WWW- Her body (naked except for the itsy-bitsy area covered by a black thong) was all natural, and the long tan stretch of her was grinding and pumping on a small stage in a Bourbon Street club, her streaked hair whipping her shoulders. At times she fell on her flat, tattooed belly, writhing and arching. Other times she dropped to her haunches to brush the stage with that thong. It was enough to make a blind man spill his coffee-but way short of what it takes to distract the editor of Corporate Board Member from his appointed rounds. I was there to get the scoop on how corporate reforms have affected Rick’s Cabaret International Inc., a publicly traded chain of 10 topless clubs and an operator of various adult websites; to learn what its board members tell their families about the nature of the business; and to discover how the company keeps organized crime from muscling in.
My host this late afternoon in New Orleans was Robert Watters, 54, co-founder, board member, and former chairman and CEO of Rick’s. He was happy to address all these questions. So was Eric S. Langan, 37, who took over the two top jobs from Watters in 1999. Both say the Sarbanes-Oxley Act and other corporate reforms are a financial burden for a company the size of Rick’s. Last year, according to Langan, the company spent $350,000 on compliance (“accounting, lawyers, etc.”)-a lot for an outfit that earned $800,000 on revenues of $16 million over the same period. Still, at least he sees an upside: “The cost of reform is my motivation to get bigger.
It forces us to expand.”
Forget any embarrassment about the industry. Both men, in fact, have put relatives on the payroll. Langan brought in his mom, a librarian, “to help sort out the books,” and Watters signed up his mother-in-law as CFO. Langan’s father, a former Peoria, Illinois, cop who went on to form his own construction company in Texas, has helped build a couple of the clubs. And Watters also once hired his oldest son, Nick, a 19-year-old college student at the time, as an assistant manager. That didn’t work out, thanks to the aggressive courting habits of certain co-workers. “Sexual harassment works in the opposite direction in this industry,” says Watters. “Managers can’t afford to stand still for a second. I had to fire him.”
As for the Mafia muscling in, Langan asks, “Why would they? We’re a credit-card business, so there’s no cash and no opportunity to launder money. Besides, we’re under constant supervision by the authorities. We may be the most watched-over business in the country.” Watters isn’t so categorical, even hinting at failed attempts by criminals to get a piece of the company in its earlier years: “I mean, they clearly have tried.”
Watters and Langan came to the topless business by very different paths. Watters, the son of a Canadian diplomat for the United Nations, was a tax lawyer at Deloitte & Touche in Houston back in 1993 when a client, an Arab oil trader, “went belly-up. For better cash flow, he said he wanted to convert a disco he owned into a topless club and wanted me as a partner. I agreed, but I have to say, I was shocked. I didn’t set foot in the place for a year.”
Langan showed no such early resistance. Four years earlier, at the age of 20, he had entered the industry with the same gusto he’d applied to collecting baseball cards as a teenager. He had a girlfriend who worked as a dancer at a club, and he noticed how much money her boss-“a complete idiot,” in his opinion-was pulling in. Langan sold his baseball cards for about $40,000 and used the money to reopen a closed-down topless club in Fort Worth, Texas. The neighbors didn’t like the club, or even his efforts to improve it. He was arrested 13 times for zoning violations. With a “silent partner,” he says, he moved to Arlington, Texas, home of the baseball Rangers, and opened a more upscale place. By the end of 1993, the silent partner had moved on and Langan was running clubs in Houston, Austin, and San Antonio. He called his company Taurus, and the clubs XTC.
Langan was a hands-on CEO from the start, a habit that has stuck. A recent Saturday found him painting a new club in Charlotte, North Carolina, the same rich maroon as its sibling establishments. He gets the paint from Home Depot. Watters, on the other hand, remained at arm’s length all that first year. But then he began to stop by the club and saw with a sense of awe that “people were actually having fun,” something rarely said of those patronizing a tax lawyer. He decided to quit Deloitte and turn full time to his new calling. After years of dispensing advice, he says, he now had a chance to play an active role in something, and he threw himself into it. “I basically lived in the club,” he recalls. “I was in the kitchen. Behind the bar. At the door. Learning all I could.”
He learned a lot-not least that behind the scenes, selling fun was all business, and that business in that particular club could be done a lot better. For example, “even though the place was really popular-there were lines outside with people waiting to get in-we didn’t have a cover charge.” More critically, “there were the dancers and how they were compensated. They had to pay commissions at the end of their shifts to just about everybody in the club-the managers, the bartenders, the DJs, the kitchen help, and the host mother.” The last, he explains, is someone who “helps the dancers with their hair, sews on buttons.” [What buttons? -Ed.] “This left the dancers feeling they worked for all those people rather than the club,” Watters says. “We had lost the ability to control their behavior.” The “we” at this point included Watters, the oil trader, and a Cajun businessman, but Watters was running the operation.
He changed the dancers’ compensation system to one that remains more or less in effect today at all Rick’s establishments. Dancers pay the club a “user fee” that varies according to the shifts they work. For slower periods-the eight hours that start at 10 a.m., say-it’s $12. Late at night it’s $57, even though shifts are often shorter. They keep 100% of the tips they make for dancing, plus the whole $20 they get for a lap dance. Langan notes that the Consumer Price Index has had no effect on the price of lap dances over the years: “It was $20 in the ’80s, and it’s $20 today.”
It is said that dancers can make hundreds, if not thousands, a night. It’s a commonplace that some use the money to pay their way through college. A few find rich husbands at the clubs; most famously, Anna Nicole Smith met her billionaire husband while she was a Rick’s dancer. And though most of the women may well spend what they make as it comes in and move on to more mundane careers once the flesh sags, Watters says one dancer managed to save $1 million in five years. She walked into his office one day to announce (a) that she had met her savings target and (b) that she was quitting. Watters hasn’t seen her since.
Probably few dancers make anything like that much, let alone save it. Some doubtless use their earnings to support various addictions, including men. Not that different a mix from your average graduating college class, in fact. Prostitution, though, is something else. Rick’s has strict bans against hanky-panky inside the clubs, but little control over what the dancers do once their shifts are over and they leave the premises.
The name Rick’s, incidentally, isn’t a nod to Eric Langan but dates from when that first disco was undergoing its transformation to a topless club. The original plan had been to call it Lipstick. Then a cab drew up one day, the rear window rolled down, and the passenger, seriously overserved, stuck out his head.
“You open for bishnish?”
“Does it look like we’re open?”
“Ish thish Ricksh?”
It washn’t, but when Watters heard about the brief exchange, Rick’s didn’t seem such a bad name (shades of Casablanca), and the three partners went for it.
They wanted to expand and agreed that acquisition was the way to go. They bought a club in Miami and then turned their eyes to another in New Orleans. Paying for this growth meant raising more money than they could rake together themselves. Their regular customers offered one source of capital, and several had already volunteered to put up cash. But Watters was wary of such investors. For one thing, they weren’t always his favorite customers anyway, and they included hard-drinking lawyers and dentists. “Then there were the plastic surgeons who drank till two in the morning and then rushed for early-morning surgery,” he recalls.
So the three opted to take their company public, and did so in 1995. More than 80 brokers showed up for the road show, and the issue was “significantly oversubscribed,” Watters says. The shares opened at $3 and quickly rose to $5 as 2,400 investors climbed aboard. The IPO raised $5 million. Watters’s two partners left to run similar clubs, something only one of them did successfully (the Cajun). Watters, now chairman and CEO of a public company, found “local businessmen I trusted” to serve as board members.
Expansion by acquisition proved a tougher challenge than expected, however. Many candidates looked like a good fit at first. But “clubs tend to be family-owned,” says Watters. (That’s “family” as in the Smiths, not “Family” as in the Sopranos.) “They have murky bookkeeping, and the promise of a fairness audit proved enough to kill most deals before they ever really got started. A lot of places just can’t take an audit.”
Still, expand by acquisition Rick’s did. In 1998 it bought Langan’s Taurus company and its three XTC clubs in an all-stock deal valued at $2 million. According to Watters, a big reason to buy Taurus was to secure Langan as his eventual successor. Langan tells a different story. He took payment in stock, he says, at a time when the shares were worth $5.25 each. Then they fell to 60 cents. With a partner, “I bought all I could,” he says, “and ended up owning more than Robert Watters.” And thus, he says, he became CEO.
With the change, the directors who had served under Watters stepped down, and Watters himself moved on to operate just the New Orleans club, something he does under license. His CFO is still his wife’s mother, but it’s not the same wife and not the same mother-in-law. Langan was anxious for Watters to remain on the board as an independent member, though. “I value his opinions. He has a vast understanding of the industry and its psychology,” Langan says. Watters consented, and the two remain “tremendously close,” says Langan. “We talk all the time.” Travis Reese, 35, a onetime pilot for Continental Airlines who oversees the Rick’s Web businesses, is an inside board member. Langan invited two Houston businessmen to join Watters as outside directors: Alan Bergstrom, 58, an investment consultant, and Steven L. Jenkins, 48, an accountant.
The directors of Rick’s aren’t getting rich off their service. Their only compensation is options on 5,000 shares a year-valuable when the share price is climbing, less so when it isn’t. As the chart on this page shows, the stock has provided something of a bump-and-grind ride over the past five years, though it has outperformed the NASDAQ, where it trades. There’s not only no cash comp, no board-meeting fees, and no committee fees but also no directors’ and officers’ insurance. That in particular, Langan admits, tends to drain some of the fun out of taking risks.
So why did Bergstrom and Jenkins sign on? Bergstrom isn’t forthcoming. “I’m not interested in participating,” he says. “Talk to the other directors.”
Jenkins, on the other hand, is affable. “One of my clients was a shareholder in a similar sort of club in Houston that Rick’s acquired with stock,” he says by way of explaining his involvement. “He was offered a board seat but asked if I could have it instead. As a CPA, I’m better at numbers.” Jenkins says his wife and various family members are aware of his connection with an adult-theme corporation and are happy with it. “They know it’s a business decision,” he adds. He says that threats from organized crime aren’t something he has ever heard discussed at board level.
What the board has discussed includes diversification into related adult businesses. Among them: an online swingers’ club, used mainly by married couples in the Houston area who find one another online and couple later. It’s thriving, says Langan, largely because the business model is so sound. Not only does each new brace of subscribers goose revenues by $9.95 a month, but their arrival swells the site’s population (it recently topped 8,000) and clinches its marketable image as a hot place to meet the like-minded. NaughtyBids.com, meanwhile, offers nine auction sites for assorted adult material, such as videos and clothing, and makes a profit. Other ventures haven’t done so well. An online gay portal failed to catch on and closed, as did a second topless club at the “wrong” end of Bourbon Street. Langan quotes Ray Kroc, who once said he wasn’t selling hamburgers but investing in real estate. It’s the same with his industry, he says, whether the location is bricks and mortar or the ether.
The entry of Rick’s into midtown Manhattan is the company’s biggest real estate bet yet. In January the company paid $7.6 million-most of it borrowed-for a 20-year lease on the premises formerly occupied by the Paradise, a rundown topless establishment with a jungle theme close to the Empire State Building, a block from Madison Square Garden, and a not-inconvenient four blocks from the New York offices of Corporate Board Member. Rick’s is spending an additional $1.6 million to gut the place, renovate and paint it (rich maroon, of course), and turn it into the kind of club that delivers on the company’s promise of “an upscale experience.” This includes a bar, a restaurant, and dancers who will not only dance but also stop by to introduce themselves without immediately asking for money. The New York expansion took a big bite out of profits, which fell to $56,000 in the six months that ended June 30, down from $608,000 for the same period last year.
Rick’s has several competitors in New York, some of which also serve food. Former mayor Rudolph Giuliani’s famous cleanup may have made Times Square safe for Disney, but the city still has zones where Larry Flynt’s Hustler Club, the Penthouse Executive Club, and Scores, among others, may plug their wanton wares. The Rick’s folk see themselves as more upscale than any of their rivals.
But they seem to save their greatest scorn for Hustler, which also has a place on Bourbon Street, and disparage such downscale experiences as Amateur Nite, a Hustler signature feature, as raunchy and tasteless.
For their part, the clubs already doing business in New York don’t think much of the newcomer’s chances of success. “The market is already saturated. It will be hard for them to find a niche,” says Mark J. Alonzo, a lawyer who represents Ten’s World-Class Cabaret. Nor are all these competitors as free of Mafia interference as Langan says Rick’s will be. Herb Hadad, a spokesman for the U.S. attorney’s office in Manhattan, says Scores was the victim in an extortion case involving John Gotti Jr. If New York’s feisty tabloids are to be believed, the Mafia has also owned various other clubs.
Meanwhile, back at the raunch, Hustler’s marketing director, Steve Karel, takes exception to the way Rick’s characterizes his establishments. “We’re as upscale as anybody,” he insists. The Hustler clubs actually have little to do with Larry Flynt. His company licenses the Hustler name to the privately held Deja Vu Club Group, the topless industry’s market leader with some 110 clubs-90 of them Deja Vus, the rest Hustlers.
But big doesn’t necessarily mean best, even in a business where silicone is rife. Rick’s has its own reasons for optimism. A CEO who picks up a paintbrush surely has investor interests at heart. Besides, Texans associated with controversial causes are enjoying success in other walks of U.S. life.