Adult club owner: Purchase price based on ‘misleading’ information

By Steve Green

Monday, Nov. 1, 2010 | 1:50 a.m.

The Las Vegas topless dancing club at the center of Clark County's biggest political corruption scandal in memory is back in the news -- this time over charges the current owner was misled and overpaid for the club.

Rick's Cabaret International Inc., a publicly held topless club operator based in Houston, said in a Securities and Exchange Commission filing on Friday it would take an impairment charge of $20 million to $23 million in the fiscal fourth quarter ended Sept. 30, "primarily because of the poor performance of the Rick’s Cabaret Las Vegas nightclub, purchased in 2008."

In layman's terms, an impairment charge is a reduction in the value of an asset because it's producing less revenue or profit than expected.

The club is at 3355 Procyon Street, at Desert Inn Road and Valley View Boulevard west of the Las Vegas Strip.

Rick's purchased the club when it was known as Scores in September 2008 in a deal involving seller D.I. Food & Beverage of Las Vegas LLC and D.I. Food & Beverage owners Harold Danzig, Frank Lovaas and Dennis DeGori.

The deal was for $12 million plus a $3 million promissory note and 200,000 shares of Rick's stock.

Previously, Scores was known as Jaguars, which gained notoriety in May 2003 when it and other adult clubs owned by the Galardi family were raided by FBI agents in an investigation that later sent four then-current or former county commissioners to prison in an influence-peddling and bribery scandal orchestrated by adult business operator Michael Galardi.

Jaguars eventually closed before becoming Scores under the new ownership.

News of the impairment charge at Rick's Cabaret Las Vegas follows the Sept. 21 filing of a lawsuit against Rick's in federal court in Las Vegas by D.I. Food & Beverage charging breach of contract because Rick's had stopped paying on the $3 million note.

"Unfortunately, after taking over the operation of the business formerly known as 'Scores,' (Rick's subsidiary) RCI realized that certain information provided by DI Food during the due diligence period was not accurate. DI Food made numerous representations and warranties regarding the accuracy of the financial information provided to RCI concerning the business of 'Scores.' That information turned out to be inaccurate and misleading. Since RCI based its purchase price for the assets of DI Food on misleading financial information, RCI concluded that it overpaid for the assets of DI Food. Accordingly, Rick's stopped payment on the $3 million note," attorneys for Rick's said in an Oct. 15 response.

Attorneys for D.I. Food & Beverage haven't yet responded to that filing.