Attached files
file | filename |
---|---|
EX-32.1 - EX-32.1 - VCG HOLDING CORP | d70094exv32w1.htm |
EX-31.1 - EX-31.1 - VCG HOLDING CORP | d70094exv31w1.htm |
EX-31.2 - EX-31.2 - VCG HOLDING CORP | d70094exv31w2.htm |
EX-32.2 - EX-32.2 - VCG HOLDING CORP | d70094exv32w2.htm |
EX-10.93 - EX-10.93 - VCG HOLDING CORP | d70094exv10w93.htm |
EX-10.95 - EX-10.95 - VCG HOLDING CORP | d70094exv10w95.htm |
EX-10.94 - EX-10.94 - VCG HOLDING CORP | d70094exv10w94.htm |
EX-10.96 - EX-10.96 - VCG HOLDING CORP | d70094exv10w96.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended: September 30, 2009
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For The Transition Period from to
Commission file number: 001-32208
VCG HOLDING CORP.
(Exact name of registrant as specified in its charter)
Colorado | 84-1157022 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
390 Union Blvd., Suite 540, Lakewood, Colorado 80228
(Address of principal executive offices, including zip code)
(Address of principal executive offices, including zip code)
(303) 934-2424
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
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 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 (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes o No 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.
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
As of November 11, 2009, there were 17,310,723 shares of the registrants common stock, $.0001
par value, outstanding.
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EX-32.1 | ||||||||
EX-32.2 |
2
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
VCG HOLDING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited) | (audited) | |||||||
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Assets |
||||||||
Current Assets |
||||||||
Cash |
$ | 2,296,122 | $ | 2,209,060 | ||||
Assets held for sale |
- | 106,900 | ||||||
Other receivables |
134,411 | 25,473 | ||||||
Income taxes receivable |
240,260 | 276,267 | ||||||
Inventories |
909,343 | 949,088 | ||||||
Prepaid expenses |
597,809 | 282,485 | ||||||
Current portion of deferred income tax asset |
171,000 | 171,000 | ||||||
Total Current Assets |
4,348,945 | 4,020,273 | ||||||
Property and equipment, net |
22,521,094 | 25,738,388 | ||||||
Non-current portion of deferred income tax asset |
3,150,795 | 4,068,593 | ||||||
Non-compete agreements, net |
28,157 | 40,933 | ||||||
Trade names |
619,000 | 619,000 | ||||||
Licenses |
36,413,189 | 36,413,189 | ||||||
Goodwill |
2,327,098 | 2,453,122 | ||||||
Favorable lease rights, net |
1,650,752 | 1,705,364 | ||||||
Other long-term assets |
490,058 | 567,181 | ||||||
Total Assets |
$ | 71,549,088 | $ | 75,626,043 | ||||
Liabilities and Equity |
||||||||
Current Liabilities |
||||||||
Accounts payable trade |
$ | 850,967 | $ | 847,493 | ||||
Accrued expenses |
1,976,258 | 2,257,116 | ||||||
Deferred revenue |
108,248 | 109,455 | ||||||
Current portion of unfavorable lease liabilities |
278,155 | 278,155 | ||||||
Current portion of capitalized lease |
- | 10,000 | ||||||
Current portion of long-term debt |
1,030,221 | 2,602,000 | ||||||
Current portion of long-term debt, related party |
38,609 | 1,024,000 | ||||||
Total Current Liabilities |
4,282,458 | 7,128,219 | ||||||
Long-term Liabilities |
||||||||
Deferred rent |
1,392,143 | 845,136 | ||||||
Unfavorable lease liabilities, net of current portion |
6,223,426 | 6,425,626 | ||||||
Capital lease, net of current portion |
- | 9,111 | ||||||
Long-term debt, net of current portion |
22,579,448 | 25,747,631 | ||||||
Long-term debt, related party, net of current portion |
7,166,360 | 7,083,578 | ||||||
Total Long-term Liabilities |
37,361,377 | 40,111,082 | ||||||
Commitments and Contingent Liabilities (Note 8) |
||||||||
Equity |
||||||||
Common stock $.0001 par value; 50,000,000 shares
authorized;17,355,877 (2009) and 17,755,378 (2008)
shares issued and outstanding |
1,735 | 1,775 | ||||||
Additional paid-in capital |
52,013,354 | 52,557,047 | ||||||
Accumulated deficit |
(25,684,871 | ) | (27,732,554 | ) | ||||
Total VCG Stockholders Equity |
26,330,218 | 24,826,268 | ||||||
Noncontrolling interests in consolidated partnerships |
3,575,035 | 3,560,474 | ||||||
Total Equity |
29,905,253 | 28,386,742 | ||||||
Total Liabilities and Equity |
$ | 71,549,088 | $ | 75,626,043 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
Table of Contents
VCG HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Restated) | (Restated) | |||||||||||||||
Revenue |
||||||||||||||||
Sales of alcoholic beverages |
$ | 5,726,768 | $ | 6,713,551 | $ | 17,486,616 | $ | 19,837,895 | ||||||||
Sales of food and merchandise |
452,605 | 656,787 | 1,388,731 | 2,003,773 | ||||||||||||
Service revenue |
6,867,244 | 7,052,312 | 20,385,882 | 18,694,480 | ||||||||||||
Other income |
842,311 | 808,262 | 2,361,420 | 2,627,344 | ||||||||||||
Total Revenue |
13,888,928 | 15,230,912 | 41,622,649 | 43,163,492 | ||||||||||||
Operating Expenses |
||||||||||||||||
Cost of goods sold |
1,451,643 | 1,779,038 | 4,444,974 | 5,329,431 | ||||||||||||
Salaries and wages |
3,565,001 | 3,311,570 | 10,131,237 | 9,856,145 | ||||||||||||
Impairment of building and land |
- | - | 268,000 | - | ||||||||||||
Other general and administrative |
||||||||||||||||
Taxes and permits |
1,189,729 | 589,680 | 2,809,524 | 1,698,022 | ||||||||||||
Charge card and bank fees |
192,022 | 223,337 | 599,957 | 633,635 | ||||||||||||
Rent |
1,463,873 | 1,261,946 | 4,387,737 | 3,639,504 | ||||||||||||
Legal fees |
190,584 | 305,421 | 876,437 | 733,569 | ||||||||||||
Other professional fees |
715,130 | 549,794 | 1,762,012 | 1,417,045 | ||||||||||||
Advertising and marketing |
691,306 | 712,630 | 2,083,551 | 2,264,482 | ||||||||||||
Insurance |
450,292 | 431,774 | 1,267,895 | 1,233,062 | ||||||||||||
Utilities |
285,064 | 325,164 | 804,313 | 839,214 | ||||||||||||
Repairs and maintenance |
248,800 | 289,726 | 839,297 | 752,774 | ||||||||||||
Other |
980,430 | 1,155,475 | 3,645,354 | 3,222,802 | ||||||||||||
Depreciation and amortization |
423,737 | 452,311 | 1,283,279 | 1,236,400 | ||||||||||||
Total Operating Expenses |
11,847,611 | 11,387,866 | 35,203,567 | 32,856,085 | ||||||||||||
Income from Operations |
2,041,317 | 3,843,046 | 6,419,082 | 10,307,407 | ||||||||||||
Other Income (expenses) |
||||||||||||||||
Interest expense |
(837,963 | ) | (1,000,331 | ) | (2,681,766 | ) | (2,613,963 | ) | ||||||||
Interest income |
4,500 | 15,416 | 4,572 | 19,952 | ||||||||||||
Gain (loss) on sale of assets |
(68,784 | ) | 4,500 | (57,363 | ) | (133,426 | ) | |||||||||
Total Other Income (expenses) |
(902,247 | ) | (980,415 | ) | (2,734,557 | ) | (2,727,437 | ) | ||||||||
Income Before Income Taxes |
1,139,070 | 2,862,631 | 3,684,525 | 7,579,970 | ||||||||||||
Income tax expense current |
(86,289 | ) | 506,865 | 86,954 | 1,452,090 | |||||||||||
Income tax expense deferred |
430,289 | 400,899 | 1,155,046 | 992,636 | ||||||||||||
Total Income Taxes |
344,000 | 907,764 | 1,242,000 | 2,444,726 | ||||||||||||
Net Income |
795,070 | 1,954,867 | 2,442,525 | 5,135,244 | ||||||||||||
Net Income Attributable to Noncontrolling Interests |
(162,843 | ) | (132,239 | ) | (394,842 | ) | (361,243 | ) | ||||||||
Net Income Attributable to VCG |
$ | 632,227 | $ | 1,822,628 | $ | 2,047,683 | $ | 4,774,001 | ||||||||
Earnings Per Share |
||||||||||||||||
Basic income per share attributable to VCGs
stockholders |
$ | 0.04 | $ | 0.10 | $ | 0.12 | $ | 0.27 | ||||||||
Fully diluted income per share attributable to VCGs
stockholders |
$ | 0.04 | $ | 0.10 | $ | 0.12 | $ | 0.26 | ||||||||
Basic weighted average shares outstanding |
17,440,835 | 18,025,248 | 17,552,034 | 17,948,802 | ||||||||||||
Fully diluted weighted average shares outstanding |
17,440,835 | 18,078,796 | 17,552,034 | 18,195,124 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
Table of Contents
VCG HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(unaudited)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(unaudited)
Additional | ||||||||||||||||||||||||
Common Stock | Paid-in | Accumulated | Noncontrolling | Total | ||||||||||||||||||||
Shares | Amount | Capital | Deficit | Interests | Equity | |||||||||||||||||||
Balances, December 31, 2008 |
17,755,378 | $ | 1,775 | $ | 52,557,047 | $ | (27,732,554 | ) | $ | 3,560,474 | $ | 28,386,742 | ||||||||||||
Amortization of warrants for services |
- | - | 92,059 | - | 92,059 | |||||||||||||||||||
Amortization of stock-based compensation |
- | - | 141,305 | - | 141,305 | |||||||||||||||||||
Repurchase of common stock |
(399,501 | ) | (40 | ) | (777,057 | ) | - | (777,097 | ) | |||||||||||||||
Net income for the nine months ended September 30,
2009 |
- | - | - | 2,047,683 | 394,842 | 2,442,525 | ||||||||||||||||||
Distributions paid to noncontrolling interests |
(380,281 | ) | (380,281 | ) | ||||||||||||||||||||
Balances, September 30, 2009 |
17,355,877 | $ | 1,735 | $ | 52,013,354 | $ | (25,684,871 | ) | $ | 3,575,035 | $ | 29,905,253 | ||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
Table of Contents
VCG HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
(Restated) | ||||||||
Operating Activities |
||||||||
Net income |
$ | 2,047,683 | $ | 4,774,001 | ||||
Adjustments
to reconcile net income to net cash provided by operating activities: |
||||||||
Impairment of buiding and land |
268,000 | - | ||||||
Depreciation |
1,270,503 | 1,223,746 | ||||||
Amortization of non-compete agreements |
12,776 | 12,654 | ||||||
Amortization of leasehold rights and liabilities, net |
(147,588 | ) | (145,000 | ) | ||||
Amortization of loan fees |
174,524 | 226,000 | ||||||
Stock-based compensation expense |
233,364 | 665,249 | ||||||
Deferred income taxes |
1,026,470 | 992,636 | ||||||
Noncontrolling interests |
394,842 | 361,243 | ||||||
(Gain) Loss on disposition of assets |
57,364 | 133,426 | ||||||
Accrued interest added to long-term debt |
132,230 | - | ||||||
Changes in operating assets and liabilities |
(39,351 | ) | 1,205,936 | |||||
Net cash provided by operating activities |
5,430,817 | 9,449,891 | ||||||
Investing Activities |
||||||||
Acquisitions of businesses, net of cash acquired |
- | (10,721,159 | ) | |||||
Additions to property and equipment |
(602,111 | ) | (1,268,549 | ) | ||||
Deposits |
- | (163,885 | ) | |||||
Proceeds from sale of assets |
252,973 | 237,811 | ||||||
Net cash used by investing activities |
(349,138 | ) | (11,915,782 | ) | ||||
Financing Activities |
||||||||
Proceeds from debt |
1,185,246 | 8,746,815 | ||||||
Payments on debt |
(4,534,649 | ) | (3,913,240 | ) | ||||
Payments on revolving line of credit, net of borrowing |
(390,000 | ) | (2,400,000 | ) | ||||
Loan fees paid |
(78,725 | ) | (223,954 | ) | ||||
Payment on capitalized leases |
(19,111 | ) | (6,906 | ) | ||||
Proceeds from stock issuances |
- | 459,251 | ||||||
Repurchase of stock |
(777,097 | ) | - | |||||
Distributions to noncontrolling interests |
(380,281 | ) | (377,357 | ) | ||||
Net cash provided by (used by) financing activities |
(4,994,617 | ) | 2,284,609 | |||||
Net increase (decrease) in cash |
87,062 | (181,282 | ) | |||||
Cash, beginning of period |
2,209,060 | 2,980,007 | ||||||
Cash, end of period |
$ | 2,296,122 | $ | 2,798,725 | ||||
Supplemental cash flow information: |
||||||||
Income taxes paid in cash |
$ | 181,392 | $ | 822,307 | ||||
Interest paid in cash |
$ | 2,400,414 | $ | 2,267,597 | ||||
Non-cash acquisition activities: |
||||||||
Liabilities of assumed in acquisitions |
||||||||
Issuance of notes payable for
acquisitions |
$ | - | $ | (5,793,027 | ) | |||
Liabilities of assumed in acquisitions |
$ | - | $ | (2,095,105 | ) | |||
Non-cash divestiture activities: |
||||||||
Fair value of liabilities transferred to
buyer |
$ | 1,771,854 | $ | - | ||||
Issuance of note receivable to buyer |
$ | 322,963 | $ | - |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
6
Table of Contents
VCG HOLDING CORP.
Notes to Condensed Consolidated Financial Statements
Notes to Condensed Consolidated Financial Statements
1. Summary of Significant Accounting Policies
General
In this report, references to VCG Holding Corp., VCG, the Company, its, we, us,
and our refer to VCG Holding Corp. and its subsidiaries.
We are in the business of acquiring, owning and operating clubs, which provide premium quality
live adult entertainment, restaurant and beverage services in an up-scale environment. As of
September 30, 2009, the Company, through its subsidiaries, owns and operates twenty clubs in
Indiana, Illinois, Colorado, Texas, North Carolina, Minnesota, Kentucky, Maine, Florida and
California. The Company operates in one reportable segment.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared by
the Company. In the opinion of management, the accompanying unaudited Condensed Consolidated
Financial Statements contain all adjustments which are (consisting of only normal recurring
accruals) necessary for fair presentation of the condensed consolidated financial position as of
September 30, 2009, and the condensed consolidated results of operations and condensed consolidated
cash flows for the periods ended September 30, 2009 and 2008.
The Condensed Consolidated Financial Statements included herein have been prepared in
accordance with the rules and regulations of the United States Securities and Exchange Commission
(the SEC) for Form 10-Q and accordingly do not include all footnote disclosures that would
normally be included in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP). However, the Company believes
that the disclosures presented are adequate to ensure the information presented is not misleading.
The unaudited Condensed Consolidated Financial Statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included in the Companys Annual Report
on Form 10-K/A for the year ended December 31, 2008 and other information filed with the SEC.
The Company utilizes a December 31 fiscal year end, and references herein to fiscal 2008
relate to the year ended December 31, 2008, and references to the first, second, third, and
fourth quarter of a fiscal year relate to the quarters ended March 31, June 30, September 30, and
December 31, respectively, of the related year.
Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts of the Company and its
wholly-owned and majority-owned subsidiaries and a consolidated variable interest entity. All
significant inter-company balances and transactions are eliminated in the consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements, as well as
the reported amounts of revenues and expenses during the reporting period and certain financial
statement disclosures. As discussed below, the Companys most significant estimates include those
made in connection with the valuation of intangible assets. Actual results could differ materially
from these estimates.
7
Table of Contents
VCG HOLDING CORP.
Notes to Condensed Consolidated Financial Statements (Continued)
Notes to Condensed Consolidated Financial Statements (Continued)
Income Taxes
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. Interest and
penalties related to uncertain tax positions, if any, are recognized in our provision for income
taxes.
Earnings per Share
Basic earnings per share is computed by dividing net income attributable to common shares by
the weighted average number of common shares outstanding during the period. Diluted earnings per
share is computed by dividing net income attributable to common shares outstanding for the period
by the weighted average number of common shares outstanding plus the dilutive common stock
equivalents that would arise from the exercise of dilutive stock options and warrants outstanding
using the treasury stock method.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Basic weighted average shares outstanding |
17,440,835 | 18,025,248 | 17,552,034 | 17,948,802 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Stock options |
- | - | - | - | ||||||||||||
Stock warrants |
- | 53,548 | - | 246,322 | ||||||||||||
Dilutive weighted average shares outstanding |
17,440,835 | 18,078,796 | 17,552,034 | 18,195,124 | ||||||||||||
Anti-dilutive options excluded from diluted weighted
average shares outstanding |
280,500 | 300,500 | 280,500 | 300,500 | ||||||||||||
Anti-dilutive warrants excluded from diluted weighted
average shares outstanding |
325,376 | - | 325,376 | - |
Fair Value of Financial Instruments
The carrying value of cash, accounts receivable and accounts payable at September 30, 2009 and
December 31, 2008, respectfully, approximates fair value due to the short-term nature of these
instruments. The carrying amount of the notes payable approximates fair value as the individual
borrowings bear interest at rates that approximate market interest rates for similar debt
instruments.
2. Recently Issued Accounting Standards
Recently adopted accounting standards
In June 2009, the Financial Accounting Standards Board (FASB) established the FASB
Accounting Standards CodificationTM (the Codification) as the single source of
authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are also sources of
authoritative U.S. GAAP for SEC registrants. The Codification did not have a material impact on
VCGs Condensed Consolidated Financial Statements upon adoption. Accordingly, the disclosures will
explain accounting concepts rather than cite specific topics of U.S. GAAP.
In December 2008, the FASB issued authoritative guidance that increases disclosure
requirements for public companies related to transfers and servicing of financial assets as well as
involvement with variable interest entities. The guidance is effective for reporting periods
(interim and annual) that end after December 15, 2008. The guidance became effective December 31,
2008. The adoption of this guidance had no impact on VCGs Condensed Consolidated Financial
Statements.
8
Table of Contents
VCG HOLDING CORP.
Notes to Condensed Consolidated Financial Statements (Continued)
Notes to Condensed Consolidated Financial Statements (Continued)
In December 2007, the FASB issued authoritative guidance to affirm that the acquisition method
of accounting (previously referred to as the purchase method) be used for all business combinations
and for an acquirer to be identified for each business combination. This guidance defines the
acquirer as the entity that obtains control of one or more businesses in the business combination
and establishes the acquisition date as the date that the acquirer achieves control. Among other
requirements, this guidance requires the acquiring entity in a business combination to recognize
the identifiable assets acquired, liabilities assumed and any noncontrolling interest in the
acquiree at their acquisition-date fair values, with limited exceptions; acquisition-related costs
generally will be expensed as incurred. This guidance requires certain financial statement
disclosures to enable users to evaluate and understand the nature and financial effects of the
business combination. The Company adopted this guidance prospectively on January 1, 2009 and there
was no impact on VCGs Condensed Consolidated Financial Statements.
In April 2009, the FASB issued authoritative guidance to require that assets acquired and
liabilities assumed in a business combination that arise from contingencies be recognized at fair
value if fair value can be reasonably determined. If the fair value of such assets or liabilities
cannot be reasonably determined, then they would generally be recognized in accordance with certain
other pre-existing accounting standards. This guidance also amends the subsequent accounting for
assets and liabilities arising from contingencies in a business combination and certain other
disclosure requirements. This guidance became effective for assets or liabilities arising from
contingencies in business combinations that are consummated on or after October 1, 2009 and did not
have an impact on VCGs Condensed Consolidated Financial Statements.
In September 2006, the FASB issued authoritative guidance which defines fair value,
establishes a framework for measuring fair value, and requires additional disclosures about a
companys financial assets and liabilities that are measured at fair value. This guidance does not
change existing guidance on whether or not an instrument is carried at fair value. In February
2008, the FASB issued authoritative guidance which delays the effective date of this guidance for
nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually), to fiscal years, and
interim periods within those fiscal years, beginning after November 15, 2008. In October 2008, the
FASB issued additional authoritative guidance which clarifies the application of determining fair
value when the market for a financial asset is inactive. Specifically, this guidance clarifies how
(1) managements internal assumptions should be considered in measuring fair value when observable
data are not present, (2) observable market information from an inactive market should be taken
into account, and (3) the use of broker quotes or pricing services should be considered in
assessing the relevance of observable and unobservable data to measure fair value. The Company
adopted the provisions for financial assets and liabilities effective January 1, 2008. The Company
adopted the provisions for nonfinancial assets and liabilities effective January 1, 2009. The
adoption had no impact on VCGs Condensed Consolidated Financial Statements.
In December 2007, the FASB issued authoritative guidance to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. This guidance requires (i) noncontrolling interests (minority interests) in a
subsidiary be reported as a component of equity, (ii) changes in a parents ownership interest
while the parent retains its controlling interest be accounted for as equity transactions, and
(iii) any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be
initially measured at fair value. This guidance requires disclosure on the face of the consolidated
income statements of those amounts of consolidated net income attributable to controlling and
noncontrolling interests. This guidance requires the parent to attribute to noncontrolling
interests their share of losses even if such attribution results in a deficit noncontrolling
interest balance within the parents equity accounts. In some instances, this guidance requires a
parent to recognize a gain or loss in net income when a subsidiary is deconsolidated. In connection
with the adoption of this guidance, VCG reclassified into its consolidated equity accounts the
historical balances related to noncontrolling interest in six of its consolidated club
partnerships. The noncontrolling interests range from 2% to 17% in each partnership. The Company
also reclassified the noncontrolling interests in a consolidated variable interest entity (VIE),
in which the noncontrolling interests own 99.9%. Prior to adoption, there were no deficit balances
for noncontrolling interests. The presentation and disclosure requirements of this guidance have
been applied retrospectively for all periods presented. The other provisions shall be applied
prospectively as of January 1, 2009.
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VCG HOLDING CORP.
Notes to Condensed Consolidated Financial Statements (Continued)
Notes to Condensed Consolidated Financial Statements (Continued)
In June 2009, the FASB issued authoritative guidance to establish general standards of
accounting for and disclosure of events that occur after the balance sheet date, but before
financial statements are issued or are available to be issued. It requires the disclosure of the
date through which an entity has evaluated subsequent events, whether that evaluation date is the
date of issuance or the date the financial statements were available to be issued, and alerts all
users of financial statements that an entity has not evaluated subsequent events after that
evaluation date in the financial statements being presented. See footnote 9 for required
disclosure.
In December 2008, the FASB issued authoritative guidance that increases disclosure
requirements for public companies related to transfers and servicing of financial assets as well as
involvement with variable interest entities. The guidance is effective for reporting periods
(interim and annual) that end after December 15, 2008. The guidance became effective on December
31, 2008, but the adoption of this guidance had no impact on the Condensed Consolidated Financial
Statements.
In April 2009, the FASB issued authoritative guidance that principally requires publicly
traded companies to provide disclosures about fair value of financial instruments in interim
financial information. It relates to fair value disclosures for any financial instruments that are
not currently reflected on the balance sheet at fair value. Prior to issuing this guidance, fair
values for these assets and liabilities were only disclosed once a year. The guidance now requires
these disclosures on a quarterly basis, providing qualitative and quantitative information about
fair value estimates for all those financial instruments not measured on the balance sheet at fair
value. This guidance was adopted by VCG effective April 1, 2009. See footnote 1 for required
disclosure.
In April 2008, the FASB issued authoritative guidance which improves the consistency of the
useful life of a recognized intangible asset among various pronouncements. This guidance was
effective for fiscal years beginning January 1, 2009. Adoption of this guidance had no impact on
the Companys Condensed Consolidated Financial Statements.
In August 2009, the FASB issued authoritative guidance to provide clarification on measuring
liabilities at fair value when a quoted price in an active market is not available. In these
circumstances, a valuation technique should be applied that uses either the quote of the liability
when traded as an asset, the quoted prices for similar liabilities or similar liabilities when
traded as assets, or another valuation technique consistent with existing fair value measurement
guidance, such as an income approach or a market approach. The new guidance also clarifies that
when estimating the fair value of a liability, a reporting entity is not required to include a
separate input or adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of the liability. This guidance was adopted effective July 1, 2009 but did
not affect our Consolidated Financial Statements
Issued but not yet effective accounting standards
In June 2009, the FASB issued authoritative guidance to require an analysis to determine
whether a variable interest gives the entity a controlling financial interest in a variable
interest entity. This guidance requires an ongoing reassessment and eliminates the quantitative
approach previously required for determining whether an entity is the primary beneficiary. It
requires an analysis to determine whether a variable interest gives the entity a controlling
financial interest in a variable interest entity. This statement requires an ongoing reassessment
and eliminates the quantitative approach previously required for determining whether an entity is
the primary beneficiary. This guidance is effective for fiscal years beginning on January 1, 2010
for the Company. VCG is currently assessing the impact that this guidance may have on its Condensed
Consolidated Financial Statements.
3. Restatement of 2008 Quarterly Financial Statements
On March 25, 2009, the Audit Committee of the Board of Directors of VCG concluded that, upon
the advice of management and in consultation with Causey Demgen & Moore Inc., the Companys
independent registered public accounting firm, the Companys previously issued financial statements
for the fiscal year ended December 31, 2007 and the fiscal quarterly periods ended March 31, 2008,
June 30, 2008 and September 30, 2008 required restatement. The Companys decision to restate was
made in connection with the Companys response to a comment letter received from the SEC regarding
the Companys Annual Report on Form 10-K for the year ended December 31, 2007 and the preparation
of the Companys Annual Report on Form 10-K/A for the fiscal year ended December 31, 2008.
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VCG HOLDING CORP.
Notes to Condensed Consolidated Financial Statements (Continued)
Notes to Condensed Consolidated Financial Statements (Continued)
The issues raised by the SEC in its comment letter included the Companys methodology for the
valuation of certain assets and liabilities purchased in connection with the acquisition of 12
clubs between December 2006 and December 2007, and two clubs in 2008. Based upon the issues raised
by the SECs comment letter, the Company retained an independent firm to conduct a valuation of the
acquired assets and liabilities. As a result of that valuation, the Company has recorded additional
intangible assets and liabilities and adjusted the fair value of licenses and goodwill acquired.
The Company also recorded deferred income taxes for those acquisitions involving the purchase of
common stock.
4. Property and Equipment, net
Property and equipment, net consisted of the following:
September 30, 2009 | December 31, 2008 | |||||||
Land |
$ | 550,512 | $ | 856,737 | ||||
Buildings |
11,362,143 | 14,076,390 | ||||||
Leasehold improvements |
10,864,863 | 10,645,692 | ||||||
Equipment |
2,689,238 | 2,470,848 | ||||||
Vehicles |
216,258 | 138,090 | ||||||
Signs |
304,381 | 268,726 | ||||||
Furniture and fixtures |
1,963,322 | 1,918,126 | ||||||
27,950,717 | 30,374,609 | |||||||
Less accumulated depreciation |
(5,429,623 | ) | (4,636,221 | ) | ||||
Property and equipment, net |
$ | 22,521,094 | $ | 25,738,388 | ||||
Depreciation expense of property and equipment was $1,270,503 and $1,223,746 for the nine
months ended September 30, 2009 and 2008, respectively.
A fair market valuation of assets, including land and buildings, is required in the event of
developments such as adverse changes in the business climate or a decline in market value. On July
31, 2009 the Company sold the building and land used by a third party to operate a club the
Phoenix, Arizona to Black Canyon Highway LLC (Black Canyon) for approximately $2,300,000. The
Company recognized a non-cash loss of $268,000 during the second quarter of 2009 and an additional
$68,800 in selling expenses in the third quarter 2009. The additional selling expenses were
recorded as a loss on the sale of the property.
5. Goodwill and Other Intangibles
The change in the carrying amount of goodwill and other intangibles from December 31, 2008 to
September 30, 2009, was as follows:
Goodwill | Licenses | Trade Names | Total | |||||||||||||
Balance at December 31, 2008 |
$ | 2,453,122 | $ | 36,413,189 | $ | 619,000 | $ | 39,485,311 | ||||||||
Amortization of component 2 goodwill for stock
purchase |
(126,024 | ) | - | - | (126,024 | ) | ||||||||||
Balance at September 30, 2009 |
$ | 2,327,098 | $ | 36,413,189 | $ | 619,000 | $ | 39,359,287 | ||||||||
There is no amortization of licenses and trade names as they have been determined to have
indefinite lives.
The ongoing uncertainty in general and economic conditions may impact the Companys business, as
well as the market price of the Companys common stock, and could negatively impact the Companys
future operating performances, cash flow and/or stock price and could result in additional goodwill
and/or intangible asset impairment charges being recorded in future periods which could materially
impact the Companys consolidated financial statements. The valuation of goodwill and intangible
assets is subject to a high degree of judgment and complexity. The next impairment test date is
December 31, 2009.
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VCG HOLDING CORP.
Notes to Condensed Consolidated Financial Statements (Continued)
Notes to Condensed Consolidated Financial Statements (Continued)
6. Debt
Long-term Debt with Third Parties
On August 17, 2009, the Company modified the terms of two existing long-term debt obligations
totaling $3,872,426 with Citywide Banks. The promissory notes that were consolidated included:
(i) | a promissory note executed on May 16, 2006 with a current outstanding principal balance of $1,770,308, bearing interest at 8.5% per annum, with monthly principal and interest payments of approximately $36,156 and with a maturity date of May 16, 2010; and | ||
(ii) | a promissory note executed on June 30, 2008 with a current outstanding principal balance of $2,102,166, bearing interest at 6% per annum, with monthly principal and interest payments of approximately $50,403 and with a maturity date of June 30, 2013. |
The consolidated replacement promissory note (the Replacement Note) in the amount of
$3,872,426 bears interest at the rate of 7% per annum, with monthly principal and interest payments
of approximately $76,865 and with a maturity date of August 15, 2014. The Replacement Note contains
two new covenants. The first new covenant requires acquisitions or additional indebtedness of equal
to or in excess of $1,000,000 be pre-approved by Citywide Banks. The second new covenant is a
financial ratio covenant. This covenant requires the quarterly calculation of net cash flow to debt
service in a ratio greater than or equal to 1.2 to 1.0. Net cash flow is defined as income
attributable to the Company plus depreciation, amortization and interest expense. Net profit
excludes any intangible impairments and related tax effects. The Company is currently in compliance
with all covenants. The new note is attached as an exhibit to this filing.
The Company also extended a revolving line of credit with Citywide Banks. The original line of
credit (the Original Line of Credit) was executed on June 29, 2008, had a maturity date of June
29, 2010, a maximum principal amount of $4,000,000, and a variable interest rate calculated on the
Prime Rate as published in the Wall Street Journal, subject to change daily with a floor of 6%.
The replacement line of credit (the Replacement Line of Credit) has the identical maximum
principal amount and interest terms as stated in the Original Line of Credit. Monthly payments vary
based on principal outstanding and the maturity date of the Replacement Line of Credit is August
15, 2011. The following is a description of material changes in the terms of the Replacement Line
of Credit compared to the Original Line of Credit: (i) The Original Line of Credit and the
Replacement Line of Credit have the same collateral, but have been cross collateralized with the
collateral for the Replacement Note: the Whole Life Insurance Policy on the life of Troy Lowrie,
plus the P&A Select Strategy Fund, LP and the P&A Multi-Sector Fund II, LP, owned by Lowrie
Management LLLP, and
(ii) The Original Line of Credit covenants required that all advances on the Original Line of
Credit were to be fully repaid for one day every 180 days. That covenant was replaced with the same
new covenants as indicated for the Replacement Note above. A copy of the new note is attached as an
exhibit to this filing.
On September 22, 2009, the Company prepaid a promissory note issued to Bryan S. Foster
(Foster), in connection with VCGs purchase of Manana Entertainment, Inc. (Manana) from Foster
in the following manner:
(a) | a cash payment of $1,600,000 made by VCG and Manana to Foster, and | ||
(b) | an offset of the amount owed by Black Canyon, the purchaser of the Phoenix, Arizona property to VCG $263,544 against the balance owed by VCG and Manana to Foster under the Foster note. |
After the application of the offset, the outstanding principal balance owed by Black Canyon to
VCG under the Black Canyon note is $63,161 and the unpaid balance on the Black Canyon note will
continue to accrue interest at 8% per annum. No other terms of the Black Canyon note were changed.
The Company is still secondary debt for payment on the original
sacred ground note, in the unlikely event of default by Black Canyon.
As previously disclosed, in August 2009, the Company renegotiated due dates on five promissory
notes, totaling $1,984,612 with original maturity dates from January to November 2010. In all
instances, the loans were extended twelve months from their original maturity dates into 2011. No
other changes were made to these notes. The Company has shown these promissory notes as long term
debt on the balance sheet.
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VCG HOLDING CORP.
Notes to Condensed Consolidated Financial Statements (Continued)
Notes to Condensed Consolidated Financial Statements (Continued)
In September 2009, the Company renegotiated due dates on three promissory notes, totaling
$1,348,000, with original maturity dates from March to November 2010. The loans were extended from
twelve to twenty-four months from their original maturity dates into 2012. No other changes were
made to these notes. The Company has shown these promissory notes as long-term debt on the balance
sheet.
The following chart shows required future maturities of the principal amounts of the related
party and third party long-term debt reflecting the extension of maturity dates disclosed in Note 9
Subsequent Events.
For the Calendar Years Ending December 31, | ||||||||||||||||||||||||||
Remaining in 2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | Total | ||||||||||||||||||||
$ | 20,188 | $ | 1,070,739 | $ | 16,864,130 | $ | 5,853,996 | $ | 219,200 | $ | 6,786,384 | $ | 30,814,637 |
7. Income Taxes
Total income tax expense was $1,242,000 and $2,444,726 for the nine months ended September 30,
2009 and 2008, respectively. Income tax expense for the three months ended September 30, 2009 was
$344,000, which represents deferred tax expense of $430,289 partially offset by a current income
tax benefit of $86,289.
In assessing the reliability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future taxable income and
tax planning strategies in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods in which the deferred tax assets
are deductible, management believes it is more likely than not that the Company will realize the
benefits of these deductible differences, net of the existing valuation allowances at September 30,
2009.
8. Commitments and Contingent Liabilities
Litigation
Other than as set forth below, we are not aware of any pending legal proceedings against the
Company, individually or in the aggregate, that would have a material adverse affect on our
business, results of operations or financial condition.
Thee Dollhouse Productions Litigation
On or around July 24, 2007, VCG Holding Corp. was named in a lawsuit filed in District Court,
191 Judicial District, of Dallas County, Texas. This lawsuit arose out of a VCG acquisition of
certain assets belonging to Regale, Inc. (Regale) by Raleigh Restaurant Concepts, Inc. (RRC), a
wholly owned subsidiary of VCG, in Raleigh, N.C. The lawsuit alleges that VCG tortiously interfered
with a contract between Michael Joseph Peter and Regale, and misappropriated Mr. Peters purported
trade secrets. On March 30, 2009, the United States District Court for the Eastern District of
North Carolina entered an Order granting Summary Judgment to VCG and dismissed Mr. Peters claims
in their entirety. The Court found that as a matter of law, VCG did not tortiously interfere with
Mr. Peters contract with Regale and further found that VCG did not misappropriate trade secrets.
Mr. Peters did not appeal that ruling and as such, the federal proceedings have concluded.
Ancillary to this litigation, Thee Dollhouse filed a claim in arbitration on June 2008 against
Regale as a result of this transaction, asserting that Regale, by selling its assets to RRC,
breached a contract between Thee Dollhouse and Regale. In addition, an assertion was made that one
of Regales principals tortiously interfered with the contract between Regale and Thee Dollhouse.
Regale filed a Motion to Stay Arbitration which was granted in part and denied in part, with the
Court staying arbitration as to Regales principal and denying the stay as to Regale. As a result,
the arbitration as to Regale is proceeding. VCG is indemnifying and holding Regale harmless from
this claim pursuant to its contract. The arbitration was originally scheduled for late October
2009, however due to illness of one of the principals of the claimant, the arbitration has been
adjourned without a new date set. The Company has not accrued anything relating to the settlement
of this litigation; however the outcome of this dispute cannot be predicted.
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VCG HOLDING CORP.
Notes to Condensed Consolidated Financial Statements (Continued)
Notes to Condensed Consolidated Financial Statements (Continued)
Zajkowski, et. al. vs VCG and Classic Affairs Litigation
In December 2007, a former employee of VCGs subsidiary Classic Affairs, Eric Zajkowski, filed
a lawsuit in Hennepin County District Court, Minneapolis, Minnesota against VCG following his
termination from employment alleging that, in connection with his employment, he was subject to
certain employment practices which violated Minnesota law. The initial action and subsequent
pleading asserted that the matter was filed as a purported class action. Subsequent to the filing
of Zajkowskis Complaint, Zajkowski moved to amend his Complaint to name additional Plaintiffs and
later, to name Classic Affairs as a party defendant. VCG and Classic Affairs have answered this
complaint denying all liability. Classic Affairs has also filed a Counter-Complaint against Mr.
Zajkowski based upon matters relating to his termination from employment with Classic Affairs.
In December 2008 and early January 2009, the parties filed cross-motions for Summary Judgment
and Zajkowski filed a Motion for Class Certification. Following the motions, the Court issued a
series of rulings on those Motions. In these rulings, the Court has dismissed VCG as a party
Defendant having determined that VCG is not directly liable to Zajkowski or the other Plaintiffs
on their claims. The Court granted Summary Judgment to Zajkowski as to one issue, but did not
determine the scope or extent, if any, of the alleged damages, ruling this issue, like the others,
are questions for a jury, and the Court dismissed two other claims asserted by Zajkowski. In all
other respects, the Court has denied the parties respective Summary Judgment motions.
On July 21, 2009, the Court denied Zajkowskis and the other Plaintiffs Motion for Class
Certification. Zajkowski appealed that decision to the Minnesota Court of Appeals and on September
22, 2009, the Court of Appeals denied Plaintiffs request for discretionary review. Plaintiffs have
indicated that they do not intend to seek leave to appeal from the Minnesota Supreme Court.
The parties have scheduled mediation for November 2009 and if mediation is unable to settle
this case, trial is scheduled to begin in late January 2010.
Texas Patron Tax Litigation
Beginning January 1, 2008, VCGs Texas clubs became subject to a new state law requiring the
Company to collect a $5 surcharge for every club visitor. A lawsuit was filed by the Texas
Entertainment Association, an organization in which the Company is a member, alleging that the fee
is an unconstitutional tax. On March 28, 2008, the Judge of the District Court of Travis County,
Texas ruled that the new state law violates the First Amendment to the U.S. Constitution and,
therefore, the District Courts order enjoined the state from collecting or assessing the tax. The
State of Texas has appealed the District Courts ruling. When cities or the State of Texas give
notice of appeal, the State supersedes and suspends the judgment, including the injunction.
Therefore, the judgment of the Travis County District Court cannot be enforced until the appeals
are completed. During the suspension of the judgment, the State of Texas has opted to collect the
tax pending the appeal. The Company has paid, under protest approximately $203,000 for the year
ended December 31, 2008 and $195,508 for the nine months ended September 30, 2009. VCG has a total
of approximately $401,285 on deposit, under protest, with the State of Texas. The Company has filed
a lawsuit to demand repayment of the paid taxes. On June 5, 2009, the Court of Appeals for the
Third District (Austin) affirmed the District Courts judgment that the Sexually Oriented Business
(S.O.B.) Fee violated the First Amendment to the U.S. Constitution. The Attorney General of Texas
has asked the Texas Supreme Court to review the case. No mandate will be issued until the Supreme
Court of Texas either refuses the review or takes and decides the case. All parties are waiting on
the decision of the Supreme Court of Texas either to grant review or not. On August 26, 2009, the
Texas Supreme Court ordered both sides to submit briefs on the merits, while not yet deciding
whether to grant the States Petition for review. The States brief was filed on September 25, 2009
and the Texas Entertainment Associations brief was filed on October 15, 2009.
At the end of the Texas legislative session in June 2009, no amendments to the S.O.B. fee or a
substitute Bill to replace the patron tax were approved. The legislative session ended terminating
the efforts to change the challenged statute, which remains in effect. All tax protest suits also
remain pending.
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VCG HOLDING CORP.
Notes to Condensed Consolidated Financial Statements (Continued)
Notes to Condensed Consolidated Financial Statements (Continued)
On the advice of Texas counsel, the Company has continued to pay the tax amounts under
protest. The table below shows the amounts paid and expensed for the three months and nine months
ended September 30, 2009 and 2008.
Three Months Ended | Nine Months Ended | |||||||||||||
September 30, | ||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||
$ | 61,008 | $ | 82,810 | $ | 195,508 | $ | 121,145 |
Department of Labor and Immigration and Customs Enforcement Reviews
In October 2008, PTs® Showclub in Louisville, KY was required to conduct a
self-audit of employee payroll by the U.S. Department of Labor (DOL). After an extensive
self-audit, it was determined that (a) the Club incorrectly paid some employees for hours worked
and minimum wage amounts and (b) the Club incorrectly charged minimum wage employees for their
uniforms. As a result, the DOL required that the Club issue back pay and refund uniform expenses to
qualified employees at a total cost of $14,439. In addition, as a result of the Kentucky audit, all
other clubs and our corporate office have been placed under a nationwide DOL audit. All clubs have
completed the self-audit in August 2009 and are currently working with the DOL to determine what,
if any, violations may have occurred. No amounts have been accrued related to this audit.
On June 30, 2009, PTs® Showclub in Portland, Maine was served a subpoena by
Immigration and Customs Enforcement (ICE) requesting documents to conduct an I-9 audit. ICE
requested all original I-9s for both current and past employees from September 14, 2007 to
present. ICE is conducting the audit to ensure proper use of the I-9 form ensuring the Club is
verifying employees right to work in the United States. The Club complied with the subpoena
submitting all requested documents between July 7, 2009 and July 16, 2009. As of November 12, 2009,
ICE is still reviewing the requested documents. This matter is still in its investigatory stage and
no determination has been made. No amounts have been accrued related to this audit.
Internal Revenue Service
The IRS audited PTs® Showclub in Denver for the years 2006, 2007 and 2008 to
determine tip reporting compliance. Every business where tipping is customary must report annually
on Form 8027 the total sales from food and beverage operations, charge sales, total tips reported
and charge tips reported. The audit was based upon this Form to determine compliance with Section
3121(q) of the Internal Revenue Code, as amended.
The audit was conducted by an examining officer in Denver in August and September 2009. The
audit focused on the data reported on Form 8027 and related underlying documentation.
The audit resulted in a determination that tips were under-reported in the three years
examined. The tax assessed as a result of this under-reporting was $61,500. Penalties and interest
were not assessed. The IRS auditor indicated that all other clubs would be audited and recommended
that a Point of Sale (POS) system should be installed in every club to ensure compliance with IRS
regulations. After completing test audits on all clubs using the same procedures followed by the
IRS, an additional accrual of $385,500 in estimated taxes was recorded to cover the estimated
liability.
The clubs are involved in various other legal proceedings that arise in the ordinary course of
business. Management believes the outcome of any of these proceedings will not have a material
effect on the consolidated operations of the Company.
9. Subsequent Events
The Company has evaluated events subsequent to September 30, 2009 through November 11, 2009,
which is the date the financial statements were available to be issued.
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VCG HOLDING CORP.
Notes to Condensed Consolidated Financial Statements (Continued)
Notes to Condensed Consolidated Financial Statements (Continued)
Extension of Company Debt
In October 2009, the Company renegotiated due dates on four promissory notes, totaling
$1,350,000, with original maturity dates from July to September 2010. In all instances, the loans
were extended twelve months from their original maturity dates into 2011. No other changes were
made to these notes and the Company treated the negotiations as modifications and not new loans.
The Company has classified these promissory notes as long-term debt on the balance sheet.
Asset Purchase
On October 8, 2009, the Company entered into a Sales Contract with Business Equipment
Consultants to purchase the Aloha Point of Sale system for all clubs owned by the Company. The
approximate total capital cost of this project will be $550,000 and will be depreciated upon
completion over five years. The Company anticipates that the systems will be installed and in use
in all clubs by December 31, 2009. The project is currently on track to meet this deadline. The
benefits from installing a point of sale system in all clubs include faster revenue reporting, more
accurate controls over labor costs and inventory plus compliance with IRS regulations requiring
companies to track charged tips and the attributable charged revenue.
Offer to Purchase
On November 3, 2009, the Company received a non-binding letter of intent (the Proposal) from
the Companys Chairman and Chief Executive Officer, Troy Lowrie, Lowrie Management, LLLP, an entity
controlled by Mr. Lowrie, and certain other unidentified investors (collectively, Lowrie), to
acquire all of the outstanding common stock of the Company for $2.10 per share in cash (the
Acquisition). The Proposal contemplates that the Company would no longer be a public reporting or
trading company following the closing of the Acquisition. The Companys Board of Directors has
formed a Special Committee consisting solely of independent directors, as defined under the NASDAQ
independence rules, to review and evaluate the Proposal and to recommend to the Companys Board of
Directors whether to approve or decline the Proposal. The Special Committee was formed to maximize
shareholder value, including evaluating the Companys alternatives to the Proposal. The members of
the Special Committee are George Sawicki, Kenton Sieckman and Carolyn Romero. Acceptance of the
Proposal is subject to the approval of the Special Committee, the Companys Board of Directors and
the Companys stockholders.
No assurance can be given that an agreement on terms satisfactory to the Special Committee or
the Board of Directors will result from the Proposal submitted by Lowrie or any other party, or
that any transaction recommended by the Special Committee will be completed.
Termination of Stock Repurchase Plan
On November 3, 2009, the Companys Board of Directors terminated the stock repurchase program
approved on July 26, 2007, to allow the Company to evaluate the Proposal.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The information set forth hereunder, Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A), presents significant factors affecting our
consolidated operating results, financial condition, liquidity and capital resources that occurred
during the three and nine months ended September 30, 2009 and 2008, respectively. Likewise, the
MD&A should be read in conjunction with the financial statements appearing elsewhere in this Form
10-Q (this Report). The MD&A discussed in the Companys Annual Report
Form 10-K/A for the year
ended December 31, 2008, and filed with the SEC on April 13, 2009, as amended on June 10, 2009
should also be referred to when reading this Report.
Cautionary Statement Regarding Forward-Looking Information and Statements
Safe Harbor Statement under the Private Securities Litigation Reform Act: Statements made in
this Report that relate to future operating periods are subject to important risks and
uncertainties that could cause actual results to differ materially. These risks could affect
certain clubs, while certain other risks could affect all of the Companys clubs and/or other
business segments.
Forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are based on the
exercise of business judgment as well as assumptions made by us, and information currently
available to us. When used in this MD&A, and elsewhere in this Report the words may, will,
anticipate, believe, estimate, expect, intend, and other words of similar import, are
intended to help identify forward-looking statements. In addition, any statements that refer to
projections of our future financial performance, our anticipated growth and trends in our
businesses, and other characteristics of future events or circumstances are forward-looking
statements. One should not place undue
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reliance on these forward-looking statements. Such statements reflect our current view of
future events and are subject to certain risks and uncertainties as noted below. Should one or more
of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the
Companys actual results could differ materially from those anticipated in these forward-looking
statements. We believe that our expectations are based on reasonable assumptions; however, we
cannot give any assurance, whatsoever, that our expectations will materialize.
Forward looking statements made herein are based on our current expectations that could
involve a number of risks and uncertainties and therefore, such expectations should not be
considered guarantees of future performance. Certain of those risks that could cause actual results
to differ materially, include, without limitation, the following:
| Dependence on key management personnel. | ||
| The impact of industry competition factors such as pricing and the timing and location of new club openings. | ||
| The ability to obtain acceptable financing to execute managements efforts toward expansion plans. | ||
| Interruptions or cancellation of existing contracts. | ||
| Adverse publicity related to the Company or the industry. | ||
| Changes in the laws governing or taxing the operation of adult entertainment businesses. | ||
| An inability to arrange additional debt or equity financing. | ||
| The costs inherent with complying with new statutes and regulations applicable to public reporting companies, such as the Sarbanes-Oxley Act of 2002. | ||
| Changes in laws governing entertainers treatment as independent contractors versus employee status. | ||
| Continued economic downturn. |
Actual results may differ materially from those set forth in forward-looking statements as a
result of certain of those factors set forth above, including such factors disclosed under Risk
Factors, or any factors as may be included elsewhere in this Report or in the document we
incorporate by reference. More information about factors that potentially could affect our
financial results is included in the Companys filings with the SEC; however, we are under no
obligation, nor do we intend to update, revise or otherwise publicly release any revisions to these
forward-looking statements or the risk factors described in this Report or in the documents we
incorporated by reference to reflect events or circumstances after the date hereof or to reflect
the occurrence of any unanticipated events.
General Overview
It is our desire to provide all parties who may read this MD&A with an understanding of the
Companys past performance, its financial condition and its prospects of going forward in the
future. Accordingly, we will discuss and provide our analysis of the following:
| Overview of the business. | ||
| Critical accounting policies. | ||
| Results of operations. | ||
| Liquidity and capital resources. | ||
| New accounting pronouncements. |
17
Table of Contents
Our Company was incorporated under the laws of the State of Colorado in 1998, but did not
begin its operations until April 2002. The Company, through its subsidiaries, owns 20 adult clubs
that offer quality live adult entertainment, restaurant and bar operations. Our clubs 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 clubs. Our current strategy is to acquire upscale adult clubs 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 club clustering. Adult clubs tend to group
together in their respective markets. We believe that clustering our clubs leads to improved brand
recognition, as well as improvement in economies of scale as costs of marketing and management are
spread over more clubs. Clustering also provides the Company with the ability to disperse
management expertise to more locations under their responsibility.
Overview of Business
Since we began operations, we have acquired the following clubs:
Name of Club |
Date Acquired | Club Type | ||||
PTs® Showclub in Indianapolis, Indiana
|
2002 | B | ||||
PTs® Brooklyn in Brooklyn, Illinois
|
2002 | B | ||||
PTs® All Nude in Denver, Colorado
|
2004 | C | ||||
The Penthouse Club® in Glendale, Colorado
|
2004 | B | ||||
Diamond Cabaret® in Denver, Colorado
|
2004 | A | ||||
The Penthouse Club® in Phoenix, Arizona
|
opened 2004/ sold in January 2007 | N/A | ||||
PTs® Appaloosa in Colorado Springs, Colorado
|
October 2006 | B | ||||
PTs® Showclub in Denver, Colorado
|
December 2006 | B | ||||
PTs® Showclub in Louisville, Kentucky
|
January 2007 | B | ||||
Roxys in Brooklyn, Illinois
|
February 2007 | B | ||||
PTs® Showclub in Centreville, Illinois
|
February 2007 | B | ||||
PTs® Sports Cabaret in Sauget, Illinois
|
March 2007 | B | ||||
The Penthouse Club® in Sauget, Illinois
|
March 2007 | A | ||||
The Mens Club® in Raleigh, North Carolina
|
April 2007 | A | ||||
Schieks Palace Royale in Minneapolis, Minnesota
|
May 2007 | A | ||||
PTs® Showclub in Portland, Maine
|
September 2007 | B | ||||
Jaguars Gold Club in Ft. Worth, Texas (Golden)
|
September 2007 | C | ||||
PTs® Showclub in Hialeah, Florida
|
October 2007 | B | ||||
LaBoheme Gentlemens Club in Denver, Colorado
|
December 2007 | B | ||||
Jaguars Gold Club in Dallas, Texas (Manana)
|
April 2008 | C | ||||
Imperial Showgirls Gentlemens Club in Anaheim, California
|
July 2008 | C |
The Company classifies its clubs into three tiers called A, B, and C clubs. Type A club
characteristics include larger facilities with a variety of entertainment and performers. A clubs
include a restaurant with an onsite chef preparer. Furthermore, A type clubs offer high-label
cigars, VIP facilities, and specialty suites. Type B clubs have smaller facilities. Food service
is limited or not provided, but the facility serves alcohol. These clubs are topless format. Type
C clubs do not provide alcoholic beverages except for some locations that follow the Bring Your
Own Bottle (B.Y.O.B) format. These clubs are all-nude format.
The Company owns International Entertainment Consultants, Inc. (IEC), which provides
management services to our clubs. IEC was originally formed in 1980. At the time of acquisition in
October 2003, IEC was owned by Troy Lowrie, our Chairman of the Board and Chief Executive Officer.
The day-to-day management of our clubs is conducted through IEC. IEC provides the clubs with
management and supervisory personnel to oversee operations, hires and contracts all operating
personnel, establishes club policies and procedures, handles compliance monitoring, purchasing,
accounting and other administrative services, and prepares financial and operating reports, and
income tax returns. IEC charges the clubs a management fee based on the Companys common expenses
that are incurred in maintaining these functions.
In June 2002, the Company formed VCG Real Estate Holdings, Inc. (VCG Real Estate), a wholly
owned subsidiary that owns the land and buildings housing two of our clubs.
The Company has one reportable segment. Our clubs are distinguished by the following features:
18
Table of Contents
| Facilities Our club facilities are within ready access to the principal
business, tourist and/or commercial districts in the metropolitan areas in which they are
located. The facilities have state of the art sound systems, lighting and professional stage
design. Our clubs maintain an upscale level of décor and furniture furnishings to create a
professional appearance. Three of our clubs offer VIP rooms. Our VIP rooms are open to
individuals who purchase annual memberships. They offer a higher level of service and are
elegantly appointed and spacious. |
||
| Professional On-Site Management Our clubs are managed by persons who are
experienced in the restaurant and/or hospitality industry. The managers for the clubs are
responsible for maintaining a quality and professionally run club. At a higher level, our
Area Directors oversee the management of several clubs within a specified geographical area.
The Company currently has 12 Area Directors who have 17 to 25 years of experience in the
industry. |
||
| Food and Beverage Operations Many of our clubs offer a first-class bar and
food service. Three of our clubs offer a full service restaurant that provides customers
with exceptional food, service and luxury. At most locations, we provide a selective variety
of food including, but not limited to, hot and cold appetizers, pizza, and other limited
food choices. Some of our club operations do not have liquor licenses. Those of our clubs
that carry B.Y.O.B. permits, sell non-alcoholic beverages. Experienced chef and bar managers
are responsible for training, supervising, staffing and operating the food and beverage
operations at each club. |
||
| Entertainment Our clubs provide a high standard of attractive, talented and
courteous female and male performers and servers. We maintain the highest standards for
appearance, attitude, demeanor, dress and personality. The entertainment encourages repeat
visits and increases the average length of a patrons stay. We prefer that performers who
work at our clubs are experienced entertainers. |
Critical Accounting Policies
The following discussion and analysis of the results of operations and financial condition are
based on the Companys Condensed Consolidated Financial Statements that have been prepared in
accordance with accounting principles generally accepted in the United States of America (U.S.
GAAP). Our significant accounting policies are more fully described in Note 2 of the Notes to the
Consolidated Financial Statements, which is included in our Annual Report on Form 10-K/A for the
year ended December 31, 2008. However, certain accounting policies and estimates are particularly
important to the understanding of our financial position and results of operations and require the
application of significant judgment by us. Further, such accounting policies and estimates can be
materially affected by changes from period to period in economic factors or conditions that are
outside our control. As a result, our accounting policies and estimates are subject to an inherent
degree of uncertainty. In applying these policies, we use our judgment to determine the appropriate
assumptions to be used in the determination of certain estimates. Those estimates are based on our
historical operations, future business plans, projected financial results, terms of existing
contracts, observance of trends in the industry, information provided by our customers, and
information available from other outside sources, as may be appropriate. Actual results may differ
from these estimates. Those critical accounting policies are discussed in Managements Discussion
and Analysis of Financial Position and Results of Operations Critical Accounting Policies,
which is a part of our Annual Report on Form 10-K/A for the year ended December 31, 2008.
19
Table of Contents
Results of Operations- Three and Nine Months Ended September 30, 2009 Compared to September 30, 2008
The following sets forth a comparison of the components of the results of our continuing
operations for the three and nine months ended September 30, 2009 and 2008, respectively:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||
September 30, | ||||||||||||||||||||||||
2009 | 2008 | % Change | 2009 | 2008 | % Change | |||||||||||||||||||
Revenue |
(Restated) | (Restated) | ||||||||||||||||||||||
Sales of alcoholic beverages |
$ | 5,726,768 | $ | 6,713,551 | (14.7) | % | $ | 17,486,616 | $ | 19,837,895 | (11.9) | % | ||||||||||||
Sales of food and merchandise |
452,605 | 656,787 | (31.1) | % | 1,388,731 | 2,003,773 | (30.7) | % | ||||||||||||||||
Service revenue |
6,867,244 | 7,052,312 | (2.6) | % | 20,385,882 | 18,694,480 | 9.0 | % | ||||||||||||||||
Other income |
842,311 | 808,262 | 4.2 | % | 2,361,420 | 2,627,344 | (10.1) | % | ||||||||||||||||
Total Revenue |
13,888,928 | 15,230,912 | (8.8) | % | 41,622,649 | 43,163,492 | (3.6) | % | ||||||||||||||||
Operating Expenses |
||||||||||||||||||||||||
Cost of goods sold |
1,451,643 | 1,779,038 | (18.4) | % | 4,444,974 | 5,329,431 | (16.6) | % | ||||||||||||||||
Salaries and wages |
3,565,001 | 3,311,570 | 7.7 | % | 10,131,237 | 9,856,145 | 2.8 | % | ||||||||||||||||
Impairment of building and land |
- | - | - | % | 268,000 | - | 100.0 | % | ||||||||||||||||
Other general and administrative
Taxes and permits |
1,189,729 | 589,680 | 101.8 | % | 2,809,524 | 1,698,022 | 65.5 | % | ||||||||||||||||
Charge card and bank fees |
192,022 | 223,337 | (14.0) | % | 599,957 | 633,635 | (5.3) | % | ||||||||||||||||
Rent |
1,463,873 | 1,261,946 | 16.0 | % | 4,387,737 | 3,639,504 | 20.6 | % | ||||||||||||||||
Legal fees |
190,584 | 305,421 | (37.6) | % | 876,437 | 733,569 | 19.5 | % | ||||||||||||||||
Other professional fees |
715,130 | 549,794 | 30.1 | % | 1,762,012 | 1,417,045 | 24.3 | % | ||||||||||||||||
Advertising and marketing |
691,306 | 712,630 | (3.0) | % | 2,083,551 | 2,264,482 | (8.0) | % | ||||||||||||||||
Insurance |
450,292 | 431,774 | 4.3 | % | 1,267,895 | 1,233,062 | 2.8 | % | ||||||||||||||||
Utilities |
285,064 | 325,164 | (12.3) | % | 804,313 | 839,214 | (4.2) | % | ||||||||||||||||
Repairs and maintenance |
248,800 | 289,726 | (14.1) | % | 839,297 | 752,774 | 11.5 | % | ||||||||||||||||
Other |
980,430 | 1,155,475 | (15.1) | % | 3,645,354 | 3,222,802 | 13.1 | % | ||||||||||||||||
Depreciation and amortization |
423,737 | 452,311 | (6.3) | % | 1,283,279 | 1,236,400 | 3.8 | % | ||||||||||||||||
Total Operating Expenses |
11,847,611 | 11,387,866 | 4.0 | % | 35,203,567 | 32,856,085 | 7.1 | % | ||||||||||||||||
Income from Operations |
2,041,317 | 3,843,046 | (46.9) | % | 6,419,082 | 10,307,407 | (37.7) | % | ||||||||||||||||
Other Income (expenses) |
||||||||||||||||||||||||
Interest expense |
(837,963 | ) | (1,000,331 | ) | (16.2) | % | (2,681,766 | ) | (2,613,963 | ) | 2.6 | % | ||||||||||||
Interest income |
4,500 | 15,416 | * | 4,572 | 19,952 | * | ||||||||||||||||||
Gain (loss) on sale of assets |
(68,784 | ) | 4,500 | * | (57,363 | ) | (133,426 | ) | * | |||||||||||||||
Total Other Income (expenses) |
(902,247 | ) | (980,415 | ) | (8.0) | % | (2,734,557 | ) | (2,727,437 | ) | 0.3 | % | ||||||||||||
Income before Income Taxes |
1,139,070 | 2,862,631 | (60.2) | % | 3,684,525 | 7,579,970 | (51.4) | % | ||||||||||||||||
Income tax expense current |
(86,289 | ) | 506,865 | (117.0) | % | 86,954 | 1,452,090 | (94.0) | % | |||||||||||||||
Income tax expense deferred |
430,289 | 400,899 | 7.3 | % | 1,155,046 | 992,636 | 16.4 | % | ||||||||||||||||
Total Income Taxes |
344,000 | 907,764 | (62.1) | % | 1,242,000 | 2,444,726 | (49.2) | % | ||||||||||||||||
Net Income |
795,070 | 1,954,867 | (59.3) | % | 2,442,525 | 5,135,244 | (52.4) | % | ||||||||||||||||
Net Income attributable to noncontrolling
interests |
(162,843 | ) | (132,239 | ) | 23.1 | % | (394,842 | ) | (361,243 | ) | 9.3 | % | ||||||||||||
Net Income attributable to VCG Holding Corp. |
$ | 632,227 | $ | 1,822,628 | (65.3) | % | $ | 2,047,683 | $ | 4,774,001 | (57.1) | % | ||||||||||||
* | - not meaningful |
20
Table of Contents
Revenue
For the three months ended September 30, 2009, total revenue decreased approximately
$1,342,000 or 8.8% when compared to the same three month period in 2008. The continuing recession
has reduced bookings of special events and annual VIP memberships. The decrease was largely due to
our four A club locations that are experiencing an aggregate revenue drop of 11.1% for the three
months in the third quarter of 2009. Eleven B club locations reported sale declines when
compared to the same three month period in 2008. Third quarter 2009 revenue was flat when compared
to second quarter 2009.
Total revenue decreased because of weak economic conditions approximately $1,541,000 or 3.6%
for the nine months ended September 30, 2009, compared to the same period in 2008. The decrease was
largely due to our four A club locations experiencing an aggregate revenue drop of 8.1% for the
first nine months in 2009. Five of our B clubs locations had same store sales increases between
0.1% and 9.9% of revenue earned compared to the same nine month period in 2008. Two of our C club
locations were not fully reported in the year-to-date numbers for 2008 because of the acquisition
dates, but were included in revenue and expenses reported for 2009.
For the three months ended September 30, 2009, sales of merchandise, food and alcoholic
beverages decreased approximately $1,191,000, or 16.2% when compared to the three months ended
September 30, 2008. Service revenue for the three month period decreased $185,000, or 2.6%. Service
revenue includes wristband sales, suite rentals, tab and tip fees, dance dollar and boutique buck
programs. Other revenue increased approximately $34,000, or 4.2%, mostly as a result of increased
revenue from ATM fees. Besides ATM fees, other revenue includes special event charges, valet
services and VIP memberships.
Sales of merchandise, food and alcoholic beverages decreased approximately $2,966,000 or 13.6%
for the nine months ended September 30, 2009, compared to the same period in 2008. Service revenue
for the nine month period increased by approximately $1,691,000, or 9.0%. Other revenue decreased
by approximately $266,000, or 10.1% compared to the same period in fiscal 2008.
Cost of Goods Sold
Cost of goods sold consists of expenses associated with the sale of alcohol, food, and
merchandise. Cost of goods sold decreased by approximately $327,000 or 18.4% for the three months
ended September 30, 2009 when compared to the same periods in 2008 and $884,000 or 16.6% for the
nine months ended September 30, 2009, compared to the same periods in 2008. These decreases are
larger than the corresponding revenue decrease for the same time period, indicating that the gross
profit margin improved even though revenue declined. This improvement is a result of tighter
controls over inventory.
A gross profit is calculated as revenue of alcoholic beverages, food and merchandise, less
cost of goods sold. The gross profit margin is calculated as gross profit divided by the
attributable revenue. VCG realized a gross profit for all clubs of 76.5% for the three months ended
September 30, 2009 compared to 75.9% for the same period in 2008. The slight increase in the gross
profit percentage showed that the Company earned a slightly higher profit on liquor, food and
merchandise sold in that three month period than it earned in the same three month period in fiscal
2008. The increase in the gross profit percentage is attributable to operations of four all-nude
clubs that do not serve alcohol. VCG owned three all-nude clubs in the first half of 2008 and
acquired the fourth all-nude club on July 28, 2008. These clubs have a lower cost of sales
percentage and a higher gross profit compared to VCGs clubs that serve alcohol.
The Company tracks cost of goods sold as a percentage of the related revenue as a management
control metric. For the nine months ended September 30, 2009, the cost of sales to revenue
percentage was 23.5% as compared to the cost of sales to revenue percentage of 24.4% for the same
nine month period in 2008.
Salaries and Wages
Salaries and wages consist of all labor costs incurred throughout the entire organization.
Labor costs increased by approximately $253,000 or 7.7% for the three months ended September 30,
2009 compared to the same period in 2008. Total employee headcount stayed virtually the same at
September 30, 2009 with 934 employees, compared to 938 employees at September 30, 2008. The slight
overall headcount reduction was due to attrition without replacement. The percentage of salaries
and wages to total revenue was 24.3% for the nine months ended September 30, 2009 and 22.8% for the
same period in 2008.
21
Table of Contents
Year-to-date salaries and wages have also increased by approximately $275,000 or 2.8% because
of the regulated increase in tipped minimum wage in a majority of the ten states the Company has
operations. The average increase in minimum wage has risen by $0.07 cents to $0.10 per hour from
2007 to 2009. Approximately 88% to 89% of the Companys labor force consists of tipped minimum wage
personnel with an average work week of approximately 30 hours. The Company is unable to estimate
the impact of increases in minimum wage for its operations.
Other General and Administrative Expenses
Taxes and Licenses
This category includes employment taxes, real and personal property taxes, the Texas Patron
tax and other business licenses and permits necessary to operate the clubs. The following chart
shows the breakdown of the amounts paid for taxes and licenses for the three months and nine months
ended September 30, 2009 and 2008, respectively.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Restated) | (Restated) | |||||||||||||||
Employment |
$ | 935,755 | $ | 407,606 | $ | 1,972,432 | $ | 1,158,050 | ||||||||
Business License |
66,330 | 71,601 | 180,001 | 139,302 | ||||||||||||
Property Taxes |
126,636 | 110,473 | 461,583 | 400,670 | ||||||||||||
Patron Tax Expense |
61,008 | 0 | 195,508 | 0 | ||||||||||||
$ | 1,189,729 | $ | 589,680 | $ | 2,809,524 | $ | 1,698,022 | |||||||||
Business licenses include costs of obtaining and maintaining liquor, cabaret and business
licenses for the clubs. This cost increased by approximately $40,700 or 29.2% for the nine months
ended September 30, 2009, compared to the amount recorded for the same period in 2008. This
increase is directly attributable to the increase in clubs in 2009 over the same time period in
2008. The two clubs acquired in 2008 are all-nude and do not require liquor licenses.
Property taxes increased by almost $60,900 or 15.2% for the nine months ended September 30,
2009, compared to the same period 2008, because of the increase in clubs owned or operated in 2008
from 18 to 20, and a general increase in property tax rates. VCG pays real and personal property
taxes on all the clubs the Company operates. The amount of $62,000 for annual property taxes is
anticipated to decrease in 2010 because of the sale of the Arizona property.
For the three and nine month period ended September 30, 2008, the Company elected to treat
payments of the Texas Patron Tax as tax deposits on the balance sheet. VCG changed this accounting
treatment in the fourth quarter of 2008 when it became apparent that payment of this tax would
continue even after the Texas District Court ruled it unconstitutional. The Texas Patron Tax
deposits were recorded as expense and we will continue to expense future tax payments. See Legal
Proceedings under Part II, Item 1 for the status of this case for the total amounts paid to and on
deposit with the State of Texas.
The current tax amounts paid under protest for the three months and nine months ended,
September 30, 2009 and 2008, are shown in the chart below.
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | |||||||||||||
2009 | 2008 | 2009 | 2008 | ||||||||||
$ | 61,008 |
$ | 82,810 | $ | 195,508 | $ | 121,145 | ||||||
Charge card and bank fees decreased $31,000 or 14.0% for the three months ended September 30,
2009, and decreased by approximately $34,000 or 5.3% for the nine months ended September 30, 2009,
compared to the same periods in 2008. Credit card processing fees decreased because the Companys
credit card processor moved the transactions to a lower risk/lower rate transaction fee. Overall,
credit card usage has dropped in virtually all clubs, but especially in the A type clubs,
resulting in a decrease in total processing fees.
Rent increased by approximately $202,000 or 16.0% for the three months ended September 30,
2009 and increased $748,000 or 20.6% for the nine months ended in 2009, compared to the same
periods in 2008. Approximately $632,000 of the increase in the nine months ended September 30, 2009
specifically relates to the accounting treatment required by authoritative accounting guidance for
22
Table of Contents
leases .This guidance requires the leveling of rent expense over the entire lease term.
Non-cash deferred rent increased by $632,000 over the nine months ended September 30, 2009,
compared to the same period in 2008. Deferred rent is high because of the extremely long lease
terms of the Companys leases, ranging from 5 to 50 years. Most of the clubs occupy rented
buildings and land. Normal operating rent increases for the 9 months period were approximately
$119,000 over the same period in 2008.
Legal expenses decreased by approximately $115,000, or 37.6%, for the three months ended
September 30, 2009 and increased approximately $143,000 or 19.5% for the nine months ended
September 30, 2009, compared to the same periods in 2008. The quarterly decrease is a result of the
completion of the SEC comment letter where final bills were incurred and paid in the second
quarter. A significant portion of the year-to-date increase is due to legal proceedings expenses
involving the Minneapolis club and the ICE and DOL audits. See Legal Proceedings under Part II,
Item 1. Additional legal expenses were incurred in July 2009 for the sale of the Arizona property.
Professional and consulting expenses include audit fees, directors fees, financial
consulting, Sarbanes Oxley (SOX) consulting and income tax return preparation fees. These
expenses increased by approximately $165,000 or 30.1% for the three months ended September 30,
2009. Significant expenses paid in the third quarter include consulting fees paid to technology
consultants for software maintenance, financial report development, server and hardware
installation and maintenance, and small amounts of lobbying and permit consulting expenses.
Professional and consulting expenses for the nine months ended September 30, 2009 increased by
approximately $345,000 or 24.3% compared to the same period in 2008. The larger transactions for
the nine months ended September 30, 2009 included a payment of a real estate broker fee of
approximately $27,000 for finding a tenant to share the building housing the Indianapolis club, SOX
consulting expenses for the year to date of approximately $54,000, income tax preparation for the
2007 and 2008 federal and state income tax returns of approximately $123,000; an additional payment
to the external auditors of approximately $78,000 for extra work performed on the 2008 audit; and
payments to consultants of approximately $50,000 in the first two quarters related to the SEC
comment letter. SOX compliance and documentation did not begin until the third quarter of 2008 and
were incurred again in the same quarter in 2009. Tax preparation fees include federal, state and
local municipality tax compliance for 2008 on eight partnerships and fifteen underlying corporate
returns required in preparation of the consolidated corporate tax return filed in 2009.
Advertising and marketing expenses decreased approximately $21,000 or 3.0% for the three
months ended and almost $181,000 or 8.0% for the nine months ended September 30, 2009, compared to
the same periods in 2008. In part, the decrease resulted from reduced marketing expenses at the
club level. The Companys use of mobile billboard trucks to advertise clubs in Dallas/Ft. Worth,
East St. Louis and Denver is substantially cheaper than billboard signs. Marketing expenses were
higher in the first half of 2008 because of the amortization of warrants issued for marketing
services.
Repairs and maintenance charges decreased approximately $41,000 or14.1% for the three months
ended September 30, 2009, over the costs incurred in the three months ended September 30, 2008.
However, they increased by approximately $87,000 or 11.5% for the nine months ended September 30,
2009 when compared to the same period in 2008. The clubs acquired in 2008 have now been repainted,
furniture reupholstered and generally cleaned up as a part of the rebranding process under new
ownership. Major roof, sewer and electrical repairs have been made in the older clubs in
Minneapolis and St. Louis.
Other general and administrative (G&A) expenses decreased by approximately $175,000 or 15.1%
for the three months ended September 30, 2009 and increased approximately $423,000, or 13.1%, in
the nine months ended September 30, 2009, compared to the same periods in 2008. The following chart
shows the breakdown of the amounts for the larger account classifications for the three months and
nine months ended September 30, 2009 and 2008, respectively.
23
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Quarter to Date | Year to Date | |||||||||||||||||||||||||||||||
September 30, | ||||||||||||||||||||||||||||||||
Increases | % | Increases | % | |||||||||||||||||||||||||||||
Description | 2009 | 2008 | (Decrease) | Change | 2009 | 2008 | (Decrease) | Change | ||||||||||||||||||||||||
(Restated) | (Restated) | |||||||||||||||||||||||||||||||
Janitorial |
$ | 194,456 | $ | 199,741 | $ | (5,285 | ) | (2.65) | % | $ | 600,233 | $ | 543,051 | $ | 57,182 | 10.53 | % | |||||||||||||||
Supplies |
158,351 | 163,460 | (5,109 | ) | (3.13) | % | 494,126 | 470,602 | 23,524 | 0.05 | % | |||||||||||||||||||||
Security |
72,650 | 85,447 | (12,797 | ) | (14.98) | % | 244,536 | 229,165 | 15,371 | 0.07 | % | |||||||||||||||||||||
Theft Loss |
- | 104,518 | (104,518 | ) | (100.00) | % | - | 104,518 | (104,518 | ) | (1.00) | % | ||||||||||||||||||||
Automobile Expenses |
63,325 | 73,616 | (10,291 | ) | (13.98) | % | 203,743 | 200,755 | 2,988 | 0.01 | % | |||||||||||||||||||||
IT/Internet Expenses |
44,869 | 48,237 | (3,368 | ) | (6.98) | % | 142,056 | 118,466 | 23,590 | 0.20 | % | |||||||||||||||||||||
Cast Relations |
29,139 | 80,182 | (51,043 | ) | (63.66) | % | 174,169 | 166,653 | 7,516 | 0.05 | % | |||||||||||||||||||||
Music |
5,173 | 4,415 | 758 | 17.17 | % | 85,691 | 64,204 | 21,487 | 0.33 | % | ||||||||||||||||||||||
Telephones |
60,433 | 59,780 | 653 | 1.09 | % | 177,230 | 176,997 | 233 | 0.00 | % | ||||||||||||||||||||||
Travel & Lodging |
52,643 | 69,581 | (16,938 | ) | (24.34) | % | 207,907 | 211,695 | (3,788 | ) | (0.02) | % | ||||||||||||||||||||
Education & Training |
48,523 | 33,640 | 14,883 | 44.24 | % | 124,999 | 113,327 | 11,672 | 0.10 | % | ||||||||||||||||||||||
Laundry |
35,218 | 38,253 | (3,035 | ) | (7.93) | % | 111,654 | 111,527 | 127 | 0.00 | % | |||||||||||||||||||||
Investor Relations |
32,897 | 25,138 | 7,759 | 30.87 | % | 104,548 | 71,573 | 32,975 | 0.46 | % | ||||||||||||||||||||||
Memberships and Subscriptions |
33,220 | 13,400 | 19,820 | 147.91 | % | 96,333 | 46,232 | 50,101 | 1.08 | % | ||||||||||||||||||||||
Office Expenses |
93,295 | 113,973 | (20,678 | ) | (18.14) | % | 286,218 | 286,297 | (79 | ) | (0.00) | % | ||||||||||||||||||||
Total other accounts with balances under $50,000 |
56,238 | 42,094 | 14,144 | 33.60 | % | 591,911 | 307,740 | 284,171 | 0.92 | % | ||||||||||||||||||||||
Total Other Expenses |
$ | 980,430 | $ | 1,155,475 | $ | (175,045 | ) | (15.15) | % | $ | 3,645,354 | $ | 3,222,802 | $ | 422,552 | 0.13 | % | |||||||||||||||
Depreciation and Amortization
Depreciation and amortization decreased approximately $29,000 or 6.3%, for the three months
ended September 30, 2009 and increased by approximately $47,000 or 3.8% for the nine months ended
September 30, 2009, compared to the same periods in 2008. The decrease for the quarter is
attributable to the disposition of the Phoenix, Arizona property that through the course of time
have been fully depreciated. The increase for the year-to-date is a result of asset additions.
Interest Expense
Interest expense decreased by almost $162,000 or 16.2% for the three months ended September
30, 2009 and increased by $68,000, or 2.6% for the nine months ended September 30, 2009, compared
to the same periods in 2008. The decrease in interest for the third quarter was result of
principal pay-downs, the transfer of the Sacred Ground note and additional note payoffs.
Income Tax Expense Current
The current portion of income tax expense of approximately ($236,613), represents the portion
of income taxes that are estimated to be payable for the nine months ended September 30, 2009, as
compared to $1,452,000 for the nine months ended September 30, 2008. Current income tax decreased
from the prior year primarily due to reduced income and increased tax credits.
Income Tax Expense Deferred
Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. Deferred income tax expense for the nine months ended
September 30, 2009 was approximately $486,000 higher than the same period in the prior year.
Net Income and Earnings Per Share
Net income for the three months ended September 30, 2009 was approximately $795,000 or $0.05
per share less than the same period in 2008. Net income after non-controlling interests was
approximately $2,443,000 for the nine months ended September 30, 2009 which is $0.08 per share less
than the same period in 2008.
The weighted average shares outstanding decreased by 584,413 shares or 3.2% for the three
month ended September 30, 2009 and 396,768 shares or 2.2% for the nine month period ended September
30, 2009, when compared to the same periods in 2008. This
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change is primarily due to shares purchased and cancelled by the Company. The Company purchased a
total of 148,975 shares of common stock for an aggregate purchase price of $329,162 for the nine
months ended September 30, 2009. Colorado state law requires cancellation of treasury stock.
Liquidity
The level of working capital for existing club operations does not materially fluctuate and is
very predictable. We anticipate that the cash flow from our existing operations will be sufficient
to fund our current level of operations for the next 12 months.
The Company successfully negotiated a
change in terms on our existing line of credit and term loan with Citywide Banks, extended the
maturity date to August 15, 2011 and August 15, 2014 respectively. As of September 30, 2009, we
have borrowing availability in the amount of $1,580,000 under our bank line of credit. We intend to
use our cash flows for principal and interest payments on debt and capital expenditures in certain
clubs and continued repairs and maintenance in other clubs.
The Company has continued to focus on using free cash flow to reduce debt. Total debt at
September 30, 2009 is approximately $3,352,000 lower than total debt at June 30, 2009 and
$5,642,000 lower than the total debt balance at December 31, 2008. Year-to-date debt reduction
includes a note payable assumed by the buyer of $1,771,854 resulting from the sale of the Arizona
property. In August 2009, the Company renegotiated additional extensions on five promissory notes,
extending maturity dates by a year. In all instances, the interest rates and principal amounts did
not change, making the extension a modification of the note, not an extinguishment of the debt.
These promissory notes have been reflected in the financial statements as long term debt. The
Companys weighted average borrowing cost is 8.59% at September 30, 2009, compared to 9.2% at
December 31, 2008.
As part of the revised terms negotiated with Citywide Banks, we no longer have a covenant
requirement of a complete a principal pay-down to a zero balance at least one day every six months.
The new covenants governing the loans require compliance of (1) pre-approval of acquisitions or
indebtedness of equal to or in excess of $1,000,000, and (2) net cash flow-to-debt service ratio
greater than or equal to 1.2 to 1.0, reported quarterly.
Cash flow from operations was approximately $5,431,000 year-to-date, compared to $9,449,900
for the same periods in 2008. We have been able to satisfy our needs for working capital and
capital expenditures through a combination of cash flow from club operations and debt. The Company
expects that operations will continue with the realization of assets and payment of current
liabilities in the normal course of business. We have no acquisitions planned in 2009, but always
consider opportunities.
Working Capital
At September 30, 2009 and December 31, 2008, the Company had cash of approximately $2,296,000
and $2,209,000, respectively, and total current assets of approximately $4,349,000 and $4,020,000
respectively. We had positive working capital where our current assets exceeded our current assets
by approximately $66,000 at September 30, 2009, compared to negative working capital of $3,108,000
at December 31, 2008. The Company anticipates meeting any working capital and debt service
requirements with cash flow from operations and funding as needed from existing debt and the line
of credit. Working capital changed because of many of the current notes were renegotiated with new
maturity dates beyond one year.
Capital Resources
The Company had equity of approximately $29,905,000 on September 30, 2009 and approximately
$28,387,000 at December 31, 2008. The increase was primarily the result of income earned during the
first nine months of 2009 of approximately $2,048,000. Non-controlling interests in consolidated
partnerships totaled approximately $3,575,000 at September 30, 2009 and $3,560,000 at September 30,
2008.
The major non-cash activity in the first nine months of 2009 was the amortization of loan fees
of approximately $175,000 and stock based compensation expense of $233,000. Deferred income tax for
the nine months ended September 30, 2009 was almost $1,026,000, an increase of only $33,000 as
compared to the nine months ended September 30, 2008. Compounded and unpaid interest on long-term
debt was $132,000 for the nine months ended September 30, 2009.
Net cash used by investing activities for the nine months ended September 30, 2009 was
approximately $349,000, compared to net cash used by investing activities of $11,916,000 for the
same period in 2008. The largest use of cash was for the purchase of fixed assets of approximately
$602,000 for the nine months ended September 30, 2009, compared to approximately $1,269,000 for the
same period in 2008. The Company anticipates spending approximately $1,200,000 in capital
expenditures over the next twelve months, including $550,000 for the installation of the POS
system, $400,000 for the remodel of the club located in Anaheim, California and approximately
$250,000 for structural roof replacements and other major club equipment replacement.
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Net cash used by financing activities for the nine months ended September 30, 2009 was
approximately $4,995,000. New debt proceeds of $1,185,000 in the nine months ended September 30,
2009 were used to repurchase company stock for about $777,000, paid off capital leases of $19,111
and, supplemented by cash provided from operations, paid down principal on debt of approximately
$4,535,000.
We have determined that should current economic conditions continue to decline affecting
current revenues, there is potential for an additional impairment adjustment to intangible assets
at the next impairment test date of December 31, 2009.
The following table reconciles net income to EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization) for the three months and nine months ended September 30, 2009
compared to the same periods in 2008. EBITDA is a non-GAAP calculation used by our investors to
measure operating results. EBITDA data is included because the Company understands that investors
consider such information as an additional basis on evaluating our ability to pay interest, repay
debt and make capital expenditures. VCGs management uses EBITDA as one method of tracking club and
Company performance. Management cautions that this EBITDA calculation may not be comparable to
similarly titled calculations reported by other companies. Because it is non-GAAP, EBITDA should
not be considered as an alternative to operating or net income in measuring company results.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Restated) | (Restated) | |||||||||||||||
Net Income |
$ | 632,227 | $ | 1,822,628 | $ | 2,047,683 | $ | 4,774,001 | ||||||||
Add back: |
||||||||||||||||
Depreciation |
419,478 | 446,352 | 1,270,503 | 1,223,746 | ||||||||||||
Amortization of non-compete agreements |
4,259 | 5,959 | 12,776 | 12,654 | ||||||||||||
Amortization of leasehold rights and
liabilities, net |
(48,606 | ) | (45,929 | ) | (147,588 | ) | (145,000 | ) | ||||||||
Amortization of loan fees |
52,620 | 79,071 | 174,523 | 226,000 | ||||||||||||
Interest expense |
785,343 | 921,260 | 2,507,243 | 2,387,963 | ||||||||||||
Total income tax expense |
344,000 | 907,764 | 1,242,000 | 2,444,726 | ||||||||||||
EBITDA before non-cash impairment charges |
$ | 2,189,321 | $ | 4,137,105 | $ | 7,107,140 | $ | 10,924,090 | ||||||||
Add back: |
||||||||||||||||
Total non-cash impairment charges |
$ | - | $ | - | $ | 268,000 | $ | - | ||||||||
EBITDA excluding non-cash impairment charges |
$ | 2,189,321 | $ | 4,137,105 | $ | 7,375,140 | $ | 10,924,090 | ||||||||
Total revenue |
$ | 13,888,928 | $ | 15,230,912 | $ | 41,622,649 | $ | 43,163,492 | ||||||||
EBITDA as a percentage of revenue |
15.8% | 27.2% | 17.1% | 25.3% |
Another non-GAAP financial measurement used by the investment community is free cash flow. The
following table calculates free cash flow for the Company for the three months and nine months
ended September 30, 2009 compared to the same period in 2008. Company management uses free cash
flow calculations as one method of cash management to anticipate available cash, but cautions
investors that this free cash flow calculation may not be comparable to similarly titled
calculations reported by other companies. Because this is non-GAAP, free cash flow should not be
considered as an alternative to the consolidated statement of cash flows.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Restated) | (Restated) | |||||||||||||||
EBITDA |
$ | 2,189,321 | $ | 4,137,105 | $ | 7,375,140 | $ | 10,924,090 | ||||||||
Less: |
||||||||||||||||
Interest Expense |
785,343 | 921,260 | 2,507,243 | 2,387,963 | ||||||||||||
Non-controlling interests |
162,843 | 132,239 | 394,842 | 361,243 | ||||||||||||
Current income tax |
(86,289 | ) | 506,865 | 86,954 | 1,452,090 | |||||||||||
Capital expenditures |
121,941 | 58,703 | 602,111 | 1,268,549 | ||||||||||||
Free Cash Flow |
$ | 1,205,483 | $ | 2,518,038 | $ | 3,783,990 | $ | 5,454,245 | ||||||||
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 4T. Controls and Procedures.
As of September 30, 2009, our Chief Executive Officer and Chief Financial Officer (the
Certifying Officers) conducted evaluations regarding the effectiveness of our disclosure controls
and procedures. As defined under Sections 13a-15(e) and 15d-15(e) of the Exchange Act, the term
disclosure controls and procedures means controls and other procedures of an issuer that are
designed to ensure that information required to be disclosed by the issuer in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the SECs rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act is
accumulated and communicated to the registrant management, including the Certifying Officers, to
allow timely decisions regarding required disclosure. Based on this evaluation, the Certifying
Officers have concluded that our disclosure controls and procedures were effective as of the end of
the period covered by this Report to ensure that material information is recorded, processed,
summarized and reported by our management on a timely basis in order to comply with our disclosure
obligations under the Exchange Act and the rules and regulations promulgated thereunder.
The Company had previously concluded that a material weakness in the Companys internal
control over financial reporting existed as of December 31, 2007, as reported in the Companys
Annual Report on Form 10-K/A for the year ended December 31, 2008. This weakness was reported in
the Form 10-K/A as follows:
| The Company lacked a sufficient number of accounting personnel with appropriate knowledge of generally accepted accounting principles to handle the acquisition growth of the Company. As a result, the input and categorization of certain entries required extensive review to assure accuracy and the December 31, 2007 year-end financial statements submitted to the SEC had to be restated. | ||
| Turnover in key accounting positions decreased the likelihood that these errors would have been detected in the ordinary monitoring of reconciliation procedures. | ||
| The Company failed to maintain effective financial reporting controls in certain areas, including general ledger journal entries, which were not always reviewed prior to entry. |
Since that report, remediation of these material weaknesses have included:
| Hiring additional accounting personnel with experience and training to produce accurate financial data and with the intent to limit turnover; and | ||
| Engaging the services of technical third party consultants to advise management on technical financial and reporting matters. |
Because of the remediation of the material weaknesses described in the preceding paragraph,
management believes that as of September 30, 2009, the Companys internal control over financial
reporting is effective based on the completion of these remediation tasks.
The Company has implemented this remediation plan after December 31, 2008. No other change has
occurred in our internal control over financial reporting that we believe has materially affected,
or is reasonable likely to materially affect, our internal controls over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
Litigation
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.
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Thee Dollhouse Productions Litigation
On or around July 24, 2007, VCG Holding Corp. was named in a lawsuit filed in District Court,
191 Judicial District, of Dallas County, Texas. This lawsuit arose out of a VCG acquisition of
certain assets belonging to Regale, Inc. (Regale) by Raleigh Restaurant Concepts, Inc. (RRC), a
wholly owned subsidiary of VCG, in Raleigh, N.C. The lawsuit alleges that VCG tortiously interfered
with a contract between Michael Joseph Peter and Regale, and misappropriated Mr. Peters purported
trade secrets. On March 30, 2009, the United States District Court for the Eastern District of
North Carolina entered an Order granting Summary Judgment to VCG and dismissed Mr. Peters claims
in their entirety. The Court found that as a matter of law, VCG did not tortiously interfere with
Mr. Peters contract with Regale and further found that VCG did not misappropriate trade secrets.
Mr. Peters did not appeal that ruling and as such, the federal proceedings have concluded.
Ancillary to this litigation, Thee Dollhouse filed a claim in arbitration on June 2008 against
Regale as a result of this transaction, asserting that Regale, by selling its assets to RRC,
breached a contract between Thee Dollhouse and Regale. In addition, an assertion was made that one
of Regales principals tortiously interfered with the contract between Regale and Thee Dollhouse.
Regale filed a Motion to Stay Arbitration which was granted in part and denied in part, with the
Court staying arbitration as to Regales principal and denying the stay as to Regale. As a result,
the arbitration as to Regale is proceeding. VCG is indemnifying and holding Regale harmless from
this claim pursuant to its contract. The arbitration was originally scheduled for late October
2009, however due to illness of one of the principals of the claimant, the arbitration has been
adjourned without a new date set. The Company has not accrued anything relating to the settlement
of this litigation; however the outcome of this dispute cannot be predicted.
Zajkowski, et. al. vs VCG and Classic Affairs Litigation
In December 2007, a former employee of VCGs subsidiary Classic Affairs, Eric Zajkowski, filed
a lawsuit in Hennepin County District Court, Minneapolis, Minnesota against VCG following his
termination from employment alleging that, in connection with his employment, he was subject to
certain employment practices which violated Minnesota law. The initial action and subsequent
pleading asserted that the matter was filed as a purported class action. Subsequent to the filing
of Zajkowskis Complaint, Zajkowski moved to amend his Complaint to name additional Plaintiffs and
later, to name Classic Affairs as a party defendant. VCG and Classic Affairs have answered this
complaint denying all liability. Classic Affairs has also filed a Counter-Complaint against Mr.
Zajkowski based upon matters relating to his termination from employment with Classic Affairs.
In December 2008 and early January 2009, the parties filed cross-motions for Summary Judgment
and Zajkowski filed a Motion for Class Certification. Following the motions, the Court issued a
series of rulings on those Motions. In these rulings, the Court has dismissed VCG as a party
Defendant having determined that VCG is not directly liable to Zajkowski or the other Plaintiffs
on their claims. The Court granted Summary Judgment to Zajkowski as to one issue, but did not
determine the scope or extent, if any, of the alleged damages, ruling this issue, like the others,
are questions for a jury, and the Court dismissed two other claims asserted by Zajkowski. In all
other respects, the Court has denied the parties respective Summary Judgment motions.
On July 21, 2009, the Court denied Zajkowskis and the other Plaintiffs Motion for Class
Certification. Zajkowski appealed that decision to the Minnesota Court of Appeals and on September
22, 2009, the Court of Appeals denied Plaintiffs request for discretionary review. Plaintiffs have
indicated that they do not intend to seek leave to appeal from the Minnesota Supreme Court.
The parties have scheduled mediation for November 2009 and if mediation is unable to settle
this case, trial is scheduled to begin in late January 2010.
Texas Patron Tax Litigation
Beginning January 1, 2008, VCGs Texas clubs became subject to a new state law requiring the
Company to collect a $5 surcharge for every club visitor. A lawsuit was filed by the Texas
Entertainment Association, an organization in which the Company is a member, alleging that the fee
is an unconstitutional tax. On March 28, 2008, the Judge of the District Court of Travis County,
Texas ruled that the new state law violates the First Amendment to the U.S. Constitution and,
therefore, the District Courts order enjoined the state from collecting or assessing the tax. The
State of Texas has appealed the District Courts ruling. When cities or the State of Texas give
notice of appeal, the State supersedes and suspends the judgment, including the injunction.
Therefore, the judgment of the Travis County District Court cannot be enforced until the appeals
are completed. During the suspension of the judgment, the State of Texas has opted to collect the
tax pending the appeal. The Company has paid, under protest approximately $203,000 for the year
ended December 31, 2008 and $195,508 for the nine months ended September 30, 2009. VCG has a total
of approximately $401,285 on deposit, under protest, with the State of Texas. The Company has filed
a lawsuit to demand repayment of the paid taxes. On June 5,
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2009, the Court of Appeals for the
Third District (Austin) affirmed the District Courts judgment that the Sexually Oriented Business
(S.O.B.) Fee violated the First Amendment to the U.S. Constitution. The Attorney General of Texas
has asked the Texas Supreme Court to review the case. No mandate will be issued until the Supreme
Court of Texas either refuses the review or takes and decides the case. All parties are waiting on
the decision of the Supreme Court of Texas either to grant review or not. On August 26, 2009, the
Texas Supreme Court ordered both sides to submit briefs on the merits, while not yet deciding
whether to grant the States Petition for review. The States brief was filed on September 25, 2009
and the Texas Entertainment Associations brief was filed on October 15, 2009.
At the end of the Texas legislative session in June 2009, no amendments to the S.O.B. fee or a
substitute Bill to replace the patron tax were approved. The legislative session ended terminating
the efforts to change the challenged statute, which remains in effect. All tax protest suits also
remain pending.
On the advice of Texas counsel, the Company has continued to pay the tax amounts under
protest. The table below shows the amounts paid and expensed for the three months and nine months
ended September 30, 2009 and 2008.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
$ | 61,008 | $ | 82,810 | $ | 195,508 | $ | 121,145 | |||||||||
Department of Labor and Immigration and Customs Enforcement Reviews
In October 2008, PTs® Showclub in Louisville, KY was required to conduct a
self-audit of employee payroll by the U.S. Department of Labor (DOL). After an extensive
self-audit, it was determined that (a) the Club incorrectly paid some employees for hours worked
and minimum wage amounts and (b) the Club incorrectly charged minimum wage employees for their
uniforms. As a result, the DOL required that the Club issue back pay and refund uniform expenses to
qualified employees at a total cost of $14,439. In addition, as a result of the Kentucky audit, all
other clubs and our corporate office have been placed under a nationwide DOL audit. All clubs have
completed the self-audit in August 2009 and are currently working with the DOL to determine what,
if any, violations may have occurred. No amounts have been accrued related to this audit.
On June 30, 2009, PTs® Showclub in Portland, Maine was served a subpoena by
Immigration and Customs Enforcement (ICE) requesting documents to conduct an I-9 audit. ICE
requested all original I-9s for both current and past employees from September 14, 2007 to
present. ICE is conducting the audit to ensure proper use of the I-9 form ensuring the Club is
verifying employees right to work in the United States. The Club complied with the subpoena
submitting all requested documents between July 7, 2009 and July 16, 2009. As of November 12, 2009,
ICE is still reviewing the requested documents. This matter is still in its investigatory stage and
no determination has been made. No amounts have been accrued related to this audit.
Internal Revenue Service
The IRS audited PTs® Showclub in Denver for the years 2006, 2007 and 2008 to
determine tip reporting compliance. Every business where tipping is customary must report annually
on Form 8027 the total sales from food and beverage operations, charge sales, total tips reported
and charge tips reported. The audit was based upon this Form to determine compliance with Section
3121(q) of the Internal Revenue Code, as amended.
The audit was conducted by an examining officer in Denver in August and September 2009. The
audit focused on the data reported on Form 8027 and related underlying documentation.
The audit resulted in a determination that tips were under-reported in the three years
examined. The tax assessed as a result of this under-reporting was $61,500. Penalties and
interest were not assessed. The IRS auditor indicated that all other clubs would be audited and
recommended that a Point of Sale (POS) system should be installed in every club to ensure
compliance with IRS regulations. After completing test audits on all clubs using the same
procedures followed by the IRS, an additional accrual of $385,500 in estimated taxes was recorded
to cover the estimated liability.
The clubs are involved in various other legal proceedings that arise in the ordinary course of
business. Management believes the outcome of any of these proceedings will not have a material
effect on the consolidated operations of the Company.
29
Table of Contents
Item 1A. Risk Factors.
In addition to the other information set forth in this Report, you should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K/A for
the year ended December 31, 2008, which could materially affect our business, financial condition
or future results. The risks described in our Annual Report on Form 10-K/A are not the only risks
we face. Additional risks and uncertainties not currently known to us, or that we currently deem to
be immaterial, also may materially adversely affect our business, financial condition and/or
operating results. There are no material changes to the risk factors included in our Annual Report
on Form 10-K/A for the fiscal year ended December 31, 2008 and during the quarter ended September
30, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
As previously announced, the Board of Directors of VCG Holding Corp. 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, par value $0.0001 (the Common Stock), or (b) an
aggregate of $10,000,000 of Common Stock (the Repurchase Program). On September 29, 2008, the
Companys Board of Directors authorized the Companys Executive Committee to repurchase, in its
discretion, up to an aggregate of $1,000,000 of Common Stock pursuant to the Repurchase Program.
Further, on January 9, 2009, the Companys Board of Directors authorized the Companys Executive
Committee to repurchase, at its discretion, up to an additional aggregate of $1,000,000 of Common
Stock pursuant to the Repurchase Program (for a total amount of $2,000,000 of authorized purchases
under the Repurchase Program).
During the quarter ended September 30, 2009, the Company repurchased an aggregate of 148,975
shares of Common Stock for an aggregate purchase price of $329,162. As a result, as of September
30, 2009, up to 832,875 shares of Common Stock or shares of Common Stock with an aggregate purchase
price of approximately $8,212,329 (whichever is less) remain available for repurchase under the
Repurchase Program.
The following table provides additional information about the Companys purchases under the
Repurchase Program for the quarter ended September 30, 2009:
Maximum Number | |||||||||||||||||
(or Approximate | |||||||||||||||||
Total Number of | Dollar Value) of | ||||||||||||||||
Shares Purchased | Shares that May | ||||||||||||||||
as Part of | Yet Be | ||||||||||||||||
Total Number of | Publicly | Purchased under | |||||||||||||||
Shares | Average Price | Announced Plans | the Plans or | ||||||||||||||
Period | Purchased(1) | Paid per Share | or Programs(1) | Programs | |||||||||||||
July 1 to 31, 2009 |
27,457 | $ | 2.21 | 27,457 | 954,393 shares or $8,480,641 | ||||||||||||
August 1 to 31, 2009 |
66,149 | $ | 2.23 | 66,149 | 888,244 shares or $8,333,023 | ||||||||||||
September 1 to 30, 2009 |
55,369 | (2) | $ | 2.17 | 55,369 | 832,875 shares or $8,212,329 | |||||||||||
Total |
148,975 | $ | 2.20 | 148,975 | 832,875 shares or $8,212,329 | ||||||||||||
(1) | Unless noted, the Company made all repurchases in the open market. | |
(2) | Of these repurchases, the Company purchased 143,975 shares of common stock in the open market and 5,000 shares of common stock in a private transaction. |
Subsequent to September 30, 2009, the Company repurchased an additional 45,154 shares of
Common Stock for an aggregate purchase price of $92,296.
On November 3, 2009, the Companys Board of Directors terminated the stock repurchase program
approved on July 26, 2007, to allow the Company to evaluate the Proposal.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
30
Table of Contents
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
10.93 | Promissory Note (Replacement Note), dated August 15, 2009, between VCG Holding Corp. and Lowrie Management LLLP and Citywide Banks (1) | |
10.94 | Business Loan Agreement (Replacement Note), dated August 15, 2009, between VCG Holding Corp. and Lowrie Management LLLP and Citywide Banks (1) | |
10.95 | Change In Terms Agreement (Original Line of Credit), dated August 15, 2009, between VCG Holding Corp. and Lowrie Management LLLP and Citywide Banks (1) | |
10.96 | Business Loan Agreement (Original Line of Credit), dated August 15, 2009, between VCG Holding Corp. and Lowrie Management LLLP and Citywide Banks (1) | |
31.1 | Certification of Chief Executive Officer of VCG Holding Corp., pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1) | |
31.2 | Certification of Chief Financial and Accounting Officer of VCG Holding Corp., pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted Section 302 of the Sarbanes-Oxley Act of 2002. (1) | |
32.1 | Certification of Chief Executive Officer of VCG Holding Corp., in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) (2) | |
32.2 | Certification of Chief Financial and Accounting Officer of VCG Holding Corp., in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) (2) |
(1) | Filed herewith. | |
(2) | Furnished. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
VCG HOLDING CORP. |
||||
Date: November 12, 2009 | By: | /s/ Troy Lowrie | ||
Troy Lowrie | ||||
Chairman of the Board and Chief Executive Officer (Principal Executive Officer) | ||||
Date: November 12, 2009 | By: | /s/ Courtney Cowgill | ||
Courtney Cowgill | ||||
Chief Financial and Accounting Officer | ||||
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