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Long-term Debt

12 Months Ended

Sep. 30, 2012

Long-term Debt

Long-term debt consisted of:

		September 30,
(in thousands)		2012		2011

Notes payable at 9-11%, mature August 2015	*	$	1,551	$	1,703
Notes payable at 10%, mature December 2014 and January 2015	*		2,364		2,460
Note payable at 7%, matures October 2012, collateralized by assets of RCI Entertainment North Carolina, Inc.			-		61
Note payable at 7%, matures December 2019	*		261		288
Note payable at 7.25%, matures May 2013	*		1,169		1,432
Notes payable at 14%, mature September 30, 2020, collateralized by stocks of Miami Gardens Square One, Inc. and Stellar Management, Inc.			7,741		9,506
Note payable at 6.15%, matures February 2028, collateralized by an aircraft			-		1,408
Note payable at the greater of 2% above prime or 7.5%, (7.5% at September 30, 2012), matures April 2017	*		3,250		3,345
Note payable at the greater of 2% above prime or 7.5%, (7.5% at September 30, 2012), matures June 2017	*		3,901		4,019
Note payable at 8%, matures January 2022	*		3,343		-
Notes payable at 5.5%, matures January 2023			1,500		-
Notes payable at 5.5%, matures January 2023	*		6,500		-
8.15% note payable secured by aircraft, matures February 2017			2,680		-
Note payable at 7%, matures April 2025	*		1,981		2,076
Note payable at 6.3%, matures June 2030, collateralized by an aircraft			488		502
Notes payable at 4.75%-7.25%, mature December 2014 and September 2019	*		1,396		1,815
10% convertible debentures			2,653		6,189
Note payable at 9.5%, matures August 2024			22,000		-
Convertible note payable from a related party at 10%, matures August 1, 2014			750		750
Total debt			63,528		35,554

Less current portion			6,603		5,494

Total long-term debt		$	56,925	$	30,060

* Collateralized by real estate

Following is a summary of long-term debt at September 30:
(in thousands)
	2012		2011
Secured by real estate	$	25,716	$	17,138
Secured by stock in subsidiary		29,741		9,506
Other		8,071		8,910
	$	63,528	$	35,554

On October 12, 2007, the Company borrowed $1 million 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 was 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 was 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. The note was paid off during the year ended September 30, 2011.

On April 29, 2009, the Company entered into a modification to two secured promissory notes 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, Debt.

On September 30, 2010, the two secured promissory notes were modified again. Under the modified terms the promissory notes become 10 year amortized facilities that provides for equal monthly payments of $77,633 each and will be fully paid on September 30, 2020, rather than a balloon payment for the entire amount that would have been due on November 30, 2012. Interest on the modified note remains at 14 percent. The Company paid each holder $50,000 as consideration for entering into the extension. The $100,000 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, Debt.

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 million, which was paid $1.6 million in cash and $4.4 million through the issuance of a 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 note is payable in monthly installments of $34,999 until June 2017.

On August 6, 2009, the Company completed the sale of an aggregate of $7.2 million in 10% Convertible Debentures (the “2009 Debentures”) to certain accredited investors (the “Holders”). On April 16, 2010, the Company sent a Notice of Redemption to all of the Holders, thereby exercising its right to redeem all of the 2009 Debentures, including the entire outstanding principal amount of all the 2009 Debentures and any accrued but unpaid interest thereon. Upon receipt of such Notice of Redemption, all of the Holders exercised their right to convert the principal amount plus all accrued but unpaid interest thereon of the 2009 Debentures at the conversion price of $8.75 per share in lieu of receiving a cash payment (pursuant to the terms of the 2009 Debentures), effective as of May 3, 2010. Accordingly, on May 4, 2010, the Company issued an aggregate of 842,972 shares of its common stock to these Holders, in conversion of an aggregate of $7.2 million of outstanding principal and an aggregate of $176,000 of outstanding interest on such 2009 Debentures. As a result of this conversion, the Company made no cash payments to the Holders in connection with the Notice of Redemption. Concurrent with the retirement of the debt, the Company was required to write off, as interest expense, the unamortized portion of its related loan origination costs, amounting to $274,425.

In connection with the sale of the 2009 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 $8.75 conversion price for the 2009 Convertible Debentures was in excess of the market price at date of issuance of $8.09. The beneficial conversion was calculated by comparing the “effective conversion price” of the debenture to the actual stock price at the transaction date. The “effective conversion price” was calculated by dividing the fair value of the debt, after deducting the fair value of the debt discount due to the issuance of warrants with the debt in the amount of $539,178, by the convertible shares. The resulting $8.09 was equal to the stock price at the transaction date; therefore, there was no beneficial conversion feature.

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 years
Expected dividend yield	-
Risk free rates	1.62	%

The fair value of the warrants has been recognized as a discount to the debt and was being amortized as interest expense over the life of the debt. Upon conversion, the unamortized portion of the discount amounting to $404,383 was charged to additional paid-in capital.

In connection with the acquisition of Joy Club of Austin (now Rick’s Cabaret) in December 2009 (Note N), the Company assumed and entered into certain notes payable aggregating $2.5 million. These notes bear interest at rates ranging from 4.75% to 7.25% and are payable in monthly installments aggregating $42,461, including interest. The notes mature in December 2014 and September 2019.

In April 2010, the Company acquired the real estate for the club in Austin, Texas formerly known as Rick’s Cabaret, now operated as “The Mansion”. In connection with the purchase, the Company executed a note to the seller amounting to $2.2 million. The note is collateralized by the real estate and is payable in monthly installments through April 2025 of $19,774, including principal and interest at the prime rate plus 4.5% with a minimum rate of 7%. As of September 30, 2012, the effective rate was 7%.

In June 2010, the Company borrowed $518,192 from a lender. The funds were used to purchase an aircraft. The debt bears interest at 6.30% with monthly principal and interest payments of $3,803 beginning July 2010. The note matures in June 2030.

On June 25, 2010, the Company completed the sale of an aggregate of approximately $9.2 million in 10% Convertible Debentures (the “2010 Debentures”) to certain accredited investors (the “2010 Holders”). The 2010 Debentures bear interest at the rate of 10% per annum and mature on June 25, 2013. The 2010 Debentures are payable with one initial payment of interest only due December 26, 2010, and, thereafter in ten equal quarterly principal payments of $920,000 plus accrued interest thereon. At the option of the 2010 Holders, the principal amount of the 2010 Debentures and the accrued but unpaid interest thereon may be converted into shares of the Company’s common stock at $10.25 per share. The 2010 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 $13.47 per share. Considering the cost of the associated warrants and issue costs explained below, the effective interest rate on the 2010 Debentures is 13.1%.

In connection with the sale of the 2010 Debentures in June 2010, the Company also issued an aggregate of 179,513 warrants (the “Warrants”) to the 2010 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 2010 Debenture is convertible. The Warrants have an exercise price of $10.25 and expire on June 25, 2013. 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 $14.35.

The conversion price for the 2010 Convertible Debentures was determined by negotiation with the creditors. The $10.25 conversion price was in excess of the market price at date of issuance of $8.73. The beneficial conversion was calculated by comparing the “effective conversion price” of the debenture to the actual stock price at the transaction date. The “effective conversion price” was calculated by dividing the fair value of the debt, after deducting the fair value of the debt discount due to the issuance of warrants with the debt in the amount of $462,724, by the convertible shares. The resulting $9.74 was above the stock price at the transaction date; therefore, there was no beneficial conversion feature.

The fair value of the warrants was estimated to be $434,571 in accordance with FASB ASC 820, Fair Value Measurements, using a Black-Scholes option-pricing model using the following weighted average assumptions:

Volatility	68	%
Expected life	1.5 years
Expected dividend yield	-
Risk free rate	1.18	%

The cost of the warrants has been recognized as a discount on the related debt and will be amortized over the life of the debt. The remaining unamortized debt discount of $106,631 is included in current portion of long-term debt.

The proceeds from the sale of the 2010 Debentures and Warrants in June 2010 are intended to be utilized to make future acquisitions, and may be utilized for working capital and general corporate purposes.

An adviser to the Company received compensation in the amount of $460,000, which was capitalized as loan origination cost and will be amortized over the life of the debt, in connection with advising the Company regarding the June 2010 sale of the 2010 Debentures and Warrants. 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.

In August 2011, the Company borrowed $750,000 from an employee. The note bears interest at the rate of 10% per annum and matures on August 1, 2014. The note is payable with one initial payment of interest only due January 1, 2012, and, thereafter in ten interest-only quarterly payments. The principal is payable on August 1, 2014. At the option of the holder, the principal amount of the note and the accrued but unpaid interest thereon may be converted into shares of the Company’s common stock at $10.00 per share. The note is redeemable by the Company after six months at any time if the closing price of its common stock for 20 consecutive trading days is at least $13.00 per share.

On December 2, 2011, RCI Holdings entered into a Real Estate Sales Agreement with Bryan S. Foster, providing for RCI Holdings to purchase from Mr. Foster the real properties located at 12325 Calloway Cemetery Road, Fort Worth, Texas and 2151 Manana Drive, Dallas, Texas, for the aggregate purchase price of $5,500,000, including $2,000,000 cash and $3,500,000 in the form of an 8% promissory note that is payable over 10 years at $42,465 per month including interest. The Fort Worth property represents the land for Cabaret East, one of our clubs, and the Dallas property represents the land at another gentlemen’s club. This transaction closed on January 13, 2012.

In connection with the acquisition of Silver City in January 2012, the Company executed notes to the seller in the amount of $1.5 million. The notes are payable over eleven years at $12,256 per month including interest and have an adjustable interest rate of 5.5%. The rate adjusts to prime plus 2.5% in the 61^st month, not to exceed 9%. In the same transaction, the Company also acquired the related real estate and executed notes to the seller for $6.5 million. The notes are also payable over eleven years at $53,110 per month including interest and have the same adjustable interest rate of 5.5%.

In February 2012, the Company borrowed $2.7 million from a lender. The funds were used to purchase an aircraft. The debt bears interest at 8.15% with monthly principal and interest payments of $26,386 beginning March 2012. The note matures in February 2017.

As consideration for the purchase of the Foster Clubs (Note M), a subsidiary paid to the sellers at closing $3,500,000 cash and $22,000,000 pursuant to a secured promissory note (the “Club Note”). The Club Note bears interest at the rate of 9.5% per annum, is payable in 144 equal monthly installments of $256,602 per month and is secured by the assets purchased from the Companies.

Future maturities of long-term debt consist of the following: (in thousands)

2013	$	6,603
2014		5,909
2015		6,520
2016		4,252
2017		12,284
Thereafter		27,960
Total maturities of long-term debt, net of debt discount	$	63,528