UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One):
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number:
001-32208
VCG HOLDING CORP.
(Exact Name of Registrant as
Specified in its Charter)
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Colorado
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84-1157022
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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390 Union Boulevard, Suite 540, Lakewood, CO
(Address of principal
executive offices)
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80228
(Zip
Code)
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Registrants telephone number, including area code:
(303) 934-2424
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class:
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Name of Each Exchange on Which Registered:
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Common Stock, $.0001 par value
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The NASDAQ Global Market
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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 registrants 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):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller Reporting company þ
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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 registrants Common Stock,
par value of $.0001 per share, outstanding.
VCG
HOLDING CORP.
FORM 10-K
TABLE OF
CONTENTS
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 managements 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.
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.
1
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:
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Name of Club
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Date Acquired
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Club Type
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PTs®
Showclub in Indianapolis, Indiana
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2002
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B
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PTs®
Brooklyn in Brooklyn, Illinois
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2002
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B
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PTs®
All Nude in Denver, Colorado
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2004
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C
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The Penthouse
Club®
in Glendale, Colorado
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2004
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A
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Diamond
Cabaret®
in Denver, Colorado
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2004
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A
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PTs®
Appaloosa in Colorado Springs, Colorado
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October 2006
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B
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PTs®
Showclub in Denver, Colorado
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December 2006
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B
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PTs®
Showclub in Louisville, Kentucky
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January 2007
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B
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Roxys in Brooklyn, Illinois
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February 2007
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B
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PTs®
Showclub in Centreville, Illinois
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February 2007
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B
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PTs®
Sports Cabaret in Sauget, Illinois
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March 2007
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B
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The Penthouse
Club®
in Sauget, Illinois
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March 2007
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A
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The Mens
Club®
in Raleigh, North Carolina
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April 2007
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A
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Schieks Palace Royale in Minneapolis, Minnesota
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May 2007
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A
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PTs®
Showclub in Portland, Maine
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September 2007
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B
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Jaguars Gold Club in Ft. Worth, Texas
(Golden)
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September 2007
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C
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PTs®
Showclub in Hialeah, Florida
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October 2007
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B
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La Boheme Gentlemens Club in Denver, Colorado
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December 2007
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B
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Jaguars Gold Club in Dallas, Texas (Manana)
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April 2008
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C
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Imperial Showgirls Gentlemens Club in Anaheim, California
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July 2008
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C
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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 Companys 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
2
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
PTs®
Showclub in Indianapolis, IN and
PTs®
Brooklyn in Brooklyn, IL are located.
The Company has one reportable segment. Our clubs are
distinguished by the following features:
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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.
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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.
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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.
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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 patrons stay. Performers who work at our clubs
are experienced entertainers.
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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 nightclubs 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.
3
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 Jaguars Gold
Club for our nightclubs located in Dallas and
Ft. Worth, Texas without a fee.
The Diamond
Cabaret®
name and
PTs®
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
PTs®
trademark for a fee. Roxys 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
Mens
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.
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Club Ownership
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Trade Name
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Classic Affairs, Inc.
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Schieks Palace Royale
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VCG-IS, LLC
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Imperial Showgirls Gentlemens Club
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Stout Restaurant Concepts, Inc.
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La Boheme Gentlemens Cabaret
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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
managements 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
managements 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 Ricks 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 Companys 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
5
Proposal) from the Companys 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
Companys 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 Companys 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
Boards 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 Companys Current Report on
Form 8-K
filed with the SEC on February 17, 2010, the Company,
Ricks, 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,
Ricks agreed to acquire all of the outstanding shares of
common stock of the Company and the Company will merge with and
into Ricks or a wholly-owned subsidiary of Ricks
(the Merger). In the event the Merger is
consummated, the Company will become a subsidiary of Ricks
and the Companys shareholders will become shareholders of
Ricks. 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 Companys
shareholders will receive shares of common stock of Ricks
in exchange for their shares of the Companys common stock
based on an exchange ratio that values each share of the
Companys 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 Ricks 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 Ricks common stock as determined by
this formula is below $8.00, Ricks 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
Ricks common stock for the 20 consecutive trading days
ending on February 11, 2010 was equal to the closing price
of Ricks common stock on February 11, 2010 of $11.76
per share), the value of each share of the Companys common
stock under this formula would be $2.66 per share.
6
Contemporaneously with the closing of the Merger, Ricks
has agreed to acquire 5,770,197 shares of the
Companys 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 Companys shareholders in
the Merger. At Lowries election, Lowrie may receive
Ricks common stock, at the same exchange ratio received by
the Companys 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
Ricks), (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 Ricks the outstanding capital stock of Club Licensing,
Inc., a wholly-owned subsidiary of Lowrie Management, LLLP that
owns the trademarks Diamond Cabaret and
PTs, (the Trademarks), and
(iv) enter into a three-year consulting agreement with
Ricks (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
Companys 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 Ricks 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 Ricks and has further agreed not to
solicit any offer or engage in any negotiations other than with
Ricks for the merger, sale of the business or assets of
the Company or tender or exchange offer for the Companys
common stock. In the event the Company receives an unsolicited
offer that is superior to the terms of the Merger (a
Superior Proposal) and Ricks 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
Ricks 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 Ricks 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 Ricks
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 Ricks, which, among other things, registers
the shares of common stock to be issued to the Companys
shareholders in the Merger. There can be no assurance that the
Company, Ricks 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 Companys website is www.vcgh.com. The Companys
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 Companys
website is not incorporated by reference into this Report on
Form 10-K.
7
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 Companys Board, and Troy
Lowrie, the Companys 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
Ricks 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 Companys 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 Companys favor, could be
substantial. Such lawsuits could also substantially divert the
attention of the Companys 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.
8
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
9
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 managements 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 managements
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
10
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
PTs®,
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
11
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
SECs 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
Companys Board to acquire all of the Companys common
stock in a going private transaction. Further, in the proposed
merger transaction as currently proposed, Mr. Lowrie will
receive different consideration than the Companys other
shareholders, due in part to his continued guaranty of certain
Company obligations, the sale of certain trademarks owned by
Mr. Lowries affiliates, the refinancing of his
promissory note with the Company, and his consulting agreement
with Ricks 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. Lowries 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 Companys 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. Lowries 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:
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election of our Directors;
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amendment of our organizational documents;
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the potential merger or going private transactions or the sale
of our assets or other corporate transaction; and
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Control of the outcome of any other matter submitted to the
stockholders for vote.
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Mr. Lowries 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.
12
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
managements 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 managements 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,
womens 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, womens 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.
13
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 individuals service on the Companys 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 Companys 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 Companys
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 Companys
operating capital and will have an adverse effect on the
Companys 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.
14
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
officers 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
officers employment is terminated for any reason, we must,
at the officers 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. Lowries employment agreement provides
that if Mr. Lowries 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 NASDAQs
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
Companys 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.
15
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 Markets 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 NASDAQs independence requirements
in the future and we fail to regain compliance with
NASDAQs continued listing requirements, the Companys
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
stocks 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 SECs
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
16
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 customers 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
purchasers 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:
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our performance and prospects;
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17
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the depth and liquidity of the market for our securities;
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sales by selling stockholders of shares issued or issuable in
connection with our private placements;
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investor perception of us and the industry in which we operate;
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changes in earnings estimates or buy/sell recommendations by the
analyst;
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general financial and other market conditions; and
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Domestic and international economic conditions.
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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.
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Item 1B.
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Unresolved
Staff Comments
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Not applicable.
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).
18
The table contains specifics about our leased and owned adult
nightclub locations:
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Name/Club Ownership
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Lease Information
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PTs®
Brooklyn
Platinum of Illinois, Inc.
Acq. Date: 5/1/2002
Location: Brooklyn, IL
Sq. Ft.: 9,000
Building owned by VCG: Yes
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An Illinois corporation and wholly-owned subsidiary of VCG.
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PTs®
Showclub
Indy Restaurant Concepts, Inc.
Acq. Date: 6/30/02
Location: Indianapolis, IN
Sq. Ft.: 9,200
Building owned by VCG: Yes
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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.
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PTs®
All Nude
VCG Restaurants Denver, Inc.
Acq. Date: 6/30/04
Location: Denver, CO
Sq. Ft.: 8,000
Building owned by VCG: No
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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.
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The Penthouse
Club®
Glendale Restaurant Concepts, LP
Acq. Date: 6/30/04
Location: Glendale, CO
Sq. Ft.: 9,600
Building owned by VCG: No
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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.
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PTs®
Showclub Appaloosa
VCG CO Springs, Inc.
Acq. Date: 10/2/06
Location: Colorado Springs, CO
Sq. Ft.: 9,500
Building owned by VCG: No
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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.
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Diamond
Cabaret®
Glenarm Restaurant, LLC
Acq. Date: 10/8/04
Location: Denver, CO
Sq. Ft.: 36,000
Building owned by VCG: No
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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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19
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Name/Club Ownership
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Lease Information
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PTs®
Show Club
Denver Restaurant Concepts, LP
Acq. Date: 12/28/06
Location: Denver, CO
Sq. Ft.: 20,720
Building owned by VCG: No
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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.
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Roxys
RCC LP
Acq. Date: 1/18/07
Location: Brooklyn, IL
Sq. Ft.: 4,400
Building owned by VCG: No
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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.
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PTs®
Showclub
Kentucky Restaurant Concepts, Inc.
Acq. Date: 1/2/07
Location: Louisville, KY
Sq. Ft.: 23,000
Building owned by VCG: No
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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.
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PTs®
Showclub
Cardinal Management LP
Acq. Date: 2/5/07
Location: Centreville, IL
Sq. Ft.: 5,700
Building owned by VCG: No
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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.
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PTs®
Sports Cabaret
MRC LP
Acq. Date: 2/9/07
Location: Sauget, IL
Sq. Ft.: 9,700
Building Owned by VCG: No
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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.
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The Penthouse
Club®
IRC LP
Acq. Date: 2/7/07
Location: Sauget, IL
Sq. Ft.: 19,300
Building Owned by VCG: No
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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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20
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Name/Club Ownership
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Lease Information
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The Mens
Club®
Raleigh Restaurant Concepts, Inc.
Acq. Date: 4/16/07
Location: Raleigh, NC
Sq. Ft.: 21,200
Building owned by VCG: No
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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.
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Schieks Palace Royale
Classic Affairs, Inc.
Acq. Date: 5/30/07
Location: Minneapolis, MN
Sq. Ft.: 11,600
Building owned by VCG: No
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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.
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PTs®
Showclub
Kenkev II, Inc.
Acq. Date: 9/14/07
Location: Portland, ME
Sq. Ft.: 13,000
Building owned by VCG: No
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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.
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Jaguars 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
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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
terms rental obligation.
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PTs®
Showclub
Kenja II, Inc.
Acq. Date: 10/29/07
Location: Miami, FL
Sq. Ft.: 7,600
Building owned by VCG: No
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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.
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La Boheme Gentlemens Club
Stout Restaurant Concepts, Inc.
Acq. Date: 12/21/07
Location: Denver, CO
Sq. Ft.: 6,200
Building owned by VCG: No
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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.
|
|
|
|
|
Jaguars 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 terms rental
obligation.
|
|
|
|
|
21
|
|
|
|
Name/Club Ownership
|
|
|
Lease Information
|
Imperial Showgirls Gentlemens 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. Peters 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. Peters
claims in their entirety. The Court found that as a matter of
law, VCG did not tortiously interfere with Mr. Peters
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 Regales
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 Regales 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 Companys or a successor entitys, 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 VCGs 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
Zajkowskis 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,
22
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 Zajkowskis 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, VCGs 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 Courts order enjoined the
state from collecting or assessing the tax. The State of Texas
has appealed the District Courts 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 Courts 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 States brief was
filed on September 25, 2009 and the Texas Entertainment
Associations brief was filed on October 15, 2009. On
February 12, 2010 the Texas Supreme Court granted the
States 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 (PTs
Showclub)
In October 2008,
PTs®
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,
PTs®
Showclub in Portland, Maine was served a subpoena by ICE
requesting documents to conduct an I-9 audit. ICE requested all
original I-9s 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
23
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
PTs®
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 Companys 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 Companys stockholders. The
complaint alleges, among other things, that Troy Lowrie, the
Companys Chairman of the Board and Chief Executive
Officer, has conflicts of interest with respect to the Proposal
and that in connection with the Boards 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
24
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
Companys Board rejected the Proposal concerning the
proposed Going Private Transaction as then-currently inadequate
and, as previously disclosed in the Companys 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 Ricks 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 Companys 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.
25
|
|
Item 4.
|
(Remove
and Reserved)
|
PART II
|
|
Item 5.
|
Market
For Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information
The Companys 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
Companys repurchase program.
26
The following table provides additional information about the
Companys purchases under the repurchase program during the
fourth quarter of 2009.
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys 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 Companys
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 Companys 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 Companys 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 Managements 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 Managements 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.
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(1) |
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Fiscal year 2006 reflects the acquisitions of two adult
nightclubs in Colorado. |
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(2) |
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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). |
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(3) |
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Fiscal year 2008 reflects the acquisitions of one adult
nightclub in California and one in Texas. See Note 4 to the
Consolidated Financial Statements. |
27
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(4) |
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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. |
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(5) |
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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. |
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Item 7.
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Managements
Discussion and Analysis of Financial Condition and Results of
Operations
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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 managements 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.
28
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 Managements 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 nightclubs intangible assets. Accordingly,
the fair value of a reporting unit is allocated to all of the
assets and liabilities of that nightclub,
29
including any unrecognized intangible assets and the excess
becomes the implied value of the goodwill. This is done in
relation to the nightclubs respective forecasted cash
flows and other relevant assumptions
In performing the Companys 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.
30
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
PTs®
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,
PTs®
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.
31
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 companys 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 Jaguars Gold Club in
Dallas, Texas and Imperial Showgirls Gentlemens 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.
32
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:
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an increase in the federal and state minimum wages ranging from
$0.17 to $0.70 per hour from 2008 to 2009;
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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.
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In November 2007, the Companys Compensation Committee
hired an independent consulting firm to determine proper
compensation levels for our CEO and President. The studys
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. Ocellos
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 Companys 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:
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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;
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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
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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.
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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
33
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:
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audit and quarterly review fees of $210,000 (see Item 14
Principal Accountant Fees and Services in Part III);
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tax return preparation fees of $214,000 to file 2008 tax
returns, amend all the Companys federal and state returns
filed in 2008 for the fiscal year ending December 31, 2007
and correct earlier years state tax returns;
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consultant expenses to test internal controls and document
compliance with the Sarbanes-Oxley Act of 2002 of approximately
$99,000;
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$102,000 in marketing consulting fee expenses paid by warrants
that expired in 2009; and
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$290,000 of valuation and impairment calculation costs and
consulting fees for work related to the SEC comment letter and
subsequent amended SEC filings;
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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 Ricks 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 Companys 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
34
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 years 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 Companys 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
35
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 Companys 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
36
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 VCGs 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 Companys 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
37
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
38
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
Companys 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, Ricks Cabaret
International, Inc. (Ricks), 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, Ricks agreed to acquire all of the
outstanding shares of common stock of the Company and the
Company will merge with and into Ricks or a wholly-owned
subsidiary of Ricks (the Merger). In the event
the Merger is consummated, the Company will become a subsidiary
of Ricks and the Companys shareholders will become
shareholders of Ricks. 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.
39
|
|
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 Managements 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 companys 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 companys 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 companys
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
companys 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
40
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.
41
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 VCGs
stockholders
|
|
$
|
0.04
|
|
|
$
|
(1.71
|
)
|
Fully diluted earnings (loss) per share attributable to
VCGs 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.
42
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.
43
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.
44
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
|
|
45
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 Companys 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 Companys 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.
46
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
47
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 Companys 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 Companys
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 companys 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.
48
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
49
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 SECs position on various matters. There is
no new guidance, but it includes adjustments to the SECs
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
50
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 Companys 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 Streets 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.
Inventories consist of beverages, food, tobacco products and
merchandise. All are valued at the lower of cost or market.
51
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
|
|
|
|
|
|
|
|
|
|
|
On April 14, 2008, the Company acquired 100% of the common
stock of Manana Entertainment, Inc. (Manana) and the
building in which Manana operates Jaguars 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 Gentlemens 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.
52
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 Companys 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 Companys 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.
53
VCG
Holding Corp.
Notes to
Consolidated Financial
Statements (Continued)
|
|
6)
|
Goodwill
and Other Intangible Assets
|
The Companys 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 Companys 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
54
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 Companys 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
|
|
|
|
|
|
|
|
|
|
|
The Companys 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
|
|
|
|
|
|
|
|
|
|
|
The Companys 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
|
|
|
$
|
-
|
|
55
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 Companys 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
|
|
|
|
|
|
|
|
|
|
|
56
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 Buyers 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
|
|
57
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.
58
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.
A reconciliation of the Companys 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
|
|
|
|
|
|
|
|
|
|
|
59
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.
Common
Stock
Holders of the Companys common stock are entitled to one
vote for each share held of record on all matters. Since the
Companys 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 Companys assets remaining
after payment of claims by creditors and liquidation preferences
of any preferred stock. Holders of the Companys 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 Companys
Series A Preferred Stock was outstanding.
Stock
Option and Stock Bonus Plans
The Companys 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.
60
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
Companys historical stock prices since it became public in
October 2003, averaged with a peer-groups historical
volatility for the one to two
61
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 Companys 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 Companys 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 Companys 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.
62
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 Companys 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 clubs 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 clubs 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. Peters 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. Peters
claims in their entirety. The Court found that as a matter of
law, VCG did not tortiously interfere with Mr. Peters
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 Regales
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 Regales principal and
denying the stay as to Regale. As a
63
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 Companys or a
successor entitys, 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 VCGs 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
Zajkowskis 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 Zajkowskis 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, VCGs 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 Courts order enjoined the
state from collecting or assessing the tax. The State of Texas
has appealed the District Courts 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 Courts 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 States brief was
filed on September 25, 2009 and the Texas Entertainment
Associations brief was filed on October 15, 2009. On
February 12, 2010 the Texas Supreme Court granted the
States Petition for Review and set oral arguments for
March 25, 2010.
64
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 (PTs
Showclub)
In October 2008,
PTs®
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,
PTs®
Showclub in Portland, Maine was served a subpoena by ICE
requesting documents to conduct an I-9 audit. ICE requested all
original I-9s 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
PTs®
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
65
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 Companys 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 Companys stockholders. The
complaint alleges, among other things, that Troy Lowrie, the
Companys Chairman of the Board and Chief Executive
Officer, has conflicts of interest with respect to the Proposal
and that in connection with the Boards 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
66
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
Companys Board rejected the Proposal concerning the
proposed Going Private Transaction as then-currently inadequate
and, as previously disclosed in the Companys 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 Ricks 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 Companys 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.
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13)
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Fair
Value of Financial Instruments
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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
67
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.
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 Companys 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 Companys 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
Companys 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 Companys 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
Boards 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.
68
VCG
Holding Corp.
Notes to
Consolidated Financial
Statements (Continued)
As reported on the Companys Current Report on
Form 8-K
filed with the SEC on February 17, 2010, the Company,
Ricks, 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,
Ricks agreed to acquire all of the outstanding shares of
common stock of the Company and the Company will merge with and
into Ricks or a wholly-owned subsidiary of Ricks
(the Merger). In the event the Merger is
consummated, the Company will become a subsidiary of Ricks
and the Companys stockholders will become stockholders of
Ricks. 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 Companys
stockholders will receive shares of common stock of Ricks
in exchange for their shares of the Companys common stock
based on an exchange ratio that values each share of the
Companys 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 Ricks 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 Ricks common stock as determined by
this formula is below $8.00, Ricks 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 Ricks common stock for
the 20 consecutive trading days ending on March 9, 2010
$13.95 per share, the value of each share of the Companys
common stock under this formula would be $2.85 per share.
Contemporaneously with the closing of the Merger, Ricks
has agreed to acquire 5,770,197 shares of the
Companys 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 Companys stockholders in
the Merger. At Lowries election, Lowrie may receive
Ricks common stock, at the same exchange ratio received by
the Companys 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
Ricks), (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 Ricks the outstanding capital stock of Club Licensing,
Inc., a wholly-owned subsidiary of Lowrie Management, LLLP that
owns the trademarks Diamond Cabaret and
PTs, (the Trademarks), and
(iv) enter into a three-year consulting agreement with
Ricks (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
Companys 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 Ricks 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 Ricks and has further agreed not to
solicit any offer or engage in any negotiations other than with
Ricks for the merger, sale of the business or assets of
the Company or tender or exchange offer for the Companys
common stock. In the event the Company receives an unsolicited
offer that is superior to the terms of the Merger (a
Superior Proposal) and Ricks 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
Ricks for its
out-of-pocket
expenses and fees incurred in evaluating and
69
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 Ricks 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 Ricks
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 Ricks, which, among other things, registers
the shares of common stock to be issued to the Companys
stockholders in the Merger. There can be no assurance that the
Company, Ricks 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.
70
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Item 9.
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Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure
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None.
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Item 9A.
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Controls
and Procedures
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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 SECs 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.
Managements
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:
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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.
71
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 Companys 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
72
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. Lowries 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
PTs®
Showclubs, Diamond
Cabaret®,
The Penthouse
Club®,
and Shotgun Willies located in Denver;
PTs®
Showclub in Colorado Springs; The Penthouse
Club®,
The Platinum Club, Roxys and
PTs®
Showclubs in St. Louis; Schieks Palace Royale in
Minneapolis; The Mens Club in Raleigh; Jaguars in Dallas
and Ft. Worth; Imperial Showgirls Gentlemens 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 Missouris 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. Ocellos 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. McGraws 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 Bachelors 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. McGraws accounting and financial
experience, among other factors, led the Board to conclude that
he should serve as a director.
73
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. Grusins 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 worlds
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. Sawickis
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 worlds 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. Sieckmans 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. Romeros accounting and financial experience,
among other factors, led the Board to conclude that she should
serve as a director.
74
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 Companys compliance with legal and regulatory
requirements, the independence and qualifications of the
independent auditors, and the performance of the Companys
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 Companys compensation and benefit policies,
including the review and approval of the Companys
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 Companys 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 Companys 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
Companys 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 studys 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
75
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 Companys corporate governance guidelines,
including the Companys 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 Boards 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.
76
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 Companys common stock to each member of the
Companys 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 Companys common
stock to each member of the Companys 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 $2.41 calculated using
the
Black-Scholes
Option Pricing Model. |
|
(e) |
|
Ms. Cowgill joined the Company in June 2008. |
77
|
|
|
(f) |
|
Amounts in the All Other Compensation Column consist
of the following payments to or on behalf of the named executive
officers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
|
Life, Health
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal Life
|
|
|
and Dental
|
|
|
|
|
|
|
|
|
|
|
|
|
Car
|
|
|
Insurance
|
|
|
Insurance
|
|
|
Board
|
|
|
|
|
|
|
|
|
|
Allowance
|
|
|
Premiums
|
|
|
Premiums
|
|
|
Compensation
|
|
|
Total
|
|
Name and Principal Position
|
|
Year
|
|
|
($) (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 Companys 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 Companys
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 Companys
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 Companys Compensation Committee
hired an independent consulting firm to determine proper
compensation levels for our Chief Executive Officer and
President. The studys 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 Companys
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 Companys
Chairman of the Board and Chief Executive Officer, and Micheal
Ocello, the Companys President,
78
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 officers employment agreement, the
Company is required to pay the officer severance in an amount
equal to three times the sum of the officers 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 Companys Board. In addition, bonuses, if
any, are payable at the discretion of the Companys 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 Companys incentive, savings,
retirement, profit sharing, perquisites and other programs, as
approved by the Companys Board.
Pursuant to the terms of the employment agreements, if an
officers employment is terminated by reason of such
officers death or disability, the
Company will continue paying the officers 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
officers employment is terminated as a result of the
officers disability, the Company will also pay
certain amounts in respect of the officers disability
benefits and long-term care policy. If an officers
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 officers 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
officers 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
officers employment is terminated for any reason, the
Company shall, at the officers 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
Companys 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 Companys common
stock on the date of termination.
Finally, Mr. Lowries 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.
79
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
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
80
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. |
|
(2) |
|
Messrs. McGraw, Sawicki, and Sieckman served as members of
the Audit Committee and received an additional $12,500 for the
2009/2010 term. |
|
(3) |
|
Messrs. Sawicki and Sieckman and Ms. Romero were each
compensated $2,500 per month from November to December 2009 for
their services as members of the Special Committee.
Mr. Sawicki, as Chairman, of the Special Committee was
compensated an additional amount of $1,000 each month. |
|
(4) |
|
Mr. Rubin resigned from the Board in August 2009 due to his
lack of independence. The amount reflects payments to
Mr. Rubin through his service on the Board. |
|
(5) |
|
Ms. Romero joined the board in August 2009. The amount
reflects payments made to Ms. Romero for her services on
Board and the Audit Committee, including $3,125 for her role as
an independent financial expert. |
Indemnification
of Directors
The Company has entered into indemnification agreements to
indemnify its Directors and Executive Officers. Under these
agreements, the Company is obligated to indemnify its Directors
and Executive Officers against claims arising out of events or
occurrences related to such individuals service on the
Companys Board or as an Executive Officer, to the extent
permitted by Article 109 of the Colorado Business
Corporation Act. The Company believes that these agreements are
necessary in attracting and retaining qualified Directors and
Officers.
81
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Stockholders
beneficially owning more than 5% of the Companys common
stock
The following table shows, as of March 11, 2010 and to the
best of our knowledge, all persons we know to be
beneficial owners of more than 5% of our common
stock.
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Percent of
|
|
|
|
and
|
|
|
Common
|
|
|
|
Nature of
|
|
|
Stock
|
|
Name and Address
|
|
Beneficial
|
|
|
Beneficially
|
|
of Beneficial Owner(1)
|
|
Ownership
|
|
|
Owned
|
|
|
Troy Lowrie(2)
|
|
|
4,943,289
|
|
|
|
28.56
|
%
|
390 Union Blvd, Suite 540
|
|
|
|
|
|
|
|
|
Lakewood, CO 80228
|
|
|
|
|
|
|
|
|
Lowrie Management LLLP
|
|
|
4,394,100
|
|
|
|
25.38
|
%
|
390 Union Blvd, Suite 540
|
|
|
|
|
|
|
|
|
Lakewood, CO 80228
|
|
|
|
|
|
|
|
|
Whitebox Advisors, LLC, Whitebox Combined Advisors, LLC,
Whitebox Combined Partners, L.P., Whitebox Multi-Strategy Fund,
L.P., Whitebox Multi-Strategy Fund, Ltd., Whitebox Intermarket
Advisors, LLC, Whitebox Intermarket Partners, L.P., Whitebox
Intermarket Fund, L.P., Whitebox Intermarket Fund, Ltd., HFR RVA
Combined Master Trust.(3)
|
|
|
1,380,498
|
|
|
|
7.97
|
%
|
3033 Excelsior Boulevard, Suite 300
|
|
|
|
|
|
|
|
|
Minneapolis, MN 55416
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unless otherwise noted, all shares of common stock listed above
are owned and registered in the name of each person listed as
beneficial owner and such person has sole voting and dispositive
power with respect to the shares of common stock beneficially
owned by each of them. Pursuant to Exchange Act
Rule 13d-3(d), shares not outstanding which are subject to
options, warrants, rights or conversion privileges exercisable
within 60 days of the record date are deemed outstanding
for the purpose of calculating the number and percentage
beneficially owned by such person, but are not deemed
outstanding for the purpose of calculating the percentage
beneficially owned by each other person listed. |
|
(2) |
|
Includes (i) 4,394,100 shares of common stock owned by
Lowrie Management LLLP and (ii) 549,189 shares of
common stock owned by Mr. Lowrie over which Mr. Lowrie
has sole voting and dispositive power. Mr. Lowrie is the
President of Lowrie Investment Management, Inc., the General
Partner of Lowrie Management LLLP. Mr. Lowrie disclaims
beneficial ownership of the shares owned by Lowrie Management
LLLP, except to the extent of his pecuniary interest therein. |
|
(3) |
|
As reported by Whitebox Advisors, LLC on Schedule 13G filed
with the SEC on February 8, 2010. |
82
Security
Ownership of our Directors and Executive Officers
The following table sets forth certain information regarding
beneficial ownership of our common stock as of March 11,
2010 by: (i) each director; (ii) each current
executive officer listed in the Summary Compensation Table; and
(iii) all directors and executive officers as a group.
Unless otherwise specified, the address of each person named is
390 Union Blvd., Suite #540, Lakewood, Colorado 80228.
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
Beneficially
|
|
|
Percent
|
|
Name and Address
|
|
Owned(1)
|
|
|
of Class
|
|
|
Troy Lowrie
|
|
|
4,943,289
|
(2)
|
|
|
28.56
|
%
|
Micheal Ocello
|
|
|
195,589
|
(3)
|
|
|
1.13
|
%
|
Courtney Cowgill
|
|
|
4,300
|
(4)
|
|
|
*
|
|
Robert McGraw, Jr.
|
|
|
67,735
|
(6)
|
|
|
*
|
|
Carolyn Romero
|
|
|
-
|
|
|
|
*
|
|
Martin Grusin
|
|
|
86,319
|
(5)
|
|
|
*
|
|
Kenton Sieckman
|
|
|
47,868
|
(7)
|
|
|
*
|
|
George Sawicki
|
|
|
11,218
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All Executive Officers and Directors (as a group of eight
persons)
|
|
|
5,356,318
|
|
|
|
30.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents less than 1%. |
|
(1) |
|
Unless otherwise noted, all shares of common stock listed above
are owned and registered in the name of each person listed as
beneficial owner and such person has sole voting and dispositive
power with respect to the shares of common stock beneficially
owned by each of them. Pursuant to Exchange Act
Rule 13d-3(d), shares not outstanding which are subject to
options, warrants, rights, or conversion privileges exercisable
within 60 days of the Record Date are deemed outstanding
for the purpose of calculating the number and percentage
beneficially owned by such person, but are not deemed
outstanding for the purpose of calculating the percentage
beneficially owned by each other person listed. |
|
(2) |
|
Includes (i) 4,394,100 shares of common stock owned by
Lowrie Management LLLP and (ii) 549,189 shares of
common stock owned by Mr. Lowrie over which Mr. Lowrie
has sole voting and dispositive power. Mr. Lowrie is the
President of Lowrie Investment Management, Inc., the General
Partner of Lowrie Management LLLP. Mr. Lowrie disclaims
beneficial ownership of the shares owned by Lowrie Management
LLLP, except to the extent of his pecuniary interest therein.
Mr. Lowrie has pledged 2,325,900 shares of stock as
collateral on two of the Companies current notes. |
|
(3) |
|
Includes (i) 158,000 shares of common stock owned by
LTD Investment Group, LLC, of which Mr. Ocello is the
Managing Member and (ii) 37,589 shares of common stock
owned by Mr. Ocello over which Mr. Ocello has sole
voting and dispositive power. This does not include
30,000 shares of common stock underlying options to
purchase stock that are currently not exercisable within
60 days of the Record Date. Mr. Ocello has not pledged
any of his stock as collateral. |
|
(4) |
|
Includes (i) 4,300 shares of common stock owned by
Ms. Cowgill over which Ms. Cowgill has sole voting and
dispositive power. This does not include 25,000 shares of
common stock underlying options to purchase stock that are
currently not exercisable within 60 days of the Record
Date. Ms. Cowgill has not pledged any of her stock as
collateral. |
|
(5) |
|
Includes (i) 10,000 shares beneficially owned by ACM
Management, LLC, of which Mr. Grusin does not have sole
voting power but is the Chief Manager,
(ii) 66,319 shares owned by Mr. Grusin over which
Mr. Grusin has sole voting and dispositive power, and
(iii) 10,000 shares held by Mr. Grusins
wife, Ms. Gayle Powelson. Mr. Grusin has not pledged
any of his stock as collateral. |
|
(6) |
|
Includes (i) 65,735 shares owned by Mr. McGraw
over which Mr. McGraw has sole voting and dispositive power
and (ii) 2,000 shares held by Mrs. Marjorie
McGraw, Mr. McGraws wife. Mr. McGraw has not
pledged any of his stock as collateral. |
83
|
|
|
(7) |
|
Includes (i) 47,118 shares owned by Mr. Sieckman
over which Mr. Sieckman has sole voting and dispositive
power and (ii) 750 shares held by
Mr. Sieckmans son. Mr. Sieckman has not pledged
any of his stock as collateral. |
Securities
Authorized for Issuance under Equity Compensation
Plans
The table below sets forth, as of December 31, 2009,
information about our common stock that may be issued upon
exercise of options under our equity incentive plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
Number of Securities
|
|
|
|
|
|
Future Issuance Under
|
|
|
|
to be Issued Upon
|
|
|
Weighted-average
|
|
|
Equity Compensation
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Plans
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
(Excluding Securities
|
|
|
|
Options
|
|
|
Options
|
|
|
Reflected in Column (a))
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders
|
|
|
262,500
|
(3)
|
|
$
|
10.21
|
|
|
|
644,391
|
(1)
|
Equity compensation plans not approved by security holders
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
2,708
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
262,500
|
|
|
$
|
10.21
|
|
|
|
647,099
|
|
|
|
|
(1) |
|
The Company adopted a 2002 Stock Option and Stock Bonus Plan,
which was approved by its stockholders on July 22, 2002,
and reserved 700,000 shares of common stock for issuance
under the plan. In addition, the Company adopted a 2004 Stock
Option and Appreciation Rights Plan, which was approved by its
stockholders on July 29, 2005, and reserved
1,000,000 shares of common stock for issuance under the
plan. Shares of common stock may be issued either: (i) upon
the exercise of stock options granted under the plans; or
(ii) as stock bonuses granted under the plans. If there is
any change in the number of shares of common stock through the
declaration of stock dividends, or through a recapitalization
resulting in stock splits, or combinations or exchanges of such
shares, the number of shares of common stock available for
options and the number of such shares covered by outstanding
options, and the exercise price per share of the outstanding
options, shall be proportionately adjusted to reflect any
increase or decrease in the number of issued shares of common
stock; provided, however, that any fractional shares resulting
from such adjustment shall be eliminated. |
|
(2) |
|
The Company adopted a 2003 Stock Option and Stock Bonus Plan and
reserved 250,000 shares of common stock for issuance under
the plan. These shares have been registered under the Securities
Act of 1933, as amended, pursuant to a registration statement on
Form S-8. |
|
(3) |
|
The Company has issued 262,500 options to employees under the
2002 and 2004 Stock Option and Stock Bonus Plans. |
Equity
Incentive Plans
At December 31, 2009, we had the (i) 2002 Stock Option
and Bonus Plan (the 2002 Plan), (ii) 2003 Stock
Option and Stock Bonus Plan (the 2003 Plan), and
(iii) 2004 Stock Option and Appreciation Rights Plan (the
2004 Plan). The 2002 Plan was adopted by the Board
as of April 23, 2002, and by our stockholders on
July 22, 2002; the 2003 Plan was adopted by the Board on
June 23, 2003; and the 2004 Plan was adopted by the Board
as of December 14, 2004, and by our stockholders on
July 29, 2005.
The 2002 Plan authorizes the issuance of up to
700,000 shares of common stock. The 2003 Plan authorizes
the issuance of up to 250,000 shares of common stock. The
2004 Plan authorizes the issuance of up to 1,000,000 shares
of common stock. By encouraging stock ownership, we seek to
motivate plan participants by allowing them an opportunity to
benefit from any increased value of our Company which their
individual effort, initiative, and skill help produce. The plans
are administered by our Compensation Committee, but our Board
makes all final decisions with respect to compensation matters.
The material terms and provisions of the plans are as follows:
|
|
|
|
|
Under both the 2002 and the 2003 Plans, we may grant to our
designated employees, Officers, Directors, advisors and
consultants incentive stock options, nonqualified stock options
and stock. Under the 2004 Plan, we may grant to our designated
employees, Officers, Directors, advisors and consultants
incentive stock options, nonqualified stock options and stock
appreciation rights. As applicable, stock grants and stock
|
84
|
|
|
|
|
appreciation rights may be made to employees, officers,
directors and consultants of the Company and its subsidiaries,
including any non-employee members of the Board. Incentive stock
options may be granted only to employees of the Company.
Nonqualified stock options may be granted to employees,
officers, directors and consultants.
|
|
|
|
|
|
If options granted under either plan 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
respective plan.
|
|
|
|
The Compensation Committee 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. The exercise price
of an option may be equal to, greater than, or less than the
fair market value of a share of common stock at the time of
grant; provided that:
|
(i) the exercise price of an incentive stock option must be
equal to or greater than the fair market value of a share of
common stock on the date of grant;
(ii) the exercise price of an incentive stock option
granted to an employee who owns more than 10% of the issued and
outstanding common stock must not be less than 110% of the fair
market value of the underlying shares of common stock on the
date of grant; and
(iii) pursuant to the terms of the 2002 and 2003 Plans the
exercise price of a non-qualified stock option must be at a
price not less than 85% of the fair market value of the
underlying shares of common stock on the date of grant.
|
|
|
|
|
The Compensation Committee determines the term of each option,
which may not exceed ten years from the date of grant, except
that the term of an incentive stock option granted to an
employee who owns more than 10% of the issued and outstanding
common stock may not exceed five years from the date of grant.
The Compensation Committee may accelerate or extend the
exercisability of any or all outstanding options at any time for
any reason.
|
|
|
|
The Compensation Committee determines the number of shares of
stock granted to a participant and may subject any grant to
performance requirements, vesting provisions, transfer
restrictions and other restrictions and conditions.
|
As of December 31, 2009, there were no options outstanding
under the 2002 and the 2003 Plan. As of December 31, 2009,
there were 262,500 options outstanding under 2004 Plan. There is
still a small amount of shares available to be optioned or
granted in the 2002 and 2003 Plans.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Review,
Approval or Ratification of Transactions with Related
Persons
Our Board reviews, approves or ratifies all related party
transactions. A related party is someone who is a
(i) director, director nominee or Executive Officer of the
Company, (ii) beneficial owner of more than 5% of our
common stock, or (iii) an immediate family member of any of
the foregoing persons. Our policy covers transactions, or a
series of transactions, in which a related party was or is to be
a participant involving an amount exceeding $120,000 and in
which a related party has or will have a direct or indirect
material interest. Our Audit Committee is responsible for
overseeing this policy and may review and amend this policy from
time to time. Any member of the Audit Committee who has an
interest in the transaction under discussion will abstain from
voting on the approval of the related party transaction, but
may, if so requested by the Chair of the Audit Committee,
participate in some or all of the Committees discussions
of the related party transaction.
In determining whether to approve a related party transaction,
the Audit Committee will consider, among other things, the
following factors to the extent relevant to the related party
transaction:
|
|
|
|
|
whether the terms of the related party transaction are fair to
the Company and such terms would be on the same basis if the
transaction did not involve a related party;
|
85
|
|
|
|
|
whether there are business reasons for the Company to enter into
the related party transaction;
|
|
|
|
whether the related party transaction would impair the
independence of an independent Director;
|
|
|
|
whether the related party transaction would present an improper
conflict of interest for any Director or Executive Officer of
the Company, taking into account: (i) the size of the
transaction, (ii) the overall financial position of the
Director or Executive Officer, (iii) the direct or indirect
nature of the Directors or Executive Officers
interest in the transaction, and (iv) the ongoing nature of
any proposed relationship, and any other factors deemed
relevant; and
|
|
|
|
whether the related party transaction is material, taking into
account: (i) the importance of the interest to the related
party, (ii) the relationship of the related party to the
transaction and of related parties to each other, (iii) the
dollar amount involved, and (iv) the significance of the
transaction to the Companys investors in light of all of
the circumstances.
|
Prior to acquiring any properties owned by or affiliated with
management, an appraisal or valuation must be conducted by an
independent third party and a majority of the independent
directors are required to approve any such transaction. In
addition, management is required to present to the Company all
property acquisition opportunities of which management becomes
aware and have the right of first refusal with respect to any
such opportunity.
Lowrie Management LLLP has made a written agreement that we have
a first right of refusal to any nightclub property
proposed for acquisition by Lowrie Management LLLP. Lowrie
Management LLLP is controlled and majority owned by Troy Lowrie,
the Companys Chairman of the Board and Chief Executive
Officer.
During the fiscal year ended December 31, 2009, our Audit
Committee reviewed, approved, or ratified all material related
party transactions.
Guarantees
Troy Lowrie, our Chairman and Chief Executive Officer,
personally
and/or
Lowrie Management LLLP (its relationship to us is described
earlier) guaranteed certain of our obligations in a number of
transactions during 2009 and 2008.
86
The following table lists the transactions involved and set
forth the principal amounts personally guaranteed or secured by
his assets as of the fiscal years ended December 31, 2009
and 2008.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Description of Transactions
|
|
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 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
|
|
|
|
|
|
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 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
|
|
Notes payable to investors, interest at 11%, monthly interest
payments, due January 2010, collateralized by the general assets
of the Company and a guarantee by Mr. Lowrie.
|
|
|
1,400,000
|
|
|
|
1,400,000
|
|
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
|
|
Various notes payable, interest at 11% fixed, monthly interest
payments, 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
|
|
|
|
-
|
|
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
|
|
|
|
413,501
|
|
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
|
|
|
|
|
|
|
|
|
|
|
Total debt due
|
|
$
|
17,937,463
|
|
|
$
|
15,388,159
|
|
|
|
|
|
|
|
|
|
|
87
Trademarks
The Diamond
Cabaret®
name and
PTs®
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 wholly owned by Lowrie
Management LLLP, to use these trademarks for a fee. Lowrie
Management LLLPs relationship to us is described above.
The fee was established in 2006 and approved by the independent
members of our Board. Per the existing agreement, the Company
pays $500 per month per club for licensing fees on twelve clubs.
This totals $72,000 per year.
Long-Term
Debt
On April 9, 2008, the Company obtained a loan with the
principal amount of $1,250,000 from Lowrie Management LLLP, an
entity controlled and majority-owned by the Companys
Chairman and Chief Executive Officer in exchange for a 10% fixed
rate promissory note, due April 9, 2011. This note accrued
interest and was collateralized by the general assets of IRC LP
and DRC LP and the transfer of both nightclubs adult
permits and liquor licenses upon default. For 2009, this note
accrued approximately $76,000 in interest and no principal was
paid. On June 30, 2009, the Company renegotiated the terms
of this loan and another existing loan payable to Lowrie
Management LLLP. The Company consolidated these two debt
obligations totaling $5,700,000. The above promissory note had
an outstanding principal balance of $1,400,000 and a note
executed on November 1, 2007 had an outstanding principal
balance of $4,300,000, bearing interest at 8.5% per annum, with
monthly principal and interest payments. On this note, the
Company paid approximately $224,000 in interest and $483,000 in
principal for 2009. For 2008, on the note in the amount of
$4,300,000 the Company paid approximately $448,000 in interest
and $906,000 in principal. On the note with the outstanding
balance of $1,400,000 the Company accrued approximately $86,000
for interest and made no principal payments.
The $5,700,000 principal amount was consolidated into a
replacement promissory note, bearing interest at 10% per annum,
with monthly interest payments. The entire principal amount and
any accrued but unpaid interest is due on June 30, 2012. No
other changes were made to collateral or terms, because the note
requires payment of only interest. The Company has paid
approximately $285,000 in interest and no principal amounts were
paid during 2009 and owes $5,700,000 as of December 31,
2009.
On September 1, 2008, the Company obtained a loan with the
principal amount of $400,000 from The Powelson Trust, an
affiliate of Martin Grusin, a current Board member, in exchange
for a 10% fixed rate promissory note. This accrues interest and
is collateralized by a personal guarantee from Troy Lowrie. All
accrued interest from September 2008 to September 2009 was
payable in September 2009; all other accrued interest is payable
on the maturity date of the note, as amended, on
February 1, 2011. The Company accrued approximately $42,000
for interest in 2009 and owes approximately $410,000 as of
December 31, 2009. For 2008, the Company accrued
approximately $13,500 for interest in 2009 and owed
approximately $414,000.
On October 15, 2008, the Company obtained a loan with the
principal amount of $100,000 from Micheal Ocello, the
Companys President and Chief Operating Officer, in
exchange for a 10% fixed rate promissory note. This note is
interest only, paid monthly, and unsecured. The maturity date of
the note, as amended, is February 1, 2011. The Company has
paid Mr. Ocello approximately $10,000 in interest during
2009 and 2008. The principal amount of $100,000 remained
unchanged from December 31, 2009 and 2008.
On December 29, 2008, the Company obtained two loans with
the principal amounts of approximately $73,000 and $170,000 from
Luella Lowrie, the mother of Troy Lowrie, in exchange for two
10% fixed rate promissory notes. The Company makes monthly
payments of principal and interest on one of the notes and
interest only on the other. These notes are unsecured. The
maturity dates are December 1, 2010 and February 1,
2011. For 2008, the Company paid approximately $26,000 in
interest and $36,000 in principal. The Company has paid
Mrs. Lowrie approximately $22,000 in interest and
approximately $36,000 in principal during 2009 and owes an
aggregate of approximately $207,000 on both loans as of
December 31, 2009.
On December 29, 2008, the Company renegotiated a loan with
the principal amount of $390,000 from Vali Lowrie-Reed, the
sister of Troy Lowrie, in exchange for a 10% fixed rate
promissory note. The note is interest only paid monthly and
secured by the general assets of IRC LP and DRC LP, and consent
to the transfer of the adult
88
permit and liquor license upon default in the name of DRC LP and
IRC LP. The terms of the note also required that the Company pay
Ms. Lowrie-Reed an initial fee of 2% of the principal
amount, which was paid in the amount of $8,000 in 2008. For
2008, the Company paid approximately $16,000 in interest and
$10,000 in principal. In June 2009, the Company repaid this debt
obligation and paid approximately $15,000 in interest and
approximately $380,000 as of December 31, 2009.
On January 20, 2009, the Company entered into a note
payable to Luella Lowrie, the mother of Troy Lowrie, in the
amount of $25,000. The interest is accrued at 10%, principal due
December 1, 2010, and is unsecured. The Company accrued
approximately $2,000 in interest and made an interest payment of
approximately $2,000 during 2009 and owes approximately $25,000
as of December 31, 2009.
On February 2, 2009, the Company extended a current debt
obligation of $50,000 from Robert McGraw, Jr., a director
of the Company. The interest rate is at 10% due monthly,
principal due November 15, 2011, and is unsecured. The
Company has paid Mr. McGraw approximately $5,000 in
interest during 2009 and owes approximately $50,000 as of
December 31, 2009.
Other
Transactions
The building that houses The Penthouse
Club®
located in Denver, Colorado is leased from Lowrie Management
LLLP; currently the rent is approximately $13,500 per month. The
aggregate lease payments due in 2010 is $162,000. The lease term
expires in 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 11 to 15 (option 1) is
$15,000 per month, years 16 to 20 (option 2) is $16,500 per
month, and years 21 to 25 (option 3) is $18,000 per month.
The Company paid Lowrie Management LLLP an aggregate of
approximately $149,000 for the year ended December 31, 2009
and $144,000 for the same period in 2008.
The building that houses
PTs®
Showclub located in Louisville, Kentucky is leased from Lowrie
Management LLLP; currently the rent is approximately $7,500 per
month. The aggregate lease payments due in 2010 are $90,000. The
lease term expires December 31, 2016 and has three
five-year options to extend that expire December 31, 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 11 to 15 (option 1) is $10,000 per month,
years 16 to 20 (option 2) is $11,250 per month, and years
21 to 24 (option 3) is $12,000. The Company paid Lowrie
Management LLLP an aggregate of approximately $90,000 for the
year ended December 31, 2009 and 2008.
The building that houses
PTs®
Showclub located in Denver, Colorado is leased from Lowrie
Management LLLP; currently the rent is approximately $17,500 per
month. The aggregate lease payments due in 2010 are $210,000.
The lease term expires December 31, 2014 and has three
five-year options to extend that expire December 31, 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 11 to 15 (option 1) is $20,000 per month,
years 16 to 20 (option 2) is $22,500 per month, and years
21 to 25 (option 3) is $25,000. The Company paid Lowrie
Management LLLP an aggregate of approximately $180,000 for the
year ended December 31, 2009 and 2008.
Director
Independence
Our Board has determined that each of Robert McGraw, Jr.,
Kenton Sieckman, Carolyn Romero, and George Sawicki qualify as
an independent director under rules promulgated by the SEC and
The NASDAQ Stock
Market®
listing standards rules and has determined that the majority of
our directors are independent. Accordingly, all members of each
board committee are independent in accordance with The NASDAQ
Stock
Market®
listing standards.
The Companys Audit Committee consists of Carolyn Romero
(Chair), Kenton Sieckman, and George Sawicki all of whom meet
the NASDAQ independence definition set forth in
Rule 4200(a)(14).
The Company tracks payments to the firms of certain directors
for legal and advisory services rendered each year, to ensure
that payments do not exceed levels mandated by the SEC and The
NASDAQ Stock
Market®
for independent board service.
89
During our fiscal year ended December 31, 2009,
Mr. Grusin was paid approximately $4,500 to the Law Office
of Martin A. Grusin, P.C. for his legal and professional
services performed for the Company. Martin Grusin is a board
member but not considered to be a independent board member
because of fees paid to his wife, Gayle Powelson, from the
Company for consulting services. During 2009, Ms. Powelson
received an aggregate of approximately $123,000 for financial
consulting services. The aggregate amount of payments made to
Mr. Grusin and his wife in 2009 totaled $127,937.
During our fiscal year ended December 31, 2009, we paid an
aggregate of approximately $215,000 to Rubin Schulman, P.L.C.
for legal and professional services performed for the Company.
Allan Rubin was a board member of the Company until August 2009
and the managing partner of Rubin Schulman P.L.C. The Company
did not consider him an independent member of the board.
The Board based the independence determinations primarily on the
Companys records regarding payments made to Board members,
plus a review of the responses of the Directors and Executive
Officers to questions regarding employment and transaction
history, affiliations, and family and other relationships and on
discussions with the directors.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The firm of Causey Demgen & Moore Inc.
(CDM) served as our independent registered public
accounting firm for our 2009 and 2008 fiscal years.
The following table summarizes the aggregate fees billed or to
be billed by CDM for the fiscal years ended December 31,
2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Audit fees
|
|
$
|
194,118
|
|
|
$
|
172,000
|
|
Audit-related fees
|
|
|
45,350
|
|
|
|
10,000
|
|
Tax fees
|
|
|
2,625
|
|
|
|
6,675
|
|
All other fees
|
|
|
12,237
|
|
|
|
637
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
254,330
|
|
|
$
|
189,312
|
|
|
|
|
|
|
|
|
|
|
Audit
fees
Fees for audit services consisted of the audit of our annual
financial statements and reports on internal controls required
by the Sarbanes-Oxley Act of 2002 and reviews of our quarterly
financial statements.
Audit-related
fees
Fees for audit-related services billed in 2009 related to the
2008 SEC Comment Letter and SOX implementation. Fees for
audit-related services billed in 2008 related to acquisition
audits and new pronouncement reviews.
Tax
Fees
Fees for taxes billed in 2009 and 2008 related to research and
discussions of the state net operating loss to determine
potential carry back opportunities.
Other
All other fees billed in 2009 and 2008 related to consulting
services regarding accounting matters.
Audit
Committees Pre-Approval Policies and
Procedures
The audit committee pre-approves all audit and non-audit
services to be performed by CDM, and has established policies
and procedures to ensure that the Company is in full compliance
with the requirements for pre-approval set forth in the
Sarbanes-Oxley Act of 2002 and the SEC rules regarding auditor
independence.
90
In accordance with these policies and procedures, management
submits for approval audit and non-audit services that
management may wish to have CDM perform. The audit committee
approves or rejects each of the services and approves a range of
fees. Services cannot commence until such approval has been
granted. During the course of the year, the chairman of the
audit committee has the authority to pre-approve requests for
services.
All of the fees set forth in the Principal Accountant Fees and
Services table above for the fiscal years of 2009 and 2008 were
pre-approved by the audit committee.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) We have filed the following documents as part of this
Annual Report on
Form 10-K:
Financial
Statements
Financial
Statement Schedules
All financial statement schedules are omitted because they are
not applicable or not required, or because the required
information is included in the consolidated financial statements
or the notes thereto.
Exhibits
|
|
|
|
|
Exhibits
|
|
|
No.
|
|
Description
|
|
|
3
|
.1
|
|
Articles of Incorporation(1)
|
|
3
|
.2
|
|
Amended Designations, Preferences, Limitations and Relative
Rights of Series A Convertible Preferred Stock(9)
|
|
3
|
.3
|
|
Amended and Restated Bylaws(28)
|
|
4
|
.1
|
|
Specimen common stock certificate, $.0001 par value(1)
|
|
4
|
.2
|
|
Specimen preferred stock certificate $.0001 par value(1)
|
|
*4
|
.3
|
|
Stock Option and Stock Bonus Plan(1)
|
|
*4
|
.4
|
|
2003 Stock Option and Stock Bonus Plan(3)
|
|
4
|
.5
|
|
Form of Subscription Agreement(16)
|
|
10
|
.01
|
|
Trademark License Agreement, dated June 30, 2002, between
VCG Holding Corp. and Lowrie Management LLLP(1)
|
|
10
|
.02
|
|
Line of Credit and Security Agreement, dated June 30, 2002,
between VCG Holding Corp. and Lowrie Management LLLP(1)
|
|
*10
|
.03
|
|
Management Contract, dated May 2, 2002, between VCG Holding
Corp. and International Entertainment Consultants, Inc.(1)
|
|
10
|
.04
|
|
Lease Agreement for
213-215
Madison, Brooklyn, Illinois, dated May 1, 2002, by and
between RELMSS and VCG Holding Corp.(1)
|
|
10
|
.05
|
|
Agreement to Purchase/Sell Real Estate, dated March 5,
2003, between VCG Real Estate Holdings, Inc. and Sacred Grounds
Resources, L.L.C.(2)
|
91
|
|
|
|
|
Exhibits
|
|
|
No.
|
|
Description
|
|
|
10
|
.06
|
|
Limited Partnership Purchase Agreement, executed effective
June 30, 2004, by and among VCG Holding Corp., WCC
Acquisitions, Inc. and Lowrie Management LLLP(4)
|
|
10
|
.07
|
|
Promissory Note and Security Agreement, dated July 21,
2004, by VCG Holding Corp. in favor of Lowrie Management LLLP(4)
|
|
10
|
.08
|
|
Lease Agreement, dated October 1, 2004, by and between
Lowrie Management LLLP and Glendale Restaurant Concepts LP(5)
|
|
10
|
.09
|
|
Agreement for the Purchase and Sale of Assets, dated
August 18, 2004, by and between CCCG, Inc. and Glenarm
Restaurant Concepts, LLC(6)
|
|
10
|
.10
|
|
Lease Agreement, dated August 31, 2004, by and between
Glenarm Associates, Inc. and Glenarm Restaurant LLC(6)
|
|
10
|
.11
|
|
First Amendment to Commercial Lease, dated February 1,
2005, by Hampden and Galena Limited and VCG Restaurants Denver,
Inc.(7)
|
|
*10
|
.12
|
|
2004 Stock Option and Appreciation Rights Plan(8)
|
|
10
|
.13
|
|
Agreement for the Purchase and Sale of Business and Assets,
dated August 2, 2006, by and between VCG Holding Corp. and
Consolidated Restaurants Limited, LLC(10)
|
|
10
|
.14
|
|
Business Lease, dated October 2, 2006, by and between 5975
Terminal, LLC and VCG CO Springs, Inc.(11)
|
|
10
|
.15
|
|
Limited Partnership Purchase Agreement, dated December 18,
2006, by and among Lowrie Management LLLP and W.C.C.
Acquisitions Inc., VCG Holding Corp. and Denver Restaurants
Concepts, LP(12)
|
|
10
|
.16
|
|
Promissory Note and Security Agreement, dated December 31,
2006, by VCG Holding Corp. in favor of Lowrie Management LLLP(12)
|
|
10
|
.17
|
|
Lease, dated January 1, 2005, by and between Lowrie
Management LLLP and Denver Restaurant Concepts LP(12)
|
|
10
|
.18
|
|
Sale of VCGs 100% Membership Interest in Epicurean
Enterprises, L.L.C., dated January 15, 2007, by and between
VCG Holding Corp and Cory James Anderson(13)
|
|
10
|
.19
|
|
Lease, dated January 15, 2007, by and between VCG Real
Estate Holdings Inc. and Epicurean Enterprises LLC(13)
|
|
10
|
.20
|
|
Purchase Agreement, dated January 2, 2007, by and among
Troy Lowrie, VCG Holding Corp and Kentucky Restaurants Concepts,
Inc.(14)
|
|
10
|
.21
|
|
Agreement for Sale of Limited Partnership Interest Restaurant
Concepts of Kentucky Limited Partnership, dated January 2,
2007(14)
|
|
10
|
.22
|
|
Lease, dated January 1, 2007, by and between Lowrie
Management LLLP and Kentucky Restaurant Concepts, Inc.(14)
|
|
10
|
.23
|
|
Limited Partnership Purchase Agreement, dated January 18,
2007, by and among Lowrie Management LLLP and Illinois
Acquisitions Inc., VCG Holding Corp and RCC, LP(15)
|
|
10
|
.24
|
|
Consent to Sell Partnership Interest of RCC, LP, dated
January 31, 2007(15)
|
|
10
|
.25
|
|
Consent to Transfer Partnership Interest into Common Stock,
dated January 31, 2007(15)
|
|
10
|
.26
|
|
Business Lease, dated February 1, 2007, by and between Jay
Dinkelmann, as Trustee of Chicago Title Land Trust #1080459
and RCC LP(15)
|
|
10
|
.27
|
|
Limited Partnership Purchase Agreement, dated February 5,
2007, by and among Lowrie Management LLLP, Illinois Acquisitions
Inc., VCG Holding Corp. and Cardinal Management LP(16)
|
|
10
|
.28
|
|
Business Lease, dated February 1, 2007, by and between Jay
Dinkelmann, as Trustee of Chicago Title Land Trust #879-51
and Cardinal Management LP dba PTs Centreville(16)
|
|
10
|
.29
|
|
Limited Partnership Purchase Agreement, dated February 9,
2007, by and among Lowrie Management LLLP and Illinois
Acquisitions Inc., VCG Holding Corp and MRC, LP(17)
|
|
10
|
.30
|
|
Promissory Note and Security Agreement, dated March 31,
2007, by VCG Holding Corp. in favor of Lowrie Management
LLLP(17)
|
92
|
|
|
|
|
Exhibits
|
|
|
No.
|
|
Description
|
|
|
10
|
.31
|
|
Business Lease, dated March 1, 2007, by and between Jay
Dinkelmann as Trustee of Chicago Title Land Trust #1083191
and MRC, LP.(17)
|
|
10
|
.32
|
|
Limited Partnership Purchase Agreement, dated February 7,
2007, by and among Lowrie Management LLLP, Illinois Acquisitions
Inc., VCG Holding Corp. and IRC, LP(18)
|
|
10
|
.33
|
|
Promissory Note, dated March 31, 2007, by VCG Holding Corp
in favor of Lowrie Management LLLP(18)
|
|
10
|
.34
|
|
Consent to Sell Partnership Interest of IRC, LP, dated
February 21, 2007(18)
|
|
10
|
.35
|
|
Business Lease, dated March 1, 2007, by and between Regions
Bank, as Trustee of Trust #39007440 and Omni Warehouse, Inc. and
IRC, LP.(18)
|
|
10
|
.36
|
|
Promissory Note and Security Agreement, dated June 1, 2006,
by VCG Holding Corp. in favor of Lowrie Management LLLP(20)
|
|
10
|
.37
|
|
Agreement for the Purchase and Sale of Assets, dated
March 23, 2007, by and among Regale, Inc., VCG Holding
Corp. and Raleigh Restaurant Concepts, Inc.(20)
|
|
10
|
.38
|
|
Agreement of Sublease, dated April 16, 2007, by and between
Regale, Inc. and Raleigh Restaurant Concepts, Inc.(21)
|
|
10
|
.39
|
|
Lease Agreement, dated April 16, 2007, by and between Big
Deck Parking, LLC and Raleigh Restaurant Concepts, Inc.(21)
|
|
10
|
.40
|
|
Stock Purchase Agreement, dated April 25, 2007, by and
between Robert W. Sabes and VCG Holding Corp.(22)
|
|
10
|
.41
|
|
Real Estate Purchase Agreement, dated April 25, 2007, by
and between JFS Desert Fountain Properties, LLC and VCG Holding
Corp.(22)
|
|
10
|
.42
|
|
Lease, dated May 31, 2007, by and between JFS Desert
Fountain Properties, LLC and Classic Affairs, Inc.(22)
|
|
10
|
.43
|
|
Lease, dated June 29, 2007, by and between 4th Street
Partnership, LLLP and Classic Affairs, Inc.(23)
|
|
10
|
.44
|
|
Stock Purchase Agreement re: Kenkev II, Inc. f/k/a Mark R. Dean,
Inc., dated September 14, 2007, between Ken-Kev Inc. and
VCG Holding Corp.(24)
|
|
10
|
.45
|
|
Restrictive Covenant Covenant Not to Compete, dated
September 14, 2007, between Gregory Kenwood Gaines and VCG
Holding Corp.(24)
|
|
10
|
.46
|
|
Consulting-License Agreement, dated September 14, 2007, by
and between Alliance Management Partners, LLC and VCG Holding
Corp. on behalf of Seller Equity holding(24)
|
|
10
|
.47
|
|
Business Lease, dated September 14, 2007, by and between
K & R Properties, Inc. and KenKevII, Inc.(24)
|
|
10
|
.48
|
|
Guaranty of Lease, dated September 14, 2007, by VCG Holding
Corp. in favor of K & R Properties(24)
|
|
10
|
.49
|
|
Purchase of Membership Interest, dated September 17, 2007,
by and among VCG Holding Corp. and Golden Productions JGC
Fort Worth, LLC, d/b/a Jaguars Gold Club
Fort Worth, and Bryan S. Foster(25)
|
|
10
|
.50
|
|
Covenant not to compete, dated September 17, 2007, between
Bryan S. Foster and VCG Holding Corp.(25)
|
|
10
|
.51
|
|
Covenant not to compete, dated September 17, 2007, between
Richard Richardson and VCG Holding Corp.(25)
|
|
10
|
.52
|
|
Deed of Ground Lease, dated September 17, 2007, by and
between VCG Holding Corp. and Bryan S. Foster(25)
|
|
10
|
.53
|
|
Stock Purchase Agreement, dated October 29, 2007, by and
among VCG Holding Corp. and Manana Entertainment, Inc. db/a
Jaguars Gold Club Dallas, and Bryan S. Foster(26)
|
|
10
|
.54
|
|
Covenant Not to Compete, made and effective as of the Effective
Date, as defined in the Stock Purchase Agreement by and among
VCG Holding Corp. and Manana Entertainment, Inc. d/b/a
Jaguars Gold Club Dallas and Bryan S. Foster, between
Bryan S. (Niko) Foster and VCG Holding Corp.(26)
|
|
10
|
.55
|
|
Covenant Not to Compete, made and effective as of the Effective
Date, as defined in the Stock Purchase Agreement by and among
VCG Holding Corp. and Manana Entertainment, Inc. d/b/a
Jaguars Gold Club Dallas and Bryan S. Foster, between
Richard Richardson and VCG Holding Corp.(26)
|
93
|
|
|
|
|
Exhibits
|
|
|
No.
|
|
Description
|
|
|
10
|
.56
|
|
Stock Purchase Agreement Re: Kenja II, Inc. f/k/a Mark R. Dean,
Inc., dated September 14, 2007, between Kenja II, Inc. and
VCG Holding Corp.(26)
|
|
10
|
.57
|
|
Restrictive Covenant Covenant Not to Compete, dated
October 29, 2007, between Gregory Kenwood Gaines and VCG
Holding Corp.(26)
|
|
10
|
.58
|
|
Bonus Agreement Related to Purchase Agreement, dated
September 14, 2007, between G. Kenwood Gaines and VCG
Holding Corp.(26)
|
|
10
|
.59
|
|
Ground Lease Agreement, dated October 29, 2007, between VCG
Holding Corp. and Bryan S. Foster(26)
|
|
10
|
.60
|
|
Business Lease Agreement, dated October 29, 2007, by and
between Third Properties, LLC and Kenja II, Inc.(26)
|
|
10
|
.61
|
|
Guaranty of Lease, dated October 29, 2007, by VCG Holding
Corp. in favor of Third Property, Inc.(26)
|
|
10
|
.62
|
|
Balloon Promissory Note dated December 4, 2007, in favor of
Sunshine Mortgage Investors, Inc.(27)
|
|
10
|
.63
|
|
Agreement for Purchase and Sale of Assets, dated
December 5, 2007, by and between 1443 Corp., Inc. and Stout
Restaurant Concepts, Inc.(29)
|
|
10
|
.64
|
|
Assignment Agreement, dated December 21, 2007, by and
between VVSM, Inc. and VCG Holding Corp.(29)
|
|
10
|
.65
|
|
Non-Competition Agreement, dated December 21, 2007, by and
between 1443 Corp., Inc., Lance Migliaccio, Gidget Sanders, Ted
R. Bullard and Stout Restaurant Concepts, Inc.(29)
|
|
10
|
.66
|
|
Agreement for the Purchase and Sale of Assets, dated
December 21, 2007, by and between 1447, Inc. and Bradshaw
Hotel, Inc.(29)
|
|
10
|
.67
|
|
Assignment and Assumption of Building Lease, dated
December 19, 2007, by and between P.P.P., LLC, Lance C.
Migliaccio, Gidget Bridget Sanders, Anthony Scott Falcone, Frank
Henry Walley, IV, Ted R. Bullard and Stout Restaurant Concepts,
Inc.(29)
|
|
10
|
.68
|
|
Building Lease, dated July 7, 2001, by and between Dikeou
Realty and 2222, Inc., as amended(29)
|
|
10
|
.69
|
|
Consulting Agreement, dated December 4, 2007, by and
between Lance C. Migliaccio and VCG Holding Corp.(29)
|
|
10
|
.70
|
|
Indemnification Agreement, dated as of December 21, 2007,
by and between 1443 Corp., Inc., Lance C. Migliaccio, Gidget
Bridget Sanders, Anthony Scott Falcone, Frank Henry Walley, IV,
Ted R. Bullard and VCG Holding Corp.(29)
|
|
10
|
.71
|
|
Agreement of Merger, dated February 9, 2008 by and between
VCG Holding Corp. and Mega Club(30)
|
|
10
|
.72
|
|
Agreement and Plan of Reorganization, dated
February 9,2008, by and between VCG Holding Corp and Mega
Club(30)
|
|
10
|
.73
|
|
Covenant Not to Compete, dated February 9, 2008, between
Mega Club and VCG Holding Corp.(30)
|
|
10
|
.74
|
|
Covenant not to Compete, dated February 9, 2008, between
Mega Club Employee and VCG Holding Corp.(30)
|
|
10
|
.75
|
|
Sales Agreement, dated February 9, 2008, between Mega Club
and VCG Holding Corp.(30)
|
|
10
|
.76
|
|
Ground Lease Agreement, dated February 9, 2008, between VCG
Holding Corp. and Mega Club(30)
|
|
10
|
.77
|
|
Agreement of Purchase of Assets, dated March 15, 2008, by
and between VCG Holding Corp. and Mega Club(31)
|
|
10
|
.78
|
|
Covenant Not to Compete, dated March 15, 2008, by and
between VCG Holding Corp. and Mega Club(31)
|
|
10
|
.79
|
|
First Amendment to Stock Purchase Agreement, dated
April 15, 2008, by VCG Holding Corp. and Manana
Entertainment, Inc. and Bryan Foster(36)
|
|
10
|
.80
|
|
Promissory Note, dated April 14, 2008, by and between VCG
Holding Corp. and Bryan Foster(36)
|
|
10
|
.81
|
|
Security Agreement, dated April 14, 2008, by and between
VCG Holding Corp. and Bryan Foster(32)
|
|
10
|
.82
|
|
Leasehold Deed of Trust Security Agreement, dated
April 14, 2008(32)
|
|
10
|
.83
|
|
Amended Balloon Promissory Note, dated July 11, 2008, by
and between VCG Holding Corp. and Sunshine Mortgage Investors,
Inc.(33)
|
94
|
|
|
|
|
Exhibits
|
|
|
No.
|
|
Description
|
|
|
10
|
.84
|
|
Balloon Promissory Note, dated, July 14, 2008, by and
between VCG Holding Corp. and Richard Stanton(33)
|
|
10
|
.85
|
|
Asset Purchase Agreement, dated March 15, 2008, by and
between 2640 W. Woodland Inc., and Glenn Smith, and
VCG-IS, LLC, and VCG Holding Corp.(34)
|
|
10
|
.86
|
|
Covenant Not to Compete, dated July 28, 2008, by and
between Glenn Smith and VCG-IS, LLC(34)
|
|
10
|
.87
|
|
Promissory Note, dated July 28, 2008, by and between
VCG-IS, LLC and 2640 W. Woodland, Inc.(34)
|
|
10
|
.88
|
|
Security Agreement, dated July 28, 2008, by and between
VCG-IS, LLC and 2640 W. Woodland, Inc.(34)
|
|
10
|
.89
|
|
Promissory Note and Security Agreement, dated November 11,
2007, by VCG Holding Corp. in favor of Lowrie Management LLLP(35)
|
|
10
|
.90
|
|
Promissory Note and Security Agreement, dated July 17,
2008, by VCG Holding Corp. in favor of Vali Lowrie Reed(35)
|
|
*10
|
.91
|
|
Employment Agreement, dated December 4, 2008, by and
between VCG Holding Corp. and Troy Lowrie(36)
|
|
*10
|
.92
|
|
Employment Agreement, dated December 4, 2008, by and
between VCG Holding Corp. and Micheal Ocello(36)
|
|
10
|
.93
|
|
Agreement of Merger, dated February 9, 2008 by and between
VCG Holding Corp. and TTNA, Inc.(37)
|
|
10
|
.94
|
|
Agreement and Plan of Reorganization, dated
February 9,2008, by and between VCG Holding Corp and TTNA,
Inc.(37)
|
|
10
|
.95
|
|
Covenant Not to Compete, dated February 9, 2008, by and
between VCG Holding Corp and Duncan Burch(37)
|
|
10
|
.96
|
|
Covenant not to Compete, dated February 9, 2008, between
TTNA, Inc. Employee and VCG Holding Corp(37)
|
|
10
|
.97
|
|
Sales Agreement, dated February 9, 2008, between Duncan
Burch and VCG Holding Corp(37)
|
|
10
|
.98
|
|
Ground Lease Agreement, dated February 9, 2008, between VCG
Holding Corp. and Duncan Burch(37)
|
|
10
|
.99
|
|
Promissory Note and Security Agreement, dated June 30,
2009, by VCG Holding Corp. in favor of Lowrie Management LLLP(38)
|
|
11
|
.00
|
|
Real Estate Purchase Agreement, dated July 31, 2009 , by
and between Black Canyon Highway LLC and VCG Real Estate
Holding(39)
|
|
11
|
.01
|
|
Promissory Note dated August 15, 2009, by VCG Holding Corp.
in favor of Citywide Banks(40)
|
|
11
|
.02
|
|
Promissory Note dated August 15, 2009, by VCG Holding Corp.
in favor of Citywide Banks(40)
|
|
11
|
.03
|
|
Business Lease Agreement, dated August 15, 2009 by and
between VCG Holding Corp and Lowrie Management LLLP and Citywide
Banks(40)
|
|
11
|
.04
|
|
Change in Terms Agreement, dated August 15, 2009 by and
between VCG Holding Corp and Citywide Banks(40)
|
|
11
|
.05
|
|
Business Lease Agreement, dated August 15, 2009 by and
between VCG Holding Corp and Lowrie Management LLLP and Citywide
Banks(40)
|
|
11
|
.06
|
|
Indemnification Agreement, dated as of December 16, 2009,
by and between VCG Holding Corp, Troy Lowrie, Micheal Ocello,
Courtney Cowgill, Martin Grusin, Robert McGraw, Jr., Kenton
Sieckman, George Sawicki and Carolyn Romero(41)
|
|
11
|
.07
|
|
Letter of Intent between Ricks Cabaret International,
Inc., VCG Holding Corp., Troy Lowrie and Lowrie Management
LLLP(42)
|
|
21
|
.1
|
|
Subsidiaries of VCG Holding Corp.(44)
|
|
23
|
.1
|
|
Consent of Causey Demgen & Moore Inc.(44)
|
|
31
|
.1
|
|
Certification of Chief Executive Officer of VCG Holding Corp.
required by
Rule 13a-14(1)
or
Rule 15d-14(a)
of the Securities Exchange act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002(44)
|
95
|
|
|
|
|
Exhibits
|
|
|
No.
|
|
Description
|
|
|
31
|
.2
|
|
Certification of Chief Financial Officer of VCG Holding Corp.
required by
Rule 13a-14(1)
or
Rule 15d-14(a)
of the Securities Exchange act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002(44)
|
|
32
|
.1
|
|
Certification of Chief Executive Officer of VCG Holding Corp.
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
and Section 1350 of 18 U.S.C. 63(43)
|
|
32
|
.2
|
|
Certification of Chief Financial Officer of VCG Holding Corp.
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
and Section 1350 of 18 U.S.C. 63(43)
|
|
|
|
(1) |
|
Incorporated by reference from Registration Statement on
Form SB-2
filed on September 10, 2002 |
|
(2) |
|
Incorporated by reference from Amendment No. 2 to the
Registration Statement on
Form SB-2
filed on April 21, 2003 |
|
(3) |
|
Incorporated by reference from the Companys Registration
Statement on
Form S-8
filed August 6, 2003 |
|
(4) |
|
Incorporated by reference from Current Report on
Form 8-K
filed on July 29, 2004 |
|
(5) |
|
Incorporated by reference from Current Report on
Form 8-K
filed on October 8, 2004 |
|
(6) |
|
Incorporated by reference from Amended Current Report on
Form 8-K/A
filed on October 18, 2004 |
|
(7) |
|
Incorporated by reference from Current Report on
Form 8-K
filed on February 9, 2005 |
|
(8) |
|
Incorporated by reference from Current Report on
Form 8-K
filed on August 1, 2005 |
|
(9) |
|
Incorporated by reference from the Companys Quarterly
Report on
Form 10-Q
filed on November 14, 2005 |
|
(10) |
|
Incorporated by reference from the Companys Quarterly
Report on
Form 10-Q
filed on August 14, 2006 |
|
(11) |
|
Incorporated by reference from Current Report on
Form 8-K
filed on October 5, 2006 |
|
(12) |
|
Incorporated by reference from Current Report on
Form 8-K
filed on January 5, 2007 |
|
(13) |
|
Incorporated by reference from Current Report on
Form 8-K
on January 19, 2007 |
|
(14) |
|
Incorporated by reference from Current Report on
Form 8-K
on January 23, 2007 |
|
(15) |
|
Incorporated by reference from Current Report on
Form 8-K
on February 15, 2007 |
|
(16) |
|
Incorporated by reference from the Companys Registration
Statement on
Form S-3
filed March 1, 2007 |
|
(17) |
|
Incorporated by reference from Current Report on
Form 8-K
on March 6, 2007 |
|
(18) |
|
Incorporated by reference from Current Report on
Form 8-K
on March 21, 2007 |
|
(19) |
|
Incorporated by reference from Current Report on
Form 8-K
on March 23, 2007 |
|
(20) |
|
Incorporated by reference from the Annual Report on
Form 10-KSB
filed April 3, 2007 |
|
(21) |
|
Incorporated by reference from Current Report on
Form 8-K
filed on April 20, 2007 |
|
(22) |
|
Incorporated by reference from Current Report on
Form 8-K
filed on June 7, 2007 |
|
(23) |
|
Incorporated by reference from Current Report on
Form 8-K/A
filed on July 12, 2007 |
|
(24) |
|
Incorporated by reference from Current Report on
Form 8-K
filed on September 20, 2007 |
|
(25) |
|
Incorporated by reference from Current Report on
Form 8-K
filed on September 21, 2007 |
|
(26) |
|
Incorporated by reference from Current Report on
Form 8-K/A
filed on November 16, 2007 |
|
(27) |
|
Incorporated by reference from Current Report on
Form 8-K
filed on December 10, 2007 |
|
(28) |
|
Incorporated by reference from Current Report on
Form 8-K
filed on December 27, 2007 |
|
(29) |
|
Incorporated by reference from Current Report on
Form 8-K
filed on December 28, 2007 |
|
(30) |
|
Incorporated by reference from Current Report on
Form 8-K
filed on February 14, 2008 & Current Report on
Form 8-K
filed February 3, 2009 |
|
(31) |
|
Incorporated by reference from Current Report on
Form 8-K
filed March 20, 2008 & Current Report on
Form 8-K
filed February 3, 2009 |
|
(32) |
|
Incorporated by reference from Current Report on
Form 8-K/A
filed April 18, 2008 |
96
|
|
|
(33) |
|
Incorporated by reference from Current Report on
Form 8-K/A
filed July 21, 2008 |
|
(34) |
|
Incorporated by reference from Current Report on
Form 8-K
filed August 1, 2008 |
|
(35) |
|
Incorporated by reference from Quarterly Report on
Form 10-Q
filed August 11, 2008 |
|
(36) |
|
Incorporated by reference from Current Report on
Form 8-K
filed December 10, 2008 |
|
(37) |
|
Incorporated by reference from Current Report on
Form 8-K
filed February 3, 2009 |
|
(38) |
|
Incorporated by reference from Current Report on
Form 8-K
filed July 2, 2009 |
|
(39) |
|
Incorporated by reference from Current Report on
Form 8-K
filed August 5, 2009 |
|
(40) |
|
Incorporated by reference from Quarterly Report on
Form 10-Q
filed November 11, 2009 |
|
(41) |
|
Incorporated by reference from Current Report on
Form 8-K
filed December 17, 2009 |
|
(42) |
|
Incorporated by reference from Current Report on
Form 8-K
filed February 16, 2010 |
|
(43) |
|
Furnished herewith |
|
(44) |
|
Filed herewith |
|
* |
|
Indicates a management contract or compensation plan or
arrangement |
97
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, this 12th day of March, 2010.
VCG HOLDING CORP.
Troy Lowrie
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
March 12, 2010
|
|
|
|
|
Troy Lowrie
|
|
|
Chairman of the Board and
|
|
|
Chief Executive Officer
|
|
|
|
March 12, 2010
|
|
|
|
|
Micheal Ocello
|
|
|
Director
|
|
|
Chief Operating Officer and President
|
|
|
|
March 12, 2010
|
|
|
|
|
Courtney Cowgill
|
|
|
Chief Financial Officer
|
|
|
Secretary and Treasurer
|
|
|
|
March 12, 2010
|
|
By: /s/ Robert
McGraw, Jr.
|
|
|
Robert McGraw, Jr.
|
|
|
Director
|
|
|
|
March 12, 2010
|
|
|
|
|
Carolyn Romero
|
|
|
Director
|
|
|
|
March 12, 2010
|
|
|
|
|
Martin Grusin
|
|
|
Director
|
|
|
|
March 12, 2010
|
|
|
|
|
George Sawicki
|
|
|
Director
|
|
|
|
March 12, 2010
|
|
|
|
|
Kenton Sieckman
|
|
|
Director
|
98