RCI Hospitality Holdings, Inc. (filed as Rick’s Cabaret International, Inc.) — FY2011 Form 10-K
Reporting period: Fiscal year ended September 30, 2011. The filing is an annual report, not a standalone fourth-quarter filing; fourth-quarter figures are identified separately below. Unless otherwise stated, financial amounts are in U.S. dollars.
Business context
The company operated adult nightclubs, adult-entertainment websites and an industry media business. The filing reported 23 clubs and a 40% interest in an Austin club. Nightclubs accounted for the substantial majority of revenue. In FY2011, the company acquired or opened locations in Fort Worth, Indianapolis and Minneapolis; it also closed its Las Vegas club and sold a 60% interest in its original Austin club, which became an equity-method investment.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $83.5 million | $74.1 million |
| Income from operations | $18.8 million | $11.4 million |
| Operating margin | 22.5% | 15.4% |
| Income from continuing operations | $10.3 million | $3.9 million |
| Net income (loss) attributable to Rick’s shareholders | $7.8 million | $(8.0) million |
| Diluted EPS | $0.79 | $(0.82) |
| Adjusted EBITDA (non-GAAP) | $23.6 million | $17.9 million |
| Net cash provided by operating activities | $18.9 million | $17.3 million |
- Revenue increased 12.7%; management attributed growth to acquisitions, a full year of contribution from prior-year acquisitions and stronger existing-club results, particularly New York. Same-location, same-period nightclub revenue rose 4.9%.
- FY2011 continuing-operations income improved partly because FY2010 included a $3.6 million impairment charge. FY2011 also included a $0.9 million gain on settlement of debt. The company reported a $2.2 million after-tax loss from discontinued operations, including the Las Vegas closure and Austin disposition.
- Fourth-quarter FY2011 revenue was $21.5 million, income from continuing operations $2.1 million and net income $2.0 million.
- Cash and cash equivalents were $9.7 million at year-end, down from $18.6 million. Working capital fell to $2.0 million from $9.1 million, principally reflecting cash-funded acquisitions. Investing activities used $16.3 million, including acquisitions and capital spending; financing activities used $11.4 million.
- Total debt was $35.6 million, down from $42.7 million; $5.5 million was current and $30.1 million long-term. FY2012 scheduled debt maturities were $5.5 million and FY2013 maturities $13.5 million. The company disclosed no lines of credit.
- Total assets were $153.4 million and stockholders’ equity, including noncontrolling interests, was $80.2 million. Goodwill and indefinite-lived intangibles totaled $65.6 million.
Material changes, outlook and risks
- The company provided no quantified FY2012 earnings or revenue guidance. Management planned to pursue selective club acquisitions and organic growth, while noting that further expansion may require debt or equity financing and that financing availability and terms are uncertain.
- FY2011 acquisitions cost approximately $11.3 million, including real estate; the acquired operations generated $1.6 million of FY2011 revenue and a reported pretax loss of approximately $0.6 million. Subsequent to year-end, the company acquired The New West for $380,000. It also announced proposed Dallas-area club and property acquisitions with aggregate stated consideration of $12.0 million, substantially payable through long-term notes and subject to licensing and closing conditions.
- Texas patron tax: A $5-per-visitor fee remained in litigation after the Texas Supreme Court ruled in August 2011 that it did not violate the federal First Amendment and remanded state-constitutional claims. The company had accrued $6.8 million at September 30, 2011, paid more than $2 million under protest, and said it did not plan further payments while litigation continued. A final adverse outcome would affect cash and the balance sheet; a favorable outcome could result in a one-time gain.
- Other contingencies: Nevada authorities asserted approximately $2.1 million in Las Vegas live-entertainment taxes, which the company contested and did not accrue. A Las Vegas landlord and a shareholder also sued the company and/or its CEO; the company disputed liability and recorded no accrual for the landlord claim. The filing states no specific damages for the shareholder case.
- Key operating risks include regulation and liquor licensing, competition, economic and discretionary-spending sensitivity, acquisitions and integration, possible impairment of goodwill and licenses, reliance on entertainers treated primarily as independent contractors, and dependence on the CEO. The company noted that certain locations had underperformed and that the Las Vegas club was closed.
- The independent auditor gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of September 30, 2011. The company did not anticipate paying common-stock dividends in the foreseeable future.
Important facts for investors to verify
- Track the Texas patron-tax litigation, the $6.8 million accrued balance, and the treatment or potential recovery of amounts already paid.
- Check developments in the Nevada tax audit and the Las Vegas landlord and shareholder lawsuits, including whether any liabilities are subsequently recorded.
- Assess cash generation against acquisition spending, debt maturities—particularly FY2013—and the company’s stated lack of committed credit facilities.
- Separate recurring operating improvement from discontinued operations, the FY2010 impairment comparison and FY2011 debt-settlement gain; review the non-GAAP adjusted EBITDA reconciliation.
- Monitor performance of recently acquired clubs, impairment exposure in goodwill and licenses, and the financing and licensing conditions for announced subsequent acquisitions.