RCI Hospitality Holdings, Inc. (RICK) Q4 2008 Earnings Report, Transcript and Summary

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

Thank you very much. Good afternoon. I’m Allan Priaulx, Investor Relations Counsel for Rick’s Cabaret International, Inc. Welcome to our fiscal year 2008 conference call and webcast. In a moment I’ll turn the call over to our CEO, Eric Langan, and to our CFO, Phil Marshall, who will present our ’08 results and then answer any questions you may have. Before we begin, I’d like to call your attention to our Safe Harbor statement, which is included on slide two of our PowerPoint presentation available on our website and at precisionir.com. Please take a good look at the statement as this conference call may contain forward-looking statements information within the meaning of Section 21E of the Securities and Exchange Act of 1934. Later this week, a complete transcript of this call will be available on Seekingalpha.com. I’d also like to remind you that Rick’s Cabaret filed reports and other documents with the Securities and Exchange Commission, and all of them are available on our website, www.ricks.com. The website is temporarily down, but it should be up in a matter of hours. And now I’d like to turn our call over to Eric Langan.

Thank you, Allan. For you that are looking for our website, you can also -- if you need it immediately, you can download it from the SEC’s website at their database. One of our database servers crashed in Houston today. So they are in there frantically trying to get it back up. I’ll start today’s presentation with an overview. We are going to review the fiscal 2008 results. We are going to look at the key drivers of our record revenue and income, and we are going to review the fourth quarter of 2008, talk about our acquisition strategy, review the effect of the put options on our cash flow, and take a look at how 2009 is just shaping up for us so far. Begin the highlights 2008, we had record revenues of $59.9 million compared to $32.0 million in 2007, a total revenue increase of 87%. Same-store club revenues were up 14.6%. Net income increased to $7.66 million versus $3.05 million last year. Earnings per share were $0.91 on a fully diluted basis. Cash flow from operations were $14.8 million. Our key revenue drivers were the strong performance of our Rick’s Cabaret in New York City, which had another record year and continues to grow. FY contribution from 5.5 acquisitions that were made in 2008, plus our Media Division. Strong same-club sales of 14.6%. We are very, very pleased with our same (inaudible) sales growth is going across the country. We do have certain locations that we are working on. But overall in 2008, our sales were very strong. Our alcoholic beverage sales were $22.28 million versus $12.0 in 2007. And our service revenues were $28.67 million, up from $14.88 million, up nearly 93%. And as you know, our service revenues have little to no associated cost with…

(Operator instructions) Our first question is from Eric Wold with Merriman Curhan Ford. Please go ahead with your question. Eric Wold – Merriman Curhan Ford: Hey, good afternoon, Eric.

Hey, good afternoon. What do you do? You got it fast. You’re always like one of the first ones in there. Eric Wold – Merriman Curhan Ford: Sorry, it could be –

That’s great, appreciate it. Eric Wold – Merriman Curhan Ford: I apologize for the noise in the background, I’m at the airport. But a couple questions. I guess the first one you mentioned looking into a couple of things that some of the clubs to obviously correct them or stem losses. How many clubs are actually losing money?

Three that are major concern right now. Our Austin location and two of our rather small locations, one in Houston and one in San Antonio, are the main problems. Eric Wold – Merriman Curhan Ford: Okay. And then I guess a couple thoughts on specific markets, New York City, what are your thoughts there going into this year with Sapphire that was taking over the Fort Worth, already they are looking to go towards east? And how much are --?

Those are probably their 4,000 square foot clubs. I mean, they are pretty insignificant. Yes, they put out flashy press releases, but the reality of it is, they are operating at 60/40 in the east side. I don’t know how much money they are going to spend on that. Eventually that lawsuit is going to come to – that phase, that lawsuit is going to come to a close. I don’t know how much money they are willing to risk. With the opportunity that they may have to close some day, that loophole goes away. But – I mean, we’re really not concerned with Sapphire right now. We’re more concerned with Hustler and Penthouse, the other two major competitors in that market. Everywhere they have 10,000 square feet. But I feel there is enough business in New York City for everyone. Our business is continuing to grow. We are getting market share, we are gaining market share every month. Some of our big customers aren’t paying us much money, but we are getting so many more customers. And that’s why we’ve decided (inaudible) got an unbelievable iconic we put up for two months. Basically that leaked out in March, but they didn’t have anybody for these two months. So it’s hard for them to get a big (inaudible). We are happy to do it for the two months. I think we got (inaudible) couple of billboards just over on the Long Island Expressway coming into the Midtown Tunnel, which will hopefully get us some more of that bridge and tunnel business on the weekends and build our weekends up. Those are the days we can – we have the most capacity to club, like Friday nights and Saturday nights and Sunday nights. So we’re doing things to build those nights up, get more tourists in there on the weekend. Eric Wold – Merriman Curhan Ford: Okay. And then last question on Vegas, I heard some reports of some closes, the Vegas market down as much 50% in recent months from they were early this year. Are you willing to say kind of how much Vegas is down and what’s changed recently with the taxi cab payments and kind of what --?

The taxi cab – we just can’t get the war to end. There are some clubs I believe are down 100% and they are closing or have closed, especially the regular nightclubs. It’s pretty brutal in Vegas right now. Especially in the last two weeks, the casinos have been very slow. The people that are out there aren’t spending any money to see if they are coming to the clubs. I mean, we’re getting some – some headcount in the door, but nothing significant, nothing to really give us any hope at this point. But the convention schedule in January is a very heavy convention schedule. We put two major parties to couple with the convention. One is on a Tuesday night with 800 people. So I think we are going to see a big increase in January. Hopefully we will see more recovery by March. It’s just really a matter of survival, I think, right for a lot of the clubs out there. I hear clubs are down as much as 70%. We are in that 50% to 70% range off year-over-year. Like I said, it’s pretty boodle out there. In hindsight, if we could have known, obviously we wouldn’t have done the transaction. We are in it. We are going to survive it. And it’s just a matter of getting past the holidays and getting the convention season started back up and getting out there and building. The nice things is everybody is going to be building because everybody is hurt and – everybody is hurt out there right now. So all of the clubs are going to have to be out there and be at the top of their game there just to rebuild after this. Eric Wold – Merriman Curhan Ford: I appreciate it. Last final question, on the put option and I have not [ph] the whole things you got. If you do extend some of these put options out in a year or two, are there anything you have to pay in addition to what’s already on the table with them?

We haven’t negotiated anything like that. What we are asking for now is favors. A couple of friends have agreed. So we will wait and see what happens. I know exactly in 2009 at least two of the holders will extend, probably allowing us to pay about half of what they would have gotten during that time period from instead of putting 5,000, either put 3,000 or 2,000 options to us a month for 2009. And then we are going to see how the company’s cash position is, how we are positioned after that point as we want to move forward. Basically what we’re trying to do right now is preserve our cash and let our cash build up, make sure that whatever comes our way in the next two quarters that we are prepared for it. Even if no one negotiates, it’s only $2.5 million. As you can see, at the end of the quarter, we had $5.6 million in cash on hand. I mean, we can pay these put options. It’s not an issue. We have the current cash on hand. We have cash flow of $14.8 million from operations. Even if we get a 50% reduction in cash flow from operations, we are still going to have enough money to pay for these put options. And I don’t see it having that type of decline in revenue at all. I actually anticipate that our year-over-year revenue will continue to increase as we’ve seen. Eric Wold – Merriman Curhan Ford: Perfect. Thank you again.

Yes.

Our next question is from Jamie Clement with Sidoti & Company. Please state your question. Jamie Clement – Sidoti & Company: Hey, good afternoon, Eric.

Hey, Jamie, how are you? Jamie Clement – Sidoti & Company: Good, thanks. Just one quick book-keeping question. I just have a couple of other things. But the diluted share count for the quarter, do you have that money?

We are going to forward that real quick. Jamie Clement – Sidoti & Company: And then maybe while we wait for that, Eric, it looks – I’m sorry?

I think that would be 9.3 or 9.4 for the quarter -- 9,378,000. Jamie Clement – Sidoti & Company: Okay. All right, great. Thanks. In looking at your other general and administrative costs, you were pushing $8 million for the quarter if my math is correct. That basically costs you at maybe close to $0.10 or so versus the third quarter. What – can you get those costs down back into the $6 million range where you had been the prior two quarters? On the third quarter call, you talked about having some excess cost related to some of the new clubs and that sort of thing. What’s going on in the cost side? And looking into fiscal 2009, what are your goals there?

We are definitely looking to keep our cost down. We’ve gotten rid of some marketing – some marketing gap. We’ve gotten rid of – we changed out some of our management, upper management. We structured a little bit, moved some of our guys that were regional got the management down into GM or lower spots a little bit and extended some of our – so basically six guys’ jobs turned into four jobs, four guys basically doing that job now, which seems to be big enough for money. As of now, we get the minimum wage increase. We have a lot of employees that are in that area or guys that we paid a little bit more than minimum wage. Well, the minimum wage increase gives the minimum wage employee’s increase, we have to give the other guys little increase. We did have some increase from that as well. And a lot of it is legal expense. We had a lot of legal expenses, especially in that quarter. We are going to have a little bit more of that from the Minnesota case in October – October, November and probably in December. The judge, however – they tried to extend discovery. The judge denied their extension of discovery. The discovery phase is over. That phase probably cost us $150,000 in depositions and whatnot a quarter for the last couple of quarters -- for this quarter that we are in right now and for the last quarter. So I think as we move into 2009, those expense will be much less than we’ve seen. Jamie Clement – Sidoti & Company: Okay. Okay, all right. Thank you very much.

Yes.

The next question is from Scott Kolman with Credence Capital Corp. Please go ahead with your question. Scott Kolman – Credence Capital Corp.: Hi, guys. A few questions. One, on Houston, Austin and San Antonio, what do you think you can do there? Do you own the land in those properties? And what is your basic way about going attacking? What’s going on at these locations? And then net income was about $1.44 million I think you said for the fourth quarter. That’s about half of what we are projecting about six months ago per quarter. Or is it that the third quarter – your fourth quarter, calendar third quarter is a little slower than the rest of the months? Thanks.

The fourth quarter is strictly our weakest quarter. July, August, September are our weakest quarter typically every year. That is the summer month and schools starting back up again. I don’t think our projections were at 1.44 – I mean, we are at 2.8 or whatever. So we aren’t double. We're trying to pull them of now, see where we had our projections out. Scott Kolman – Credence Capital Corp.: It’s like kind of saying it could be just – you were looking at (inaudible) the year.

It’s sort of less than we thought, but I think we are only about couple of hundred thousands less than I thought we are going to come in at one point. We did have 9.3 million shares outstanding in the fully diluted count for the quarter. That was a bit – and we didn’t close Vegas in time. We closed Vegas basically the second week of September – first week of September. So I guess there you are. You’re right. We did have our projections much higher than the $1.44 million. I’m going to have to dig into that a little bit more and figure out exactly where we’re quite different, because I know a lot of it was our legal expenses were much higher. Scott Kolman – Credence Capital Corp.: Okay. Do you –

I mean, we had – if you look at our legal, our legal was about $550,000 higher than the previous year. Scott Kolman – Credence Capital Corp.: Okay. And then on the poor acting locations?

Yes. And that’s the other part of it, with our new locations that we just closed out. We hired -- Phil was just showing me that the new locations we projected – we projected earnings from the new locations we’re projecting much higher than they actually came in at. That’s where we are really getting hit at. That’s how we’ve converted Philadelphia. We are working on the Rick’s in Dallas location right now on some of the solutions so we can actually spend the money and make it work, because we know we are not going to have any problems with the liquor licensing for basically get the liquor license up converted into an XTC and do a BYOB club at that location. Those are the two choices we have there. The Onyx location we have worked out. We have the liquor license back at the Onyx. The Onyx location is building, it’s doing strong numbers again. Scott Kolman – Credence Capital Corp.: Which city is that?

In Dallas. Scott Kolman – Credence Capital Corp.: In Dallas, okay. Onyx there, that’s right. Okay. And then Austin, Houston and San Antonio, which you said has problems --?

Houston is a very small part of our stuff now. The Houston Rick’s location is doing very good, which I really thought it would be affected more with the business there were down. That’s opposed to the airport here. But it’s actually doing pretty good. We got a decent management team in there. It’s doing well. The Rick’s in San Antonio is doing okay, not fantastic. We did get the new sign-off in November, which I believe starting to have. We are seeing people are easy to find now. We had no freeway frontage. We are actually just a little off the freeway. And so people couldn’t really see us, but now we have a kind right on the freeway that’s helping the Rick’s location. The San Antonio location is doing fine there. The other club there, the Encounters, a little club we have there, we are probably going to sell or get rid of that location in this next quarter. Scott Kolman – Credence Capital Corp.: At Austin?

In San Antonio. The Rick’s in Austin, based on what we’ve done there, we’ve negotiated with the landlord to lower the rent and we basically cut our cost down. We’ve gotten rid of the competitions. We closed the day shift. We are doing more of a lower end than the higher end Rick’s location. We are bringing our cost down there and we are going to try to write that out or maybe sell that location as well. We may put that location on the market as well if we can’t curb the expenses there. Scott Kolman – Credence Capital Corp.: Got you. In this three real problem locations that you brought up, you don’t own the land in any of those three locations?

About half we do. Scott Kolman – Credence Capital Corp.: Owned houses. Okay. And then –

I mean, our worst case – if you were to look at a worst case scenario, we could basically lock the leases, close the places down, basically those subsidiaries – basically get rid of those subsidiaries. I guess the landlord would have rights to maybe see that subsidiary. But the parent company is guaranteed to have [ph] those leases. So I don’t think there is much parent company liability. Or we do some kind of buyouts of the leases, which is what we would prefer, just do a buyout if we’re going to lease them and just pay the landlord the cash settlement to let him sub-lease to someone else or something along those lines. Scott Kolman – Credence Capital Corp.: Okay. And pardon me if I missed this. You said 2009 is quite clearly, which many companies are saying that. So it’s hard to put out –

I mean, how do I guess what’s going to happen in the next – Scott Kolman – Credence Capital Corp.: Absolutely. But what about the quarter we are in, which we are almost finished with now?

I don’t have the hard number from December yet. December is weak. October was really good. So I’m hoping that – what I’m hoping is that the strength in October outweighs the weakness in December. November was about average. So we’re – Scott Kolman – Credence Capital Corp.: Earlier you said that November was a little weak on an average?

But that was compared to October. It was weak compared to October. Scott Kolman – Credence Capital Corp.: I see, okay.

I don’t remember the net number or the gross number up hand, but it wasn’t one of – it wasn’t scary. December is – right now, I mean we still got a few days, but I don’t have this week’s sales in, but I have left seven days sales to get in and get my report for. But with Christmas in there, I don’t expect it to be fantastic. It’s definitely going to be weaker. December is definitely weaker than November, which is not normal. Normally, November is the weaker month. So like I said, I’m hoping that people trend back. I think people are spending money for Christmas presents and whatnot and tightening everything up. But I – gas is back down at $2 a gallon. So I expect a lot of our lower and blue-collar clubs will be doing much better as we move into January, February and March. Scott Kolman – Credence Capital Corp.: Okay, great. Thanks.

Yes.

The next question is from Michael Silverman [ph], a private investor. Please state your question.

Yes, hi. A couple of calls ago, I believe in the spring, you talked about some initiatives that you were looking into related to some beverage manufacturers. Is that still happening?

I’m sorry. You broke out.

What I’m looking at some co-branding and co-marketing ideas with some alcohol vendors. Is that still happening?

We talked to them. I mean, we haven’t had anybody – obviously everybody, even the alcohol companies now are cutting back their budgets and whatnot. We are talking with people, but we haven’t really got anything solid at this –

Okay. That was only thing I was curious about. Thank you.

Okay.

The next question is from David Fore with Montgomery Street Research. Please state your question. David Fore – Montgomery Street Research: Hi, guys. What's kind of a good ballpark monthly cash flow number for you guys right now, or maybe as of November?

Good question. Yes, we’d probably be around $1 million. It’s hard to tell. We paid off some debt and we paid our income taxes. So we’re trying to really kind of sort through on our sales right now as well. We are still gaining cash. We probably don’t have $5.6 million on hand because of the debt repayments that we pay. We paid off a couple of convertible debentures and we paid our income taxes. Our income tax – we made a $1.5 million estimated income tax payment, which is probably a little higher than what we are going to have. But being the first year that we paid, we didn’t want to pay under. We know we can always take the credit in the next quarter, which we’re going to have to pay anyway. So I would say it’s around $1 million still. David Fore – Montgomery Street Research: Okay. And the $1.5 million, that’s all with the Texas bill tax?

No, no, no, that’s our federal income tax. David Fore – Montgomery Street Research: I’m sorry. What would be the Texas bill tax? I mean –

The tax is now paid in little over $2 million. The legislator is going to meet in this session. Our sources tell us they are going to take this issue up. They are probably going to start to do a new bill. I know that the non-profit orgs are going to submit a bill through their representatives. Our organization is going to try to submit a bill as well that something we would like to see, something we think our industry can live with as well as they can live with to meet their funding needs and something that would be constitutional versus the $5 tax and the way it’s structured right now is unconstitutional. So we have hope. We’d like to see Rick’s as a company is asking at a minimum that all taxes that were paid – all taxpayers who had paid the tax be issued a credit, not all – not all the companies in close in the state have paid. We have. We’ve expensed that. I know that one of our competitors is not expensing that. They are actually taking that on the balance sheet as a credit, as money that’s going to be owed back to them. We did pay under protest. We filed our protest letters. We are hoping to resolve that before the – to do a full tax protest and be refunded a tax protest could take years. We are hoping that we can have come with a – the legislator will come up with something that works for everyone. And we can get rid of these lawsuits and get back to making money and running our business. Whenever that does happen, obviously since we’ve expensed all that money, we’ll have a credit come back. If you take that $2 million in credit to back in, it’s a very considerable percentage of our earnings per share. So you will see us putting out in the 10-K on how we are handling that. If you want detailed information, you can see exactly how we’ve expensed it, why we have expensed it, and what we intend to do should we prevail important and be issued the credit for a refund of that money. For refund of the money, we’ll probably take it all back in a single quarter. If we’re issued credit, we’re going to be looking at other ways of us incoming it in as we are able to recoup some future taxes. So it will be – I do believe there will be a future revenue that we basically have a $2 million savings account with the phase right now. So, as I look at it, we’re just waiting for confirmation of that from the state or from the lawyers or the judges. David Fore – Montgomery Street Research: Okay. And then another question, on the put option analysis in the 10-K, does the (inaudible) shares reflect any renegotiation so far? Would that be kind of all in --?

No, we have not – we’ve negotiated – we kind of signed the actual extension and deals because of Christmas. We’ve been little busy and it’s difficult to get hold a couple of the people. And since we’re asking for favors, obviously it’s too pushy. We kind of have to wait till we can get the agreements done. There are lawyers and whatnot that they were on vacation this week and last week. So I’m hoping that in early January, as we sign out agreements and we’ll probably do a press release and let the market know so that you can adjust your cash flow models. David Fore – Montgomery Street Research: Perfect. Thanks guys, appreciate it.

Thank you.

The next question is from Michael Philedano [ph] with Gilder, Gagnon, Howe. Please state your question. Michael Philedano – Gilder, Gagnon, Howe: Hey, guys. Couple of quick questions. CapEx requirement for next year without any acquisitions or anything, what were you guys kind of thinking?

That’s very minor. What have we already said this year? $1 million? It’s probably $100,000 or $200,000 a month max. I don’t think we spend much more than that. I mean, basically we have to replace some carpets and chairs. We did see some signs and some extra stuff in this year. I don’t see it’s doing a whole lot of extraordinary stuff in 2009. I think we’re going to try to write it out and be defensive. Obviously we repaid everything that needs repaired, our clubs in working order. But I don’t see it’s making any – we’re not going to do any additions like we did in last year at Fort Worth where we did a $400,000 add-on to the VIP rev and whatnot. I don’t think we have any of those plans at this time. We may do some stuff in Miami, a few hundred thousand to Miami, but that probably is about the only thing that I’m looking at at this point. Michael Philedano – Gilder, Gagnon, Howe: And you mentioned your market share in New York City. What is do you think your market share in New York City, I’m kind of curious?

Well, I don’t have – obviously other clubs' numbers aren't public. I can only go by rumors. But I think we are number two in the city right now. I think Hustler club outdoes us because of their weekend business. We are just not strong in the weekends. We are strong Tuesday, Wednesday, Thursday. They are strong Friday and Saturday. They do big business on Friday and Saturday – Thursday, Friday and Saturday. Everybody is pretty much busy on Thursday. I think we’ve taken the market share from the Penthouse Club there. And I think they are probably number three now. I know that before we opened, there were rumors where that they were doing about $20 million a year. Michael Philedano – Gilder, Gagnon, Howe: This is the Penthouse or Hustler?

Hustler – I mean, Penthouse, Penthouse. I believe Hustler is doing somewhere in the 22 to 25 range right now. We are probably – we’re getting close to the $15 million range. So we can start taking up that weekend business, which would help some of these billboards and some of our other marketing mix, marketing some of the other boroughs instead of just in the city. And what we’re going to see if we can build that weekend business up at Rick’s as well, we do have the deck. We open the outside deck. Of course, it’s wintertime, so I got a lot of used over right now. But as we get to the spring, we’ll have the outdoor smoking deck so you can drink and smoke, which is something very rare in New York City. You can do both at the same time unless we’re home. So we’re going to – we’re hoping that’s going to continue to build our business. And we believe we just have a – in New York City, we just have the greatest location in the city. They are at 3013 Broadway, such easy access to all the trains, it’s easy to get cabs, Penn stations is a block away, the garden, the Empire State building there. I do believe that we can grow that location. I used to think the $300,000 was the cap, but I think we can do $0.5 million if we get that location now. I really do. Michael Philedano – Gilder, Gagnon, Howe: And I guess one last question. All in, assuming the worst case scenario to put option, let’s – or given and take because stock equity goes to zero. What would be the – what would be your – how much in debt are you going to pay this coming year provided no renegotiations and worst case scenarios?

Well, $2.5 million on the put. You know what our other current portion of long-term debt? We have it right here, let me look. The current portion of long-term debt another $2.6 million. We will pay about $5.5 million of our debt off this year. Michael Philedano – Gilder, Gagnon, Howe: Okay. And that’s then so you have about that in cash, plus whatever your cash flow is this year is basically almost all --?

Exactly. There is no -- we did not have a liquidity problem. I have had people call and question, and I know there are rumors out there that we are going bankrupt. I mean, we make $7.6 million. I don’t think – if we were going to go bankrupt, we would have went bankrupt years ago when we were losing $3 million a year, not when we are making $7 million. From a cash standpoint, we are in a good position. From a liquidity standpoint, we are fine. We still have sources of credit available to us. I’ve talked to a lot of people. I just – I’m reluctant to borrow a bunch of money right now. I’m reluctant to do anything until we get to March. Michael Philedano – Gilder, Gagnon, Howe: I totally agree. So thank you very much.

It doesn’t make any sense in this environment not knowing what’s going to happen with the new President, what he is going to do, what the stimulus package is going to be. I mean, there is just so many unknowns at this time that I think the best thing we can do is hunker down, build up our cash, strengthen every market, any place we can get market share and build from our competitors to do that at this time. And I think that’s the smarter thing we do. Michael Philedano – Gilder, Gagnon, Howe: And the – sorry, actually about that, the hunkering down. I mean, it seems to me that one of the best uses of the excess cash would be buying back more shares. Is that – I mean, I know you have the authorization of $5 million, but I mean --?

We actually bought some stock at $5.95. We got stock about $5. I’d say we thought we bought 15,000 shares. I don’t have the exact – probably about a third at about $5. We probably bought a few shares between $4 and $5. But the majority of the stock I believe was bought under $4. When I see down there that cheap, it's so hard not to buy it, believe me. I come to feel like how much cash we got, what we’re going to do. All right, well, spend another $100,000 with the broker and let’s pick up some more stock. And that’s really what we’re going to do. We’re going to look at our cash. We’re going to see where we are at. We’re going to look at where our cash is coming. We have some cash burn out in January for our property taxes, but we got a bunch of cash kind of go out in January. We’ll probably send it about the 21st, do on the 31st. We’ll pay all of our property taxes, we’ll sit back and look at our cash. Basically this quarter income taxes are already paid due to the overpayment, we believe. So all in all, we should be in strong shape. And like I said, the stock base at these prices, yes, we’re going to buy it. I mean, what else would we buy? We’ll buy our own stock. We made $0.91 last year. So at 4.50, we’re paying five times. I just think that that’s cheaper than we're buying anything else out in the market right now. As far as other clubs, we know what our clubs are going to do and we also know that if we get rid of a couple of clubs that are losing money, yes, we would take a one-time hit – one-time hit to our income statement, but then our earnings would go up because we're currently funding that with our cash flow, so we’d increase our cash flow by getting rid of a couple of locations. It's something we're going to seriously look at as we get into March if we don’t see things getting better at some of those locations and we can’t reconcept or we don’t – we don’t have a plan for them. The plan is going to be to get rid of them. Michael Philedano – Gilder, Gagnon, Howe: Okay. Great, thank you so much.

Next question is from Larry Schumacher with Oppenheimer & Company. Please go ahead with your question. Larry Schumacher – Oppenheimer & Company: Hey, guys.

Hi, how are you doing? Larry Schumacher – Oppenheimer & Company: I’m great. Couple of questions. Is there – can you guys quantify the decline in like corporate business at the bigger clubs I guess? And totally unrelated, any issues with the economy and with the downturn of business, with the performers, the finding or having enough, or is it just quite plenty because of --?

They are more. Yes, we are actually getting a lot of applications. Larry Schumacher – Oppenheimer & Company: Can the girls still make enough money or --?

Yes, the girls – I mean, in some locations the girls are obviously – it just depends on the market and what grade of club it is. Christmas has been – Christmas has been pretty hard for some of the markets. The reports I'm getting from Miami are the girls are still doing great. New York, the girls are doing very well. It’s different. It’s different business. They are doing more $20 dances and less $400 an hour rooms. However, when I was up in New York before Christmas, I had a friend come to the club and say, hey -- come to me and say, hey, can you get me a room? I said, yes, sure, come on. But if I went to take to get him a room, there was an hour wait. And keep in mind we’ve added three more rooms. So we now have 13 – 16 rooms I believe or maybe – yes, 16 or 17 rooms in a location. I don’t know they turn the one into -- they were going to turn the one room into two, but I don’t know if they actually did it or if they left the one bigger room still. Off the top of my hand, I didn’t actually go into the room because they were all occupied the whole time I was at the club. Larry Schumacher – Oppenheimer & Company: The corporate business was more important?

Corporate business, it’s hard to explain what is really happening from the corporate business. Like I said, we are seeing – certain clubs are seeing more visits, more frequent visits. What we are seeing – we’re still seeing that same trend as before. The guy used to buy a $500,000 bottle of champagne buying a $200,000 bottle of champagne. The guy that is buying a bottle is buying his drinks by the glass. And the guy that was coming and buying four drinks is only buying three or two. But I think with gas prices coming down, I’m hoping that we’re going to see a little difference in that trend. It’s just really hard to tell right now. I just – I think the biggest problem and I find myself doing it as well, you’re cautious of every decision you are making when you are spending money right now. And I think that affects – I think that’s the biggest effect in Vegas. That’s why people aren’t in Vegas. They are not out there gambling and going crazy because they are just so cautious of every decision, every dollar they are spending they are cautious of and they are watching an eye on it more. So we are not getting the guys that come in and go crazy. They are very cautious of what they are doing. We still get the guys that are celebrating business transaction. There are still business transactions going down in New York City, believe it or not. We're getting those guys are coming celebrating in those transactions. In a market where cash is king, the guys with the cash who are out there making deals and making money and they're celebrating. They just -- they don't celebrate as crazy as the Wall Street broker or trader who makes a whole bunch of money trading stocks in one day. They're little more cautious. So it's just a different type of spending. We have to create more value for customer services much more important. And like I said we're seeing that flight to quality and just in the way people think. Larry Schumacher – Oppenheimer & Company: Thanks.

Next question is a follow-up from Eric Wold with Merriman Curhan Ford. Please go ahead with the question. Eric Wold – Merriman Curhan Ford: Hey, Eric. A follow-up question, kind of on the question I guess two ago talked about how you could eliminate or close some of these money losing clubs, obviously one-time hit and earnings would be better. I know you're not giving guidance for '09, but you're looking for net income obviously I guess net income to be higher in '09 than '08. Looking at the past few quarters that you talked, kind of maybe you can break down looking at Q4 how much of the EPS was losses from clubs, how much would you consider one-time kind of legal that maybe a quarter or so from now won't be there, kind of get us to what you're --?

We know it's 525,000 in the third quarter. We didn't really do a breakdown this quarter. We've been so busy with the auditors because this was a K. I mean, the audit and with all the Sarbanes-Oxley, because of our size we're clearly pushing on lot more compliant issues and getting everything compliant. So I didn't have time to have really get in, break that stuff down, but yes, it is something we can definitely do. Eric Wold – Merriman Curhan Ford: To get that about 91 or somewhere around there, you would have to get at least [ph] $0.07, $0.08 a quarter, one-time is your loss is related?

Right. I think it's possible. Like I said, I just haven't dug into it. I know the legal has been hell, I mean I've spent a lot of time reading depositions in Minnesota, the law firm in Minnesota has just been having a heyday, trying to -- I call a fishing expedition, because that's what they've been doing. They've been trying to get more and more information they don't really have any (inaudible) and saying we didn't pay minimum wage. Well, we have records through the IRS that we paid everybody minimum wage. So I just don't understand -- and they've got those records. So hope we get there, we will see these to an end here soon and at least a cost. I mean, I know the discovery process is over, so that's been the biggest cost. We do have the lawsuit in Minnesota – I mean, in New York, but it's a single -- they only have one defendant there. We're trying to get a class with one defendant. Our lawyers are optimistic and said hopefully that one will go away sooner than the Minnesota one did, but it's just hard to tell. I think that we are the -- we're the test case for them. They're going to try to beat Rick’s. If they can beat Rick’s, then they're going to try to go after the industry and go after this independent contractor status deal. I don't know how it's all going to work out, but it's crazy for us because in Minnesota they are suing us where they are and where the girls are employees, and then they are trying to sue us in New York because they aren't employees. So they are not happy with their employees, they're not happy if they are independent contractors. It's like basically what they're saying is one of the girls it's 3 o'clock. I don't know how we're going to deal with those issues. I mean, we'll try to work through them, but we're very confident. The attorneys on the case are very confident that our liability on it is very limited. Eric Wold – Merriman Curhan Ford: Let me ask this try to get in a conservative way. If you look at the legal side, what they conservatively --

(inaudible) million dollars less, more than a million – it feels like a little more than a million. So (inaudible) little more than a $1 million. We've made some major cuts there that are probably lower dose expenses by 600,000 already with reduction in rent and some of the other changes we made. So I mean Austin alone is going to be $500,000, $600,000 plus and losses I think -- the Philadelphia Club costs us money, but with the mid concept going, it's only been a few weeks, but we're getting very positive results, we just had a record Saturday night, Saturday after Christmas. It's really catching on. We've had a lot of major athletes in, in the past few weeks, record for Christmas and thereafter Christmas for a couple of parties. On a concept seems to be very well for us. We got the liquor license back in Dallas, which was just a total pain. We got a letter from the state saying we can operate for 60 days at the same time, but the license of the operating -- underlying license for that letter expired November 11, is that right? In November, sometime in November. So we were rather licensed for six weeks, because what happened is when the underlying license expires, then they said the letter is no good. We thought we knew the -- we want to renew the license then. We just paid the fee, it’s like $3,500. They said you can't renew the fee because you have a 60-day letter. You have to renew before you get the 60-day letter, because you can't renew a license it's been transferred. So basically they hold a quick one on us that's going to result, the license is issued, the club is open, it's doing very, very well. As you know, I mean that was probably one of the best acquisitions we made, $7.5 million for the location, for the club, and it’s doing -- it's back up to like 50,000, 70,000 during Christmas. So I think in January we will get those numbers back in to 100,000 a month range -- 100,000 a week range, what they were at. I mean that club is doing $5 million in revenues and we paid a $1.5 million for it. Eric Wold – Merriman Curhan Ford: Okay. One last final question, where – accounting-wise, where do the – when you make a payment to a cab driver, where does that going in the expense line?

I think we’re taking expenses right? We have it down here? (inaudible) You are probably in the K though. You gave us the – a very good question. I don’t know where that – Eric Wold – Merriman Curhan Ford: I thought advertising and marketing kicked up there and I always heard that goes in there, but --

Eric Wold – Merriman Curhan Ford: Thanks, Eric. Appreciate it.

You bet.

The next question is from Ross Haberman with Haberman Funds. Please state your question. Ross Haberman – Haberman Funds: Hi, Eric. How are you gentlemen? I got two quick questions. How much in operating income for the year did New York and Miami do in calendar and fiscal '08? Can you just break it down?

I think it's probably about 60% (inaudible). Ross Haberman – Haberman Funds: Yes, of the $13.7 million in total.

I don’t know. Probably about 60%. Ross Haberman – Haberman Funds: 60%? 60% of the 13.7. Okay.

I’m guessing. I don’t know, okay? I mean, I don’t have in front of me. I am just guessing that they are about 50% of revenues. So I am assuming they are a large portion of our income for sure. Ross Haberman – Haberman Funds: Okay. And let me just say, maybe I can ask in different way. How much did your losing locations lose in total for the fiscal ‘08 as in, I guess, in dollars?

I don’t have that in front of me. So I don’t know off the top of my head. I know that Austin was our biggest loser. I know it was a little over a million. We have a couple small clubs that are losing a couple of hundred thousand a year. Is that actual? Okay. It’s about 2.4 million total. Ross Haberman – Haberman Funds: 2.4 million total. So you are saying the income from operations would have been about 16.1 without those losses?

14.8. It's been 14.8 and 2.4, so 17.0 something. Yes, 17.3. Ross Haberman – Haberman Funds: Okay. Thank you, sir.

You bet.

The next question is from Reid Ellison with William D. Witter. Please state your question. Reid Ellison – William D. Witter: Going back a little bit to some of these underperforming clubs when you are saying they're losing, is that –are you talking about that on a cash flow basis or just on a GAAP basis?

It's more of a GAAP basis, but there is depreciation, that’s actually GAAP basis.

They are still losing money, yes.

Yes, they are still losing – yes, they are still losing money on a GAAP basis as well. But that GAAP, probably a little less under than -- obviously we don't -- there is non-cash expenses in there. Reid Ellison – William D. Witter: Certainly. I guess the reasons for the underperformance I guess is – I guess decreased top line over the last couple months then, right?

It’s decreased top line and – and just to make sense, they're just new clubs. I mean, new clubs are little fickle. When you are in this economy, it's been tough, because people don’t want to try new things. That’s what we are seeing out there. They are going to the clubs, they know. I mean, take our Philly location, facility-wise it is the absolute best location in Philadelphia. But the problem is the club, a lot of us has been there for 15 years and they are the known names and known quality clubs. And even though our facility is better, getting people believe what they already know and what they already expect has been very difficult. So we decided a free concept. We did the demographic studies in Philly and found that the African-American market is way underserved and we converted the club over and it’s doing fantastic. Reid Ellison – William D. Witter: Okay. And I guess if you are thinking about your total portfolio of night clubs, what number would you say are the number one in each location? I guess trying to think the number that might be sensitive to I guess –

Probably, Miami is our strongest location, New York is our second strongest location. After that, they should be number – actually Vegas was coming in higher than New York when we purchased it, but in the current market I don’t think it’s going to beat New York. I think we are going to -- we are going to struggle there for at least couple more months, and we could struggle through the summer. It’s just still hard to say when the Vegas market is going to come back. Fort Worth is very strong club for us. Charlotte and Minnesota are both good revenues. Minnesota doesn’t make the net income for the costs are little higher up there to operate. But in Austin, our Austin XTC location is one of our top income producers. I mean those are the big income producers, and the rest are kind of mediocre. They contribute our three or four locations that are really costing us money right now. Reid Ellison – William D. Witter: Okay. And then when talking about disposing those clubs, what do you think you could get for those locations on a more -- thinking about the most (inaudible) I guess --?

Yes, I mean, we didn’t get any of them multiple. I mean there is no multiple, there is no earnings. Basically what you would be doing on our business license, licensing business there, current leases, that type of stuff. We back [ph] around, we shopped around, we got the people interested. If we carry paper, we’ll get a much higher price. We demand cash. We get a lower price. It really depends on the buyer. We talked a couple of larger chains that might be interested in the Austin location. Fantastic facility. I think it’s just too early, if you got the wherewithal to sit there and lose money for another year or so. Building is – the economy had continued and the building had continued and they are building – basically they are building about 3.8 million in retail space right down the street from us. They are building 9,000 homes. Samsung just opened their new flat-panel television factory right there with 9,000 shops that they added. In the area right there where we are at is growing or was growing huge. And I think in the next year or so, it would have been great, I don’t know how long that build-out is going to be. There is still construction going on in Austin, driven by it, I've spent some time around there. But it’s much slower pace than it was a year ago. I don’t know I want to sit there and hold a location for three years unless we get there. We can open up eight hours a day or ten hours a day during the prime business night hours. We got the rent reduced and we can sit there and stop losing the money we are losing, get it to break even or much lower losses. Maybe we held on to it and that happens for another year or two. If we can’t, then we are going to have to look at other options. There are people out there still buying clubs. There is a lot of smaller operators that want to grow into bigger clubs. So I think they may trade up to couple of our locations if we finance for them. Those are the options. I mean, there is options out there that are just right now we are weighing what the best thing to do is. Reid Ellison – William D. Witter: Okay, perfect. And then, switching the topic a little bit towards your use of debt or just your use of cash in order to repaying debt or I guess repurchasing your stock, how do you think about that especially now with credit availability the way it is?

We are going to -- I mean our debt -- we are not in a hurry to pay out any debt. We paid off some converts, A, because one of them came due, but we paid it off. I’ve got some of that is about 7% to 9%. There is a 14% debt on Miami, but we can’t even pay it off. We are -- I think we can’t even make prepayment on that right now. So we are not real concerned about that. In fact, I have already talked to one of the principals there. They are trying to get extend the debt already. Are you sure you don’t want a couple more years? They love the interest payments they are making on it, where they going to invest right now and make that guaranteed interest. And while it’s not the best interest rate in the world, it’s definitely one that we can afford to pay out of that location. Reid Ellison – William D. Witter: Would you extend out at 14% if given the option?

Probably yes. If we need to – I mean, if we have the cash, we’ll pay it off. It just depends on what’s available to us at the time. Reid Ellison – William D. Witter: Okay.

I'm not -- I mean the 14% debt on that particular $10 million doesn't scare me at all. In fact, what we are able to do with that location was go and buy $8 million in EBITDA for $15 million and let them keep $1.4 million of it. And then return it into $11.5 million in EBITDA. So that location has been very good to us. Reid Ellison – William D. Witter: Okay. Perfect. And then if you are looking at – when you think a debt -- do you have specific net debt to EBITDA target?

I don't want to get over 2.5 to 1. If you look at where we are right now, we are probably with the put options, we are probably a little over that. We are just 1 to 3 I think. So I think we are still considering with our (inaudible) 34. Long-term debt, 30. We are 34 – we are about 32 million long-term debt, add another 13, it's 45 -- $14.8 million in operating cash flow. I mean I think we are – we are not in -- we are not pushing it I guess. And we can still, like I say, we can still negotiate on a lot of the put options. We can still negotiate the debt. Most of our debt is mortgage debt. We can go get new 30-year mortgage or new 20-year mortgages, then been lower our payments. Lot of our mortgages are still lower – less than a 10-years or 5 years; we have some other mortgages I think that's three years; three-year debt, we are making higher payments. I think the New York location gets paid off few more months too. I think our last payment in New York is in – should be in the next few months. If we exercise the put, there won't be the full time period. So we have a lot of cash there but we just paid off the first -- the second-lien on the San Antonio was paid off, that was a 30-some payment, that was recently paid off in the last quarter. So as we continue to move forward, we are going to try to take our debt and put it on those longest terms schedules as we can, get a much better interest rates than we did in the past – our last two (inaudible) were 7.5%. We got 300, that's -- we are paying 70. So we got -- so we only have to five more payments on the New York, 70,000 a month and that’s going to (inaudible), so in May, we have another 70,000 cash flow, that’s just been going out in the past and it's not going to go out for past debt. So if you can take that and put that over some of the put options, we are fine a liquidity standpoint, it's really a matter of how we want to manage our debt and manage the real estate. The other option we always have, if we need cash, we have cash -- we can obviously sell leaseback on our real estate. We have 15 million in net real estate equity. Our worst-case scenario for the company would be to sell that real estate and lease it back. Reid Ellison – William D. Witter: Okay. Perfect. Thank you very much.

Okay.

The next question is from Peter Mork [ph] with Mork [ph] Capital Management. Please state your question.

Hi, guys. Thanks for taking the call. Just look on when you are talking about net income being higher next year, does that include any acquisition?

No, absolutely not. Peter Mork – Mork Capital Management: Okay. So some of the current hold in short next couple of months, something second half of '09 you will be looking at?

I'm sorry, I for a second. Can you say the last part again? Peter Mork – Mork Capital Management: Yes, just I mean, when are the -- about the acquisition strategy. Is that – are these things you see happen in the second half of '09?

I don’t see anything happen before March I tell you that. I am not even looking at acquisitions right now. We are just – it something comes up and I get a feel he will revenue and yes, I am going to go look, unless it’s just something that almost too good to be true and then I check it out and maybe but I am trying to keep our cost down, our travel down right now. We are just tight enough for at least a next three months. I really thought that we will start seeing changes by the time in November, but not happened yet. We are going to sit back and when we see the economy starting to recover, we start seeing business pick up and then we get aggressive again. But I don’t think it makes a lot of sense for you to be really aggressive right now.

With the economy there are people looking at cash out, cash out?

I still get e-mail, I still get phone call from time to time guys that are saying "Would you be interested in buying?" We have got guys trying to buy out one of our New York Club; (inaudible) in the last three months. There is just talk out there that Rick's is so much (inaudible) people just didn’t understand the put, that's why we really tried to make sure that when this 10-K, that we explain those put; that people understand that 2.5 million this year is insignificant in the overall liquidity of the company. And hopefully that will squash all that -- all those rumors and all those questions that people have, so that they understand.

Alright.

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

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

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