UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One):
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-32208

VCG HOLDING CORP.

Colorado (State or other jurisdiction of incorporation or organization)		84-1157022 (I.R.S. Employer Identification No.)
390 Union Boulevard, Suite 540, Lakewood, CO (Address of principal executive offices)		80228 (Zip Code)

Title of Each Class:		Name of Each Exchange on Which Registered:
Common Stock, $.0001 par value		The NASDAQ Global Market

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o   No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o   No þ

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No o

     Indicate by a check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405) of this chapter) during the preceding 12 months (or for such shorter period) Yes o   No þ

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller Reporting company þ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No þ

     The aggregate market value of the voting common equity held by non-affiliates of the registrant as of the last business day of the second fiscal quarter, June 30, 2010, was $18,779,125 (computed by reference to the average sale price as reported on the NASDAQ Global Market). As of March 29, 2011, there were 16,292,071 shares of the registrant’s Common Stock, par value of $.0001 per share, outstanding.

 

 

VCG HOLDING CORP.

FORM 10-K

TABLE OF CONTENTS

PART I
ITEM 1.		Business		3
ITEM 1A.		Risk Factors		8
ITEM 1B.		Unresolved Staff Comments		17
ITEM 2.		Properties		17
ITEM 3.		Legal Proceedings		20
ITEM 4.		(Removed and Reserved)		23
PART II
ITEM 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		24
ITEM 6.		Selected Financial Data		26
ITEM 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
ITEM 7A.		Quantitative and Qualitative Disclosures About Market Risk		37
ITEM 8.		Financial Statements and Supplementary Data		37
ITEM 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		66
ITEM 9A		Controls and Procedures		66
ITEM 9B.		Other Information		67
PART III
ITEM 10.		Directors, Executive Officers and Corporate Governance		68
ITEM 11.		Executive Compensation		72
ITEM 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		76
ITEM 13.		Certain Relationships and Related Transactions and Director Independence		79
ITEM 14.		Principal Accountant Fees and Services		82
PART IV
ITEM 15.		Exhibits and Financial Statement Schedules		83
SIGNATURES				91
EX-21.1
EX-23.1
EX-31.1
EX-32.1

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 and the documents we incorporate by reference herein include forward-looking statements. All statements other than statements of historical facts contained in this Form 10-K and the documents we incorporate by reference, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “could,” “target,” “potential,” “is likely,” “will,” “expect” and similar expressions, as they relate to us, are intended to identify forward-looking statements within the meaning of the “safe harbor” provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.

     These forward-looking statements are subject to a number of risks, uncertainties and assumptions described in “Risk Factors” and elsewhere in this Annual Report on Form 10-K. In addition, our past results of operations do not necessarily indicate our future results. Moreover, the ready-mix concrete and the heavy highway construction business are very competitive and rapidly changing. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any risk factor, or combination of risk factors, may cause actual results to differ materially from those contained in any forward-looking statements.

     Except as otherwise required by applicable laws, we undertake no obligation to publicly update or revise any forward-looking statements or the risk factors described in this Annual Report on Form 10-K or in the documents we incorporate by reference, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Annual Report on Form 10-K. You should not rely upon forward-looking statements as predictions of future events or performance. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Item 1. Business

General Information

     Our Company was incorporated under the laws of the State of Colorado in 1998, but did not begin its operations until April 2002. The Company, through its subsidiaries, owns 19 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.

     We believe maximum profitability and sustained growth in the industry is obtained by owning and operating upscale adult nightclubs. Our current strategy is to acquire upscale adult nightclubs in areas that are not market saturated and where the public is open to these types of establishments. Another part of our growth strategy is to achieve nightclub “clustering.” Adult nightclubs tend to group together in their respective markets. We believe that clustering our nightclubs leads to improved brand recognition, as well as some improvement in economies of scale as costs of marketing are spread over more nightclubs. Clustering also provides the Company with the ability to disperse management expertise to more locations under their responsibility.

Business

     We operate the following nightclubs:

Name of Nightclub		Date Acquired		Nightclub Type
PT’s® Showclub in Indianapolis, Indiana		2002		B
PT’s® Brooklyn in Brooklyn, Illinois		2002		B
PT’s® All Nude in Denver, Colorado		2004		C
The Penthouse Club® in Glendale, Colorado		2004		A
Diamond Cabaret® in Denver, Colorado		2004		A
PT’s® Appaloosa in Colorado Springs, Colorado		October 2006		B
PT’s® Showclub in Denver, Colorado		December 2006		B
PT’s® Showclub in Louisville, Kentucky		January 2007		B
Roxy’s in Brooklyn, Illinois		February 2007		B
PT’s® Showclub in Centreville, Illinois		February 2007		B
PT’s® Sports Cabaret in Sauget, Illinois		March 2007		B
The Penthouse Club® in Sauget, Illinois		March 2007		A
The Men’s Club® in Raleigh, North Carolina		April 2007		A
Schiek’s Palace Royale in Minneapolis, Minnesota**		May 2007		A
PT’s® Showclub in Portland, Maine		September 2007		B
PT’s® Showclub in Hialeah, Florida		October 2007		B
La Boheme Gentlemen’s Club in Denver, Colorado		December 2007		B
Jaguar’s Gold Club in Dallas, Texas (“Manana”)		April 2008		C
Imperial Showgirls Gentlemen’s Club in Anaheim, California		July 2008		C
Jaguar’s Gold Club in Ft. Worth, Texas (“Golden”)*		September 2007		C

     The Company classifies its nightclubs into three tiers called A, B, and C nightclubs. Type “A” nightclubs’ characteristics include larger facilities with a variety of entertainment and performers. “A” nightclubs include a restaurant with an onsite chef preparer. Furthermore, “A” type nightclubs offer high-label cigars, VIP facilities, and specialty suites. Type “B” nightclubs have smaller facilities. Food service is limited or not provided, but the facility serves alcohol. These nightclubs are a topless format. Type “C” nightclubs do not provide alcoholic beverages, except for our Texas location that follows the “Bring Your Own Bottle” (“B.Y.O.B.”) format. This nightclub is “all-nude.”

     The Company owns International Entertainment Consultants, Inc. (“IEC”), which provides management services to our nightclubs. 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 nightclubs is conducted through IEC. IEC provides the nightclubs with management and supervisory personnel to oversee operations, hires and contracts all operating personnel, establishes nightclub 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 nightclubs a management fee based on the Company’s common expenses that are incurred in maintaining these functions.

     In June 2002, the Company formed VCG Real Estate Holdings, Inc. (“VCG-RE”), a wholly-owned subsidiary that owns the land and buildings housing two of our nightclubs.

     The Company has one reportable segment. Our nightclubs are distinguished by the following features:

•

Facilities — Our nightclub 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 nightclubs maintain an upscale level of décor and furnishings to create a professional appearance. Three of our nightclubs offer VIP rooms. Our VIP rooms are open to individuals who purchase annual memberships. They offer a higher level of service and are elegantly appointed and spacious.

•

Professional On-Site Management — Our nightclubs are managed by persons who are experienced in the restaurant and/or hospitality industry. The managers for the nightclubs are responsible for maintaining a quality and professionally run nightclub. At a higher level, our area directors oversee the management of several nightclubs within a specified geographical area. The Company currently has twelve area directors who have twelve to twenty-eight years of experience in the industry.

•

Food and Beverage Operations — Many of our nightclubs offer a first-class bar and food service. Five of our nightclubs 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 nightclub operations do not have liquor licenses. Those of our nightclubs 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 nightclub.

•

Entertainment — Our nightclubs provide a high standard of attractive, talented, and courteous female and male performers and servers. We maintain the highest standards for appearance, attitude, demeanor, dress, and personality. The entertainment encourages repeat visits and increases the average length of a patron’s stay. Performers who work at our nightclubs are experienced entertainers.

Working Capital

     We have historically reported negative working capital, where current liabilities exceed current assets. This is consistent with other businesses in our industry that report a working capital deficit, which increases net cash provided by operating activities. This is because we receive immediate cash payment for sales, while inventories, accrued expenses, and other current liabilities normally carry longer payment terms.

Advertising and Promotion

     Our ability to attract patrons to a nightclub for the first time is critical to a nightclub’s success. Promotions, advertising, and special offers are the typical means to market a nightclub. We use a variety of highly targeted methods to reach our customers including local radio, billboard trucks, internet, newspaper and magazine ads, and professional sporting events.

     We extensively utilize a marketing program developed by IEC. Our nightclubs are marketed as a safe and upscale environment for adult entertainment. The marketing strategy is to attract new customers, increase the frequency of visits by existing customers, and establish a higher level of name recognition. The target market is the business-convention traveler, local professionals, and business people. In addition, IEC conducts various promotional activities throughout the year to keep the nightclubs’ names before the public. In order to be good corporate citizens, the nightclubs actively sponsor and participate in local charitable events and make contributions to local charities.

Compliance Policies and Controls

     IEC has developed comprehensive policies aimed at ensuring that the operation of each nightclub is conducted in conformance with local, state, and federal laws and they are designed to assure our clients a quality and enjoyable experience. We have a “no tolerance” policy on illegal drug use in or around the facilities. We continually monitor the actions of entertainers, employees, and customers to ensure that proper behavior standards are met.

     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 nightclubs. 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 nightclub.

Patents, Trademarks, Licenses and Royalty Agreements

     Under the terms of a 2003 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 the St. Louis area. The royalty payments are based on a percentage of revenue. We also have permission to use the name “Jaguar’s Gold Club” for our nightclub located in Dallas, Texas without a fee.

     The “Diamond Cabaret^®” name and “PT’s^®” name and logo are trademarks registered with the U.S. Patent and Trademark Office. We have an indefinite license from Club Licensing, LLC, which is controlled and majority-owned by Troy Lowrie, who is a significant stockholder and our Chairman of the Board and CEO, to use the “PT’s^®” trademark for a fee. Roxy’s is a service mark registered with the State of Illinois and is 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 since approved in 2006. The Men’s Club^® has an annually renewable license from the Texas Richmond Corporation.

     Some of our nightclubs operate under owned trade names as opposed to licensed registered trademarks. The Company has three nightclubs that own trade names, which are used to market the nightclubs, set forth in the table below.

Club Ownership		Trade Name
Classic Affairs, Inc.		Schiek’s Palace Royale
VCG-IS, LLC		Imperial Showgirls Gentlemen’s Club
Stout Restaurant Concepts, Inc.		La Boheme Gentlemen’s Cabaret

     The Company does not pay royalties for the use of the owned trade names on its own products and services. The trade names are valuable in the operation of the nightclubs and their dealings with customers. We have valued the three trade names using the “income approach.” The income approach is based on the premise that free cash flow is a more valid criterion for measuring value than “book” or accounting profits. The after-tax nightclub free cash flows were discounted back to their net present value at an appropriate intangible rate of return to estimate the fair value of the trade names. All trade names have indefinite lives based on management’s expectations that we will continue using the trade names in the future.

     Our nightclubs hold several licenses (including liquor, dance, and cabaret licenses) that are essential to the operation of our business. Dance or cabaret licenses are not saleable, yet they can be transferred if a nightclub is transferred with approval. We estimated the fair value of cabaret licenses by using a variation of the income approach called the excess earnings method. This approach measures the present worth and anticipated future benefits of the license. The appropriate expenses were deducted from the sales attributable to the licenses and economic rents were charged for the use of other contributory assets. Economic rents are charges in the form of an expense to account for the assets’ reliance on other tangible and intangible assets in order to generate sales. The nightclub after-tax cash flows attributable to the assets were discounted back to their net present value at an appropriate intangible asset rate of return and summed to indicate a value for the licenses. All licenses have indefinite lives based on management’s expectations that we will continue using the licenses in the future.

Seasonality

     We do not consider our business to be seasonal; however, severe winter weather can limit customers from visiting our nightclubs.

Customers

     The business of the Company taken as a whole, or any individual nightclub, 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. Two of our locations compete with nightclubs owned by Rick’s Cabaret International, Inc. (“Ricks”). Changes in customer preferences, economic conditions, demographic trends, and the location, number of, and quality of competing nightclubs could adversely affect our business, as could a shortage of experienced local management and hourly employees. We believe that our nightclubs enjoy a high level of repeat business and customer loyalty due to our upscale restaurant atmosphere, food quality, premium entertainment, perceived price-value relationship, and efficient service. Although we believe that we are well positioned to compete successfully, there can be no assurance that we will be able to maintain our high level of name recognition and prestige within the marketplace.

Government Regulations

     Our business is regulated by zoning, local and state liquor licensing, and local ordinances. Also, we are subject to state and federal time, place, and manner free speech restrictions. In the states in which we currently operate, state liquor licenses renew annually and are considered to be a “privileged” license that could be subject to suspension or revocation. The adult entertainment provided by our nightclubs has elements of free speech and expression and therefore, has some protection under the First Amendment to the U.S. Constitution. However, the protection is limited to expression, and not conduct. In addition to various regulatory requirements affecting the sale of alcoholic beverages in many cities where we operate, the location of a topless cabaret is subject to restriction by city ordinance. These ordinances affect the locations in which sexually oriented businesses may be operated by typically requiring minimum distances to schools, churches, and other sexually oriented businesses and containing restrictions based on the percentage of residences within the immediate vicinity of the sexually oriented business. The granting of a sexually oriented business permit is not subject to discretion; such a business permit must be granted if the proposed operation satisfies the requirements of the applicable ordinance.

     In all states where we operate, management believes that we comply with applicable laws, regulations, and ordinances governing the sale of alcohol and the operation of sexually oriented businesses. While our nightclubs are generally well established in their respective markets, there can be no assurance that local, state, and/or federal licensing and other regulations will permit our nightclubs to remain in operation or be profitable in the future.

Employees and Independent Contractors

     As of March 29, 2011, we had approximately 868 employees, of which 122 were full-time management employees including corporate and administrative operations, and approximately 746 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 29, 2011, 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

     On November 9, 2010, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Family Dog, LLC (“Parent”), FD Acquisition Co. (“Merger Sub”), the Company’s Chairman of the Board and Chief Executive Officer, Troy Lowrie, and the Company’s President and Chief Operating Officer, Micheal Ocello. Under the terms of the Merger Agreement, Merger Sub will be merged with and into the Company, with the Company continuing as the surviving corporation and becoming a wholly-owned subsidiary of Parent (the “Merger”). Parent and Merger Sub are currently owned and controlled by Mr. Lowrie.

     Pursuant to the Merger Agreement, as of the effective time of the Going Private Transaction, each issued and outstanding share of the Company’s Common Stock, par value $0.0001 per share (collectively, the “Common Stock”), except for any shares of Common Stock held by Parent and Dissenting Shares (as such term is defined in the Merger Agreement) will be converted into the right to receive a cash payment in the amount of $2.25 per share, without interest (the “Going Private Consideration”).

     The Company’s board of directors (with Troy Lowrie abstaining from voting) unanimously approved the Going Private Transaction and the Merger Agreement following the unanimous recommendation of a special committee comprised entirely of independent members of the Company’s board of directors (the “Special Committee”). Before the Company’s board of directors unanimously approved the Going Private Transaction and the Merger Agreement, the Special Committee and the Company’s board of directors received an opinion from an independent financial advisor to the effect that, based on and subject to the various assumptions and qualifications set forth therein, as of the date of such opinion, the Going Private Transaction Consideration to be received by the Company’s stockholders in the Going Private Transaction is fair to such stockholders from a financial perspective. On March 1, 2011, the independent financial advisor delivered a supplemental opinion letter to the Special Committee confirming its prior conclusion regarding the fairness of the Going Private Transaction consideration after taking into account developments since November 9, 2010.

     The transaction is expected to close in the second quarter of 2011. Upon the closing of the Going Private Transaction, the Company’s Common Stock will no longer be traded on the NASDAQ Global Stock Market and the Company will cease reporting to the U.S. Securities and Exchange Commission.

     On March 18,2011, the Company filed its definitive proxy statement for the to-be-held special meeting of the Company’s stockholders at which the stockholders will consider and vote on approval of the Going Private Transaction and an accompanying Transaction Statement on Schedule 13E-3. The terms of the Going Private Transaction and the Merger Agreement are more fully set forth in the Company’s Current Report on Form 8-K filed on November 10, 2010, proxy statement and Schedule 13E-3. The Company cautions investors that no assurance can be given that the Going Private Transaction will be consummated.

Available Information

     The Company’s website is www.vcgh.com. The Company’s periodic reports and all amendments to those reports required to be filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 are available free of charge through its website. The Company will continue to post its periodic reports on Form 10-K and Form 10-Q and its current reports on Form 8-K and any amendments to those documents to our website as soon as reasonably practicable after those reports are filed with, or furnished to, the SEC. Material contained on the Company’s website is not incorporated by reference into this Report on Form 10-K.

Item 1A. Risk Factors

     Our business prospects are subject to various risks and uncertainties that impact our business. You should carefully consider the following discussion of risks, and the other information provided in this Annual Report on Form 10-K. The risks described below are not the only ones we face. Additional risks that are presently unknown to us or that we currently deem immaterial may also impact our business.

The process of consummating the Going Private Transaction or any other transaction, as well as the failure to successfully consummate such a transaction, could adversely affect our business.

     The process of consummating the Going Private Transaction 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 Going Private Transaction 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 Going Private Transaction or any other transaction will occur. If the Going Private Transaction 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 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, our recently filed proxy statement for a special meeting of our stockholders and Item 3 of this Annual Report, two complaints have been filed relating to the Going Private Transaction. The defendants in these lawsuits include among combinations of the Company, the members of the Company’s board, Troy Lowrie, the Company’s Chairman and CEO, Micheal Ocello, the Company’s President and Chief Operating Officer, and certain entities involved in the Going Private Transaction. Among other things, the complaints seek to enjoin the Company, its directors, and certain of its officers from consummating the proposed Going Private Transaction. Additional lawsuits pertaining to the Going Private Transaction could be filed in the future or the existing lawsuits could affect the proposed Going Private Transaction.

     Although the state and federal court lawsuits challenging the Going Private Transaction have been settled by the parties to these lawsuits (as more fully described in “Item 3. Legal Proceedings”), there is no assurance that the court will approve the settlement and permit the dismissal of these lawsuits. In such event, the Company could be required to incur significant additional costs and expenses, as well as the diversion of the attention of the Company’s management and other resources, as a result of these lawsuits. Further, the Company could be prohibited from consummating the Going Private Transaction or, once it has been consummated, the Company could be forced to rescind it. The Company could also be required to pay damages to the plaintiffs if the settlement is not approved by the court and the Company is not successful in defending these lawsuits.

Anyone buying shares of our Common Stock for more than $2.25 per share is unlikely to receive more than $2.25 per share for such stock for as long as the merger agreement remains in effect.

     The merger agreement provides that upon consummation of the Going Private Transaction, each share of our Common Stock (except for shares owned by us, Messrs. Lowrie and Ocello, certain of their affiliates, and stockholders that are eligible to and elect to invoke dissenters’ rights), will be cancelled and converted into the right to receive $2.25 in cash, without interest (and less applicable withholding taxes). It is likely that the Going Private Transaction consideration will act as a cap on the market price of our Common Stock until the Going Private Transaction is consummated or the merger agreement terminated. Therefore, it is unlikely that anyone selling shares of our Common Stock before consummation of the Going Private Transaction will receive more than $2.25 per share.

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 19 adult nightclubs that offer quality live adult entertainment, restaurant, and bar operations.

     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 36 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 general have experienced larger declines in operating revenues. Overall, the economic environment during our 2010 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. In performing the Company’s annual impairment assessment at December 31, 2010 in accordance with ASC Topic 350, the Company determined that no impairment had occurred. If difficult market and economic conditions continue in 2011 and/or we experience a decrease in revenue at one or more nightclubs, we could incur a decline in fair value of one or more of our nightclubs. This could result in a future impairment charge of up to the total value of the indefinite lived intangible assets.

Our acquisitions may result in disruptions in our business and diversion of management’s attention.

     We have made, and may continue to make, acquisitions of complementary nightclubs, restaurants, or related operations. Any acquisitions will require the integration of the operations, products, and personnel of the acquired businesses and the training and motivation of these individuals. Such acquisitions may disrupt our operations and divert management’s attention from day-to-day operations, which could impair our relationships with current employees, customers, and partners. We may also incur debt or issue equity securities to pay for any future acquisitions. These issuances could be substantially dilutive to our stockholders. In addition, our profitability may suffer because of acquisition-related costs or amortization, or impairment costs for acquired goodwill and other intangible assets. If management is unable to fully integrate acquired business, products, or persons with existing operations, we may not receive the benefits of the acquisitions, and our revenues and stock trading price may decrease.

Our business is subject to risks associated with geographic market concentration.

     One part of our growth strategy is nightclub “clustering.” Adult nightclubs tend to group together in their respective markets. We believe that clustering leads to improved brand recognition as well as some improvement in economics of scale as costs of marketing are spread over more nightclubs. Clustering also provides the Company with the ability to disperse management expertise to more locations under their responsibility. We are subject to risks associated with geographic market concentration in areas in which we own and operate multiple nightclubs, such as adverse changes in the local economy, the local regulatory environment, and our local reputation. If we are unable to successfully diminish the impact of these risks, our profitability and growth prospects may be materially and adversely affected.

Our business operations are subject to regulatory uncertainties which may affect our ability to acquire additional nightclubs, remain in operation or be profitable.

     Our business is regulated by constantly changing zoning, local and state liquor licensing, local ordinances, and state and federal time, place and manner free speech restrictions. In states in which we currently operate, liquor licenses renew annually and are considered to be “privileged” licenses that could be subject to suspension or revocation. The adult entertainment provided by our nightclubs has elements of free speech and expression and, therefore, has some protection under the First Amendment to the U.S. Constitution. However, the protection is limited to the expression of our entertainers and not their conduct.

     In all states where we operate, management believes that we comply with applicable laws, regulations, and ordinances governing the sale of alcohol and the operation of sexually oriented businesses. However, changes in these laws, regulations, and ordinances may increase our cost of compliance therewith, or cause us to be unable to renew them, thereby reducing our profitability or preventing our nightclubs to remain in operation. There can be no assurance that local, state and/or federal licensing, and other regulations will permit our nightclubs to remain in operation or profitable in the future. Further, if we are involved in costly administrative or legal proceedings to 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 Texas nightclub became subject to a new state law requiring each nightclub to collect a five dollar surcharge for every nightclub visitor. We have filed a tax protest suit against this “patron tax,” and the suit has been stayed by agreement until the Texas Supreme Court resolves the underlying case. This trend is spreading to other states to enact similar surcharges or admission fee taxes. Currently, the Company is not passing this surcharge on to our customers and we are absorbing this expense. Our profitability could be negatively impacted if this surcharge continues in Texas and spreads to other states in which the Company operates.

There is substantial competition in the nightclub entertainment industry, which may affect our ability to operate profitably or acquire additional nightclubs.

     Our ability to increase or sustain revenues is impacted by our ability to compete effectively with our competitors, both for nightclub acquisitions and patrons. Our ability to compete depends on many factors, many of which are outside of our control. These factors include the quality and appeal of our competitors’ nightclubs relative to our offerings, the strength of our competitors’ brands, the effectiveness of our competitors’ sales, marketing efforts and the attractiveness of their product offerings, and general consumer behaviors and preferences regarding how they choose to spend their discretionary income. Further, our competitors may have significantly greater financial and management resources than our Company. In addition, the industry is especially sensitive to ever-changing and unpredictable competitive trends and competition for general entertainment dollars which cannot be easily predicted and which are beyond our control. If we are unable to compete effectively in the market, we may be unable to attract patrons to our existing nightclubs or complete acquisitions of new nightclubs, which may prevent us from sustaining or increasing our revenues or growing our business.

If we are unable to effectively promote our brands and establish a leading position in the marketplace, our business may fail.

     We believe that we may attract more patrons to our nightclubs and distinguish ourselves from our competition by increasing the awareness of our brands and that the importance of brand recognition will increase over time. In order to gain brand recognition, we believe that we must increase our marketing and advertising budgets to create and maintain brand name loyalty through the promotion and development of our affiliation with the PT’s^®, Diamond Cabaret^®, and Penthouse^® names. We do not know whether these efforts will lead to greater brand recognition. If we are unable to effectively promote our brand and establish a leading position in the marketplace, we may be unable to attract patrons or new nightclubs for acquisitions, which may prevent us from sustaining or increasing our revenues or growing our business.

Our failure to protect our brands may undermine our competitive position and litigation to protect our brands or defend against third-party allegations of infringement may be costly.

     We believe that it is important for our business to achieve brand recognition. We rely primarily on trademarks and trade names to achieve this. Third parties may infringe or misappropriate our trademarks, trade names, and other intellectual property rights, which could have a material adverse effect on our business, financial condition, or operating results. In addition, policing unauthorized use of our trademarks, trade names, and other intellectual property can be difficult and expensive. Litigation may be necessary to enforce our intellectual property rights or determine the validity and scope of the proprietary rights of others. We cannot give assurance that the outcome of such potential litigation will be in our favor. Such litigation may be costly and may divert management attention as well as expend our other resources away from our business. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects, and reputation.

Our business is dependent upon management and employees for continuing operations and expansion.

     Our success will depend, to a significant extent, on the efforts and abilities of Troy Lowrie, our Chairman of the Board and CEO, and Micheal Ocello, our President and Chief Operating Officer. The loss of the services of Messrs. Lowrie and/or Ocello or our inability to recruit and train additional key personnel in a timely fashion could have a material and continuing adverse effect on our business and future prospects. A loss of one or more of our current officers or key personnel could severely and negatively impact our operations. Messrs. Lowrie and Ocello have limited experience managing a public company subject to the SEC’s periodic reporting obligations.

     Hiring qualified management is difficult due to the limited number of qualified professionals in the industry in which we operate. We have in the past experienced difficulty in recruiting qualified personnel and there can be no assurance that we will be successful in attracting and retaining additional members of management if our business continues to grow. Failure to attract and retain personnel, particularly management personnel, would continue to materially harm our business, financial condition and results of operations.

Troy Lowrie, our Chairman of the Board and CEO, may have potential conflicts of interest with the Company, which may adversely affect our business. He beneficially owns a significant number of shares of our Common Stock, which will have an impact on all major decisions on which our stockholders may vote and which may discourage an acquisition of our Company.

     We have engaged in several transactions with Lowrie Management LLLP, which is controlled and majority owned by Troy Lowrie, who is a significant stockholder, and our Chairman of the Board and CEO. Additionally, Mr. Lowrie and Lowrie Management LLLP are parties to the Going Private Transaction and will become indirect owners of the Company, if and when the Going Private Transaction closes. Conflicts of interest may arise between Mr. Lowrie’s duties to our Company and his duties to Lowrie Management LLLP, or his interest as an owner of Lowrie Management LLLP or as a potential acquirer of the Company’s Common Stock in the Going Private Transaction. Because Mr. Lowrie is a director and the CEO of our Company, he has a duty of loyalty and care to us under Colorado law when there are any potential conflicts of interest between our Company and Lowrie Management LLLP. We cannot give you assurance that when conflicts of interest arise, Mr. Lowrie will act completely in our interests or that conflicts of interest will be resolved in our favor. In addition, Mr. Lowrie could violate his legal duties by diverting business opportunities from us to others. If we cannot resolve any conflicts of interest between Mr. Lowrie and us, we would have to rely on legal proceedings which could disrupt our business.

Several of our landlords and lenders have required Mr. Lowrie’s continued management role with our Company in order to avoid a default or acceleration of our obligations under certain of our leases or loan agreements.

     As of March 29, 2011, Mr. Lowrie beneficially owns approximately 30.3% of our issued and outstanding Common Stock. In addition, he is our Chairman of the Board and CEO. The interests of Mr. Lowrie may differ from the interests of other stockholders. Because of his significant ownership of our Common Stock, Mr. Lowrie will have the ability to significantly influence virtually all corporate actions requiring stockholder approval, including the following actions:

•

election of our directors;

•

amendment of our organizational documents;

•

the Going Private Transaction or the sale of our assets or other corporate transaction; and

•

control of the outcome of any other matter submitted to the stockholders for vote.

     Mr. Lowrie’s beneficial stock ownership may discourage potential investors from investing in shares of our Common Stock due to the lack of influence they could have on our business decisions, which in turn could reduce our stock price.

We must comply with all licenses and permits relating to the sale of alcohol.

     We derive a significant portion of our revenues from the sale of alcoholic beverages. States in which we operate may have laws which may limit the availability of a permit to sell alcoholic beverages or which may provide for suspension or revocation of a permit to sell alcoholic beverages in certain circumstances. The temporary or permanent suspension or revocations of any such permits would have a material adverse effect on the revenues, financial condition, and results of operations of the Company. In all states where we operate, management believes that we comply with applicable city, county, state, or other local laws governing the sale of alcohol.

Activities or conduct at our nightclubs may cause us to lose necessary business licenses, expose us to liability, or result in adverse publicity, which may increase our costs, divert management’s attention from our business, and cause our stockholders to lose confidence in us, thereby lowering our profitability and our stock price.

     We are subject to risks associated with activities or conduct at our nightclubs that are illegal or violate the terms of necessary business licenses. Our nightclubs operate under licenses for sexually oriented businesses and some protection under the First Amendment to the U.S. Constitution. While we believe that the activities at our nightclubs comply with the terms of such licenses, and that the element of our business that constitutes an expression of free speech under the First Amendment to the U.S. Constitution is protected, activities and conduct at our nightclubs may be found to violate the terms of such licenses or be unprotected under the U.S. Constitution. This protection is limited to the expression and not the conduct of an entertainer. An issuing authority may suspend or terminate a license for a nightclub found to have violated the license terms. Illegal activities or conduct at any of our nightclubs may result in negative publicity or litigation. Such consequences may increase our cost of doing business, divert management’s attention from our business, and make an investment in our securities unattractive to current and potential investors, thereby lowering our profitability and our stock price.

     IEC has developed comprehensive policies aimed at ensuring that the operation of each nightclub is conducted in conformance with local, state and federal laws. We have a “no tolerance” policy on illegal drug use in or around the facilities. We continually monitor the actions of entertainers, waitresses, and customers to ensure that proper behavior standards are met. However, such policies, no matter how well designed and enforced, can provide only reasonable, but not absolute, assurance that the policies’ objectives are being achieved. Because of the inherent limitations in all control systems and policies, there can be no assurance that our policies will prevent deliberate acts by persons attempting to violate or circumvent them. Notwithstanding the foregoing limitations, management believes that our policies are reasonably effective in achieving their purposes.

Our industry is viewed negatively by many for moral, religious, women’s rights, and other reasons, therefore, the market for our securities is smaller than for other securities and an investor may find it hard to sell our securities.

     We operate in an industry that is viewed negatively by many. People may object to sexually oriented entertainment for moral, religious, women’s rights, or other reasons. As a result, we are exposed to risks associated with societal attitudes towards our business, both locally and nationally. Local attitudes may disproportionally affect our nightclubs in areas in which we are operating while national attitudes may affect our business generally or our stock price specifically. Because of the negative perception of our industry, the market for our securities is smaller than for securities without such negative perception. Therefore, an investor in our securities may be unable to sell our securities at an acceptable time and price, or at all.

Our business plan and proposed strategy have 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.

We may be subject to uninsured risks which, if realized, could expose us to money damages, which we may be unable to pay.

     We maintain insurance in amounts we consider adequate for personal injury and property damage to which our nightclubs may be subject. We also currently have personal injury liquor liability coverage in place. However, there can be no assurance that we will not be exposed to potential liabilities for money damages in excess of the coverage provided by insurance, including, but not limited to, liabilities which may be imposed pursuant to state “dram shop” statutes or common law theories of liability. In general, “dram shop” statutes provide that a person injured by an intoxicated person has the right to recover damages from an establishment that wrongfully served alcoholic beverages to such person if it was apparent to the server that the individual being sold, served, or provided with an alcoholic beverage was obviously intoxicated to the extent that he presented a clear danger to himself and others. If our insurance coverage is not sufficient to pay for any money damages that we may be found liable for, we will have to pay such excess damages using the funds needed for operation of our business, if available, thereby increasing our costs and reducing our profitability.

Our directors and officers have limited liability and are entitled to indemnification that could encourage derivative lawsuits and require us to direct funds away from our business.

     Our Articles of Incorporation provide that our directors shall not be liable to the Company or our stockholders for monetary damages for breaches of fiduciary duties as a director to the fullest extent permitted by Colorado law.

     Further, we are obligated to indemnify and advance expenses to our directors and executive officers in certain circumstances. Our Articles of Incorporation provide that the Company shall indemnify and advance expenses to a director or officer in connection with a proceeding to the fullest extent permitted or required by and in accordance with Colorado law. We have also entered into separate, but substantively identical, indemnification agreements with all of our directors and named executive officers. The indemnification agreements provide that the Company will indemnify each director and executive officer against claims arising out of events or occurrences related to such individual’s service on the Company’s board or as an executive officer, as applicable, (i) when such indemnification is expressly required to be made by law, or (ii) after a determination has been made that such indemnification is permissible. Pursuant to these arrangements, we may be required to advance costs incurred by an officer or director and to pay judgments, fines, and expenses incurred by an officer or director, including reasonable attorneys’ fees, as a result of actions or proceedings in which our officers and directors may become involved by reason of being or having been an officer or director of our Company. Funds paid in satisfaction of judgments, fines, and expenses may be funds we need for the operation of our business, thereby affecting our ability to maintain profitability.

     These provisions in the Company’s Articles of Incorporation and the stand-alone indemnification agreements may have the effect of reducing the likelihood of derivative litigation against directors and executive officers, and may discourage or deter stockholders or management from bringing a lawsuit against directors and executive officers even though such an action, if successful, might otherwise have benefited our stockholders. We also note that our directors and Troy Lowrie, the Company’s Chairman of the Board and CEO, are currently defendants in one or more lawsuits in connection with the Going Private Transaction, as further discussed in another risk factor and elsewhere in this Annual Report on Form 10-K. The Company may be required to advance expenses to and indemnify the directors and Mr. Lowrie from expenses involved in defending against such lawsuits. Any amount we are required to pay or advance to a director or executive officer pursuant to these provisions will be diverted from the Company’s operating capital and will have an adverse effect on the Company’s cash flow and results of operation. While the Company has obtained directors’ and officers’ insurance to protect against this occurrence, there can be no assurance that our directors’ and officers’ insurance will cover a claim made for indemnification or be sufficient to cover the entire amount claimed for indemnification.

     We have been informed that the SEC has the opinion that indemnification of liabilities to executive officers or directors under the Securities Exchange Act of 1933, as amended (the “Securities Act”), to be against public policy as expressed in the Securities Act and therefore are unenforceable.

We could use the issuance of additional shares of our authorized stock to deter a change in control.

     As of March 29, 2011, we have 16,292,071 shares of Common Stock outstanding, out of a total of 50,000,000 shares of Common Stock authorized, and zero shares of Series A preferred stock, out of a total of 1,000,000 shares authorized for future issuance under our Articles of Incorporation. This does not include 224 shares of Common Stock reserved for issuance under our 2002 Stock Option and Stock Bonus Plan, 2,708 shares of Common Stock reserved for issuance under our 2003 Stock Option and Stock Bonus Plan, and 906,667 shares of Common Stock reserved for issuance under our 2004 Stock Option and Appreciation Rights Plan. In addition, our board is authorized to issue “blank check” preferred stock, with designations, rights, and preferences as they may determine. Accordingly, our board may, without stockholder approval, issue shares of preferred stock with dividend, liquidation, conversion, voting, or other rights that could adversely affect the voting power or other rights of the holders of our Common Stock. This type of preferred stock could also be issued to discourage, delay, or prevent a change in our control. The ability to issue “blank check” preferred stock is a traditional anti-takeover measure. These provisions in our charter documents make it difficult for a majority stockholder to gain control of the board and of our Company. The issuance of additional shares would make it more difficult for a third party to acquire us, even if its doing so would be beneficial to our stockholders.

We have employment agreements with Troy Lowrie and Micheal Ocello that contain features that may discourage a change of control.

     On December 4, 2008, we entered into five-year employment agreements with Troy Lowrie, our Chairman of the Board and CEO, and Micheal Ocello, one of our directors and our President and Chief Operating Officer. Pursuant to the terms of the employment agreements, if we terminate either of them other than for “cause,” “death,” or “disability” (as such terms are defined therein), or either of them terminates his employment for “good reason” (as such term is defined therein, which term includes termination of the officer following a change of control), we must pay the officer a severance payment equal to three times the sum of the officer’s base salary in effect upon termination plus an amount equal to the highest bonus the officer received in the three years before termination, if any.

     Further, the employment agreements provide that if such an officer’s employment is terminated for any reason, we must, at the officer’s election, promptly pay all outstanding debt owed to the officer and his family or issue to the officer, with his approval, the number of shares of our Common Stock determined by dividing (a) the outstanding principal and interest owed to the officer (b) 50% of the last sale price of our Common Stock on the date of termination.

     Finally, Mr. Lowrie’s employment agreement provides that if Mr. Lowrie’s employment is terminated for any reason, we must also take all necessary steps to remove Mr. Lowrie as a guarantor of any of our (or our affiliates’) obligations to any third party. In the event that we are not successful in doing so, we must pay to Mr. Lowrie a cash amount equal to five percent per year of the aggregate amount he is continuously guaranteeing until such time when Mr. Lowrie no longer guarantees the obligations.

     A change of control may trigger the payments set forth above and the resulting costs may prevent or deter a potential acquirer from buying the Company. Even if doing so could be beneficial to our stockholders.

We must meet the NASDAQ Global Market continued listing requirements or we risk delisting, which may decrease our stock price and make it harder for our stockholders to trade our stock.

     Our Common Stock is currently listed for trading on the NASDAQ Global Market. We must continue to satisfy NASDAQ’s continued listing requirements or risk delisting of our securities. That would likely have an adverse effect on the price of our Common Stock and our business. There can be no assurance that the Company will meet the continued listing requirements for the NASDAQ Global Market, or that the Company’s Common Stock will not be delisted from the NASDAQ Global Market in the future. If our Common Stock is delisted from NASDAQ, it may trade on the over-the-counter market, which may be a less liquid market. In such case, our stockholders’ ability to trade, or obtain quotations of the market value of, shares of our Common Stock would be severely limited because of lower trading volumes and transaction delays. These factors could contribute to lower prices and larger spreads in the bid and ask prices for our securities.

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 Global Stock Market’s continued listing requirements require, among other things, that a majority of the members of our board are independent and that our audit committee consists entirely of independent directors. We know that we currently comply with the SEC and NASDAQ requirements regarding director independence. However, in the event that we do not remain in compliance with these requirements, our executive officers could establish policies and enter into transactions without the requisite independent review and approval. This could present the potential for a conflict of interest between us and our stockholders generally and our executive officers, stockholders, or directors.

     Further, our failure to comply with these requirements may limit the quality of the decisions that are made by our board and audit committee, such that the risk of material misstatements or omissions caused by errors or fraud with respect to our financial statements or other disclosures that may occur and not be detected in a timely manner or at all; or the payment of inappropriate levels of compensation to our executive officers. In the event there are deficiencies or weaknesses in our internal controls, we may misreport our financial results or lose significant amounts due to misstatements caused by errors or fraud. Finally, if the composition of our board or audit committee fails to meet NASDAQ’s independence requirements in the future and we fail to regain compliance with NASDAQ’s continued listing requirements, the Company’s Common Stock will be delisted from the NASDAQ Global Market, as further described in the previous risk factor.

     The Company is currently non-compliant with NASDAQ Marketplace Rule 5605(c)(2)(A), which requires listed Companies have at least three audit committee members.

Securities analysts may not initiate coverage or continue to cover our Common Stock, and this may have a negative impact on our Common Stock’s market price.

     The trading market for our Common Stock depends, in part, on the research and reports that securities analysts publish about us and our business. We do not have any control over these analysts. Currently, we have no analyst firm covering the Company. If securities analysts do not cover our Common Stock, the lack of research coverage may adversely affect its market price. If we are covered by securities analysts, and our stock is downgraded, our stock price would likely decline. If the analyst ceases to cover us or fails to publish regular reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

In the past, we have raised substantial amounts of capital in private placements, and if we fail to comply with the applicable securities laws, ensuing rescission rights or lawsuits would severely damage our financial position.

     Our 2004 private placement consisted of securities that were not registered under the Securities Act, as amended (the “Securities Act”), or under any state “blue sky” law as a result of exemptions from such registration requirements. Such exemptions are highly technical in nature and if we inadvertently failed to comply with any of such exemptive provisions, investors could have the right to rescind their purchase of our securities and sue for damages. If any investors were to successfully seek such rescission or prevail in any such suit, we could face severe financial demands that could have significant, adverse affects on our financial position. Future financings may involve sales of our Common Stock at prices below prevailing market prices, as well as the issuance of warrants or convertible securities at a discount to market price.

The application of the “penny stock” rules could adversely affect the market price of our Common Stock and increase the transaction costs to sell those shares.

     The SEC has adopted regulations which generally define a “penny stock” as an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. Because the last reported trade of our company stock on the NASDAQ Global Market was at a price below $5.00 per share, our Common Stock is currently considered a penny stock. The SEC’s penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and the salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that before a transaction in a penny stock occurs, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s agreement to the transaction. If applicable in the future, these rules may restrict the ability of brokers-dealers to sell our Common Stock and may affect the ability of investors to sell their shares, until our Common Stock no longer is considered a penny stock.

Because we do not intend to pay any dividends on our Common Stock, purchases of our Common Stock may not be suited for investors seeking dividend income.

     Since our inception, we have not paid any dividends on our Common Stock and we do not anticipate paying any dividends on our Common Stock in the foreseeable future. The board has elected not to pay dividends in the future. We expect that future earnings applicable to the Common Stockholders, if any, will be used for working capital and to finance growth.

Future sales of our Common Stock may depress our stock price. A significant amount of Common Stock is subject to issuance upon exercise of securities to purchase Common Stock. The exercise and sale of these financial instruments could depress the market price of our Common Stock.

     A significant amount of our Common Stock may be eligible for sale under Rule 144 promulgated under the Securities Act at different times in the future and its sale could depress the market price of our Common Stock. Provided that all applicable Rule 144 conditions are satisfied, we believe that stockholders holding 16,292,071 shares of our issued and outstanding shares of Common Stock are currently eligible to sell their shares. The Company issued no stock in 2010.

     We also have issued stock options convertible into an aggregate of 231,500 shares of our Common Stock at an exercise price of between $10 and $13 per share. As of December 31, 2010, there were 31,090 of the stock options exercisable but the remaining 200,410 vest and become exercisable between January 2011 and January 2015. All option exercise prices substantially exceed the market price of our Common Stock on March 29, 2011.

     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 29, 2011, we have 50,000,000 authorized shares of which 16,292,071 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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the depth and liquidity of the market for our securities;

•

sales by selling stockholders of shares issued or issuable in connection with our private placements;

•

the Going Private Transaction and any public announcements related thereto or any other transaction;

•

investor perception of us and the industry in which we operate;

•

changes in earnings estimates or buy/sell recommendations by the analyst;

•

general financial and other market conditions; and

•

domestic and international economic conditions.

     Public stock markets have experienced and are currently experiencing substantial price and trading volume volatility. These broad market fluctuations may adversely affect the market price of our securities. Further, if the Going Private Transaction or any alternative transaction is not completed, the share price of our Common Stock may change, to the extent that the current market price of our Common Stock reflects an assumption that a transaction will be completed. Fluctuations in our stock price may have made our stock attractive to momentum, hedge, or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction particularly when viewed on a quarterly basis.

Other Risk Factors May Adversely Affect Our Financial Performance.

     Other risk factors that could cause our actual results to differ materially from those indicated in the forward-looking statements by affecting, among many things, pricing, consumer spending, and consumer confidence, include, without limitation, changes in economic conditions and financial and credit markets, credit availability, increased fuel costs and availability for our employees, customers and suppliers, health epidemics or pandemics or the prospects of these events (such as reports on avian flu), consumer perceptions of food safety, changes in consumer tastes and behaviors, governmental monetary policies, changes in demographic trends, terrorist acts, energy shortages and rolling blackouts, and weather (including major hurricanes and regional snow storms) and other acts of God.

Item 1B. Unresolved Staff Comments

     Not applicable.

Item 2. Properties

     Our corporate office is located at 390 Union Boulevard, Suite 540, Lakewood, Colorado 80228. This office space is used by IEC, our wholly-owned subsidiary. We occupy approximately 5,500 square feet under a lease with an unrelated third party that expires in February 2017. Additional administrative offices are located inside various nightclub locations or rented on a month-to-month basis without a formal lease.

     Each of our adult entertainment nightclubs is held in separately owned subsidiary corporations, limited liability companies, or limited partnerships. We currently lease the real estate for a majority of our company-owned adult entertainment nightclubs under operating leases with remaining terms ranging from five years to just over 50 years. These leases generally contain options which permit us to extend the lease term at an agreed rent or at prevailing market rates.

     We own the real property on which we operate two company-owned adult entertainment nightclubs located in Illinois and Indiana and the building in Texas.

     The table contains specifics about our leased and owned adult nightclub locations:

	Name/Club Ownership			Lease Information
	PT’s® Brooklyn Platinum of Illinois, Inc. Acq. Date: 5/1/02 Location: Brooklyn, IL Sq. Ft.: 9,000 Building owned by VCG: Yes			An Illinois corporation and wholly-owned subsidiary of VCG.
	PT’s® Showclub Indy Restaurant Concepts, Inc. Acq. Date: 6/30/02 Location: Indianapolis, IN Sq. Ft.: 9,200 Building owned by VCG: Yes			An Indiana corporation and wholly-owned subsidiary of VCG. VCG Real Estate leases a portion of the building that is not used by the nightclub operation to an unaffiliated third party.
	PT’s® All Nude VCG Restaurants Denver, Inc. Acq. Date: 6/30/04 Location: Denver, CO Sq. Ft.: 8,000 Building owned by VCG: No			A Colorado corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $14,500 per month. The regular lease term expired in January 2010 but the Company exercised a five year extension option and the lease now will expire in January 2015. The base rent for each subsequent lease year during the option period commencing February 2010 and every February 1st will increase by the percentage increase in the Consumer Price Index (“CPI”) for the month of February immediately preceding the adjustment date, and the CPI for the month of February for the year preceding the adjustment date.
	The Penthouse Club® Glendale Restaurant Concepts, LP Acq. Date: 6/30/04 Location: Glendale, CO Sq. Ft.: 9,600 Building owned by VCG: No			A Colorado limited partnership and 98% owned subsidiary of VCG, including the 1% general partnership interest. The building is leased from Lowrie Management LLLP, controlled by our Chairman of the Board and CEO, Troy Lowrie, currently for $13,500 per month. The lease term expires September 2014 and has three options to extend that expire September 2029. The base rent adjusts every five years. The rent from years one to five was $12,000 per month, years six to ten is $13,500 per month, years eleven to fifteen (option 1) is $15,000 per month, years sixteen to twenty (option 2) is $16,500 per month, and years twenty-one to twenty-five (option 3) is $18,000 per month.
	PT’s® Showclub Appaloosa VCG CO Springs, Inc. Acq. Date: 10/2/06 Location: Colorado Springs, CO Sq. Ft.: 9,500 Building owned by VCG: No			A Colorado corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party for $10,000 per month. The lease term expires October 2016 and has two options to extend that expire October 2026. The base rent adjusts every five years. The rent from years one to five is $10,000 per month, years six to ten is $10,500 per month, years eleven to fifteen (option 1) is $12,000 per month, and years sixteen to twenty (option 2) is $13,500 per month.
	Diamond Cabaret® Glenarm Restaurant, LLC Acq. Date: 10/8/04 Location: Denver, CO Sq. Ft.: 33,000 Building owned by VCG: No			A Colorado limited liability company and 90% owned subsidiary of VCG. The building is leased from an unaffiliated third party for $45,000 per month. The lease term expires October 2014 and has three options to extend that expire October 2029. The base rent adjusts every five years. The rent from years one to five was $40,000 per month, years six to ten is $45,000 per month, years eleven to fifteen (option 1) is $50,000 per month, years sixteen to twenty (option 2) is $55,000 per month, and years twenty-one to twenty-five (option 3) is $60,000 per month.
	PT’s® Show Club Denver Restaurant Concepts, LP Acq. Date: 12/28/06 Location: Denver, CO Sq. Ft.: 20,720 Building owned by VCG: No			A Colorado limited partnership and 98% owned subsidiary of VCG. The building is leased from Lowrie Management LLLP, controlled by our Chairman of the Board and CEO, Troy Lowrie, currently for $17,500 per month. This square footage includes nightclub, office and storage space. The lease term expires December 2014, 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 per month.

	Roxy’s RCC LP Acq. Date: 1/18/07 Location: Brooklyn, IL Sq. Ft.: 4,400 Building owned by VCG: No			An Illinois limited partnership and 88% subsidiary of VCG. The building is leased from an unaffiliated third party for $5,000 per month. The lease term expires January 2017 and has two options to extend that expire January 2027. The base rent never changes, but the rent amount fluctuates monthly based on sales.
	PT’s® Showclub Kentucky Restaurant Concepts, Inc. Acq. Date: 1/2/07 Location: Louisville, KY Sq. Ft.: 23,000 Building owned by VCG: No			A Kentucky corporation and 100% owned subsidiary of VCG. The building is leased from Lowrie Management LLLP, controlled by our Chairman of the Board and CEO, Troy Lowrie, currently for $7,500 per month. The lease term expires December 2016 and has three five year options to extend that expire December 2031. The base rent adjusts every five years. The rent from years one to five is $7,500 per month, years six to ten is $8,750 per month, years eleven to fifteen (option 1) is $10,000 per month, years sixteen to twenty (option 2) is $11,250 per month, and years twenty one to twenty-five (option 3) is $12,000 per month.
	PT’s® Showclub Cardinal Management LP Acq. Date: 2/5/07 Location: Centreville, IL Sq. Ft.: 5,700 Building owned by VCG: No			An Illinois limited partnership and 83% owned subsidiary of VCG. The building is leased from an unaffiliated third party for $5,000 per month. The lease term expires January 2017 and has two options to extend that expire January 2027. The base rent never changes, but the rent amount fluctuates monthly based on sales.
	PT’s® Sports Cabaret MRC LP Acq. Date: 2/9/07 Location: Sauget, IL Sq. Ft.: 9,700 Building Owned by VCG: No			An Illinois limited partnership and 100% owned subsidiary of VCG. The building is leased from an unaffiliated third party for $20,000 per month. The lease term expires February 2017 and has two options to extend that expire February 2027. The base rent never changes but the rent amount fluctuates monthly based on sales.
	The Penthouse Club® IRC LP Acq. Date: 2/7/07 Location: Sauget, IL Sq. Ft.: 19,300 Building Owned by VCG: No			An Illinois limited partnership and a 90% owned subsidiary of VCG. The building is leased from an unaffiliated third party for $25,000 per month. The lease term expires March 2017 and has two options to extend that expire March 2027. The base rent never changes but the rent amount fluctuates monthly based on sales.
	The Men’s Club® Raleigh Restaurant Concepts, Inc. Acq. Date: 4/16/07 Location: Raleigh, NC Sq. Ft.: 21,200 Building owned by VCG: No			A North Carolina corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $6,000 per month. This lease has options to renew for ten consecutive renewal terms of five years each that expire January 2062. The base rent adjusts every five years by $250 per month after January 2017 with a maximum of $8,250 per month. The Company also has a separate lease for the parking premises currently for $20,750 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 every year by $500 per month with a maximum of $45,750 per month.
	Schiek’s Palace Royale Classic Affairs, Inc. Acq. Date: 5/30/07 Location: Minneapolis, MN Sq. Ft.: 23,000 Building owned by VCG: No			A Minnesota corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $25,000 per month. The building lease term expires June 2012 and has three five year options to extend that expire June 2027. The base rent adjusts every five years. The rent from one to five years is $25,000 per month, years six to ten (option 1) is $27,750 per month, years eleven to fifteen (option 2) is $30,000 per month, and years sixteen to twenty (option 3) is $33,000 per month. On March 22, 2011, The Company signed an Asset Purchase Agreement to sell (see Note 15 of the Notes to the Consolidated Financial Statements under “Subsequent Events.”
	PT’s® Showclub Kenkev II, Inc. Acq. Date: 9/14/07 Location: Portland, ME Sq. Ft.: 13,000 Building owned by VCG: No			A Maine corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $16,118 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.

	PT’s® Showclub Kenja II, Inc. Acq. Date: 10/29/07 Location: Miami, FL Sq. Ft.: 7,600 Building owned by VCG: No			A Florida corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $10,927 per month. The lease term expires October 2032 and has two options to extend that expire October 2042. The base rent adjusts every year by 3% after the first year of the lease.
	La Boheme Gentlemen’s Club Stout Restaurant Concepts, Inc. Acq. Date: 12/21/07 Location: Denver, CO Sq. Ft.: 6,200 Building owned by VCG: No			A Colorado corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $17,000 per month. The lease term expires August 2016. The rent from years one to three was $12,000 per month, years four to six was $15,000 per month, years seven to nine is $21,000 per month, years ten to eleven is $20,000 per month, and years twelve to fifteen is $21,000 per month.
	Jaguar’s Gold Club Manana Entertainment, Inc. Acq. Date: 4/14/08 Location: Dallas, TX Sq. Ft.: 12,500 Building owned by VCG: Yes			A Texas limited liability company and wholly-owned subsidiary of VCG. The building is owned by the nightclub but the land is leased from an unaffiliated third party for $25,000 per month. The lease term expires April 2013 and has four five year options to extend that expire April 2033. The base rent adjusts every option period by 10% over the prior term’s rental obligation.
	Imperial Showgirls Gentlemen’s Club VCG-IS, LLC Acq. Date: 7/28/08 Location: Anaheim, CA Sq. Ft.: 8,100 Building owned by VCG: No			A California corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $10,000 per month. The regular lease term expired August 2010. The company exercised the first option and the current option period will expire in April 2015. There are four remaining five-year options expiring in 2035. The base rent adjusts by $1,000 every option period.

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.

Acquisition Indemnification Claim and Litigation

     On July 24, 2007, VCG Holding Corp. was named in a lawsuit filed in the District Court of Dallas County, Texas. This lawsuit arose out of a VCG acquisition of certain assets belonging to Regale, Inc. (“Regale”) by Raleigh Restaurant Concepts, Inc. (“RRC”), a wholly owned subsidiary of VCG, in Raleigh, N.C. The lawsuit alleges that VCG tortiously interfered with a contract between Michael Joseph Peter and Regale and misappropriated Mr. Peter’s purported trade secrets. On March 30, 2009, the United States District Court for the Eastern District of North Carolina entered an order granting summary judgment to VCG and dismissed Mr. Peter’s claims in their entirety. The court found that as a matter of law, VCG did not tortiously interfere with Mr. Peter’s contract with Regale and further found that VCG did not misappropriate trade secrets. Mr. Peter did not appeal that ruling and as such, the federal proceedings have concluded.

     Ancillary to this litigation, Thee Dollhouse N.C., Inc. filed a claim in arbitration in June 2008 against Regale as a result of this transaction, asserting that Regale, by selling its assets to RRC, breached a contract between Thee Dollhouse and Regale. In addition, an assertion was made that one of Regale’s principals tortiously interfered with the contract between Regale and Thee Dollhouse. Regale filed a Motion to Stay Arbitration which was granted in part and denied in part, with the court staying arbitration as to Regale’s principal and denying the stay as to Regale. VCG is indemnifying and holding Regale harmless from this claim pursuant to the terms of the asset purchase agreement between Regale and RRC. The arbitration hearing was conducted during April, 2010. On June 28, 2010, the arbitration panel entered an award in favor of Thee Dollhouse N.C., Inc. and against Regale, Inc., awarding Thee Dollhouse damages in the amount of $2,102,476, plus costs of $32,390 for a total award of $2,134,866, plus interest. The judgment has now been confirmed by the District Court and Regale has filed an appeal to the 4^th Circuit Court of Appeal. During 2010, the Company accrued $2,134,866, which is reported in the Consolidated Statements of Income as Acquisition Indemnification Claim. The Company is accruing interest on this liability.

     On March 22, 2011, the Company and Mr. Peter signed a release and settlement agreement pursuant to the Indemnification Claim payment of $2,134,866 plus interest. It was agreed that the Company shall be responsible for two installment payments of (i) a payment of $1,000,000 to be paid on or before April 14, 2011 and (ii) a payment of $1,223,934 plus accumulated interest of 8.5% per annum from March 1, 2011 until paid on or before August 1, 2011. The total settlement amount can be prepaid at anytime without penalty and interest.

Texas Patron Tax Litigation

     Beginning January 1, 2008, VCG’s Texas nightclubs became subject to a new state law requiring the Company to collect a five dollar surcharge for every nightclub visitor. A lawsuit was filed by the Texas Entertainment Association, an organization in which the Company is a member, alleging that the surcharge is an unconstitutional tax. On March 28, 2008, the judge of the District Court of Travis County, Texas ruled that the new state law violates the First Amendment to the U.S. Constitution and therefore, the District Court’s order enjoined the state from collecting or assessing the tax. The State of Texas has appealed the District Court’s ruling. Under Texas law, when cities or the State of Texas give notice of appeal, the State of Texas intervenes and suspends the judgment, including the injunction. Therefore, the judgment of the District Court of Travis County 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 Texas Third Court of Appeals (serving the Austin, Texas area) affirmed the District Court’s judgment that the Sexually Oriented Business Tax 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 February 12, 2010, the Texas Supreme Court granted the State’s Petition for Review. Oral arguments of the case were heard on March 25, 2010, and the parties are currently awaiting a decision by the Texas Supreme Court.

     The Company paid the tax for 2008 and the first three quarters of 2009 under protest and expensed the tax for such periods. For each quarter since December 31, 2009, the Company accrued the tax and filed the appropriate tax returns, but did not pay the State of Texas. As of December 31, 2010, the Company has approximately $311,000 in accrued but unpaid liabilities for this tax. The Company has paid approximately $401,000, under protest, to the State of Texas since the inception of this tax.

DOL Audit (PT’s Showclub)

     In March 2009, VCG was placed under a nationwide Department of Labor (“DOL”) self-audit of employee payroll 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. A summary meeting was held with the DOL and Company counsel on March 19, 2010. The DOL presented its preliminary findings of violations. A meeting was held on May 20, 2010 in which DOL and Company counsel agreed to continue negotiations at a later date. The Company believes it has corrected all processes that resulted in the potential violations. This case is still in the investigatory state and no final determination can be made at this time of the outcome or any potential liability. After discussion with Company counsel on this case, the Company accrued $200,000 as of December 31, 2009, for potential wage/hour violations. This accrual and any estimate of potential liability have not changed as of December 31, 2010. The DOL made an administrative change in investigators, requiring the settlement negotiation to be extended. The Company expects to have a resolution by the second quarter of 2011.

Texas Sales Tax Audit

     The Texas Comptroller’s Office conducted a sales and use tax audit of Manana Entertainment, Inc., the entity operating Jaguar’s Gold Club in Dallas, Texas, for the time period beginning with the nightclub’s acquisition in April 2008 and ending in November 2009. The primary focus of the audit is the taxability of revenue received by Manana Entertainment, Inc. with respect to independent contractor entertainer fees, credit card sales of dance dollars and use tax.

     In July 2010, the Company received notice from the Texas Comptroller’s Office that the audit period would be extended to include the period of October 1, 2006 to April 1, 2008, which period pre-dates the Company’s ownership of the nightclub. Under the purchase agreement by which the Company acquired the nightclub, the Company is fully indemnified by the seller for any liability arising for the pre-acquisition period.

     The audit is complete; however, the Company is disputing certain of the audit results. As of December 31, 2010, approximately $283,000 was accrued, with an offsetting receivable of approximately $146,000 expected to be collected from the seller. During February 2011, the Company paid $173,336 of the undisputed tax assessment, of which approximately $118,000 related to the pre-acquisition period and the Company is pursuing the seller for reimbursement under the indemnification provisions. The Company expects a resolution of the disputed tax by the second quarter of 2011.

Litigation Associated with the Going Private Transaction

     On July 30, 2010, a complaint was filed in Colorado state court, First Judicial District, Jefferson County District Court, challenging the Going Private Transaction. The complaint was filed by David Cohen, Timothy Cunningham, Gene Harris, Dean R. Jakubczak and William C. Steppacher, Jr. derivatively on behalf of VCG and as a class action on behalf of themselves and other similarly situated stockholders against Mr. Lowrie, Mr. Ocello, Martin A. Grusin, Robert J. Mcgraw, Jr., Carolyn Romero, George Sawicki, David Levine, Family Dog, FD Acquisition Co., Lowrie Investment Management, Inc., Lowrie Management LLLP, and VCG (as a nominal defendant). The plaintiff’s complaint has since been amended twice.

     The second amended complaint was filed by the plaintiffs on January 15, 2011 and was accepted by the court as of January 24, 2011. In the second amended complaint, the plaintiffs challenge the merger agreement and the Going Private Transaction, but they drop their derivative claim and purport only to bring a class action on behalf of themselves and all similarly situated stockholders. In the second amended complaint, the plaintiffs allege, among other things, that: the Going Private Transaction consideration of $2.25 per share payable to VCG’s non-executive group stockholders upon the closing of the Going Private Transaction, if at all, is inadequate; Mr. Lowrie has a conflict of interest with respect to the Going Private Transaction; the individual defendants have breached their fiduciary duties under Colorado law in connection with the Going Private Transaction; and the proxy statement filed by VCG with the SEC on December 23, 2010 contains certain omissions and misleading statements. The second amended complaint seeks, among other relief, certification of the plaintiffs as class representatives, an injunction directing the members of VCG’s board of directors to comply with their fiduciary duties and enjoining them from consummating the Going Private Transaction, an accounting of alleged damages suffered by the plaintiffs and the class, 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 January 28, 2011, VCG moved to stay the state court proceedings pending the resolution of the parallel federal lawsuit described below on the grounds that the two actions are substantially the same, arise out of the same operative facts, seek the same relief, and trying both actions would be a waste of both judicial and corporate resources. The plaintiffs oppose the motion to stay. On February 11, 2011, the plaintiffs moved for expedited discovery. The defendants opposed the motion for expedited discovery. The court denied the motion to stay and denied the motion for expedited discovery.

     On January 7, 2011, VCG was served with a complaint filed by Andrew Doyle in federal court in the United States District Court for the District of Colorado. In the complaint, the plaintiff purports to bring a class action lawsuit on behalf of himself and all others similarly situated against Mr. Lowrie, Mr. Ocello, Martin A. Grusin, Robert J. McGraw, Jr., Carolyn Romero, George Sawicki, Kenton Sieckman, David Levine, Family Dog, FD Acquisition Co., Lowrie Investment Management, Inc., Lowrie Management LLLP, and VCG. Like the second amended state-law complaint, the federal complaint challenges the Going Private Transaction. The allegations in the federal complaint and the relief sought are substantially the same as those in the state action; in addition to the allegation set forth in the second amended complaint, the federal complaint also alleges violations of federal securities laws and regulations based on the allegations described above related to the proxy statement filed by VCG with the SEC on December 23, 2010.

     On January 28, 2011, VCG filed its answer to the federal complaint denying the material allegations therein and denying that the plaintiff is entitled to judgment on any of his claims or any relief whatsoever. VCG’s answer also asserts certain defenses.

     On March 22, 2011, the Company entered into a Memorandum of Understanding (the “MOU”) with the parties in and to the actions in the First Judicial District, Jefferson County District Court captioned Cohen v. Grusin, et. al., Case No. 2010CV3624 (the “State Action”), and in the United States District Court for the District of Colorado, captioned Doyle v. Lowrie, et. al., C.A. No. 11-CV-0037 (the “Federal Action”). The MOU sets forth the terms of the parties’ agreement to settle and dismiss the State Action and the Federal Action. Pursuant to the MOU, among other things, the parties agreed to the following terms:

	•		the termination fee payable by the Company to Family Dog, in the event that the Company terminates the Merger Agreement to enter into a Company Acquisition Agreement (as defined in the Merger Agreement) involving a Superior Acquisition Proposal (as defined in the Merger Agreement) from certain parties described in the Merger Agreement, will be reduced from $600,000 to $100,000;
	•		the terms of the stipulation of settlement will include, among other things and subject to certain terms and conditions, a full, final, and complete release of any and all known and unknown claims, liabilities, or damages, that were brought or could have been brought in the State Action and the Federal Action, or that relate to the Merger Agreement and the merger, including filings with the SEC relating to the Merger Agreement and the merger;

	•		the Company, or its successors, will pay any fees and expenses of the plaintiffs in such actions awarded by the court up to $67,500, following final approval from the state court and petition by the plaintiffs for an award of fees and expenses; and
	•		the Federal Action will be dismissed with prejudice after certification of the class and approval of the stipulation of settlement in the state court action.

     The terms of the MOU are conditioned upon final approval by the state court.

Johnson Litigation

     On October 27, 2010, a complaint was filed against the Company in the United States District Court for the District of Maine, in a lawsuit captioned Johnson et al. v. VCG Holding Corp. The Company has not been formally served with the lawsuit, however, the Company, via its attorneys, has agreed to accept service of the complaint.

     The complaint was filed by two former employees of one of the Company’s subsidiaries, Kenkev II, Inc. d/b/a PT’s^® Showclub Portland, Maine who allege that the Company misclassified them as tipped minimum wage employees while employed by the Company as disk jockeys and, as a result, failed to pay all wages due to them under applicable law. The action is plead as a class action and seeks to certify a class action on behalf of all similarly situated employees who are employed by the Company nationwide. In addition, the two named plaintiffs allege that the Company failed to pay them all wages required to be paid to them under Maine law.

     The Company intends to deny all liability in this matter; however, this matter is in its earliest stages and the Company’s ultimate liability cannot be predicted at this time. Discovery has just commenced and no evaluation can be made as the merits of this claim. As such, the Company has not accrued anything related to this action.

Louisville Ordinance Litigation

     In 2004, Kentucky Restaurant Concepts, Inc. d/b/a PT’s^® Showclub (“KRC”) filed suit in the Jefferson County Circuit Court challenging a recently enacted adult regulatory ordinance which would impose significant restrictions on adult entertainment in Jefferson County, Kentucky. The suit challenged the legality, under the Kentucky State Constitution, of certain restrictions that Jefferson County was seeking to impose on adult businesses, such as a substantial restriction on hours of operation, a prohibition on the sale of alcohol by adult entertainment establishments, and other similar restrictions, which in the view of management would likely result in decreased revenues. Initially a temporary injunction was issued prohibiting enforcement of the ordinance during the litigation. After substantial litigation, the Jefferson County Circuit Court upheld the constitutionality of the ordinance, but granted a stay on its implementation pending appeal. KRC along with other co-appellants appealed the order to the Kentucky Court of Appeal who affirmed the constitutionality of the ordinance. Thereafter, KRC and others appealed the decision to the Kentucky Supreme Court which held oral argument on the appeal in 2009. On April 22, 2010, the Kentucky Supreme Court affirmed in part, reversed in part and remanded the case to the lower court. The Kentucky Supreme Court’s ruling upheld the constitutionality of a majority of the restrictions. KRC and others have appealed the Kentucky Supreme Court’s decision to the United States Supreme Court, which declined to hear the appeal during March 2011.

     In addition to the matters described above, the Company is involved in various other legal proceedings that arise in the ordinary course of business. The Company believes that any adverse or positive outcome of any of these proceedings will not have a material effect on the consolidated operations of the Company.

Item 4. (Remove and Reserved)

PART II

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   Market Information

     The Company’s Common Stock, $0.0001 par value per share, is currently traded on the NASDAQ Global Market under the symbol “VCGH.” The market for our Common Stock is limited and volatile.

     The following table sets forth the range of high and low bid prices for our Common Stock for each quarterly period indicated, as reported on the NASDAQ Global Market:

		2010								2009
Three Months Ended		High				Low				High				Low
March 31		$	2.92			$	2.05			$	1.85			$	1.27
June 30		$	2.38			$	1.53			$	2.79			$	1.38
September 30		$	2.19			$	1.56			$	2.30			$	1.90
December 31		$	2.22			$	1.78			$	2.31			$	1.62

     The high and low bid prices per share as reported on the NASDAQ Global Market on March 28, 2011, were $2.23 and $2.20, respectively.

   Holders

     As of March 29, 2011, there were approximately 184 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

     As previously announced, the Company’s board of directors adopted a stock repurchase program on July 26, 2007 pursuant to which the Company may repurchase up to the lesser of (a) 1,600,000 shares of its Common Stock or (b) an aggregate of $10,000,000 of Common Stock (the “Repurchase Program”). On September 29, 2008, the Company’s board of directors authorized the Company’s executive committee to repurchase, in its discretion, up to an additional aggregate of $1,000,000 of Common Stock pursuant to the Repurchase Program. On January 9, 2009, the Company’s board of directors authorized the Company’s executive committee to repurchase, in its discretion, up to an additional aggregate of $1,000,000 of Common Stock pursuant to the Repurchase Program. Further, on April 30, 2010 the Company’s board of directors authorized the Company’s executive committee to repurchase, in its discretion, up to an additional aggregate of $1,000,000 of Common Stock pursuant to the Repurchase Program (for a total amount of $3,000,000 of authorized purchases under the Repurchase Program).

     During 2010, the Company repurchased an aggregate of 551,155 shares of Common Stock for an aggregate purchase price of $935,243. As a result, as of December 31, 2010, up to 240,439 shares of Common Stock or shares of Common Stock with an aggregate purchase price of approximately $7,118,000 (whichever is less) remain available for repurchase under the Repurchase Program. The Company’s executive committee has the authority to purchase shares of Common Stock with an aggregate purchase price of up to approximately $118,232 pursuant to the board of directors’ September 2008, January 2009 and April 2010 authorizations under the Repurchase Program. Due to the potential sale of the Company (see Note 14 of the Notes to Consolidated Financial Statements under “Potential Sale of Company”) on July 21, 2010, the Company’s board of directors terminated its 10b5-1 plan and discontinued buying stock.

Item 6. Selected Financial Data

     The following table sets forth certain of the Company’s historical financial data. The selected historical consolidated financial data for the years ended December 31, 2010 and 2009 have been derived from the Company’s audited Consolidated Financial Statements and the related notes included elsewhere herein. The selected historical consolidated financial data for the years ended December 31, 2008, 2007, and 2006 have been derived from the Company’s audited financial statements for such years, which are not included in this Annual Report on Form 10-K. The selected historical consolidated financial data set forth are not necessarily indicative of the results of future operations and should be read in conjunction with the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the historical Consolidated Financial Statements and accompanying notes included herein. The historical results are not necessarily indicative of the results to be expected in any future period.

     Please read the following selected consolidated financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and the related notes appearing elsewhere in this Annual Report on Form 10-K for a discussion of information that will enhance understanding of this data.

	Year Ended December 31,
	2010				2009				2008				2007				2006
Statements of Income Data:													(Restated)
Total Revenue	$	55,269,961		(6)	$	53,201,905			$	55,563,227		(3)	$	38,743,730		(2)	$	16,114,581		(1)
Income (loss) From Continuing Operations, net of Income Taxes	$	2,004,049			$	1,081,676		(5)	$	(28,799,586)		(4)	$	5,403,274			$	1,619,687
Basic Income (loss) from continuing operations per common share attributable to VCG stockholders	$	0.12			$	0.06			$	(1.61	)		$	0.33			$	0.18
Fully diluted income (loss) from continuing operations per common share attributable to VCG stockholders	$	0.12			$	0.06			$	(1.59	)		$	0.32			$	0.17
Weighted average shares outstanding		16,805,951				17,541,376				17,925,132				16,623,213				9,128,985
Fully diluted weighted average shares outstanding		16,805,951				17,541,376				18,146,949				17,012,983				9,338,570
Balance Sheet Data (At End of Period):
Total Assets	$	66,887,112			$	71,151,173			$	75,626,043			$	103,719,255			$	35,079,698
Current portion of notes and other obligations	$	10,350,988			$	3,867,344			$	3,636,000			$	9,343,029			$	2,761,197
Long-term notes and other obligations, net of current portion	$	14,571,722			$	26,880,039			$	32,840,320			$	21,505,497			$	17,230,560
Total Stockholders’ Equity	$	28,867,983			$	28,482,530			$	28,386,742			$	53,987,842			$	12,795,623

Discontinued Operations

     On July 16, 2010, VCG completed the sale of substantially all of the assets of Golden Productions JGC Fort Worth, LLC (“Golden”), consisting of the nightclub Jaguar’s Gold Club in Ft. Worth, Texas. The results of operations for this nightclub have been reclassified as discontinued operations in the statements of income for the periods presented during which VCG owned the nightclub, September 2007 to July 2010.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, 2010, the Company, through its subsidiaries, owns and operates 19 nightclubs in Indiana, Illinois, Colorado, Texas, North Carolina, Minnesota, Kentucky, Maine, Florida, and California. The Company operates in one reportable segment.

Critical Accounting Estimates

     The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes, Note 2. Summary of significant accounting policies, to the Consolidated Financial Statements describes the significant accounting policies and methods used in preparation of the Consolidated Financial Statements. The accounting positions described below are significantly affected by critical accounting estimates. Such accounting positions require significant judgments, assumptions, and estimates to be used in the preparation of the Consolidated Financial Statements, and actual results could differ materially from the amounts reported based on variability in factors affecting these estimates.

     Our management has discussed the development and selection of these critical accounting estimates with the audit committee of our board of directors, and the audit committee has reviewed our disclosures to it in this Management’s Discussion and Analysis.

Assignment of Fair Values upon Acquisition of Licenses, Goodwill and Other Intangibles

     In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”), and ASC Topic 350, Intangibles - Goodwill and Other (“ASC 350”), when the Company acquires a nightclub, we assign fair values to all identifiable assets and liabilities, including intangible assets such as licenses, goodwill, identifiable trade names, and covenants not to compete. We also determine the useful life for the amortizable identifiable intangible assets acquired. These determinations require significant judgment, estimates, and projections. The remainder of the purchased cost of the acquired nightclub that is not assigned to identifiable assets or liabilities is then recorded as goodwill. As a result of our acquisitions, each nightclub has recorded a significant amount of intangibles, including licenses and goodwill. The Company has not had an acquisition since July 2008.

     The assumptions and estimates used in determining the current value of a nightclub includes operating cash flows, market and market share, sales volume, prices, and working capital changes. Historical experience and any other available information is also used at the time that the fair value of the nightclub is estimated.

     In estimating the fair values of our nightclubs, we used a combination of the income approach and the market-based approach. The income approach is a valuation technique, which involves discounting estimated future cash flows of each nightclub to their present value to calculate fair value. The discount rate used varies by nightclub and represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in our operations and cash flows. To estimate future cash flows, we applied a multiple to EBITDA. The market-based approach uses a comparable public company, and then compares specific parts of our operations such as rent expense.

Testing for Impairment of Intangible Assets

     ASC Topic 350 requires an annual reassessment of the carrying value of indefinite lived assets at the reporting unit or nightclub level, or even more frequently, if certain circumstances occur, for impairment of that value. The evaluation of impairment involves comparing the current fair value of the reporting units to the recorded value. If the recorded value of a nightclub exceeds its current fair value, then an impairment loss is recognized to the extent that the book value of the intangible assets exceeds the implied fair value of the nightclub’s intangible assets. Accordingly, the fair value of a reporting unit is allocated to all of the assets and liabilities of that nightclub, including any unrecognized intangible assets and the excess becomes the implied value of the goodwill. This is done in relation to the nightclub’s respective forecasted cash flows and other relevant assumptions.

     In performing the Company’s annual impairment assessment at December 31, 2010 in accordance with ASC Topic 350, the Company determined that no impairment had occurred. In 2009, 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 for 2009 was approximately $1,758,000.

     The fair value of the licenses, trade names, and reporting units was based on significant unobservable inputs (level 3) using estimated discounted future net cash flows at the nightclub level. We computed an estimate of our company-wide weighted average cost of capital of 13.0% and 12.0% for 2010 and 2009, respectively. 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, 2010.

Stock Options

     In 2007 and 2008, the Company issued stock option grants to key employees and officers. The 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, 2010 and March 29, 2011.

     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 2010, the only estimate which affected the 2010 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 and to 40% during 2010 based upon actual forfeitures. This resulted in a reduction of stock-based compensation expense of $72,922 for 2010.

     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.

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.

DOL Audit

     In October 2008, PT’s^® Showclub in Louisville, KY was required to conduct a self-audit of employee payroll by the DOL. After an extensive self-audit, the DOL required that the Club issue back pay and refund uniform expenses to qualified employees at a total cost of $14,439.

     In March 2009, VCG was placed under a similar nationwide DOL audit for all nightclub locations and its corporate office. All locations completed the self-audit in August 2009 and are currently working with the DOL to determine what, if any, violations may have occurred. This case is still in the investigatory state and no final determination can be made at this time of an unfavorable outcome or any potential liability. The Company has accrued $200,000 as of December 31, 2009 for potential wage/hour violations; however this estimate involves significant judgment and the actual liability may vary materially from this estimate. The Company expects a final resolution in the second quarter of 2011. 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 $112,000 accrued liability as of December 31, 2010.

Income Taxes

     We are subject to income taxes 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, 2010, we have an estimated tax net operating loss carry-forward of approximately $2,329,000 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 2011. 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.

     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 2010 permanent differences of approximately $358,000 (tax effected) and tax credits generated of approximately $590,000.

     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, 2010, the current portion of the deferred income tax asset was determined to be $837,628 attributable to the Company’s partially self-insured health insurance reserve and indemnification claim accrual and the $2,464,817 non-current deferred income tax asset attributable to other temporary differences.

Recently Issued Accounting Pronouncements

     In September 2010, the SEC issued Release 33-9142 which amended the SEC’s rules and forms to remove the requirement for issuers that are neither accelerated filers nor large accelerated filers to obtain an auditor attestation report on internal control over financial reporting. Therefore, smaller reporting companies such as VCG will not need their auditors to test internal controls; however, management will still need to do its assessment for the year ended December 31, 2010. Although VCG obtained an audit opinion on the Company’s internal controls over financial reporting for the year ended December 31, 2009, we did not obtain an opinion on the Company’s internal controls over financial reporting for the year ended December 31, 2010 due to this change in the requirement.

     In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements. This update provides amendment to the codification regarding the disclosures required for fair value measurements. The key amendments include: (a) a requirement to disclose transfer in and out of Level 1 and 2; (b) activity in Level 3 should show information about purchases, sales, settlements, etc. on a gross basis rather than as net basis; and (c) additional disclosures about inputs and valuation techniques. The new disclosure requirements are effective for periods beginning after December 31, 2009, except for the gross disclosures of purchases, etc. which is effective for periods beginning after December 15, 2010. The Company adopted this update on January 1, 2010, and it did not have a significant impact on the Consolidated Financial Statements.

     In January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810) — Accounting and Reporting for Decreases in Ownership of a Subsidiary — a Scope Clarification. This update provides clarification about Topic 810 (previously Statement of Accounting Standards (“SFAS”) No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51) and clarifies that the de-recognition provisions of Topic 810 apply to (a) a subsidiary or group of assets that is a business or nonprofit activity; (b) a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture; and (c) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity. This update is effective for the first reporting period beginning after December 15, 2009. The Company adopted this update effective January 1, 2010, and it did not have a significant impact on the Consolidated Financial Statements.

     In December 2009, the FASB issued ASU 2009-17, Consolidation (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This update amends Topic 810 and is a result of SFAS No. 166, Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140. This standard did not have a significant impact on the Consolidated Financial Statements when it was adopted on January 1, 2010.

     Management has reviewed and continues to monitor the pronouncements of the various financial and regulatory agencies and is currently not aware of any other pronouncements that could have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

Results of Operations

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Revenues

     The Company’s revenue from nightclubs is comprised of funds received from the sale of alcoholic beverages, food, merchandise, service revenue and other income. The Company recognizes revenue at point-of-sale (“POS”) upon the receipt of cash or charge card.

     Total revenue, net of sales taxes, increased from approximately $53,202,000 for the year ended December 31, 2009 to approximately $55,270,000 for the same period in 2010. The increase in revenue of approximately $2,068,000 or 3.9% was primarily due to the increase in service revenue. The Company experienced a decrease in sales of alcoholic beverages of approximately $1.8 million or 7.9% for the year ended December 31, 2010 compared to the same period in 2009. This decrease was due to a change in spending habits of the patrons. Service revenue increased by approximately $3,617,000 or 14.1%. Service revenue includes entertainer payments to perform at the nightclubs, customer admission fees, customer payments for tabs, dance dollar payments and suite rentals. The Company’s “A” type nightclubs had an increase in total revenue of approximately $1,254,000 or 6.3%, when compared to the same period in 2009. The Company’s “B” type nightclubs had an increase in total revenue of approximately $832,000 or 3.3%, when compared to the same period in 2009. The Company’s “C” type nightclubs had a slight decrease in total revenue of approximately $30,000 or 0.4%.

Cost of Goods Sold

     Costs of goods sold, comprised of food, alcohol and merchandise expenses, are variable and generally fluctuate with sales. For the year ended December 31, 2010, cost of goods sold as a percentage of related revenue was 26.1% compared to 23.8% for the same period in 2009. Prior to 2009, VCG had subleased the kitchen and outsourced the food service to experienced chefs (“food vendors”) at four of our five “A” type nightclubs (the fifth nightclub continues to run the kitchen and account for all food costs). This arrangement provides better food service to customers with no risk of loss to VCG. Since the installations of the POS systems in our nightclubs between October 2009 and February 2010, the food vendors elected to use our POS systems to facilitate credit card processing, whereas before, the food revenue and related costs were being handled separately by the food vendors. VCG pays the food revenue, net of any out of pocket costs to the vendor. The new arrangement still represents a breakeven food operation for VCG; however, now food sales and cost of sales are being recorded by VCG. The outsourced food revenue is reduced by appropriate sales taxes, credit card fees and other directly related charges. The cost of food and preparation materials is reported under cost of goods sold. Other ancillary costs associated with running a restaurant, such as wait-staff payroll, restaurant supplies and licenses, are paid directly by the food vendors out of the net sales proceeds.

     The following table is a comparison of our cost of goods sold and its percentage relative to revenue for our “A” nightclubs that have subleased restaurants and relative to all other nightclubs that do not operate restaurants.

		For the Years Ended
		December 31,
		2010												2009
		Total				“A” Clubs				All Other Clubs				Total				“A” Clubs				All Other Clubs
Sales of alcoholic beverages		$	21,009,283			$	8,221,697			$	12,787,586			$	22,808,436			$	9,007,272			$	13,801,164
Sales of food and merchandise			2,006,147				1,063,242				942,905				1,844,738				985,511				859,227
Total		$	23,015,430			$	9,284,939			$	13,730,491			$	24,653,174			$	9,992,783			$	14,660,391
Cost of goods sold		$	5,999,135			$	2,637,439			$	3,361,696			$	5,877,337			$	2,484,045			$	3,393,292
Cost of goods sold percentage			26.1%				28.4%				24.5%				23.8%				24.9%				23.1%

     In the table above you will notice when “A” nightclub restaurants cost of goods sold data is excluded from the total, the cost of goods sold percentage relative to revenues for all other nightclubs drops to 24.5% for the year ended December 31, 2010. The increase of cost of goods sold to revenue percentage relative to revenues for all other nightclubs is 1.4%, calculated by comparing 24.5% to 23.1% for the year ended December 31, 2010 and 2009, respectively.

Salaries and Wages

     Salaries and wages include hourly wages, management salaries and bonuses. For the year ended December 31, 2010, salaries and wages increased by approximately $1.7 million or 12.5%, compared to the same period in 2009. This increase was due to the additional commission paid to TLC employees, which corresponds to an increase in service revenue, increased supervisor salaries, the fee structure used to compensate entertainers in Minnesota and a severance payment made to a departing executive officer.

     The following is a comparison of salaries and wages for the year ended December 31, 2010 and 2009, respectively, showing the percentages of salaries and wages expenses compared to total revenue:

		For the Years Ended
		December 31,
		2010				2009
Salaries and wages		$	15,615,313			$	13,874,720
As a percentage of revenue			28.3	%			26.1	%

Other General and Administrative Expenses

Taxes, Permits, and Licenses

     This category includes employment taxes, costs associated with business licenses and permits, real and personal property taxes and the Texas Patron Tax.

     The following table shows the breakdown of the amounts paid for taxes, permits and licenses for the year ended December 31, 2010 and 2009, respectively.

		For the Years Ended
		December 31,
		2010				2009
Employment Taxes		$	1,901,069			$	2,187,151
Business License			392,392				250,225
Property Taxes			155,816				167,643
Texas Patron Tax Expense			623,491				645,157
		$	3,072,768			$	3,250,176

     Employment taxes are based on wages plus reported tips. Employment taxes decreased by approximately $286,000 or 13.1% for the year ended December 31, 2010, compared to the same period in 2009. The decrease is a result of having accrued the liability for an Internal Revenue Service (“IRS”) tip audit in 2009 of approximately $206,000. In addition, there was a decrease in reported tips corresponding to the decrease in the sales of alcoholic beverages resulting in a decrease of employment taxes of approximately $80,000.

     Business licenses expense includes costs of maintaining liquor, cabaret and other general business licenses. The business licenses expense increased by approximately $142,000 or 56.8% for the year ended December 31, 2010, compared to the same period 2009. This increase is attributable to the Texas Sales Tax Audit of Manana further discussed in Note 12 of the Notes to the Consolidated Financial Statements under “Commitments and Contingent Liabilities.” The audit is complete; however, the Company is disputing certain of the audit results. The Company has expensed approximately $115,000 during 2010.

     The Company pays real and personal property taxes on all the nightclubs the Company operates. Property taxes decreased by approximately $22,000 or 3.4% for the year ended December 31, 2010, compared to the same period in 2009. The decrease resulted from a slight increase in the property taxes on most of our nightclubs in 2010, which was offset by the sale of the Arizona property in 2009 resulting in a decrease of approximately $33,000.

     The Company continues to accrue the Texas Patron Tax and to file quarterly returns, under protest, with the State of Texas as discussed in Note 12 of the Notes to the Consolidated Financial Statements under “Commitments and Contingent Liabilities.”

Charge Card and Bank Fees

     Credit card and bank fees include chargebacks to the Company. The credit card and bank fees decreased by approximately $51,000 or 6.4% for the year ended December 31, 2010, compared to the same period in 2009. The decrease is a result of decreased use of credit cards at most of our nightclubs and the Company’s purchase of the ATM machine located in our California nightclub, thereby no longer paying fees to a third party for its maintenance, and improved procedures in processing and protesting customer chargebacks.

Rent

     Rent expense includes rent payments to landlords, deferred rent recorded per Accounting Codification 840-10 and 840-20 and the amortization of leasehold rights and liabilities. For the year ended December 31, 2010, rent expense increased by approximately $245,000 or 4.4% compared to the same period in 2009. The increase is attributable to normal rent increases, including rent increases where rent is based on a percentage of sales.

Legal Fees

     Legal fees decreased by approximately $16,000 or 1.1% for the year ended December 31, 2010, compared to the same period in 2009. This decrease is primarily the result of the settlement of the Classic Affairs (the entity that operates Schiek’s Palace Royale in Minneapolis, Minnesota) lawsuit which was ultimately dismissed, with prejudice, in the fourth quarter of 2009 and was offset by legal fees related to Thee Dollhouse vs. Regale litigation, also known as the Acquisition Indemnification Claim (see Note 12 of the Notes to Consolidated Financial Statements under “Commitments and Contingent Liabilities”) and the costs related to the internal inquiry into our controls and procedures.

Other Professional Fees

     Other professional fees include charges for accounting, tax and Sarbanes-Oxley Act consultants, appraisals and license valuations, broker commissions for renting Company real estate, lobbying fees, environmental assessments, and accounting costs allocated to individual nightclubs by the Company. For the year ended December 31, 2010, other professional fees decreased by approximately $229,000 or 8.8%, compared to the same period in 2009. This decrease is attributable to fees paid to a consultant for valuations, using consultants to implement Section 404 of the Sarbanes-Oxley Act of 2002 and to assist with the 2007 restatement of financial reports during 2009, as well as the cost of tax consultants to amend prior years’ tax returns during 2009, which professional fees were incurred in 2009 and not in 2010.

Advisory Fees Related to Change in Control Proposals

     These costs represent the expenses of the Special Committee of the board of directors (the “Special Committee”), including costs billed by the Special Committee’s legal counsel, legal costs incurred by the Company in relation to both the Going Private Transaction and the proposed merger with Rick’s Cabaret International, Inc. (“Rick’s”), costs billed and accrued from the financial advisor of the Special Committee, the compensation of the Special Committee and other fees associated with the Rick’s transaction and the Going Private Transaction. For the year ended December 31, 2010, advisory fees related to the change in control proposals decreased by approximately $546,000 or 57.0% compared to the same period in 2009. Certain of the work performed to evaluate the two competing offers for the Company during 2009 was non-recurring during 2010.

Advertising and Marketing

     Advertising and marketing expenses increased by approximately $145,000 or 5.5% for the year ended December 31, 2010, compared to the same period in 2009. This increase is due in part to supplemental advertising at the Anaheim nightclub to promote the newly remodeled area. The remainder of the increase corresponds with the increase in gross revenue. Management uses a metric of between 4% and 5% of revenue for advertising expenses. Advertising and marketing expenses were approximately 5.0% of total revenues in 2010 and 4.9% in 2009.

Insurance

     Insurance costs include the cost of worker’s compensation, health, general liability, employee life, property and long-term care insurance. For the year ended December 31, 2010, insurance costs increased by approximately $179,000 or 11.2% compared to the same period in 2009. This increase is due to increased health insurance premiums and premium increases for worker’s compensation insurance due to the Company’s increase in salaries and wages.

Repairs and Maintenance

     Repairs and maintenance expense decreased by approximately $124,000 or 10.1% for the year ended December 31, 2010, compared to the same period in 2009. The decrease is due to fewer nightclubs needing to be painted and fewer repairs to equipment, than were done in 2009.

Other Expenses

     Other general and administrative expense includes common office and nightclub expenses such as janitorial, supplies, security, employee and investor relations, education and training, travel and automobile, telephone and internet expenses. For the year ended December 31, 2010, other expenses decreased approximately $89,000 or 0.4%. This decrease is attributable to decreases in security, travel and supplies expenses, offset by increases in employee education and IT expense.

Depreciation and Amortization

     Depreciation and amortization expense increased by approximately $92,000 or 5.8% for the year ended December 31, 2010, compared to the same period in 2009. This increase was a result of the installation of the POS systems at our nightclubs and other fixed assets acquired, including four vehicles.

Interest Expense

     Total interest expense decreased by approximately $639,000 or 18.5% for the year ended December 31, 2010, compared to the same period in 2009. The interest expense decrease is due to repayment of debt of $5,800,000.

Gain (Loss) on Sale of Assets

     For the year ended December 31, 2010, there was a gain on the sale of assets of $968. 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 nightclubs.

Income Taxes

     For 2010, the current income tax expense for continuing operations of approximately $171,000 represents state income tax expense for taxes payable for those states which do not allow consolidated tax filings, as well as minimum taxes due in various states. There is no federal income tax owed for 2010 since approximately $227,000 of the tax net operating loss carry forward was utilized.

     For 2009, the current income tax benefit for continuing operations of approximately $134,000 represents the net of a federal benefit of approximately $274,000 offset by state income tax expense of $140,000. 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 income tax expense for continuing operations in 2010 totaled approximately $579,000 as compared to deferred income tax expense for continuing operations of $436,000 for 2009.

Liquidity

     The amount of cash flow generated and the working capital needs of nightclub operations do not materially fluctuate and are 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 nightclubs and repairs and maintenance.

     The Company has access to a revolving line of credit with Citywide Banks and as of December 31, 2010, we had approximately $1,650,000 in borrowing availability under this line of credit. In August 2010, the Company extended the maturity date of the revolving line of credit from August 2011 to August 2012. All other terms of the line of credit remained unchanged. The terms of the revolving line of credit require the Company to have a net cash flow-to-debt service ratio greater than or equal to 1.2 to 1.0, calculated quarterly. At December 31, 2010, the Company met the covenant ratio required.

     On July 16, 2010, the Company sold the building in which the Ft. Worth Club is located and all assets associated with the nightclub as more fully described in Note 4 of the Notes to the Consolidated Financial Statements under “Discontinued Operations.” The purchase price paid at closing consisted of $1,000,000 in cash and 467,497 shares of Common Stock, held by the purchaser. The $1,000,000 in cash was used to prepay the 14% note payable to Sunshine Mortgage and the 467,497 shares of Common Stock were cancelled.

     During the three months and year ended December 31, 2010, the Company continued to be focused on using free cash flow to reduce debt and repurchase Common Stock. The Company is in the process of negotiating extensions on long-term debt which will be maturing during the coming year. As of December 31, 2010, debt was approximately $24,923,000, which is approximately $5,825,000 less than the total debt at December 31, 2009.

Working Capital

     At December 31, 2010 and 2009, the Company had cash of approximately $2,654,000 and $2,677,000, respectively. Our total current assets as of December 31, 2010 and 2009 were approximately $5,064,000 and $7,398,000, respectively. Current liabilities totaled approximately $16,674,000 at December 31, 2010 and $9,432,000 at December 31, 2009. The Company’s current liabilities exceed its current assets resulting in a negative working capital of approximately $11,610,000 at December 31, 2010 and approximately $2,034,000 at December 31, 2009. The working capital deficit increased by approximately $9,576,000 during 2010. This increase is primarily due to the amount of debt that has maturity dates in 2011 and the 2010 accrual of the Acquisition Indemnification Claim of $2,134,866.

     Of the current liabilities at December 31, 2010, none is due to Lowrie Management LLLP. A total of approximately $7,080,000 of current liabilities are guaranteed by Mr. Lowrie and secured by his personal assets. At December 31, 2010, the Company had $1,650,000 of available and unused funding on its revolving line of credit with one bank. The Going Private Transaction has 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 2012 to 2014.

     Net cash provided by operating activities was approximately $7,802,000 for the year ended December 31, 2010 compared to approximately $7,081,000 for the same period in 2009. Changes in operating assets and liabilities generated $3,460,000 cash during 2010, an increase of $2,400,000 over 2009, which was primarily attributable to the 2010 accrual of the $2,100,000 million Acquisition Indemnification Claim.

     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. Our working capital requirement for working capital is not significant since we receive payment for food and beverage purchases in cash and credit cards at the time of sale. We receive the cash revenue before we are required to pay our suppliers for these purchases.

     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 Going Private Transaction 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 approximately $28,868,000 at December 31, 2010 and approximately $28,483,000 at December 31, 2009. The increase of $385,000 in stockholders’ equity is attributable to net income of approximately $2,048,000, offset by the stock buybacks of approximately $1,730,000 during the year and the expense for stock options of approximately $73,000 for the year ended December 31, 2010.

     Net cash used by investing activities totaled approximately $178,000 and $1.2 million for the years ended December 31, 2010 and 2009, respectively. The Company purchased $1,200,000 of property and equipment during 2010, mostly in nightclub remodels and the POS systems. Capital expenditures during 2010 were approximately $254,000 lower than in 2009. The sale of the Ft. Worth nightclub and related assets generated $1,000,000 cash proceeds, which was used to prepay the 14% note payable to Sunshine Mortgage.

     Net cash used by financing activities was approximately $7,647,000 for 2010. We received $300,000 in proceeds from new debt, and paid off approximately $6,484,000 of debt in 2010. We repurchased approximately $935,000 of Common Stock, which was immediately cancelled according to Colorado state law. During 2010, we paid approximately $40,000 in loan fees, compared to approximately $79,000 paid to lenders in 2009.

     The following table reconciles net income to EBITDA for the periods ended December 31, 2010 and 2009 and includes amounts related to discontinued operations. EBITDA is normally a presentation of “earnings before interest, taxes, depreciation and amortization.” EBITDA is a non-U.S. 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-U.S. GAAP, EBITDA should not be considered an alternative to operating or net income in measuring company results.

		For The Year Ended
		December 31,
		2010				2009
Net Income attributable to VCG stockholders		$	2,048,049			$	735,691
Add back:
Depreciation			1,737,248				1,695,277
Amortization of non-compete agreements			14,518				17,035
Amortization of leasehold rights and liabilities, net			(178,102	)			(212,342	)
Interest expense			2,818,010				3,456,616
Total income tax expense			944,345				339,000
EBITDA before non-cash impairment charges		$	7,384,068			$	6,031,277
Add back:
Total non-cash impairment charges			-				2,026,000
Total excluding non-cash impairment charges		$	7,384,068			$	8,057,277
Total revenue (excluding discontinued operations)		$	55,269,961			$	53,201,905
EBITDA as a percentage of revenue			13.4%				15.1%

     Another non-U.S. GAAP financial measurement used by the investment community is free cash flow. The following table calculates free cash flow for the Company for the periods ended December 31, 2010 and 2009. We use free cash flow calculations as one method of cash management to anticipate available cash, but caution investors that this free cash flow calculation may not be comparable to similarly titled calculations reported by other companies. Because this is a non-U.S. GAAP measure, free cash flow should not be considered as an alternative to the Consolidated Statement of Cash Flows.

		For The Year Ended
		December 31,
		2010				2009
EBITDA (excluding non-cash impairment charges)		$	7,384,068			$	8,057,277
Less:
Interest expense			2,818,010				3,456,616
Current income tax			179,803				(126,896	)
Capital expenditures			1,200,772				1,454,478
Free Cash Flow		$	3,185,483			$	3,273,079

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, 2010.

		Total				2011				2012				2013				2014				2015				Thereafter
Long-term debt and capital leases		$	24,922,709			$	10,350,988			$	10,293,290			$	2,848,352			$	1,278,040			$	40,993			$	111,046
Interest payments			3,399,479				2,150,173				920,328				243,138				51,185				12,842				21,813
Operating leases			98,265,853				3,659,037				3,737,601				3,792,958				3,840,618				3,810,090				79,425,549

Potential Sale of the Company

     On November 9, 2010, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Family Dog, LLC (“Parent”), FD Acquisition Co. (“Merger Sub”), the Company’s Chairman of the Board and Chief Executive Officer, Troy Lowrie, and the Company’s President and Chief Operating Officer, Micheal Ocello. Under the terms of the Merger Agreement, Merger Sub will be merged with and into the Company, with the Company continuing as the surviving corporation and becoming a wholly-owned subsidiary of Parent (the “Merger”). Parent and Merger Sub are currently owned and controlled by Mr. Lowrie.

     Pursuant to the Merger Agreement, as of the effective time of the Going Private Transaction, each issued and outstanding share of the Company’s Common Stock, par value $0.0001 per share (collectively, the “Common Stock”), except for any shares of Common Stock held by Parent and Dissenting Shares (as such term is defined in the Merger Agreement) will be converted into the right to receive a cash payment in the amount of $2.25 per share, without interest (the “Going Private Consideration”).

     The Company’s board of directors (with Troy Lowrie abstaining from voting) unanimously approved the Going Private Transaction and the Merger Agreement following the unanimous recommendation of a special committee comprised entirely of independent members of the Company’s board of directors (the “Special Committee”). Before the Company’s board of directors unanimously approved the Going Private Transaction and the Merger Agreement, the Special Committee and the Company’s board of directors received an opinion from an independent financial advisor to the effect that, based on and subject to the various assumptions and qualifications set forth therein, as of the date of such opinion, the Going Private Transaction Consideration to be received by the Company’s stockholders in the Going Private Transaction is fair to such stockholders from a financial perspective. On March 1, 2011, the independent financial advisor delivered a supplemental opinion letter to the Special Committee confirming its prior conclusion regarding the fairness of the Going Private Transaction consideration after taking into account developments since November 9, 2010.

     The transaction is expected to close in the second quarter of 2011. Upon the closing of the Going Private Transaction, the Company’s Common Stock will no longer be traded on the NASDAQ Global Stock Market and the Company will cease reporting to the U.S. Securities and Exchange Commission.

     On March 18, 2011, the Company filed its definitive proxy statement for the to-be-held special meeting of the Company’s stockholders at which the stockholders will consider and vote on approval of the Going Private Transaction and an accompanying Transaction Statement on Schedule 13E-3. The terms of the Going Private Transaction and the Merger Agreement are more fully set forth in the Company’s Current Report on Form 8-K filed on November 10, 2010, proxy statement and Schedule 13E-3. The Company cautions investors that no assurance can be given that the Going Private Transaction will be consummated.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

     Not applicable to smaller reporting companies.

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 sheet of VCG Holding Corp. as of December 31, 2010, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year ended December 31, 2010. VCG Holding Corp.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.

     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes 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, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

     We were not engaged to examine management’s assertion about the effectiveness of VCG Holding Corp.’s internal control over financial reporting as of December 31, 2010 included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting and, accordingly we do not express an opinion thereon.

     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, 2010, and the consolidated results of its operations and its cash flows for the year ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.

     /s/ CAUSEY DEMGEN & MOORE INC.

     Denver, Colorado

     March 30, 2011

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 sheet of VCG Holding Corp. as of December 31, 2009, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year ended December 31, 2009. We also have audited VCG Holding Corp.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). VCG Holding Corp.’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting (Item 9A) Our responsibility is to express an opinion on these financial statements and an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit 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 audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Consolidated Financial Statements referred to above present fairly, in all material respects, the consolidated financial position of VCG Holding Corp. as of December 31, 2009, and the consolidated results of its operations and its cash flows for the year 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).

     CAUSEY DEMGEN & MOORE INC.

     Denver, Colorado

     March 12, 2010

VCG Holding Corp. Consolidated Balance Sheets

		December 31,
		2010				2009
Assets
Current Assets
Cash		$	2,653,878			$	2,677,440
Other receivables			198,035				254,333
Income taxes receivable			61,935				594,720
Inventories			855,419				920,192
Prepaid expenses			456,655				354,730
Current portion of deferred income tax asset			837,628				76,920
Assets of business held for sale			-				2,519,962
Total Current Assets			5,063,550				7,398,297
Property and equipment, net			20,742,386				21,016,179
Licenses, net			34,103,622				34,252,018
Goodwill, net			2,279,045				2,279,045
Trade names			452,000				452,000
Favorable lease rights, net			1,576,100				1,647,968
Non-compete agreements, net			8,000				22,000
Other long-term assets			197,592				241,993
Non-current portion of deferred income tax asset			2,464,817				3,841,673
Total Assets		$	66,887,112			$	71,151,173
Liabilities and Equity
Current Liabilities
Accounts payable — trade		$	1,362,430			$	1,750,940
Accrued expenses			4,576,654				1,930,049
Income taxes payable			27,395				67,917
Deferred revenue			139,851				110,010
Current portion of capitalized lease			16,664				-
Current portion of long-term debt			10,258,057				3,805,277
Current portion of long-term debt, related party			76,267				62,067
Current portion of unfavorable lease rights			217,116				217,116
Liabilities of business held for sale			-				1,488,157
Total Current Liabilities			16,674,434				9,431,533
Long-Term Liabilities
Deferred rent			2,154,158				1,521,140
Unfavorable lease rights, net of current portion			4,618,815				4,835,931
Capital lease, net of current portion			87,845				-
Long-term debt, net of current portion			7,439,373				19,751,021
Long-term debt, related party, net of current portion			7,044,504				7,129,018
Total Long-Term Liabilities			21,344,695				33,237,110
Commitments and Contingent Liabilities (Note 12)
Equity
Common stock $.0001 par value; 50,000,000 shares authorized;16,292,071 (2010) and 17,310,723 (2009) shares issued and outstanding			1,629				1,731
Additional paid-in capital			50,275,118				51,932,082
Accumulated deficit			(24,948,814	)			(26,996,863	)
Total VCG Stockholders’ Equity			25,327,933				24,936,950
Noncontrolling interests in consolidated partnerships			3,540,050				3,545,580
Total Equity			28,867,983				28,482,530
Total Liabilities and Equity		$	66,887,112			$	71,151,173

The accompanying notes are an integral part of the Consolidated Financial Statements.

VCG Holding Corp. Consolidated Statements of Income
For the years ended

		December 31,
		2010				2009
Revenue
Sales of alcoholic beverages		$	21,009,283			$	22,808,436
Sales of food and merchandise			2,006,147				1,844,738
Service revenue			29,176,688				25,560,047
Other income			3,077,843				2,988,684
Total Revenue			55,269,961				53,201,905
Operating Expenses
Cost of goods sold			5,999,135				5,877,337
Salaries and wages			15,615,313				13,874,720
Acquisition indemnification claim			2,134,866				-
Other general and administrative:
Taxes, permits and licenses			3,072,768				3,250,176
Charge card and bank fees			736,566				787,087
Rent			5,855,941				5,611,343
Legal fees			1,440,466				1,456,463
Other professional fees			2,385,983				2,614,981
Advisory fees related to change in control proposals			407,737				953,517
Advertising and marketing			2,772,839				2,627,948
Insurance			1,774,048				1,595,043
Utilities			982,760				971,962
Repairs and maintenance			1,105,656				1,229,399
Other			3,736,109				3,824,695
Impairment of building and land			-				268,000
Impairment of indefinite-lived intangible assets			-				1,741,000
Impairment of goodwill			-				17,000
Depreciation and amortization			1,685,610				1,593,655
Total Operating Expenses			49,705,797				48,294,326
Income from Operations			5,564,164				4,907,579
Other Income (Expenses)
Interest expense			(2,098,431	)			(2,746,503	)
Interest expense, related party			(719,579	)			(710,113	)
Interest income			6,927				7,382
Gain (loss) on sale of assets			968				(74,669	)
Total Other Expenses			(2,810,115	)			(3,523,903	)
Income Before Income Taxes			2,754,049				1,383,676
Income tax expense (benefit) — current			171,454				(133,808	)
Income tax expense — deferred			578,546				435,808
Total Income Tax Expense			750,000				302,000
Income From Continuing Operations, net of Income Taxes			2,004,049				1,081,676
Income From Discontinued Operations, net of Income Taxes			520,389				130,732
Profit of Consolidated and Affiliated Companies			2,524,438				1,212,408
Net Income Attributable to Noncontrolling Interests			(476,389	)			(476,717	)
Net Income Attributable to VCG		$	2,048,049			$	735,691
Earnings Per Share
Continuing Operations:
Basic and fully diluted income per share attributable to VCG’s stockholders		$	0.09			$	0.03
Discontinued Operations:
Basic and fully diluted earnings per share attributable to VCG’s stockholders		$	0.03			$	0.01
Net Income Attributable to VCG Stockholders:		$	0.12			$	0.04
Basic and fully diluted weighted average shares outstanding			16,805,951				17,541,376

The accompanying notes are an integral part of the Consolidated Financial Statements.

VCG Holding Corp. Consolidated Statements of Equity
For the years ended December 31, 2010 and 2009

																		Noncontrolling
										Additional								Interests in				Total
		Common Stock								Paid-in				Accumulated				Consolidated				Stockholders’
		Shares				Amount				Capital				Deficit				Partnerships				Equity
Balance, 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
Amortization of stock-based compensation			-				-				72,922				-				-				72,922
Repurchase of common stock			(551,155	)			(55	)			(935,188	)			-				-				(935,243	)
Common stock received as consideration for club sale			(467,497	)			(47	)			(794,698	)			-				-				(794,745	)
Net income for the year ended December 31, 2010			-				-				-				2,048,049				476,389				2,524,438
Distributions paid to noncontrolling interests			-				-				-				-				(481,919	)			(481,919	)
Balances, December 31, 2010			16,292,071			$	1,629			$	50,275,118			$	(24,948,814	)		$	3,540,050			$	28,867,983

The accompanying notes are an integral part of the Consolidated Financial Statements.

VCG Holding Corp. Consolidated Statements of Cash Flows
For the years ended

		December 31,
		2010				2009
Operating Activities
Profit of consolidated and affiliated companies		$	2,524,438			$	1,212,408
Adjustments to reconcile profit of consolidated and affiliated companies to net cash provided by operating activities:
Impairment of building and land			-				268,000
Impairment of goodwill			-				17,000
Impairment of indefinite lived intangible assets			-				1,741,000
Depreciation			1,737,248				1,695,277
Amortization of non-compete agreements			14,518				17,035
Amortization of leasehold rights and liabilities, net			(178,102	)			(212,342	)
Amortization of loan fees			65,661				216,205
Stock-based compensation expense			72,922				244,383
Deferred income taxes			764,543				465,896
(Gain) Loss on disposition of assets			(817,002	)			74,669
Accrued interest added to long-term debt			160,605				243,901
Write-off uncollectible deposits			-				7,151
Changes in operating assets and liabilities:
Income taxes and other receivables			589,082				(287,894	)
Inventories			60,322				22,767
Prepaid expenses			(101,925	)			(72,245	)
Accounts payable — trade and accrued expenses			2,258,095				576,380
Income taxes payable			(40,522	)			67,917
Deferred revenue			9,841				555
Deferred rent			661,969				783,165
Net cash provided by operating activities			7,781,693				7,081,228
Investing Activities
Proceeds from divestiture of a club			1,000,000				-
Additions to property and equipment			(1,200,772	)			(1,454,478	)
Deposits			18,740				(19,444	)
Proceeds from sale of assets			4,200				238,241
Net cash used in investing activities			(177,832	)			(1,235,681	)
Financing Activities
Proceeds from debt			100,000				1,212,115
Payments on debt			(5,757,891	)			(4,152,700	)
Proceeds from related party debt			200,000				25,099
Payments on related party debt			(355,958	)			(912,843	)
Net borrowing (payments) on revolving line of credit			(370,000	)			(90,000	)
Payment on capitalized leases			(6,412	)			(19,111	)
Loan fees paid			(40,000	)			(78,724	)
Repurchase of stock			(935,243	)			(869,392	)
Distributions to noncontrolling interests			(481,919	)			(491,611	)
Net cash used in financing activities			(7,647,423	)			(5,377,167	)
Net increase (decrease) in cash			(43,562	)			468,380
Cash beginning of period			2,677,440				2,209,060
Cash end of period		$	2,633,878			$	2,677,440
Supplemental cash flow information:
Income taxes paid in cash		$	319,788			$	225,972
Interest paid in cash		$	2,529,453			$	3,067,195
Non-cash divestiture activities:
Common stock received as partial consideration for Golden		$	794,745
Fair value of liabilities transferred to buyer						$	1,771,854
Issuance of note receivable to buyer						$	322,963
Non-cash investing and financing activities:
Acquisition of vehicles through capital leases and loans		$	204,984

The accompanying notes are an integral part of the Consolidated Financial Statements.

VCG Holding Corp.

Notes to Consolidated Financial Statements

Index

Note
1.		Description of Business		45
2.		Summary of Significant Accounting Policies		45
3.		Inventories		49
4.		Discontinued Operations		50
5.		Property and Equipment		51
6.		Goodwill and Other Intangible Assets		51
7.		Other Long-Term Assets		52
8.		Accrued Expenses		52
9.		Long-Term Debt		53
10.		Income Taxes		55
11.		Stockholders’ Equity		56
12.		Commitments and Contingencies		58
13.		Fair Value Disclosure		64
14.		Potential Sale of the Company		65
15.		Subsequent Events		65

VCG Holding Corp.
Notes to Consolidated Financial Statements

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, 2010, the Company, through its subsidiaries, owns and operates 19 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, its wholly-owned and majority-owned subsidiaries, and a consolidated variable interest entity. All significant inter-company balances and transactions are eliminated in the Consolidated Financial Statements.

Use of Estimates

     The preparation of financial statements in conformity with principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period and certain financial statement disclosures. As discussed below, the Company’s most significant estimates include those made in connection with the valuation of property and equipment, intangible assets, goodwill, and the accrual of certain liabilities. Actual results could differ materially from these estimates.

Cash

     Substantially all of the Company’s cash is held by one bank located in Colorado. The Company does not believe that, as a result of this concentration, it is subject to any financial risk beyond the normal risk associated with commercial banking relationships.

Other Receivables

     Other receivables at December 31, 2010 consist of approximately $146,000 due from previous owner of Manana Entertainment, Inc. for sales tax assessed on audit relating to sales taxes prior to acquisition, $34,000 from the sale of the Arizona land and building and various small receivable amounts for employee advances. In 2009, other receivables consisted of approximately $151,000 of a deposit due from the cancelled acquisition, $56,000 from the sale of the Arizona land and building and other various small receivable amounts due from property insurance damage claims, credit card fees and employee advances.

Income Tax Receivable

     Income tax receivable is the amount due from various states for overpayment of estimated income tax deposits made during the year shown. This amount is either refunded to the Company or 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.

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.

VCG Holding Corp.
Notes to Consolidated Financial Statements (continued)

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.

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. 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 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 revenue ratably over the one-year life of membership from the date of purchase.

VCG Holding Corp.
Notes to Consolidated Financial Statements (continued)

Deferred Rent

     In accordance with FASB ASC Topic 840, Leases (“ASC 840”), the Company expenses rent on a straight-line basis over the expected lease term, which includes expected renewals.

Revenue Recognition

     The Company’s revenue from nightclubs include funds received from the sale of alcoholic beverages, food, merchandise, service and other revenue, net of sales taxes. The Company recognizes sales revenue at point-of-sale upon receipt of cash, check, or charge card. Service revenue includes entertainer payments to perform at the Company’s nightclubs, customer admission fees, customer payments for tabs and tip charges, dance dollar payments and suite rental fees. Service revenue is collected and recorded as revenue on a daily basis when received and earned.

     Other income is comprised of fees charged for usage of ATM machines located in nightclubs, VIP memberships, valet parking fees, various fees at nightclubs for services and special events. Other income also includes non-nightclub revenue of rent received from an unrelated third party in Indianapolis.

Legal Fees

     Legal fees expected to be incurred in connection with the loss contingency are expensed in the period in which they are incurred.

Advertising Costs

     Advertising costs are expensed as incurred and are included in other general and administrative expense.

Stock-Based Compensation

     At December 31, 2010, the Company had stock options outstanding, which are described in Note 11. The Company recognizes stock-based compensation in accordance with FASB ASC Topic 718, Compensation-Stock Compensation (“ASC 718”), which requires the Company to measure the cost of services to be rendered based on the grant-date fair value of the equity award. The compensation expense is recognized over the period an employee is required to provide service in exchange for the award, referred to as the requisite service period.

Income Taxes

     Income taxes are recorded in accordance with the provisions of FASB ASC Topic 740, Income Taxes (“ASC 740”). Pursuant to ASC 740, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized.

     ASC 740 clarified the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribed a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As a result, the Company has applied a more-likely-than-not recognition threshold for all tax uncertainties. ASC 740 only allows the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the various taxing authorities.

     Penalties, if any, related to unrecognized tax liabilities are in other general and administrative on the Statement of Income. Interest expense, if any, related to unrecognized tax liabilities are in interest expense on the Statement of Income.

VCG Holding Corp.
Notes to Consolidated Financial Statements (continued)

Earnings per Share

     In accordance with FASB ASC Topic 260, Earnings per Share, basic earnings per share is computed by dividing net income attributable to shares of the Company’s Common Stock (the “Common Stock”) by the weighted average number of shares of Common Stock outstanding during the period. Diluted earnings per share is computed by dividing net income attributable to shares of Common Stock by the weighted average number of shares of Common Stock outstanding during the period plus the incremental shares of Common Stock issuable upon the exercise of stock options and warrants, to the extent that the latter shares are dilutive.

     The following table sets forth the computation of basic and diluted weighted average shares outstanding:

		Years Ended December 31,
		2010				2009
Net income attributable to VCG		$	2,048,049			$	735,691
Basic weighted average shares outstanding			16,805,951				17,541,376
Effect of dilutive securities:
Stock options and warrants			-				-
Basic and dilutive weighted average shares outstanding			16,805,951				17,541,376
Basic and dilutive earnings per share		$	0.12			$	0.04

     The Company has excluded options to purchase 231,500 and 262,500 shares of Common Stock for 2010 and 2009, respectively, from its calculation of the effect of dilutive securities, as they represent anti-dilutive stock options. In 2009, the Company excluded warrants exercisable into 325,376 shares of Common Stock from its calculation of the effect of dilutive securities as they represent anti-dilutive warrants. The exercise prices of these stock options and warrants were substantially above the market price of the Common Stock during each period.

Reclassifications

     Certain prior year amounts have been reclassified to conform to the current period presentation.

Recently Issued Accounting Pronouncements

     In September 2010, the SEC issued Release 33-9142 which amended the SEC’s rules and forms to remove the requirement for issuers that are neither accelerated filers nor large accelerated filers to obtain an auditor attestation report on internal control over financial reporting. Therefore, smaller reporting companies such as VCG will not need their auditors to test internal controls; however, management will still need to do its assessment for the year ended December 31, 2010. Although VCG obtained an audit opinion on the Company’s internal controls over financial reporting for the year ended December 31, 2009, we did not obtain an opinion on the Company’s internal controls over financial reporting for the year ended December 31, 2010 due to this change in the requirement.

     In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements. This update provides amendment to the codification regarding the disclosures required for fair value measurements. The key amendments include: (a) a requirement to disclose transfer in and out of Level 1 and 2; (b) activity in Level 3 should show information about purchases, sales, settlements, etc. on a gross basis rather than as net basis; and (c) additional disclosures about inputs and valuation techniques. The new disclosure requirements are effective for periods beginning after December 31, 2009, except for the gross disclosures of purchases, etc. which is effective for periods beginning after December 15, 2010. The Company adopted this update on January 1, 2010, and it did not have a significant impact on the Consolidated Financial Statements.

VCG Holding Corp.
Notes to Consolidated Financial Statements (continued)

     In January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810) — Accounting and Reporting for Decreases in Ownership of a Subsidiary — a Scope Clarification. This update provides clarification about Topic 810 (previously Statement of Accounting Standards (“SFAS”) No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51) and clarifies that the de-recognition provisions of Topic 810 apply to (a) a subsidiary or group of assets that is a business or nonprofit activity; (b) a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture; and (c) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity. This update is effective for the first reporting period beginning after December 15, 2009. The Company adopted this update effective January 1, 2010, and it did not have a significant impact on the Consolidated Financial Statements.

     In December 2009, the FASB issued ASU 2009-17, Consolidation (Topic 810) — Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This update amends Topic 810 and is a result of SFAS No. 166, Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140. This standard did not have a significant impact on the Consolidated Financial Statements when it was adopted on January 1, 2010.

     Management has reviewed and continues to monitor the pronouncements of the various financial and regulatory agencies and is currently not aware of any other pronouncements that could have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

Consolidation of Variable Interest Entities

     During 2007, the Company became the .01% General Partner of 4th Street Limited Partnership LLLP (“4th Street”), a limited liability limited partnership that owns a building in Minneapolis, MN that is rented by the Minneapolis nightclub operated by the Company. The land and building, which have a net book value of approximately $2,774,000 and $2,844,000 at December 31, 2010 and 2009, respectively, represent the only assets held by 4th Street. The remaining lease term is for 16 years. The majority of the 99.9% limited partner interests are held by related parties, ranging from noteholders to stockholders and directors. Under the terms of the 4th Street partnership agreement, profits and losses and cash flows are allocated between the General and the Limited Partners based on their respective ownership percentages.

     The Company has considered the provisions of FASB ASC Topic 810, Consolidation (“ASC 810”) and has determined the following:

	•		the Limited Partners have very limited rights with respect to the management and control of 4th Street;
	•		the Company is the General Partner; and therefore, has control of the partnership;
	•		the Company is the Primary Beneficiary;
	•		the Company has determined that 4th Street is a variable interest entity; and
	•		therefore, the Company has consolidated 4th Street’s assets and included its equity as noncontrolling interest on the consolidated balance sheet.

     The Company has reviewed the provisions of FASB ASC Topic 360-20, Real Estate Sales (“ASC 360-20”) as it relates to accounting for the noncontrolling interest attributable to the Limited Partners and has determined that the interest should not be accounted for using the financing method.

3) Inventories

     Inventories consist of beverages, food, tobacco products and merchandise. All are valued at the lower of cost or market.

		December 31
		2010				2009
Food and beverage		$	754,593			$	820,534
Tobacco and merchandise			100,826				99,658
Total		$	855,419			$	920,192

VCG Holding Corp.
Notes to Consolidated Financial Statements (continued)

4) Discontinued Operations

     On July 16, 2010, the Company completed the sale of substantially all of the assets of Golden Productions JGC Fort Worth, LLC, which operated Jaguar’s Gold Club in Ft. Worth (“the Ft. Worth Club”), to RCI Entertainment (Fort Worth), Inc., a Texas corporation and wholly owned subsidiary of Rick’s Cabaret International, Inc. (“Rick’s”). This sale consisted of substantially all of the assets associated with the Ft. Worth Club, excluding cash and the real property upon which the Ft. Worth Club is located. In connection with the sale, the Company entered into a lease termination agreement with its landlord. The landlord then executed a new ground lease agreement with Rick’s. All applicable licenses and permits required to operate the Ft. Worth Club were transferred to Rick’s at closing.

     The purchase price paid at closing consisted of $1,000,000 in cash and the transfer from Rick’s to the Company of 467,497 shares of Common Stock held by Rick’s. The Common Stock was valued at the closing price on July 16, 2010 of $1.70 per share, for a total purchase price of $1,794,745. The $1,000,000 in cash was used to prepay a portion of the 14% note payable to Sunshine Mortgage and the 467,497 shares of Common Stock were cancelled. The Company realized a pre-tax book gain of $816,035 in July 2010 upon the closing of the sale.

     Shortly after the Company’s acquisition of the Ft. Worth Club in September 2007, Ft. Worth enacted a smoking ban that significantly reduced customer volume, sales and profits. The Texas Patron Tax went into effect on January 1, 2008, which increased the costs of operating the Ft. Worth Club. The Company sold the Ft. Worth Club because it was not meeting financial targets and the impact of selling it will improve total Company financial performance going forward. In accordance with authoritative accounting guidance for reporting discontinued operations, the financial results of its Ft. Worth Club are now presented as discontinued operations for all periods in the Consolidated Financial Statements.

     Operating results of discontinued operations are as follows:

		Years ended December 31,
		2010				2009
Revenue		$	843,139			$	1,838,129
Cost of goods sold			18,815				43,717
Salaries and wages			277,352				457,599
Other general and administrative expenses			582,117				1,050,425
Depreciation and amortization			66,156				118,656
Total Operating Expenses			944,440				1,670,397
Gain on sale of business			816,035				-
Income From Discontinued Operations Before Income Taxes			714,734				167,732
Income tax expense			194,345				37,000
Income From Discontinued Operations, Net of Income Taxes		$	520,389			$	130,732
Assets and liabilities held for sale consist of the following:
		December 31, 2009
Inventories		$	6,129
Property and equipment, net			1,929,935
Non-compete agreement, net			1,898
Licenses, net			582,000
Assets of business held for sale		$	2,519,962
Unfavorable lease rights, net		$	1,380,996
Deferred rent			107,161
Liabilities of business held for sale		$	1,488,157

VCG Holding Corp.
Notes to Consolidated Financial Statements (continued)

5) Property and Equipment

     The Company’s property and equipment consists of the following:

		December 31,
		2010				2009
Land		$	500,000			$	500,000
Buildings			9,362,143				9,362,143
Leasehold improvements			11,834,023				11,021,103
Equipment			3,376,731				3,082,474
Vehicles			479,039				269,503
Signs			311,239				308,819
Furniture and fixtures			2,020,869				1,911,270
Assets to be placed in service			112,120				168,245
			27,996,164				26,623,557
Less accumulated depreciation			(7,253,778	)			(5,607,378	)
Property and equipment, net		$	20,742,386			$	21,016,179

     Depreciation expense was approximately $1,672,000 and $1,578,000 for the years ended December 31, 2010 and 2009, respectively.

     During 2010, the Company entered into two capital leases for vehicles totaling $110,921. The accumulated amortization of the vehicles totaled $5,858 for the year ended December 31, 2010.

6) Goodwill and Other Intangible Assets

     The Company’s definite lived intangible assets consist of the following:

		December 31,
		2010												2009
						Accumulated												Accumulated
		Cost				Amortization				Net				Cost				Amortization				Net
Amortizable intangible assets
Covenant not to compete		$	56,694			$	(48,694	)		$	8,000			$	56,694			$	(34,694	)		$	22,000
Favorable lease rights			1,820,000				(243,900	)			1,576,100				1,820,000				(172,032	)			1,647,968
		$	1,876,694			$	(292,594	)		$	1,584,100			$	1,876,694			$	(206,726	)		$	1,669,968

     Amortization expense for the years ended December 31, 2010 and 2009 totaled $85,868 and $73,396, respectively.

     At December 31, 2010, definite lived intangible assets are expected to be amortized over a period of one to 23 years as follows:

Year Ending December 31,
2011		$	75,868
2012			75,468
2013			72,268
2014			71,868
2015			71,868
Thereafter			1,216,760
		$	1,584,100

VCG Holding Corp.
Notes to Consolidated Financial Statements (continued)

     A reconciliation of the activity affecting indefinite lived intangible assets is as follows:

		Goodwill				Licenses				Trade Names
Balance at December 31, 2008 (net of accumulated impairment losses of $43,434,821)		$	2,453,122			$	35,831,189			$	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				34,252,018				452,000
Component 2 amortization			-				(148,396	)			-
Balance at December 31, 2010		$	2,279,045			$	34,103,622			$	452,000

     During the year ended December 31, 2010, the Company recorded amortization of Component 2 goodwill of $148,396, which reduced book basis of licenses. 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.

     In performing the Company’s annual impairment assessment at December 31, 2010 in accordance with ASC Topic 350, the Company determined that no impairment had occurred. The fair values of the licenses, trade names and goodwill were based on significant unobservable inputs (level 3) using estimated discounted future net cash flows. The impairment charges at December 31, 2009 were a result of a continued weak economy, which resulted in either zero growth or a reduction of estimated future cash flows at the nightclub level.

7) Other Long-Term Assets

     The Company’s other long-term assets consists of the following:

		December 31,
		2010				2009
Loan fees, net		$	83,205			$	108,866
Deposits — lease, utility, and taxes			114,387				133,127
		$	197,592			$	241,993

8) Accrued Expenses

     The Company’s accrued expenses consisted of the following:

		December 31,
		2010				2009
Payroll and related expenses		$	1,014,531			$	1,225,526
Sales taxes			822,643				282,007
Property taxes			351,054				319,773
Legal and professional charges			133,973				31,344
Interest			35,549				54,772
Rent			5,200				16,627
Indemnification claim and interest			2,213,704				-
Total		$	4,576,654			$	1,930,049