10-K 1 d71477e10vk.htm FORM 10-K e10vk
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
     
(Mark One):    
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2009
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission File Number: 001-32208
 
VCG HOLDING CORP.
(Exact Name of Registrant as Specified in its Charter)
 
     
Colorado
  84-1157022
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
390 Union Boulevard, Suite 540, Lakewood, CO
(Address of principal executive offices)
  80228
(Zip Code)
 
Registrant’s telephone number, including area code:
(303) 934-2424
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class:
 
Name of Each Exchange on Which Registered:
 
Common Stock, $.0001 par value
  The NASDAQ Global Market
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by a check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405) of this chapter) during the preceding 12 months (or for such shorter period)  Yes o     No þ
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer o
  Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller Reporting company þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
The aggregate market value of the voting common equity held by non-affiliates of the registrant as of the last business day of the second fiscal quarter, June 30, 2009, was $25,955,857 (computed by reference to the average sale price as reported on the NASDAQ Global Market). As of March 12, 2010, there were 17,310,723 shares of the registrant’s Common Stock, par value of $.0001 per share, outstanding.
 


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VCG HOLDING CORP.
 
FORM 10-K
 
TABLE OF CONTENTS
 
             
  Business.     1  
  Risk Factors.     8  
  Unresolved Staff Comments.     18  
  Properties.     18  
  Legal Proceedings.     22  
  (Removed and Reserved)     26  
 
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.     26  
  Selected Financial Data.     27  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations.     28  
  Quantitative and Qualitative Disclosures About Market Risk.     39  
  Financial Statements and Supplementary Data.     40  
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.     71  
  Controls and Procedures.     71  
  Other Information.     71  
 
  Directors, Executive Officers and Corporate Governance.     72  
  Executive Compensation.     77  
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.     82  
  Certain Relationships and Related Transactions and Director Independence.     85  
  Principal Accountant Fees and Services.     90  
 
  Exhibits and Financial Statement Schedules.     91  
SIGNATURES     98  


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PART I
 
Forward-Looking Statement Disclaimer
 
In this report, references to “VCG Holding Corp,” “VCG”, the “Company,” “we,” “us,” and “our” refer to VCG Holding Corp. and its subsidiaries.
 
This Annual Report on Form 10-K contains certain forward-looking statements and, for this purpose, any statements contained herein that are not statements of historical fact are intended to be “forward-looking statements” with the meaning of the Private Securities Litigation Reform Act of 1995. Without limiting the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “estimate,” “continue,” or comparable terminology, are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include, but are not limited, to, costs and liabilities associated with the proposed going private transaction and associated litigation and the proposed merger transaction, our inability to retain employees and members of management due to uncertainty about our future direction due to the proposed merger transaction, costs and liabilities associated with our inability to successfully close the proposed merger transaction or any other similar transaction, the possibility that we may be prohibited from closing the proposed merger transaction or forced to rescind it if it has been consummated and pay damages as a result of litigation, diversion of management’s attention caused by the proposed merger transaction and associated litigation, our limited operating history making our future operating results difficult to predict, the availability of, and costs associated with, potential sources of financing, disruptions in the credit markets, economic conditions generally and in the geographical markets in which we may participate, our inability to manage growth, difficulties associated with integrating acquired businesses into our operations, geographic market concentration, legislation and government regulations affecting us and our industry, competition within our industry, our failure to promote our brands, our failure to protect our brands, the loss of senior management and key personnel, potential conflicts of interest between us and Troy Lowrie, our Chairman of the Board and Chief Executive Officer (“CEO”), our failure to comply with licensing requirements applicable to our business, liability from unsanctioned, unlawful conduct at our nightclubs, the negative perception of our industry, the failure of our business strategy to generate sufficient revenues, liability from uninsured risks or risks not covered by insurance proceeds, claims for indemnification from officers and Directors, deterrence of a change of control because of our ability to issue securities or from the severance payment terms of certain employment agreements with senior management, our failure to meet the NASDAQ continued listing requirements, the failure of securities analysts to cover our common stock, our failure to comply with securities laws when issuing securities, our common stock being a penny stock, our intention not to pay dividends on our common stock, our future issuance of common stock depressing the sale price of our common stock or diluting existing stockholders, the limited trading market for, and volatile price of, our common stock, and our inability to comply with rules and regulations applicable to public companies.
 
We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made and are based on certain assumptions and expectations which may or may not be valid or actually occur and which involve various risks and uncertainties.
 
Unless otherwise required by applicable law, we do not undertake, and specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.
 
Item 1.   Business
 
General Information
 
Our Company was incorporated under the laws of the State of Colorado in 1998, but did not begin its operations until April 2002. The Company, through its subsidiaries, owns 20 adult nightclubs that offer quality live adult entertainment, restaurant and bar operations. Our nightclubs are located in Colorado, California, Florida, Illinois, Indiana, Kentucky, Minnesota, North Carolina, Maine, and Texas.


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We believe maximum profitability and sustained growth in the industry is obtained by owning and operating upscale adult nightclubs. Our current strategy is to acquire upscale adult nightclubs in areas that are not market saturated and where the public is open to these types of establishments. Another part of our growth strategy is to achieve nightclub “clustering.” Adult nightclubs tend to group together in their respective markets. We believe that clustering our nightclubs leads to improved brand recognition, as well as some improvement in economies of scale as costs of marketing are spread over more nightclubs. Clustering also provides the Company with the ability to disperse management expertise to more locations under their responsibility.
 
Business
 
We operate the following nightclubs:
 
         
Name of Club
  Date Acquired   Club Type
 
PT’s® Showclub in Indianapolis, Indiana
  2002   B
PT’s® Brooklyn in Brooklyn, Illinois
  2002   B
PT’s® All Nude in Denver, Colorado
  2004   C
The Penthouse Club® in Glendale, Colorado
  2004   A
Diamond Cabaret® in Denver, Colorado
  2004   A
PT’s® Appaloosa in Colorado Springs, Colorado
  October 2006   B
PT’s® Showclub in Denver, Colorado
  December 2006   B
PT’s® Showclub in Louisville, Kentucky
  January 2007   B
Roxy’s in Brooklyn, Illinois
  February 2007   B
PT’s® Showclub in Centreville, Illinois
  February 2007   B
PT’s® Sports Cabaret in Sauget, Illinois
  March 2007   B
The Penthouse Club® in Sauget, Illinois
  March 2007   A
The Men’s Club® in Raleigh, North Carolina
  April 2007   A
Schiek’s Palace Royale in Minneapolis, Minnesota
  May 2007   A
PT’s® Showclub in Portland, Maine
  September 2007   B
Jaguar’s Gold Club in Ft. Worth, Texas (“Golden”)
  September 2007   C
PT’s® Showclub in Hialeah, Florida
  October 2007   B
La Boheme Gentlemen’s Club in Denver, Colorado
  December 2007   B
Jaguar’s Gold Club in Dallas, Texas (“Manana”)
  April 2008   C
Imperial Showgirls Gentlemen’s Club in Anaheim, California
  July 2008   C
 
The Company classifies its clubs into three tiers called A, B, and C clubs. Type “A” club characteristics include larger facilities with a variety of entertainment and performers. “A” clubs include a restaurant with an onsite chef preparer. Furthermore, “A” type clubs offer high-label cigars, VIP facilities, and specialty suites. Type “B” clubs have smaller facilities. Food service is limited or not provided, but the facility serves alcohol. These clubs are a topless format. Type “C” clubs do not provide alcoholic beverages, except for Texas locations that follow the “Bring Your Own Bottle” (“B.Y.O.B”) format. These clubs are “all-nude.”
 
The Company owns International Entertainment Consultants, Inc. (“IEC”), which provides management services to our clubs. IEC was originally formed in 1980. At the time of acquisition in October 2003, IEC was owned by Troy Lowrie, our Chairman of the Board and CEO.
 
The day-to-day management of our clubs is conducted through IEC. IEC provides the clubs with management and supervisory personnel to oversee operations, hires and contracts all operating personnel, establishes club policies and procedures, handles compliance monitoring, purchasing, accounting and other administrative services, and prepares financial and operating reports, and income tax returns. IEC charges the clubs a management fee based on the Company’s common expenses that are incurred in maintaining these functions.
 
In June 2002, the Company formed VCG Real Estate Holdings, Inc. (“VCG-RE”), a wholly owned subsidiary that currently owns the land and buildings of two of our nightclubs. On July 31, 2009, VCG-RE sold another piece


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of the real property located in Phoenix, Arizona to Black Canyon Highway LLC, a Texas limited liability company. As of December 31, 2009, VCG-RE owns both the real property on which PT’s® Showclub in Indianapolis, IN and PT’s® Brooklyn in Brooklyn, IL are located.
 
The Company has one reportable segment. Our clubs are distinguished by the following features:
 
  •  Facilities — Our club facilities are within ready access to the principal business, tourist and/or commercial districts in the metropolitan areas in which they are located. The facilities have state of the art sound systems, lighting and professional stage design. Our clubs maintain an upscale level of décor and furnishings to create a professional appearance. Three of our clubs offer VIP rooms. Our VIP rooms are open to individuals who purchase annual memberships. They offer a higher level of service and are elegantly appointed and spacious.
 
  •  Professional On-Site Management — Our clubs are managed by persons who are experienced in the restaurant and/or hospitality industry. The managers for the clubs are responsible for maintaining a quality and professionally run club. At a higher level, our Area Directors oversee the management of several clubs within a specified geographical area. The Company currently has 12 Area Directors who have collectively 18 to 26 years of experience in the industry.
 
  •  Food and Beverage Operations — Many of our clubs offer a first-class bar and food service. Five of our clubs offer a full service restaurant that provides customers with exceptional food, service and luxury. At most locations, we provide a selective variety of food including, but not limited to, hot and cold appetizers, pizza, and other limited food choices. Some of our club operations do not have liquor licenses. Those of our clubs that carry B.Y.O.B. permits sell non-alcoholic beverages. Experienced chef and bar managers are responsible for training, supervising, staffing, and operating the food and beverage operations at each club.
 
  •  Entertainment — Our clubs provide a high standard of attractive, talented, and courteous female and male performers and servers. We maintain the highest standards for appearance, attitude, demeanor, dress, and personality. The entertainment encourages repeat visits and increases the average length of a patron’s stay. Performers who work at our clubs are experienced entertainers.
 
Working Capital
 
We have historically reported negative working capital, where current liabilities exceed current assets. This is consistent with other businesses in our industry who report a working capital deficit, which increases net cash provided by operating activities. This is because we receive immediate cash payment for sales, while inventories, accrued expenses, and other current liabilities normally carry longer payment terms.
 
Advertising and Promotion
 
Our ability to attract patrons to a nightclub for the first time is critical to a nightclub’s success. Promotions, advertising, and special offers are the typical means to market a nightclub. We use a variety of highly targeted methods to reach our customers including local radio, billboard trucks, internet, newspaper and magazine ads, and professional sporting events.
 
We extensively utilize a marketing program developed by IEC. Our nightclubs are marketed as a safe and upscale environment for adult entertainment. The marketing strategy is to attract new customers, increase the frequency of visits by existing customers, and establish a higher level of name recognition. The target market is the business-convention traveler, local professionals, and business people. In addition, IEC conducts various promotional activities throughout the year to keep the nightclubs’ names before the public. In order to be good corporate citizens, the nightclubs actively sponsor and participate in local charitable events and make contributions to local charities.
 
Compliance Policies and Controls
 
IEC has developed comprehensive policies aimed at ensuring that the operation of each nightclub is conducted in conformance with local, state, and federal laws and they are designed to assure our clients a quality and enjoyable experience. We have a “no tolerance” policy on illegal drug use in or around the facilities. We continually monitor the actions of entertainers, employees, and customers to ensure that proper behavior standards are met.


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We believe that operational and accounting controls are essential to the successful operation of a cash intensive nightclub and bar business. IEC has also developed and implemented internal operating and accounting controls to track cash, credit card transactions, and food and beverage inventory. We have installed an Aloha point of sale system, including restaurant fraud tracking software, in all our clubs. These controls also help to maintain the accuracy of our operating and accounting records. IEC has developed other special software programs to capture operating information and generate reports for efficient management and control of the nightclubs. We review all revenue information on a daily basis by club.
 
Patents, Trademarks, Licenses and Royalty Agreements
 
Under the terms of a 2005 Licensing Agreement and in consideration of royalty payments to General Media Communications, Inc., Penthouse granted us a five-year non-exclusive license, renewable in five years, for the use of the registered trademarks “Penthouse”, “Pet of the Month”, “Pet of the Year”, “Three-Key Logo” and “One-Key Logo” in our nightclub operations in Denver, Colorado and St. Louis, Illinois. The royalty payments are based on a percentage of revenue. We also have permission to use the name “Jaguar’s Gold Club” for our nightclubs located in Dallas and Ft. Worth, Texas without a fee.
 
The “Diamond Cabaret®” name and “PT’s®” name and logo are trademarks registered with the U.S. Patent and Trademark Office. We have an indefinite license from Club Licensing, LLC, which is controlled and majority-owned by Troy Lowrie, who is a significant stockholder and our Chairman of the Board and CEO, to use the “PT’s®” trademark for a fee. Roxy’s is a service mark registered with the state of Illinois also owned by Club Licensing, LLC. The fee was established in 2006 and approved by the independent members of our Board of Directors (“Board”). The licensing fee amount has not changed for several years. The Men’s Club® has a annually renewable license from the Texas Richmond Corporation.
 
Some of our nightclubs operate under owned trade names as opposed to licensed registered trademarks. The Company has three nightclubs that own trade names, which are used to market the nightclubs, set forth in the table below.
 
     
Club Ownership
 
Trade Name
 
Classic Affairs, Inc.    Schieks Palace Royale
VCG-IS, LLC   Imperial Showgirls Gentlemen’s Club
Stout Restaurant Concepts, Inc.    La Boheme Gentlemen’s Cabaret
 
The Company does not pay royalties for the use of the owned trade names on its own products and services. The trade names are valuable in the operation of the nightclubs and their dealings with customers. We have valued the three trade names using the “income approach”. The income approach is based on the premise that free cash flow is a more valid criterion for measuring value than “book” or accounting profits. The after-tax nightclub free cash flows were discounted back to their net present value at an appropriate intangible rate of return to estimate the fair value of the trade names. All trade names have indefinite lives based on management’s expectations that we will continue using the trade names in the future.
 
Our nightclubs hold several licenses (including liquor, dance, and cabaret licenses) that are essential to the operation of our business. Dance or cabaret licenses are not salable, yet they can be transferred if a nightclub is transferred with approval. We estimated the fair value of cabaret licenses by using a variation of the income approach called the excess earnings method. This approach measures the present worth and anticipated future benefits of the license. The appropriate expenses were deducted from the sales attributable to the licenses and economic rents were charged for the use of other contributory assets. Economic rents are charges in the form of an expense to account for the assets’ reliance on other tangible and intangible assets in order to generate sales. The nightclub after-tax cash flows attributable to the assets were discounted back to their net present value at an appropriate intangible asset rate of return and summed to indicate a value for the licenses. All licenses have indefinite lives based on management’s expectations that we will continue using the licenses in the future.
 
Seasonality
 
We do not consider our business to be seasonal; however, severe winter weather can limit customers from visiting our nightclubs.


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Customers
 
The business of the Company taken as a whole, or any individual club, is not dependent upon any single customer or a few customers.
 
Competition
 
The adult nightclub entertainment business is highly competitive with respect to price, location and quality of the facility, entertainment, service, and food and beverages. Due to the highly fragmented nature of the adult nightclub industry, exact industry details are sparse about the actual number of operating nightclubs in the United States. However, various sources state that there are approximately 3,000 to 4,000 adult nightclubs in the United States with no clear industry leader. We have many competitors in the metropolitan areas in which we are located and/or intend to expand. Our current nightclubs compete with locally owned nightclub owners. Three of our locations compete with nightclubs owned by Rick’s Cabaret International, Inc. (“Ricks”). Changes in customer preferences, economic conditions, demographic trends, and the location, number of, and quality of competing nightclubs could adversely affect our business, as could a shortage of experienced local management and hourly employees. We believe that our nightclubs enjoy a high level of repeat business and customer loyalty due to our upscale restaurant atmosphere, food quality, premium entertainment, perceived price-value relationship, and efficient service. Although we believe that we are well positioned to compete successfully, there can be no assurance that we will be able to maintain our high level of name recognition and prestige within the marketplace.
 
Government Regulations
 
Our business is regulated by zoning, local and state liquor licensing, and local ordinances. Also, we are subject to state and federal time, place, and manner free speech restrictions. In the states in which we currently operate, state liquor licenses renew annually and are considered to be a “privileged” license that could be subject to suspension or revocation. The adult entertainment provided by our nightclubs has elements of free speech and expression and therefore, has some protection under the First Amendment to the U.S. Constitution. However, the protection is limited to expression, and not conduct. In addition to various regulatory requirements affecting the sale of alcoholic beverages in many cities where we operate, the location of a topless cabaret is subject to restriction by city ordinance. These ordinances affect the locations in which sexually oriented businesses may be operated by typically requiring minimum distances to schools, churches, and other sexually oriented businesses and containing restrictions based on the percentage of residences within the immediate vicinity of the sexually oriented business. The granting of a sexually oriented business permit is not subject to discretion; such a business permit must be granted if the proposed operation satisfies the requirements of the applicable ordinance.
 
In all states where we operate, management believes that we comply with applicable laws, regulations, and ordinances governing the sale of alcohol and the operation of sexually oriented businesses. While our nightclubs are generally well established in their respective markets, there can be no assurance that local, state, and/or federal licensing and other regulations will permit our nightclubs to remain in operation or be profitable in the future.
 
Employees and Independent Contractors
 
As of March 11, 2010, we had approximately 925 employees, of which 135 were full-time management employees including corporate and administrative operations, and approximately 790 who were engaged in entertainment, food, and beverage service, including bartenders and waitresses. None of our employees are represented by a union nor have we ever suffered a work stoppage. Our entertainers in Minneapolis, Minnesota act as commissioned employees. As of March 11, 2010, we had independent contractor relationships with approximately 2,000 entertainers in other states, who are self-employed and perform at our locations on a non-exclusive basis. Independent contractors/entertainers pay a fee to the nightclub to perform.
 
Potential Sale of the Company
 
As previously reported on the Company’s Current Reports on Form 8-K (filed with the Securities and Exchange Commission (“SEC”) on November 4, 2009, November 19, 2009, November 25, 2009, December 7, 2009 and December 17, 2009), on November 3, 2009, the Company received a non-binding letter of intent (the


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“Proposal”) from the Company’s Chairman and CEO, Troy Lowrie, Lowrie Management, LLLP, an entity controlled by Mr. Lowrie, and certain other unidentified investors (collectively, the “Lowrie Investors”), to acquire all of the outstanding common stock of the Company for $2.10 per share in cash (the “Going Private Transaction”). The Proposal contemplated that the Company would no longer be a public reporting or trading company following the closing of the Going Private Transaction. In response to the Proposal, the Board formed a Special Committee consisting solely of directors who are independent under the NASDAQ Global Market (“NASDAQ”) independence rules to review and evaluate the Proposal. The Special Committee was formed in order to properly and fairly represent the best interests of the Company’s shareholders in a full and diligent evaluation of the Proposal and any alternatives thereto in order to maximize shareholder value. The members of the Special Committee are George Sawicki, Kenton Sieckman and Carolyn Romero. The Special Committee retained a financial advisor and independent legal counsel to assist the Special Committee in its evaluation of the Proposal and alternatives thereto. On December 16, 2009, the Special Committee informed the Lowrie Investors that it had determined, with input from its advisors, that the terms of the Proposal were currently inadequate, and the Special Committee directed its financial advisors to contact any parties that had either previously expressed an interest or might potentially be interested in pursuing a transaction with the Company.
 
In connection with the Proposal, the Company has been served with three complaints (the “Complaints”) filed by various plaintiffs, alleging that they bring purported derivative and class action lawsuits against the Company and each of the individual members of the Board on behalf of themselves and all others similarly situated and derivatively on behalf of the Company, which previously have been reported in the Company’s Current Reports on Form 8-K (filed with the SEC on November 19, 2009, November 24, 2009 and December 7, 2009). The Complaints allege, among other things, that the consideration in the Proposal is inadequate, that Mr. Lowrie has conflicts of interest with respect to the Proposal and that in connection with the Board’s evaluation of the Proposal, the individual defendants have breached their fiduciary duties under Colorado law. The Complaints seek, among other things, certification of the individual plaintiffs as a class representative, either an injunction enjoining the defendants from consummating or closing the Going Private Transaction, or if the Going Private Transaction is consummated, rescission of the Going Private Transaction, an injunction directing the Board members to comply with their fiduciary duties, an award of damages in an amount to be determined at trial, an accounting to the Plaintiffs and the class for alleged damages suffered or to be suffered based on the conduct described in the Complaint, an award of reasonable attorneys’ and experts’ fees, and such other relief the court deems just and proper. As of the date hereof, the Company believes that the allegations set forth in the Complaints are baseless and the Company intends to vigorously defend itself in the lawsuits.
 
As reported on the Company’s Current Report on Form 8-K filed with the SEC on February 17, 2010, the Company, Rick’s, Mr. Lowrie, and Lowrie Management, LLLP (collectively with Mr. Lowrie, “Lowrie”), entered into a non-binding (except as to certain provisions, including exclusivity and confidentiality) letter of intent (the “Letter of Intent”). Pursuant to the Letter of Intent, Rick’s agreed to acquire all of the outstanding shares of common stock of the Company and the Company will merge with and into Rick’s or a wholly-owned subsidiary of Rick’s (the “Merger”). In the event the Merger is consummated, the Company will become a subsidiary of Rick’s and the Company’s shareholders will become shareholders of Rick’s. The parties intend that the Merger will be structured to qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as amended.
 
Pursuant to the Letter of Intent, the Company’s shareholders will receive shares of common stock of Rick’s in exchange for their shares of the Company’s common stock based on an exchange ratio that values each share of the Company’s common stock between $2.20 and $3.80 per share. The applicable exchange ratio will be determined based on the weighted average closing price of Rick’s common stock on NASDAQ for the 20 consecutive trading days ending on the second trading day prior to the closing of the Merger. In the event the price per share of Rick’s common stock as determined by this formula is below $8.00, Rick’s may terminate the Merger agreement, subject to the payment to the Company of a termination fee to be negotiated by the parties in connection with the preparation of the Merger agreement. As of February 16, 2010 (assuming the Merger were to close on such date and the weighted average closing price per share of Rick’s common stock for the 20 consecutive trading days ending on February 11, 2010 was equal to the closing price of Rick’s common stock on February 11, 2010 of $11.76 per share), the value of each share of the Company’s common stock under this formula would be $2.66 per share.


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Contemporaneously with the closing of the Merger, Rick’s has agreed to acquire 5,770,197 shares of the Company’s common stock held by Lowrie and its affiliates (the “Lowrie Common Stock”) for cash in an amount equal to the lesser of $2.44 per share or the per share value of the common stock received by the Company’s shareholders in the Merger. At Lowrie’s election, Lowrie may receive Rick’s common stock, at the same exchange ratio received by the Company’s shareholders in the Merger, for up to 30% of the Lowrie Common Stock. In addition, Mr. Lowrie will (i) refinance (at a lower interest rate) and continue to carry a $5.7 million note from the Company (as acquired by Rick’s), (ii) continue to personally guarantee certain Company obligations in exchange for a to-be-determined fair market value cash payment for such guarantees, (iii) sell to Rick’s the outstanding capital stock of Club Licensing, Inc., a wholly-owned subsidiary of Lowrie Management, LLLP that owns the trademarks “Diamond Cabaret” and “PT’s,” (the “Trademarks”), and (iv) enter into a three-year consulting agreement with Rick’s (collectively, the “Lowrie Transactions”). In exchange for the Lowrie Transactions, Lowrie will receive the following: (a) a to-be-determined amount equal to the fair market value of the restructuring of the $5.7 million note and continued personal guarantees (currently estimated to be $2 million); (b) a to-be-determined amount equal to the fair market value of the Trademarks (currently estimated to be $5 million); and (c) payment of $1.0 million over three years and a monthly expense allowance equal to $1,500 under the consulting agreement. Assuming Lowrie elects to be paid solely in cash at a price of $2.44 per share of the Company’s common stock and the fair market value of the Lowrie Transactions is as set forth above (totaling $7.0 million), Lowrie will receive aggregate payments of approximately $26.8 million (which amount includes the restructuring of the existing $5.7 million note held by Mr. Lowrie and excludes payments under the consulting agreement) in connection with the Merger, of which approximately $16.8 million will be payable in cash at the closing of the Merger and $10.0 million will be payable pursuant to a four-year promissory note from Rick’s bearing interest at 8.0% per annum.
 
The Letter of Intent provided for a binding exclusivity period through March 12, 2010, which the parties have extended to March 31, 2010, during which time the Company has agreed, on behalf of itself and its representatives, to negotiate exclusively with Rick’s and has further agreed not to solicit any offer or engage in any negotiations other than with Rick’s for the merger, sale of the business or assets of the Company or tender or exchange offer for the Company’s common stock. In the event the Company receives an unsolicited offer that is superior to the terms of the Merger (a “Superior Proposal”) and Rick’s does not amend its offer within five business days of the date on which it receives notice of such Superior Proposal to be superior to the Superior Proposal, then the Company may terminate the Letter of Intent. If the Company terminates the Letter of Intent due to its receipt of a Superior Proposal, it has agreed to reimburse Rick’s for its out-of-pocket expenses and fees incurred in evaluating and negotiating the Merger in an amount not to exceed $250,000 in the aggregate. If a definitive Merger agreement is not entered into by March 31, 2010, the Letter of Intent will automatically terminate, unless further extended by the parties.
 
The Merger agreement is expected to contain customary representations and warranties including the absence of a material adverse change in the business of Rick’s and the Company prior to closing and other customary closing conditions, including but not limited to, the receipt of material consents, the approval of the Merger by the shareholders of Rick’s and the Company and the effectiveness of a registration statement containing a joint proxy statement/prospectus filed with the SEC on Form S-4 to be filed by Rick’s, which, among other things, registers the shares of common stock to be issued to the Company’s shareholders in the Merger. There can be no assurance that the Company, Rick’s and Lowrie will enter into a definitive Merger agreement, that the entry into a definitive Merger agreement, if any, will result in the closing of any transaction or that the terms of any definitive Merger documents will reflect the terms of the proposed Merger as outlined in the Letter of Intent. See the discussion under the heading, “Risk Factors.”
 
Available Information
 
The Company’s website is www.vcgh.com. The Company’s periodic reports and all amendments to those reports required to be filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 are available free of charge through its website. The Company will continue to post its periodic reports on Form 10-K and Form 10-Q and its current reports on Form 8-K and any amendments to those documents to our website as soon as reasonably practicable after those reports are filed with, or furnished to, the SEC. Material contained on the Company’s website is not incorporated by reference into this Report on Form 10-K.


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Item 1A.   Risk Factors
 
Our business prospects are subject to various risks and uncertainties that impact our business. You should carefully consider the following discussion of risks, and the other information provided in this Annual Report on Form 10-K. The risks described below are not the only ones we face. Additional risks that are presently unknown to us or that we currently deem immaterial may also impact our business.
 
The process of negotiating and consummating the proposed merger transaction or any other transaction, as well as the failure to successfully consummate such a transaction, could adversely affect our business.
 
The process of analyzing, negotiating, documenting, and consummating (in each case, as necessary) the proposed merger or any other transaction resulting from the processes conducted by the legal and financial advisors to the Special Committee of our Board could cause disruptions in our business, which could have an adverse effect on our financial results. Among other things, uncertainty as to whether the proposed merger or any alternative transaction will be completed may cause current and prospective employees and members of management to become uncertain about their future roles with the Company if the transaction is completed. This uncertainty could adversely affect our ability to retain employees, members of management, and our relationships with customers and vendors. In addition, despite the fact that a Special Committee has been formed to manage and oversee any transaction and the Special Committee is being advised by outside professionals, the attention of management and other resources may be directed toward a potential transaction and diverted from day-to-day operations. Further, the costs associated with these processes are expected to be considerable, regardless of whether any transaction is approved or consummated. There is no assurance that the proposed merger or any other transaction will occur. If the proposed merger or any other transaction is not completed, the share price of our common stock may change to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed. Finally, a failed transaction may result in negative publicity and/or a negative impression of us in the investment community. All of the foregoing could materially adversely affect our business, results of operations and financial condition.
 
We are subject to litigation related to the proposed going private transaction, which could affect our ability to consummate a transaction, force us to rescind a transaction if it is consummated before the conclusion of the litigation or otherwise adversely affect our business or stock price.
 
As previously disclosed in Current Reports on Form 8-K and Item 3 of this Annual Report, four complaints have been filed relating to the original going private transaction. The defendants in these lawsuits include varying combinations of the Company, the members of the Company’s Board, and Troy Lowrie, the Company’s Chairman and CEO. Among other things, the complaints seek to enjoin the Company, its directors, and certain of its officers from consummating the proposed going private transaction. The going private transaction offer made by Troy Lowrie was deemed inadequate by the Special Committee of the Board on December 16, 2009. On February 16, 2010, the Company signed a letter of intent to merge operations with Rick’s Cabaret International, Inc. as a wholly-owned subsidiary. Additional lawsuits pertaining to the proposed merger transaction could be filed in the future or the existing lawsuits could affect the proposed merger transaction.
 
If successful, the results of any lawsuits could be that the Company could be prohibited from consummating a proposed transaction, or, if it has been consummated, the Company could be forced to rescind it. The Company could also be required to pay damages to the plaintiffs. Any conclusion of these lawsuits or any other in a manner adverse to the Company could have a material adverse effect on the Company’s business, results of operations, financial condition, and cash flow. In addition, the cost to the Company of defending these or any other lawsuits, even if resolved in the Company’s favor, could be substantial. Such lawsuits could also substantially divert the attention of the Company’s management and other resources.
 
We have had limited operations which makes our future operating results difficult to predict.
 
Our Company was incorporated under the laws of the State of Colorado in 1998, but did not begin its operations until April 2002. The Company through its subsidiaries currently owns (in total or in partnerships) and operates 20 adult nightclubs that offer quality live adult entertainment, restaurant, and bar operations.


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We have a limited operating history and face the risk and uncertainties of other early-stage companies. Because of our limited operating history, we may not be able to correctly estimate our future operating expenses, which could lead to cash shortfalls. Our budgeted expense levels are based in part on our expectations concerning future revenues. We may be unable to adjust our operations in a timely manner to compensate for any unexpected shortfall in revenues. Accordingly, a significant shortfall in demand for our services would decrease our revenues and could have an immediate and material adverse effect on our business, results of operations, and financial condition. To the extent that expenses precede or are not rapidly followed by increased revenue, our business, results of operations, and financial condition may be materially adversely affected.
 
Our inability to obtain capital, use internally generated cash, or use our securities or debt to finance future expansion efforts could impair the growth and expansion of our business.
 
Reliance on internally generated cash or debt to finance our operations or complete business expansion efforts could substantially limit our operational and financial flexibility. The extent to which we will be able or willing to issue securities to consummate expansions will depend on the market value of our securities from time to time and the willingness of potential investors, sellers, or business partners to accept it as full or partial payment. Using securities for this purpose also may result in significant dilution to our then existing stockholders. To the extent that we are unable to use securities to make future expansions, our ability to grow through expansions may be limited by the extent to which we are able to raise capital for this purpose through debt or equity financings. Raising external capital in the form of debt could require periodic interest payments that could hinder our financial flexibility in the future. No assurance can be given that we will be able to obtain the necessary capital to finance a successful expansion program or our other cash needs. If we are unable to obtain additional capital on acceptable terms, we may be required to reduce the scope of any expansion. In addition to requiring funding for expansions, we may need additional funds to implement our internal growth and operating strategies or to finance other aspects of our operations. Our failure to (a) obtain additional capital on acceptable terms, (b) use internally generated cash or debt to complete expansions because it significantly limits our operational or financial flexibility, or (c) use securities to make future expansions may hinder our ability to actively pursue any expansion program we may decide to implement. In addition, if we are unable to obtain necessary capital going forward, our ability to continue as a going concern would be negatively impacted.
 
Our business has been, and may continue to be, adversely affected by disruptions in the credit markets, including reduced access to credit and higher costs of obtaining credit.
 
Widening credit spreads, as well as significant declines in the availability of credit, have adversely affected our ability to borrow on a secured and unsecured basis and may continue to do so. Disruptions in the credit markets may make it harder and more expensive to obtain funding for our businesses. We often rely on access to the secured and unsecured credit markets to finance acquisitions of additional nightclubs. Additional nightclub acquisitions are also financed by promissory notes carried by the sellers and debt financed by company investors and related parties. If our available funding is limited or we are forced to fund our operations at a higher cost, these conditions may require us to curtail our business activities and increase our cost of funding, both of which could reduce our profitability and prevent or hamper our growth through acquisitions.
 
Our business has been, and may continue to be, adversely affected by conditions in the U.S. financial markets and economic conditions generally.
 
Our business is materially affected by conditions in the U.S. financial markets and economic conditions generally. In the past 24 months, these conditions have changed suddenly and negatively. The ongoing financial crisis and the loss of confidence in the stock market has increased our cost of funding and limited our access to some of our traditional sources of liquidity, including both secured and unsecured borrowings. Increases in funding costs and limitations on our access to liquidity could have a negative impact on our earnings and our ability to acquire additional nightclubs. In addition, the deteriorating general economic conditions in the United States has caused a drop in consumer spending in general, and discretionary spending in particular. This has caused a decline in the number of patrons at our nightclubs and the amount of money spent by them. Further, our nightclubs located in geographical areas suffering from proportionally worse economic conditions when compared to the United States in


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general have experienced larger declines in operating revenues. Overall, the economic environment during our 2009 fiscal year has been slightly adverse for our business compared to the previous year and there can be no assurance that these conditions will improve in the near term. Until they do, we expect our results of operations to be slightly adversely affected.
 
Our nightclubs were acquired with a purchase price based on historical EBITDA. This results in each nightclub carrying a substantial amount of intangible value, mostly allocated to licenses and goodwill. Generally accepted accounting principles require an annual impairment review of these indefinite lived assets. For the fiscal year ended December 31, 2009, the annual impairment review resulted in an impairment loss of approximately $1.8 million, compared to the impairment loss of approximately $46 million in 2008. If difficult market and economic conditions continue over 2010 and/or we experience a decrease in revenue at one or more nightclubs, we could incur an additional decline in fair value of one or more of our nightclubs. This could result in another future impairment charge of up to the total value of the indefinite lived intangible assets.
 
Our acquisitions may result in disruptions in our business and diversion of management’s attention.
 
We have made, and may continue to make, acquisitions of complementary nightclubs, restaurants, or related operations. Any acquisitions will require the integration of the operations, products, and personnel of the acquired businesses and the training and motivation of these individuals. Such acquisitions may disrupt our operations and divert management’s attention from day-to-day operations, which could impair our relationships with current employees, customers, and partners. We may also incur debt or issue equity securities to pay for any future acquisitions. These issuances could be substantially dilutive to our stockholders. In addition, our profitability may suffer because of acquisition-related costs or amortization, or impairment costs for acquired goodwill and other intangible assets. If management is unable to fully integrate acquired business, products, or persons with existing operations, we may not receive the benefits of the acquisitions, and our revenues and stock trading price may decrease.
 
Our business is subject to risks associated with geographic market concentration.
 
One part of our growth strategy is nightclub “clustering.” Adult nightclubs tend to group together in their respective markets. We believe that clustering leads to improved brand recognition as well as some improvement in economics of scale as costs of marketing are spread over more nightclubs. Clustering also provides the Company with the ability to disperse management expertise to more locations under their responsibility. We are subject to risks associated with geographic market concentration in areas in which we own and operate multiple nightclubs, such as adverse changes in the local economy, the local regulatory environment, and our local reputation. If we are unable to successfully diminish the impact of these risks, our profitability and growth prospects may be materially and adversely affected.
 
Our business operations are subject to regulatory uncertainties which may affect our ability to acquire additional nightclubs, remain in operation or be profitable.
 
Our business is regulated by constantly changing zoning, local and state liquor licensing, local ordinances, and state and federal time, place and manner free speech restrictions. In states in which we currently operate, liquor licenses renew annually and are considered to be “privileged” licenses that could be subject to suspension or revocation. The adult entertainment provided by our nightclubs has elements of free speech and expression and, therefore, has some protection under the First Amendment to the U.S. Constitution. However, the protection is limited to the expression of our entertainers and not their conduct.
 
In all states where we operate, management believes that we comply with applicable laws, regulations, and ordinances governing the sale of alcohol and the operation of sexually oriented businesses. However, changes in these laws, regulations, and ordinances may increase our cost of compliance therewith, or cause us to be unable to renew them, thereby reducing our profitability or preventing our nightclubs to remain in operation. There can be no assurance that local, state and/or federal licensing, and other regulations will permit our nightclubs to remain in operation or profitable in the future. Further, if we are involved in costly administrative or legal proceedings to


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renew our licenses or defend against claims involving non-protected free speech, it may result in negative publicity and decreased profitability.
 
Beginning January 1, 2008, our two Texas nightclubs became subject to a new state law requiring each nightclub to collect a five dollar surcharge for every nightclub visitor. We have filed a tax protest suit against this “patron tax,” and the suit has been stayed by agreement until the Texas Supreme Court resolves the underlying case. This trend is spreading to other states to enact similar surcharges or admission fee taxes. Currently, the Company is not passing this surcharge on to our customers and we are absorbing this expense. Our profitability could be negatively impacted if this surcharge continues in Texas and spreads to other states in which the Company operates.
 
There is substantial competition in the nightclub entertainment industry, which may affect our ability to operate profitably or acquire additional nightclubs.
 
Our ability to increase or sustain revenues is impacted by our ability to compete effectively with our competitors, both for nightclub acquisitions and patrons. Our ability to compete depends on many factors, many of which are outside of our control. These factors include the quality and appeal of our competitors’ nightclubs relative to our offerings, the strength of our competitors’ brands, the effectiveness of our competitors’ sales, marketing efforts and the attractiveness of their product offerings, and general consumer behaviors and preferences regarding how they choose to spend their discretionary income. Further, our competitors may have significantly greater financial and management resources than our Company. In addition, the industry is especially sensitive to ever-changing and unpredictable competitive trends and competition for general entertainment dollars which cannot be easily predicted and which are beyond our control. If we are unable to compete effectively in the market, we may be unable to attract patrons to our existing nightclubs or complete acquisitions of new nightclubs, which may prevent us from sustaining or increasing our revenues or growing our business.
 
If we are unable to effectively promote our brands and establish a leading position in the marketplace, our business may fail.
 
We believe that we may attract more patrons to our nightclubs and distinguish ourselves from our competition by increasing the awareness of our brands and that the importance of brand recognition will increase over time. In order to gain brand recognition, we believe that we must increase our marketing and advertising budgets to create and maintain brand name loyalty through the promotion and development of our affiliation with the PT’s®, Diamond Cabaret®, and Penthouse® names. We do not know whether these efforts will lead to greater brand recognition. If we are unable to effectively promote our brand and establish a leading position in the marketplace, we may be unable to attract patrons or new nightclubs for acquisitions, which may prevent us from sustaining or increasing our revenues or growing our business.
 
Our failure to protect our brands may undermine our competitive position and litigation to protect our brands or defend against third-party allegations of infringement may be costly.
 
We believe that it is important for our business to achieve brand recognition. We rely primarily on trademarks and trade names to achieve this. Third parties may infringe or misappropriate our trademarks, trade names, and other intellectual property rights, which could have a material adverse effect on our business, financial condition, or operating results. In addition, policing unauthorized use of our trademarks, trade names, and other intellectual property can be difficult and expensive. Litigation may be necessary to enforce our intellectual property rights or determine the validity and scope of the proprietary rights of others. We cannot give assurance that the outcome of such potential litigation will be in our favor. Such litigation may be costly and may divert management attention as well as expend our other resources away from our business. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects, and reputation.
 
Our business is dependent upon management and employees for continuing operations and expansion.
 
Our success will depend, to a significant extent, on the efforts and abilities of Troy Lowrie, our Chairman of the Board and CEO, Micheal Ocello, a Director and our President and Chief Operating Officer and Courtney Cowgill, our Chief Financial and Accounting Officer. The loss of the services of Messrs. Lowrie and/or Ocello or our


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inability to recruit and train additional key personnel in a timely fashion could have a material and continuing adverse effect on our business and future prospects. A loss of one or more of our current officers or key personnel could severely and negatively impact our operations. Messrs. Lowrie and Ocello have limited experience managing a public company subject to the SEC’s periodic reporting obligations.
 
Hiring qualified management is difficult due to the limited number of qualified professionals in the industry in which we operate. We have in the past experienced difficulty in recruiting qualified personnel and there can be no assurance that we will be successful in attracting and retaining additional members of management if our business continues to grow. Failure to attract and retain personnel, particularly management personnel, would continue to materially harm our business, financial condition and results of operations.
 
Troy Lowrie, our Chairman of the Board and CEO, may have potential conflicts of interest with the Company, which may adversely affect our business. He beneficially owns a significant number of shares of our common stock, which will have an impact on all major decisions on which our stockholders may vote and which may discourage an acquisition of our Company.
 
We have engaged in several transactions with Lowrie Management LLLP, which is controlled and majority owned by Troy Lowrie, who is a significant stockholder, and our Chairman of the Board and CEO. Additionally, Mr. Lowrie and Lowrie Management LLLP is one of several parties that have submitted a proposal to the Company’s Board to acquire all of the Company’s common stock in a going private transaction. Further, in the proposed merger transaction as currently proposed, Mr. Lowrie will receive different consideration than the Company’s other shareholders, due in part to his continued guaranty of certain Company obligations, the sale of certain trademarks owned by Mr. Lowrie’s affiliates, the refinancing of his promissory note with the Company, and his consulting agreement with Rick’s Cabaret International, Inc. The Special Committee of the Board rejected the proposed going private transaction as inadequate on December 16, 2009. Conflicts of interest may arise between Mr. Lowrie’s duties to our Company and his duties to Lowrie Management LLLP, or his interest as an owner of Lowrie Management LLLP or as a potential acquirer of the Company’s common stock in the proposed going private transaction. Because Mr. Lowrie is a Director and the CEO of our Company, he has a duty of loyalty and care to us under Colorado law when there are any potential conflicts of interest between our Company and Lowrie Management LLLP. We cannot give you assurance that when conflicts of interest arise, Mr. Lowrie will act completely in our interests or that conflicts of interest will be resolved in our favor. In addition, Mr. Lowrie could violate his legal duties by diverting business opportunities from us to others. If we cannot resolve any conflicts of interest between Mr. Lowrie and us, we would have to rely on legal proceedings which could disrupt our business.
 
Several of our landlords and lenders have required Mr. Lowrie’s continued management role with our Company in order to avoid a default or acceleration of our obligations under certain of our leases or loan agreements.
 
As of March 12, 2010, Mr. Lowrie owns approximately 28% of our issued and outstanding common stock. In addition, he is our Chairman of the Board and CEO. The interests of Mr. Lowrie may differ from the interests of other stockholders. Because of his significant ownership of our common stock, Mr. Lowrie will have the ability to significantly influence virtually all corporate actions requiring stockholder approval, including the following actions:
 
  •  election of our Directors;
 
  •  amendment of our organizational documents;
 
  •  the potential merger or going private transactions or the sale of our assets or other corporate transaction; and
 
  •  Control of the outcome of any other matter submitted to the stockholders for vote.
 
Mr. Lowrie’s beneficial stock ownership may discourage potential investors from investing in shares of our common stock due to the lack of influence they could have on our business decisions, which in turn could reduce our stock price.


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We must comply with all licenses and permits relating to the sale of alcohol.
 
We derive a significant portion of our revenues from the sale of alcoholic beverages. States in which we operate may have laws which may limit the availability of a permit to sell alcoholic beverages or which may provide for suspension or revocation of a permit to sell alcoholic beverages in certain circumstances. The temporary or permanent suspension or revocations of any such permits would have a material adverse effect on the revenues, financial condition, and results of operations of the Company. In all states where we operate, management believes that we comply with applicable city, county, state, or other local laws governing the sale of alcohol.
 
Activities or conduct at our nightclubs may cause us to lose necessary business licenses, expose us to liability, or result in adverse publicity, which may increase our costs, divert management’s attention from our business, and cause our stockholders to lose confidence in us, thereby lowering our profitability and our stock price.
 
We are subject to risks associated with activities or conduct at our nightclubs that are illegal or violate the terms of necessary business licenses. Our nightclubs operate under licenses for sexually oriented businesses and some protection under the First Amendment to the U.S. Constitution. While we believe that the activities at our nightclubs comply with the terms of such licenses, and that the element of our business that constitutes an expression of free speech under the First Amendment to the U.S. Constitution is protected, activities and conduct at our nightclubs may be found to violate the terms of such licenses or be unprotected under the U.S. Constitution. This protection is limited to the expression and not the conduct of an entertainer. An issuing authority may suspend or terminate a license for a nightclub found to have violated the license terms. Illegal activities or conduct at any of our nightclubs may result in negative publicity or litigation. Such consequences may increase our cost of doing business, divert management’s attention from our business, and make an investment in our securities unattractive to current and potential investors, thereby lowering our profitability and our stock price.
 
IEC has developed comprehensive policies aimed at ensuring that the operation of each nightclub is conducted in conformance with local, state and federal laws. We have a “no tolerance” policy on illegal drug use in or around the facilities. We continually monitor the actions of entertainers, waitresses, and customers to ensure that proper behavior standards are met. However, such policies, no matter how well designed and enforced, can provide only reasonable, but not absolute, assurance that the policies’ objectives are being achieved. Because of the inherent limitations in all control systems and policies, there can be no assurance that our policies will prevent deliberate acts by persons attempting to violate or circumvent them. Notwithstanding the foregoing limitations, management believes that our policies are reasonably effective in achieving their purposes.
 
Our industry is viewed negatively by many for moral, religious, women’s rights, and other reasons, therefore, the market for our securities is smaller than for other securities and an investor may find it hard to sell our securities.
 
We operate in an industry that is viewed negatively by many. People may object to sexually oriented entertainment for moral, religious, women’s rights, or other reasons. As a result, we are exposed to risks associated with societal attitudes towards our business, both locally and nationally. Local attitudes may disproportionally affect our nightclubs in areas in which we are operating while national attitudes may affect our business generally or our stock price specifically. Because of the negative perception of our industry, the market for our securities is smaller than for securities without such negative perception. Therefore, an investor in our securities may be unable to sell our securities at an acceptable time and price, or at all.
 
Our business plan and proposed strategy has not been independently evaluated.
 
We have not obtained any independent evaluation of our business plan and proposed business strategy. There can be no assurance that our nightclubs or proposed strategy will generate sufficient revenues to maintain profitability.


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We may be subject to uninsured risks which, if realized, could expose us to money damages, which we may be unable to pay.
 
We maintain insurance in amounts we consider adequate for personal injury and property damage to which our nightclubs may be subject. We also currently have personal injury liquor liability coverage in place. However, there can be no assurance that we will not be exposed to potential liabilities for money damages in excess of the coverage provided by insurance, including, but not limited to, liabilities which may be imposed pursuant to state “dram shop” statutes or common law theories of liability. In general, “dram shop” statutes provide that a person injured by an intoxicated person has the right to recover damages from an establishment that wrongfully served alcoholic beverages to such person if it was apparent to the server that the individual being sold, served, or provided with an alcoholic beverage was obviously intoxicated to the extent that he presented a clear danger to himself and others. If our insurance coverage is not sufficient to pay for any money damages that we may be found liable for, we will have to pay such excess damages using the funds needed for operation of our business, if available, thereby increasing our costs and reducing our profitability.
 
Our Directors and Officers have limited liability and are entitled to indemnification that could encourage derivative lawsuits and require us to direct funds away from our business.
 
Our Articles of Incorporation provide that our Directors shall not be liable to the Company or our stockholders for monetary damages for breaches of fiduciary duties as a Director to the fullest extent permitted by Colorado law.
 
Further, we are obligated to indemnify and advance expenses to our Directors and Executive Officers in certain circumstances. Our Articles of Incorporation provide that the Company shall indemnify and advance expenses to a Director or Officer in connection with a proceeding to the fullest extent permitted or required by and in accordance with Colorado law. We have also entered into separate, but substantively identical, indemnification agreements with all of our Directors and named executive officers. The indemnification agreements provide that the Company will indemnify each Director and Executive Officer against claims arising out of events or occurrences related to such individual’s service on the Company’s Board or as an Executive Officer, as applicable, (i) when such indemnification is expressly required to be made by law, or (ii) after a determination has been made that such indemnification is permissible. Pursuant to these arrangements, we may be required to advance costs incurred by an Officer or Director and to pay judgments, fines, and expenses incurred by an Officer or Director, including reasonable attorneys’ fees, as a result of actions or proceedings in which our Officers and Directors may become involved by reason of being or having been an Officer or Director of our Company. Funds paid in satisfaction of judgments, fines, and expenses may be funds we need for the operation of our business, thereby affecting our ability to maintain profitability.
 
These provisions in the Company’s Articles of Incorporation and the stand-alone indemnification agreements may have the effect of reducing the likelihood of derivative litigation against Directors and Executive Officers, and may discourage or deter stockholders or management from bringing a lawsuit against Directors and Executive Officers even though such an action, if successful, might otherwise have benefited our stockholders. We also note that our Directors and Troy Lowrie, the Company’s Chairman of the Board and CEO, are currently defendants in one or more lawsuits in connection with the proposed going private transaction, as further discussed in another risk factor and elsewhere in this Annual Report on Form 10-K. The Company may be required to advance expenses to and indemnify the Directors and Mr. Lowrie from expenses involved in defending against such lawsuits. Any amount we are required to pay or advance to a Director or Executive Officer pursuant to these provisions will be diverted from the Company’s operating capital and will have an adverse effect on the Company’s cash flow and results of operation. While the Company has obtained directors’ and officers’ insurance to protect against this occurrence, there can be no assurance that our directors’ and officers’ insurance will cover a claim made for indemnification or be sufficient to cover the entire amount claimed for indemnification.
 
We have been informed that the Securities and Exchange Commission has the opinion that indemnification of liabilities to Executive Officers or Directors under the Securities Act of 1933, as amended (the “Securities Act”) to be against public policy as expressed in the Securities Act and therefore are unenforceable.


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We could use the issuance of additional shares of our authorized stock to deter a change in control.
 
As of March 12, 2010, we have 17,310,723 shares of common stock outstanding, out of a total of 50,000,000 shares of common stock authorized, and zero shares of Series A preferred stock, out of a total of 1,000,000 shares authorized for future issuance under our Articles of Incorporation. This does not include 224 shares of common stock reserved for issuance under our 2002 Stock Option and Stock Bonus Plan, 2,708 shares of common stock reserved for issuance under our 2003 Stock Option and Stock Bonus Plan, and 906,667 shares of common stock reserved for issuance under our 2004 Stock Option and Appreciation Rights Plan. In addition, our Board is authorized to issue “blank check” preferred stock, with designations, rights, and preferences as they may determine. Accordingly, our Board may, without stockholder approval, issue shares of preferred stock with dividend, liquidation, conversion, voting, or other rights that could adversely affect the voting power or other rights of the holders of our common stock. This type of preferred stock could also be issued to discourage, delay, or prevent a change in our control. The ability to issue “blank check” preferred stock is a traditional anti-takeover measure. These provisions in our charter documents make it difficult for a majority stockholder to gain control of the Board and of our Company. The issuance of additional shares would make it more difficult for a third party to acquire us, even if its doing so would be beneficial to our stockholders.
 
We have employment agreements with Troy Lowrie and Micheal Ocello that contain features that may discourage a change of control.
 
On December 4, 2008, we entered into five-year employment agreements with Troy Lowrie, our Chairman of the Board and CEO, and Micheal Ocello, one of our Directors and our President and Chief Operating Officer. Pursuant to the terms of the employment agreements, if we terminate either of them other than for “cause,” “death,” or “disability” (as such terms are defined therein), or either of them terminates his employment for “good reason” (as such term is defined therein, which term includes termination of the officer following a change of control), we must pay the officer a severance payment equal to three times the sum of the officer’s base salary in effect upon termination plus an amount equal to the highest bonus the officer received in the three years before termination, if any.
 
Further, the employment agreements provide that if such an officer’s employment is terminated for any reason, we must, at the officer’s election, promptly pay all outstanding debt owed to the officer and his family or issue to the officer, with his approval, the number of shares of our common stock determined by dividing (a) the outstanding principal and interest owed to the officer (b) 50% of the last sale price of our common stock on the date of termination.
 
Finally, Mr. Lowrie’s employment agreement provides that if Mr. Lowrie’s employment is terminated for any reason, we must also take all necessary steps to remove Mr. Lowrie as a guarantor of any of our (or our affiliates’) obligations to any third party. In the event that we are not successful in doing so, we must pay to Mr. Lowrie a cash amount equal to five percent per year of the aggregate amount he is continuously guaranteeing until such time when Mr. Lowrie no longer guarantees the obligations.
 
A change of control may trigger the payments set forth above and the resulting costs may prevent or deter a potential acquirer from buying the Company. Even if doing so could be beneficial to our stockholders.
 
We must meet the NASDAQ Global Market continued listing requirements or we risk delisting, which may decrease our stock price and make it harder for our stockholders to trade our stock.
 
Our common stock is currently listed for trading on the NASDAQ Global Market. We must continue to satisfy NASDAQ’s continued listing requirements or risk delisting of our securities. That would likely have an adverse effect on the price of our common stock and our business. There can be no assurance that the Company will meet the continued listing requirements for the NASDAQ Global Market, or that the Company’s common stock will not be delisted from the NASDAQ Global Market in the future. If our common stock is delisted from NASDAQ, it may trade on the over-the-counter market, which may be a less liquid market. In such case, our stockholders’ ability to trade, or obtain quotations of the market value of, shares of our common stock would be severely limited because of lower trading volumes and transaction delays. These factors could contribute to lower prices and larger spreads in the bid and ask prices for our securities.


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In the event the make-up of our Board or Audit Committee were not, or are not in the future, in compliance with the SEC and NASDAQ independence requirements, we face a number of risks that could materially and adversely affect our stockholders and our business.
 
The SEC rules and the NASDAQ Stock Market’s continued listing requirements require, among other things, that a majority of the members of our Board are independent and that our Audit Committee consists entirely of independent directors. We know that we currently comply with the SEC and NASDAQ requirements regarding director independence. However, in the event that we do not remain in compliance with these requirements, our Executive Officers could establish policies and enter into transactions without the requisite independent review and approval. This could present the potential for a conflict of interest between us and our stockholders generally and our Executive Officers, stockholders, or Directors.
 
Further, our failure to comply with these requirements may limit the quality of the decisions that are made by our Board and Audit Committee, such that the risk of material misstatements or omissions caused by errors or fraud with respect to our financial statements or other disclosures that may occur and not be detected in a timely manner or at all; or the payment of inappropriate levels of compensation to our executive officers. In the event there are deficiencies or weaknesses in our internal controls, we may misreport our financial results or lose significant amounts due to misstatements caused by errors or fraud. Finally, if the composition of our Board or Audit Committee fails to meet NASDAQ’s independence requirements in the future and we fail to regain compliance with NASDAQ’s continued listing requirements, the Company’s common stock will be delisted from the NASDAQ Global Market, as further described in the previous risk factor.
 
Securities analysts may not initiate coverage or continue to cover our common stock, and this may have a negative impact on our common stock’s market price.
 
The trading market for our common stock depends, in part, on the research and reports that securities analysts publish about us and our business. We do not have any control over these analysts. Currently, one analyst firm covers us but there is no guarantee that this securities analyst will continue to cover our common stock in the future. If securities analysts do not cover our common stock, the lack of research coverage may adversely affect its market price. If we are covered by securities analysts, and our stock is downgraded, our stock price would likely decline. If the analyst ceases to cover us or fails to publish regular reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.
 
In the past, we have raised substantial amounts of capital in private placements, and if we fail to comply with the applicable securities laws, ensuing rescission rights or lawsuits would severely damage our financial position.
 
Our 2004 private placement consisted of securities that were not registered under the Securities Act, as amended (the “Securities Act”), or under any state “blue sky” law as a result of exemptions from such registration requirements. Such exemptions are highly technical in nature and if we inadvertently failed to comply with any of such exemptive provisions, investors could have the right to rescind their purchase of our securities and sue for damages. If any investors were to successfully seek such rescission or prevail in any such suit, we could face severe financial demands that could have significant, adverse affects on our financial position. Future financings may involve sales of our common stock at prices below prevailing market prices, as well as the issuance of warrants or convertible securities at a discount to market price.
 
The application of the “penny stock” rules could adversely affect the market price of our common stock and increase the transaction costs to sell those shares.
 
The SEC has adopted regulations which generally define a “penny stock” as an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. Because the last reported trade of our company stock on the NASDAQ Global Market was at a price below $5.00 per share, our common stock is currently considered a penny stock. The SEC’s penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock


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market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and the salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that before a transaction in a penny stock occurs, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s agreement to the transaction. If applicable in the future, these rules may restrict the ability of brokers-dealers to sell our common stock and may affect the ability of investors to sell their shares, until our common stock no longer is considered a penny stock.
 
Because we do not intend to pay any dividends on our common stock, purchases of our common stock may not be suited for investors seeking dividend income.
 
Since our inception, we have not paid any dividends on our common stock and we do not anticipate paying any dividends on our common stock in the foreseeable future. The Board has elected not to pay dividends in the future. We expect that future earnings applicable to the common stockholders, if any, will be used for working capital and to finance growth.
 
Future sales of our common stock may depress our stock price. A significant amount of common stock is subject to issuance upon exercise of securities to purchase common stock. The exercise and sale of these financial instruments could depress the market price of our common stock.
 
A significant amount of our common stock may be eligible for sale under Rule 144 promulgated under the Securities Act at different times in the future and its sale could depress the market price of our common stock. Provided that all applicable Rule 144 conditions are satisfied, we believe that stockholders holding 17,310,723 shares of our issued and outstanding shares of common stock are currently eligible to sell their shares. The Company issued no stock in 2009.
 
We also have issued stock options convertible into an aggregate of 262,500 shares of our common stock at an exercise price of between $6 and $13 per share. None of the options are currently vested or exercisable but they vest and become exercisable between April 2010 and June 2015. All option exercise prices substantially exceed the market price of our common stock on March 12, 2010.
 
The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market, or as a result of the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of common stock. As of March 12, 2010, we have 50,000,000 authorized shares of which 17,310,723 shares of common stock are issued and outstanding.
 
Ownership could be diluted by future issuances of our stock, options, warrants or other securities.
 
Ownership in the Company may be diluted by future issuances of capital stock or the exercise of outstanding or to be issued options, warrants or convertible notes to purchase capital stock. In particular, we may sell securities in the future in order to finance operations, expansions, or particular projects or expenditures.
 
There is a limited public trading market for our common stock.
 
Our stock is currently traded on the NASDAQ Global Market under the trading symbol “VCGH.” There is a limited public trading market for our common stock. Without an active trading market, there can be no assurance of any liquidity or resale value of our common stock, and stockholders may be required to hold shares of our common stock for an indefinite period of time.
 
Our stock price has been volatile and may fluctuate in the future.
 
The trading price of our securities may fluctuate significantly. This price may be influenced by many factors, including:
 
  •  our performance and prospects;


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  •  the depth and liquidity of the market for our securities;
 
  •  sales by selling stockholders of shares issued or issuable in connection with our private placements;
 
  •  investor perception of us and the industry in which we operate;
 
  •  changes in earnings estimates or buy/sell recommendations by the analyst;
 
  •  general financial and other market conditions; and
 
  •  Domestic and international economic conditions.
 
Public stock markets have experienced and are currently experiencing substantial price and trading volume volatility. These broad market fluctuations may adversely affect the market price of our securities. Further, if the proposed merger transaction or any alternative transaction is not completed, the share price of our common stock may change, to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed. Fluctuations in our stock price may have made our stock attractive to momentum, hedge, or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction particularly when viewed on a quarterly basis.
 
Other Risk Factors May Adversely Affect Our Financial Performance.
 
Other risk factors that could cause our actual results to differ materially from those indicated in the forward-looking statements by affecting, among many things, pricing, consumer spending, and consumer confidence, include, without limitation, changes in economic conditions and financial and credit markets, credit availability, increased fuel costs and availability for our employees, customers and suppliers, health epidemics or pandemics or the prospects of these events (such as reports on avian flu), consumer perceptions of food safety, changes in consumer tastes and behaviors, governmental monetary policies, changes in demographic trends, terrorist acts, energy shortages and rolling blackouts, and weather (including, major hurricanes and regional snow storms) and other acts of God.
 
Item 1B.   Unresolved Staff Comments
 
Not applicable.
 
Item 2.   Properties
 
Our corporate office is located at 390 Union Boulevard, Suite 540, Lakewood, Colorado 80228. This office space is used by IEC, our wholly-owned subsidiary. We occupy approximately 5,500 square feet under a lease with an unrelated third party that expires in February 2017. Additional administrative offices are located inside various nightclub locations or rented on a month-to-month basis without a formal lease.
 
Each of our adult entertainment nightclubs is held in separately owned subsidiary corporations, limited liability companies, or limited partnerships. We currently lease the real estate for a majority of our company-owned adult entertainment nightclubs under operating leases with remaining terms ranging from five years to just over 50 years. These leases generally contain options which permit us to extend the lease term at an agreed rent or at prevailing market rates.
 
We own the real property on which we operate four company-owned adult entertainment nightclubs located in Texas (2), Illinois (1) and Indiana (1).


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The table contains specifics about our leased and owned adult nightclub locations:
 
       
 Name/Club Ownership     Lease Information
PT’s® Brooklyn
Platinum of Illinois, Inc.
Acq. Date: 5/1/2002
Location: Brooklyn, IL
Sq. Ft.: 9,000
Building owned by VCG: Yes
    An Illinois corporation and wholly-owned subsidiary of VCG.
       
PT’s® Showclub
Indy Restaurant Concepts, Inc.
Acq. Date: 6/30/02
Location: Indianapolis, IN
Sq. Ft.: 9,200
Building owned by VCG: Yes
    An Indiana corporation and wholly-owned subsidiary of VCG. VCG Real Estate leases a portion of the building that is not used by the nightclub operation to an unaffiliated third party.
       
PT’s® All Nude
VCG Restaurants Denver, Inc.
Acq. Date: 6/30/04
Location: Denver, CO
Sq. Ft.: 8,000
Building owned by VCG: No
    A Colorado corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $14,500 per month. The regular lease term expired in January 2010 but the Company exercised a five year extension option and the lease now will expire in January 2015. The base rent for each subsequent lease year during the option period commencing February 2010 and every February 1st will increase or decrease by the percentage increase in the Consumer Price Index (“CPI”) for the month of February immediately preceding the adjustment date, and the CPI for the month of February for the year preceding the adjustment date.
       
The Penthouse Club®
Glendale Restaurant Concepts, LP
Acq. Date: 6/30/04
Location: Glendale, CO
Sq. Ft.: 9,600
Building owned by VCG: No
    A Colorado limited partnership and 98% owned subsidiary of VCG, including the 1% general partnership interest. The building is leased from Lowrie Management LLLP, controlled by our Chairman of the Board and CEO, Troy Lowrie, currently for $13,500 per month. The lease term expires September 2014 and has three options to extend that expire September 2029. The base rent adjusts every five years. The rent from years one to five was $12,000 per month, years six to ten is $13,500 per month, years eleven to fifteen (option 1) is $15,000 per month, years sixteen to twenty (option 2) is $16,500 per month, and years twenty one to twenty five (option 3) is $18,000 per month.
       
PT’s® Showclub Appaloosa
VCG CO Springs, Inc.
Acq. Date: 10/2/06
Location: Colorado Springs, CO
Sq. Ft.: 9,500
Building owned by VCG: No
    A Colorado corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party for $10,000 per month. The lease term expires October 2016 and has two options to extend that expire October 2026. The base rent adjusts every five years. The rent from years one to five is $10,000 per month, years six to ten is $10,500 per month, years eleven to fifteen (option 1) is $12,000 per month, and years sixteen to twenty (option 2) is $13,500 per month.
       
Diamond Cabaret®
Glenarm Restaurant, LLC
Acq. Date: 10/8/04
Location: Denver, CO
Sq. Ft.: 36,000
Building owned by VCG: No
    A Colorado limited liability company and 90% owned subsidiary of VCG. The building is leased from an unaffiliated third party for $45,000 per month. The lease term expires October 2014 and has three options to extend that expire October 2029. The base rent adjusts every five years. The rent from years one to five was $40,000 per month, years six to ten is $45,000 per month, years eleven to fifteen (option 1) is $50,000 per month, years sixteen to twenty (option 2) is $55,000 per month, and years twenty one to twenty five (option 3) is $60,000.
       


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 Name/Club Ownership     Lease Information
PT’s® Show Club
Denver Restaurant Concepts, LP
Acq. Date: 12/28/06
Location: Denver, CO
Sq. Ft.: 20,720
Building owned by VCG: No
    A Colorado limited partnership and 98% owned subsidiary of VCG. The building is leased from Lowrie Management LLLP, controlled by our Chairman of the Board and CEO, Troy Lowrie, currently for $17,500 per month. This square footage includes nightclub, office and storage space. The lease term expires December 2015 and has three options to extend that expire December 2029. The base rent adjusts every five years. The rent from years one to five was $15,000 per month, years six to ten is $17,500 per month, years eleven to fifteen (option 1) is $20,000 per month, years sixteen to twenty (option 2) is $22,500 per month, and years twenty one to twenty five (option 3) is $25,000.
       
Roxy’s
RCC LP
Acq. Date: 1/18/07
Location: Brooklyn, IL
Sq. Ft.: 4,400
Building owned by VCG: No
    An Illinois limited partnership and 88% subsidiary of VCG. The building is leased from an unaffiliated third party for $5,000 per month. The lease term expires January 2017 and has two options to extend that expire January 2027. The base rent never changes, but the rent amount fluctuates monthly based on sales.
       
PT’s® Showclub
Kentucky Restaurant Concepts, Inc.
Acq. Date: 1/2/07
Location: Louisville, KY
Sq. Ft.: 23,000
Building owned by VCG: No
    A Kentucky corporation and 100% owned subsidiary of VCG. The building is leased from Lowrie Management LLLP, controlled by our Chairman of the Board and CEO, Troy Lowrie, currently for $7,500 per month. The lease term expires December 2016 and has three five year options to extend that expire December 2031. The base rent adjusts every five years. The rent from years one to five is $7,500 per month, years six to ten is $8,750 per month, years eleven to fifteen (option 1) is $10,000 per month, years sixteen to twenty (option 2) is $11,250 per month, and years twenty one to twenty five (option 3) is $12,000.
       
PT’s® Showclub
Cardinal Management LP
Acq. Date: 2/5/07
Location: Centreville, IL
Sq. Ft.: 5,700
Building owned by VCG: No
    An Illinois limited partnership and 83% owned subsidiary of VCG. The building is leased from an unaffiliated third party for $5,000 per month. The lease term expires January 2017 and has two options to extend that expire January 2027. The base rent never changes, but the rent amount fluctuates monthly based on sales.
       
PT’s® Sports Cabaret
MRC LP
Acq. Date: 2/9/07
Location: Sauget, IL
Sq. Ft.: 9,700
Building Owned by VCG: No
    An Illinois limited partnership and 100% owned subsidiary of VCG. The building is leased from an unaffiliated third party for $20,000 per month. The lease term expires February 2017 and has two options to extend that expire February 2027. The base rent never changes but the rent amount fluctuates monthly based on sales.
       
The Penthouse Club®
IRC LP
Acq. Date: 2/7/07
Location: Sauget, IL
Sq. Ft.: 19,300
Building Owned by VCG: No
    An Illinois limited partnership and a 90% owned subsidiary of VCG. The building is leased from an unaffiliated third party for $25,000 per month. The lease term expires March 2017 and has two options to extend that expire March 2027. The base rent never changes but the rent amount fluctuates monthly based on sales.
       

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 Name/Club Ownership     Lease Information
The Men’s Club®
Raleigh Restaurant Concepts, Inc.
Acq. Date: 4/16/07
Location: Raleigh, NC
Sq. Ft.: 21,200
Building owned by VCG: No
    A North Carolina corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $6,000 per month. This lease has options to renew for ten consecutive renewal terms of five years each that expire January 2062. The base rent adjusts every five years by $250 after January 2017 with a maximum of $8,250 per month. The Company also has a separate lease for the parking premises currently for $20,250 per month. This lease expires January 2012 and has ten consecutive renewal terms of five years each that expire on January 2062. The base rent adjusts on every renewal term by $500 with a maximum of $45,750.
       
Schiek’s Palace Royale
Classic Affairs, Inc.
Acq. Date: 5/30/07
Location: Minneapolis, MN
Sq. Ft.: 11,600
Building owned by VCG: No
    A Minnesota corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $25,000 per month. The building lease term expires June 2012 and has three five year options to extend that expire June 2027. The base rent adjusts every five years. The rent from one to five years is $25,000 per month, years six to ten (option 1) is $27,750 per month, years eleven to fifteen (option 2) is $30,000 per month, and years sixteen to twenty (option 3) is $33,000 per month.
       
PT’s® Showclub
Kenkev II, Inc.
Acq. Date: 9/14/07
Location: Portland, ME
Sq. Ft.: 13,000
Building owned by VCG: No
    A Maine corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $14,750 per month. The lease term expires September 2032 and has two options to extend that expire September 2042. The base rent adjusts every year by 3% after the first year of the lease.
       
Jaguar’s Gold Club
Golden Productions JGC
Fort Worth LLC
Acq. Date: 9/17/07
Location: Fort Worth, TX
Sq. Ft.: 10,000
Building owned by VCG: Yes
    A Texas limited liability company and wholly-owned subsidiary of VCG. The building is owned by the nightclub but the land is leased from an unaffiliated third party currently for $20,000 per month. The lease term expires September 2012 and has four five year options to extend that expire September 2032. The base rent adjusts every option period by 10% over the prior term’s rental obligation.
       
PT’s® Showclub
Kenja II, Inc.
Acq. Date: 10/29/07
Location: Miami, FL
Sq. Ft.: 7,600
Building owned by VCG: No
    A Florida corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $10,609 per month. The lease term expires October 2032 and has two options to extend that expire October 2042. The base rent adjusts every year by 3% after the first year of the lease.
       
La Boheme Gentlemen’s Club
Stout Restaurant Concepts, Inc.
Acq. Date: 12/21/07
Location: Denver, CO
Sq. Ft.: 6,200
Building owned by VCG: No
    A Colorado corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $17,000 per month. The lease term expires June 2016. The base rent adjusts every three years. The rent from years one to four is $17,000 per month, five to seven years is $20,000 per month, and eight to nine years is $21,000 per month.
       
Jaguar’s Gold Club
Manana Entertainment, Inc.
Acq. Date: 4/14/08
Location: Dallas, TX
Sq. Ft.: 12,500
Building owned by VCG: Yes
    A Texas limited liability company and wholly-owned subsidiary of VCG. The building is owned by the nightclub but the land is leased from an unaffiliated third party for $25,000 per month. The lease term expires April 2013 and has four five year options to extend that expire April 2033. The base rent adjusts every option period by 10% over the prior term’s rental obligation.
       

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 Name/Club Ownership     Lease Information
Imperial Showgirls Gentlemen’s Club
VCG-IS, LLC
Acq. Date: 7/28/08
Location: Anaheim, CA
Sq. Ft.: 8,100
Building owned by VCG: No
    A California corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $8,000 per month. The lease term expires August 2010 and has four five year options to extend that expire August 2025. The base rent adjusts by $500 every five years with a maximum of $9,500 per month.
       
 
Item 3.   Legal Proceedings
 
Other than as set forth below, we are not aware of any pending legal proceedings against the Company, individually or in the aggregate, that would have a material adverse affect on our business, results of operations, or financial condition.
 
Thee Dollhouse Productions Litigation
 
On or around July 24, 2007, VCG Holding Corp. was named in a lawsuit filed in District Court, 191 Judicial District, of Dallas County, Texas. This lawsuit arose out of a VCG acquisition of certain assets belonging to Regale, Inc. (“Regale”) by Raleigh Restaurant Concepts, Inc. (“RRC”), a wholly owned subsidiary of VCG, in Raleigh, N.C. The lawsuit alleges that VCG tortiously interfered with a contract between Michael Joseph Peter and Regale and misappropriated Mr. Peter’s purported trade secrets. On March 30, 2009, the United States District Court for the Eastern District of North Carolina entered an Order granting Summary Judgment to VCG and dismissed Mr. Peter’s claims in their entirety. The Court found that as a matter of law, VCG did not tortiously interfere with Mr. Peter’s contract with Regale and further found that VCG did not misappropriate trade secrets. Mr. Peters did not appeal that ruling and as such, the federal proceedings have concluded.
 
Ancillary to this litigation, Thee Dollhouse filed a claim in arbitration on June 2008 against Regale as a result of this transaction, asserting that Regale, by selling its assets to RRC, breached a contract between Thee Dollhouse and Regale. In addition, an assertion was made that one of Regale’s principals tortiously interfered with the contract between Regale and Thee Dollhouse. Regale filed a Motion to Stay Arbitration which was granted in part and denied in part, with the Court staying arbitration as to Regale’s principal and denying the stay as to Regale. As a result, the arbitration as to Regale is proceeding. VCG is indemnifying and holding Regale harmless from this claim pursuant to their contract. The arbitration was originally scheduled for late October 2009, however due to illness of one of the principals of the claimant, the arbitration has been adjourned to April 26, 2010. The Company has not accrued any funds for the settlement of this litigation, as the outcome of this dispute cannot be predicted. The Company’s or a successor entity’s, indemnification obligation to Regale will continue even if any of the proposed sale transactions or an alternative transactions is consummated.
 
Zajkowski, et. al. vs VCG and Classic Affairs Litigation
 
In December 2007, a former employee of VCG’s subsidiary Classic Affairs, Eric Zajkowski, filed a lawsuit in Hennepin County District Court, Minneapolis, Minnesota against VCG following his termination from employment alleging that, in connection with his employment, he was subject to certain employment practices which violated Minnesota law. The initial action and subsequent pleading asserted that the matter was filed as a purported class action. Subsequent to the filing of Zajkowski’s Complaint, Zajkowski moved to amend his Complaint to name additional Plaintiffs and later, to name Classic Affairs as a party defendant. VCG and Classic Affairs have answered this complaint denying all liability. Classic Affairs has also filed a Counter-Complaint against Mr. Zajkowski based upon matters relating to his termination from employment with Classic Affairs.
 
In December 2008 and early January 2009, the parties filed cross-motions for Summary Judgment and Zajkowski filed a Motion for Class Certification. Following the motions, the Court issued a series of rulings on those Motions. In these rulings, the Court has dismissed VCG as a party Defendant — having determined that VCG is not directly liable to Zajkowski or the other Plaintiffs on their claims. The Court granted Summary Judgment to Zajkowski as to one issue, but did not determine the scope or extent, if any, of the alleged damages, ruling this issue,

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like the others, are questions for a jury, and the Court dismissed two other claims asserted by Zajkowski. In all other respects, the Court has denied the parties respective Summary Judgment motions.
 
On July 21, 2009, the Court denied Zajkowski’s and the other Plaintiffs’ Motion for Class Certification. Zajkowski appealed that decision to the Minnesota Court of Appeals and on September 22, 2009, the Court of Appeals denied Plaintiffs request for discretionary review. Plaintiffs have indicated that they do not intend to seek leave to appeal from the Minnesota Supreme Court. The parties have held mediation in November 2009 and the case was resolved. The settlement terms, including the amounts, are confidential. The lawsuit has now been dismissed, with prejudice. All related costs have been accrued or paid as of December 31, 2009.
 
Texas Patron Tax Litigation
 
Beginning January 1, 2008, VCG’s Texas clubs became subject to a new state law requiring the Company to collect a five dollar surcharge for every club visitor. A lawsuit was filed by the Texas Entertainment Association, an organization in which the Company is a member, alleging that the fee is an unconstitutional tax. On March 28, 2008, the Judge of the District Court of Travis County, Texas ruled that the new state law violates the First Amendment to the U.S. Constitution and, therefore, the District Court’s order enjoined the state from collecting or assessing the tax. The State of Texas has appealed the District Court’s ruling. When cities or the State of Texas give notice of appeal, the State supersedes and suspends the judgment, including the injunction. Therefore, the judgment of the Travis County District Court cannot be enforced until the appeals are completed.
 
The Company has filed a lawsuit to demand repayment of the paid taxes. On June 5, 2009, the Court of Appeals for the Third District (Austin) affirmed the District Court’s judgment that the Sexually Oriented Business Fee violated the First Amendment to the U.S. Constitution. The State of Texas appealed the Court of Appeals ruling to the Texas Supreme Court. On August 26, 2009, the Texas Supreme Court ordered both sides to submit briefs on the merits. The State’s brief was filed on September 25, 2009 and the Texas Entertainment Association’s brief was filed on October 15, 2009. On February 12, 2010 the Texas Supreme Court granted the State’s Petition for Review and set oral arguments for March 25, 2010.
 
The Company has expensed approximately $290,000 for the year ended December 31, 2009 and $203,000 for the year ended December 31, 2008 for the Texas Patron Tax. The Company accrued, but did not pay the fourth quarter estimated tax liability of $71,000. The Company has paid, under protest, approximately $422,000 to the State of Texas for the two year period.
 
Department of Labor and Immigration and Customs Enforcement Reviews
 
United States Department of Labor (“DOL”) Audit (PT’s Showclub)
 
In October 2008, PT’s® Showclub in Louisville, KY was required to conduct a self-audit of employee payroll by the DOL. After an extensive self-audit, it was determined that (a) the club incorrectly paid certain employees for hours worked and minimum wage amounts and (b) the club incorrectly charged certain minimum wage employees for their uniforms. As a result, the DOL required that the club issue back pay and refund uniform expenses to qualified employees at a total cost of $14,439.
 
In March 2009, VCG was placed under a similar nationwide DOL audit for all nightclub locations and its corporate office. All locations completed the self-audit in August 2009 and are currently working with the DOL to determine what, if any, violations may have occurred. This case is still in the investigatory state and no final determination can be made at this time of an unfavorable outcome or any potential liability. After discussion with outside legal counsel on this case, the Company has accrued $200,000 as of December 31, 2009 for potential wage/hour violations. A summary meeting has tentatively been scheduled with the DOL and counsel on March 15, 2010 to finalize the liability. The Company believes it has corrected all processes that resulted in the potential violations.
 
Immigration and Customs Enforcement (“ICE”) Reviews
 
On June 30, 2009, PT’s® Showclub in Portland, Maine was served a subpoena by ICE requesting documents to conduct an I-9 audit. ICE requested all original I-9’s for both current and past employees from September 14, 2007 (club acquisition date) to June 30, 2009. ICE conducted the audit to ensure proper use of the I-9 form to confirm that


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the club verified employees’ right to work in the United States. The club complied with the subpoena submitting all requested documents by July 16, 2009. As of March 12, 2010, ICE is still reviewing the requested documents. This matter is still in its investigatory stage and no determination of potential violations or liability has been made. No amounts have been accrued related to this audit. While ICE initially discussed taking this audit to all clubs, no formal actions have been taken by ICE to begin that process. This audit is still isolated to Maine.
 
Internal Revenue Service
 
The IRS audited PT’s® Showclub in Denver for the years 2006, 2007, and 2008 to determine tip reporting compliance. Every business with customary tipping must report annually on Form 8027 the total sales from food and beverage operations, charge sales, total tips reported, and charge tips reported. The audit was based upon this Form to determine compliance with the amended Section 3121(q) of the Internal Revenue Code. The audit was conducted by an examining agent in Denver in August and September 2009. The audit focused on the data reported on Form 8027 and related underlying documentation. It included the agent examining information contained in the daily sales packages generated by the club.
 
The audit resulted in a determination that cash tips for that club were under-reported in the three years examined. The tax assessed as a result of this under-reporting was $61,500. Penalties and interest were not assessed. The IRS auditor indicated that all other clubs would be audited and recommended that a Point of Sale (“POS”) system should be installed in every club to ensure compliance with IRS regulations. Upon completion of this audit, the Company began an intensive self-audit for the three year period using the same procedures followed by the IRS agent. This resulted in an initial accrual of $386,000 in estimated taxes to cover the estimated liability as of September 30, 2009. Subsequent discussions with the IRS agent removed 2006 from the audit period, replacing that year with 2009. The Company has submitted workpapers prepared for the self-assessment to the IRS agent for the periods 2007, 2008, and 2009. The agent has tentatively indicated that these workpapers and test period could be used to determine the ultimate tip reporting rate by club. As a result of the completion of the self-assessment process for the three years under examination, the Company has reduced the estimated liability by $179,000 to approximately $207,000 as of December 31, 2009.
 
Litigation Associated with the Proposed Going Private Transaction
 
In connection with the Proposal concerning the proposed Going Private Transaction, the Company has been served with three complaints filed by various plaintiffs, alleging that they bring purported derivative and class action lawsuits against the Company and each of the individual members of the Board on behalf of themselves and all others similarly situated and derivatively on behalf of the Company, which previously have been reported in the Company’s Current Reports on Form 8-K (filed with the SEC on November 19, 2009, November 24, 2009 and December 7, 2009).
 
On November 13, 2009, the Company was served with a complaint filed by David Cohen in the District Court in Jefferson County, Colorado. In the complaint, Mr. Cohen alleges that he brings the purported class action lawsuit against the Company and each of the individual members of the Board on behalf of the Company’s stockholders. The complaint alleges, among other things, that Troy Lowrie, the Company’s Chairman of the Board and Chief Executive Officer, has conflicts of interest with respect to the Proposal and that in connection with the Board’s evaluation of the Proposal, the individual defendants have breached their fiduciary duties under Colorado law. The complaint seeks, among other things, certification of Mr. Cohen as class representative, either an injunction enjoining the defendants from consummating or closing the Going Private Transaction, or if the Going Private Transaction is consummated, rescission of the Going Private Transaction, an award of damages in an amount to be determined at trial and an award of reasonable attorneys’ and experts’ fees.
 
On November 20, 2009, the Company was served with a complaint filed by Gene Harris and William C. Steppacher, Jr. in the District Court in Jefferson County, Colorado. In the complaint, the plaintiffs purport to bring a derivative and class action lawsuit against the Company and each of the individual members of the Board on behalf of themselves and all others similarly situated and derivatively on behalf of the Company. The complaint alleges, among other things, that Mr. Lowrie has conflicts of interest with respect to the Proposal and that the individual defendants have breached their fiduciary duties under Colorado law in connection with the Proposal. The complaint


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seeks, among other things, certification of the plaintiffs as class representatives, an injunction directing the Board members to comply with their fiduciary duties, an accounting to the plaintiffs and the class for alleged damages suffered or to be suffered based on the conduct described in the complaint, an award of the costs and disbursements of maintaining the action, including reasonable attorneys’ and experts’ fees, and such other relief the court deems just and proper.
 
On December 3, 2009, the Company was served with a complaint filed by David J. Sutton and Sandra Sutton in the District Court in Jefferson County, Colorado. In the complaint, the plaintiffs purport to bring a class action lawsuit against the Company and each of the individual members of the Board on behalf of themselves and all others similarly situated. The complaint alleges, among other things, that Mr. Lowrie has conflicts of interest with respect to the Proposal and that the individual defendants have breached their fiduciary duties under Colorado law in connection with the Proposal. The complaint seeks, among other things, certification of the plaintiffs as class representatives, an injunction directing the Board to comply with their fiduciary duties and enjoining the Board from consummating the Proposal, imposition of a constructive trust in favor of the plaintiffs and the class upon any benefits improperly received by the defendants, an award of the costs and disbursements of maintaining the action, including reasonable attorneys’ and experts’ fees, and such other relief the court deems just and proper.
 
The plaintiffs in the three lawsuits have moved to consolidate all three of the lawsuits (the “Class Action and Derivative Suits”) into one suit together with a fourth lawsuit arising out of the Proposal for the proposed Going Private Transaction, in which the Company was not named as a defendant, filed on December 11, 2009 by Brandon Ostry in the District Court in Jefferson County, Colorado against Mr. Lowrie and Lowrie Management, LLLP. The Company provided additional details on the Ostry lawsuit in its Current Report on Form 8-K filed with the SEC on December 17, 2009. The court has indicated that it will consider the consolidation motion if and when the plaintiffs move for class certification. As of the date hereof, the plaintiffs have not yet moved for class certification.
 
As of the date hereof, the Company believes that the allegations made in each of the Class Action and Derivative Suits are baseless and the Company intends to vigorously defend itself. The Company has not accrued any reserves for damages or for the settlement of these lawsuits as the outcome of the disputes cannot be predicted. Further, the uncertainty over the potential outcome of the Class Action and Derivative Suits has increased in light of subsequent events. As described elsewhere in this Annual Report on Form 10-K, on December 16, 2009, the Special Committee of the Company’s Board rejected the Proposal concerning the proposed Going Private Transaction as then-currently inadequate and, as previously disclosed in the Company’s Current Report on Form 8-K filed with the SEC on February 17, 2010, on February 17, 2010, the Company entered into the Letter of Intent with Rick’s concerning the proposed Merger. Currently, the Class Action and Derivative Suits only pertain to the Proposal for the proposed Going Private Transaction and not the proposed Merger. However, it is possible that the plaintiffs in the Class Action and Derivative Suits will attempt to amend their complaints to make claims related to the proposed Merger or that these plaintiffs or others persons may file one or more new lawsuits related to it.
 
Pursuant to the terms of the Company’s Articles of Incorporation and stand-alone indemnification agreement the Company has entered into with its Directors and executive officers, the Company may be required to advance expenses to and indemnify the Directors and Mr. Lowrie from expenses involved in defending against the lawsuits described above. The Company has discussed the risks and costs associated with such indemnification under the heading “Risk Factors.”
 
The Company is involved in various other legal proceedings that arise in the ordinary course of business. The Company believes the outcome of any of these proceedings will not have a material effect on the consolidated operations of the Company.
 
The Company is involved in various other legal proceedings that arise in the ordinary course of business. The Company believes the outcome of any of these proceedings will not have a material effect on the consolidated operations of the Company.


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Item 4.   (Remove and Reserved)
 
PART II
 
Item 5.   Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
The Company’s common stock, $0.0001 par value per share, is currently traded on the NASDAQ Global Market under the symbol “VCGH.” The market for our common stock is limited and volatile.
 
The following table sets forth the range of high and low bid prices for our common stock for each quarterly period indicated, as reported on the NASDAQ Global Market:
 
                                 
    2009     2008  
Three Months Ended
  High     Low     High     Low  
 
March 31
  $ 1.85     $ 1.27     $ 13.90     $ 5.95  
June 30
  $ 2.79     $ 1.38     $ 6.70     $ 3.60  
September 30
  $ 2.30     $ 1.90     $ 4.03     $ 2.80  
December 31
  $ 2.31     $ 1.62     $ 3.35     $ 1.24  
 
The high and low bid prices per share as reported on the NASDAQ Global Market on March 11, 2010, were $2.88 and $2.73, respectively.
 
Holders
 
As of March 12, 2010, there were approximately 2,232 stockholders of record of our common stock, excluding shares held by objecting beneficial owners.
 
Dividends
 
The Company has never declared or paid any dividends on our common stock. We do not intend to pay cash dividends on our common stock. We plan to retain our future earnings, if any, to finance our operations and for expansion of our business. The decision whether to pay cash dividends on our common stock will be made by our Board, in its discretion, and will depend on our financial condition, operating results, capital requirements, and other factors that our Board consider relevant.
 
Recent Sales of Unregistered Securities
 
None.
 
Transfer Agent and Registrar
 
The transfer agent and registrar for our common stock is Transfer Online, Inc., 512 SE Salmon Street, Portland, OR 97214.
 
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
During 2009, the Company repurchased an aggregate of 444,655 shares of common stock for an aggregate purchase price of $869,393. As a result, as of December 31, 2009, up to 787,721 shares of common stock or shares of common stock with an aggregate purchase price of approximately $8,046,000 (whichever is less) remain available for repurchase under the Company’s repurchase program.


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The following table provides additional information about the Company’s purchases under the repurchase program during the fourth quarter of 2009.
 
                                 
                      Maximum Number
 
                Total Number of
    (or Approximate
 
                Shares Purchased
    Dollar Value) of Shares
 
    Total Number
          as Part of Publicly
    that may yet be
 
    of Shares
    Average Price
    Announced Plans
    Purchased Under
 
Period
  Purchased(1)     Paid per Share     or Programs(1)     the Plans or Programs  
 
October 1 to 31, 2009
    44,681     $ 2.05       44,681     788,194 shares or $ 8,046,913  
November 1 to 30, 2009
    473     $ 1.83       473     787,721 shares or $ 8,046,033  
December 1 to 31, 2009
    -     $ -       -     787,721 shares or $ 8,046,033  
                                 
Total
    45,154 (2)   $ 2.04       45,154 (2)   787,721 shares or $ 8,046,033  
                                 
 
 
(1) Unless noted, the Company made all repurchases in the open market.
 
(2) Of these repurchases, the Company purchased 37,454 shares of common stock in the open market and 7,700 shares of common stock in a private transaction.
 
On November 3, 2009, the Company’s Board terminated the stock repurchase program approved on July 26, 2007, to allow the Company to evaluate the proposed going private transaction by Troy Lowrie, our Chairman of the Board and CEO, among other parties.
 
Item 6.   Selected Financial Data
 
The following table sets forth certain of the Company’s historical financial data. The selected historical consolidated financial data as of December 31, 2009 and 2008 and for the years ended December 31, 2009 and 2008 have been derived from the Company’s audited consolidated financial statements and the related notes included elsewhere herein. The selected historical consolidated financial data as of December 31, 2007, 2006, and 2005 and for the years ended December 31, 2007, 2006, and 2005 have been derived from the Company’s audited financial statements for such years, which are not included in this Annual Report on Form 10-K. The selected historical consolidated financial data set forth are not necessarily indicative of the results of future operations and should be read in conjunction with the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the historical consolidated financial statements and accompanying notes included herein. The historical results are not necessarily indicative of the results to be expected in any future period.
 
                                         
Description
  2009     2008     2007     2006     2005  
                (Restated)              
 
Total revenue
  $ 55,040,034 (5)   $ 57,692,671 (3),(4)   $ 39,616,731 (2)   $ 16,114,581 (1)   $ 15,854,153  
Net income (loss) from operations
  $ 5,075,311     $ (37,440,195 )   $ 5,442,076     $ 236,833     $ (1,271,251 )
Basic income (loss) per common share
  $ 0.04     $ (1.71 )   $ 0.33     $ 0.03     $ (0.15 )
Weighted average shares outstanding
    17,541,376       17,925,132       16,623,213       9,128,985       8,477,571  
Total assets
  $ 71,151,173     $ 75,626,043     $ 103,719,255     $ 35,079,698     $ 27,859,065  
Total stockholders’ equity
  $ 28,482,530     $ 28,386,742     $ 53,987,842     $ 12,795,623     $ 3,043,588  
 
Please read the following selected consolidated financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K for a discussion of information that will enhance understanding of this data.
 
 
(1) Fiscal year 2006 reflects the acquisitions of two adult nightclubs in Colorado.
 
(2) Fiscal year 2007 reflects the sale of Arizona and the acquisitions of 11 adult nightclubs in Minnesota (1), Illinois (4), Colorado (1), Maine (1), Florida (1) North Carolina (1), Kentucky (1), and Texas (1).
 
(3) Fiscal year 2008 reflects the acquisitions of one adult nightclub in California and one in Texas. See Note 4 to the Consolidated Financial Statements.


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(4) Fiscal year 2008 includes non-cash impairment charges for goodwill, licenses, trade names and other intangible assets for a total amount of approximately $46.0 million. In addition the Company recognized a non-cash impairment of real estate of approximately $1.9 million. See Note 6 to the Consolidated Financial Statements.
 
(5) Fiscal year 2009 includes non-cash impairment charges for goodwill, licenses, trade names and other intangible assets for a total amount of approximately $2.0 million. In addition the Company recognized a non-cash impairment of real estate of approximately $268,000. See Note 6 to the Consolidated Financial Statements.
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Statement Disclaimer
 
In this report, references to “VCG Holding Corp,” “VCG,” the “Company,” “we,” “us,” and “our” refer to VCG Holding Corp. and its subsidiaries.
 
This Annual Report on Form 10-K contains certain forward-looking statements and, for this purpose, any statements contained herein that are not statements of historical fact are intended to be “forward-looking statements” with the meaning of the Private Securities Litigation Reform Act of 1995. Without limiting the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “estimate,” “continue,” or comparable terminology, are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include, but are not limited, to, costs and liabilities associated with the proposed going private transaction and associated litigation and the proposed merger transaction, our inability to retain employees and members of management due to uncertainty about our future direction due to the proposed merger transaction, costs and liabilities associated with our inability to successfully close the proposed merger transaction or any other similar transaction, the possibility that we may be prohibited from closing the proposed merger transaction or forced to rescind it if it has been consummated and pay damages as a result of litigation, diversion of management’s attention caused by the proposed merger transaction and associated litigation, our limited operating history making our future operating results difficult to predict, the availability of, and costs associated with, potential sources of financing, disruptions in the credit markets, economic conditions generally and in the geographical markets in which we may participate, our inability to manage growth, difficulties associated with integrating acquired businesses into our operations, geographic market concentration, legislation and government regulations affecting us and our industry, competition within our industry, our failure to promote our brands, our failure to protect our brands, the loss of senior management and key personnel, potential conflicts of interest between us and Troy Lowrie, our Chairman of the Board and Chief Executive Officer (“CEO”), our failure to comply with licensing requirements applicable to our business, liability from unsanctioned, unlawful conduct at our nightclubs, the negative perception of our industry, the failure of our business strategy to generate sufficient revenues, liability from uninsured risks or risks not covered by insurance proceeds, claims for indemnification from officers and Directors, deterrence of a change of control because of our ability to issue securities or from the severance payment terms of certain employment agreements with senior management, our failure to meet the NASDAQ continued listing requirements, the failure of securities analysts to cover our common stock, our failure to comply with securities laws when issuing securities, our common stock being a penny stock, our intention not to pay dividends on our common stock, our future issuance of common stock depressing the sale price of our common stock or diluting existing stockholders, the limited trading market for, and volatile price of, our common stock, and our inability to comply with rules and regulations applicable to public companies.
 
We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made and are based on certain assumptions and expectations which may or may not be valid or actually occur and which involve various risks and uncertainties.
 
Unless otherwise required by applicable law, we do not undertake, and specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.


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Overview
 
The Company is in the business of acquiring, owning and operating nightclubs, which provide premium quality live adult entertainment, restaurant and beverage services in an up-scale environment. As of December 31, 2009, the Company, through its subsidiaries, owns and operates 20 nightclubs in Indiana, Illinois, Colorado, Texas, North Carolina, Minnesota, Kentucky, Maine, Florida, and California. The Company operates in one reportable segment.
 
Critical Accounting Estimates
 
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes, Note 2. Summary of significant accounting policies, to the Consolidated Financial Statements describes the significant accounting policies and methods used in preparation of the Consolidated Financial Statements. The accounting positions described below are significantly affected by critical accounting estimates. Such accounting positions require significant judgments, assumptions, and estimates to be used in the preparation of the Consolidated Financial Statements, and actual results could differ materially from the amounts reported based on variability in factors affecting these estimates.
 
Our management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed our disclosures to it in this Management’s Discussion and Analysis.
 
Assignment of Fair Values upon Acquisition of Licenses, Goodwill and Other Intangibles
 
In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”), and ASC Topic 350, Intangibles - Goodwill and Other (“ASC 350”), when the Company acquires a nightclub, we assign fair values to all identifiable assets and liabilities, including intangible assets such as licenses, goodwill, identifiable trade names, and covenants not to compete. We also determine the useful life for the amortizable identifiable intangible assets acquired. These determinations require significant judgment, estimates, and projections. The remainder of the purchased cost of the acquired nightclub that is not assigned to identifiable assets or liabilities is then recorded as goodwill. As a result of our acquisitions, each nightclub has recorded a significant amount of intangibles, including licenses and goodwill. The Company has not had an acquisition since July 2008.
 
The assumptions and estimates used in determining the current value of a nightclub includes operating cash flows, market and market share, sales volume, prices, and working capital changes. Historical experience, project performance, and any other available information is also used at the time that the fair value of the nightclub is estimated.
 
In estimating the fair values of our nightclubs, we used a combination of the income approach and the market-based approach. The income approach is a valuation technique, which involves discounting estimated future cash flows of each nightclub to their present value to calculate fair value. The discount rate used varies by nightclub and represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in our operations and cash flows. To estimate future cash flows, we applied a multiple to EBITDA. The market-based approach uses a comparable public company, and then compares specific parts of our operations such as rent expense.
 
Testing for Impairment of Intangible Assets
 
ASC Topic 350 requires an annual reassessment of the carrying value of indefinite lived assets at the reporting unit or nightclub level, or even more frequently, if certain circumstances occur, for impairment of that value. The evaluation of impairment involves comparing the current fair value of the reporting units to the recorded value. If the recorded value of a nightclub exceeds its current fair value, then an impairment loss is recognized to the extent that the book value of the intangible assets exceeds the implied fair value of the nightclub’s intangible assets. Accordingly, the fair value of a reporting unit is allocated to all of the assets and liabilities of that nightclub,


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including any unrecognized intangible assets and the excess becomes the implied value of the goodwill. This is done in relation to the nightclub’s respective forecasted cash flows and other relevant assumptions
 
In performing the Company’s annual impairment assessment at December 31, 2009 in accordance with ASC Topic 350, the Company recorded a non-cash impairment charge for licenses of $1,574,000 and trade names of $167,000. In addition, the Company evaluated its goodwill at December 31, 2009 and recorded a non-cash impairment charge of approximately $17,000. The total impairment charge was approximately $1,758,000.
 
The fair value of the licenses, trade names, and reporting units was based on estimated discounted future net cash flows at the club level. The impairment charge is a result of a continued weak economy. We computed an estimate of our company-wide weighted average cost of capital of 12.0%. The long-term growth rate of 3% was estimated by using the Gordon Growth Model. These processes are subjective and require significant estimates. These estimates include judgments about future cash flows that are dependent on internal forecasts, growth rates, company specific risk premiums and estimates of weighted average cost of capital used to discount future cash flows. Changes in these assumptions and estimates could materially affect the results of our reviews for impairment.
 
Impairment of Real Estate
 
ASC Topic 360, Property Plant and Equipment requires a fair market valuation of assets, including land and buildings, in the event of triggering events including adverse changes in the business climate or decline in market value. In December 2008, the Company ordered an appraisal of the land and building owned in Phoenix, Arizona. The appraisal was performed by an independent third party real estate appraiser who valued the land and building at $2,600,000, resulting in an impairment of approximately $1,886,000 at December 31, 2008. This building was rented by the individual who purchased the operations and ownership interest in our subsidiary Epicurean Enterprises in January 2007. The lessee defaulted on the lease in August 2008 and an impairment charge of $268,000 was recorded at June 30, 2009. On July 31, 2009, the Company sold the building and land for approximately $2,300,000. The Company recognized a non-cash loss of approximately $69,000 upon the sale. The Company does not have any real property held for sale or vacant as of December 31, 2009.
 
Stock Options
 
In 2007 and 2008, the Company issued stock option grants to key employees and officers. The two officer grants vest one-third on the 3rd, 5th and 7th anniversary of the grant date. Key employee grants vest 20% on the 3rd anniversary and 40% each on the 5th and 7th anniversary of the grant date. The options are cancelled upon termination of employment and expire ten years from the date of grant. All options were granted at an exercise price significantly above the fair market value of the common stock covered by the option on the grant date. All option exercise prices substantially exceed fair market value on December 31, 2009 and March 12, 2010.
 
The Company accounts for stock-based compensation by measuring and recognizing as compensation expense the fair value of all options as of the grant date. The determination of fair value involves a number of significant estimates. We use the Black-Scholes Option Pricing Model to estimate the fair value of option grants using assumptions which are described in Note 11 to the consolidated financial statements. These include the expected volatility of our stock and employee exercise behavior. These variables make estimation of fair value of stock options difficult. A key assumption is the number of options ultimately expected to vest. Since no options were granted during 2009, the only estimate which affected the 2009 financial statements was the forfeiture assumption. Forfeitures were estimated at the time of the grant in 2007 and 2008 of 16% over the seven year option vesting period based upon limited historical experience and were revised to 25% during 2009 based upon actual forfeitures. This resulted in a reduction of stock-based compensation expense of approximately $46,000 for 2009.
 
Any subsequent revisions to the forfeiture assumptions adjusts the prior period compensation expense in the period of the change on a cumulative basis for unvested options for which compensation expense has already been recognized and in subsequent periods for unvested options for which the expense has not yet been recognized. Actual forfeitures could differ materially as a result of voluntary employee actions and involuntary actions which may result in significant changes in our stock-based compensation expense amounts in the future. In addition, the value, if any, an employee ultimately receives from stock-based compensation awards will likely not correspond to the expense amounts recorded by the Company.


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Legal and Other Contingencies
 
As discussed in Note 12 to the consolidated financial statements, legal proceedings are pending or threatened. The outcomes of legal proceedings and claims brought against us and other loss contingencies are subject to significant uncertainty. We accrue a charge against income when our management determines that it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether an accrual should be established or adjusted. Due to the inherent uncertain nature of litigation, the ultimate outcome or actual cost of defense or settlement may vary materially from estimates.
 
IRS Tip Audit
 
The IRS audited PT’s® Showclub in Denver for the years 2006, 2007, and 2008 to determine tip reporting compliance. Every business with customary tipping must report annually on Form 8027 the total sales from food and beverage operations, charge sales, total tips reported, and charge tips reported. The audit resulted in a determination that cash tips for that club were under-reported in the three years examined. The tax assessed, without penalties and interest, as a result of this under-reporting was $61,500. The Company performed an intensive self-audit for 2007, 2008 and 2009 using the same procedures followed by the IRS agent. As a result of the completion of the self-assessment process for the three years under examination, the Company has accrued a tip liability of $207,000 as of December 31, 2009. This estimate involves significant judgment and the actual tax liability may differ materially.
 
DOL Audit
 
In October 2008, PT’s® Showclub in Louisville, KY was required to conduct a self-audit of employee payroll by the DOL. After an extensive self-audit, the DOL required that the Club issue back pay and refund uniform expenses to qualified employees at a total cost of $14,439.
 
In March 2009, VCG was placed under a similar nationwide DOL audit for all nightclub locations and its corporate office. All locations completed the self-audit in August 2009 and are currently working with the DOL to determine what, if any, violations may have occurred. This case is still in the investigatory state and no final determination can be made at this time of an unfavorable outcome or any potential liability. The Company has accrued $200,000 as of December 31, 2009 for potential wage/hour violations; however this estimate involves significant judgment and the actual liability may vary materially from this estimate. A summary meeting has tentatively been scheduled with the DOL and counsel on March 15, 2010 to finalize the liability. The Company believes it has corrected all processes that resulted in the potential violations.
 
Self-Insured Health Insurance
 
The Company is partially self-insured for group health insurance. The accrual is regularly evaluated and adjusted for claims incurred but not reported. Due to the inherent uncertain nature of medical claims, the actual cost may materially differ from the $200,000 accrued liability as of December 31, 2009.
 
Income Taxes
 
We are subject to income in the United States. Tax law requires items to be included in the tax return at different times than when the same items are reflected in the consolidated financial statements. Permanent differences result when either deductible items for U.S. GAAP purposes are not deductible for tax purposes or income recognized for U.S. GAAP purposes is not recognized for tax. Temporary differences reverse over time, such as depreciation, amortization, and net operating loss carry-forwards. As of December 31, 2009, we have an estimated tax net operating loss carry-forward of approximately $2,608,000 which is classified as non-current deferred tax asset. Significant judgment is used in determining the timing of utilizing the net operating loss carry-forward, some of which may be utilized in 2010. Based on the evaluation of all available information, the Company recognizes future tax benefits, such as net operating loss carry-forwards, to the extent that realizing these benefits is considered “more likely than not” to be sustained in accordance with FASB guidance issues in accounting for uncertainty in income taxes recognized.


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The timing differences create either deferred tax assets or liabilities. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities. The tax rates used to determine deferred tax assets or liabilities are enacted tax rates in effect for the year and manner in which the differences are expected to reverse. Our effective rates differ from the statutory rate primarily due to 2009 permanent differences of approximately $351,000 (tax affected) and tax credits of approximately $582,000.
 
During the course of ordinary business, there are some transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, additional tax will be due. The reserves are established when we believe that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities. We evaluate our ability to realize the tax benefits associated with deferred tax assets by analyzing our future taxable income using both historical and projected future operating results, reversing the existing taxable temporary differences, taxable income in prior carry-back years (if permitted) and the availability of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
 
As of December 31, 2009, the current portion of the deferred income tax asset was determined to be $76,920 attributable to the company’s partially self insured health insurance reserve and $3,841,673 non-current deferred income tax asset attributable to other temporary differences.
 
Results of Operations
 
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
 
Revenues
 
Total revenue, net of sales taxes, decreased from approximately $57,693,000 for the year ended December 31, 2008 to approximately $55,040,000 for the year ended December 31, 2009. The decrease in revenue of approximately $2,653,000 or 4.6% was primarily due to the weak economy and a reduction in business and convention travel. The high-end A clubs had a decline in revenue of approximately $1,552,000 or 7.3%. These clubs are the most susceptible to the economic recession because of their business clientele. Because of the weak economy the B format clubs also experienced an overall decline in revenue of approximately $2,462,000 or 8.8%. The Jaguar’s Gold Club in Dallas, Texas and Imperial Showgirls Gentlemen’s Club in Anaheim, California were included in operations for all of 2009, but only for a part of 2008. These acquisitions generated approximately $1,720,000 of additional income in 2009 that was not included in 2008 results.
 
Rental income received from unrelated third parties, included in other income, totaled approximately $179,000 for the year ended December 31, 2009 and approximately $288,000 in 2008. This was due to the Company not receiving rental income in 2009 on the Arizona property which was sold in July 2009. Rental income in 2008 was less than 0.5% of total income and decreased to approximately 0.3% in 2009.
 
Cost of Goods Sold
 
Cost of Goods sold includes the cost of the alcohol, food, and merchandise we sell to customers. We track cost of goods sold as a percentage of the attributable revenues. Costs of goods sold decreased in 2009 to approximately $5,921,000 or 23.9% of attributable revenue. This compares to approximately $6,980,000 in 2008, or approximately 24.3% of attributable revenue. The decrease is a result of operating two additional all nude nightclubs (C clubs) for the full year of 2009 as compared to 2008. The all nude clubs do not sell alcohol and have a lower cost of goods sold percentage. In addition, the A and B clubs better managed their inventories, reducing the cost of sales percentage by more than the decrease in attributable revenue.


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Salaries and Wages
 
Salaries and wages increased by approximately $320,000 or 2.4% in 2009, from $13,461,000 for the year ended December 31, 2008 to approximately $13,781,000 for the year ended December 31, 2009. This slight change can be attributable to the following:
 
  •  an increase in the federal and state minimum wages ranging from $0.17 to $0.70 per hour from 2008 to 2009;
 
  •  the estimated accrual of $200,000 for DOL minimum wage violations for 2006 through 2008; offset in part by a reduction in club employee headcount by approximately 85 tipped, minimum wage personnel from December 31, 2008 headcounts.
 
In November 2007, the Company’s Compensation Committee hired an independent consulting firm to determine proper compensation levels for our CEO and President. The study’s results were used to determine the compensation of our President, Micheal Ocello, after he changed his status from consultant to employee in October 2007. Mr. Ocello’s annual salary has remained consistent, without an increase for the twelve months ended December 31, 2009 and 2008.
 
Our CEO and principal stockholder, Troy Lowrie, elected to not receive a salary from the Company’s inception in 2002 until March 2008. At that time, Mr. Lowrie elected to receive a salary of approximately $300,000 annually, only 40% of the salary recommended by the independent salary survey and approved by the Board. In November 2008, Mr. Lowrie elected to increase his salary to $700,000, the full amount approved by the Board. Mr. Lowrie has been paid that salary, without an increase, through 2009.
 
The percentage of salary to total revenue for the year ended December 31, 2009 was 25.0%. The same percentage for the previous year was 23.3%, an increase of 1.7%. We expect the ongoing percentage of salary to total revenue to continue to be approximately 25% of total revenues.
 
Other General and Administrative Expenses
 
Taxes and permits expenses increased by approximately $585,000 for the year ended December 31, 2009, compared to the same period in 2008. This 20.2% increase was a result of:
 
  •  increased payroll taxes of $616,000 or 37.9%. This increase includes the estimated tip audit accrual of $207,000 plus the additional FICA tax already paid on unreported tip from 2006 to 2008 of $61,500 and additional FICA tax paid on reported tips in 2009;
 
  •  increases in taxes and permits of approximately $72,000 or 15.4%. This category contains club liquor, cabaret or sexually oriented business (“S.O.B.”) licenses, sales tax, and business and health inspection licenses. This category also includes amounts expensed for the Texas Patron Tax, paid under protest, in the amounts of approximately $290,000 for the year ended December 31, 2009 and $203,000 for the year ended December 31, 2008. Refer to Item 3 Legal Proceedings for additional information; and
 
  •  decreases in property taxes of approximately $103,000 or 12.9%. Property tax valuations were protested in the five clubs located in East St. Louis, resulting in a property tax savings of approximately $30,000. The sale of the Arizona building in July 2009, with annual property taxes of approximately $60,000, reduced the 2009 property tax expense by almost $30,000. Assessed values of club properties were reduced in Texas, with a savings of approximately $16,000.
 
Charge card and bank fees decreased by approximately $72,000 to a total of approximately $797,000 for the year ended December 31, 2009. This is an 8.3% decrease over the same period in 2008. This decrease is attributable to a change in several cities to banks with lower service charges, closing of many bank accounts with little or nominal activity, sharp decrease in wiring funds to avoid wire fees and the use of electronic funds transfers and online banking. Chargeback losses are also down in 2009 by approximately $37,000 due to changes in procedures in processing and fighting customer chargebacks.
 
Annual rent increased slightly in 2009, to approximately $5,855,000 as of December 31, 2009 compared to $5,798,000 for the same period ending December 31, 2008. This increase of approximately $57,000 or 1.0% is for


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scheduled rent increases plus rents for full year on Manana Entertainment, Inc. and VCG-IS, LLC, the two clubs acquired during 2008.
 
Legal fees increased by 33.1% to approximately $1,466,000 for the year ended December 31, 2009 compared to the same period in 2008. This increase is due to litigation involving the Classic Affairs nightclub (see Item 3 Legal Proceedings). The lawsuit has now been dismissed, with prejudice. All related costs have been accrued or paid as of December 31, 2009.
 
Other professional fees decreased by approximately $572,000 or 20.5% in 2009 to approximately $2,216,000 at December 31, 2009, from the previous amount of $2,788,000 in 2008. These fees include charges for appraisals, broker commissions for renting company real estate, lobbying fees, and environment assessments. Other professional fees in 2009 included the following approximate amounts:
 
  •  audit and quarterly review fees of $210,000 (see Item 14 Principal Accountant Fees and Services in Part III);
 
  •  tax return preparation fees of $214,000 to file 2008 tax returns, amend all the Company’s federal and state returns filed in 2008 for the fiscal year ending December 31, 2007 and correct earlier years’ state tax returns;
 
  •  consultant expenses to test internal controls and document compliance with the Sarbanes-Oxley Act of 2002 of approximately $99,000;
 
  •  $102,000 in marketing consulting fee expenses paid by warrants that expired in 2009; and
 
  •  $290,000 of valuation and impairment calculation costs and consulting fees for work related to the SEC comment letter and subsequent amended SEC filings;
 
Approximately $954,000 in expenses were incurred by the Company and the Special Committee in relation to the proposed going private transaction and proposed merger with Rick’s Cabaret International, Inc. See Footnote 3 to the Financial Statements. These costs represent expenses of the Special Committee, legal costs billed by the legal counsel to the Special Committee, legal costs incurred by the Company in relation to both the proposed going private transaction and proposed merger, and costs billed and accrued from the financial advisor to the Special Committee.
 
Advertising and marketing expenses decreased by approximately $116,000 or 3.9% over the year ended December 31, 2008. This decrease is mostly attributable to more efficient methods of advertising, including using billboard trucks for mobile advertising versus leasing fixed billboard signs. Advertising and marketing expenses were approximately 5.1% of total revenues in 2009 and 2008. The Company’s senior management uses this metric to monitor and control advertising expenses.
 
Insurance expenses decreased by approximately $57,000 for the year ended December 31, 2009, a 3.3% decrease over the prior year. This decrease is due to insurance premium savings related to economies of scale and lower rates resulting from a reduction in claims. Insurance premiums represented approximately 3.0% of total revenues in 2009 and 2008. This percentage is a metric that Company senior management uses to monitor and control insurance expenses.
 
Utilities expenses slightly decreased in 2009 over the same period in 2008. The decrease of approximately $72,000 or 6.5% was a result of milder weather in 2009 versus the very cold winter in the central and northeast United States in 2008.
 
Repair and maintenance expenses increased from approximately $1,022,000 in 2008 to $1,242,000 in 2009. This increase of $220,000 or 21.5% resulted from repairs and stepped up maintenance on several nightclubs, including repairs to heating/air conditioning systems in Minnesota, Kentucky, Illinois and Colorado. Sprinkler systems were repaired and updated in Raleigh and sewer and drains were repaired in Denver. Electrical wiring and lighting systems were repaired in several clubs as well.
 
General and administrative (“G&A”) expenses include common office and nightclub expenses such as janitorial, supplies, security, cast and employee relations, education and training, travel and automobile, telephone, and internet expenses. Total G&A expenses totaled $5,023,000 for the twelve months ended December 31, 2009 compared to $4,777,000 for the same time period in 2008. Janitorial expenses were the largest item in the G&A


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category, totaling approximately $870,000 for the twelve months ended December 31, 2009. This is an increase of approximately $126,000 over the same time period in 2008. The primary reason for this increase is that the two clubs acquired in 2008 were included in a full year’s expenses in 2009. In addition, upholstery and carpet cleaning are included in this account and this has been done semi-annually in most clubs in 2009. Office and nightclub supplies totaled $694,000 for the 12 months ended December 31, 2009, an increase of approximately 9.5% over the same time period for 2008. Automobile and travel also increased by approximately $51,000 for the year ended December 31, 2009 compared to the same period in 2008. Employee education and travel was higher for club personnel, where classes on non-violent security training, club management and classes on the new point of sales POS system were offered to personnel in all clubs. G&A expenses for being a public company included SEC filing fees, investor relations and transfer agent charges totaled approximately $218,000 for the fiscal year ending in 2009. Other unusual and previously disclosed expenses are included in the G&A total, including abandoned acquisition totaling approximately $52,000 in 2009.
 
Depreciation and Amortization
 
Depreciation and amortization expenses increased by $13,507 or 0.8%, during the year ended December 31, 2009, compared to the same period in 2008. This small increase is a result of the point of sale (“POS”) system being installed in November and December 2009. Depreciation on other asset additions earlier in 2009 were offset by the end of depreciation expense on the Arizona building that was sold in July 2009.
 
Amortization of non-compete agreements entered into in connection with nightclub acquisitions, is included in depreciation and amortization in the statement of consolidated operations. For the year ended December 31, 2008 amortization of non-competes was $20,761 and $17,035 for the year ended December 31, 2009. All non-compete agreements were included in the acquisition valuation analysis and adjusted accordingly. These adjusted values are being amortized ratably over the life of the agreement.
 
Interest Expense
 
Total interest expense decreased by approximately $305,000 or approximately 8.1%, during the year ended December 31, 2009, compared to the same period in 2008. The decrease in interest expense was a result of the Company paying down over approximately $4,700,000 in total debt, during 2009, including one promissory note with an annual interest rate of 12%.
 
Interest Income
 
Interest income decreased by almost $16,000 or 68.4% for the year ended December 31, 2009, when compared to the same period in 2008. This is because the Company made a decision to spend virtually all free cash on paying down debt or buying back the Company’s stock, and because of interest earned in 2008 on a federal tax refund.
 
Loss on Sale of Assets
 
The Company recorded losses on the sale or write-off of assets totaling approximately $75,000 for the year ended December 31, 2009. The previously disclosed loss on the sale of the Arizona property totaled almost $69,000 of that loss. The remaining $6,000 was the write-off of miscellaneous small assets at the clubs.
 
Income Taxes
 
For 2009, the current income tax benefit of approximately $127,000 represents the net of a Federal benefit of approximately $274,000 offset by state income tax expense of $147,000. Since a tax net operating loss of $2,529,111 was generated during 2009, there is no Federal income tax owed for 2009. The Federal benefit resulted from the amendment of 2007 tax returns during 2009 and the reconciliation of the 2008 book provision to the tax returns. State income tax expense primarily represents taxes payable for those states which do not allow consolidated tax filings, as well as minimum taxes due in various states.
 
Deferred tax expense in 2009 included approximately $466,000 of deferred income taxes expense as compared to a deferred income tax benefit of $11,831,550 for the prior year which was substantially attributable to asset


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impairments of $48,006,241. Our non-current portion of deferred income tax asset increased by $1,017,181 during 2009 due to the tax net operating loss generated. This was partially offset by the sale of the Arizona land and building during 2009 which reduced our non-current portion of deferred income tax asset by approximately $780,000.
 
Net income was $735,691 for the year ended December 31, 2009 as compared with a net loss of $30,710,794 for 2008.
 
Liquidity and Capital Resources
 
The amount of cash flow generated and the working capital needs of the nightclub operations does not materially fluctuate and is predictable. We expect to meet our liquidity needs for the next year from existing cash balances and cash flows from operations. We intend to use our cash flows for principal and interest payments on debt, capital expenditures in certain clubs, and repairs and maintenance in other clubs.
 
Working Capital
 
At December 31, 2009 and December 31, 2008, the Company had cash of approximately $2,677,000 and $2,209,000 respectively. Our total current assets were approximately $4,884,000 and $4,220,000 for the same time period. Current liabilities totaled approximately $8,004,000 at December 31, 2009 and $7,128,000 at December 31, 2008. The Company’s current liabilities exceed its current assets resulting in a negative working capital of approximately $3,120,000 at December 31, 2009 and $3,108,000 at December 31, 2008. The working capital deficit decreased by approximately $12,000 between the two years. Our requirement for working capital is not significant since we receive payment for food and beverage purchases in cash or credit cards at the time of the sale. So we receive the cash revenue before we are required to pay our suppliers for these purchases.
 
Of the current liabilities at December 31, 2009, none is due to Lowrie Management LLLP. A total of approximately $1,309,000 of current liabilities are guaranteed by Mr. Lowrie and secured by his personal assets. Of that, the Company paid $1,400,000 in full on January 4, 2010. At December 31, 2009, the Company still had $1,280,000 of available and unused funding on its revolving line of credit with one bank and consolidated two loans into one loan with the same bank. The proposed merger transaction and current economic conditions have temporarily suspended the process of negotiating a larger line of credit. We have loans and a line of credit with our lead bank and have no reason to believe that these will not be renewed, when they come due in 2010 to 2014.
 
In 2009, we made payments on debt totaling approximately $5,175,000, including payments of high-interest rate debt. The Company renegotiated terms on many loans during the fourth quarter of 2008 and first quarter of 2009, extending maturity dates by 12 to 14 months or more. In all instances but one loan, the interest rate and principal amounts did not change, making the extension a modification of the loan, not an extinguishment.
 
On August 17, 2009, the Company modified the terms of two existing long-term debt obligations totaling $3,872,426 with Citywide Banks. The promissory notes that were consolidated included:
 
(i) a promissory note executed on May 16, 2006 with a current outstanding principal balance of $1,770,286, bearing interest at 8.5% per annum, with monthly principal and interest payments of approximately $36,156 and with a maturity date of May 16, 2010; and
 
(ii) a promissory note executed on June 30, 2008 with a current outstanding principal balance of $2,102,140, bearing interest at 6% per annum, with monthly principal and interest payments of approximately $50,403 and with a maturity date of June 30, 2013.
 
The consolidated replacement promissory note (the “Replacement Note”) in the amount of $3,872,426 bears interest at the rate of 7% per annum, with monthly principal and interest payments of approximately $76,865 and with a maturity date of August 15, 2014. The Replacement Note contains two new covenants. The first new covenant requires acquisitions or additional indebtedness of equal to, or in excess, of $1,000,000 be pre-approved by Citywide Banks. The second new covenant is a financial ratio covenant. This covenant requires the quarterly calculation of net cash flow to debt service in a ratio greater than, or equal to, 1.2 to 1.0. Net cash flow is defined as


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income attributable to the Company plus depreciation, amortization, and interest expense. Net profit excludes any intangible impairments and related tax effects. The Company is currently in compliance with all debt covenants.
 
The Company also extended its revolving line of credit with Citywide Banks. The original line of credit (the “Original Line of Credit”) was executed on June 29, 2008, had a maturity date of June 29, 2010, a maximum principal amount of $4,000,000, and a variable interest rate calculated on the Prime Rate as published in the Wall Street Journal, subject to change daily with a floor of six percent. The replacement line of credit (the “Replacement Line of Credit”) has the identical maximum principal amount and interest terms as stated in the Original Line of Credit. Monthly payments vary based on principal outstanding. The maturity date of the Replacement Line of Credit is August 15, 2011. The following is a description of material changes in the terms of the Replacement Line of Credit compared to the Original Line of Credit: (i) The Original Line of Credit and the Replacement Line of Credit have the same collateral, but have been cross collateralized with the collateral for the Replacement Note: the Whole Life Insurance Policy on the life of Troy Lowrie, plus the P&A Select Strategy Fund, LP and the P&A Multi-Sector Fund II, LP, owned by Lowrie Management LLLP, and (ii) The Original Line of Credit covenants required that all advances on the Original Line of Credit be fully repaid for one day every 180 days. That covenant was replaced with the same new covenants as indicated for the Replacement Note above.
 
On September 22, 2009, the Company prepaid a promissory note issued to Bryan S. Foster (“Foster”) in connection with VCG’s purchase of Manana Entertainment, Inc. (“Manana”) from Foster in the following manner:
 
(a) a cash payment of $1,600,000 made by VCG and Manana to Foster, and
 
(b) an offset of the amount owed by Black Canyon Highway LLC, the purchaser of the Phoenix, Arizona property to VCG totaling $263,544 against the balance owed by VCG and Manana to Foster under the Foster note.
 
After the application of the offset and note payments, the outstanding principal balance owed by Black Canyon to VCG at December 31, 2009 under the Black Canyon note is $56,132. The unpaid balance on the Black Canyon note will continue to accrue interest at eight percent per annum. No other terms of the Black Canyon note were changed.
 
As previously disclosed, in August 2009, the Company renegotiated due dates on five promissory notes, totaling $1,984,612 with original maturity dates from January to November 2010. In all instances, the loans were extended twelve months from their original maturity dates into 2011. No other changes were made to these notes. The Company has shown these promissory notes as long-term debt on the balance sheet. Please see Note 9 in the consolidated financial statements for additional detail on the Company’s debt. The Company is not currently considering any immediate acquisitions because of the proposed merger transaction.
 
Cash flows generated from operations was $7,081,000, and we had a net increase in cash at the end of the fiscal year ended December 31, 2009. We have been able to satisfy our needs for working capital and capital expenditures through a combination of cash flow from nightclub operations and debt. We expect that operations will continue with the realization of assets and payment of current liabilities in the ordinary course of business.
 
While we can offer no assurances, we believe that our existing cash and expected cash flow from operations will be sufficient to fund our operations and necessary capital expenditures and to service our debt obligations for the foreseeable future. If the proposed merger does not occur and if we are unable to achieve our planned revenues, costs and working capital objectives, we believe that we have the ability to curtail stock repurchases and capital expenditures and will reduce costs to levels that will be sufficient to enable us to meet our cash requirement needs in the upcoming year.
 
Capital Resources
 
We had stockholders’ equity of $28,482,530 at December 31, 2009 and $28,386,742 at December 31, 2008. The $95,789 increase in stockholders’ equity is primarily a result of the stock buybacks that occurred and are described elsewhere in this document. We had stockholders’ equity of $28,482,530 at December 31, 2009 and $28,386,742 at December 31, 2008. The stock buybacks described elsewhere in this document resulted in an


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approximate reduction in stock and additional paid-in capital of $625,000. This was offset by net income attributable to VCG of $735,691 for the year ended December 31, 2009.
 
Net cash provided by operating activities was approximately $7,081,000 in 2009 compared to approximately $11,752,000 in 2008. The major non-cash activities in 2009 were the impairment of indefinite life intangible assets (licenses, goodwill and trademarks) of $1,758,000; the non-cash impairment of the Phoenix, Arizona land and building of $268,000 and the provisions of depreciation of approximately $1,695,000; non-compete amortization of approximately $17,000 and net amortization of favorable lease rights and unfavorable lease liabilities of approximately $212,000. The amortization of loan fees included an additional approximately $37,000 related to the extinguishment and replacement of a bank debt, with a new note including an extended due date and modified interest rate. Accounts payable and accrued expenses also increased by approximately $576,000. There was also a decrease in the deferred income tax benefit of $739,000 due to the income tax effect of the sale of the Arizona property offset by the impairment losses.
 
Net cash used by investing activities totaled approximately $1,236,000 for the year ended December 31, 2009. The Company purchased approximately $1,454,000 of property and equipment, mostly in club remodels and the POS system.
 
Net cash used by financing activities was approximately $5,380,000 for 2009. During 2009, we paid approximately $79,000 in loan fees, compared to approximately $268,000 paid to lenders in 2008. We received approximately $1,212,000 in proceeds from new debt, and paid approximately $5,175,000 in debt in 2009. We repurchased approximately $869,000 of common stock, which was immediately cancelled according to Colorado state law.
 
The following table reconciles net income or (loss) to EBITDA by quarter. EBITDA is normally a presentation of “earnings before interest, taxes, depreciation, and amortization.” EBITDA is a non-GAAP calculation that is frequently used by our investors to measure operating results. EBITDA data is included because the Company understands that such information is considered by investors as an additional basis on evaluating our ability to pay interest, repay debt, and make capital expenditures. Management cautions that this EBITDA may not be comparable to similarly titled calculations reported by other companies. Because it is non-GAAP, EBITDA should not be considered an alternative to operating or net income in measuring company results.
 
                 
    December 31,  
    2009     2008  
 
Net Income (loss) attributable to VCG
  $ 735,691     $ (30,710,794 )
Add back:
               
Depreciation
    1,695,277       1,678,043  
Amortization of covenants not-to-compete
    17,035       20,761  
Amortization of leasehold rights and liabilities, net
    (212,342 )     (192,067 )
Amortization of loan fees
    216,205       448,015  
Amortization component 2 goodwill
    157,077       144,896  
Interest expense
    3,456,616       3,761,151  
Income taxes
    339,000       (11,101,610 )
                 
EBITDA before non-cash impairment charges
    6,404,559       35,951,605  
Add back:
               
Non-cash impairment charges
    2,026,000       48,006,241  
                 
EBITDA excluding non-cash impairment charges
  $ 8,430,559     $ 12,054,636  
                 
 
EBITDA (excluding non-cash impairment charges) decreased $3,404,500 in fiscal year 2009, primarily because of the reduction in income tax benefits from the impairment charges.
 
Another non-GAAP financial measurement used by the investment community is free cash flow. The following table calculated free cash flow for the Company for the twelve months ended December 31, 2009 and 2008. We use free cash flow calculations as one method of cash management to anticipate available cash, but


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cautions investors that this free cash flow calculation may not be comparable to similarly titled calculations reported by other companies. Because this is non-GAAP, free cash flow should not be considered as an alternative to the consolidated statement of cash flows.
 
                 
EBITDA (excluding non-cash impairment charges)
  $ 8,430,559     $ 12,054,636  
Less:
               
Interest expense
    3,456,616       3,761,151  
Net income (loss) attributable to noncontrolling interests
    476,717       428,614  
Total income tax
    339,000       (11,101,610 )
Capital expenditures
    1,454,478       1,324,252  
                 
Free cash flow
  $ 2,703,748     $ 17,642,229  
                 
 
Contractual Obligations and Commercial Commitments
 
The Company has long-term contractual obligations primarily in the form of operating leases and debt obligations. The following table summarizes our contractual obligations and their aggregate maturities as well as future minimum rent payments. Future interest payments related to variable interest rate debt were estimated by using the interest rate in effect at December 31, 2009.
 
                                                         
    Total     2010     2011     2012     2013     2014     Thereafter  
 
Long-term debt
  $ 30,747,383     $   3,867,344     $ 16,842,568     $ 7,207,409     $ 1,622,791     $ 1,198,348     $ 8,923  
Interest payments
    5,542,948       2,849,231       1,963,890       531,813       162,794       34,868       351  
Operating leases
    102,264,692       3,773,720       3,815,037       3,893,601       3,966,958       4,016,618       82,798,758  
 
Potential Sale of the Company
 
On November 3, 2009, the Company received a non-binding letter of intent (the “Proposal”) from the Company’s Chairman and CEO, Troy Lowrie, Lowrie Management, LLLP, an entity controlled by Mr. Lowrie, and certain other unidentified investors (collectively, the “Lowrie Investors”), to acquire all of the outstanding common stock of the Company for $2.10 per share in cash (the “Going Private Transaction”). The Proposal contemplated that the Company would no longer be a public reporting or trading company following the closing of the Going Private Transaction. In response to the Proposal, the Board formed a Special Committee to review and evaluate the Proposal and to recommend to the Board whether or not to approve or decline the Proposal. On December 16, 2009, the Special Committee informed the Lowrie Investors that it had determined, with input from its advisors, that the terms of the Proposal were currently inadequate, and the Special Committee directed its financial advisors to contact any parties that had either previously expressed an interest or might potentially be interested in pursuing a transaction with the Company.
 
On February 16, 2010, the Company, Rick’s Cabaret International, Inc. (“Rick’s”), Mr. Lowrie, and Lowrie Management, LLLP (collectively with Mr. Lowrie, “Lowrie”), entered into a non-binding (except as to certain provisions, including exclusivity and confidentiality) letter of intent (the “Letter of Intent”). Pursuant to the Letter of Intent, Rick’s agreed to acquire all of the outstanding shares of common stock of the Company and the Company will merge with and into Rick’s or a wholly-owned subsidiary of Rick’s (the “Merger”). In the event the Merger is consummated, the Company will become a subsidiary of Rick’s and the Company’s shareholders will become shareholders of Rick’s. The parties intend that the Merger will be structured to qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as amended.
 
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk
 
Not applicable to smaller reporting companies.


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Item 8.   Financial Statements and Supplementary Data.
 
Report of Independent Registered Public Accounting Firm
 
To the Board of Directors and Stockholders of VCG Holding Corp.
 
We have audited the accompanying consolidated balance sheets of VCG Holding Corp. as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2009. We also have audited VCG Holding Corp.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). VCG Holding Corp.’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting (Item 9A.). Our responsibility is to express an opinion on these financial statements and an opinion on the company’s internal control over financial reporting based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of VCG Holding Corp. as of December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, VCG Holding Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
 
/s/ Causey Demgen & Moore Inc.
Denver, Colorado
March 12, 2010


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Table of Contents

VCG Holding Corp.
 
 
                 
    December 31,  
    2009     2008  
 
Assets
               
Current Assets
               
Cash
  $ 2,677,440     $ 2,209,060  
Assets held for sale
    -       106,900  
Other receivables
    254,333       25,473  
Income taxes receivable
    594,720       276,267  
Inventories
    926,321       949,088  
Prepaid expenses
    354,730       282,485  
Current portion of deferred income tax asset
    76,920       171,000  
                 
Total Current Assets
    4,884,464       4,020,273  
                 
Property and equipment, net
    22,946,114       25,738,388  
Licenses, net
    34,834,018       36,413,189  
Goodwill, net
    2,279,045       2,453,122  
Trade names
    452,000       619,000  
Favorable lease rights, net
    1,647,968       1,705,364  
Non-compete agreements, net
    23,898       40,933  
Non-current portion of deferred income tax asset
    3,841,673       4,068,593  
Other long-term assets
    241,993       567,181  
                 
Total Assets
  $ 71,151,173     $ 75,626,043  
                 
Liabilities and Equity
               
Current Liabilities
               
Accounts payable — trade
  $ 1,750,940     $ 847,493  
Accrued expenses
    1,930,049       2,257,116  
Income taxes payable
    67,917       -  
Current portion of capitalized lease
    -       10,000  
Current portion of long-term debt
    3,805,277       2,602,000  
Current portion of long-term debt, related party
    62,067       1,024,000  
Deferred revenue
    110,010       109,455  
Current portion of unfavorable lease rights
    277,920       278,155  
                 
Total Current Liabilities
    8,004,180       7,128,219  
                 
Long-Term Liabilities
               
Deferred rent
    1,628,301       845,136  
Unfavorable lease rights, net of current portion
    6,156,123       6,425,626  
Capital lease, net of current portion
    -       9,111  
Long-term debt, net of current portion
    19,751,021       25,916,111  
Long-term debt, related party, net of current portion
    7,129,018       6,915,098  
                 
Total Long-Term Liabilities
    34,664,463       40,111,082  
                 
Commitments and Contingent Liabilities (Note 9 and 12)
               
Equity
               
Common stock $.0001 par value; 50,000,000 shares authorized;17,310,723 (2009) and 17,755,378 (2008) shares issued and outstanding
    1,731       1,775  
Additional paid-in capital
    51,932,082       52,557,047  
Accumulated deficit
    (26,996,863 )     (27,732,554 )
                 
Total VCG Stockholders’ Equity
    24,936,950       24,826,268  
Noncontrolling interests in consolidated partnerships
    3,545,580       3,560,474  
                 
Total Equity
    28,482,530       28,386,742  
                 
Total Liabilities and Equity
  $ 71,151,173     $ 75,626,043  
                 
 
The accompanying notes are an integral part of the consolidated financial statements.


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VCG Holding Corp.
 
For the years ended
 
                 
    December 31,  
    2009     2008  
 
Revenue
               
Sales of alcoholic beverages
  $ 22,877,141     $ 26,242,303  
Sales of food and merchandise
    1,868,576       2,502,393  
Service revenue
    27,170,918       25,568,380  
Other income
    3,123,399       3,379,595  
                 
Total Revenue
    55,040,034       57,692,671  
                 
Operating Expenses
               
Cost of goods sold
    5,921,054       6,979,636  
Salaries and wages
    13,780,775       13,461,173  
Other general and administrative
               
Taxes and permits
    3,478,871       2,894,076  
Charge card and bank fees
    797,340       869,210  
Rent
    5,855,191       5,798,066  
Legal fees
    1,465,638       1,100,991  
Other professional fees
    2,215,655       2,787,789  
Advertising and marketing
    2,805,260       2,921,327  
Insurance
    1,655,280       1,712,036  
Utilities
    1,032,494       1,104,047  
Repairs and maintenance
    1,242,276       1,022,100  
Advisory fees related to change in control proposals
    953,517       -  
Other
    5,023,061       4,777,060  
Impairment of building and land
    268,000       1,961,200  
Impairment of indefinite-lived intangible assets
    1,741,000       27,323,855  
Impairment of goodwill
    17,000       18,721,496  
Depreciation and amortization
    1,712,311       1,698,804  
                 
Total Operating Expenses
    49,964,723       95,132,866  
                 
Income (Loss) from Operations
    5,075,311       (37,440,195 )
                 
Other Income (Expenses)
               
Interest expense
    (2,746,503 )     (3,091,642 )
Interest expense, related party
    (710,113 )     (669,509 )
Interest income
    7,382       23,381  
(Loss) gain on sale of assets
    (74,669 )     (205,825 )
                 
Total Other Expenses
    (3,523,903 )     (3,943,595 )
                 
Income (Loss) Before Income Taxes
    1,551,408       (41,383,790 )
                 
Income tax expense (benefit) — current
    (126,896 )     729,940  
Income tax expense (benefit) — deferred
    465,896       (11,831,550 )
                 
Total Income Taxes
    339,000       (11,101,610 )
                 
Net Income (Loss)
    1,212,408       (30,282,180 )
Net Income (Loss) Attributable to Noncontrolling Interests
    476,717       428,614  
                 
Net Income (Loss) Attributable to VCG
  $ 735,691     $ (30,710,794 )
                 
Earnings Per Share
               
Basic earnings (loss) per share attributable to VCG’s stockholders
  $ 0.04     $ (1.71 )
Fully diluted earnings (loss) per share attributable to VCG’s stockholders
  $ 0.04     $ (1.69 )
Basic weighted average shares outstanding
    17,541,376       17,925,132  
Fully diluted weighted average shares outstanding
    17,541,376       18,146,949  
 
The accompanying notes are an integral part of the consolidated financial statements.


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VCG Holding Corp.
 
For the years ended December 31, 2009 and 2008
 
                                                 
                            Noncontrolling
       
                Additional
          Interests in
    Total
 
    Common Stock     Paid-in
    Accumulated
    Consolidated
    Stockholders’
 
    Shares     Amount     Capital     Deficit     Partnerships     Equity  
 
Restated Balances, December 31, 2007
    17,723,985     $ 1,772     $ 51,007,824     $   2,978,240     $ 3,660,915     $ 57,648,751  
Issuance of common stock for services
    184,417       18       1,487,235       -       -       1,487,253  
Issuance of common stock for loan fee
    7,000       1       36,539       -       -       36,540  
Exercise of warrants
    167,000       17       459,250       -       -       459,267  
Repurchase of common stock
    (327,024 )     (33 )     (753,169 )     -       -       (753,202 )
Stock-based compensation
    -       -       233,634       -       -       233,634  
Amortization of warrants for services
    -       -       122,745       -       -       122,745  
Deferred offering costs
    -       -       (37,011 )     -       -       (37,011 )
Net loss for the year ended December 31, 2008
    -       -       -       (30,710,794 )     428,614       (30,282,180 )
Distributions paid to noncontrolling interests
    -       -       -       -       (529,055 )     (529,055 )
                                                 
Balances, December 31, 2008
    17,755,378       1,775       52,557,047       (27,732,554 )     3,560,474       28,386,742  
Amortization of warrants for services
    -       -       102,288       -       -       102,288  
Stock-based compensation
    -       -       142,095       -       -       142,095  
Repurchase of common stock
    (444,655 )     (44 )     (869,348 )     -       -       (869,392 )
Net income for the year ended December 31, 2009
    -       -       -       735,691       476,717       1,212,408  
Distributions paid to noncontrolling interests
    -       -       -       -       (491,611 )     (491,611 )
                                                 
Balances, December 31, 2009
    17,310,723     $ 1,731     $ 51,932,082     $ (26,996,863 )   $ 3,545,580     $ 28,482,530  
                                                 
 
The accompanying notes are an integral part of the consolidated financial statements.


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VCG Holding Corp.
 
For the years ended
 
                 
    For the Year Ended
 
    December 31,  
    2009     2008  
 
Operating Activities
               
Net income (loss) attributable to VCG
  $ 735,691     $ (30,710,794 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Impairment of goodwill
    17,000       18,721,496  
Impairment of indefinite lived intangible assets
    1,741,000       27,323,546  
Impairment of building and land
    268,000       1,961,200  
Depreciation
    1,695,277       1,678,043  
Amortization of non-compete agreements
    17,035       20,761  
Amortization of leasehold rights and liabilities, net
    (212,342 )     (192,067 )
Amortization of loan fees
    216,205       448,015  
Stock-based compensation expense
    244,383       421,379  
Issuance of stock for services
    -       1,422,253  
Deferred income taxes
    465,896       (11,831,550 )
Noncontrolling interests
    476,717       428,614  
(Gain) Loss on disposition of assets
    74,669       216,539  
Accrued interest added to long-term debt
    243,901       180,613  
Write-off uncollectible deposits
    7,151       -  
Changes in operating assets and liabilities :
               
Income taxes and other receivables
    (287,894 )     152,135  
Inventories
    22,767       20,030  
Prepaid expenses
    (72,245 )     (6,480 )
Accounts payable — trade and accrued expenses
    576,380       693,896  
Income taxes payable
    67,917       -  
Deferred revenue
    555       (40,811 )
Deferred rent
    783,165       845,136  
                 
Net cash provided by operating activities
    7,081,228       11,751,954  
Investing Activities
               
Acquisitions of businesses, net of cash acquired
    -       (9,670,691 )
Additions to property and equipment
    (1,454,478 )     (1,324,252 )
Deposits
    (19,444 )     (206,068 )
Purchase of assets held for sale
    -       (127,952 )
Proceeds from sale of assets
    238,241       243,131  
                 
Net cash used by investing activities
    (1,235,681 )     (11,085,832 )
Financing Activities
               
Proceeds from debt
    1,212,115       14,009,000  
Payments on debt
    (4,152,700 )     (13,345,601 )
Proceeds from related party debt
    25,099       2,140,000  
Payments on related party debt
    (912,843 )     (949,900 )
Borrowing (payments) on revolving line of credit
    (90,000 )     (2,190,000 )
Loan fees paid
    (78,724 )     (268,218 )
Payment on capital lease
    (19,111 )     (9,343 )
Proceeds from exercise of warrants
    -       459,250  
Repurchase of stock
    (869,392 )     (753,202 )
Distributions to noncontrolling interests
    (491,611 )     (529,055 )
                 
Net cash used by financing activities
    (5,380,167 )     (1,437,069 )
                 
Net increase (decrease) in cash
    465,380       (770,947 )
Cash beginning of period
    2,209,060       2,980,007  
                 
Cash end of period
  $ 2,674,440     $ 2,209,060  
                 
Supplemental cash flow information:
               
Income taxes paid in cash
  $ 225,972     $ 822,307  
Interest paid in cash
  $ 3,067,195     $ 3,108,962  
Non-cash acquisition activities:
               
Issuance of notes payable for acquisitions
  $ -     $ (5,793,027 )
Fair value of liabilities assumed
  $ -     $ (2,095,105 )
Non-cash divestiture activities:
               
Book value of note payable transferred to buyer
  $ 1,771,854     $ -  
Issuance of note receivable to buyer
  $ 322,963     $ -  
 
The accompanying notes are an integral part of the consolidated financial statements.


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Table of Contents

VCG Holding Corp.
 
Notes to Consolidated Financial Statements
 
Index
 
                 
Note
       
 
 
1.
    Description of Business     46  
 
2.
    Summary of Significant Accounting Policies     46  
 
3.
    Inventories     51  
 
4.
    Acquisitions     52  
 
5.
    Property and Equipment     53  
 
6.
    Goodwill and Other Intangible Assets     54  
 
7.
    Other Long Term Assets     55  
 
8.
    Accrued Expenses     55  
 
9.
    Long-Term Debt     55  
 
10.
    Income Taxes     59  
 
11.
    Stockholders’ Equity     60  
 
12.
    Commitments and Contingencies     62  
 
13.
    Fair Value Disclosure     67  
 
14.
    Subsequent Events     68  


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Table of Contents

VCG Holding Corp.
 
 
1)   Description of Business
 
VCG Holding Corp. (the “Company”) is in the business of acquiring, owning, and operating nightclubs, which provide premium quality live adult entertainment, restaurant, and beverage services in an up-scale environment. As of December 31, 2009, the Company, through its subsidiaries, owns and operates twenty nightclubs in Indiana, Illinois, Colorado, Texas, North Carolina, Minnesota, Kentucky, Maine, Florida, and California. The Company operates in one reportable segment.
 
2)   Summary of Significant Accounting Policies
 
Principles of Consolidation
 
The Consolidated Financial Statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries and a consolidated variable interest entity. All inter-company balances and transactions are eliminated in consolidation.
 
Use of Estimates
 
The preparation of financial statements in conformity with principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period and certain financial statement disclosures. As discussed below, the Company’s most significant estimates include those made in connection with the valuation of property and equipment, intangible assets, goodwill, and the accrual of certain liabilities. Actual results could differ materially from these estimates.
 
Cash
 
Substantially all of the Company’s cash is held by one bank located in Colorado. The Company does not believe that, as a result of this concentration, it is subject to any financial risk beyond the normal risk associated with commercial banking relationships.
 
Asset Held for Sale
 
Asset held for sale in 2008 consisted of an employee house, purchased by the Company when the employee was transferred to a new nightclub in a new state. The house was sold in 2009 for $107,326.
 
Other Receivables
 
Other receivables at December 31, 2009 consist of approximately $151,000 deposit due from a cancelled acquisition, $56,000 from the sale of the Arizona land and building, various small receivable amounts due from property insurance damage claims, credit card fees, and employee advances. The December 31, 2008 balance includes small receivable amounts for property taxes, credit card fees, and employee advances.
 
Income Tax Receivable
 
Income tax receivable is the amount due from the IRS for overpayment of estimated income tax deposits made during the year shown. This amount is applied against the first estimated tax deposit due in the next fiscal year.
 
Inventories
 
Inventories include alcoholic beverages, food, and Company merchandise. Inventories are stated at the lower of cost or market, where cost is determined by using first-in, first-out method.


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Table of Contents

 
VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
Prepaid Expenses
 
Prepaid expenses represent expenses paid prior to the receipt of the related goods or services. The balance consists primarily of prepaid rent, liquor and other license fees, prepaid memberships and prepaid insurance premiums for the corporate office, and various nightclubs.
 
Property and Equipment
 
Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated life, listed below.
 
     
   
Years
 
Buildings
  39
Leasehold improvements
  The shorter of useful life or lease term
Vehicles
  5
Computers and software
  5
Equipment
  3 – 10
Furniture and Fixtures
  3 – 7
Signs
  10
 
Expenditures for maintenance and repairs are charged to expense as incurred. When an asset is sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and the resulting gain or loss is recognized in the consolidated statement of operations for the respective period.
 
Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. An impairment loss is recognized if the carrying amount of the asset exceeds its fair value (see Note 5).
 
Goodwill
 
The excess of the purchase over the fair value of assets acquired and liabilities assumed in purchase business combinations is classified as goodwill. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles — Goodwill and Other (“ASC 350”), the Company does not amortize goodwill, but performs impairment tests of the carrying value at least annually. The Company tests goodwill for impairment at the “nightclub” or “reporting unit” level, which is one level below the operating segment.
 
Intangible Assets
 
Indefinite life intangible assets, which are stated at cost, are composed of liquor and cabaret or sexually oriented business licenses and trade names. Finite lived assets include non-compete agreements, which are stated at cost less accumulated amortization. Amortization is computed on the straight-line method over term of the non-compete agreement. Intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
 
Indefinite life intangible assets are tested annually and individually for impairment in accordance with ASC 350, for impairment. An impairment loss is recognized if the carrying amount of the asset exceeds its fair value.
 
Favorable Lease Rights and Unfavorable Lease Rights
 
Favorable lease rights and unfavorable lease liabilities resulted from the fair value analysis of nightclub acquisitions. A favorable lease right occurs when the acquired lease is below market at the time of acquisition. An


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Table of Contents

 
VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
unfavorable lease right occurs when the acquired lease payments are above market. The balance is amortized ratably into rent expense over the expected lease term, which includes expected renewals.
 
Deferred Revenue
 
Deferred revenue consists of the unearned portion of VIP room memberships. VIP room memberships are amortized into revenues ratably over the one-year life of membership from the date of purchase.
 
Deferred Rent
 
In accordance with FASB ASC Topic 840, Leases (“ASC 840”), the Company expenses rent on a straight-line basis over the expected lease term, which includes expected renewals.
 
Revenue Recognition
 
The Company’s revenues from nightclubs include funds received from the sale of alcoholic beverages, food, and merchandise, service and other revenues. The Company recognizes sales revenue at point-of-sale upon receipt of cash, check, or charge card. Service revenues include entertainer payments to perform at the Company’s nightclubs, customer admission fees, customer payments for tabs and tip charges, dance dollar payments, and suite rental fees. Service revenue is collected and recorded as revenue on a daily basis when received and earned.
 
Other income is comprised of fees charged for usage of ATM machines located in nightclubs, credit card charges, VIP memberships, valet parking fees, various fees at nightclubs for services and special events, and rental income from third party tenants at certain nightclubs. Other Income also includes non-club revenue of rent received from unrelated third parties in Indianapolis and Phoenix.
 
Advertising Cost
 
Advertising costs are expensed as incurred and are included in selling, general, and administrative expense.
 
Stock-Based Compensation
 
At December 31, 2009, the Company had stock options outstanding, which are described in Note 11. The Company recognizes stock-based compensation in accordance with FASB ASC Topic 718, Compensation-Stock Compensation (“ASC 718”), which requires the Company to measure the cost of services to be rendered based on the grant-date fair value of the equity award. The compensation expense is recognized over the period an employee is required to provide service in exchange for the award, referred to as the requisite service period.
 
Income Taxes
 
Income taxes are recorded in accordance with the provisions of FASB ASC Topic 740, Income Taxes (“ASC 740”). Pursuant to ASC 740, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized.
 
ASC 740 clarified the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribed a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As a result, the Company has applied a more-likely-than-not recognition threshold for all tax uncertainties. ASC 740 only allows the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the various taxing authorities.


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VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
The company files tax returns in the U.S. Federal and various state jurisdictions. The company is no longer subject to U.S. Federal income tax examinations for years prior to 2006 and state and local income tax examinations by tax authorities for years prior to 2005. Penalties, if any, related to unrecognized tax liabilities are in other general and administrative on the Statement of Operations. Interest expense, if any, related to unrecognized tax liabilities are in interest expense on the Statement of Operations.
 
Earnings per Share
 
In accordance with FASB ASC Topic 260, Earnings per Share (“ASC 260”), basic earnings (loss) per share is computed by dividing net income (loss) attributable to common shares by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) attributable to common shares by the weighted average number of common and potential common shares outstanding during the period. Potential common shares, composed of the incremental common shares issuable upon the exercise of stock options and warrants, are included in the calculation of diluted earnings (loss) per share calculation to the extent such shares are dilutive.
 
The following table sets forth the computation of basic and diluted weighted average shares outstanding:
 
                 
    Years Ended December 31,  
    2009     2008  
 
Net income
  $ 735,691     $ (30,710,794 )
                 
Basic weighted average shares outstanding
    17,541,376       17,925,132  
Effect of dilutive securities:
               
Stock warrants
    -       221,817  
Stock options
    -       -  
                 
Dilutive weighted average shares outstanding
    17,541,376       18,146,949  
                 
Earnings per share:
               
Basic
  $ 0.04     $ (1.71 )
                 
Diluted
  $ 0.04     $ (1.69 )
                 
 
The Company has excluded 262,500 and 300,500 stock options from its calculation of the effect of dilutive securities in 2009 and 2008, respectively, as they represent anti-dilutive stock options.
 
The Company has also excluded 325,376 warrants from its calculation of the effect of dilutive securities in 2009, as they represent anti-dilutive warrants.
 
Reclassifications
 
Certain and significant prior year amounts have been reclassified to conform to the current period presentation.
 
Fair Value of Financial Instruments
 
The carrying value of cash, accounts receivable, and accounts payable approximates fair value due to the short-term nature of these instruments. The carrying amount of the notes payable approximates fair value as the individual borrowings bear interest at rates that approximate market interest rates for similar debt instruments.
 
Recently Issued Accounting Pronouncements
 
In June 2009, the Financial Accounting Standards Board (“FASB”) established the FASB Accounting Standards Codificationtm (the “Codification”) as the single source of authoritative U.S. GAAP recognized by


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VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. We have conformed the references in the notes to our financial statements to the new Codification.
 
In April 2009, the FASB issued an update to FASB ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), to provide additional guidance on estimating fair value when the volume and level of transaction activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability. Additional disclosures are required regarding fair value in interim and annual reports. These provisions are effective for interim and annual periods ending after June 15, 2009.
 
In April 2009, the FASB issued an update to FASB ASC Topic 805, Business Combinations (“ASC 805”) authoritative guidance to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably determined. If the fair value of such assets or liabilities cannot be reasonably determined, then they would generally be recognized in accordance with certain other pre-existing accounting standards. This guidance also amends the subsequent accounting for assets and liabilities arising from contingencies in a business combination and certain other disclosure requirements. This guidance became effective for assets or liabilities arising from contingencies in business combinations that are consummated on or after October 1, 2009. Accordingly, the Company will record and disclose assets acquired and liabilities assumed in a business combination that arises from contingencies under the revised standard for transactions consummated, if any, after October 1, 2009.
 
In May 2009, the FASB issued ASC Topic 855, Subsequent Events (“ASC 855”), which provides guidance on events that occur after the balance sheet date but prior to the issuance of the financial statements. ASC 855 distinguishes between events requiring recognition in the financial statements from those that may require disclosure in the financial statements. This guidance is effective for interim and annual periods after June 15, 2009. We adopted this guidance for the quarter ended June 30, 2009. The adoption had no impact on our consolidated financial statements.
 
In August 2009, the FASB issued Accounting Standard Update (“ASU”) No. 2009-05, Fair Value Measurements and Disclosure Topic 820, Measuring Liabilities at Fair Value authoritative guidance to provide clarification on measuring liabilities at fair value when a quoted price in an active market is not available. In these circumstances, a valuation technique should be applied that uses either the quote of the liability when traded as an asset, the quoted prices for similar liabilities or similar liabilities when traded as assets, or another valuation technique consistent with existing fair value measurement guidance, such as an income approach or a market approach. The new guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This guidance was adopted effective July 1, 2009. The adoption had no impact on our consolidated financial statements.
 
In January 2010, the FASB issued ASU No. 2010-04, Accounting for Various Topics — Technical Corrections to SEC Paragraphs. This update provides updates/corrections to various topics of the codification with regards to the SEC’s position on various matters. There is no new guidance, but it includes adjustments to the SEC’s position on already issued updates. Some of the main topics covered are as follows: 1) Requirements for using push down accounting in an acquisition 2) appropriate balance sheet presentation of unvested, forfeitable equity instruments, which are issued to nonemployees as consideration for future services, and 3) intangible assets arising from insurance contracts acquired in a business combination. The corrections are applicable for 2009 since the updates relate to already issued guidance. The adoption had no impact on our consolidated financial statements.
 
Issued but not yet effective accounting standards
 
In June 2009, the FASB issued ASC Topic 810, Consolidation authoritative guidance to require an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. This


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VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
guidance requires an ongoing reassessment and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. It requires an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. This guidance is effective for fiscal years beginning after November 15, 2009. VCG is currently assessing the impact that this guidance may have on its Consolidated Financial Statements.
 
In June 2009, the FASB issued ASC Topic 860, Transfers and Servicing authoritative guidance to improve information and disclosures related to the transfers of financial assets, including securitization transactions, and the continuing risk exposures related to transferred financial assets. The concept of a “qualifying special-purpose entity” is eliminated and the requirements for derecognizing financial assets have been modified. This guidance will be effective for fiscal years beginning after November 15, 2009. We do not expect the adoption of this new guidance will have a significant impact on our Consolidated Financial Statements.
 
Management has reviewed and continues to monitor the pronouncements of the various financial and regulatory agencies and is currently not aware of any other pronouncements that could have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.
 
Consolidation of Variable Interest Entities
 
During 2007, the Company became the .01% General Partner of 4th Street Limited Partnership LLLP (“4th Street”), a limited liability limited partnership that owns a building in Minneapolis, MN that is rented by the Minneapolis nightclub operated by the Company. The land and building, which had a net book value of approximately $2,844,000 and $2,896,000 at December 31, 2009 and 2008, respectively, represent the only assets held by 4th Street. The lease term is for 17 years. The majority of the 99.9% limited partner interests are held by related parties, ranging from note holder, to stockholders and Directors. Under the terms of the 4th Street partnership agreement, profits and losses and cash flows are allocated between the General and the Limited Partners based on their respective ownership percentages.
 
The Company has considered the provisions of FASB ASC Topic 810, Consolidation (“ASC 810”) and has determined the following:
 
  •  the Limited Partners have very limited rights with respect to the management and control of 4th Street;
 
  •  the Company is the General Partner; and therefore, has control of the partnership;
 
  •  the Company is the Primary Beneficiary;
 
  •  the Company has determined that 4th Street is a variable interest entity; and
 
  •  therefore, the Company has consolidated 4th Street’s assets and included its equity as noncontrolling interest on the consolidated balance sheet.
 
The Company has reviewed the provisions of FASB ASC Topic 360-20, Real Estate Sales (“ASC 360-20”) as it relates to accounting for the noncontrolling interest attributable to the Limited Partners and has determined that the interest should not be accounted for using the financing method.
 
3)   Inventories
 
Inventories consist of beverages, food, tobacco products and merchandise. All are valued at the lower of cost or market.
 


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VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
                 
    December 31  
    2009     2008  
 
Food and beverage
  $ 823,165     $ 841,154  
Tobacco and merchandise
    103,156       107,934  
                 
Total
  $ 926,321     $ 949,088  
                 
 
4)   Acquisitions
 
On April 14, 2008, the Company acquired 100% of the common stock of Manana Entertainment, Inc. (“Manana”) and the building in which Manana operates Jaguar’s Gold Club of Dallas for total cash consideration of $4,093,525 and a 12% promissory note in the amount of $2,500,000. The total purchase price of $6,593,525, including direct acquisition costs of $307,914, was allocated to the acquired assets and liabilities as set forth in the following table:
 
         
Cash
  $ 32,000  
Inventories
    4,523  
Property and equipment
    3,166,440  
Deposits and other assets
    25,000  
Goodwill
    2,259,581  
Licenses
    3,501,000  
Non-compete agreement
    8,000  
Unfavorable lease right
    (1,390,000 )
Deferred income taxes
    (705,105 )
         
Purchase price
  $ 6,901,439  
         
 
Goodwill is not amortizable for tax purposes.
 
On July 28, 2008, the Company acquired the assets of VCG-IS LLC (“VCG-IS”) for cash consideration of $4,005,000 and an 8% promissory note in the principal amount of $3,293,027. VCG-IS operates Imperial Showgirls Gentlemen’s Club in Anaheim, CA. The total purchase price of $7,293,027, including direct acquisition costs of $321,643, was allocated to the acquired assets and liabilities as set forth in the following table:
 
         
Property and equipment
  $ 160,633  
Deposits and other assets
    7,000  
Goodwill
    380,037  
Trade name
    276,000  
Licenses
    6,546,000  
Favorable lease right
    250,000  
         
Purchase price
  $ 7,619,670  
         
 
The total amount of goodwill amortizable over 15 years for tax purposes is $380,000.
 
The following pro forma financial information includes the consolidated results of operations as if the 2008 acquisitions had occurred at January 1, 2008, but do not purport to be indicative of the results that would have occurred has the acquisitions been made as of that date or of results which may occur in the future.
 

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VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
         
    December 31,
 
Pro forma
  2008  
 
Revenue
  $ 59,816,000  
Net income (loss)
    (29,800,000 )
Earnings per share
       
Basic
  $ (1.66 )
Diluted
  $ (1.64 )
 
5)   Property and Equipment
 
The Company’s property and equipment consists of the following:
 
                 
    December 31,  
    2009     2008  
 
Land
  $ 500,000     $ 856,737  
Buildings
    11,362,143       14,076,390  
Leasehold improvements
    11,056,795       10,645,692  
Equipment
    3,138,217       2,470,848  
Vehicles
    269,503       138,090  
Signs
    308,819       268,726  
Furniture and fixtures
    1,993,370       1,918,126  
Assets to be placed in service
    168,245       -  
                 
      28,797,092       30,374,609  
Less accumulated depreciation
    (5,850,978 )     (4,636,221 )
                 
Property and equipment, net
  $ 22,946,114     $ 25,738,388  
                 
 
Depreciation expense was approximately $1,695,000 and $1,678,000 for the years-ended December 31, 2009 and 2008, respectively.
 
The Company’s land and building in Phoenix was rented by the individual who purchased the operations and ownership interest in our subsidiary Epicurean Enterprises in January 2007. The lessee defaulted on the lease in August 2008. In December 2008, the Company ordered an appraisal of the land and building owned in Phoenix, Arizona. The appraisal was performed by an independent third party real estate appraiser who valued the land and building at $2,600,000. The Company recognized a noncash impairment loss of $1,861,200 on December 31, 2008. On July 31, 2009, the Company sold the building and land in Phoenix to a third party for approximately $2,300,000. The Company recognized a non-cash impairment loss of $268,000 during the second quarter of 2009 and an additional $68,800 in selling expenses in the third quarter 2009. The additional selling expenses were recorded as a loss on the sale of the property.

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VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
 
6)   Goodwill and Other Intangible Assets
 
The Company’s definite lived intangible assets consist of the following:
 
                                                 
    December 31,  
    2009     2008  
          Accumulated
                Accumulated
       
    Cost     Amortization     Net     Cost     Amortization     Net  
 
Amortizable intangible assets
                                               
Covenant not to compete
  $ 61,694     $ (37,796 )   $ 23,898     $ 61,694     $ (20,761 )   $ 40,933  
Favorable lease rights
    1,820,000       (172,032 )     1,647,968       1,820,000       (114,636 )     1,705,364  
                                                 
    $ 1,881,694     $ (209,828 )   $ 1,671,866     $ 1,881,694     $ (135,397 )   $ 1,746,297  
                                                 
 
Amortization expense for the years ended December 31, 2009 and 2008 totaled $74,431 and $98,609, respectively.
 
At December 31, 2009, definite lived intangible assets are expected to be amortized over a period of one to 24 years as follows:
 
         
Year Ending December 31,  
 
2010
  $ 86,927  
2011
    76,755  
2012
    75,492  
2013
    72,292  
2014
    71,892  
Thereafter
    1,288,508  
         
    $ 1,671,866  
         
 
A reconciliation of the activity affecting indefinite lived intangible assets is as follows:
 
                         
    Goodwill     Licenses     Trade Names  
 
Balance at December 31, 2007
  $ 17,622,000     $ 53,316,734     $ 578,000  
Club acquisitions in 2008
    2,639,618       10,047,000       276,000  
Acquisition purchase price adjustments
    1,057,898       138,310       -  
Component 2 amortization
    (144,896 )     -       -  
2008 impairment charges
    (18,721,496 )     (27,088,855 )     (235,000 )
                         
Balance — December 31, 2008
    2,453,122       36,413,189       619,000  
Component 2 amortization
    (157,077 )     (5,171 )     -  
2009 impairment charges
    (17,000 )     (1,574,000 )     (167,000 )
                         
Balance at December 31, 2009
  $ 2,279,045     $ 34,834,018     $ 452,000  
                         
 
During the year ended December 31, 2009, the Company recorded amortization of component 2 goodwill of $162,248, which reduced the book basis of goodwill by $157,077 and reduced the remaining book basis of licenses by $5,171. During the year ended December 31, 2008, the Company recorded amortization of component 2 goodwill of $144,896, which reduced book basis of goodwill. No impairment on goodwill as taken prior to December 31, 2007. Total accumulated impairment charges are $18,736,496.
 
In performing the Company’s annual impairment assessment at December 31, 2009 in accordance with ASC Topic 350, the Company recorded a non-cash impairment charge for licenses of $1,574,000 and trade names of


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VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
$167,000. In addition, the Company evaluated its goodwill at December 31, 2009 and recorded a non-cash impairment charge of $17,000.
 
For 2008, the Company recorded a non-cash impairment charge for licenses of approximately $27,089,000 and trade names of approximately $235,000. In addition, the Company evaluated its goodwill at December 31, 2008 and recorded a non-cash impairment charge of approximately $18,721,000. The total impairment charge for 2008 was approximately $46,045,000.
 
The fair values of the licenses, trade names, and the reporting units with the impaired goodwill were based on estimated discounted future net cash flows. These impairment charges are a result of a continued weak economy, which resulted in either zero growth or a reduction of estimated future cash flows at the club level.
 
7)   Other Long-Term Assets
 
The Company’s other long-term assets consists of the following:
 
                 
    December 31,  
    2009     2008  
 
Loan fees, net
  $ 108,866     $ 246,347  
Deposits — lease, utility, and taxes
    133,127       120,834  
Acquisition deposit
    -       200,000  
                 
    $ 241,993     $ 567,181  
                 
 
8)   Accrued Expenses
 
The Company’s accrued expenses consisted of the following:
 
                 
    December 31,  
    2009     2008  
 
Payroll and related expenses
  $ 1,225,526     $ 832,802  
Sales taxes
    282,007       297,449  
Property taxes
    319,773       375,277  
Legal and professional charges
    31,344       667,810  
Interest
    54,772       83,778  
Rent
    16,627       -  
                 
Total
  $ 1,930,049     $ 2,257,116  
                 
 
9)   Long-Term Debt
 
The Company’s long-term debt consists of the following:
 
Related Party
 
                 
    December 31,  
Description of Related Party Debt
  2009     2008  
 
Note payable to Lowrie Management LLLP, interest at 10%, due monthly, principal due June 2012, collateralized by general assets of Illinois Restaurant Concepts LP and Denver Restaurant Concepts LP, plus the consent to the transfer of the adult permit and liquor license for both clubs upon default.
  $ 5,700,000     $ -  


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VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
                 
    December 31,  
Description of Related Party Debt
  2009     2008  
 
Note payable to Lowrie Management LLLP, interest at 8.5%, monthly principal and interest payments of $112,841, due January 2013, collateralized by general assets of Illinois Restaurant Concepts, LP and Denver Restaurant Concepts, LP and a security interest in the general assets of VCG Holding Corp. and consent to the transfer of the adult permit and liquor license for both clubs. This loan was consolidated into the new 10% loan in June 2009.
    -       4,754,394  
Note payable to Lowrie Family Foundation, a corporation controlled by the Company’s Chairman of the Board and Chief Executive Officer, interest at 10%, interest accrued monthly to principal, but no payments, due February 2011, unsecured.
    698,934       662,828  
Note payable to Lowrie Management LLLP, interest at 10%, due monthly, principal due April 2011, collateralized by the general assets of Denver Restaurant Concepts LP, general assets of Illinois Restaurant Concepts LP, and consent to the transfer of the adult permit and liquor license upon default in the name of Denver Restaurant Concepts LP and RCC LP. This loan was consolidated into the new 10% loan in June 2009.
    -       1,335,805  
Note payable to the President and Chief Operating Officer with interest at 10%, due monthly, principal due February 2011, unsecured.
    100,000       100,000  
Note payable to a board member with interest at 10%, due monthly, principal due November 2011, unsecured.
    50,000       50,000  
Note payable to the mother of the Chairman with interest at 10%, due monthly, principal due February 2011, unsecured.
    170,000       170,000  
Note payable to the mother of the Chairman, with interest at 10%, monthly principal and interest payments of $3,456.22, due December 2010, unsecured.
    36,741       72,571  
Note payable to the mother of the Chairman, with interest at 10%, interest accrues monthly to principal, but no payments, due December 2010, unsecured.
    25,326       -  
Note payable to the sister of Chairman, with interest at 10%, monthly interest payments of $3,167, due February 2010, collateralized by the general assets of Illinois Restaurant Concepts LP and Denver Restaurant Concepts LP and consent to the transfer of the adult permit and liquor license for both clubs upon default. In June 2009, the Company paid this loan in full.
    -       380,000  
Note payable to an affiliate of a current Board member with interest at 10%, due February 2011, collateralized by a personal guarantee from Mr. Lowrie.
    410,084       413,500  
                 
Total debt due
    7,191,085       7,939,098  
Less current portion, related party
    (62,067 )     (1,024,000 )
                 
Total long-term debt, related party
  $ 7,129,018     $ 6,915,098  
                 

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VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
The rates on all related party transactions are equal to or less than other unsecured or secured notes to unrelated parties.
 
Third Party
 
                 
    December 31,  
Description of Debt
  2009     2008  
 
Note payable to Sunshine Mortgage, interest at 14% fixed, due monthly, periodic principal with balance due December 2011, collateralized by one parcel of real property located in Ft. Worth, TX, the common stock of Kenja II, Inc., 238,000 shares of VCG stock, furniture, fixtures and equipment of Kenja II, Inc. and a guarantee from Lowrie Management LLLP.
  $ 4,700,000     $ 5,000,000  
Loan from Citywide Banks, interest at 7% fixed, monthly principal and interest payments of $76,865 due August 15, 2014, collateralized with a life insurance policy on Troy Lowrie and additional securities owned by Mr. Lowrie.
    3,654,865       -  
Note payable, interest at 8% fixed, monthly principal and interest payments, due July 2011, collateralized by assets of VCG-IS, LLC.
    2,915,386       3,186,835  
Note payable to Amfirst Bank, variable interest rate calculated at prime subject to a 6% floor, actual rate of 6% at December 31, 2009, monthly principal and interest payments of approximately $55,898, due November 14, 2014, collateralized by UCC Security Agreement of RCC LP, IRC LP, MRC LP , Platinum of Illinois, Inc., Cardinal Management LP,VCG CO Springs, Inc., VCG Real Estate, Inc., Glendale Restaurant Concepts LP, Glenarm Restaurant LLC, the Indiana building, and a guarantee from Lowrie Management LLLP.
    2,844,219       3,325,927  
Line of credit from Citywide Banks, variable interest rate calculated at prime subject to a 6% floor, actual rate of 6% at December 31, 2009, due monthly, principal due August 15, 2011, collateralized by Company shares of common stock owned by Lowrie Management LLLP, a life insurance policy on Troy Lowrie, and additional securities owned by Mr. Lowrie.
    2,720,000       2,810,000  
Note payable, variable interest rate calculated at prime subject to a 6% floor, actual rate of 6% at December 31, 2008, due monthly, periodic principal payments with balance due June 2013, collateralized by a P&A Select Strategy Fund and securities owned by Lowrie Management LLLP. This loan was consolidated into a new loan in August 2009.
    -       2,375,138  
Note payable to Citywide Banks, interest at 8.5%, monthly principal and interest payments of $36,156 with a balloon payment of $2,062,483 due May 16, 2010, collateralized by securities owned by Lowrie Management LLLP. This note was consolidated on August 15, 2009.
    -       2,080,527  
Note payable, interest at 12% fixed, monthly principal and interest payments, with periodic principal payments, due May 2010, collateralized by assets of Manana Entertainment, Inc. The Company paid this note in full in September 2009.
    -       1,928,410  
Note payable, interest at a rate equal to the lesser of(i) twelve percent (12%) or (ii) the rate for ten (10) year Treasury Bills plus four percent (4%). Monthly principal and interest payments of $22,949 due September 2018, collateralized by certain real and personal property of Epicurean. The Company sold the AZ property in July 2009 and transferred this debt to the new owner. VCG agreed to guaranty the Buyer’s performance on the $1,772,000 mortgage note payable. The Buyer and its sole member agreed to indemnify VCG from any losses arising from its guaranty of the same mortgage note.
    -       1,847,618  


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VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
                 
    December 31,  
Description of Debt
  2009     2008  
 
Notes payable to investors, interest at 11%, monthly interest payments, principal due January 2010, collateralized by the general assets of the Company and a guarantee by Mr. Lowrie.
    1,400,000       1,400,000  
Notes payable, interest at 10% and 11% fixed, monthly interest payments, due November 2010, collateralized by the general assets and cash flow of VCG and 100% stock in Manana Entertainment, Inc. 
    1,336,529       250,000  
Notes payable, interest at 10%, monthly interest payments, principal due between November 2009 and March 2012, unsecured.
    1,198,000       1,380,000  
Various notes payable, interest at 11% fixed, monthly interest payments, principal due July 2011, collateralized by the general assets and cash flow of VCG and 100% stock in VCG-IS, LLC and a guarantee from Mr. Lowrie.
    1,000,000       1,000,000  
Note payable, interest at 12% fixed due monthly, periodic principal payments with balance due July 2011, collateralized by one parcel of real property located in Ft. Worth, TX and the common stock of Kenja II, Inc., and a guarantee from Lowrie Management LLLP.
    1,000,000       1,000,000  
Note payable, interest at 10% fixed, monthly principal and interest payments, due October 2013, unsecured.
    214,732       231,957  
Note payable to investors, interest at 8.5%, monthly principal and interest payments, due October 20, 2011, collateralized by the general assets of the Company and guaranteed by Mr. Lowrie.
    208,295       308,993  
Note payable to employee, interest at 10%, due October 2011, unsecured.
    186,122       168,480  
Auto loans payable, interest at 0%, monthly principal payments, due in May 2012 and October 2015, collateralized by the vehicles purchased.
    102,317       -  
Note payable, variable interest rate calculated at prime subject to a 6% floor, actual rate of 6% at December 31, 2009, due monthly, principal and interest due January 2011, unsecured.
    75,833       145,833  
Note payable, variable interest rate calculated at prime subject to a 6% floor, actual rate of 6% at December 31, 2009, principal and interest payments, due December 2009, unsecured.
    -       78,393  
                 
Total debt due
    23,556,298       28,518,111  
Less current portion
    (3,805,277 )     (2,602,000 )
                 
Total long-term debt
  $ 19,751,021     $ 25,916,111  
                 
 
In conjunction with the refinancing of the two Citywide notes in August 2009, two covenants were added. The first new covenant requires acquisitions or additional indebtedness of equal to or in excess of $1,000,000 be pre-approved by Citywide Banks. The second new covenant is a financial ratio covenant. This covenant requires the quarterly calculation of net cash flow to debt service in a ratio greater than or equal to 1.2 to 1.0. Net cash flow is defined as income attributable to the Company plus depreciation, amortization and interest expense. Net profit excludes any intangible impairments and related tax effects. The Company has been in compliance with all covenants for the year ended December 31, 2009.

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VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
The table below shows the future maturities of the principal amount of the related party and third party long-term debt as of December 31, 2009, including the new note of $100,000 disclosed in the subsequent events footnote:
 
         
2010
  $ 3,867,344  
2011
    16,942,568  
2012
    7,207,409  
2013
    1,622,791  
2014
    1,198,348  
Thereafter
    8,923  
         
    $ 30,847,383  
         
 
At December 31, 2009, the Company still had $1,280,000 of available and unused funding on its revolving line of credit. Management believes the carrying amount of our fixed rate debt approximates the fair value at December 31, 2009.
 
10)   Income Taxes
 
A reconciliation of the Company’s effective income tax rate and the United States Federal statutory rate is as follows:
 
                 
    Year Ended December 31,  
    2009     2008  
 
United States federal statutory rate
    34.0 %     (34.0 )%
State income taxes, net of Federal income tax benefit
    5.2       (3.8 )
Permanent differences
    22.6       1.9  
Utilization of net operating loss
    -       (0.4 )
Tax credits
    (37.5 )     (1.0 )
Impairment of nondeductible goodwill
    -       9.7  
Other
    (2.4 )     0.8  
                 
      21.9 %     (26.8 )%
                 
 
The Company is entitled to a tax credit for the social security and medicare taxes paid by the Company on its employees’ tip income. This tip tax credit is subject to carry back and carry forward provisions of the Internal Revenue Code. At December 31, 2009 and 2008, the Company has unused tip tax credits of $582,000 and $256,000, respectively, which expire in 2029.
 
At December 31, 2009 and 2008, total deferred tax assets, liabilities, and valuation allowance are as follows:
 
                 
    December 31,  
    2009     2008  
 
Licenses, goodwill and other intangible assets
  $ 1,195,738     $ 1,170,697  
Favorable/unfavorable leases, net
    1,866,569       2,718,507  
Property and equipment
    (819,743 )     (26,868 )
Accrued cost
    76,920       100,105  
Net operating loss carryforwards
    1,017,181       21,539  
Tax credits
    581,928       255,613  
                 
Net deferred tax asset
  $ 3,918,593     $ 4,239,593  
                 


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VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
The Company has a tax net operating loss carry forward of approximately $2,608,000 as of December 31, 2009, which expires in 2029. Because the Company anticipates being profitable in the future and anticipates being able to utilize its deferred tax assets, no valuation allowance was recorded at December 31, 2009.
 
We have analyzed filing positions in all of the federal and state jurisdictions where we are required to file income tax returns. We believe that our income tax filing positions and deductions will be sustained on audit and do not anticipate any adjustments that will result in a material adverse effect on our financial condition, results of operations or cash flow. Interest and penalties paid in 2009 and 2008 totaled $14,469 and $0, respectively.
 
The company files tax returns in the U.S. Federal and various state jurisdictions. The company is no longer subject to U.S. Federal income tax examinations for years prior to 2006 and state and local income tax examinations by tax authorities for years prior to 2005.
 
11)   Stockholders’ Equity
 
Common Stock
 
Holders of the Company’s common stock are entitled to one vote for each share held of record on all matters. Since the Company’s common stock does not have cumulative voting rights, the holders of shares having more than 50% of the voting power, if they choose to do so, may elect all Directors and the holders of the remaining shares would not be able to elect any Directors. In the event of a voluntary or involuntary liquidation of our Company, all stockholders are entitled to a prorated distribution of the Company’s assets remaining after payment of claims by creditors and liquidation preferences of any preferred stock. Holders of the Company’s common stock have no conversion, redemption, or sinking fund rights. All of the outstanding shares of common stock are fully paid and non-assessable.
 
Preferred Stock
 
The Board, without further action by the stockholders, is authorized to issue up to 1,000,000 shares of Preferred Stock in one or more series. The Board may, without stockholder approval, determine the dividend rates, redemption prices, preferences on liquidation or dissolution, conversion rights, voting rights, and any other preferences. Because of its broad discretion with respect to the creation and issuance of preferred stock without stockholder approval, the Board could adversely affect the voting power of the holders of our common stock and, by issuing shares of Preferred Stock with certain voting, conversion and/or redemption rights, could delay, defer, or prevent an attempt to obtain control of the Company. The Board has authorized the sale of 1,000,000 shares of Class A Preferred. As of December 31, 2009 and 2008, none of the Company’s Series A Preferred Stock was outstanding.
 
Stock Option and Stock Bonus Plans
 
The Company’s stockholders have approved (i) the 2002 Stock Option and Stock Bonus Plan, (ii) the 2003 Stock Option and Stock Bonus Plan, and (iii) the 2004 Stock Option and Appreciation Rights Plan (collectively, “the Plans”). Under each of the Plans, the Company may grant to designated employees, officers, Directors, advisors, and independent contractors incentive stock options, nonqualified stock options, and stock. If options granted under the Plans expire, or are terminated for any reason without being exercised, or bonus shares are forfeited, the shares underlying such option and/or bonus shares will become available again for issuance under the applicable Plan.
 
The Compensation Committee and/or the Board determines which individuals will receive grants, the type, size and terms of the grants, the time when the grants are made, and the duration of any applicable exercise or restriction period, including the criteria for vesting and the acceleration of vesting, and the total number of shares of common stock available for grants.


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VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
The stock awards issued under the Plans as of December 31, 2009 were:
 
                                         
                      Shares to be
    Shares
 
                      Issued Upon
    Remaining
 
                      Exercise of
    Available for
 
    Shares
    Shares
    Available
    Outstanding
    Future
 
    Authorized     Granted     for Grant     Options     Issuance  
 
2002 Stock Option and Stock Bonus Plan
    700,000       699,776       224       -       224  
2003 Stock Option and Stock Bonus Plan
    250,000       247,292       2,708       -       2,708  
2004 Stock Option and Appreciation Rights Plan
    1,000,000       93,333       906,667       262,500       644,167  
                                         
      1,950,000       1,040,401       909,599       262,500       647,099  
                                         
 
For the year-ended December 31, 2009, the Company did not issue any stock.
 
The following is a summary of all stock option transactions under the 2004 Stock Option Plan for the years ended December 31, 2009 and 2008:
 
                 
          Weighted-Average
 
    Options     Exercise Price  
 
Outstanding at December 31, 2007
    188,000     $ 10.00  
Granted above fair market value
    167,000       11.95  
Exercised
    -       -  
Forfeited
    (54,500 )     11.21  
                 
Outstanding at December 31, 2008
    300,500     $ 10.37  
Granted
    -       -  
Exercised
    -       -  
Forfeited
    (38,000 )     11.42  
                 
Outstanding at December 31, 2009
    262,500     $ 10.21  
                 
Exercisable at December 31, 2009
    -       -  
                 
 
As of December 31, 2009, the range of exercise prices for outstanding options was $6.00 — $13.00. The weighted average remaining contractual term as of December 31, 2009 is 7.7 years for the outstanding options under the Plans. There is no aggregate intrinsic value as of December 31, 2009 because the fair market value of the outstanding options is below the weighted average exercise price.
 
Employee stock options are subject to cancellation upon termination of employment and expire ten years from the date of grant. The options generally vest 20% on the third anniversary and 40% each on the fifth and seventh anniversaries of the date of grant. Options have historically been granted at an exercise price significantly above the fair market value of the common stock covered by the option on the grant date.
 
Valuation and Assumptions
 
The Company adopted FASB ASC Topic 718, Stock Compensation (“ASC 718”), upon its initial stock option issuance in April 2007. A transition method was not required since there were no outstanding stock options. The Company used the Black-Scholes Option Pricing Model to determine the fair value of option grants, using the assumptions noted in the following table. Expected volatility was calculated using the Company’s historical stock prices since it became public in October 2003, averaged with a peer-group’s historical volatility for the one to two


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VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
years prior to 2003 needed to reflect the six year expected life. The expected option life was determined using the simplified method and represents the period of time that options granted are expected to be outstanding.
 
                 
    Option Grant Year  
    2008     2007  
 
Expected life in years
    6.07       6.07  
Weighted average expected volatility
    62 %     61 %
Weighted average risk free rates
    3.5 %     4.6 %
Dividend yield
    -       -  
Weighted average grant date fair value
  $ 5.25     $ 4.89  
 
For the years ended December 31, 2009 and 2008, compensation cost charged against income was $142,095 and $233,634, respectively. At December 31, 2009, there was $800,125 of total unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options. The assumption for forfeitures increased during 2009 from 16% to 25% based upon the Company’s actual forfeitures. This cost is expected to be recognized on a straight-line basis over the remaining weighted average vesting period of approximately six years.
 
Stock Warrants
 
The Company issued stock warrants in 2004 and 2006.  The warrants were exercisable at a range of prices between $2.00 — $4.00. Each warrant was exercisable into one share of the Company’s common stock, subject to certain adjustments and was in certain circumstances exercisable on a cashless basis. At December 31, 2008, the Company had warrants representing an aggregate of 325,376 warrants outstanding after 167,000 warrants were exercised. In 2009 no warrants were exercised and all unexercised warrants expired in November 2009. There are no warrants outstanding at December 31, 2009. Amortization of warrants issued for services totaled $102,288 and $122,745 for the years ended December 31, 2009 and 2008, respectively.
 
12)   Commitments and Contingencies
 
Operating Leases
 
The Company conducts a major part of its nightclub operations from 16 leased facilities, including three under related party leases, and two land leases. The buildings are under non-cancellable operating leases that expire between January 2015 and January 2062. Most of the operating leases contain provisions where the Company can, at the end of the initial lease term, extend the lease term for between two and 12 additional five or ten-year periods, with fixed rent increases. The land leases expire between April 2012 and September 2012, but can be extended for four additional five-year terms and 12 additional five-year terms, respectively. In virtually all cases, the Company expects that in the normal course of business, the leases will be renewed for the maximum lease option term. The Company also leases office space in Colorado for the Company’s headquarter location.
 
Total rent expense for all leased facilities for the year ended December 31, 2009 was approximately $5,855,000, of which $418,500 was paid to Lowrie Management LLLP. Rent expense for the year ended December 31, 2008 was approximately $5,798,000 of which $414,000 was paid to Lowrie Management LLLP.


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VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
Future minimum lease payments as of December 31, 2009 are set forth in the following table:
 
                         
Year Ended December 31,
  Related Party     Third Party     Total  
 
2010
  $ 462,000     $ 3,311,720     $ 3,773,720  
2011
    462,000       3,353,037       3,815,037  
2012
    477,000       3,416,601       3,893,601  
2013
    477,000       3,489,958       3,966,958  
2014
    481,500       3,535,118       4,016,618  
Thereafter
    9,180,000       73,618,758       82,798,758  
                         
Total minimum lease payments
  $ 11,539,500     $ 90,725,192     $ 102,264,692  
                         
 
The Company’s leases typically require that it pay real estate taxes, insurance, and maintenance costs in addition to the minimum rental payments included in the above table. Such costs vary from year to year and totaled $856,000 for 2009 and $805,000 for 2008.
 
Favorable lease rights represent the approximate fair market value arising from lease rates that are below market rates as of the date of a club’s acquisition. The amount is being amortized into rent expense ratably over the remaining term of the underlying lease. Unfavorable lease liability represents the approximate fair market value arising from lease rates that are above market rates as on the date of a club’s acquisition. Unfavorable lease liabilities are being amortized into rent expense ratably over the remaining term of the underlying lease.
 
The Company leased the Arizona building and land to the purchaser of Epicurean Enterprises, LLC for $20,000 per month, actually collecting $140,000 in 2008. The lessee defaulted on the lease in August 2008 and the Company fully reserved as bad debt the remaining rent payments due for 2008. The Company did not receive rent from this lessee in 2009. The property was sold in July 2009.
 
The Company subleases unused space in the buildings that also house clubs in Indianapolis and Denver. These are operating leases with a contract for the first year, and switching to a month-to-month basis thereafter. Rental income earned from the Indianapolis facility totaled $71,475 in 2009 and $20,365 in 2008. This 2008 lessee vacated the Indianapolis facility in March 2009. Another tenant moved in beginning April 2009 at the rate of $6,720 per month, increasing to $9,100 per month after September 1, 2009. The new lease is for 12 months and month-to-month thereafter.
 
Legal Proceedings
 
Thee Dollhouse Productions Litigation
 
On or around July 24, 2007, VCG Holding Corp. was named in a lawsuit filed in District Court, 191 Judicial District, of Dallas County, Texas. This lawsuit arose out of a VCG acquisition of certain assets belonging to Regale, Inc. (“Regale”) by Raleigh Restaurant Concepts, Inc. (“RRC”), a wholly owned subsidiary of VCG, in Raleigh, N.C. The lawsuit alleges that VCG tortiously interfered with a contract between Michael Joseph Peter and Regale and misappropriated Mr. Peter’s purported trade secrets. On March 30, 2009, the United States District Court for the Eastern District of North Carolina entered an Order granting Summary Judgment to VCG and dismissed Mr. Peter’s claims in their entirety. The Court found that as a matter of law, VCG did not tortiously interfere with Mr. Peter’s contract with Regale and further found that VCG did not misappropriate trade secrets. Mr. Peters did not appeal that ruling and as such, the federal proceedings have concluded.
 
Ancillary to this litigation, Thee Dollhouse filed a claim in arbitration on June 2008 against Regale as a result of this transaction, asserting that Regale, by selling its assets to RRC, breached a contract between Thee Dollhouse and Regale. In addition, an assertion was made that one of Regale’s principals tortiously interfered with the contract between Regale and Thee Dollhouse. Regale filed a Motion to Stay Arbitration which was granted in part and denied in part, with the Court staying arbitration as to Regale’s principal and denying the stay as to Regale. As a


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VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
result, the arbitration as to Regale is proceeding. VCG is indemnifying and holding Regale harmless from this claim pursuant to their contract. The arbitration was originally scheduled for late October 2009, however due to illness of one of the principals of the claimant, the arbitration has been adjourned to April 26, 2010. The Company has not accrued any funds for the settlement of this litigation, as the outcome of this dispute cannot be predicted. The Company’s or a successor entity’s, indemnification obligation to Regale will continue even if any of the proposed sale transactions or an alternative transactions is consummated.
 
Zajkowski, et. al. vs VCG and Classic Affairs Litigation
 
In December 2007, a former employee of VCG’s subsidiary Classic Affairs, Eric Zajkowski, filed a lawsuit in Hennepin County District Court, Minneapolis, Minnesota against VCG following his termination from employment alleging that, in connection with his employment, he was subject to certain employment practices which violated Minnesota law. The initial action and subsequent pleading asserted that the matter was filed as a purported class action. Subsequent to the filing of Zajkowski’s Complaint, Zajkowski moved to amend his Complaint to name additional Plaintiffs and later, to name Classic Affairs as a party defendant. VCG and Classic Affairs have answered this complaint denying all liability. Classic Affairs has also filed a Counter-Complaint against Mr. Zajkowski based upon matters relating to his termination from employment with Classic Affairs.
 
In December 2008 and early January 2009, the parties filed cross-motions for Summary Judgment and Zajkowski filed a Motion for Class Certification. Following the motions, the Court issued a series of rulings on those Motions. In these rulings, the Court has dismissed VCG as a party Defendant — having determined that VCG is not directly liable to Zajkowski or the other Plaintiffs on their claims. The Court granted Summary Judgment to Zajkowski as to one issue, but did not determine the scope or extent, if any, of the alleged damages, ruling this issue, like the others, are questions for a jury, and the Court dismissed two other claims asserted by Zajkowski. In all other respects, the Court has denied the parties respective Summary Judgment motions.
 
On July 21, 2009, the Court denied Zajkowski’s and the other Plaintiffs’ Motion for Class Certification. Zajkowski appealed that decision to the Minnesota Court of Appeals and on September 22, 2009, the Court of Appeals denied Plaintiffs request for discretionary review. Plaintiffs have indicated that they do not intend to seek leave to appeal from the Minnesota Supreme Court. The parties have held mediation in November 2009 and the case was resolved. The settlement terms, including the amounts, are confidential. The lawsuit has now been dismissed, with prejudice. All related costs have been accrued or paid as of December 31, 2009.
 
Texas Patron Tax Litigation
 
Beginning January 1, 2008, VCG’s Texas clubs became subject to a new state law requiring the Company to collect a five dollar surcharge for every club visitor. A lawsuit was filed by the Texas Entertainment Association, an organization in which the Company is a member, alleging that the fee is an unconstitutional tax. On March 28, 2008, the Judge of the District Court of Travis County, Texas ruled that the new state law violates the First Amendment to the U.S. Constitution and, therefore, the District Court’s order enjoined the state from collecting or assessing the tax. The State of Texas has appealed the District Court’s ruling. When cities or the State of Texas give notice of appeal, the State supersedes and suspends the judgment, including the injunction. Therefore, the judgment of the Travis County District Court cannot be enforced until the appeals are completed.
 
The Company has filed a lawsuit to demand repayment of the paid taxes. On June 5, 2009, the Court of Appeals for the Third District (Austin) affirmed the District Court’s judgment that the Sexually Oriented Business Fee violated the First Amendment to the U.S. Constitution. The State of Texas appealed the Court of Appeals ruling to the Texas Supreme Court. On August 26, 2009, the Texas Supreme Court ordered both sides to submit briefs on the merits. The State’s brief was filed on September 25, 2009 and the Texas Entertainment Association’s brief was filed on October 15, 2009. On February 12, 2010 the Texas Supreme Court granted the State’s Petition for Review and set oral arguments for March 25, 2010.


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VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
The Company has expensed approximately $290,000 for the year ended December 31, 2009 and $203,000 for the year ended December 31, 2008 for the Texas Patron Tax. The Company accrued, but did not pay the fourth           quarter estimated tax liability of $71,000. The Company has paid, under protest, approximately $422,000 with the State of Texas for the two year period.
 
Department of Labor and Immigration and Customs Enforcement Reviews
 
United States Department of Labor (“DOL”) Audit (PT’s Showclub)
 
In October 2008, PT’s® Showclub in Louisville, KY was required to conduct a self-audit of employee payroll by the DOL. After an extensive self-audit, it was determined that (a) the club incorrectly paid certain employees for hours worked and minimum wage amounts and (b) the club incorrectly charged certain minimum wage employees for their uniforms. As a result, the DOL required that the club issue back pay and refund uniform expenses to qualified employees at a total cost of $14,439.
 
In March 2009, VCG was placed under a similar nationwide DOL audit for all nightclub locations and its corporate office. All locations completed the self-audit in August 2009 and are currently working with the DOL to determine what, if any, violations may have occurred. This case is still in the investigatory state and no final determination can be made at this time of an unfavorable outcome or any potential liability. After discussion with outside legal counsel on this case, the Company has accrued $200,000 as of December 31, 2009 for potential wage/hour violations. A summary meeting has tentatively been scheduled with the DOL and counsel on March 15, 2010 to finalize the liability. The Company believes it has corrected all processes that resulted in the potential violations.
 
Immigration and Customs Enforcement (“ICE”) Reviews
 
On June 30, 2009, PT’s® Showclub in Portland, Maine was served a subpoena by ICE requesting documents to conduct an I-9 audit. ICE requested all original I-9’s for both current and past employees from September 14, 2007 (club acquisition date) to June 30, 2009. ICE conducted the audit to ensure proper use of the I-9 form to confirm that the club verified employees’ right to work in the United States. The club complied with the subpoena submitting all requested documents by July 16, 2009. As of March 12, 2010, ICE is still reviewing the requested documents. This matter is still in its investigatory stage and no determination of potential violations or liability has been made. No amounts have been accrued related to this audit. While ICE initially discussed taking this audit to all clubs, no formal actions have been taken by ICE to begin that process. This audit is still isolated to Maine.
 
Internal Revenue Service
 
The IRS audited PT’s® Showclub in Denver for the years 2006, 2007, and 2008 to determine tip reporting compliance. Every business with customary tipping must report annually on Form 8027 the total sales from food and beverage operations, charge sales, total tips reported, and charge tips reported. The audit was based upon this Form to determine compliance with the amended Section 3121(q) of the Internal Revenue Code. The audit was conducted by an examining agent in Denver in August and September 2009. The audit focused on the data reported on Form 8027 and related underlying documentation. It included the agent examining information contained in the daily sales packages generated by the club.
 
The audit resulted in a determination that cash tips for that club were under-reported in the three years examined. The tax assessed as a result of this under-reporting was $61,500. Penalties and interest were not assessed. The IRS auditor indicated that all other clubs would be audited and recommended that a Point of Sale (“POS”) system should be installed in every club to ensure compliance with IRS regulations. Upon completion of this audit, the Company began an intensive self-audit for the three year period using the same procedures followed by the IRS agent. This resulted in an initial accrual of $394,000 in estimated taxes to cover the estimated liability as of September 30, 2009. Subsequent discussions with the IRS agent removed 2006 from the audit period, replacing that year with 2009. The Company has submitted workpapers prepared for the self-assessment to the IRS agent for the


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VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
periods 2007, 2008, and 2009. The agent has tentatively indicated that these workpapers and test period could be used to determine the ultimate tip reporting rate by club. As a result of the completion of the self-assessment process for the three years under examination, the Company has reduced the estimated liability by $187,000 to approximately $207,000 as of December 31, 2009.
 
Litigation Associated with the Proposed Going Private Transaction
 
In connection with the Proposal concerning the proposed Going Private Transaction, the Company has been served with three complaints filed by various plaintiffs, alleging that they bring purported derivative and class action lawsuits against the Company and each of the individual members of the Board on behalf of themselves and all others similarly situated and derivatively on behalf of the Company, which previously have been reported in the Company’s Current Reports on Form 8-K (filed with the SEC on November 19, 2009, November 24, 2009 and December 7, 2009).
 
On November 13, 2009, the Company was served with a complaint filed by David Cohen in the District Court in Jefferson County, Colorado. In the complaint, Mr. Cohen alleges that he brings the purported class action lawsuit against the Company and each of the individual members of the Board on behalf of the Company’s stockholders. The complaint alleges, among other things, that Troy Lowrie, the Company’s Chairman of the Board and Chief Executive Officer, has conflicts of interest with respect to the Proposal and that in connection with the Board’s evaluation of the Proposal, the individual defendants have breached their fiduciary duties under Colorado law. The complaint seeks, among other things, certification of Mr. Cohen as class representative, either an injunction enjoining the defendants from consummating or closing the Going Private Transaction, or if the Going Private Transaction is consummated, rescission of the Going Private Transaction, an award of damages in an amount to be determined at trial and an award of reasonable attorneys’ and experts’ fees.
 
On November 20, 2009, the Company was served with a complaint filed by Gene Harris and William C. Steppacher, Jr. in the District Court in Jefferson County, Colorado. In the complaint, the plaintiffs purport to bring a derivative and class action lawsuit against the Company and each of the individual members of the Board on behalf of themselves and all others similarly situated and derivatively on behalf of the Company. The complaint alleges, among other things, that Mr. Lowrie has conflicts of interest with respect to the Proposal and that the individual defendants have breached their fiduciary duties under Colorado law in connection with the Proposal. The complaint seeks, among other things, certification of the plaintiffs as class representatives, an injunction directing the Board members to comply with their fiduciary duties, an accounting to the plaintiffs and the class for alleged damages suffered or to be suffered based on the conduct described in the complaint, an award of the costs and disbursements of maintaining the action, including reasonable attorneys’ and experts’ fees, and such other relief the court deems just and proper.
 
On December 3, 2009, the Company was served with a complaint filed by David J. Sutton and Sandra Sutton in the District Court in Jefferson County, Colorado. In the complaint, the plaintiffs purport to bring a class action lawsuit against the Company and each of the individual members of the Board on behalf of themselves and all others similarly situated. The complaint alleges, among other things, that Mr. Lowrie has conflicts of interest with respect to the Proposal and that the individual defendants have breached their fiduciary duties under Colorado law in connection with the Proposal. The complaint seeks, among other things, certification of the plaintiffs as class representatives, an injunction directing the Board to comply with their fiduciary duties and enjoining the Board from consummating the Proposal, imposition of a constructive trust in favor of the plaintiffs and the class upon any benefits improperly received by the defendants, an award of the costs and disbursements of maintaining the action, including reasonable attorneys’ and experts’ fees, and such other relief the court deems just and proper.
 
The plaintiffs in the three lawsuits have moved to consolidate all three of the lawsuits (the “Class Action and Derivative Suits”) into one suit together with a fourth lawsuit arising out of the Proposal for the proposed Going Private Transaction, in which the Company was not named as a defendant, filed on December 11, 2009 by Brandon Ostry in the District Court in Jefferson County, Colorado against Mr. Lowrie and Lowrie Management, LLLP. The


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VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
Company provided additional details on the Ostry lawsuit in its Current Report on Form 8-K filed with the SEC on December 17, 2009. The court has indicated that it will consider the consolidation motion if and when the plaintiffs move for class certification. As of the date hereof, the plaintiffs have not yet moved for class certification.
 
As of the date hereof, the Company believes that the allegations made in each of the Class Action and Derivative Suits are baseless and the Company intends to vigorously defend itself. The Company has not accrued any reserves for damages or for the settlement of these lawsuits as the outcome of the disputes cannot be predicted. Further, the uncertainty over the potential outcome of the Class Action and Derivative Suits has increased in light of subsequent events. As described elsewhere in this Annual Report on Form 10-K, on December 16, 2009, the Special Committee of the Company’s Board rejected the Proposal concerning the proposed Going Private Transaction as then-currently inadequate and, as previously disclosed in the Company’s Current Report on Form 8-K filed with the SEC on February 17, 2010, on February 17, 2010, the Company entered into the Letter of Intent with Rick’s concerning the proposed Merger. Currently, the Class Action and Derivative Suits only pertain to the Proposal for the proposed Going Private Transaction and not the proposed Merger. However, it is possible that the plaintiffs in the Class Action and Derivative Suits will attempt to amend their complaints to make claims related to the proposed Merger or that these plaintiffs or others persons may file one or more new lawsuits related to it.
 
Pursuant to the terms of the Company’s Articles of Incorporation and stand-alone indemnification agreement the Company has entered into with its Directors and executive officers, the Company may be required to advance expenses to and indemnify the Directors and Mr. Lowrie from expenses involved in defending against the lawsuits described above. The Company has discussed the risks and costs associated with such indemnification under the heading “Risk Factors.”
 
The Company is involved in various other legal proceedings that arise in the ordinary course of business. The Company believes the outcome of any of these proceedings will not have a material effect on the consolidated operations of the Company.
 
13)   Fair Value of Financial Instruments
 
The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. We adopted ASC 820-10 on January 1, 2008. This guidance defines fair value, establishes a framework to measure fair value, and expands disclosures about fair value measurements. ASC 820-10 establishes a fair value hierarchy used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:
 
Level 1:  Quoted market prices in active markets for identical assets or liabilities.
 
Level 2:  Observable market based inputs or unobservable inputs that are corroborated by market data.
 
Level 3:  Unobservable inputs that are not corroborated by market data.
 
The carrying amounts reported in the accompanying consolidated balance sheets for cash and cash equivalents, accounts and other receivables, and trade accounts payable approximate fair value because of the immediate or short-term maturities of these financial instruments. As of December 31, 2009 and 2008, our total debt was approximately $30,747,000 and $36,457,000; respectively. The total debt had a fair value of $29,748,000 and $36,396,000 at December 31, 2009 and 2008; respectively. The fair value of the debt was estimated using significant unobservable inputs (Level 3) and was computed using a discounted cash flow model using estimated market rates, adjusted for our credit risk as of December 31, 2009 and 2008.
 
Our disclosure of the estimated fair value of our financial instruments is made in accordance with the requirements of ASC 825-10, Financial Instruments. The estimated fair value amounts have been determined using


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VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts we could realize in a current market exchange. The use of different market assumptions and estimation methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2009 and 2008.
 
14)   Subsequent Events
 
Long-term debt
 
In January 2010, the Company entered into a 10% fixed note with an individual in the amount of $100,000. The note is unsecured, interest only, and due January 2011.
 
Potential Sale of the Company
 
As previously reported on the Company’s Current Reports on Form 8-K (filed with the Securities and Exchange Commission (“SEC”) on November 4, 2009, November 19, 2009, November 25, 2009, December 7, 2009 and December 17, 2009), on November 3, 2009, the Company received a non-binding letter of intent (the “Proposal”) from the Company’s Chairman and CEO, Troy Lowrie, Lowrie Management, LLLP, an entity controlled by Mr. Lowrie, and certain other unidentified investors (collectively, the “Lowrie Investors”), to acquire all of the outstanding common stock of the Company for $2.10 per share in cash (the “Going Private Transaction”). The Proposal contemplated that the Company would no longer be a public reporting or trading company following the closing of the Going Private Transaction. In response to the Proposal, the Board formed a Special Committee consisting solely of directors who are independent under the NASDAQ Global Market (“NASDAQ”) independence rules to review and evaluate the Proposal. The Special Committee was formed in order to properly and fairly represent the best interests of the Company’s stockholders in a full and diligent evaluation of the Proposal and any alternatives thereto in order to maximize stockholder value. The members of the Special Committee are George Sawicki, Kenton Sieckman and Carolyn Romero CPA. The Special Committee retained a financial advisor and independent legal counsel to assist the Special Committee in its evaluation of the Proposal and alternatives thereto. On December 16, 2009, the Special Committee informed the Lowrie Investors that it had determined, with input from its advisors, that the terms of the Proposal were currently inadequate, and the Special Committee directed its financial advisors to contact any parties that had either previously expressed an interest or might potentially be interested in pursuing a transaction with the Company.
 
In connection with the Proposal, the Company has been served with three complaints (the “Complaints”) filed by various plaintiffs, alleging that they bring purported derivative and class action lawsuits against the Company and each of the individual members of the Board on behalf of themselves and all others similarly situated and derivatively on behalf of the Company, which previously have been reported in the Company’s Current Reports on Form 8-K (filed with the SEC on November 19, 2009, November 24, 2009 and December 7, 2009). The Complaints allege, among other things, that the consideration in the Proposal is inadequate, that Mr. Lowrie has conflicts of interest with respect to the Proposal and that in connection with the Board’s evaluation of the Proposal, the individual defendants have breached their fiduciary duties under Colorado law. The Complaints seek, among other things, certification of the individual plaintiffs as a class representative, either an injunction enjoining the defendants from consummating or closing the Going Private Transaction, or if the Going Private Transaction is consummated, rescission of the Going Private Transaction, an injunction directing the Board members to comply with their fiduciary duties, an award of damages in an amount to be determined at trial, an accounting to the Plaintiffs and the class for alleged damages suffered or to be suffered based on the conduct described in the Complaint, an award of reasonable attorneys’ and experts’ fees, and such other relief the court deems just and proper. As of the date hereof, the Company believes that the allegations set forth in the Complaints are baseless and the Company intends to vigorously defend itself in the lawsuits.


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VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
As reported on the Company’s Current Report on Form 8-K filed with the SEC on February 17, 2010, the Company, Rick’s, Mr. Lowrie, and Lowrie Management, LLLP (collectively with Mr. Lowrie, “Lowrie”), entered into a non-binding (except as to certain provisions, including exclusivity and confidentiality) letter of intent (the “Letter of Intent”). Pursuant to the Letter of Intent, Rick’s agreed to acquire all of the outstanding shares of common stock of the Company and the Company will merge with and into Rick’s or a wholly-owned subsidiary of Rick’s (the “Merger”). In the event the Merger is consummated, the Company will become a subsidiary of Rick’s and the Company’s stockholders will become stockholders of Rick’s. The parties intend that the Merger will be structured to qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as amended.
 
Pursuant to the Letter of Intent, the Company’s stockholders will receive shares of common stock of Rick’s in exchange for their shares of the Company’s common stock based on an exchange ratio that values each share of the Company’s common stock between $2.20 and $3.80 per share. The applicable exchange ratio will be determined based on the weighted average closing price of Rick’s common stock on NASDAQ for the 20 consecutive trading days ending on the second trading day prior to the closing of the Merger. In the event the price per share of Rick’s common stock as determined by this formula is below $8.00, Rick’s may terminate the Merger agreement, subject to the payment to the Company of a termination fee to be negotiated by the parties in connection with the preparation of the Merger agreement. Assuming the Merger were to close on March 11, 2010, the weighted average closing price per share of Rick’s common stock for the 20 consecutive trading days ending on March 9, 2010 $13.95 per share, the value of each share of the Company’s common stock under this formula would be $2.85 per share.
 
Contemporaneously with the closing of the Merger, Rick’s has agreed to acquire 5,770,197 shares of the Company’s common stock held by Lowrie and its affiliates (the “Lowrie Common Stock”) for cash in an amount equal to the lesser of $2.44 per share or the per share value of the common stock received by the Company’s stockholders in the Merger. At Lowrie’s election, Lowrie may receive Rick’s common stock, at the same exchange ratio received by the Company’s stockholders in the Merger, for up to 30% of the Lowrie Common Stock. In addition, Mr. Lowrie will (i) refinance (at a lower interest rate) and continue to carry a $5.7 million note from the Company (as acquired by Rick’s), (ii) continue to personally guarantee certain Company obligations in exchange for a to-be-determined fair market value cash payment for such guarantees, (iii) sell to Rick’s the outstanding capital stock of Club Licensing, Inc., a wholly-owned subsidiary of Lowrie Management, LLLP that owns the trademarks “Diamond Cabaret” and “PT’s,” (the “Trademarks”), and (iv) enter into a three-year consulting agreement with Rick’s (collectively, the “Lowrie Transactions”). In exchange for the Lowrie Transactions, Lowrie will receive the following: (a) a to-be-determined amount equal to the fair market value of the restructuring of the $5.7 million note and continued personal guarantees (currently estimated to be $2 million); (b) a to-be-determined amount equal to the fair market value of the Trademarks (currently estimated to be $5 million); and (c) payment of $1.0 million over three years and a monthly expense allowance equal to $1,500 under the consulting agreement. Assuming Lowrie elects to be paid solely in cash at a price of $2.44 per share of the Company’s common stock and the fair market value of the Lowrie Transactions is as set forth above (totaling $7.0 million), Lowrie will receive aggregate payments of approximately $26.8 million (which amount includes the restructuring of the existing $5.7 million note held by Mr. Lowrie and excludes payments under the consulting agreement) in connection with the Merger, of which approximately $16.8 million will be payable in cash at the closing of the Merger and $10.0 million will be payable pursuant to a four-year promissory note from Rick’s bearing interest at 8.0% per annum.
 
The Letter of Intent provided for a binding exclusivity period through March 12, 2010, which the parties have extended to March 31, 2010, during which time the Company has agreed, on behalf of itself and its representatives, to negotiate exclusively with Rick’s and has further agreed not to solicit any offer or engage in any negotiations other than with Rick’s for the merger, sale of the business or assets of the Company or tender or exchange offer for the Company’s common stock. In the event the Company receives an unsolicited offer that is superior to the terms of the Merger (a “Superior Proposal”) and Rick’s does not amend its offer within five business days of the date on which it receives notice of such Superior Proposal to be superior to the Superior Proposal, then the Company may terminate the Letter of Intent. If the Company terminates the Letter of Intent due to its receipt of a Superior Proposal, it has agreed to reimburse Rick’s for its out-of-pocket expenses and fees incurred in evaluating and


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VCG Holding Corp.
 
Notes to Consolidated Financial Statements — (Continued)
 
negotiating the Merger in an amount not to exceed $250,000 in the aggregate. If a definitive Merger agreement is not entered into by March 31, 2010, the Letter of Intent will automatically terminate, unless further extended by the parties.
 
The Merger agreement is expected to contain customary representations and warranties including the absence of a material adverse change in the business of Rick’s and the Company prior to closing and other customary closing conditions, including but not limited to, the receipt of material consents, the approval of the Merger by the stockholders of Rick’s and the Company and the effectiveness of a registration statement containing a joint proxy statement/prospectus filed with the SEC on Form S-4 to be filed by Rick’s, which, among other things, registers the shares of common stock to be issued to the Company’s stockholders in the Merger. There can be no assurance that the Company, Rick’s and Lowrie will enter into a definitive Merger agreement, that the entry into a definitive Merger agreement, if any, will result in the closing of any transaction or that the terms of any definitive Merger documents will reflect the terms of the proposed Merger as outlined in the Letter of Intent. See the discussion under the heading, “Risk Factors.”


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Item 9.   Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A.   Controls and Procedures
 
Effectiveness of Disclosure Controls and Procedures.
 
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report (i) were appropriately designed to provide reasonable assurance of achieving their objectives and (ii) were effective and provided reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended (“Exchange Act”) is (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
Management’s Annual Report on Internal Control over Financial Reporting.
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act as a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
 
  •  pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of our assets;
 
  •  provide reasonable assurance that transactions are recorded, as necessary, to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
 
  •  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on this assessment using those criteria, our management concluded that, as of December 31, 2009, our internal control over financial reporting was effective. The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by Causey Demgen & Moore Inc., our independent registered public accounting firm, as stated in its report, which appears under Item 8.
 
Changes in Internal Control Over Financial Reporting.
 
No change in our internal control over financial reporting occurred during our fourth quarter of fiscal 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
Item 9B.   Other Information
 
None.


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PART III
 
Item 10.   Directors, Executive Officers and Corporate Governance
 
Background of our Directors and Executive Officers
 
The following table sets forth certain information about our Directors and Executive Officers presented as of March 11, 2010.
 
             
Name
 
Age
 
Position
 
Troy Lowrie(4),(6)
    44     Chairman of the Board and Chief Executive Officer
Micheal Ocello(4),(6)
    50     Director, Chief Operating Officer, and President
Courtney Cowgill(7)
    56     Chief Financial and Accounting Officer, Secretary, and Treasurer
Robert McGraw, Jr.(2),(3),(5)
    55     Director
Carolyn Romero(1),(5)
    51     Director
Martin Grusin(6)
    65     Director
Kenton Sieckman(1),(2),(3),(5)
    48     Director
George Sawicki(1),(2),(3),(5)
    50     Director
 
 
(1) Member of the Audit Committee
 
(2) Member of the Governance and Nominating Committee
 
(3) Member of the Compensation Committee
 
(4) Member of the Executive Committee
 
(5) Independent Board member
 
(6) Non-independent Board member who is currently not serving on any Committee
 
(7) Advisor to the Executive Committee and Chief Financial and Accounting Officer who joined the Company on June 19, 2008
 
The Company’s Directors are elected to hold office for three-year terms and until their respective successors have been duly elected and qualified. At the April 2007 Board of Directors Meeting, the Board voted to amend the Bylaws and to divide the Directors into three classes, one of which includes three Directors and two of which includes two Directors.
 
The following table shows the terms of each current Director:
 
     
Name
  Term
 
Troy Lowrie
  2007 - 2010
Micheal Ocello
  2009 - 2012
Robert McGraw Jr. 
  2007 - 2010
Carolyn Romero
  2009 - 2010
Martin Grusin
  2009 - 2012
Kenton Sieckman
  2008 - 2011
George Sawicki
  2008 - 2011
 
Our Executive Officers serve at the pleasure of the Board until their resignation, termination, or death. There are no family relationships among any of our officers and/or Directors.
 
Provided below are descriptions and the backgrounds of our Executive Officers and Directors and their principal occupations for the past five years:
 
Troy Lowrie.  Mr. Lowrie has been the Chairman of the Board since April 2002 and Chief Executive Officer since November 2002. Mr. Lowrie is President of Lowrie Investment Management Inc., the General Partner of Lowrie Management LLLP, a Colorado limited liability limited partnership, which formerly owned and operated


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adult entertainment nightclubs and is now an investment entity. Mr. Lowrie was the owner and President of International Entertainment Consultants, Inc. (IEC), a company engaged in the business of managing adult entertainment nightclubs, from 1982 to October 2003, when it was acquired by the Company. Mr. Lowrie has served as President of Western Country Clubs, Inc., a public company specializing in large country and western bars with live music from 1992 to 1996 and President of New Millennium Media, Inc., a public company which sells rotating print advertising equipment and full movement video billboards. Mr. Lowrie has a M.A. in Finance from the University of Denver in Denver, Colorado and a B.A. in Business from Fort Lewis College in Durango, Colorado. Mr. Lowrie has not served on any other public company board. Mr. Lowrie’s leadership skills and experience in the adult nightclub industry, among other factors, led the Board to conclude that he should serve as a director.
 
Micheal Ocello.  Mr. Ocello has been a Director, President, and Chief Operating Officer of the Company since April 2002. Mr. Ocello is the owner and President of Unique Entertainment Consultants, Inc., of St. Louis, Missouri, a management company that has specialized in the management of nightclubs since 1995. Mr. Ocello has been affiliated with IEC in a managerial capacity since 1982. He is currently the President of IEC. Over his career, Mr. Ocello has been affiliated with more than 25 adult entertainment nightclubs including all PT’s® Showclubs, Diamond Cabaret®, The Penthouse Club®, and Shotgun Willies located in Denver; PT’s® Showclub in Colorado Springs; The Penthouse Club®, The Platinum Club, Roxy’s and PT’s® Showclubs in St. Louis; Schieks Palace Royale in Minneapolis; The Men’s Club in Raleigh; Jaguars in Dallas and Ft. Worth; Imperial Showgirls Gentlemen’s Club in Anaheim, and the Olympic Garden in Las Vegas. He is President of the Association of Club Executives (ACE National, the national trade association for the adult nightclub industry), President of the Illinois Club Owners Association, and past Vice Chairman and current Board member of Missouri’s Small Business Regulatory Fairness Board. He is a past Vice President and board member of the Free Speech Coalition. Mr. Ocello attended the University of Missouri, Kansas City from 1977 to 1978 and the United States Military Academy at West Point from 1979 to 1981. Mr. Ocello was originally elected to the Mehlville Board of Education in 2006 and was re-elected for an additional three year term in 2009. Mr. Ocello has served as a commissioned Police Officer for the Village of Brooklyn, Illinois since early 2009. Mr. Ocello has not served on any other public company board. Mr. Ocello’s industry experience and leadership roles in the adult entertainment industry, among other factors, led the Board to conclude that he should serve as a director.
 
Courtney Cowgill.  Ms. Cowgill has been Chief Financial and Accounting Officer, Corporate Secretary, and Treasurer since June 2008. Ms. Cowgill served as Chief Financial Officer and Treasurer of Oceanic Exploration Company, a publically held oil and gas exploration company, from May 2003 to June 2008. She has more than 30 years of accounting experience, including three years experience as an auditor with the former Arthur Young & Co. She has served in Chief Financial Officer, Controller, and Internal Auditor Manager positions for the last 20 years. She served as the Executive Director of Program Management for Tele-Communications, Inc./AT&T Broadband, a telecommunications company, from 1996 to 2000, and was employed by the University of Colorado at Boulder, Colorado as an Adjunct Faculty Member from 2001 to 2004. Ms. Cowgill holds a B.S. in Accounting from Metropolitan State College in Denver, Colorado and an M.S. in Telecommunications Engineering from the University of Colorado at Boulder, Colorado. Ms. Cowgill served on the Board as the Independent Financial Expert for Cotter Corp., a privately held uranium mining company. Ms. Cowgill is currently serving as Board President for the Colorado State Board of Accountancy. Ms. Cowgill is an active licensed CPA, CMA, CIA, and CFE.
 
Robert McGraw, Jr. Mr. McGraw has been a Director of the Company since November 2002. A Certified Public Accountant since 1982, Mr. McGraw is President of McGraw and McGraw CPA PC of Westminster, Colorado. Mr. McGraw’s firm specializes in accounting for restaurants, lounges, and small businesses. The practice consists of income tax preparation, financial statement preparation, and small business consulting. Mr. McGraw has a Bachelor’s Degree from Western State College in Gunnison, Colorado. Mr. McGraw is currently licensed in the State of Colorado and is a member of the American Institute of Certified Public Accountants and Colorado Society of Certified Public Accountants. Mr. McGraw was a Director of Iptimize, Inc., a publically held broadband voice and data service provider. Mr. McGraw served on the Audit Committee for half the 2009 year and still serves on the Compensation, Governance and Nominating Committee and is an independent member of the Board. Mr. McGraw’s accounting and financial experience, among other factors, led the Board to conclude that he should serve as a director.


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Martin A. Grusin.  Mr. Grusin has been a director of VCG since July 2005. Mr. Grusin has been practicing law since 1973. In addition to the active practice of law Mr. Grusin has served as: General Counsel and Director of Aqua Glass Corporation, one of the largest suppliers of bathing fixtures in the country; President, Chief Executive Officer and Director of United American Bank in Memphis, Tennessee; Director of Regions Bank of Memphis, Tennessee; an Associate Professor at the University of Arkansas in Fayetteville, Arkansas and the Cecil C. Humphreys School of Law at the University of Memphis in Memphis, Tennessee; Director of Davis Cartage Company, a provider of transportation and warehousing services in Owasso, Michigan; Managing Director of Stern Cardiovascular Center, P.A. in Memphis, Tennessee, one of the largest cardiac medical services providers in the South; and former Director of Iptimize, Inc., a publically held broadband voice and data service provider. Mr. Grusin received a B. S. degree from the University of Memphis, a Juris Doctorate degree from the Cecil C. Humphreys School of Law at the University of Memphis State (1972) and an LL.M. from the University of Miami School of Law (1973). Mr. Grusin serves on no committees because of his involvement in merger and acquisition activity for the Company and its subsidiaries. Mr. Grusin is an independent member of the Board. Mr. Grusin’s legal, merger and acquisition experience, as well as experience as a director of other public companies, among other factors, led the Board to conclude that he should serve as a director.
 
George Sawicki.  Mr. Sawicki has been a Director of the Company since June 2008. Mr. Sawicki has been in-house counsel for Zed, formerly 9 Squared, a mobile media solutions company, since 2007. Mr. Sawicki has previously served as in-house counsel for Playboy Enterprises, Inc., an adult entertainment company, New Frontier Media, Inc., a producer and distributor of adult themed and general motion picture entertainment, Storage Technology Corporation, a data storage company, and Oracle Corporation, the world’s largest enterprise software company. Mr. Sawicki has worked as legal counsel with the areas of corporate governance, patent, e-commerce, entertainment, and marketing organizations, managing complex transactions, and legal compliance consulting. Mr. Sawicki has a B.A. in Chemistry from Vassar College in Poughkeepsie, New York, a M.S. in Management Information Systems from Houston Baptist University in Houston, Texas, and a Juris Doctor degree from the University of Houston Law Center in Houston, Texas. Mr. Sawicki serves on the Audit, Compensation, and Governance and Nominating Committee (Chair) and is an independent member of the Board. Mr. Sawicki’s experience as legal counsel for the adult industry, among other factors, led the Board to conclude that he should serve as a director.
 
Kenton Sieckman.  Mr. Sieckman has been a Director of the Company since June 2008. Mr. Sieckman has been Vice President of World Technical Services at CA Wily Technology, a provider of application management solutions, since 2003. Previously Mr. Sieckman was employed in similar positions at Oracle Corporation, the world’s largest enterprise software company, and BEA Systems, Inc., an application infrastructure software company. Mr. Sieckman has also worked in the areas of sales and building a worldwide technical services organization. Mr. Sieckman has a B.A. in Mathematics and Computer Science from the University of Colorado at Boulder, Colorado. Mr. Sieckman served as a Director of USMedSys, Corp., a former distributor of medical supplies and a non-public company. Mr. Sieckman serves on the Audit, Compensation (Chair), and Governance and Nominating Committees and is an independent member of the Board. Mr. Sieckman’s investment experience and service on other public company boards, among other factors, led the Board to conclude that he should serve as a director.
 
Carolyn Romero.  Ms. Romero has been a Director of the Company since August 2009. She is a Certified Public Accountant and Certified Valuation Analyst. Ms. Romero has more than 30 years of financial management experience, including 24 years in public accounting. Ms. Romero was Manager of Financial Reporting for Woodward Governor Company until March 2010. Ms. Romero has been President of BPW/CO Enhancement Corp since 1999; Treasurer of BPW/USA since 2003; Treasurer of Juan de Jesus Vigil Family Foundation since 2004, Finance Chair of Colorado Business Women since 2005; and Member of the City of Loveland Retirement Board from 2008-2009. Ms. Romero has not previously served on a public company board. Ms. Romero serves on the Audit Committee (Chair), is the financial expert and an independent member of the Board. Ms. Romero’s accounting and financial experience, among other factors, led the Board to conclude that she should serve as a director.


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Audit Committee
 
We have a separately-designated standing Audit Committee. During our fiscal year ended December 31, 2009, the members of the audit committee were Kenton Sieckman (Chair until December 31, 2009), George Sawicki, and Carolyn Romero (Chair beginning January 1, 2010) and for a portion of the year Robert McGraw Jr., each of whom was an “independent director,” as defined by applicable securities laws and NASDAQ listing standards. The Company has determined that both Carolyn Romero and Robert McGraw, Jr. qualify as “audit committee financial experts.”
 
The purpose of the Audit Committee is to assist the Board in its oversight of the integrity of the financial statements of the Company, the Company’s compliance with legal and regulatory requirements, the independence and qualifications of the independent auditors, and the performance of the Company’s internal audit function and the independent auditors. The Audit Committee, among other things:
 
  •  oversees the work and compensation of the independent auditor;
 
  •  reviews the scope of the independent auditors’ audit examination, including its engagement letter prior to the annual audit, and reviews the audit fees agreed upon and any permitted non-audit services to be provided by the independent auditors; and
 
  •  recommends to the Board the retention or replacement of the independent auditors, which reports solely and directly to the Audit Committee.
 
Compensation Committee
 
The members of the Compensation Committee are Kenton Sieckman (Chair), Robert McGraw, Jr., and George Sawicki. The principal responsibilities and functions of the Compensation Committee are as follows:
 
  •  to develop, review, evaluate and recommend to the Board for its approval the Company’s compensation and benefit policies, including the review and approval of the Company’s incentive and equity-based compensation plans, or amendments to such plans; and
 
  •  to review and recommend to the Board for its approval compensation of the Company’s Executive Officers’ including annual base salaries, annual incentive compensation, long-term incentive compensation, retirement benefits, if any, employment, severance, and change-in-control agreements.
 
In reviewing the Company’s compensation and benefits policies, the Compensation Committee may consider the recruitment, development, promotion, retention, compensation of executive and senior officers of the Company, trends in management compensation, and any other factors that it deems appropriate. Such process shall include, when appropriate, review of the financial performance and third party administration of plans. The Compensation Committee seeks the advice of our Chief Executive Officer on such matters. Our Chief Executive officer makes recommendations to the Compensation Committee about the compensation levels for other executive officers.
 
The Compensation Committee has the power to form and delegate authority to subcommittees and may delegate authority to one or more designated members of the Compensation Committee, but no subcommittee or member will have any final decision making authority on behalf of the Board or the Compensation Committee. The Compensation Committee may delegate to one or more officers of the Company the authority to make grants and awards of stock or options to any officer not subject to Section 16 of the Securities Act or employee of the Company under the Company’s incentive compensation or other equity-based plans as the Compensation Committee deems appropriate and in accordance with the terms of any such plan.
 
The Compensation Committee may engage consultants in determining or recommending the amount of compensation paid to our Directors and Executive Officers. For example, in November 2007, the Compensation Committee retained an independent consulting firm to determine proper compensation levels for our Chief Executive Officer and President. The study’s results were used to determine the compensation of our President, Micheal Ocello, after he changed his status from consultant to employee in October 2007 and for our Chief Executive Officer, Troy Lowrie, when he began to take a salary in March 2008. Compensation for our Chief Financial and Accounting Officer, Secretary and Treasurer, Courtney Cowgill, was determined after discussion


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with financial recruiters and a study of chief financial officer salaries in other public companies of similar size and complexity.
 
The Compensation Committee reviews director and executive officer compensation annually and suggests appropriate adjustments for approval by the full Board.
 
Governance and Nominating Committee
 
The members of the Governance and Nominating Committee are George Sawicki (Chair), Robert McGraw, Jr., and Kenton Sieckman. The Governance and Nominating Committee performs, among others, the following functions:
 
  •  assists the Board in identifying individuals qualified to become Board members and Committee members;
 
  •  recommends that the Board select the director nominees for election at the next annual or special meeting of stockholders at which directors are to be elected;
 
  •  recommends individuals to fill any vacancies or newly created directorships that occur on the Board or its Committees between any annual or special meeting of stockholders at which directors are to be elected;
 
  •  makes recommendations to the Board as to determinations of director independence;
 
  •  evaluates the Board and Committee structure, performance and composition;
 
  •  reviews, evaluates, recommends changes, and oversees compliance with the Company’s corporate governance guidelines, including the Company’s Code of Ethics; and
 
  •  performs other duties or responsibilities expressly delegated to the Governance and Nominating Committee by the Board relating to the nomination of Board or Committee members.
 
The Governance and Nominating Committee will evaluate new director candidates based on their biographical information, a description of their qualifications, thorough reviews of biographical and other information, input from others including members of our Board and Executive Officers, and personal discussions with the candidate. In considering director candidates, the Governance and Nominating Committee evaluates a variety of factors to develop a Board and Committees that are diverse in nature and comprised of experienced and seasoned advisors. Each director nominee is evaluated in the context of the full Board’s qualifications as a whole, with the objective of establishing a Board that can best perpetuate our success and represent stockholder interests through the exercise of sound judgment. In the nomination of an existing director, the Governance and Nominating Committee will review the Board performance of such director and solicit feedback about the director from other Board members.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors, and greater than ten percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.
 
To our knowledge, based solely on a review of the copies of such reports furnished to us and representations that other than as described below, during the fiscal year ended December 31, 2009, our directors, officers, and 10% holders complied with all filing requirements under Section 16(a) of the Exchange Act. Ms. Courtney Cowgill, our Chief Financial and Accounting Officer, Secretary and Treasurer had a delinquent Form 4 filing on October 26, 2009 for one transaction that took place four days before the filing.


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Code of Ethics
 
We have adopted a Code of Ethics that applies to our directors, executive officers, and all of our employees. Our Code of Ethics codifies the business and ethical principles that govern all aspects of our business. The Code of Ethics is designed to deter wrongdoing and to promote:
 
  •  honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
 
  •  full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in other public communications made by us;
 
  •  compliance with applicable governmental laws, rules and regulations;
 
  •  prompt internal reporting of violations of the ethics code to an appropriate person or persons identified in the code; and
 
  •  accountability for adherence to the Code of Ethics.
 
We will provide any person, without charge and upon request, with a copy of our Code of Ethics. Requests should be directed to us at 390 Union Blvd., Suite #540, Lakewood, Colorado 80228, Attention: Secretary. The Code of Ethics is also available on our website at www.vcgh.com. The information on our website is not incorporated into this proxy statement.
 
Item 11.   Executive Compensation
 
Executive Compensation
 
The following table sets forth summary information concerning compensation awarded to, earned by, or accrued for services rendered to the Company in all capacities by our Chief Executive Officer, Chief Operating Officer/ President, and Chief Financial Officer (collectively, the “named executive officers”) for fiscal years 2009 through 2008.
 
                                                                         
                                        Nonqualified
             
                                  Non-Equity
    Deferred
             
                      Stock
    Options
    Incentive Plan
    Compensation
    All Other
       
          Salary
    Bonus
    Award(s)
    Award(s)
    Compensation
    Earnings
    Compensation
    Total
 
Name and Principal Position
  Year     (a) ($)     (b) ($)     (c) ($)     (d) ($)     ($)     ($)     (f) ($)     ($)  
 
Troy Lowrie
    2009       700,000       -       -       -       -       -       92,449       792,449  
Chief Executive Officer
    2008       292,307       -       75,003       -       -       -       42,370       409,680  
Micheal Ocello
    2009       700,000       1,500       -       -       -       -       162,460       863,960  
President/Chief Operating Officer
    2008       700,000       1,500       75,003       -       -       -       102,341       878,844  
Courtney Cowgill(e)
    2009       190,000       26,500       -       -       -       -       14,763       231,263  
Chief Financial and Accounting Officer
    2008       92,807       1,500       -       60,137       -       -       8,977       163,421  
 
 
(a) Salary amounts represent base salary and payment for vacation, holidays, and sick days.
 
(b) Unless otherwise indicated, bonuses shown were paid in the fiscal year in which services were provided.
 
(c) On January 18, 2008, the Company issued 5,214 shares of the Company’s common stock to each member of the Company’s Board, including Mr. Lowrie and Mr. Ocello, in consideration for Board services provided from June 2007 to June 2008. The fair market value of each share of common stock at the time of grant was $9.59, the closing market price on the grant date. On October 2, 2008, the Company issued 7,375 shares of the Company’s common stock to each member of the Company’s Board, including Mr. Lowrie and Mr. Ocello, in consideration for Board services provided from June 2008 to December 2008. The fair market value of each share of common stock at the time of grant was $3.39, the closing market price on the grant date.
 
(d) The amounts reported reflected the aggregate fair value of stock option awards granted during the fiscal year pursuant to our 2004 Stock Option and Appreciation Rights Plan. Ms. Cowgill was awarded 25,000 stock options on June 19, 2008 with a calculated fair value of approximately $2.41 calculated using the Black-Scholes Option Pricing Model.
 
(e) Ms. Cowgill joined the Company in June 2008.


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(f) Amounts in the “All Other Compensation” Column consist of the following payments to or on behalf of the named executive officers:
 
                                                 
                Variable
    Life, Health
             
                Universal Life
    and Dental
             
          Car
    Insurance
    Insurance
    Board
       
          Allowance
    Premiums
    Premiums
    Compensation
    Total
 
Name and Principal Position
  Year     ($) (a)     ($) (b)     ($) (c)     ($) (d)     ($)  
 
Troy Lowrie
    2009       22,040       -       20,409       50,000       92,449  
Chief Executive Officer
    2008       24,416       -       17,954       -       42,370  
Micheal Ocello
    2009       22,051       58,673       31,736       50,000       162,460  
President/ Chief Operating Officer
    2008       14,408       58,673       29,260       -       102,341  
Courtney Cowgill
    2009       -       -       14,763       -       14,763  
Chief Financial and Accounting Officer
    2008       -       -       8,977       -       8,977  
 
 
(a) Certain executives and other employees receive monthly car allowances.
 
(b) Variable universal life insurance is provided to Mr. Ocello and paid by the Company.
 
(c) Life, health, and dental insurance is provided to all executives.
 
(d) Mr. Lowrie and Mr. Ocello received cash compensation for their services on the Company’s Board.
 
Outstanding Equity Awards at Fiscal Year End
 
The following table sets forth information regarding outstanding but unexercised options held by our named executive officers as of December 31, 2009:
 
                         
    Number of
             
    Securities
             
    Underlying
             
    Unexercised
    Option
    Option
 
    Options (#)
    Exercise
    Expiration
 
Name and Principal Position
  Unexercisable     Price ($)     Date  
 
Micheal Ocello
    30,000 (1)   $ 10.00       10/12/2017  
President/ Chief Operating Officer
                       
Courtney Cowgill
    25,000 (2)   $ 6.00       6/19/2018  
Chief Financial and Accounting Officer
                       
 
 
(1) On October 12, 2007, the Company granted to Mr. Ocello options to purchase 30,000 shares of the Company’s common stock. The options vest in three equal installments on the third, fifth, and seventh anniversaries of the date of grant.
 
(2) On June 19, 2008, the Company granted to Ms. Cowgill options to purchase 25,000 shares of the Company’s common stock. The options vest in three equal installments on the third, fifth, and seventh anniversaries of the date of grant.
 
Employment Contracts and Termination of Employment and Change in Control Arrangements
 
In November 2007, the Company’s Compensation Committee hired an independent consulting firm to determine proper compensation levels for our Chief Executive Officer and President. The study’s results were used to determine the compensation of our President, Micheal Ocello, after he changed his status from consultant to employee in October 2007.
 
Our Chief Executive Officer and principal stockholder, Troy Lowrie, decided to forego a salary from the Company’s inception in 2002 until March 2008. At that time, Mr. Lowrie decided to receive the Board approved salary of approximately $300,000 annually, only 40% of the salary recommended by the independent salary study and approved by the Board. In November 2008, Mr. Lowrie elected to increase his annual salary to the full amount of $700,000, as recommended by the independent salary study and approved earlier by the Board.
 
On December 4, 2008, the Company entered into five-year employment agreements with Troy Lowrie, the Company’s Chairman of the Board and Chief Executive Officer, and Micheal Ocello, the Company’s President,


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Chief Operating Officer and a Director. The agreements with each of Mr. Lowrie and Mr. Ocello expire on December 4, 2013, but each has an automatic renewal for an additional five-year period unless either party thereto provides written notice that the agreement shall not be extended and renewed. In the event that the Company does not renew the initial term of an officer’s employment agreement, the Company is required to pay the officer severance in an amount equal to three times the sum of the officer’s base salary in effect upon termination of the employment agreement plus an amount equal to the highest bonus the officer received in the three years before termination, if any.
 
The employment agreements provide for an annual base salary payable to each officer of $700,000, subject to review at least every 24 months and potential upward adjustments as determined by the Company’s Board. In addition, bonuses, if any, are payable at the discretion of the Company’s Board. Each officer is entitled to certain benefits such as health, dental, disability, long term care, paid time off, use of a leased automobile and other fringe benefits as well as participation in the Company’s incentive, savings, retirement, profit sharing, perquisites and other programs, as approved by the Company’s Board.
 
Pursuant to the terms of the employment agreements, if an officer’s employment is terminated by reason of such officer’s “death” or “disability,” the Company will continue paying the officer’s base salary plus an amount equal to the highest bonus the officer received in the three years before termination, if any, for a period of one year following such termination. In addition, health insurance coverage for the officer and his family will continue for three years following such termination. In the event that an officer’s employment is terminated as a result of the officer’s “disability,” the Company will also pay certain amounts in respect of the officer’s disability benefits and long-term care policy. If an officer’s employment is terminated for “cause” or without “good reason,” the Company will pay the officer his base salary through the date of termination and will have no further obligations to the officer. Each officer has the right to terminate the employment agreement for “good reason” within nine months following a “change of control” of the Company.
 
If the Company terminates an officer’s employment other than for “cause,” “death,” or “disability,” or an officer terminates his employment for “good reason,” the officer will be entitled to a severance payment equal to three times the sum of the officer’s base salary in effect upon termination plus an amount equal to the highest bonus the officer received in the three years before termination, if any. In addition, health insurance and disability benefits will be paid by the Company for three years (or until such earlier time that the officer accepts other employment) following such termination of employment and certain outstanding but unvested options held by the officer at the time of termination, if any, will become immediately vested and exercisable for a period of 180 days following such termination.
 
The employment agreements provide that during the employment period and for one year following the termination of the employment agreement by the Company with “cause” or by the officer without “good reason,” each officer may not compete with the Company within a 25-mile radius of any nightclub owned or operated by the Company or any of its affiliates. The employment agreements also contain customary confidentiality, non-solicitation, and non-disparagement covenants.
 
Further, the employment agreements provide that if an officer’s employment is terminated for any reason, the Company shall, at the officer’s election, promptly pay all outstanding debt owed to the officer and his family or issue to the officer, with his approval, the number of shares of the Company’s common stock determined by dividing (a) the outstanding principal and interest owed to the officer by (b) 50% of the last sale price of the Company’s common stock on the date of termination.
 
Finally, Mr. Lowrie’s employment agreement provides that if his employment is terminated for any reason, the Company must also take all necessary steps to remove Mr. Lowrie as a guarantor of any Company (or its affiliates) obligations to any third party. In the event that the Company is not successful in doing so, the Company must pay to Mr. Lowrie a cash amount equal to 5% per year of the aggregate amount he is continuously guaranteeing until such time as Mr. Lowrie no longer guarantees the obligations.


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Potential Payments upon Termination or Change in Control
 
The following table presents the amount of compensation payable to each of our named executive officers as if the triggering termination event had occurred on the last day of our most recently completed fiscal year, December 31, 2009:
 
                                     
        Termination w/out
                   
        Cause, Non-Renewal
                   
        Change in Control
                   
        or Quit with
          Total
    Termination
 
Name and Principal Position   Benefit   Good Reason     Death     Disability     with Cause  
 
Troy Lowrie
  Salary   $ 2,100,000     $ 700,000     $ 700,000     $ -  
Chief Executive Officer
  Board of Directors Compensation     50,000       -       -       -  
    Bonus     -       -       -       -  
    Health Benefits     61,227       61,227       61,227       -  
    Acceleration of Options     -       -       -       -  
    All Other Benefits     199,629       -       159,348       -  
Micheal Ocello
  Salary     2,100,000       700,000       700,000       -  
President/ Chief Operating Officer
  Board of Directors Compensation     50,000       -       -       -  
    Bonus     1,500       1,500       1,500       -  
    Health Benefits     61,227       61,227       61,227       -  
    Acceleration of Options     -       -       -       -  
    All Other Benefits     126,893       -       -       -  
All Other Benefits:
                                   
Troy Lowrie
  Disability Insurance     -       -       -       -  
    Long Term Care Insurance     159,348       -       159,348       -  
    Auto     40,281       -       -       -  
    Retirement Plans     -       -       -       -  
    Unused Vacation     -       -       -       -  
    Club Memberships     -       -       -       -  
                                     
          199,629       -       159,348       -  
Micheal Ocello
  Disability and VUL Insurance     70,000       -       -       -  
    Long Term Care Insurance     -       -       -       -  
    Auto     56,893       -       -       -  
    Retirement Plans     -       -       -       -  
    Unused Vacation     -       -       -       -  
    Club Memberships     -       -       -       -  
                                     
          126,893       -       -       -  


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Compensation of our Directors
 
The following table sets forth a summary of the compensation we paid to our non — employee directors in 2009.
 
                 
    Fees Earned
       
    or Paid
       
    in Cash
    Total
 
Name and Principal Position
  ($)(1)     ($)  
 
Robert McGraw Jr.(2)
    62,500       62,500  
Carolyn Romero(3),(5)
    34,792       34,792  
Martin Grusin
    50,000       50,000  
Kenton Sieckman(2),(3)
    67,500       67,500  
George Sawicki(2),(3)
    69,500       69,500  
Allan Rubin(4)
    31,250       31,250  
                 
      315,542       315,542  
                 
 
 
(1) Except for Mr. Rubin and Ms. Romero, all Board members received $50,000 as compensation for their service on the Board for their 2009/2010 term.