Allan Priaulx - Investor Relations Officer Eric S. Langan - Chairman, Chief Executive Officer, President and President of XTC Cabaret Inc

Eric M. Beder - Brean Capital LLC, Research Division

Greetings, and welcome to the Rick's Cabaret International Second Quarter 2013 earnings conference call and webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Allan Priaulx, Investor Relations Officer. Thank you, Mr. Priaulx, you may begin.

Thanks, Scott. Thank you. I just want to remind everybody that our Safe Harbor statement is posted at the beginning of our PowerPoint presentation. You can get to that through www.ricksinvestor.com. It's posted at the beginning. It reminds you that you may hear or see forward-looking statements that involve a number of risks and uncertainties. I won't go into the entire statement on this call, of course, but I do urge you to read it as well as the explanations of non-GAAP and adjusted EBITDA measurements that we use. They're included at the bottom of the PowerPoint. I would also like to remind you that our press release and the 10-Q for the quarter are posted on our website, www.ricksinvestor.com, as is the presentation itself. Finally, I'd like to invite everyone in the New York City area to stop by Rick’s Cabaret at 50 West 33rd Street this evening between 6 and 8 for our Due Diligence Ball. It's a great opportunity to visit with Eric and to get a behind-the-scenes look at our flagship club. Now it's my pleasure to present to you our President and CEO, Eric Langan. Eric? Eric S. Langan: Thanks, Allan. And thanks, everyone for taking the time this afternoon to call in and keep track of the company with us. We'll start with a quick conference overview. We're going to go over of the summary of the second quarter of 2013. I'll give you the status of our new projects, all of our new clubs, new operations that we've opened or that are going to be opening in a few months. We now have 37 locations operating, with 5 in the works. We're going to update you on the status of our REIT discussions and the things that we're finding out, what we're learning about that as well. And then look out -- go over our outlook for the remainder of 2013 and in the call, with the question-and-answer session at the end. Our consolidated revenues for the quarter were $28.7 million, up 13%. Our 6-month total now is up, a 17.9% growth for the 6 months. Obviously, our goal is 20% to 30%, so we're going to continue to work on that. Clubs acquired in the past 3 years or in the past year, the Jaguars acquisition contributed $3.7 million in revenues. Our income from operations on a non-GAAP basis were $7.5 million, on a GAAP basis, $6.2 million. I'll go into them later, why we are working on this non-GAAP versus GAAP as well. Our net income, non-GAAP $0.39 and GAAP income, $0.29, with operating margins for the quarter of 21.5%. Adjusted EBITDA was $7.5 million and our cash flow from operations for the 6 months was $10.9 million. Another metric that we're starting to watch closely due to our debt and concern from some shareholders on the debt ratio is our interest rent combined expense and its percentage of revenues which is currently 8.2% of total revenues. We've also completed our stock buyback in this quarter and also subsequently, the Board approved an additional $3 million for our stock buyback. Our long-term debt is $75 million, of which $35.9 million is real estate. And I know the number sounds very large to a lot of people but when you look at our past, and you look at the amount of debt that we carry versus the amount of EBITDA that we had and the amount of assets we had under management, basically our total assets is about $215 million now and $75 million of debt where we used to have $35 million or $36 million in debt with $100 million under of our total assets. So we've increased our assets a lot as we've increased our debt and we've also increased our EBITDA. Our interest expense for the quarter was $1.8 million or 6.1% of revenues. Again, we look at that, the majority of that interest expense, as basically the rent and that we own about 85% to 90% of our real estate. Additional principal payments have been reduced on the 14% Tootsies debt and have now got that debt down to $6.6 million. And we continue, when we have the extra cash, to make additional principal payments on that debt to continue to lower that. We've secured $18 million in real estate financing on the New York property that will be non-dilutive. It will be straight debt, it will be a not -- not a convertible and not convertible into equity. I know that's been a concern for a lot of us on exactly how we were going to fund that debt financing and that there was going to be some dilution from that. There should be no dilution from the financing on that we have -- now that we have the $18 million in financing set up. We should hopefully close on that in June. Progress on our new projects. The Bombshells opened February 26 in Dallas and it's exceeding our expectations. We're very, very happy with the opening there. I -- in fact, I spent about 9 days in a row there from about 10:00 in the morning until 03:00 in the morning, really refining a few things. Very excited about the prospects of that. We're going to look for additional locations where we can open these as we continue to refine the concept and we do believe that we'll do begin a lot of growth from that concept. Construction is near complete in Los Angeles County and we expect to open the Vivid Cabaret there in June. Ricky Bobby Sports Saloon in Fort Worth will open in July. It's another restaurant live music venue concept that we're creating. And we're very excited about the prospects there. The construction is just about complete. All the furniture should be in early June and we're going to set up and hope to open by July 10. And then do a grand opening weekend, that following weekend. Our Beaumont and Odessa clubs, we're working on the Beaumont clubs under construction. We expect that to -- construction to be completed here in the next week or so. We're waiting for a liquor license to be issued in that -- at that location. It was the former Jaguars location. We moved the Jaguars into a different property and are going to reopen this Beaumont location as Temptations with Liquor. Expect that to open probably in July as well. And the Odessa club, we have -- the liquor permit is issued because of the very difficult and expensive and for construction right now, we have the crew is doing the Beaumont location for us. When they complete there, are probably going to go to Odessa and build that location out for us and hope to have that opened by the end of the summer. And the construction is proceeding on the Vivid Cabaret in New York, all the structural has been started, the permits are issued and we expect to open that sometime in October. And we're very excited about the additional New York City location as we believe it will bring lots of revenue and of course the Super Bowl is in New York next February which we believe will be a big boost for both the New York clubs at that time. Looking forward, we're going to continue to evaluate non-adult concepts like Bombshells and Ricky Bobby Sports Saloon when we get that opened. And for future growth, we're also seeking existing clubs for acquisition on favorable terms. And we may consider doing additional greenfields because the long-term profitability is so much higher on them. While they do hurt our short-term earnings, like in this quarter, approximately $300,000 for the startup of Vee and Bombshells and an additional $160,000 in expenses for the other projects that we have under construction like rents and stuff that, under GAAP, we must expense out. And our REIT exploration continues. And we are -- the board is reviewing some stuff from our bankers and some other stuff from -- and some taxing stuff and how we're qualified -- the qualification stuff we have to meet. And of course, the expenses to actually take the real estate and get it on to a single subsidiary and roll that subsidiary into another publicly traded company. Our plans, if we do this, is not to lose control of our real estate or sell the real estate to anyone else. What we would do is create a separate publicly traded company that we would roll into and dividend those shares of the new company to our existing shareholders so that all of our existing holders would participate in the REIT in an equal -- to their holdings in the current company. The reason we're doing this is the real estate really holds back due to the depreciation and amortization expenses of the real estate and the cost of real estate slows the operating company's growth. We think that that would help. And we also believe in the tax advantages in that in order to return cash to shareholders. We believe that a REIT is the best way to do that from a tax advantage and avoid double taxation. In enhancing our shareholder value, obviously, we've completed the stock buyback purchasing 756,087 shares at an average price of $6.61. As I was saying, the REIT allows us a cash -- a tax advantage to return cash to shareholders. And another thing we're going to be doing here for the next -- for the rest of the year, the company is going to be presenting at several important investor conferences throughout the rest of the year to get out there and tell our story and try to bring more exposure to the company. On the outlook, we're focused on achieving our 20% to 30% growth. As I said, we're at 17.9% so far this year. We're going to continue to leverage our strong cash flow and favorable debt to EBITDA ratios. Based on the $14.9 million in EBITDA for the 6 months, basically we're on about a $30 million EBITDA run rate with $75 million of debt. So we're about 2.5x EBITDA including our real estate. So typically I think we're safe as long as we're at 3x or less. So we still have some additional -- a debt load that we could carry easily with our current cash flow. We're going to continue to explore the best use of our real estate holdings to maximize shareholder values. In addition to looking at our REIT, we're also looking at a strategic rollup of this real estate into a -- instead of multiple loans, a single loan, with a discount interest rate. The biggest problem we have when we go for individual loans is that we're a single tenant operator and so what we figured, we can take 20 -- or 25 of our operations into a single entity and borrow the money on that. But it's more -- we should be able to get rates similar to a shopping mall because even though these properties are single tenant, the overall loan will be 20, 25 tenants. So we're exploring that right now as a way to not only lower our interest expenses, but also to be able to maybe pull equity out of our real estate to enhance our growth. We're very excited about all the growth, especially the new locations. And very excited about getting the L.A. property opened next month and getting the New York property built out. At this time, I'll end the formal presentation and take any questions anyone may have.

[Operator Instructions] Our first question is coming from the line of Mr. Eric Beder with Brean Capital. Eric M. Beder - Brean Capital LLC, Research Division: Could you talk a little bit about the difference in returns between a greenfield and an acquisition? That's something that you always have talked very heavily about buying companies and how should we think about that? Eric S. Langan: Well, it's obviously, it's difficult in a greenfield to know exactly what we're going to be getting, but it's definitely a cheaper avenue. For example, we would take the New York location that's under construction right now. We estimate the cost to build out will be something worth around $3 million to $4 million and $3 million for the purchase of the license and whatnot. So we're going to have about $6.4 million into that location at the end of the day. If it contributes half of what our current New York location does, we'll be looking at about $3 million to $3.5 million in EBITDA from that location. So basically, it's less than a 2x transaction. And if it contributes what the New York does, it'll be less than 1x. Typically on our acquisitions, we're paying close to 3x. We would prefer, obviously, to do acquisitions if our stock is trading at a higher even multiple than we're able to buy stuff for. But we've been having a tough time finding the right locations at the right times to continue and have a steady growth. So to acquisitions alone, what you're seeing, is big growth and then a low of no growth and then a big growth and a low no growth. So what we're hoping to do between the greenfield-ing, between the new concepts that we're doing and acquisitions, is to having a much steadier growth cycle for the next 3 years. Eric M. Beder - Brean Capital LLC, Research Division: Oh, I see. So it kind of smoothes it out for you? Eric S. Langan: That's what we're hoping to see. Obviously, we're in the beginning stages of it but we're seeing the ramp up now. We did have, in the last quarter, only 13% growth but we had some major issues that we're affected in, that we had no Super Bowl in our city. The Super Bowl typically adds about $500,000 in additional income, if it's in our host city, if hosted in a city that we have clubs in. So that was a big deal. And then of course you had the -- the Big East Conference this year wasn't as big in New York so -- and there was no hockey games so the Garden was a little off this quarter. We're seeing in April, of course, a huge return with the Rangers in the playoffs and the Knicks in the playoffs in May here so we're seeing some really nice numbers out of New York this quarter, I think. So we're very excited. The other thing that was affected, speaking of New York, the labor law suit of course, the final motions and everything were filed with the courts by mid-April. And so our legal will be considerably less in the current quarter than it was in the past quarter. Eric M. Beder - Brean Capital LLC, Research Division: Okay. And strategically, the Los Angeles club is your first club in California -- it's actually if I guessed, the first club you've had in the West. How should we think about that in terms of ground for places for acquisitions or for expansion there? Eric S. Langan: I think once we get into that market, like everywhere else, we start hearing about new opportunities. We find more opportunities in those markets because we have soldiers on the grounds, so to speak, that hear about these opportunities as they come up. So I would expect that once we get a foothold in the marketplace that we'll continue to expand and grow in that marketplace. Eric M. Beder - Brean Capital LLC, Research Division: Okay. And on the acquisition front, how is it looking in terms of deal flow and should we be expecting basically multi -- by multi-owner, multi-clubs as opposed to singles from now on? Eric S. Langan: I think I'm seeing a little bit of both still. I mean, we're still getting a lot of calls on some single up locations due to the fact that we're working on the financing for New York and it was such a large amount of money that we we're going to have to raise or get a mortgage for. That has been our focus. And now that that's behind us, I think you'll see us get a lot more active. We're pretty much lined out with the new clubs that were coming online with the constructions. We've signed a deal so it's not a lot of work other than just making sure people are doing what they're supposed to do to complete the construction and get those locations opened. So as far as my time is concerned, I think I'll have a lot more of my time to be out looking at some of the new acquisitions. And I think our plan is to try to find a couple more that we can do by the end of the year.

Our next question is coming from the line of Mr. Earl Hasser [ph] with Triangle Capital.

I wanted to expand a little bit -- find out just a little bit more about your thought process on contributing your real estate to the REIT and splitting out the REIT shares? Trying to get a handle on how big something like that could be and how big you thought a REIT should be if it's going to trade successfully and not have to have a yield that's super high because it's very [indiscernible]? Eric S. Langan: Right. Well, obviously our idea, and of course, this is -- we're exploring this. None of this is together yet. We don't even know for sure the legalities of all of it. We're in the process so far. We haven't run into anything that stops us from doing what we're planning to do but it will develop as we go. But our plan is to obviously take all the real estate, spin it off into a separate publicly traded REIT to our existing shareholders to transfer it through a master lease a percentage of income from the parent company into the REIT that would -- of course, REITS require 90% distribution, so we would then distribute that without paying a corporate income tax on the dividend, thus, avoiding the double taxation. So that's our plan. How we will do that is basically take the land company and move it. It'll be a stock transfer where we contribute the stock from our land subsidiaries. So all our land is currently owned by several subsidiaries. And it would be moved into that parent that would do. Then the REIT, of course, would also be able to raise capital, be able to fund and buy other adult club operators' real estate, or make acquisitions of their real estate, allowing them to tap into their equity, which they can't really do right now because there's really no lenders for adult entertainment right now, specialty single tenant buildings. So when you combine single tenant and adult, it basically becomes impossible to find conventional financing. So the REIT can then turn around and purchase real estate, give them long-term leases to operate their clubs in their existing real estate and let them basically cash out. And they can do shares if they wanted to do a stock, they could always take some cash, sos stock, they could still have some voting pay-in in the REIT on a go forward basis. And we figured that while the majority, the management or ownership of the REIT will basically stay in the same control as the operating company, the active investors will have different goals that some will be looking for the growth of the operating company and some will be looking for the income of the REITS. So the shareholders -- the overall shareholder base will change over time.

And do you have any idea on the sort of initial size of the REIT going out? Eric S. Langan: Well, with the purchase of the New York property, when we closed on the New York property, we're going to be just under $100 million in total marketable real estate that the company owns. So to start with I guess it will be around that size.

[Operator Instructions] At this time, there are no further questions. I would like to turn the floor back over to management for any -- I'm sorry, we do have a question that just queued up. Our next question will be from Jeff Flanery [ph], a private investor. Ladies and gentlemen, my apologies. It appears that Mr. Flanery [ph] has put us on hold. With that there are no further questions at this time and I will turn the floor back to management for closing remarks.

All right. Well thank you very much everyone for attending our conference call. As always, if you have any further questions, you are welcome to e-mail me or Eric. I can be reached at ir@ricks.com or Allan, A-L-L-A-N at ricks.com. And we'll try to answer any questions that you have promptly. If you are in the New York City area, we definitely invite you to attend our Due Diligence Ball this evening. It's always a lot of fun and it gives you a chance to see our club in action, see our cash management systems, our financial controls and of course, have an opportunity to chat with Eric. So without any further ado, I guess since there are no further questions, we'll thank you for attending our conference call and invite you to be in touch with us as you will.

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