, the Company also
entered into a 12-month Consulting Agreement with DeGori (the “Consulting
Agreement”) for a total aggregate of $133,333 in consulting fees payable in
eighteen (18) equal monthly payments of $7,407.38 per month with the first
payment due October 15, 2008.  Upon closing of the transaction, the
Company entered a one-year Non-Compete Agreement with Lovaas (the “Lovaas
Non-Compete Agreement”) pursuant to which Lovaas agreed not to compete with the
Club by operating an establishment serving liquor and providing live female nude
or semi-nude adult entertainment in Clark County, Nevada, or any of its
surrounding counties; provided, however, that this Non-Competition Agreement
shall specifically exclude the Penthouse Club and the Bada Bing Club located in
Clark County, Nevada. The Company incurred $367,580 in costs in connection
with the acquisition.
 
 The
following information summarizes the allocation of fair values assigned to the
assets and liabilities at the acquisition date based on a preliminary
valuation.  Subsequent adjustments may be recorded upon the completion
of the valuation and the final determination of the purchase price
allocation.
 
 Net
      current assets
              
              $
              112,885Property
      and equipment and other assets
              
              
              1,953,065Non-compete
      agreement
              
              
              100,000Goodwill
              
              
              16,062,848Net
      assets acquired
              
              $
              18,228,798
 
 The main
factor that contributes to goodwill in the transaction is the Company’s ability
to rebrand this operation as a Rick’s Cabaret to produce more
revenues.  The results of operations of this acquired entity are
included in the Company’s consolidated results of operations since September 5,
2008.  This acquisition was made to further the Company’s growth
objective of acquiring nightclubs that will quickly contribute to the Company’s
earnings per share.
  68
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  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 O.
              Acquisitions
      and Dispositions - continued
 
 The
following unaudited pro forma information presents the results of operations as
if the acquisition had occurred as of the beginning of the immediate preceding
period.  The pro forma information is not necessarily indicative of
what would have occurred had the acquisition been made as of such periods, nor
is it indicative of future results of operations.  The pro forma
amounts give effect to appropriate adjustments for the fair value of the assets
acquired, amortization of intangibles and interest expense.
 
 For
      the Year Ended
                September
      30, 2008Revenues
              
              $
              74,486,278Net
      income
              
              $
              9,006,517Net
      income per share - basic
              
              $
              1.11Net
      income per share - diluted
              
              $
              1.05Weighted
      average shares outstanding - basic
              
              
              8,131,121Weighted
      average shares outstanding - diluted
              
              
              8,617,187
 
 The
following unaudited pro forma information presents the results of as if the
acquisitions of Miami Gardens Square One, Inc. and DI Food and Beverage of Las
Vegas, LLC had occurred as of the beginning of the immediate preceding
period.  The pro forma information is not necessarily indicative of
what would have occurred had the
 
 acquisition
been made as of such periods, nor is it indicative of future results of
operations.  The pro forma amounts give effect to appropriate
adjustments for the fair value of the assets acquired, amortization of
intangibles and interest expense.
 
 For
      the Year Ended
                September
      30, 2008Revenues
              
              $
              77,452,932Net
      income
              
              $
              9,368,439Net
      income per share - basic
              
              $
              1.15Net
      income per share - diluted
              
              $
              1.10Weighted
      average shares outstanding - basic
              
              
              8,131,121Weighted
      average shares outstanding - diluted
              
              
              8,617,187
 69
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
  
  O.
              Acquisitions
      and Dispositions - continued
  Media
Acquisitions
 
 On April
15, 2008, the Company’s wholly owned subsidiary, RCI Entertainment (Media
Holdings), Inc., a Texas corporation ("RCI Media"), acquired 100% of the issued
and outstanding common stock (the "ED Stock") of ED Publications, Inc., a Texas
corporation ("ED"), 100% of the issued and outstanding common stock (the "TEEZE
Stock") of TEEZE International, Inc., a Delaware corporation ("TEEZE") and 100%
of the issued and outstanding membership interest (the "Membership Interest") of
Adult Store Buyers  Magazine, LLC, a Georgia limited liability
company.
 
 ED Publications,
Inc.
  Under the
terms of a Purchase Agreement between Don Waitt ("Waitt"), RCI Media and Rick's
Cabaret International, Inc. ("Rick's") dated April 15, 2008 (the "ED Purchase
Agreement"), the Company agreed to pay Waitt the following consideration for the
purchase of the ED Stock:
 
 (i)
$300,000 cash at closing;
 (ii)
$200,000 cash payable in 6 months (paid); and
 (iii) The
issuance of 8,696 shares of restricted common stock valued at $23.00 per share
(the "Closing Shares").   (See the explanation below of the
subsequent renegotiation of these terms).
 
 Additionally,
during the three (3) year period following the Closing Date (the "Earn Out
Period"), Waitt shall be entitled to earn additional consideration (the
"Additional Consideration") of up to $2,000,000 (the "Maximum Amount")
consisting of $500,000 cash (the “Cash”) and 65,217 shares of restricted common
stock valued at $23.00 per share (the "Earn Out Shares"), based upon the
earnings before income tax, depreciation and amortization ("EBITDA") of RCI
Media. RCI Media will pay the Maximum Amount of the Additional Consideration to
the Seller if RCI Media's EBITDA during the three (3) year period following the
Closing Date totals an aggregate of $2,400,000. At the end of each twelve (12)
month period after the Closing Date, RCI Media shall determine its EBITDA and
shall pay to Waitt any such portion of the Additional Consideration as has been
earned. The Closing Shares and Earn Out Shares are collectively referred to as
the "Rick's Shares".
 
 At
Closing, Waitt entered into a Lock-Up/Leak-Out Agreement with the Company
pursuant to which on or after one year after the closing date with respect to
the Closing Shares, or on or after seven (7) months from the date of issuance
with respect to the Earn Out Shares, if any, Waitt shall have the right, but not
the obligation to have with respect to the Earn Out Shares, if any, Waitt shall
have the right, but not the obligation to have Rick's purchase from Waitt 5,000
Rick's Shares per month (the "Monthly Shares"), calculated at a price per share
equal to $23.00 per share ("Value of the Rick's Shares") until Waitt has
received an aggregate of $1,700,000 (i) from the sale of the Rick's Shares sold
in the open market or in a private transaction or otherwise, and (ii) the
payment of any deficiency (as defined in the ED Purchase Agreement) by Rick's.
At the Company’s election during any given month, the Company may either buy the
Monthly Shares or, if the Company elects not to buy the Monthly Shares from
Waitt, then Waitt shall sell the Monthly Shares in the open market. Any
deficiency between the amount which Waitt receives from the sale of the Monthly
Shares and the Value of the Rick's Shares shall be paid by the Company within
three (3) business days of the date of sale of the Monthly Shares during that
particular month. The Company’s obligation to purchase the Monthly Shares from
Waitt shall terminate and cease at such time as Waitt has received an aggregate
total of $1,700,000 from the sale of the Rick's Shares and any deficiency (as
defined in the ED Purchase Agreement).
 
 At
Closing, Waitt also entered a three (3) year Employment Agreement with RCI Media
(the "Employment Agreement") pursuant to which he will serve as President. The
Employment Agreement extends through April 15, 2011, and provides for an annual
base salary of $250,000. Pursuant to the Employment Agreement, Mr. Waitt is also
eligible to participate in all benefit plans maintained by the Company for
salaried employees. Under the terms of the Employment Agreement, Mr. Waitt is
bound to a confidentiality provision and cannot compete with the Company upon
the expiration of the Employment Agreement.
  70
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 O.
              Acquisitions
      and Dispositions – continued
 
 TEEZE/Adult Store Buyers
Magazine LLC
 Under the
terms of a Purchase Agreement between John Cornetta ("Cornetta"), Waitt, RCI
Media and Rick's dated April 15, 2008 (the "TEEZE/ASB Purchase Agreement"), the
Company agreed to pay the following consideration to Cornetta and Waitt for the
purchase of the TEEZE Stock and the Membership Interest:
 
 (i)
              an
      aggregate of $200,000 cash at closing;
and
 (ii)
              the
      issuance of 6,522 shares of restricted common stock to each of Messrs.
      Waitt and Cornetta, for an aggregate of 13,044 shares of restricted common
      stock to be valued at $23.00 per share (the "Rick's TEEZE
      Shares").
 
 Pursuant
to the TEEZE/ASB Purchase Agreement, on or after one year after the closing
date, each of Messrs. Waitt and Cornetta shall have the right, but not the
obligation to have Rick's purchase the Rick's TEEZE Shares calculated at a price
per share equal to $23.00 per share ("Value of the Rick's TEEZE Shares") until
Messrs. Waitt and Cornetta have each received $150,000 (i) from the sale of the
Rick's TEEZE Shares sold by them, regardless of whether sold to Rick's, sold in
the open market or in a private transaction or otherwise, and (ii) the payment
of any deficiency (as defined in the TEEZE/ASB Purchase Agreement) by Rick's. At
the Company’s election during any given month, the Company may either buy the
Rick's TEEZE Shares or, if the Company elects not to buy the Rick's TEEZE
Shares, then Cornetta and/or Waitt shall sell the Rick's TEEZE Shares in the
open market. Any deficiency between the amount which Cornetta or Waitt receives
from the sale of the Rick's TEEZE Shares and the Value of the Rick's TEEZE
Shares shall be paid by the Company within three (3) business days of the date
of sale of the Rick's TEEZE Shares during that particular month. The Company’s
obligation to purchase the Rick's TEEZE Shares shall terminate and cease at such
time as Waitt and Cornetta have each received $150,000 from the sale of the
Rick's TEEZE Shares and any deficiency.
 
 In April
2009, the Company renegotiated the terms of its purchase agreements with the
former owners of ED Publications, Teeze and Adult Store Buyer publications. The
new agreement with the former owner of ED Publications provides for the
execution of a $200,000 promissory note payable over two years with interest at
4% per annum in lieu of the issuance of 8,696 shares. The Company simultaneously
purchased 6,522 shares that had been issued in connection with the Teeze
transaction by means of a $150,000 promissory note payable over two years with
interest at 4% per annum.
 
 At
Closing, Cornetta entered a five year Non-Competition Agreement with the Company
pursuant to which he agreed not to compete with the Company either directly or
indirectly with TEEZE, ASB, RCI Media, Rick's or any of their affiliates by
publishing any sexually oriented industry trade print publications, with the
exception of a publication known as "Xcitement" which is currently owned and
operated by Cornetta.
 
 The
following information summarizes the initial allocation of fair values assigned
to the assets and liabilities at the acquisition date based on a preliminary
valuation for the ED Publications, Inc., Adult Store Buyers Magazine LLC, and
TEEZE International, Inc. acquisitions.  Subsequent adjustments may be
recorded upon the completion of the valuation and the final determination of the
purchase price allocation.
 
 Net
      current assets
              
              $
              469,378Non-compete
      agreement
              
              
              100,000Goodwill
              
              
              567,125Net
      current liabilities
              
              
              (66,749
              )Net
      assets acquired
              
              $
              1,069,754
 
 The
results of operations of these entities are included in the Company’s results of
operations since April 15, 2008.  This acquisition was made to create
new marketing synergies with major industry product suppliers and new national
advertising opportunities and also provides the Company with additional
diversification of revenue and income streams while remaining within the
Company’s core competency.  The ability to create additional cash
flows from the marketing synergies is the main factor contributing to goodwill
in the transaction.  Proforma results of operations
have not been provided, as the amounts were not deemed material to the
consolidated financial statements.
  71
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 O.
              Acquisitions
      and Dispositions – continued
  2009
Acquisition
 
 On
September 30, 2009, the Company’s subsidiary, RCI Entertainment (North FW), Inc.
(the “Purchaser”), purchased 100% of the outstanding common shares of Cabaret
North, Inc., a Texas corporation (“CNI”).  CNI owns and operates an
adult entertainment cabaret known as “Cabaret North” (the “Club”), located at
5316 Superior Parkway, Fort Worth, Texas 76106. The Company paid the sellers
total aggregate consideration of $2,300,000 (the “Purchase Price”). The Purchase
Price was payable as follows:
 
 (i)
              $140,000
      directly to CNI to be used for the payment of outstanding
      liabilities;
 
 (ii)
              $2,000,000
      to the Sellers; and
 
 (iii)
              $160,000
      to be held in an escrow account to pay any liabilities or obligations of
      CNI which were incurred but unpaid as of Closing and to be held in
      connection with the outcome of certain pending
  litigation.
 
 Also, at
closing, each of the sellers entered into a five year Non-Competition Agreement,
and CNI obtained a consent from its landlord to the sale of the Shares of CNI by
the sellers to the purchaser and entered into an addendum to the lease agreement
by and between the CNI and the landlord of the premises where the Club is
located.
 
 The
Company incurred $85,228 in costs in connection with the
acquisition.
 
 The
following information summarizes the allocation of fair values assigned to the
assets and liabilities at the acquisition date based on a preliminary
valuation.  Subsequent adjustments may be recorded upon the completion
of the valuation and the final determination of the purchase price
allocation.
 
 Net
      current assets
              
              $
              23,777Property
      and equipment
              
              
              200,000Non-compete
      agreement
              
              
              200,000Goodwill
              
              
              686,508Deferred
      income tax liability
              
              
              (686,508
              )SOB
      license
              
              
              1,961,451Net
      assets acquired
              
              $
              2,385,228
 
 
 Goodwill
in the acquisition represents the offset to the deferred tax liability recorded
as a result of the difference in the basis of the net assets for tax and
financial purposes.  The results of operations of this acquired entity
will be included in the Company’s consolidated results of operations beginning
October 1, 2009.  This acquisition was made to further the Company’s
growth objective of acquiring nightclubs that will quickly contribute to the
Company’s earnings per share. Proforma results of operations have not been
provided, as the amounts were not deemed material to the consolidated financial
statements.
  72
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 P. Discontinued
Operations
 
 The
accompanying consolidated financial statements reflect the following as
discontinued operations as of and for the years ended September 30, 2009 and
2008.
 
 The
Rick’s Cabaret in Austin is held for sale and included in discontinued
operations.  A sale of the club was scheduled in May 2009, but the
sale was never closed.  The Company recognized an impairment of the
net assets of the club of $823,090 as of March 31, 2009.
 
 The
Company sold one of its nightclubs, Encounters in San Antonio, on March 1, 2009
for $40,000, including $5,000 in cash and a $35,000 note payable monthly for one
year.  The Company recognized an impairment of $221,563 for this club
during the quarter ended December 31, 2008.  The actual loss at date
of sale was $226,175.
 
 The
Company closed its Divas Latinas club in Houston in late September,
2009.  The Company owns the building location and the location is
currently held for sale.  There was no gain or loss on the closing of
the club.
 
 Following
is summarized information regarding the discontinued operations:
  
 Year
      Ended
                September
      30,2009
              
              
              2008Loss
      from discontinued operations
              
              $
              (1,089,902
              )
              
              $
              (1,394,792
              )Loss
      on sale of discontinued operations
              
              
              (1,049,265
              )
              
              
              -Income
      tax - discontinued operations
              
              
              718,663
              
              
              
              433,607Total
      loss from discontinued operations, net of tax
              
              $
              (1,420,504
              )
              
              $
              (961,185
              )
  Major
classes of assets and liabilities included as assets and liabilities of
discontinued operations as of:
  September
      30,
                2009
              
              
              September
      30,
                2008Current
      assets
              
              $
              176,331
              
              
              $
              250,900Property
      and equipment
              
              
              1,181,378
              
              
              
              1,641,247Other
      assets
              
              
              1,007,995
              
              
              
              1,907,296Current
      liabilities
              
              
              (129,142
              )
              
              
              (237,448
              )Long-term
      liabilities
              
              
              (277,954
              )
              
              
              (255,176
              )Net
      assets
              
              $
              1,958,608
              
              
              $
              3,306,819
  Q.
              Subsequent
      Events
 
 We have
evaluated subsequent events for potential recognition and/or disclosure through
December 17, 2009, the date the consolidated financial statements were
issued.
  73
 Table of Contents
  RICK’S
CABARET INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009 AND 2008
 
 R.
Quarterly Results of Operations (Unaudited)
 
 Fiscal
      Year 2009
                Quarters
      EndedDec.
      31
              
              
              March
      31
              
              
              June
      30
              
              
              Sept.
      30Revenues
              
              $
              17,006,420
              
              
              $
              18,360,361
              
              
              $
              20,934,833
              
              
              $
              18,847,982Income
      from continuing operations
              
              $
              985,383
              
              
              $
              1,505,587
              
              
              $
              1,894,698
              
              
              $
              2,105,814Net
      income
              
              $
              790,832
              
              
              $
              839,471
              
              
              $
              1,784,493
              
              
              $
              1,793,301Basic
      income per share:Income
      from continuing operations
              
              $
              0.11
              
              
              $
              0.16
              
              
              $
              0.21
              
              
              $
              0.23Net
      income
              
              $
              0.08
              
              
              $
              0.09
              
              
              $
              0.19
              
              
              $
              0.19Diluted
      income per share:Income
      from continuing operations
              
              $
              0.10
              
              
              $
              0.16
              
              
              $
              0.20
              
              
              $
              0.23Net
      income
              
              $
              0.08
              
              
              $
              0.09
              
              
              $
              0.19
              
              
              $
              0.19Basic
      weighted average shares outstanding
              
              
              9,366,033
              
              
              
              9,313,819
              
              
              
              9,185,758
              
              
              
              9,197,528Diluted
      weighted average shares outstanding
              
              
              9,599,954
              
              
              
              9,487,528
              
              
              
              9,409,562
              
              
              
              9,212,545
 
 Fiscal
      Year 2008
                Quarters
      EndedDec.
      31
              
              
              March
      31
              
              
              June
      30
              
              
              Sept.
      30Revenues
              
              $
              10,569,146
              
              
              $
              15,093,032
              
              
              $
              15,940,006
              
              
              $
              16,131,964Income
      from continuing operations
              
              $
              1,943,538
              
              
              $
              2,854,047
              
              
              $
              2,035,955
              
              
              $
              1,683,537Net
      income
              
              $
              1,783,272
              
              
              $
              2,605,380
              
              
              $
              1,829,204
              
              
              $
              1,442,811Basic
      income per share:Income
      from continuing operations
              
              $
              0.29
              
              
              $
              0.38
              
              
              $
              0.25
              
              
              $
              0.18Net
      income
              
              $
              0.26
              
              
              $
              0.34
              
              
              $
              0.22
              
              
              $
              0.16Diluted
      income per share:Income
      from continuing operations
              
              $
              0.25
              
              
              $
              0.35
              
              
              $
              0.23
              
              
              $
              0.18Net
      income
              
              $
              0.23
              
              
              $
              0.32
              
              
              $
              0.21
              
              
              $
              0.15Basic
      weighted average shares outstanding
              
              
              6,806,234
              
              
              
              7,561,163
              
              
              
              8,240,914
              
              
              
              9,116,171Diluted
      weighted average shares outstanding
              
              
              7,635,326
              
              
              
              8,473,497
              
              
              
              8,860,699
              
              
              
              9,378,452
 74
 Table of Contents
  Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.
 
 There
have been no changes in or disagreements with accountants on accounting and
financial disclosure.
 
 Item 9A(T). Controls and Procedures.
 
 (a)       
Evaluation of Disclosure Controls and Procedures.
 
 Our
management evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based on that
evaluation, our management concluded that our disclosure controls and procedures
as of the end of the period covered by this report were effective such that the
information required to be disclosed by us in reports filed under the Securities
Exchange Act of 1934 is (i) recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms and (ii) accumulated and
communicated to our management, including our chief executive officer and our
chief financial officer, as appropriate to allow timely decisions regarding
disclosure.
 
 Management’s Annual Report on
Internal Control over Financial Reporting.
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United
States.
 
 Our
management, with the participation of the president, evaluated the effectiveness
of the Company’s internal control over financial reporting as of September 30,
2009.  In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control — Integrated Framework.  Based on this
evaluation, our management, with the participation of our president, concluded
that, as of September 30, 2009, the Company maintained effective internal
control over financial reporting.
 
 This
annual report does not include an attestation report of the Company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's independent
registered public accounting firm pursuant to temporary rules of the SEC that
permit the Company to provide only management's report in this Annual Report on
Form 10-K.
 
 Changes
in internal control over financial reporting
 
 There
were no changes in our internal control over financial reporting during the year
ended September 30, 2009 that have materially affected, or are reasonably likely
to materially affect our internal control over financial reporting.
 
 Certifications
 
 Certifications
with respect to disclosure controls and procedures and internal control over
financial reporting under Rules 13a-14(a) or 15d-14(a) of the Exchange Act are
attached to this annual report on Form 10-K.
 
 Item 9B. Other Information.
 
 None
  75
 Table of Contents
  PART
III
 
 Item 10. Directors, Executive Officers and Corporate
Governance.
 
 DIRECTORS
AND EXECUTIVE OFFICERS
 
 Our
Directors are elected annually and hold office until the next annual meeting of
our stockholders or until their successors are elected and qualified. Officers
are appointed by the Board of Directors annually and serve at the discretion of
the Board of Directors (subject to any existing employment agreements). There is
no family relationship between or among any of our directors and executive
officers. Our Board of Directors consists of six persons. The following table
sets forth our Directors and executive officers:
 
 Name
              Age
              PositionEric
      S. Langan
              41
              Director,
      Chairman, Chief Executive Officer, PresidentPhillip
      Marshall
              60
              Chief
      Financial OfficerTravis
      Reese
              40
              Director
      and V.P.-Director of TechnologyRobert
      L. Watters
              58
              DirectorAlan
      Bergstrom
              64
              DirectorSteven
      Jenkins
              52
              DirectorLuke
      Lirot
              52
              Director
 
 Eric S.
Langan has been a Director since 1998 and our President since March 1999. He has
been involved in the adult entertainment business since 1989. From January 1997
through the present, he has held the position of President of XTC Cabaret, Inc.
From November 1992 until January 1997, Mr. Langan was the President of Bathing
Beauties, Inc. Since 1989, Mr. Langan has exercised managerial control over more
than a dozen adult entertainment businesses. Through these activities, Mr.
Langan has acquired the knowledge and skills necessary to successfully operate
adult entertainment businesses.
 
 Phillip
Marshall has served as our Chief Financial Officer since May 2007. He was
previously controller of Dorado Exploration, Inc., an oil and gas exploration
and production company, from February 2007 to May 2007. He previously served as
Chief Financial Officer of CDT Systems, Inc., a publicly held water technology
company, from July 2003 to September 2006. In 1972, Mr. Marshall began his
public accounting career with the international accounting firm, KMG Main
Hurdman. After its merger with Peat Marwick, Mr. Marshall served as an audit
partner at KPMG for several years. After leaving KPMG, Mr. Marshall was partner
in charge of the audit practice at Jackson & Rhodes in Dallas from 1992 to
2003, where he specialized in small publicly held companies. Mr. Marshall is
also a trustee of United Mortgage Trust and United Development Funding IV,
publicly held real estate investment trusts.
 
 Robert L.
Watters is our founder and has been our Director since 1986. Mr. Watters was our
President and our Chief Executive Officer from 1991 until March 1999. Since
1999, Mr. Watters has owned and operated Rick’s Cabaret, an adult entertainment
club in New Orleans, Louisiana, which licenses our name. He was also a founder
in 1989 and operator until 1993 of the Colorado Bar & Grill, an adult club
located in Houston, Texas and in 1988 performed site selection, negotiated the
property purchase and oversaw the design and permitting for the club that became
the Cabaret Royale, in Dallas, Texas. Mr. Watters practiced law as a solicitor
in London, England and is qualified to practice law in New York. Mr. Watters
worked in the international tax group of the accounting firm of Touche, Ross
& Co. (now succeeded by Deloitte & Touche) from 1979 to 1983 and was
engaged in the private practice of law in Houston, Texas from 1983 to 1986, when
he became involved in our full-time management. Mr. Watters graduated from the
London School of Economics and Political Science, University of London, in 1973
with a Bachelor of Laws (Honours) degree and in 1975 with a Master of Laws
degree from Osgoode Hall Law School, York University.
 
 Steven L.
Jenkins has been a Director since June 2001. Since 1988, Mr. Jenkins has been a
certified public accountant with Pringle Jenkins & Associates, P.C., located
in Houston, Texas. Mr. Jenkins is the President and owner of Pringle Jenkins
& Associates, P.C. Mr. Jenkins has a BBA Degree (1979) from Texas A&M
University. Mr. Jenkins is a member of the AICPA and the TSCPA.
  76
 Table of Contents
  Alan
Bergstrom became our Director in 1999. Since 1997, Mr. Bergstrom has been the
Chief Operating Officer of Eagle Securities, which is an investment consulting
firm. Mr. Bergstrom is also a registered stockbroker with Rhodes Securities,
Inc. From 1991 until 1997, Mr. Bergstrom was a Vice President--Investments with
Principal Financial Securities, Inc. Mr. Bergstrom holds a B.B.A. Degree in
Finance, 1967, from the University of Texas.
 
 Travis
Reese became our Director and V.P.-Director of Technology in 1999. From 1997
through 1999, Mr. Reese had been a senior network administrator at St. Vincent's
Hospital in Santa Fe, New Mexico. During 1997, Mr. Reese was a computer systems
engineer with Deloitte & Touche. From 1995 until 1997, Mr. Reese was Vice
President with Digital Publishing Resources, Inc., an Internet service provider.
From 1994 until 1995, Mr. Reese was a pilot with Continental Airlines. From 1992
until 1994, Mr. Reese was a pilot with Hang On, Inc., an airline company. Mr.
Reese has an Associate’s Degree in Aeronautical Science from Texas State
Technical College.
 
 Luke
Lirot became a Director on July 31, 2007. Mr. Lirot received his law degree from
the University of San Francisco in 1986. After serving as an intern in the San
Francisco Public Defender’s Office in 1986, Mr. Lirot returned to Florida and
established a private law practice where he continues to practice and
specializes in adult entertainment issues. He is a past President of the First
Amendment Lawyers’ Association and has actively participated in numerous state
and federal legal matters.
 
 COMMITTEES
OF THE BOARD OF DIRECTORS
 
 AUDIT
COMMITTEE
 
 The
Company has an Audit Committee whose members are Steven Jenkins, Alan Bergstrom
and Luke Lirot. Mr. Jenkins, Mr. Bergstrom and Mr. Lirot are independent
Directors. The primary purpose of the Audit Committee is to oversee the
Company's financial reporting process on behalf of the Board of Directors. The
Audit Committee meets privately with our Chief Financial Officer and with our
independent registered public accounting firm and evaluates the responses by the
Chief Financial Officer both to the facts presented and to the judgments made by
our outside independent registered public accounting firm. Our Audit Committee
has reviewed and discussed our audited financial statements for the year ended
September 30, 2009 with our management. Steven L. Jenkins serves as the Audit
Committee’s Financial Expert.
 
 In May
2000, our Board adopted a Charter for the Audit Committee. A copy of the Audit
Committee Charter was attached to our Proxy Statement as Exhibit “A” filed with
the U.S. Securities and Exchange Commission on July 21, 2008. The Charter
establishes the independence of our Audit Committee and sets forth the scope of
the Audit Committee's duties. The Purpose of the Audit Committee is to conduct
continuing oversight of our financial affairs. The Audit Committee conducts an
ongoing review of our financial reports and other financial information prior to
their being filed with the Securities and Exchange Commission, or otherwise
provided to the public. The Audit Committee also reviews our systems, methods
and procedures of internal controls in the areas of: financial reporting,
audits, treasury operations, corporate finance, managerial, financial and SEC
accounting, compliance with law, and ethical conduct. A majority of the members
of the Audit Committee will be independent. The Audit Committee is objective,
and reviews and assesses the work of our independent registered public
accounting firm and our internal audit department.
 
 The Audit
Committee reviewed and discussed the matters required by SAS 61 and our audited
financial statements for the fiscal year ended September 30, 2009 with
management and our independent registered public accounting firm. The Audit
Committee has received the written disclosures and the letter from our
independent registered public accounting firm required by Independence Standards
Board No. 1, and the Audit Committee has discussed with the independent
registered public accounting firm the independent registered public accounting
firm's independence. The Audit Committee recommended to the Board of Directors
that the Company's audited financial statements for the fiscal year September
30, 2009 be included in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2009.
 
 NOMINATING
COMMITTEE
 
 The
Company has a Nominating Committee whose members are Steven Jenkins, Alan
Bergstrom and Luke Lirot. In July 2004, the Board unanimously adopted a Charter
with regard to the process to be used for identifying and evaluating nominees
for director. The Charter establishes the independence of our Nominating
Committee and sets forth the scope of the Nominating Committee's duties. A
majority of the members of the Nominating Committee will be independent. A copy
of the Nominating Committee’s Charter can be found on the Company’s website at
www.ricks.com.
  77
 Table of Contents
  COMPENSATION
COMMITEE
 
 The
Company has a Compensation Committee whose members are Steven Jenkins, Alan
Bergstrom and Luke Lirot. Decisions concerning executive officer compensation
for the fiscal year ended September 30, 2009 were made by the Compensation
Committee. Eric S. Langan and Travis Reese are the only directors of the Company
who are also officers of the Company. The primary purpose of the Compensation
Committee is to evaluate and review the compensation of executive
officers.
 
 COMPLIANCE
WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 Section
16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers, and persons who own beneficially more than ten percent of
our common stock, to file reports of ownership and changes of ownership with the
Securities and Exchange Commission. Based solely on the reports we have received
and on written representations from certain reporting persons, we believe that
the directors, executive officers, and greater than ten percent beneficial
owners have complied with all applicable filing requirements during the fiscal
year ended September 30, 2009, with the exception of an exit filing on Form 5
which we believe is due for the Estate of Ralph McElroy.
 
 CODE
OF ETHICS
 
 We have
adopted a code of ethics for our Principal Executive and Senior Financial
Officers, which is attached as Exhibit 14 to this Form 10-K.
 
 Item 11. Executive Compensation.
 
 The
following table reflects all forms of compensation for services to us for the
fiscal years ended September 30, 2009 and 2008 of certain executive
officers.
 
 Summary
Compensation Table
 
 Name
      and Principal Position
              Year
              Salary
                ($)
              Bonus
                ($)
              Stock
      Awards
                ($)
              Option
      Awards
                ($)
              Non-Equity
      Incentive Plan Compensation
                ($)
              Nonqualified
      Deferred Compensation Earnings
                ($)
              All
      other compensation
                ($)
              Total
                ($)(a)
              (b)
              (c)
              (d)
              (e)
              (f)
              (g)
              (h)
              (i)
              (j)Eric
      S. Langan, President/CEO
              2009
                  2008
              623,077
                  494,713
              -0-
                  -0-
              -0-
                  -0-
              2,446(1)
                  4,727(1)
              -0-
                  -0-
              -0-
                  -0-
              11,637
                  10,478
              637,160
                  509,918Phillip
      Marshall, CFO
              2009
                  2008
              189,423
                  175,000
              20,000(4)
                  20,000(4)
              -0-
                  -0-
              47,273(2)
                  45,870(2)
              -0-
                  -0-
              -0-
                  -0-
              2,441
                  6,056
              259,137
                  246,926Travis
      Reese, VP/Chief Technology Officer
              2009
                  2008
              194,204
                  193,226
              -0-
                  -0-
              -0-
                  -0-
              2,446(3)
                  4,727(3)
              -0-
                  -0-
              -0-
                  -0-
              5,753
                  5,328
              202,403
                  203,281
 78
 Table of Contents
  1
              Mr.
      Langan received 5,000 options to purchase shares of our common stock at an
      exercise price of $9.40 as Director compensation in August
      2007.  Mr. Langan also received 5,000 options to purchase shares
      of our common stock at an exercise price of $8.75 in July
      2009.
 2
              Mr.
      Marshall received 20,000 options to purchase shares of our common stock at
      an exercise price of $9.40 as a performance bonus in August
      2007.
 3
              Mr.
      Reese received 5,000 options to purchase shares of our common stock at an
      exercise price of $9.40 as Director compensation in August
      2007.  Mr. Reese also received 5,000 options to purchase shares
      of our common stock at an exercise price of $8.75 in July
      2009.
 4
              Mr.
      Marshall received a bonus of $20,000 each year for outstanding
      performance.
 
 Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.
 
 The
following table sets forth certain information at December 3, 2009, with respect
to the beneficial ownership of shares of Common Stock by (i) each person known
to us who owns beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each of our directors, (iii) each of our executive officers and (iv)
all of our executive officers and directors as a group. Unless otherwise
indicated, each stockholder has sole voting and investment power with respect to
the shares shown. As of December 3, 2009, there were 9,344,325 shares of common
stock outstanding.
 
 Name/Address
              Number
      of shares
              Title
      of class
              Percent
      of Class (7)Eric
      S. Langan
                  10959
      Cutten Road
                  Houston,
      Texas 77066
              1,213,429
      (1)
              Common
      stock
              13.0%Phillip
      K. Marshall
                  10959
      Cutten Road
                  Houston,
      Texas 77066
              23,800
      (2)
              Common
      stock
              <1%Robert
      L. Watters
                  315
      Bourbon Street
                  New
      Orleans, Louisiana 70130
              41,500
      (3)
              Common
      stock
              <1%Steven
      L. Jenkins
                  16815
      Royal Crest Drive
                  Suite
      160
                  Houston,
      Texas 77058
              -0-
              Common
      stock
              -0-Travis
      Reese
                  10959
      Cutten Road
                  Houston,
      Texas 77066
              32,830
      (4)
              Common
      stock
              <1%Alan
      Bergstrom
                  904
      West Avenue, Suite 100
                  Austin,
      Texas 78701
              1,150
      (5)
              Common
      stock
              <1%Luke
      Lirot
                  2240
      Belleair Road, Suite 190
                  Clearwater,
      GL 33764
              -0-
              Common
      stock
              -0-All
      of our Directors and Officers as a Group of seven (7)
      persons
              1,312,709
      (6)
              Common
      stock
              14.0%E.
      S. Langan. L.P.
                  10959
      Cutten Road
                  Houston,
      Texas 77066
              578,632
      (1)
              Common
      stock
              6.2%Diane
      McElroy
                  P.
      O. Box 27244
                  Austin,
      Texas 78755
              527,459
              Common
      Stock
              5.6%
 79
 Table of Contents
  (1)
              Mr.
      Langan has sole voting and investment power for 624,797 shares of common
      stock he owns directly. Mr. Langan has shared voting and investment power
      for 578,632 shares that he owns indirectly through E. S. Langan, L.P. Mr.
      Langan is the general partner of E. S. Langan, L.P. This amount also
      includes options to purchase up to 10,000 shares of common stock that are
      presently exercisable.
 
 (2)
              Includes
      3,800 shares of common stock he owns directly and options to purchase up
      to 20,000 shares of common stock that are presently
      exercisable.
 
 (3)
              Includes
      21,500 shares of common stock he owns directly and options to purchase up
      to 20,000 shares of common stock that are presently
      exercisable.
 
 (4)
              Includes
      22,830 shares of common stock he owns directly and options to purchase up
      to 10,000 shares of common stock that are presently
      exercisable.
 
 (5)
              Includes
      1,150 shares of common stock he owns
directly.
 
 (6)
              Includes
      options to purchase up to 60,000 shares of common stock that are presently
      exercisable.
 
 (7)
              These
      percentages exclude treasury shares in the calculation of percentage of
      class.
 
 We are
not aware of any arrangements that could result in a change in control of the
Company.
 
 The
disclosure required by Item 201(d) of Regulation S-K is set forth in Item 5
herein.
 
 Item 13. Certain Relationships and Related Transactions, and
Director Independence.
 
 Our Board
of Directors has adopted a policy that our business affairs will be conducted in
all respects by standards applicable to publicly held corporations and that we
will not enter into any future transactions and/or loans between us and our
officers, directors and 5% shareholders unless the terms are no less favorable
than could be obtained from independent, third parties and will be approved by a
majority of our independent and disinterested directors.  The Company
currently has three independent directors, Steven Jenkins, Alan Bergstrom and
Luke Lirot.   In our view, all of the transactions described
below meet this standard.
 
 On July
22, 2005, we issued a Secured Convertible Debenture to Ralph McElroy, a greater
than 10% shareholder, for the principal sum of $660,000. The debenture matured
on August 1, 2008 and bears interest at a rate of 12% per annum. Under the terms
of the Debenture, we were required to make monthly interest payments beginning
September 1, 2005. The debenture was converted into 220,000 shares of common
stock in July 2008. Additionally, we issued Mr. McElroy warrants to purchase
50,000 shares of our common stock at an exercise price of $3.00 per share until
July 22, 2008. These warrants were exercised in July 2008. The shares of Common
Stock underlying the principal amount of the Debenture and the Warrants had
piggyback registration rights and became registered with the SEC on September 1,
2005. Mr. McElroy passed away in June 2007 and his estate is currently under
settlement.
 
 On April
28, 2006, we entered into convertible debentures with three shareholders, one of
which is a greater than 10% shareholder, for a principal sum of $825,000. The
debentures mature April 30, 2009 and bear interest at a rate of 12% per annum.
At the election of the holders, the holders had the right to convert (subject to
certain limitations) until April 30, 2008, all or any portion of the principal
amount of the debentures into shares of our common stock at a rate of $6.55 per
share, which approximates the closing price of our stock on April 28, 2006. The
shares were converted in April 2008 into 125,954 shares of common stock. The
shares of Common Stock underlying the principal amount of the debentures had
piggyback registration rights and were registered with the SEC in June
2006.
  80
 Table of Contents
  On
November 9, 2006, we entered into convertible debentures with three shareholders
for a principal sum of $600,000. The term is for two years and the interest rate
is 12% per annum. At the election of the holders, the holders have the right to
convert (subject to certain limitations) all or any portion of the principal
amount of the debentures into shares of our common stock at a rate of $7.50 per
share, which was higher than the closing price of our stock on November 9, 2006.
The debentures provide, absent shareholder approval, that the number of shares
of our common stock that may be issued by us or acquired by the holders upon
conversion of the debentures shall not exceed 19.99% of the total number of
issued and outstanding shares of our common stock. These debentures matured and
were paid in cash in November 2008.
 
 
 Item 14. Principal Accounting Fees and Services.
 
 The
following table sets forth the aggregate fees paid or accrued for professional
services rendered by Whitley Penn LLP for the audit of our annual financial
statements for fiscal year 2009 and 2008 and the aggregate fees paid or accrued
for audit-related services and all other services rendered by Whitley Penn LLP
for fiscal year 2009 and fiscal year 2008.
 
 2009
              
              
              2008Audit
      fees
              
              $
              289,277
              
              
              $
              268,468Audit-related
      fees
              
              
              22,758
              
              
              
              13,368Tax
      fees
              
              
              60,530
              
              
              
              62,540All
      other fees
              
              
              -
              
              
              
              1,035Total
              
              $
              372,565
              
              
              $
              345,411
 81
 Table of Contents
  The
category of “Audit fees” includes fees for our annual audit, quarterly reviews
and services rendered in connection with regulatory filings with the SEC, such
as the issuance of comfort letters and consents.
 
 The
category of “Audit-related fees” includes employee benefit plan audits, internal
control reviews and accounting consultation.
 
 The
category of “Tax fees” includes consultation related to corporate development
activities.
 
 All above
audit services, audit-related services and tax services were pre-approved by the
Audit Committee, which concluded that the provision of such services by Whitley
Penn LLP was compatible with the maintenance of that firm’s independence in the
conduct of its auditing functions. The Audit Committee’s outside auditor
independence policy provides for pre-approval of all services performed by the
outside auditors.
 
 
 PART
IV
 
 Item 15. Exhibits, Financial Statement Schedules.
 
 Exhibit
14- Code of Ethics
 
 Exhibit 21-
Subsidiaries of the Registrant.
 
 Exhibit
31.1 - Certification of Chief Executive Officer of Rick’s Cabaret
International, Inc. Corporation required by Rule 13a-14(1) or Rule 15d - 14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
 
 Exhibit
31.2 - Certification of Chief Financial Officer of Rick’s Cabaret
International, Inc. Corporation required by Rule 13a-14(1) or Rule 15d - 14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
 
 Exhibit
32.1 - Certification of Chief Executive Officer of Rick’s Cabaret
International, Inc. Corporation pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and Section 1350 of 18 U.S.C. 63.
 
 Exhibit
32.2- Certification of Chief Financial Officer of Rick’s Cabaret
International, Inc. Corporation pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and Section 1350 of 18 U.S.C. 63.
  82
 Table of Contents
  SIGNATURES
 
 
 In
accordance with the requirements of Section 13 of 15(d) of the Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on December 17, 2009.
 
 Rick's
      Cabaret International, Inc./s/
      Eric S. LanganBy:
      Eric S. LanganChief
      Executive Officer and President/s/
      Phillip K. MarshallBy:
      Phillip K. MarshallChief
      Financial Officer and
                Principal Accounting
      Officer
 
 Pursuant
to the requirements of the Exchange Act, this report has been signed below by
the following persons in the capacities and on the dates indicated:
 
 Signature
              
              Title
              
              Date/s/
      Eric S. LanganEric
      S. Langan
              
              Director,
      Chief Executive Officer, and President
              
              December
      17, 2009/s/
      Travis ReeseTravis
      Reese
              
              Director
      and V.P.-Director of Technology
              
              December
      17, 2009/s/
      Robert L. WattersRobert
      L. Watters
              
              Director
              
              December
      17, 2009/s/
      Alan BergstromAlan
      Bergstrom
              
              Director
              
              December
      17, 2009/s/
      Steven JenkinsSteven
      Jenkins
              
              Director
              
              December
      17, 2009/s/
      Luke LirotLuke
      Lirot
              
              Director
              
              December
      17, 2009


83