UNITED STATES SECURITIES AND EXCHANGE COMMISSION ~~Washington, D.C. 20549~~

Washington, D.C. 20549

Form 10-K

(Mark One):
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended December 31, 2009
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to


(Mark One):

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

For the fiscal year ended December 31, 2010


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

Registrant’s telephone number, including area code: (303) 934-2424

(303) 934-2424

Securities registered pursuant to Section 12(b) of the Act:


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

Securities registered pursuant to Section 12(g) of the Act: None

None

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

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

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

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

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

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

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

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

The aggregate market value of the voting common equity held by non-affiliates of the registrant as of the last business day of the second fiscal quarter, June 30, ~~2009~~2010, was $2518,~~955~~779,~~857~~125 (computed by reference to the average sale price as reported on the NASDAQ Global Market). As of March 1229, ~~2010~~2011, there were 17 16,~~310~~292,~~723~~ 071 shares of the registrant’s Common Stock, par value of $.0001 per share, outstanding.

VCG HOLDING CORP.

FORM 10-K

TABLE OF CONTENTS

PART I
ITEM 1.	Business.	3	1
ITEM 1A.	Risk Factors.	8	8
ITEM 1B.	Unresolved Staff Comments.	17	18
ITEM 2.	Properties.	17	18
ITEM 3.	Legal Proceedings.	20	22
ITEM 4.	(Removed and Reserved)	23	26
PART II
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	24	26
ITEM 6.	Selected Financial Data.	26	27
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	27	28
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk.	37	39
ITEM 8.	Financial Statements and Supplementary Data.	37	40
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	66	71
ITEM 9A	Controls and Procedures.	66	71
ITEM 9B.	Other Information.	67	71
PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance.	68	72
ITEM 11.	Executive Compensation.	72	77
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	76	82
ITEM 13.	Certain Relationships and Related Transactions and Director Independence.	79	85
ITEM 14.	Principal Accountant Fees and Services.	82	90
PART IV
ITEM 15.	Exhibits and Financial Statement Schedules.	83	91
SIGNATURES		91	98
EX-21.1
EX-23.1
EX-31.1
EX-32.1

PART I

Forward-Looking Statement Disclaimer

In this report, references to “VCG Holding Corp,” “VCG”, the “Company,” “we,” “us,” and “our” refer to VCG Holding Corp. and its subsidiaries.

This Annual Report on Form 10-K ~~contains~~ ~~certain forward-looking statements~~ and, ~~for this purpose, any statements contained herein that are not statements of historical fact are intended to be “forward-looking statements” with~~ the ~~meaning~~documents ofwe ~~the~~incorporate ~~Private~~by ~~Securities Litigation~~reference ~~Reform~~herein ~~Act of 1995. Without limiting the foregoing,~~include ~~words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “estimate,” “continue,” or comparable terminology, are intended to identify~~ forward-looking statements. ~~These~~All statements byother ~~their~~than ~~nature involve~~statements ~~substantial risks and uncertainties, and actual results may differ materially depending on a variety~~ of ~~factors,~~historical ~~many~~facts ~~of which~~contained ~~are not within our control. These factors include, but are~~in ~~not~~this ~~limited,~~Form ~~to,~~10-K ~~costs~~ and ~~liabilities associated with~~ the ~~proposed~~ ~~going~~documents ~~private~~we ~~transaction~~incorporate ~~and~~by ~~associated litigation and the proposed merger transaction~~reference, ~~our~~including ~~inability~~statements toregarding ~~retain employees and members of management due to uncertainty about~~ our future ~~direction~~financial ~~due~~position, tobusiness ~~the~~strategy ~~proposed merger transaction, costs~~ and ~~liabilities~~plans associated with our inability to successfully close the proposed merger transaction or any other similar transaction, the possibility that we may be prohibited from closing the proposed merger transaction or forced to rescind it if it has been consummated and ~~pay~~objectives ~~damages as a result~~ of ~~litigation,~~ ~~diversion of~~ management’s ~~attention~~for ~~caused by~~future ~~the proposed merger transaction and associated litigation~~operations, ~~our limited~~are ~~operating~~forward-looking ~~history~~statements. ~~making~~The ~~our~~words ~~future operating results difficult to predict~~“believe,” ~~the availability of~~“may,” ~~and costs associated with~~“estimate,” ~~potential sources of financing~~“continue, ~~disruptions in the credit~~” ~~markets~~“anticipate,” ~~economic conditions generally and in the geographical markets in which we may participate~~“intend,” ~~our inability to manage growth~~“should,” ~~difficulties associated with integrating acquired businesses into our operations~~“plan,” ~~geographic market concentration~~“could, ~~legislation~~” ~~and government regulations affecting us and our industry~~“target,” ~~competition within our industry~~“potential,” ~~our~~“is ~~failure to promote our brands~~likely,” ~~our failure to protect our brands~~“will, ~~the loss~~” of“expect” ~~senior management~~ and ~~key~~similar ~~personnel~~expressions, ~~potential~~as ~~conflicts~~they ~~of interest~~relate ~~between~~to us ~~and Troy Lowrie~~, ~~our~~are ~~Chairman~~intended ~~of the Board and Chief Executive Officer (“CEO”), our failure~~ to ~~comply~~ ~~with~~identify ~~licensing requirements applicable to our business,~~forward-looking ~~liability~~statements ~~from~~within ~~unsanctioned,~~the ~~unlawful~~meaning ~~conduct~~of ~~at our nightclubs,~~ the ~~negative~~“safe ~~perception~~harbor” provisions of ~~our~~Section 27A ~~industry,~~of the ~~failure~~Securities Act of ~~our business strategy to generate sufficient revenues~~1933, ~~liability from~~as ~~uninsured risks or risks not covered by insurance proceeds~~amended, ~~claims~~ ~~for indemnification from officers~~ and ~~Directors, deterrence~~Section 21E of ~~a change of control because of our ability to issue securities or from~~ the ~~severance~~Securities ~~payment~~Exchange ~~terms~~Act of ~~certain employment agreements with senior management~~1934, ~~our~~as ~~failure~~amended. ~~to meet~~We ~~the NASDAQ continued listing requirements, the failure of~~have ~~securities~~based ~~analysts~~these toforward-looking ~~cover~~statements ~~our~~largely ~~common~~on ~~stock,~~ our ~~failure~~current ~~to comply~~expectations ~~with~~and ~~securities~~projections ~~laws when issuing securities, our common~~about ~~stock~~future ~~being~~events aand ~~penny~~financial ~~stock,~~trends ~~our~~that ~~intention~~we ~~not~~believe tomay ~~pay~~affect ~~dividends on~~ our ~~common~~financial ~~stock~~condition, ~~our~~results ~~future issuance~~ of ~~common stock depressing~~ ~~the sale price of our common stock or diluting existing stockholders~~operations, ~~the~~business ~~limited~~strategy ~~trading market for,~~ and ~~volatile~~financial ~~price of, our common stock, and our inability to comply with rules and regulations applicable to public companies~~needs.

We These ~~caution~~forward-looking ~~readers~~statements ~~not~~are subject to ~~place~~a ~~undue~~number ~~reliance~~of onrisks, ~~any~~uncertainties and ~~forward~~assumptions described in “Risk Factors” and elsewhere in this Annual Report on Form 10-~~looking~~K. ~~statements~~In addition, ~~which~~our ~~speak~~past ~~only~~results as of ~~the~~operations ~~date~~do ~~made~~not necessarily indicate our future results. Moreover, the ready-mix concrete and the heavy highway construction business are ~~based~~very oncompetitive ~~certain~~and ~~assumptions~~rapidly changing. New risk factors emerge from time to time and ~~expectations~~it ~~which~~is ~~may~~not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or ~~may~~the extent ~~not~~to bewhich ~~valid~~any risk factor, or ~~actually~~combination ~~occur~~of ~~and~~risk ~~which~~factors, ~~involve~~may ~~various~~cause actual results to differ ~~risks~~materially ~~and~~from ~~uncertainties~~those contained in any forward-looking statements.

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

Item 1. Business

General Information

Our Company was incorporated under the laws of the State of Colorado in 1998, but did not begin its operations until April 2002. The Company, through its subsidiaries, owns 2019 adult nightclubs that offer quality live adult entertainment, restaurant and bar operations. Our nightclubs are located in Colorado, California, Florida, Illinois, Indiana, Kentucky, Minnesota, North Carolina, Maine, and Texas.

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

Business

We operate the following nightclubs:

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

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


*		- sold on July 16, 2010

**		- signed an Asset Purchase Agreement to sell March 22, 2011 (see Note 15 of the Notes to the Consolidated Financial Statements under “Subsequent Events.”

The Company ~~owns~~classifies ~~International~~its ~~Entertainment~~nightclubs ~~Consultants~~into three tiers called A, ~~Inc~~B, and C nightclubs. Type “A” (nightclubs’ characteristics include larger facilities with a variety of entertainment and performers. “~~IEC~~A”) nightclubs include a restaurant with an onsite chef preparer. Furthermore, ~~which~~“A” ~~provides~~type nightclubs ~~management~~offer ~~services~~high-label tocigars, ~~our~~VIP facilities, and specialty suites. Type “B” nightclubs have ~~clubs~~smaller facilities. ~~IEC~~Food ~~was~~service ~~originally~~is ~~formed~~limited inor ~~1980.~~not Atprovided, but the ~~time~~facility ofserves alcohol. These ~~acquisition~~nightclubs inare ~~October~~a ~~2003,~~topless ~~IEC~~format. ~~was~~Type ~~owned~~“C” bynightclubs ~~Troy~~do ~~Lowrie~~not provide alcoholic beverages, ~~our~~except for ~~Chairman~~our ofTexas location that follows the ~~Board~~“Bring ~~and~~Your ~~CEO~~Own Bottle” (“B.Y.O.B.”) format. This nightclub is “all-nude.”

The ~~day-to-day management~~ ofCompany ~~our~~owns ~~clubs~~International isEntertainment ~~conducted~~Consultants, ~~through IEC~~Inc. (“IEC”), which provides ~~the clubs with~~ management ~~and~~services ~~supervisory personnel~~ to ~~oversee operations,~~our ~~hires~~nightclubs. ~~and~~IEC ~~contracts~~was ~~all~~originally ~~operating~~formed ~~personnel, establishes~~in ~~club~~1980. ~~policies~~At ~~and~~the ~~procedures,~~time ~~handles compliance~~of ~~monitoring,~~acquisition ~~purchasing,~~in ~~accounting and other administrative services~~October 2003, ~~and~~IEC ~~prepares~~was ~~financial~~owned ~~and~~by ~~operating~~Troy ~~reports~~Lowrie, ~~and income~~our ~~tax~~Chairman ~~returns.~~of ~~IEC charges~~ the ~~clubs~~Board aand ~~management fee based on the Company’s common expenses that are incurred in maintaining these functions~~CEO.

In The ~~June~~day-to-day ~~2002,~~management of our nightclubs is conducted through IEC. IEC provides the nightclubs ~~Company~~with ~~formed~~management ~~VCG~~and ~~Real~~supervisory ~~Estate~~personnel ~~Holdings~~to oversee operations, ~~Inc.~~hires and contracts all ~~(“VCG-RE”)~~operating personnel, aestablishes ~~wholly~~nightclub ~~owned~~policies ~~subsidiary~~and ~~that~~procedures, ~~currently~~handles compliance monitoring, ~~owns~~purchasing, ~~the~~accounting ~~land~~and other administrative services, and ~~buildings~~prepares offinancial ~~two~~and ofoperating reports ~~our~~and ~~nightclubs~~income tax returns. OnIEC charges the nightclubs a management fee based on the Company’s ~~July 31,~~common ~~2009,~~expenses ~~VCG-RE~~that ~~sold~~are ~~another~~incurred ~~piece~~in maintaining these functions.

In June 2002, the Company formed VCG Real Estate Holdings, Inc. (“VCG-RE”), a wholly-owned subsidiary that owns the land and buildings housing two of our nightclubs. 2

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

•

Facilities — Our nightclub facilities are within ready access to the principal business, tourist and/or commercial districts in the metropolitan areas in which they are located. The facilities have state-of-the-art sound systems, lighting and professional stage design. Our nightclubs maintain an upscale level of décor and furnishings to create a professional appearance. Three of our nightclubs offer VIP rooms. Our VIP rooms are open to individuals who purchase annual memberships. They offer a higher level of service and are elegantly appointed and spacious.

of• ~~the~~Professional ~~real~~On-Site ~~property~~Management ~~located~~— Our nightclubs are managed by persons who are experienced in ~~Phoenix,~~the ~~Arizona~~restaurant toand/or ~~Black~~hospitality ~~Canyon Highway~~industry. ~~LLC,~~The managers for the nightclubs are responsible for maintaining a ~~Texas~~quality ~~limited~~and ~~liability~~professionally ~~company~~run nightclub. AsAt ~~of December 31,~~a ~~2009~~higher level, ~~VCG-RE~~our ~~owns~~area ~~both~~directors oversee the ~~real~~management ~~property~~of ~~on which PT’s® Showclub~~several innightclubs ~~Indianapolis,~~within INa ~~and PT’s® Brooklyn~~specified ingeographical ~~Brooklyn,~~area. ILThe ~~are~~Company ~~located~~currently has twelve area directors who have twelve to twenty-eight years of experience in the industry.

~~The~~• ~~Company~~Food ~~has~~and ~~one~~Beverage ~~reportable~~Operations ~~segment~~— Many of our nightclubs offer a first-class bar and food service. ~~Our~~Five ~~clubs~~of our nightclubs offer a full service restaurant that provides customers with exceptional food, service and luxury. At most locations, we provide a selective variety of food including, but not limited to, hot and cold appetizers, pizza, and other limited food choices. Some of our nightclub operations do not have liquor licenses. Those of our nightclubs that carry B.Y.O.B. permits sell non-alcoholic beverages. Experienced chef and bar managers are ~~distinguished~~ byresponsible for training, supervising, staffing, and operating the ~~following~~food ~~features:~~ and beverage operations at each nightclub.

• Facilities — Our club facilities are within ready access to the principal business, tourist and/or commercial districts in the metropolitan areas in which they are located. The facilities have state of the art sound systems, lighting and professional stage design. Our clubs maintain an upscale level of décor and furnishings to create a professional appearance. Three of our clubs offer VIP rooms. Our VIP rooms are open to individuals who purchase annual memberships. They offer a higher level of service and are elegantly appointed and spacious. • Professional On-Site Management — Our clubs are managed by persons who are experienced in the restaurant and/or hospitality industry. The managers for the clubs are responsible for maintaining a quality and professionally run club. At a higher level, our Area Directors oversee the management of several clubs within a specified geographical area. The Company currently has 12 Area Directors who have collectively 18 to 26 years of experience in the industry. • Food and Beverage Operations — Many of our clubs offer a first-class bar and food service. Five of our clubs offer a full service restaurant that provides customers with exceptional food, service and luxury. At most locations, we provide a selective variety of food including, but not limited to, hot and cold appetizers, pizza, and other limited food choices. Some of our club operations do not have liquor licenses. Those of our clubs that carry B.Y.O.B. permits sell non-alcoholic beverages. Experienced chef and bar managers are responsible for training, supervising, staffing, and operating the food and beverage operations at each club. • Entertainment — Our ~~clubs~~nightclubs provide a high standard of attractive, talented, and courteous female and male performers and servers. We maintain the highest standards for appearance, attitude, demeanor, dress, and personality. The entertainment encourages repeat visits and increases the average length of a patron’s stay. Performers who work at our ~~clubs~~nightclubs are experienced entertainers.

Working Capital

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

Advertising and Promotion

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

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

Compliance Policies and Controls

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

We believe that operational and accounting controls are essential to the successful operation of a cash intensive nightclub and bar business. IEC has also developed and implemented internal 3operating and accounting controls to track cash, credit card transactions, and food and beverage inventory. We have installed an Aloha point of sale system, including restaurant fraud tracking software, in all our nightclubs. These controls also help to maintain the accuracy of our operating and accounting records. IEC has developed other special software programs to capture operating information and generate reports for efficient management and control of the nightclubs. We review all revenue information on a daily basis by nightclub.

We believe that operational and accounting controls are essential to the successful operation of a cash intensive nightclub and bar business. IEC has also developed and implemented internal operating and accounting controls to track cash, credit card transactions, and food and beverage inventory. We have installed an Aloha point of sale system, including restaurant fraud tracking software, in all our clubs. These controls also help to maintain the accuracy of our operating and accounting records. IEC has developed other special software programs to capture operating information and generate reports for efficient management and control of the nightclubs. We review all revenue information on a daily basis by club.

Patents, Trademarks, Licenses and Royalty Agreements

Under the terms of a ~~2005~~2003 Licensing Agreement and in consideration of royalty payments to General Media Communications, Inc., Penthouse granted us a five-year non-exclusive license, renewable in five years, for the use of the registered trademarks “Penthouse”,” “Pet of the Month”, ” “Pet of the Year”,” “Three-Key Logo,” and “One-Key Logo” in our nightclub operations in Denver, Colorado and the St. Louis, ~~Illinois~~area. The royalty payments are based on a percentage of revenue. We also have permission to use the name “Jaguar’s Gold Club” for our ~~nightclubs~~nightclub located in Dallas ~~and Ft. Worth~~, Texas without a fee.

5 The “Diamond Cabaret®” name and “PT’s®” name and logo are trademarks registered with the U.S. Patent and Trademark Office. We have an indefinite license from Club Licensing, LLC, which is controlled and majority-owned by Troy Lowrie, who is a significant stockholder and our Chairman of the Board and CEO, to use the “PT’s®” trademark for a fee. Roxy’s is a service mark registered with the state of Illinois also owned by Club Licensing, LLC. The fee was established in 2006 and approved by the independent members of our Board of Directors (“Board”). The licensing fee amount has not changed for several years. The Men’s Club® has a annually renewable license from the Texas Richmond Corporation.

The “Diamond Cabaret^®” name and “PT’s^®” name and logo are trademarks registered with the U.S. Patent and Trademark Office. We have an indefinite license from Club Licensing, LLC, which is controlled and majority-owned by Troy Lowrie, who is a significant stockholder and our Chairman of the Board and CEO, to use the “PT’s^®” trademark for a fee. Roxy’s is a service mark registered with the State of Illinois and is also owned by Club Licensing, LLC. The fee was established in 2006 and approved by the independent members of our board of directors (“board”). The licensing fee amount has not changed since approved in 2006. The Men’s Club^® has an annually renewable license from the Texas Richmond Corporation.

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

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

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

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

Seasonality

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

Customers

The business of the Company taken as a whole, or any individual ~~club~~ nightclub, is not dependent upon any single customer or a few customers.

Competition

The adult nightclub entertainment business is highly competitive with respect to price, location and quality of the facility, entertainment, service, and food and beverages. Due to the highly fragmented nature of the adult nightclub industry, exact industry details are sparse about the actual number of operating nightclubs in the United States. However, various sources state ~~that~~ that there are approximately 3,000 to 4,000 adult nightclubs in the United States with no clear industry leader. We have many competitors in the metropolitan areas in which we are located and/or intend to expand. Our current nightclubs compete with locally owned nightclub owners. ~~Three~~Two of our locations compete with nightclubs owned by Rick’s Cabaret International, Inc. (“Ricks”). Changes in customer preferences, economic conditions, demographic trends, and the location, number of, and quality of competing nightclubs could adversely affect our business, as could a shortage of experienced local ~~management~~ management and hourly employees. We believe that our nightclubs enjoy a high level of repeat business and customer loyalty due to our upscale restaurant atmosphere, food quality, premium entertainment, perceived price-value relationship, and efficient service. Although we believe that we are well positioned to compete successfully, there can be no assurance that we will be able to maintain our high level of name recognition and prestige within the marketplace.

Government Regulations

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

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

Employees and Independent Contractors

As of March 1129, ~~2010~~2011, we had approximately ~~925~~ 868 employees, of which ~~135~~122 were full-time ~~management~~ management employees including corporate and administrative operations, and approximately ~~790~~746 who were engaged in entertainment, food, and beverage service, including bartenders and waitresses. None of our employees are represented by a union nor have we ever suffered a work stoppage. Our entertainers in Minneapolis, Minnesota act as commissioned employees. As of March 1129, ~~2010~~ 2011, we had independent contractor relationships with approximately 2,000 entertainers in other states, who are self-employed and perform at our locations on a non-exclusive basis. Independent contractors/entertainers pay a fee to the nightclub to perform.

Potential Sale of the Company

As On ~~previously~~November 9, ~~reported~~2010, on the Company’s ~~Current~~entered ~~Reports~~into ~~on Form 8-K (filed~~an ~~with~~Agreement ~~the~~and ~~Securities~~Plan ~~and~~of ~~Exchange~~Merger ~~Commission~~ (the “~~SEC~~Merger Agreement”) onwith ~~November 4~~Family Dog, ~~2009~~LLC (“Parent”), ~~November 19~~FD Acquisition Co. (“Merger Sub”), the Company’s ~~2009,~~Chairman ~~November 25,~~of ~~2009~~the Board and Chief Executive Officer, ~~December 7~~Troy Lowrie, ~~2009~~and the Company’s President and ~~December 17,~~Chief ~~2009)~~Operating Officer, onMicheal ~~November 3~~Ocello. Under the terms of the Merger Agreement, ~~2009~~Merger Sub will be merged with and into the Company, with the Company continuing as the surviving corporation and ~~received~~becoming a ~~non~~wholly-~~binding~~owned ~~letter~~subsidiary of ~~intent~~Parent (the “Merger”). Parent and Merger Sub are currently owned and controlled by Mr. Lowrie.

Pursuant to the Merger Agreement, as of the effective time of the Going Private Transaction, each issued and outstanding share of the Company’s Common Stock, par value $0.0001 per share 5(collectively, the “Common Stock”), except for any shares of Common Stock held by Parent and Dissenting Shares (as such term is defined in the Merger Agreement) will be converted into the right to receive a cash payment in the amount of $2.25 per share, without interest (the “Going Private Consideration”).

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

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

~~“Proposal”)~~ On ~~from~~March 18,2011, the Company’s ~~Chairman~~filed ~~and~~its ~~CEO, Troy~~definitive ~~Lowrie,~~proxy ~~Lowrie~~statement ~~Management,~~for ~~LLLP, an entity controlled by Mr. Lowrie, and certain other unidentified investors (collectively,~~ the ~~“Lowrie Investors”),~~ to-be-held ~~acquire all~~special ofmeeting ~~the outstanding common stock~~ of the Company’s ~~for~~stockholders ~~$2.10~~at ~~per share~~which ~~in cash (~~the ~~“Going~~stockholders ~~Private~~will ~~Transaction”).~~consider ~~The Proposal~~and ~~contemplated~~vote ~~that~~on ~~the Company would no longer be a~~approval ~~public reporting or trading company following the closing~~ of the Going Private Transaction. Inand ~~response~~an ~~to the Proposal, the~~accompanying ~~Board~~Transaction ~~formed~~Statement aon ~~Special~~Schedule 13E-3. ~~Committee~~The ~~consisting~~terms ~~solely~~ of ~~directors who are independent under~~ the ~~NASDAQ~~Going ~~Global~~Private ~~Market (“NASDAQ”)~~Transaction ~~independence rules to review~~ and ~~evaluate~~ the Merger ~~Proposal.~~Agreement ~~The~~are ~~Special~~more ~~Committee~~fully ~~was~~set ~~formed~~forth in ~~order to properly and fairly represent~~ the ~~best interests of the~~ Company’s ~~shareholders~~Current inReport aon ~~full~~Form ~~and~~8-K ~~diligent~~filed ~~evaluation of~~on ~~the~~November 10, ~~Proposal and any alternatives thereto in order to maximize shareholder value. The members of the Special Committee are George Sawicki~~2010, ~~Kenton~~proxy ~~Sieckman~~statement and ~~Carolyn Romero~~Schedule 13E-3. The ~~Special Committee~~Company ~~retained~~cautions ainvestors financial advisor and independent legal counsel to assist the Special Committee in its evaluation of the Proposal and alternatives thereto. On December 16, 2009, the Special Committee informed the Lowrie Investors that ~~it had~~no ~~determined,~~assurance ~~with~~can ~~input~~be ~~from~~given ~~its advisors,~~ that the ~~terms~~Going ofPrivate ~~the Proposal~~Transaction ~~were~~will ~~currently inadequate, and the Special Committee directed its financial advisors to contact any parties that had either previously expressed an interest or might potentially~~ be ~~interested~~ ~~in pursuing a transaction with the Company~~consummated.

In connection with the Proposal, the Company has been served with three complaints (the “Complaints”) filed by various plaintiffs, alleging that they bring purported derivative and class action lawsuits against the Company and each of the individual members of the Board on behalf of themselves and all others similarly situated and derivatively on behalf of the Company, which previously have been reported in the Company’s Current Reports on Form 8-K (filed with the SEC on November 19, 2009, November 24, 2009 and December 7, 2009). The Complaints allege, among other things, that the consideration in the Proposal is inadequate, that Mr. Lowrie has conflicts of interest with respect to the Proposal and that in connection with the Board’s evaluation of the Proposal, the individual defendants have breached their fiduciary duties under Colorado law. The Complaints seek, among other things, certification of the individual plaintiffs as a class representative, either an injunction enjoining the defendants from consummating or closing the Going Private Transaction, or if the Going Private Transaction is consummated, rescission of the Going Private Transaction, an injunction directing the Board members to comply with their fiduciary duties, an award of damages in an amount to be determined at trial, an accounting to the Plaintiffs and the class for alleged damages suffered or to be suffered based on the conduct described in the Complaint, an award of reasonable attorneys’ and experts’ fees, and such other relief the court deems just and proper. As of the date hereof, the Company believes that the allegations set forth in the Complaints are baseless and the Company intends to vigorously defend itself in the lawsuits.

As reported on the Company’s Current Report on Form 8-K filed with the SEC on February 17, 2010, the Company, Rick’s, Mr. Lowrie, and Lowrie Management, LLLP (collectively with Mr. Lowrie, “Lowrie”), entered into a non-binding (except as to certain provisions, including exclusivity and confidentiality) letter of intent (the “Letter of Intent”). Pursuant to the Letter of Intent, Rick’s agreed to acquire all of the outstanding shares of common stock of the Company and the Company will merge with and into Rick’s or a wholly-owned subsidiary of Rick’s (the “Merger”). In the event the Merger is consummated, the Company will become a subsidiary of Rick’s and the Company’s shareholders will become shareholders of Rick’s. The parties intend that the Merger will be structured to qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as amended.

Pursuant to the Letter of Intent, the Company’s shareholders will receive shares of common stock of Rick’s in exchange for their shares of the Company’s common stock based on an exchange ratio that values each share of the Company’s common stock between $2.20 and $3.80 per share. The applicable exchange ratio will be determined based on the weighted average closing price of Rick’s common stock on NASDAQ for the 20 consecutive trading days ending on the second trading day prior to the closing of the Merger. In the event the price per share of Rick’s common stock as determined by this formula is below $8.00, Rick’s may terminate the Merger agreement, subject to the payment to the Company of a termination fee to be negotiated by the parties in connection with the preparation of the Merger agreement. As of February 16, 2010 (assuming the Merger were to close on such date and the weighted average closing price per share of Rick’s common stock for the 20 consecutive trading days ending on February 11, 2010 was equal to the closing price of Rick’s common stock on February 11, 2010 of $11.76 per share), the value of each share of the Company’s common stock under this formula would be $2.66 per share.

Contemporaneously with the closing of the Merger, Rick’s has agreed to acquire 5,770,197 shares of the Company’s common stock held by Lowrie and its affiliates (the “Lowrie Common Stock”) for cash in an amount equal to the lesser of $2.44 per share or the per share value of the common stock received by the Company’s shareholders in the Merger. At Lowrie’s election, Lowrie may receive Rick’s common stock, at the same exchange ratio received by the Company’s shareholders in the Merger, for up to 30% of the Lowrie Common Stock. In addition, Mr. Lowrie will (i) refinance (at a lower interest rate) and continue to carry a $5.7 million note from the Company (as acquired by Rick’s), (ii) continue to personally guarantee certain Company obligations in exchange for a to-be-determined fair market value cash payment for such guarantees, (iii) sell to Rick’s the outstanding capital stock of Club Licensing, Inc., a wholly-owned subsidiary of Lowrie Management, LLLP that owns the trademarks “Diamond Cabaret” and “PT’s,” (the “Trademarks”), and (iv) enter into a three-year consulting agreement with Rick’s (collectively, the “Lowrie Transactions”). In exchange for the Lowrie Transactions, Lowrie will receive the following: (a) a to-be-determined amount equal to the fair market value of the restructuring of the $5.7 million note and continued personal guarantees (currently estimated to be $2 million); (b) a to-be-determined amount equal to the fair market value of the Trademarks (currently estimated to be $5 million); and (c) payment of $1.0 million over three years and a monthly expense allowance equal to $1,500 under the consulting agreement. Assuming Lowrie elects to be paid solely in cash at a price of $2.44 per share of the Company’s common stock and the fair market value of the Lowrie Transactions is as set forth above (totaling $7.0 million), Lowrie will receive aggregate payments of approximately $26.8 million (which amount includes the restructuring of the existing $5.7 million note held by Mr. Lowrie and excludes payments under the consulting agreement) in connection with the Merger, of which approximately $16.8 million will be payable in cash at the closing of the Merger and $10.0 million will be payable pursuant to a four-year promissory note from Rick’s bearing interest at 8.0% per annum.

The Letter of Intent provided for a binding exclusivity period through March 12, 2010, which the parties have extended to March 31, 2010, during which time the Company has agreed, on behalf of itself and its representatives, to negotiate exclusively with Rick’s and has further agreed not to solicit any offer or engage in any negotiations other than with Rick’s for the merger, sale of the business or assets of the Company or tender or exchange offer for the Company’s common stock. In the event the Company receives an unsolicited offer that is superior to the terms of the Merger (a “Superior Proposal”) and Rick’s does not amend its offer within five business days of the date on which it receives notice of such Superior Proposal to be superior to the Superior Proposal, then the Company may terminate the Letter of Intent. If the Company terminates the Letter of Intent due to its receipt of a Superior Proposal, it has agreed to reimburse Rick’s for its out-of-pocket expenses and fees incurred in evaluating and negotiating the Merger in an amount not to exceed $250,000 in the aggregate. If a definitive Merger agreement is not entered into by March 31, 2010, the Letter of Intent will automatically terminate, unless further extended by the parties.

The Merger agreement is expected to contain customary representations and warranties including the absence of a material adverse change in the business of Rick’s and the Company prior to closing and other customary closing conditions, including but not limited to, the receipt of material consents, the approval of the Merger by the shareholders of Rick’s and the Company and the effectiveness of a registration statement containing a joint proxy statement/prospectus filed with the SEC on Form S-4 to be filed by Rick’s, which, among other things, registers the shares of common stock to be issued to the Company’s shareholders in the Merger. There can be no assurance that the Company, Rick’s and Lowrie will enter into a definitive Merger agreement, that the entry into a definitive Merger agreement, if any, will result in the closing of any transaction or that the terms of any definitive Merger documents will reflect the terms of the proposed Merger as outlined in the Letter of Intent. See the discussion under the heading, “Risk Factors.”

Available Information

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

Item 1A. Risk Factors

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

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

The process of ~~analyzing, negotiating, documenting, and~~ consummating ~~(in each case, as necessary)~~ the ~~proposed~~Going ~~merger~~Private Transaction or any other transaction resulting from the processes conducted by the legal and financial advisors to the Special Committee of our ~~Board~~board could cause disruptions in our business, which could have an adverse effect on our financial results. Among other things, uncertainty as to whether the ~~proposed~~Going ~~merger~~Private Transaction or any ~~alternative~~ alternative transaction will be completed may cause current and prospective employees and members of management to become uncertain about their future roles with the Company if the transaction is completed. This uncertainty could adversely affect our ability to retain employees, members of management, and our relationships with customers and vendors. In addition, despite the fact that a Special Committee has been formed to manage and oversee any transaction and the Special Committee is being advised by outside professionals, the attention of management and other resources may be directed toward a potential transaction and diverted from day-to-day operations. Further, the costs associated with these processes are expected to be considerable, regardless of whether any transaction is approved or consummated. There is no assurance that the ~~proposed~~Going ~~merger~~Private orTransaction or any other transaction will occur. If the ~~proposed~~Going ~~merger~~Private Transaction or any other transaction is not completed, the share price of our ~~common~~Common ~~stock~~Stock may change to the extent that the current market price of our ~~common~~Common ~~stock~~Stock reflects an assumption that a transaction will be completed. Finally, a failed transaction may result in negative publicity and/or a negative impression of us in the investment community. All of the foregoing could materially adversely affect our business, ~~results~~ results of operations and financial condition.

We are subject to litigation related to the ~~proposed~~Going ~~going~~Private ~~private transaction~~Transaction, which could affect our ability to consummate a transaction, force us to rescind a transaction if it is consummated before the conclusion of the litigation or otherwise adversely affect our business or stock price.

As previously disclosed in Current Reports on Form 8-K, our recently filed proxy statement for a special meeting of our stockholders and Item 3 of this Annual Report, ~~four~~two complaints have been filed relating to the ~~original~~Going ~~going~~Private ~~private transaction~~Transaction. The defendants in these lawsuits include ~~varying~~ among combinations of the Company, the members of the Company’s ~~Board~~board, ~~and~~ Troy Lowrie, the Company’s Chairman and CEO., ~~Among~~Micheal ~~other things~~Ocello, the ~~complaints~~Company’s ~~seek~~President toand ~~enjoin~~Chief ~~the~~Operating ~~Company~~Officer, ~~its directors,~~ and certain entities ofinvolved ~~its~~in ~~officers from consummating~~ the ~~proposed~~Going ~~going private~~Private ~~transaction~~Transaction. ~~The~~Among ~~going~~other ~~private~~things, ~~transaction~~the ~~offer~~complaints ~~made~~seek byto ~~Troy~~enjoin ~~Lowrie was deemed inadequate by~~ the ~~Special Committee of the Board on December 16~~Company, ~~2009.~~its ~~On February 16~~directors, ~~2010, the~~and ~~Company~~certain ~~signed~~of aits ~~letter~~officers offrom ~~intent~~consummating tothe ~~merge~~proposed ~~operations with~~Going ~~Rick’s~~Private ~~Cabaret International, Inc~~Transaction. ~~as a wholly-owned subsidiary.~~ Additional lawsuits pertaining to the ~~proposed merger~~Going ~~transaction~~Private Transaction could be filed in the future or the existing lawsuits could affect the proposed ~~merger~~Going ~~transaction~~Private Transaction.

If Although ~~successful,~~ the ~~results~~state ofand ~~any~~federal court lawsuits ~~could~~challenging bethe ~~that~~Going ~~the~~Private Transaction have ~~Company~~been ~~could~~settled beby ~~prohibited~~the ~~from~~parties ~~consummating~~to athese ~~proposed~~lawsuits (as more fully described in “Item 3. Legal ~~transaction~~Proceedings”), ~~or,~~there ifis itno ~~has~~assurance ~~been~~that ~~consummated,~~the court will approve the ~~Company~~settlement ~~could be~~and ~~forced~~permit tothe dismissal ~~rescind~~of itthese lawsuits. ~~The~~In such event, the Company could ~~also~~ be required to incur significant ~~pay~~additional ~~damages~~costs toand expenses, as well as the ~~plaintiffs.~~diversion ~~Any~~of ~~conclusion~~the attention of ~~these~~the ~~lawsuits~~Company’s ormanagement ~~any~~and other inresources, as a ~~manner~~result ~~adverse~~of tothese lawsuits. Further, the Company could ~~have a~~be ~~material~~prohibited ~~adverse~~from ~~effect~~consummating on the ~~Company’s~~Going ~~business,~~Private ~~results of~~Transaction ~~operations~~or, ~~financial~~once ~~condition,~~it ~~and~~has ~~cash~~been ~~flow. In addition~~consummated, ~~the~~ ~~cost to~~ the Company ofcould ~~defending~~be ~~these~~forced orto ~~any~~rescind ~~other lawsuits,~~it. ~~even~~The ifCompany ~~resolved~~could inalso ~~the~~be ~~Company’s~~required ~~favor,~~to ~~could~~pay bedamages to ~~substantial.~~the ~~Such~~plaintiffs ~~lawsuits~~if ~~could~~the ~~also~~settlement ~~substantially~~is ~~divert~~not approved by the ~~attention~~ ofcourt and the Company’s ~~management~~is ~~and~~not ~~other~~successful ~~resources.~~in defending these lawsuits.

We have had limited operations which makes our future operating results difficult to predict.

Our Company was incorporated under the laws of the State of Colorado in 1998, but did not begin its operations until April 2002. The Company through its subsidiaries currently owns (in total or in partnerships) and operates 20 adult nightclubs that offer quality live adult entertainment, restaurant, and bar operations.

WeAnyone ~~have~~buying ashares ~~limited operating history and face the risk and uncertainties~~ of ~~other early-stage companies. Because of~~ our ~~limited~~ ~~operating~~Common ~~history,~~Stock wefor ~~may~~more ~~not~~than be$2.25 ~~able~~per toshare ~~correctly estimate~~is ~~our~~unlikely ~~future operating expenses, which could lead~~ to ~~cash shortfalls.~~receive ~~Our budgeted expense levels are based in part on our~~more ~~expectations~~than ~~concerning future revenues~~$2.25 Weper ~~may~~share befor ~~unable~~such ~~to adjust~~stock ~~our operations in a timely manner to compensate~~ for ~~any unexpected~~as ~~shortfall~~long inas ~~revenues.~~the ~~Accordingly,~~merger aagreement ~~significant shortfall~~remains in ~~demand for our services would decrease our revenues and could have an immediate and material adverse~~ effect ~~on our business, results of operations, and financial condition~~. ~~To the~~ ~~extent that expenses precede or are not rapidly followed by increased revenue, our business, results of operations, and financial condition may be materially adversely affected.~~

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

We have had limited operations which makes our future operating results difficult to predict.

Our Company was incorporated under the laws of the State of Colorado in 1998, but did not begin its operations until April 2002. The Company, through its subsidiaries, currently owns (in total or in partnerships) and operates 19 adult nightclubs that offer quality live adult entertainment, restaurant, and bar operations.

We have a limited operating history and face the risk and uncertainties of other early-stage companies. Because of our limited operating history, we may not be able to correctly estimate our future operating expenses, which could lead to cash shortfalls. Our budgeted expense levels are based in part on our expectations concerning future revenues. We may be unable to adjust our operations in a timely manner to compensate for any unexpected shortfall in revenues. Accordingly, a significant shortfall in demand for our services would decrease our revenues and could have an immediate and material adverse effect on our business, results of operations, and financial condition. To the extent that expenses precede, or are not rapidly followed by, increased revenue, our business, results of operations, and financial condition may be materially adversely affected.

Our inability to obtain capital, use internally generated cash, or use our securities or debt to finance future expansion efforts could impair the growth and expansion of our business.

Reliance on internally generated cash or debt to finance our operations or complete business expansion efforts could substantially limit our operational and financial flexibility. The extent to which we will be able or willing to issue securities to consummate expansions will depend on the market value of our securities from time to time and the willingness of potential investors, sellers, or business partners to accept it as full or partial payment. Using securities for this purpose also may result in significant dilution to our then existing stockholders. To the extent that we are unable to use securities to make future expansions, our ability to grow through expansions may be limited by the extent to which we are able to raise capital for this purpose through debt or equity financings. Raising external capital in the form of debt could require periodic interest payments that could hinder our financial flexibility in the future. No assurance can be given that we will be able to obtain the necessary capital to finance a successful expansion program or our other cash needs. If we are unable to obtain additional capital on acceptable terms, we may be required to reduce the scope of any expansion. In addition to requiring funding for expansions, we may need additional funds to implement our internal growth and operating strategies or to finance other aspects of our operations. Our failure to (a) obtain additional capital on acceptable terms, (b) use internally generated cash or debt to complete expansions because it significantly limits our operational or financial flexibility, or (c) use securities to make future expansions may hinder our ability to actively pursue any expansion program we may decide to implement. In addition, if we are unable to obtain necessary capital going forward, our ability to continue as a going concern would be negatively impacted.

Our business has been, and may continue to be, adversely affected by disruptions in the credit markets, including reduced access to credit and higher costs of obtaining credit.

Widening credit spreads, as well as significant declines in the availability of credit, have adversely affected our ability to borrow on a secured and unsecured basis and may continue to do so. Disruptions in the credit markets may make it harder and more expensive to obtain funding for our businesses. We often rely on access to the secured and unsecured credit markets to finance acquisitions of additional nightclubs. Additional nightclub acquisitions are also financed by promissory notes carried by the sellers and debt financed by company investors and related parties. If our available funding is limited or we are forced to fund our operations at a higher cost, these conditions may require us to curtail our business activities and increase our cost of funding, both of which could reduce our profitability and prevent or hamper our growth through acquisitions.

Our business has been, and may continue to be, adversely affected by conditions in the U.S. financial markets and economic conditions generally.

Our business is materially affected by conditions in the U.S. financial markets and economic conditions generally. In the past 24 months, these conditions have changed suddenly and negatively. The ongoing financial crisis and the loss of confidence in the stock market has increased our cost of funding and limited our access to some of our traditional sources of liquidity, including both secured and unsecured borrowings. Increases in funding costs and limitations on our access to liquidity could have a negative impact on our earnings and our ability to acquire additional nightclubs. In addition, the deteriorating general economic conditions in the United States has caused a drop in consumer spending in general, and discretionary spending in particular. This has caused a decline in the number of patrons at our nightclubs and the amount of money spent by them. Further, our nightclubs located in geographical areas suffering from proportionally worse economic conditions when compared to the United States in

~~general~~Our ~~have~~business ~~experienced larger declines in operating revenues. Overall, the economic environment during our 2009 fiscal year~~ has been, ~~slightly~~and ~~adverse~~may ~~for~~continue ~~our business compared~~ to ~~the previous year and there can~~ be, noadversely ~~assurance~~affected ~~that~~by ~~these~~ conditions ~~will improve~~ in the ~~near term~~U. ~~Until they do, we~~S. ~~expect~~financial ~~our~~markets ~~results~~and ofeconomic ~~operations~~conditions ~~to be slightly adversely affected~~generally.

Our ~~nightclubs~~business ~~were~~is ~~acquired~~materially ~~with~~affected aby ~~purchase~~conditions ~~price~~in ~~based~~the onU.S. financial markets and economic ~~historical~~conditions ~~EBITDA~~generally. ~~This~~In ~~results~~the inpast ~~each~~36 months, ~~nightclub~~these ~~carrying~~conditions ahave changed suddenly and negatively. ~~substantial~~The ~~amount~~ongoing financial crisis and the loss of ~~intangible~~confidence ~~value,~~in ~~mostly~~the ~~allocated~~stock tomarket has increased our cost ~~licenses~~of funding and ~~goodwill.~~limited ~~Generally~~our ~~accepted~~access ~~accounting~~to ~~principles require~~some anof ~~annual~~our ~~impairment~~traditional ~~review~~sources of ~~these~~liquidity, ~~indefinite~~including ~~lived~~both ~~assets~~secured and unsecured borrowings. ~~For~~Increases ~~the~~in ~~fiscal~~funding ~~year~~costs ~~ended~~and ~~December 31,~~limitations ~~2009,~~on ~~the~~our access to ~~annual~~liquidity ~~impairment~~could ~~review~~have ~~resulted~~a innegative animpact ~~impairment~~on ~~loss~~our ~~of approximately~~earnings $1and our ability to acquire additional nightclubs.~~8 million~~ In addition, ~~compared~~the todeteriorating general economic conditions in the ~~impairment~~United ~~loss~~States has ofcaused ~~approximately~~a ~~$46 million~~drop in ~~2008.~~consumer Ifspending ~~difficult~~in ~~market~~ general, and ~~economic~~discretionary ~~conditions~~spending ~~continue~~in ~~over~~particular. ~~2010 and/or~~This wehas ~~experience~~caused a ~~decrease~~decline in ~~revenue~~the atnumber ~~one~~of orpatrons ~~more~~at our nightclubs and the amount of money spent by them. Further, weour nightclubs located in geographical areas suffering from proportionally worse economic ~~could~~conditions ~~incur~~when ancompared ~~additional~~to ~~decline~~the United States in ~~fair~~general ~~value~~have ofexperienced ~~one~~larger ordeclines ~~more~~in ofoperating ~~our nightclubs~~revenues. ~~This~~Overall, ~~could~~the ~~result~~economic inenvironment ~~another~~during ~~future~~our 2010 fiscal year has been slightly ~~impairment~~adverse ~~charge~~for ofour upbusiness compared to the ~~total~~previous ~~value~~year ofand there can be no assurance that these conditions will improve in the ~~indefinite~~near term. Until they do, we expect our results of operations to be ~~lived~~slightly ~~intangible~~adversely ~~assets~~affected.

Our nightclubs were acquired with a purchase price based on historical EBITDA. This results in each nightclub carrying a substantial amount of intangible value, mostly allocated to licenses and goodwill. Generally accepted accounting principles require an annual impairment review of these indefinite lived assets. In performing the Company’s annual impairment assessment at December 31, 2010 in accordance with ASC Topic 350, the Company determined that no impairment had occurred. If difficult market and economic conditions continue in 2011 and/or we experience a decrease in revenue at one or more nightclubs, we could incur a decline in fair value of one or more of our nightclubs. This could result in a future impairment charge of up to the total value of the indefinite lived intangible assets.

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

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

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

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

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

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

In all states where we operate, management believes that we comply with applicable laws, regulations, and ordinances governing the sale of alcohol and the operation of sexually oriented businesses. However, changes in these laws, regulations, and ordinances may increase our cost of compliance therewith, or cause us to be unable to renew them, thereby reducing our profitability or preventing our nightclubs to remain in operation. There can be no assurance that local, state and/or federal licensing, and other regulations will permit our nightclubs to remain in operation or profitable in the future. Further, if we are involved in costly administrative or legal proceedings to

In all states where we operate, management believes that we comply with applicable laws, regulations, and ordinances governing the sale of alcohol and the operation of sexually oriented businesses. However, changes in these laws, regulations, and ordinances may increase our cost of compliance therewith, or cause us to be unable to renew them, thereby reducing our profitability or preventing our nightclubs to remain in operation. There can be no assurance that local, state and/or federal licensing, and other regulations will permit our nightclubs to remain in operation or profitable in the future. Further, if we are involved in costly administrative or legal proceedings to renew our licenses or defend against claims involving non-protected free speech, it may result in negative ~~publicity~~ publicity and decreased profitability.

Beginning January 1, 2008, our ~~two~~ Texas ~~nightclubs~~nightclub became subject to a new state law requiring each nightclub to collect a five dollar surcharge for every nightclub visitor. We have filed a tax protest suit against this “patron tax,” and the suit has been stayed by agreement until the Texas Supreme Court resolves the underlying case. This trend is spreading to other states to enact similar surcharges or admission fee taxes. Currently, the Company is not passing this surcharge on to our customers and we are absorbing this expense. Our profitability could be negatively impacted if this surcharge continues in Texas and spreads to other states in which the Company operates.

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

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

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

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

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

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

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

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

inability to recruit and train additional key personnel in a timely fashion could have a material and continuing adverse effect on our business and future prospects. A loss of one or more of our current officers or key personnel could severely and negatively impact our operations. Messrs. Lowrie and Ocello have limited experience managing a public company subject to the SEC’s periodic reporting obligations.

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

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

We have engaged in several transactions with Lowrie Management LLLP, which is controlled and majority owned by Troy Lowrie, who is a significant stockholder, and our Chairman of the Board and CEO. Additionally, Mr. Lowrie and Lowrie Management LLLP ~~is one~~are ~~of several~~ parties ~~that have submitted a proposal~~ to the ~~Company’s~~ ~~Board~~Going ~~to acquire all of the Company’s common~~Private ~~stock~~Transaction inand ~~a going private transaction. Further, in the proposed merger transaction as currently proposed, Mr. Lowrie~~ will ~~receive~~ ~~different~~become ~~consideration~~indirect ~~than~~owners ~~the Company’s other shareholders, due in part to his continued guaranty~~ of ~~certain Company obligations,~~ the ~~sale of certain trademarks owned by Mr. Lowrie’s affiliates, the refinancing of his promissory note with the~~ Company, if and ~~his~~when ~~consulting agreement with Rick’s Cabaret International, Inc. The Special Committee of~~ the ~~Board~~Going ~~rejected the proposed going private~~Private ~~transaction~~Transaction ~~as inadequate on December 16, 2009~~closes. Conflicts of interest may arise between Mr. Lowrie’s duties to our Company and his duties to Lowrie Management LLLP, or his interest as an owner of Lowrie Management LLLP or as a ~~potential~~ potential acquirer of the Company’s ~~common~~Common ~~stock~~Stock in the ~~proposed going~~Going ~~private~~Private ~~transaction~~Transaction. Because Mr. Lowrie is a ~~Director~~ director and the CEO of our Company, he has a duty of loyalty and care to us under Colorado law when there are any potential conflicts of interest between our Company and Lowrie Management LLLP. We cannot give you assurance that when conflicts of interest arise, Mr. Lowrie will act completely in our interests or that conflicts of interest will be resolved in our favor. In In addition, Mr. Lowrie could violate his legal duties by diverting business opportunities from us to others. If we cannot resolve any conflicts of interest between Mr. Lowrie and us, we would have to rely on legal proceedings which could disrupt our business.

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

As of March 1229, ~~2010~~2011, Mr. Lowrie beneficially owns approximately 28 30.3% of our issued and outstanding ~~common~~Common ~~stock~~Stock. In addition, he is our Chairman of the Board and CEO. The interests of Mr. Lowrie may differ from the interests of other stockholders. Because of his significant ownership of our ~~common stock~~Common Stock, Mr. Lowrie will have the ability to significantly ~~influence~~ influence virtually all corporate actions requiring stockholder approval, including the following actions:

• election of our ~~Directors~~directors; • amendment of our organizational documents; • the potential merger or going private transactions or the sale of our assets or other corporate transaction; and • Control of the outcome of any other matter submitted to the stockholders for vote.

~~Mr. Lowrie’s~~• ~~beneficial~~amendment ~~stock ownership may discourage potential investors from investing in shares~~ of our ~~common~~organizational ~~stock due to the lack of influence they could have on our business decisions, which in turn could reduce our stock price.~~ documents;

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

~~Table~~• control of ~~Contents~~the outcome of any other matter submitted to the stockholders for vote.

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

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

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

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

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

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

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

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

Our business plan and proposed strategy ~~has~~have not been independently evaluated.

We have not obtained any independent evaluation of our business plan and proposed business strategy. There can be no assurance that our nightclubs or proposed strategy will generate sufficient revenues to maintain profitability.

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

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

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

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

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

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

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

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

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

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

As of March 1229, ~~2010~~2011, we have 1716,~~310~~292,~~723~~ 071 shares of ~~common~~ ~~stock~~Common Stock outstanding, out of a total of 50,000,000 shares of ~~common~~Common ~~stock~~Stock authorized, and zero shares of Series A preferred stock, out of a total of 1,000,000 shares authorized for future issuance under our Articles of Incorporation. This does not include 224 shares of ~~common~~Common ~~stock~~Stock reserved for issuance under our 2002 Stock Option and Stock Bonus Plan, 2,708 shares of ~~common~~Common ~~stock~~ Stock reserved for issuance under our 2003 Stock Option and Stock Bonus Plan, and 906,667 shares of ~~common~~Common ~~stock~~Stock reserved for issuance under our 2004 Stock Option and Appreciation Rights Plan. In addition, our ~~Board~~board is authorized to issue “blank check” preferred stock, with designations, rights, and preferences as they may determine. Accordingly, our board ~~Board~~ may, without stockholder approval, issue shares of preferred stock with dividend, liquidation, conversion, voting, or other rights that could adversely affect the voting power or other rights of the holders of our ~~common~~Common ~~stock~~Stock. This type of preferred stock could also be issued to discourage, delay, or prevent a change in our control. The ability to issue “blank check” preferred stock is a traditional anti-takeover measure. These provisions in our charter documents make it difficult for a majority stockholder to gain control of the ~~Board~~board and of our Company. The issuance of additional shares would make it more difficult for a third party to acquire us, even if its doing so would be beneficial to our stockholders.

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

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

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

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

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

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

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

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

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

In the event the make-up of our Board or Audit Committee were not, or are not in the future, in compliance with the SEC and NASDAQ independence requirements, we face a number of risks that could materially and adversely affect our stockholders and our business.

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

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

~~Securities analysts~~ The ~~may~~Company ~~not~~is ~~initiate~~currently ~~coverage~~non-compliant orwith ~~continue~~NASDAQ toMarketplace ~~cover~~Rule 5605(c)(2)(A), ~~our~~which ~~common~~requires ~~stock,~~listed ~~and~~Companies ~~this may~~ have aat ~~negative~~least ~~impact~~three onaudit ~~our~~committee ~~common stock’s market price~~members.

~~The~~Securities ~~trading market for our common stock depends, in part, on the research and reports that securities~~ analysts ~~publish~~may ~~about us and our business. We do~~ not ~~have~~initiate ~~any~~coverage ~~control~~or ~~over these analysts. Currently, one analyst firm covers us but there is no guarantee that this securities analyst will~~ continue to cover ~~our~~ ~~common stock in the future. If securities analysts do not cover~~ our ~~common~~Common ~~stock~~Stock, ~~the~~and ~~lack~~this ~~of research coverage~~ may ~~adversely~~have ~~affect~~a ~~its~~negative ~~market~~impact ~~price.~~on ~~If we are covered by securities analysts, and~~ our ~~stock~~Common isStock’s ~~downgraded,~~market ~~our stock~~ price ~~would likely decline~~. ~~If the analyst ceases to cover us or~~ ~~fails to publish regular reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.~~

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

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

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

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

~~market.~~ The ~~broker-dealer~~application ~~must also provide the customer with current bid and offer quotations for the penny stock, the compensation~~ of the ~~broker-dealer and the salesperson in the transaction, and monthly account statements showing the market value of each~~ “penny stock” ~~held in the customer’s account. In addition, the penny stock~~ rules ~~generally~~could ~~require~~adversely ~~that~~affect ~~before a transaction in a penny stock occurs,~~ the ~~broker-dealer~~market ~~must make~~price aof ~~special~~our ~~written determination that the penny stock is a~~Common ~~suitable~~Stock ~~investment for the purchaser~~ and ~~receive~~increase the ~~purchaser’s~~ ~~agreement to the~~ transaction. Ifcosts ~~applicable in the future, these rules may restrict the ability of brokers-dealers~~ to sell ~~our~~those ~~common stock and may affect the ability of investors to sell their~~ shares~~, until our common stock no longer is considered a penny stock~~.

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

~~Since~~Because ~~our inception,~~ we ~~have~~do not ~~paid~~intend to pay any dividends on our ~~common~~ ~~stock~~Common ~~and~~Stock, wepurchases doof ~~not anticipate paying any dividends on~~ our ~~common~~Common ~~stock in the foreseeable future. The Board has~~Stock ~~elected~~may not ~~to pay dividends in the future. We expect that future earnings applicable to the common stockholders, if any, will~~ be ~~used~~suited for ~~working~~investors ~~capital~~seeking ~~and~~dividend ~~to finance growth~~income.

~~Future sales~~ Since of our ~~common~~inception, ~~stock~~we ~~may~~have ~~depress~~not ~~our~~paid ~~stock~~any ~~price.~~dividends ~~A significant~~on ~~amount~~our ofCommon ~~common~~Stock ~~stock~~and iswe ~~subject~~do tonot anticipate ~~issuance~~paying ~~upon exercise~~any ofdividends ~~securities~~on toour ~~purchase~~Common ~~common~~Stock ~~stock~~in the foreseeable future. The ~~exercise~~board has ~~and~~elected ~~sale~~not ofto ~~these~~pay ~~financial~~dividends ~~instruments~~in ~~could~~the ~~depress~~future. We expect that future earnings applicable to the ~~market~~Common ~~price~~Stockholders, ofif ~~our~~any, ~~common~~will ~~stock~~be used for working capital and to finance growth.

AFuture ~~significant~~sales ~~amount~~ of our ~~common~~Common ~~stock~~Stock may bedepress ~~eligible~~our ~~for sale~~stock ~~under~~price. ~~Rule 144~~A ~~promulgated~~significant ~~under~~amount ~~the~~of ~~Securities~~Common ~~Act at~~Stock ~~different~~is ~~times~~subject into ~~the~~issuance ~~future~~upon ~~and~~exercise ~~its~~of ~~sale~~securities ~~could~~to ~~depress~~purchase ~~the market~~Common ~~price of our common stock~~Stock. ~~Provided~~The ~~that~~exercise ~~all~~and ~~applicable~~sale ~~Rule 144~~of ~~conditions~~these ~~are~~financial ~~satisfied,~~instruments wecould ~~believe~~depress ~~that stockholders~~the ~~holding~~market ~~17,310,723 shares~~price of our ~~issued~~Common ~~and outstanding shares of common stock are currently eligible to sell their shares~~Stock. ~~The Company issued no stock in 2009.~~

We A ~~also~~significant ~~have~~amount ~~issued~~of ~~stock~~our ~~options~~Common ~~convertible~~Stock ~~into~~may anbe ~~aggregate of~~eligible ~~262,500~~for sale under Rule ~~shares~~144 ofpromulgated under ~~our~~the ~~common~~Securities ~~stock~~Act at andifferent ~~exercise~~times ~~price of~~in ~~between~~the $6future and ~~$13~~its ~~per~~sale ~~share.~~could ~~None~~depress the market price of ~~the~~our ~~options~~Common ~~are currently~~Stock. ~~vested~~Provided orthat ~~exercisable~~all ~~but~~applicable ~~they~~Rule 144 ~~vest~~conditions ~~and~~are ~~become~~satisfied, we ~~exercisable~~believe ~~between~~that ~~April~~stockholders ~~2010~~holding 16,292,071 shares of our issued and ~~June~~outstanding ~~2015.~~shares ~~All~~of ~~option~~Common ~~exercise~~Stock ~~prices~~are ~~substantially~~currently ~~exceed~~eligible ~~the~~to ~~market~~sell ~~price~~their ofshares. ~~our common~~The ~~stock~~Company onissued ~~March 12,~~no stock in 2010.

~~The~~ We ~~market~~also ~~price~~have ofissued ~~our common~~ stock ~~could~~options ~~decline~~convertible asinto aan ~~result of~~aggregate ~~sales~~ of ~~substantial~~231,500 ~~amounts~~shares of our ~~common stock in the~~ ~~public~~Common ~~market,~~Stock orat asan aexercise ~~result~~price of ~~the~~between ~~perception~~$10 ~~that~~and ~~these~~$13 ~~sales could~~per ~~occur~~share. InAs ~~addition~~of December 31, ~~these~~2010, ~~factors~~there were ~~could~~31,090 ~~make~~of itthe ~~more difficult~~stock ~~for~~options usexercisable tobut ~~raise~~the ~~funds~~remaining ~~through~~200,410 ~~future~~vest ~~offerings~~and ofbecome exercisable ~~common~~between ~~stock.~~January 2011 Asand ~~of March~~January ~~12,~~2015. ~~2010,~~All weoption ~~have~~exercise ~~50,000,000 authorized~~prices ~~shares~~substantially ofexceed ~~which~~the ~~17,310,723 shares~~market price of ~~common stock~~our ~~are~~Common ~~issued~~Stock ~~and~~on ~~outstanding~~March 29, 2011.

The market price of our Common Stock could decline as a result of sales of substantial amounts of our Common Stock in the public market, or as a result of the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of Common Stock. As of March 29, 2011, we have 50,000,000 authorized shares of which 16,292,071 shares of Common Stock are issued and outstanding.

Ownership could be diluted by future issuances of our stock, options, warrants or other securities.

Ownership in the Company may be diluted by future issuances of capital stock or the exercise of outstanding or to be issued options, warrants or convertible notes to purchase capital stock. In particular, we may sell securities in the future in order to finance operations, expansions, or particular projects or expenditures.

There is a limited public trading market for our ~~common stock~~Common Stock.

Our stock is currently traded on the NASDAQ Global Market under the trading symbol “VCGH.” There is a limited public trading market for our ~~common~~Common ~~stock~~Stock. Without an active trading market, there can be no assurance of any liquidity or resale value of our ~~common~~Common ~~stock~~Stock, and stockholders may be required to hold shares of our ~~common~~Common ~~stock~~Stock for an indefinite period of time.

Our stock price has been volatile and may fluctuate in the future.

The trading price of our securities may fluctuate significantly. This price may be influenced by many factors, including:

•

our performance and prospects;

17 • the depth and liquidity of the market for our securities;

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

• the ~~depth~~Going ~~and~~Private ~~liquidity~~Transaction ~~of the market for our securities; • sales by selling stockholders of shares issued or issuable in connection with our private placements; • investor perception of us~~ and ~~the~~any ~~industry~~public inannouncements ~~which~~related wethereto ~~operate; • changes in earnings estimates~~ or ~~buy/sell~~any ~~recommendations by the analyst; • general financial and~~ other ~~market conditions~~transaction; ~~and • Domestic and international economic conditions.~~

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

•

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

•

general financial and other market conditions; and

•

domestic and international economic conditions.

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

Other Risk Factors May Adversely Affect Our Financial Performance.

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

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

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

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

We own the real property on which we operate ~~four~~two company-owned adult entertainment nightclubs located in ~~Texas (2),~~ Illinois ~~(1)~~ and Indiana ~~(1)~~and the building in Texas.

17 18

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

~~Name/Club Ownership~~	Name/Club Ownership	~~Lease Information~~	Lease Information
PT’s® Brooklyn Platinum of Illinois, Inc. Acq. Date: 5/1/2002 Location: Brooklyn, IL Sq. Ft.: 9,000 Building owned by VCG: Yes		An Illinois corporation and wholly-owned subsidiary of VCG.
	PT’s® BrooklynPlatinum of Illinois, Inc.Acq. Date: 5/1/02Location: Brooklyn, ILSq. Ft.: 9,000Building owned by VCG: Yes		An Illinois corporation and wholly-owned subsidiary of VCG.
PT’s® Showclub Indy Restaurant Concepts, Inc. Acq. Date: 6/30/02 Location: Indianapolis, IN Sq. Ft.: 9,200 Building owned by VCG: Yes		An Indiana corporation and wholly-owned subsidiary of VCG. VCG Real Estate leases a portion of the building that is not used by the nightclub operation to an unaffiliated third party.
	PT’s® ShowclubIndy Restaurant Concepts, Inc.Acq. Date: 6/30/02Location: Indianapolis, INSq. Ft.: 9,200Building owned by VCG: Yes		An Indiana corporation and wholly-owned subsidiary of VCG. VCG Real Estate leases a portion of the building that is not used by the nightclub operation to an unaffiliated third party.
PT’s® All Nude VCG Restaurants Denver, Inc. Acq. Date: 6/30/04 Location: Denver, CO Sq. Ft.: 8,000 Building owned by VCG: No		A Colorado corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $14,500 per month. The regular lease term expired in January 2010 but the Company exercised a five year extension option and the lease now will expire in January 2015. The base rent for each subsequent lease year during the option period commencing February 2010 and every February 1st will increase or decrease by the percentage increase in the Consumer Price Index (“CPI”) for the month of February immediately preceding the adjustment date, and the CPI for the month of February for the year preceding the adjustment date.
	PT’s® All NudeVCG Restaurants Denver, Inc.Acq. Date: 6/30/04Location: Denver, COSq. Ft.: 8,000Building owned by VCG: No		A Colorado corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $14,500 per month. The regular lease term expired in January 2010 but the Company exercised a five year extension option and the lease now will expire in January 2015. The base rent for each subsequent lease year during the option period commencing February 2010 and every February 1st will increase by the percentage increase in the Consumer Price Index (“CPI”) for the month of February immediately preceding the adjustment date, and the CPI for the month of February for the year preceding the adjustment date.
The Penthouse Club® Glendale Restaurant Concepts, LP Acq. Date: 6/30/04 Location: Glendale, CO Sq. Ft.: 9,600 Building owned by VCG: No		A Colorado limited partnership and 98% owned subsidiary of VCG, including the 1% general partnership interest. The building is leased from Lowrie Management LLLP, controlled by our Chairman of the Board and CEO, Troy Lowrie, currently for $13,500 per month. The lease term expires September 2014 and has three options to extend that expire September 2029. The base rent adjusts every five years. The rent from years one to five was $12,000 per month, years six to ten is $13,500 per month, years eleven to fifteen (option 1) is $15,000 per month, years sixteen to twenty (option 2) is $16,500 per month, and years twenty one to twenty five (option 3) is $18,000 per month.
	The Penthouse Club®Glendale Restaurant Concepts, LPAcq. Date: 6/30/04Location: Glendale, COSq. Ft.: 9,600Building owned by VCG: No		A Colorado limited partnership and 98% owned subsidiary of VCG, including the 1% general partnership interest. The building is leased from Lowrie Management LLLP, controlled by our Chairman of the Board and CEO, Troy Lowrie, currently for $13,500 per month. The lease term expires September 2014 and has three options to extend that expire September 2029. The base rent adjusts every five years. The rent from years one to five was $12,000 per month, years six to ten is $13,500 per month, years eleven to fifteen (option 1) is $15,000 per month, years sixteen to twenty (option 2) is $16,500 per month, and years twenty-one to twenty-five (option 3) is $18,000 per month.
PT’s® Showclub Appaloosa VCG CO Springs, Inc. Acq. Date: 10/2/06 Location: Colorado Springs, CO Sq. Ft.: 9,500 Building owned by VCG: No		A Colorado corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party for $10,000 per month. The lease term expires October 2016 and has two options to extend that expire October 2026. The base rent adjusts every five years. The rent from years one to five is $10,000 per month, years six to ten is $10,500 per month, years eleven to fifteen (option 1) is $12,000 per month, and years sixteen to twenty (option 2) is $13,500 per month.
	PT’s® Showclub AppaloosaVCG CO Springs, Inc.Acq. Date: 10/2/06Location: Colorado Springs, COSq. Ft.: 9,500Building owned by VCG: No		A Colorado corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party for $10,000 per month. The lease term expires October 2016 and has two options to extend that expire October 2026. The base rent adjusts every five years. The rent from years one to five is $10,000 per month, years six to ten is $10,500 per month, years eleven to fifteen (option 1) is $12,000 per month, and years sixteen to twenty (option 2) is $13,500 per month.
Diamond Cabaret® Glenarm Restaurant, LLC Acq. Date: 10/8/04 Location: Denver, CO Sq. Ft.: 36,000 Building owned by VCG: No		A Colorado limited liability company and 90% owned subsidiary of VCG. The building is leased from an unaffiliated third party for $45,000 per month. The lease term expires October 2014 and has three options to extend that expire October 2029. The base rent adjusts every five years. The rent from years one to five was $40,000 per month, years six to ten is $45,000 per month, years eleven to fifteen (option 1) is $50,000 per month, years sixteen to twenty (option 2) is $55,000 per month, and years twenty one to twenty five (option 3) is $60,000.
	Diamond Cabaret®Glenarm Restaurant, LLCAcq. Date: 10/8/04Location: Denver, COSq. Ft.: 33,000Building owned by VCG: No		A Colorado limited liability company and 90% owned subsidiary of VCG. The building is leased from an unaffiliated third party for $45,000 per month. The lease term expires October 2014 and has three options to extend that expire October 2029. The base rent adjusts every five years. The rent from years one to five was $40,000 per month, years six to ten is $45,000 per month, years eleven to fifteen (option 1) is $50,000 per month, years sixteen to twenty (option 2) is $55,000 per month, and years twenty-one to twenty-five (option 3) is $60,000 per month.
	PT’s® Show ClubDenver Restaurant Concepts, LPAcq. Date: 12/28/06Location: Denver, COSq. Ft.: 20,720Building owned by VCG: No		A Colorado limited partnership and 98% owned subsidiary of VCG. The building is leased from Lowrie Management LLLP, controlled by our Chairman of the Board and CEO, Troy Lowrie, currently for $17,500 per month. This square footage includes nightclub, office and storage space. The lease term expires December 2014, and has three options to extend that expire December 2029. The base rent adjusts every five years. The rent from years one to five was $15,000 per month, years six to ten is $17,500 per month, years eleven to fifteen (option 1) is $20,000 per month, years sixteen to twenty (option 2) is $22,500 per month, and years twenty-one to twenty-five (option 3) is $25,000 per month.


	Roxy’s RCC LP Acq. Date: 1/18/07 Location: Brooklyn, IL Sq. Ft.: 4,400 Building owned by VCG: No			An Illinois limited partnership and 88% subsidiary of VCG. The building is leased from an unaffiliated third party for $5,000 per month. The lease term expires January 2017 and has two options to extend that expire January 2027. The base rent never changes, but the rent amount fluctuates monthly based on sales.

	PT’s^® Showclub Kentucky Restaurant Concepts, Inc. Acq. Date: 1/2/07 Location: Louisville, KY Sq. Ft.: 23,000 Building owned by VCG: No			A Kentucky corporation and 100% owned subsidiary of VCG. The building is leased from Lowrie Management LLLP, controlled by our Chairman of the Board and CEO, Troy Lowrie, currently for $7,500 per month. The lease term expires December 2016 and has three five year options to extend that expire December 2031. The base rent adjusts every five years. The rent from years one to five is $7,500 per month, years six to ten is $8,750 per month, years eleven to fifteen (option 1) is $10,000 per month, years sixteen to twenty (option 2) is $11,250 per month, and years twenty one to twenty-five (option 3) is $12,000 per month.

	PT’s^® Showclub Cardinal Management LP Acq. Date: 2/5/07 Location: Centreville, IL Sq. Ft.: 5,700 Building owned by VCG: No			An Illinois limited partnership and 83% owned subsidiary of VCG. The building is leased from an unaffiliated third party for $5,000 per month. The lease term expires January 2017 and has two options to extend that expire January 2027. The base rent never changes, but the rent amount fluctuates monthly based on sales.

	PT’s^® Sports Cabaret MRC LP Acq. Date: 2/9/07 Location: Sauget, IL Sq. Ft.: 9,700 Building Owned by VCG: No			An Illinois limited partnership and 100% owned subsidiary of VCG. The building is leased from an unaffiliated third party for $20,000 per month. The lease term expires February 2017 and has two options to extend that expire February 2027. The base rent never changes but the rent amount fluctuates monthly based on sales.

	The Penthouse Club^® IRC LP Acq. Date: 2/7/07 Location: Sauget, IL Sq. Ft.: 19,300 Building Owned by VCG: No			An Illinois limited partnership and a 90% owned subsidiary of VCG. The building is leased from an unaffiliated third party for $25,000 per month. The lease term expires March 2017 and has two options to extend that expire March 2027. The base rent never changes but the rent amount fluctuates monthly based on sales.

	The Men’s Club^® Raleigh Restaurant Concepts, Inc. Acq. Date: 4/16/07 Location: Raleigh, NC Sq. Ft.: 21,200 Building owned by VCG: No			A North Carolina corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $6,000 per month. This lease has options to renew for ten consecutive renewal terms of five years each that expire January 2062. The base rent adjusts every five years by $250 per month after January 2017 with a maximum of $8,250 per month. The Company also has a separate lease for the parking premises currently for $20,750 per month. This lease expires January 2012 and has ten consecutive renewal terms of five years each that expire on January 2062. The base rent adjusts every year by $500 per month with a maximum of $45,750 per month.

	Schiek’s Palace Royale Classic Affairs, Inc. Acq. Date: 5/30/07 Location: Minneapolis, MN Sq. Ft.: 23,000 Building owned by VCG: No			A Minnesota corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $25,000 per month. The building lease term expires June 2012 and has three five year options to extend that expire June 2027. The base rent adjusts every five years. The rent from one to five years is $25,000 per month, years six to ten (option 1) is $27,750 per month, years eleven to fifteen (option 2) is $30,000 per month, and years sixteen to twenty (option 3) is $33,000 per month. On March 22, 2011, The Company signed an Asset Purchase Agreement to sell (see Note 15 of the Notes to the Consolidated Financial Statements under “Subsequent Events.”

	PT’s^® Showclub Kenkev II, Inc. Acq. Date: 9/14/07 Location: Portland, ME Sq. Ft.: 13,000 Building owned by VCG: No			A Maine corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $16,118 per month. The lease term expires September 2032 and has two options to extend that expire September 2042. The base rent adjusts every year by 3% after the first year of the lease.

Name/Club Ownership		Lease Information
	PT’s® ShowclubKenja II, Inc.Acq. Date: 10/29/07Location: Miami, FLSq. Ft.: 7,600Building owned by VCG: No		A Florida corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $10,927 per month. The lease term expires October 2032 and has two options to extend that expire October 2042. The base rent adjusts every year by 3% after the first year of the lease.
PT’s® Show Club Denver Restaurant Concepts, LP Acq. Date: 12/28/06 Location: Denver, CO Sq. Ft.: 20,720 Building owned by VCG: No		A Colorado limited partnership and 98% owned subsidiary of VCG. The building is leased from Lowrie Management LLLP, controlled by our Chairman of the Board and CEO, Troy Lowrie, currently for $17,500 per month. This square footage includes nightclub, office and storage space. The lease term expires December 2015 and has three options to extend that expire December 2029. The base rent adjusts every five years. The rent from years one to five was $15,000 per month, years six to ten is $17,500 per month, years eleven to fifteen (option 1) is $20,000 per month, years sixteen to twenty (option 2) is $22,500 per month, and years twenty one to twenty five (option 3) is $25,000.
	La Boheme Gentlemen’s ClubStout Restaurant Concepts, Inc.Acq. Date: 12/21/07Location: Denver, COSq. Ft.: 6,200Building owned by VCG: No		A Colorado corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $17,000 per month. The lease term expires August 2016. The rent from years one to three was $12,000 per month, years four to six was $15,000 per month, years seven to nine is $21,000 per month, years ten to eleven is $20,000 per month, and years twelve to fifteen is $21,000 per month.
Roxy’s RCC LP Acq. Date: 1/18/07 Location: Brooklyn, IL Sq. Ft.: 4,400 Building owned by VCG: No		An Illinois limited partnership and 88% subsidiary of VCG. The building is leased from an unaffiliated third party for $5,000 per month. The lease term expires January 2017 and has two options to extend that expire January 2027. The base rent never changes, but the rent amount fluctuates monthly based on sales.
	Jaguar’s Gold ClubManana Entertainment, Inc.Acq. Date: 4/14/08Location: Dallas, TXSq. Ft.: 12,500Building owned by VCG: Yes		A Texas limited liability company and wholly-owned subsidiary of VCG. The building is owned by the nightclub but the land is leased from an unaffiliated third party for $25,000 per month. The lease term expires April 2013 and has four five year options to extend that expire April 2033. The base rent adjusts every option period by 10% over the prior term’s rental obligation.
PT’s® Showclub Kentucky Restaurant Concepts, Inc. Acq. Date: 1/2/07 Location: Louisville, KY Sq. Ft.: 23,000 Building owned by VCG: No		A Kentucky corporation and 100% owned subsidiary of VCG. The building is leased from Lowrie Management LLLP, controlled by our Chairman of the Board and CEO, Troy Lowrie, currently for $7,500 per month. The lease term expires December 2016 and has three five year options to extend that expire December 2031. The base rent adjusts every five years. The rent from years one to five is $7,500 per month, years six to ten is $8,750 per month, years eleven to fifteen (option 1) is $10,000 per month, years sixteen to twenty (option 2) is $11,250 per month, and years twenty one to twenty five (option 3) is $12,000.
	Imperial Showgirls Gentlemen’s ClubVCG-IS, LLCAcq. Date: 7/28/08Location: Anaheim, CASq. Ft.: 8,100Building owned by VCG: No		A California corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $10,000 per month. The regular lease term expired August 2010. The company exercised the first option and the current option period will expire in April 2015. There are four remaining five-year options expiring in 2035. The base rent adjusts by $1,000 every option period.
PT’s® Showclub Cardinal Management LP Acq. Date: 2/5/07 Location: Centreville, IL Sq. Ft.: 5,700 Building owned by VCG: No		An Illinois limited partnership and 83% owned subsidiary of VCG. The building is leased from an unaffiliated third party for $5,000 per month. The lease term expires January 2017 and has two options to extend that expire January 2027. The base rent never changes, but the rent amount fluctuates monthly based on sales.
PT’s® Sports Cabaret MRC LP Acq. Date: 2/9/07 Location: Sauget, IL Sq. Ft.: 9,700 Building Owned by VCG: No		An Illinois limited partnership and 100% owned subsidiary of VCG. The building is leased from an unaffiliated third party for $20,000 per month. The lease term expires February 2017 and has two options to extend that expire February 2027. The base rent never changes but the rent amount fluctuates monthly based on sales.
The Penthouse Club® IRC LP Acq. Date: 2/7/07 Location: Sauget, IL Sq. Ft.: 19,300 Building Owned by VCG: No		An Illinois limited partnership and a 90% owned subsidiary of VCG. The building is leased from an unaffiliated third party for $25,000 per month. The lease term expires March 2017 and has two options to extend that expire March 2027. The base rent never changes but the rent amount fluctuates monthly based on sales.

Item 3. Legal Proceedings

Other than as set forth below, we are not aware of any pending legal proceedings against the Company, individually or in the aggregate, that would have a material adverse affect on our business, results of operations, or financial condition.

Acquisition Indemnification Claim and Litigation

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

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

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

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

Texas Patron Tax Litigation

Beginning January 1, 2008, VCG’s Texas nightclubs became subject to a new state law requiring the Company to collect a five dollar surcharge for every nightclub visitor. A lawsuit was filed by the Texas Entertainment Association, an organization in which the Company is a member, alleging that the surcharge is an unconstitutional tax. On March 28, 2008, the judge of the District Court of Travis County, Texas ruled that the new state law violates the First Amendment to the U.S. Constitution and therefore, the District Court’s order enjoined the state from collecting or assessing the tax. The State of Texas has appealed the District Court’s ruling. Under Texas law, when cities or the State of Texas give notice of appeal, the State of Texas intervenes and suspends the judgment, including the injunction. Therefore, the judgment of the District Court of Travis County cannot be enforced until the appeals are completed.

The Company has filed a lawsuit to demand repayment of the paid taxes. On June 5, 2009, the Texas Third Court of Appeals (serving the Austin, Texas area) affirmed the District Court’s judgment that the Sexually Oriented Business Tax violated the First Amendment to the U.S. Constitution. The State of Texas appealed the Court of Appeals ruling to the Texas Supreme Court. On February 12, 2010, the Texas Supreme Court granted the State’s Petition for Review. Oral arguments of the case were heard on March 25, 2010, and the parties are currently awaiting a decision by the Texas Supreme Court.

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

DOL Audit (PT’s Showclub)

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

Texas Sales Tax Audit

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

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

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

Name/Club Ownership			Lease Information
Imperial Showgirls Gentlemen’s Club VCG-IS, LLC Acq. Date: 7/28/08 Location: Anaheim, CA Sq. Ft.: 8,100 Building owned by VCG: No			A California corporation and wholly-owned subsidiary of VCG. The building is leased from an unaffiliated third party currently for $8,000 per month. The lease term expires August 2010 and has four five year options to extend that expire August 2025. The base rent adjusts by $500 every five years with a maximum of $9,500 per month.

Litigation Associated with the Going Private Transaction

~~Item~~ On 3July 30, 2010, a complaint was filed in Colorado state court, First Judicial District, Jefferson County District Court, challenging the Going Private Transaction. ~~Legal~~The ~~Proceedings~~complaint was filed by David Cohen, Timothy Cunningham, Gene Harris, Dean R. Jakubczak and William C. Steppacher, Jr. derivatively on behalf of VCG and as a class action on behalf of themselves and other similarly situated stockholders against Mr. Lowrie, Mr. Ocello, Martin A. Grusin, Robert J. Mcgraw, Jr., Carolyn Romero, George Sawicki, David Levine, Family Dog, FD Acquisition Co., Lowrie Investment Management, Inc., Lowrie Management LLLP, and VCG (as a nominal defendant). The plaintiff’s complaint has since been amended twice.

The second amended complaint was filed by the plaintiffs on January 15, 2011 and was ~~Other~~accepted ~~than~~by the court as ~~set~~of ~~forth~~January 24, ~~below~~2011. In the second amended complaint, wethe ~~are~~plaintiffs challenge ~~not~~the ~~aware~~merger agreement and the Going Private Transaction, but they drop their derivative claim and purport only to bring a class action on behalf of ~~any~~themselves ~~pending~~and all similarly situated ~~legal~~stockholders. ~~proceedings~~In ~~against~~the second amended complaint, the ~~Company~~plaintiffs allege, ~~individually~~among orother inthings, that: the ~~aggregate~~Going Private Transaction consideration of $2.25 per share payable to VCG’s non-executive group stockholders upon the closing of the Going Private Transaction, ~~that~~if ~~would~~at ~~have~~all, is inadequate; Mr. Lowrie has a ~~material~~conflict ~~adverse~~of ~~affect~~interest with respect to the Going Private Transaction; the individual defendants have breached their fiduciary duties under Colorado law in connection with the Going Private Transaction; and the proxy statement filed by VCG with the SEC on ~~our~~December 23, 2010 ~~business~~contains certain omissions and misleading statements. The second amended complaint seeks, ~~results~~among other relief, certification of ~~operations~~the plaintiffs as class representatives, oran ~~financial~~injunction ~~condition~~directing the members of VCG’s board of directors to comply with their fiduciary duties and enjoining them from consummating the Going Private Transaction, an accounting of alleged damages suffered by the plaintiffs and the class, an award of the costs and disbursements of maintaining the action including reasonable attorneys’ and experts’ fees, and such other relief the court deems just and proper.

On January 28, 2011, VCG moved to stay the state court proceedings pending the resolution of the parallel federal lawsuit described below on the grounds that the two actions are ~~Thee~~substantially the same, arise out of the same operative facts, seek the same relief, and trying ~~Dollhouse~~both ~~Productions~~actions ~~Litigation~~would be a waste of both judicial and corporate resources. The plaintiffs oppose the motion to stay. On February 11, 2011, the plaintiffs moved for expedited discovery. The defendants opposed the motion for expedited discovery. The court denied the motion to stay and denied the motion for expedited discovery.

On ~~or around July~~January 247, ~~2007~~2011, VCG ~~Holding Corp.~~ was ~~named~~served in with a ~~lawsuit~~complaint filed by Andrew Doyle in federal court in the United States District Court, ~~191~~for ~~Judicial~~the District, of ~~Dallas~~ ~~County, Texas~~Colorado. ~~This~~In ~~lawsuit~~the ~~arose~~complaint, ~~out~~the plaintiff ofpurports to bring a ~~VCG acquisition~~class ofaction ~~certain~~lawsuit ~~assets~~on ~~belonging~~behalf toof ~~Regale,~~himself ~~Inc. (“Regale”)~~and byall ~~Raleigh~~others ~~Restaurant~~similarly situated ~~Concepts~~against Mr. Lowrie, ~~Inc~~Mr. ~~(“RRC”)~~ Ocello, aMartin ~~wholly~~A. ~~owned~~Grusin, ~~subsidiary~~Robert ofJ. ~~VCG~~McGraw, inJr., ~~Raleigh~~Carolyn Romero, ~~N.C.~~George ~~The~~Sawicki, ~~lawsuit~~Kenton ~~alleges~~Sieckman, ~~that~~David ~~VCG~~Levine, ~~tortiously~~Family ~~interfered~~Dog, ~~with~~FD ~~a contract~~Acquisition ~~between~~Co., ~~Michael~~Lowrie ~~Joseph~~Investment Management, ~~Peter~~Inc., ~~and~~Lowrie ~~Regale~~Management LLLP, and ~~misappropriated~~ MrVCG. ~~Peter’s~~ ~~purported~~Like ~~trade~~the ~~secrets. On~~second ~~March 30,~~amended ~~2009~~state-law complaint, the federal ~~United~~complaint ~~States~~challenges ~~District~~the ~~Court~~Going ~~for~~Private Transaction. The allegations in the federal ~~Eastern~~complaint ~~District~~and ofthe ~~North~~relief ~~Carolina~~sought ~~entered~~are ansubstantially ~~Order~~the ~~granting Summary~~same ~~Judgment~~as tothose ~~VCG~~in ~~and~~the ~~dismissed~~state ~~Mr. Peter’s claims~~action; in addition ~~their~~to ~~entirety.~~the ~~The~~allegation ~~Court~~set ~~found~~forth ~~that~~in asthe asecond ~~matter~~amended ~~of law~~complaint, ~~VCG~~the ~~did~~federal ~~not~~complaint ~~tortiously~~also alleges ~~interfere~~violations ~~with~~of ~~Mr. Peter’s contract~~federal ~~with~~securities ~~Regale~~laws and ~~further~~regulations ~~found~~based ~~that~~on ~~VCG~~the ~~did~~allegations ~~not~~described ~~misappropriate~~above ~~trade~~related ~~secrets.~~to ~~Mr. Peters~~the ~~did~~proxy ~~not~~statement ~~appeal that~~filed ~~ruling~~by ~~and~~VCG aswith ~~such,~~ the ~~federal~~SEC ~~proceedings~~on ~~have~~December 23, ~~concluded~~2010.

~~Ancillary~~ On toJanuary 28, ~~this litigation~~2011, ~~Thee~~VCG ~~Dollhouse~~ filed ~~a claim in arbitration on June 2008 against Regale as a result of this transaction, asserting that Regale, by selling~~ its ~~assets~~answer to ~~RRC,~~ ~~breached~~the afederal ~~contract~~complaint ~~between~~denying ~~Thee Dollhouse and Regale. In addition, an assertion was made that one of Regale’s principals tortiously interfered with~~ the ~~contract between~~material ~~Regale~~allegations ~~and~~therein ~~Thee Dollhouse. Regale filed a Motion to Stay Arbitration which was granted in part~~ and ~~denied in part, with the Court staying arbitration as to Regale’s principal and~~ denying ~~the~~that ~~stay as to Regale. As a result,~~ the ~~arbitration~~plaintiff ~~as to Regale~~ is ~~proceeding.~~entitled ~~VCG is indemnifying and holding Regale harmless from this claim pursuant~~ to ~~their~~judgment ~~contract.~~on ~~The arbitration~~any ~~was originally scheduled for late October 2009, however due to illness~~ of ~~one~~his ofclaims ~~the principals of the claimant,~~or ~~the arbitration has been adjourned to April 26, 2010. The Company has not accrued~~ any ~~funds~~relief ~~for the settlement of this litigation, as the outcome of this dispute cannot be predicted~~whatsoever. ~~The~~ ~~Company~~VCG’s oranswer aalso ~~successor~~asserts ~~entity’s,~~certain ~~indemnification obligation to Regale will continue even if any of the proposed sale transactions or an alternative transactions is consummated~~defenses.

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

In December 2007, a former employee of VCG’s subsidiary Classic Affairs, Eric Zajkowski, filed a lawsuit in Hennepin County District Court, Minneapolis, Minnesota against VCG following his termination from employment alleging that, in connection with his employment, he was subject to certain employment practices which violated Minnesota law. The initial action and subsequent pleading asserted that the matter was filed as a purported class action. Subsequent to the filing of Zajkowski’s Complaint, Zajkowski moved to amend his Complaint to name additional Plaintiffs and later, to name Classic Affairs as a party defendant. VCG and Classic Affairs have answered this complaint denying all liability. Classic Affairs has also filed a Counter-Complaint against Mr. Zajkowski based upon matters relating to his termination from employment with Classic Affairs.

	•		the termination fee payable by the Company to Family Dog, in the event that the Company terminates the Merger Agreement to enter into a Company Acquisition Agreement (as defined in the Merger Agreement) involving a Superior Acquisition Proposal (as defined in the Merger Agreement) from certain parties described in the Merger Agreement, will be reduced from $600,000 to $100,000;

	•		the terms of the stipulation of settlement will include, among other things and subject to certain terms and conditions, a full, final, and complete release of any and all known and unknown claims, liabilities, or damages, that were brought or could have been brought in the State Action and the Federal Action, or that relate to the Merger Agreement and the merger, including filings with the SEC relating to the Merger Agreement and the merger;

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.

	•		the Company, or its successors, will pay any fees and expenses of the plaintiffs in such actions awarded by the court up to $67,500, following final approval from the state court and petition by the plaintiffs for an award of fees and expenses; and

	•		the Federal Action will be dismissed with prejudice after certification of the class and approval of the stipulation of settlement in the state court action.

On July 21, 2009, the Court denied Zajkowski’s and the other Plaintiffs’ Motion for Class Certification. Zajkowski appealed that decision to the Minnesota Court of Appeals and on September 22, 2009, the Court of Appeals denied Plaintiffs request for discretionary review. Plaintiffs have indicated that they do not intend to seek leave to appeal from the Minnesota Supreme Court. The ~~parties have held mediation in November 2009 and the case was resolved. The settlement~~ terms, ~~including~~of the ~~amounts,~~MOU are ~~confidential.~~conditioned ~~The lawsuit~~upon ~~has~~final ~~now~~approval ~~been~~by ~~dismissed,~~the ~~with~~state ~~prejudice~~court. ~~All related~~ ~~costs have been accrued or paid as of December 31, 2009.~~

~~Texas Patron~~Johnson ~~Tax~~ Litigation

~~Beginning~~ On ~~January~~October 127, ~~2008~~2010, ~~VCG’s Texas clubs became subject to~~ a ~~new~~complaint ~~state~~was ~~law~~filed ~~requiring~~against the Company ~~to collect a five dollar surcharge for every club visitor. A lawsuit was filed by the Texas Entertainment Association, an organization~~ in ~~which~~ the ~~Company~~United isStates ~~a member, alleging that the fee is an~~District ~~unconstitutional~~Court ~~tax.~~for ~~On March 28, 2008,~~ the ~~Judge of the~~ District ~~Court~~ of ~~Travis County~~Maine, ~~Texas~~in ~~ruled~~a ~~that~~lawsuit ~~the~~captioned ~~new~~Johnson ~~state law~~et ~~violates~~al. ~~the First Amendment to the U~~v.~~S. Constitution and,~~ ~~therefore,~~VCG ~~the~~Holding ~~District Court’s order enjoined the state from collecting or assessing the tax~~Corp. The ~~State of Texas~~ Company has ~~appealed~~not ~~the~~been ~~District~~formally ~~Court’s~~served ~~ruling.~~with ~~When cities or~~ the ~~State~~lawsuit, ~~of Texas give notice of appeal~~however, the ~~State~~Company, ~~supersedes and~~via ~~suspends~~its ~~the judgment~~attorneys, ~~including~~has agreed ~~the~~to ~~injunction.~~accept ~~Therefore, the~~service ~~judgment~~ of the ~~Travis County District Court cannot be enforced until the appeals are completed~~complaint.

The ~~Company~~complaint ~~has~~was filed aby ~~lawsuit~~two toformer ~~demand~~employees ~~repayment~~of one of the ~~paid taxes.~~Company’s ~~On June 5~~subsidiaries, ~~2009~~Kenkev II, ~~the~~Inc. ~~Court~~d/b/a ofPT’s® ~~Appeals~~Showclub ~~for~~Portland, ~~the~~Maine ~~Third District~~who ~~(Austin)~~allege ~~affirmed~~that the ~~District~~Company ~~Court’s~~misclassified ~~judgment~~them as ~~that~~tipped ~~the~~minimum ~~Sexually~~wage ~~Oriented~~employees ~~Business~~while ~~Fee~~employed ~~violated~~by the ~~First Amendment~~Company toas ~~the~~disk ~~U.S. Constitution.~~jockeys ~~The~~and, ~~State~~as ofa ~~Texas~~result, ~~appealed~~failed ~~the~~to ~~Court~~pay ofall ~~Appeals~~wages ~~ruling~~due to ~~the~~them ~~Texas~~under ~~Supreme~~applicable ~~Court~~law. On ~~August 26,~~The ~~2009,~~action ~~the~~is ~~Texas~~plead ~~Supreme~~as ~~Court~~a ~~ordered~~class ~~both~~action and ~~sides~~seeks to ~~submit~~certify ~~briefs~~a onclass ~~the~~action ~~merits.~~on ~~The~~behalf ~~State’s~~of ~~brief~~all ~~was filed~~similarly onsituated ~~September 25,~~employees ~~2009~~who ~~and~~are employed by the ~~Texas~~Company ~~Entertainment Association’s~~nationwide. ~~brief~~In ~~was~~addition, ~~filed~~the ontwo ~~October 15,~~named ~~2009.~~plaintiffs ~~On February 12,~~allege ~~2010~~that the ~~Texas~~Company ~~Supreme~~failed ~~Court~~to ~~granted the~~pay ~~State’s~~them ~~Petition~~all ~~for~~wages ~~Review~~required ~~and~~to ~~set~~be ~~oral~~paid ~~arguments~~to ~~for March 25,~~them ~~2010~~under Maine law.

The Company ~~has~~intends ~~expensed~~to ~~approximately~~deny ~~$290,000~~all ~~for~~liability ~~the~~in ~~year ended~~this ~~December 31,~~matter; ~~2009 and $203~~however,~~000~~ ~~for~~this ~~the~~matter ~~year~~is ~~ended~~in its ~~December 31,~~earliest ~~2008~~stages ~~for~~and the ~~Texas~~Company’s ~~Patron~~ultimate ~~Tax.~~liability ~~The~~cannot ~~Company accrued,~~be ~~but~~predicted ~~did~~at ~~not~~this ~~pay~~time. ~~the~~Discovery has ~~fourth~~just ~~quarter~~commenced ~~estimated~~and ~~tax liability~~no ofevaluation ~~$71,000.~~can ~~The~~be ~~Company~~made ~~has~~as ~~paid,~~the ~~under~~merits ~~protest, approximately~~of ~~$422,000~~this toclaim. As such, the ~~State~~Company has ofnot ~~Texas~~accrued ~~for~~anything ~~the~~related ~~two~~to ~~year period~~this action.

~~Department of~~Louisville ~~Labor~~Ordinance ~~and Immigration and Customs Enforcement~~Litigation ~~Reviews~~

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

In ~~October~~addition ~~2008, PT’s® Showclub in Louisville, KY was required~~ to ~~conduct~~the amatters ~~self-audit of~~described ~~employee~~above, ~~payroll~~the byCompany ~~the~~is ~~DOL.~~involved ~~After~~in anvarious ~~extensive~~other ~~self-audit,~~legal itproceedings ~~was~~that ~~determined~~arise ~~that~~in ~~(a)~~ the ~~club~~ordinary ~~incorrectly~~course ~~paid certain~~of ~~employees~~business. ~~for~~The ~~hours~~Company ~~worked~~believes ~~and~~that ~~minimum~~any ~~wage~~adverse ~~amounts and~~or ~~(b) the~~positive ~~club~~outcome ~~incorrectly~~of ~~charged~~any ~~certain~~of ~~minimum~~these ~~wage employees~~proceedings ~~for~~will ~~their~~not ~~uniforms.~~have As a ~~result,~~material ~~the~~effect ~~DOL~~on ~~required that~~ the ~~club issue back pay and refund uniform expenses to qualified~~consolidated ~~employees~~operations ~~at a total cost~~ of ~~$14,439~~the Company.

In March 2009, VCG was placed under a similar nationwide DOL audit for all nightclub locations and its corporate office. All locations completed the self-audit in August 2009 and are currently working with the DOL to determine what, if any, violations may have occurred. This case is still in the investigatory state and no final determination can be made at this time of an unfavorable outcome or any potential liability. After discussion with outside legal counsel on this case, the Company has accrued $200,000 as of DecemberItem ~~31, 2009 for potential wage/hour violations~~4. A(Remove ~~summary meeting has tentatively been scheduled with the DOL~~ and ~~counsel on~~Reserved) ~~March 15, 2010 to finalize the liability. The Company believes it has corrected all processes that resulted in the potential violations.~~

Immigration and Customs Enforcement (“ICE”) Reviews

On June 30, 2009, PT’s® Showclub in Portland, Maine was served a subpoena by ICE requesting documents to conduct an I-9 audit. ICE requested all original I-9’s for both current and past employees from September 14, 2007 (club acquisition date) to June 30, 2009. ICE conducted the audit to ensure proper use of the I-9 form to confirm that

the club verified employees’ right to work in the United States. The club complied with the subpoena submitting all requested documents by July 16, 2009. As of March 12, 2010, ICE is still reviewing the requested documents. This matter is still in its investigatory stage and no determination of potential violations or liability has been made. No amounts have been accrued related to this audit. While ICE initially discussed taking this audit to all clubs, no formal actions have been taken by ICE to begin that process. This audit is still isolated to Maine.

Internal Revenue Service

The IRS audited PT’s® Showclub in Denver for the years 2006, 2007, and 2008 to determine tip reporting compliance. Every business with customary tipping must report annually on Form 8027 the total sales from food and beverage operations, charge sales, total tips reported, and charge tips reported. The audit was based upon this Form to determine compliance with the amended Section 3121(q) of the Internal Revenue Code. The audit was conducted by an examining agent in Denver in August and September 2009. The audit focused on the data reported on Form 8027 and related underlying documentation. It included the agent examining information contained in the daily sales packages generated by the club.

The audit resulted in a determination that cash tips for that club were under-reported in the three years examined. The tax assessed as a result of this under-reporting was $61,500. Penalties and interest were not assessed. The IRS auditor indicated that all other clubs would be audited and recommended that a Point of Sale (“POS”) system should be installed in every club to ensure compliance with IRS regulations. Upon completion of this audit, the Company began an intensive self-audit for the three year period using the same procedures followed by the IRS agent. This resulted in an initial accrual of $386,000 in estimated taxes to cover the estimated liability as of September 30, 2009. Subsequent discussions with the IRS agent removed 2006 from the audit period, replacing that year with 2009. The Company has submitted workpapers prepared for the self-assessment to the IRS agent for the periods 2007, 2008, and 2009. The agent has tentatively indicated that these workpapers and test period could be used to determine the ultimate tip reporting rate by club. As a result of the completion of the self-assessment process for the three years under examination, the Company has reduced the estimated liability by $179,000 to approximately $207,000 as of December 31, 2009.

Litigation Associated with the Proposed Going Private Transaction

In connection with the Proposal concerning the proposed Going Private Transaction, the Company has been served with three complaints filed by various plaintiffs, alleging that they bring purported derivative and class action lawsuits against the Company and each of the individual members of the Board on behalf of themselves and all others similarly situated and derivatively on behalf of the Company, which previously have been reported in the Company’s Current Reports on Form 8-K (filed with the SEC on November 19, 2009, November 24, 2009 and December 7, 2009).

On November 13, 2009, the Company was served with a complaint filed by David Cohen in the District Court in Jefferson County, Colorado. In the complaint, Mr. Cohen alleges that he brings the purported class action lawsuit against the Company and each of the individual members of the Board on behalf of the Company’s stockholders. The complaint alleges, among other things, that Troy Lowrie, the Company’s Chairman of the Board and Chief Executive Officer, has conflicts of interest with respect to the Proposal and that in connection with the Board’s evaluation of the Proposal, the individual defendants have breached their fiduciary duties under Colorado law. The complaint seeks, among other things, certification of Mr. Cohen as class representative, either an injunction enjoining the defendants from consummating or closing the Going Private Transaction, or if the Going Private Transaction is consummated, rescission of the Going Private Transaction, an award of damages in an amount to be determined at trial and an award of reasonable attorneys’ and experts’ fees.

On November 20, 2009, the Company was served with a complaint filed by Gene Harris and William C. Steppacher, Jr. in the District Court in Jefferson County, Colorado. In the complaint, the plaintiffs purport to bring a derivative and class action lawsuit against the Company and each of the individual members of the Board on behalf of themselves and all others similarly situated and derivatively on behalf of the Company. The complaint alleges, among other things, that Mr. Lowrie has conflicts of interest with respect to the Proposal and that the individual defendants have breached their fiduciary duties under Colorado law in connection with the Proposal. The complaint

seeks, among other things, certification of the plaintiffs as class representatives, an injunction directing the Board members to comply with their fiduciary duties, an accounting to the plaintiffs and the class for alleged damages suffered or to be suffered based on the conduct described in the complaint, an award of the costs and disbursements of maintaining the action, including reasonable attorneys’ and experts’ fees, and such other relief the court deems just and proper.

On December 3, 2009, the Company was served with a complaint filed by David J. Sutton and Sandra Sutton in the District Court in Jefferson County, Colorado. In the complaint, the plaintiffs purport to bring a class action lawsuit against the Company and each of the individual members of the Board on behalf of themselves and all others similarly situated. The complaint alleges, among other things, that Mr. Lowrie has conflicts of interest with respect to the Proposal and that the individual defendants have breached their fiduciary duties under Colorado law in connection with the Proposal. The complaint seeks, among other things, certification of the plaintiffs as class representatives, an injunction directing the Board to comply with their fiduciary duties and enjoining the Board from consummating the Proposal, imposition of a constructive trust in favor of the plaintiffs and the class upon any benefits improperly received by the defendants, an award of the costs and disbursements of maintaining the action, including reasonable attorneys’ and experts’ fees, and such other relief the court deems just and proper.

The plaintiffs in the three lawsuits have moved to consolidate all three of the lawsuits (the “Class Action and Derivative Suits”) into one suit together with a fourth lawsuit arising out of the Proposal for the proposed Going Private Transaction, in which the Company was not named as a defendant, filed on December 11, 2009 by Brandon Ostry in the District Court in Jefferson County, Colorado against Mr. Lowrie and Lowrie Management, LLLP. The Company provided additional details on the Ostry lawsuit in its Current Report on Form 8-K filed with the SEC on December 17, 2009. The court has indicated that it will consider the consolidation motion if and when the plaintiffs move for class certification. As of the date hereof, the plaintiffs have not yet moved for class certification.

As of the date hereof, the Company believes that the allegations made in each of the Class Action and Derivative Suits are baseless and the Company intends to vigorously defend itself. The Company has not accrued any reserves for damages or for the settlement of these lawsuits as the outcome of the disputes cannot be predicted. Further, the uncertainty over the potential outcome of the Class Action and Derivative Suits has increased in light of subsequent events. As described elsewhere in this Annual Report on Form 10-K, on December 16, 2009, the Special Committee of the Company’s Board rejected the Proposal concerning the proposed Going Private Transaction as then-currently inadequate and, as previously disclosed in the Company’s Current Report on Form 8-K filed with the SEC on February 17, 2010, on February 17, 2010, the Company entered into the Letter of Intent with Rick’s concerning the proposed Merger. Currently, the Class Action and Derivative Suits only pertain to the Proposal for the proposed Going Private Transaction and not the proposed Merger. However, it is possible that the plaintiffs in the Class Action and Derivative Suits will attempt to amend their complaints to make claims related to the proposed Merger or that these plaintiffs or others persons may file one or more new lawsuits related to it.

Pursuant to the terms of the Company’s Articles of Incorporation and stand-alone indemnification agreement the Company has entered into with its Directors and executive officers, the Company may be required to advance expenses to and indemnify the Directors and Mr. Lowrie from expenses involved in defending against the lawsuits described above. The Company has discussed the risks and costs associated with such indemnification under the heading “Risk Factors.”

The Company is involved in various other legal proceedings that arise in the ordinary course of business. The Company believes the outcome of any of these proceedings will not have a material effect on the consolidated operations of the Company.

Item 4. (Remove and Reserved)

PART II

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

Market Information

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

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

	2009				2008
	2010				2009
Three Months Ended	High		Low		High		Low
March 31	$	12.8592	$	12.2705	$	131.9085	$	51.9527
June 30	$	2.7938	$	1.3853	$	62.7079	$	31.6038
September 30	$	2.3019	$	1.9056	$	42.0330	$	21.8090
December 31	$	2.3122	$	1.6278	$	32.3531	$	1.2462

The high and low bid prices per share as reported on the NASDAQ Global Market on March 11 28, ~~2010~~2011, were $2.8823 and $2.7320, respectively.

Holders

As of March 1229, ~~2010~~2011, there were approximately ~~2,232~~ 184 stockholders of record of our ~~common~~Common ~~stock~~Stock, excluding shares held by objecting beneficial owners.

Dividends

The Company has never declared or paid any dividends on our ~~common~~ ~~stock~~Common Stock. We do not intend to pay cash dividends on our ~~common~~ ~~stock~~Common Stock. We plan to retain our future earnings, if any, to ~~finance~~ finance our operations and for expansion of our business. The decision whether to pay cash dividends on our Common ~~common~~Stock ~~stock~~ will be made by our ~~Board~~board, in its discretion, and will depend on our ~~financial~~ financial condition, operating results, capital requirements, and other factors that our ~~Board~~board consider relevant.

Recent Sales of Unregistered Securities

None.

Transfer Agent and Registrar

The transfer agent and registrar for our ~~common~~Common ~~stock~~Stock is Transfer Online, Inc., 512 SE Salmon Street, Portland, OR 97214.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

~~During~~ As ~~2009~~previously announced, the Company’s ~~repurchased~~board anof ~~aggregate~~directors ofadopted a stock repurchase program ~~444~~on July 26,~~655~~ 2007 pursuant to which the Company may repurchase up to the lesser of (a) 1,600,000 shares of ~~common~~its ~~stock~~Common ~~for~~Stock or (b) an aggregate ~~purchase price~~ of $~~869~~10,~~393~~000,000 of Common Stock (the “Repurchase Program”). AsOn aSeptember 29, ~~result~~2008, asthe Company’s board of ~~December~~directors authorized the Company’s executive committee to repurchase, in its discretion, up to an additional aggregate of $1,000,000 of Common Stock pursuant to the Repurchase Program. On January 319, 2009, the Company’s board of directors authorized the Company’s executive committee to repurchase, in its discretion, up to an additional aggregate of $1,000,000 of Common Stock pursuant to ~~787~~the Repurchase Program. Further,~~721~~ on April ~~shares~~30, 2010 the Company’s board of ~~common~~directors ~~stock~~authorized orthe ~~shares~~Company’s ofexecutive ~~common~~committee ~~stock~~to ~~with~~repurchase, anin ~~aggregate~~its ~~purchase~~discretion, ~~price~~up ofto ~~approximately~~an additional aggregate of $81,~~046~~000,000 of Common Stock pursuant to the Repurchase Program (~~whichever~~for isa ~~less)~~total ~~remain~~amount ~~available~~of ~~for~~$3,000,000 ~~repurchase~~of authorized purchases under the ~~Company’s~~Repurchase ~~repurchase program~~Program).

24 26

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

									Maximum Number
						Total Number of			(or Approximate
						Shares Purchased			Dollar Value) of Shares
	Total Number					as Part of Publicly			that may yet be
	of Shares			Average Price		Announced Plans			Purchased Under
Period	Purchased(1)			Paid per Share		or Programs(1)			the Plans or Programs
October 1 to 31, 2009		44,681		$	2.05		44,681		788,194 shares or $	8,046,913
November 1 to 30, 2009		473		$	1.83		473		787,721 shares or $	8,046,033
December 1 to 31, 2009		-		$	-		-		787,721 shares or $	8,046,033
Total		45,154	(2)	$	2.04		45,154	(2)	787,721 shares or $	8,046,033

(1)		Unless noted, the Company made all repurchases in the open market.
(2)		Of these repurchases, the Company purchased 37,454 shares of common stock in the open market and 7,700 shares of common stock in a private transaction.

On November 3, 2009, the Company’s Board terminated the stock repurchase program approved on July 26, 2007, to allow the Company to evaluate the proposed going private transaction by Troy Lowrie, our Chairman of the Board and CEO, among other parties.

Item 6. Selected Financial Data

The following table sets forth certain of the Company’s historical financial data. The selected historical consolidated financial data ~~as of December 31, 2009 and 2008 and~~ for the years ended December 31, ~~2009~~2010 and ~~2008~~2009 have been derived from the Company’s audited ~~consolidated~~Consolidated ~~financial statements~~Financial Statements and the related notes included elsewhere herein. The selected historical consolidated financial data ~~as of December 31, 2007, 2006, and 2005 and~~ for the years ended December 31, ~~2007~~2008, ~~2006~~2007, and ~~2005~~2006 have been derived from the Company’s audited financial statements for such years, which are not included in this Annual Report on Form 10-K. The selected historical consolidated financial data set forth are not necessarily indicative of the results of future operations and should be read in conjunction with the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the historical Consolidated ~~consolidated~~Financial ~~financial~~Statements ~~statements~~ and accompanying notes included herein. The historical results ~~are~~ are not necessarily indicative of the results to be expected in any future period.

Description	2009			2008			2007			2006			2005
							(Restated)
Total revenue	$	55,040,034	(5)	$	57,692,671	(3),(4)	$	39,616,731	(2)	$	16,114,581	(1)	$	15,854,153
Net income (loss) from operations	$	5,075,311		$	(37,440,195	)	$	5,442,076		$	236,833		$	(1,271,251	)
Basic income (loss) per common share	$	0.04		$	(1.71	)	$	0.33		$	0.03		$	(0.15	)
Weighted average shares outstanding		17,541,376			17,925,132			16,623,213			9,128,985			8,477,571
Total assets	$	71,151,173		$	75,626,043		$	103,719,255		$	35,079,698		$	27,859,065
Total stockholders’ equity	$	28,482,530		$	28,386,742		$	53,987,842		$	12,795,623		$	3,043,588

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

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


	Year Ended December 31,
	2010			2009			2008				2007			2006
Statements of Income Data:											(Restated)
Total Revenue	$	55,269,961	(6)	$	53,201,905		$	55,563,227		(3)	$	38,743,730	(2)	$	16,114,581	(1)
Income (loss) From Continuing Operations, net of Income Taxes	$	2,004,049		$	1,081,676	(5)	$	(28,799,586)		(4)	$	5,403,274		$	1,619,687
Basic Income (loss) from continuing operations per common share attributable to VCG stockholders	$	0.12		$	0.06		$	(1.61	)		$	0.33		$	0.18

Fully diluted income (loss) from continuing operations per common share attributable to VCG stockholders	$	0.12		$	0.06		$	(1.59	)		$	0.32		$	0.17
Weighted average shares outstanding		16,805,951			17,541,376			17,925,132				16,623,213			9,128,985
Fully diluted weighted average shares outstanding		16,805,951			17,541,376			18,146,949				17,012,983			9,338,570
Balance Sheet Data (At End of Period):
Total Assets	$	66,887,112		$	71,151,173		$	75,626,043			$	103,719,255		$	35,079,698
Current portion of notes and other obligations	$	10,350,988		$	3,867,344		$	3,636,000			$	9,343,029		$	2,761,197
Long-term notes and other obligations, net of current portion	$	14,571,722		$	26,880,039		$	32,840,320			$	21,505,497		$	17,230,560
Total Stockholders’ Equity	$	28,867,983		$	28,482,530		$	28,386,742			$	53,987,842		$	12,795,623

(1)		Fiscal year 2006 reflects the acquisitions of two adult nightclubs in Colorado.
(2)		Fiscal year 2007 reflects the sale of the membership interests in Epicurean Enterprises, LLC, which operated a nightclub in Arizona, and the acquisitions of 11 adult nightclubs in Minnesota (1), Illinois (4), Colorado (1), Maine (1), Florida (1) North Carolina (1), Kentucky (1), and Texas (1).
(3)		Fiscal year 2008 reflects the acquisitions of one adult nightclub in California and one in Texas. ~~See Note 4 to the Consolidated Financial Statements.~~
(4)		Fiscal year 2008 includes non-cash impairment charges for goodwill, licenses, trade names and other intangible assets for a total amount of approximately $43.0 million with Golden Productions JGC Fort Worth LLC (“Golden”) taken out of the numbers. In addition, VCG recognized a non-cash impairment of real estate of approximately $1.9 million.
(5)		Fiscal year 2009 includes non-cash impairment charges for goodwill, licenses, trade names and other intangible assets for a total amount of approximately $2.0 million. In addition, VCG recognized a non-cash impairment of real estate of approximately $268,000. This also reflects Golden taken out of the numbers.
(6)		Fiscal year 2010 reflects the sale of Golden.

Discontinued Operations 27

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

(4)		Fiscal year 2008 includes non-cash impairment charges for goodwill, licenses, trade names and other intangible assets for a total amount of approximately $46.0 million. In addition the Company recognized a non-cash impairment of real estate of approximately $1.9 million. See Note 6 to the Consolidated Financial Statements.
(5)		Fiscal year 2009 includes non-cash impairment charges for goodwill, licenses, trade names and other intangible assets for a total amount of approximately $2.0 million. In addition the Company recognized a non-cash impairment of real estate of approximately $268,000. See Note 6 to the Consolidated Financial Statements.

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

Forward-Looking Statement Disclaimer

In this report, references to “VCG Holding Corp,” “VCG,” the “Company,” “we,” “us,” and “our” refer to VCG Holding Corp. and its subsidiaries.

This Annual Report on Form 10-K contains certain forward-looking statements and, for this purpose, any statements contained herein that are not statements of historical fact are intended to be “forward-looking statements” with the meaning of the Private Securities Litigation Reform Act of 1995. Without limiting the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “estimate,” “continue,” or comparable terminology, are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within our control. These factors include, but are not limited, to, costs and liabilities associated with the proposed going private transaction and associated litigation and the proposed merger transaction, our inability to retain employees and members of management due to uncertainty about our future direction due to the proposed merger transaction, costs and liabilities associated with our inability to successfully close the proposed merger transaction or any other similar transaction, the possibility that we may be prohibited from closing the proposed merger transaction or forced to rescind it if it has been consummated and pay damages as a result of litigation, diversion of management’s attention caused by the proposed merger transaction and associated litigation, our limited operating history making our future operating results difficult to predict, the availability of, and costs associated with, potential sources of financing, disruptions in the credit markets, economic conditions generally and in the geographical markets in which we may participate, our inability to manage growth, difficulties associated with integrating acquired businesses into our operations, geographic market concentration, legislation and government regulations affecting us and our industry, competition within our industry, our failure to promote our brands, our failure to protect our brands, the loss of senior management and key personnel, potential conflicts of interest between us and Troy Lowrie, our Chairman of the Board and Chief Executive Officer (“CEO”), our failure to comply with licensing requirements applicable to our business, liability from unsanctioned, unlawful conduct at our nightclubs, the negative perception of our industry, the failure of our business strategy to generate sufficient revenues, liability from uninsured risks or risks not covered by insurance proceeds, claims for indemnification from officers and Directors, deterrence of a change of control because of our ability to issue securities or from the severance payment terms of certain employment agreements with senior management, our failure to meet the NASDAQ continued listing requirements, the failure of securities analysts to cover our common stock, our failure to comply with securities laws when issuing securities, our common stock being a penny stock, our intention not to pay dividends on our common stock, our future issuance of common stock depressing the sale price of our common stock or diluting existing stockholders, the limited trading market for, and volatile price of, our common stock, and our inability to comply with rules and regulations applicable to public companies.

We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made and are based on certain assumptions and expectations which may or may not be valid or actually occur and which involve various risks and uncertainties.

Unless otherwise required by applicable law, we do not undertake, and specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.

Overview

The Company is in the business of acquiring, owning and operating nightclubs, which provide premium quality live adult entertainment, restaurant and beverage services in an up-scale environment. As of December 31, ~~2009~~2010, the Company, through its subsidiaries, owns and operates 20 19 nightclubs in Indiana, Illinois, Colorado, Texas, North Carolina, Minnesota, Kentucky, Maine, Florida, and California. The Company operates in one reportable segment.

Critical Accounting Estimates

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

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

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

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

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

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

Testing for Impairment of Intangible Assets

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

27 29

~~including~~ In ~~any~~performing ~~unrecognized~~the ~~intangible~~Company’s ~~assets~~annual ~~and~~impairment ~~the~~assessment ~~excess~~at December 31, 2010 in accordance ~~becomes~~with ASC Topic 350, the ~~implied~~Company ~~value~~determined ofthat ~~the~~no ~~goodwill~~impairment had occurred. ~~This~~In is2009, ~~done~~the inCompany ~~relation~~recorded toa non-cash impairment charge for licenses of $1,574,000 and trade names of $167,000. In addition, the ~~nightclub’s~~Company ~~respective~~evaluated ~~forecasted~~its ~~cash~~goodwill at ~~flows~~December 31, 2009 and ~~other~~recorded ~~relevant~~a ~~assumptions~~non-cash impairment charge of approximately $17,000. The total impairment charge for 2009 was approximately $1,758,000.

In The ~~performing~~fair value of the ~~Company’s~~licenses, ~~annual~~trade ~~impairment~~names, ~~assessment~~and atreporting units was based on significant ~~December 31,~~unobservable ~~2009~~inputs in(level ~~accordance~~3) ~~with~~using ~~ASC~~estimated ~~Topic~~discounted ~~350,~~future net cash flows at the nightclub ~~Company~~level. ~~recorded~~We acomputed ~~non~~an estimate of our company-~~cash~~wide ~~impairment~~weighted ~~charge~~average ~~for~~cost ~~licenses~~of capital of ~~$1,574,000~~ 13.0% and 12.0% ~~trade~~for ~~names~~2010 ofand ~~$167~~2009,~~000~~ respectively. InThe ~~addition,~~long-term ~~the~~growth ~~Company~~rate of 3% was estimated by using the ~~evaluated~~Gordon ~~its~~Growth ~~goodwill~~Model. atThese ~~December 31,~~processes ~~2009~~are subjective and ~~recorded~~require asignificant estimates. These ~~non-~~estimates include judgments about future cash ~~impairment~~flows ~~charge~~that ofare ~~approximately~~dependent ~~$17~~on internal forecasts,~~000~~ growth rates, company specific risk premiums and estimates of weighted average cost of capital used to discount future cash flows. ~~The~~Changes ~~total~~in these assumptions and estimates could materially affect ~~impairment~~the ~~charge~~results ~~was~~of ~~approximately~~our ~~$1,758,000~~reviews for impairment.

The fair value of the licenses, trade names, and reporting units was based on estimated discounted future net cash flows at the club level. The impairment charge is a result of a continued weak economy. We computed an estimate of our company-wide weighted average cost of capital of 12.0%. The long-term growth rate of 3% was estimated by using the Gordon Growth Model. These processes are subjective and require significant estimates. These estimates include judgments about future cash flows that are dependent on internal forecasts, growth rates, company specific risk premiums and estimates of weighted average cost of capital used to discount future cash flows. Changes in these assumptions and estimates could materially affect the results of our reviews for impairment.

Impairment of Real Estate

ASC Topic 360, Property Plant and Equipment requires a fair market valuation of assets, including land and buildings, in the event of triggering events including adverse changes in ~~the~~ the business climate or decline in market value. In December 2008, the Company ordered an appraisal of the land and building owned in Phoenix, Arizona. The appraisal was performed by an ~~independent~~ independent third party real estate appraiser who valued the land and building at $2,600,000, resulting in an impairment of approximately $1,886,000 at December 31, 2008. This building was rented by the individual who purchased the operations and ownership interest in our subsidiary Epicurean Enterprises in January 2007. The lessee defaulted on the lease in August 2008 and an impairment charge of $268,000 was recorded at June 30, 2009. On July 31, 2009, the Company sold the building and land for approximately $2,300,000. The Company recognized a non-cash loss of approximately $69,000 upon the sale. The Company does not have any real property held for sale or vacant as of December 31, ~~2009~~2010.

Stock Options

In 2007 and 2008, the Company issued stock option grants to key employees and officers. The ~~two~~ officer grants vest one-third on the 3rd, 5th and 7th anniversary of the grant date. Key employee ~~grants~~ grants vest 20% on the 3rd anniversary and 40% each on the 5th and 7th anniversary of the ~~grant~~ grant date. The options are cancelled upon termination of employment and expire ten years from the date of grant. All options were granted at an exercise price significantly above the fair market value of the ~~common~~Common ~~stock~~Stock covered by the option on the grant date. All option exercise prices ~~substantially~~ substantially exceed fair market value on December 31, ~~2009~~2010 and March 1229, ~~2010~~2011.

The Company accounts for stock-based compensation by measuring and recognizing as compensation expense the fair value of all options as of the grant date. The determination of fair value involves a number of significant estimates. We use the Black-Scholes Option Pricing Model to estimate the fair value of option grants using assumptions which are described in Note 11 to the Consolidated ~~consolidated~~Financial ~~financial statements~~Statements. These include the expected volatility of our stock and employee exercise behavior. These variables make estimation of fair value of stock options difficult. A key assumption is the number of options ultimately expected to vest. Since no options were ~~granted~~ granted during ~~2009~~2010, the only estimate which affected the ~~2009~~ 2010 financial statements was the forfeiture assumption. Forfeitures were estimated at the time of the grant in 2007 and 2008 of 16% over the seven year option vesting period based upon limited historical experience and were revised to 25% during 2009 and to 40% during 2010 based upon actual forfeitures. This resulted in a reduction of stock-based compensation expense of ~~approximately~~ $4672,~~000~~922 for ~~2009~~ 2010.

Any subsequent revisions to the forfeiture assumptions adjusts the prior period compensation expense in the period of the change on a cumulative basis for unvested options for which compensation expense has already been recognized and in subsequent periods for unvested options for which the expense has not yet been recognized. Actual forfeitures could differ materially as a result of voluntary employee actions and involuntary actions which may result in significant changes in our stock-based compensation expense amounts in the future. In addition, the value, if any, an employee ultimately receives from stock-based compensation awards will likely not correspond to the expense amounts recorded by the Company.

Legal and Other Contingencies

As discussed in Note 12 to the ~~consolidated~~Consolidated ~~financial statements~~Financial Statements, legal proceedings are pending or threatened. The outcomes of legal proceedings and claims brought against us and ~~other~~ other loss contingencies are subject to significant uncertainty. We accrue a charge against income when our management determines that it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current ~~information~~ information available to us to determine whether an accrual should be established or adjusted. Due to the inherent uncertain nature of litigation, the ultimate outcome or actual cost of defense or settlement may vary materially from estimates.

28 ~~IRS Tip Audit~~

TheTable IRS audited PT’s® Showclub in Denver for the years 2006, 2007, and 2008 to determine tip reporting compliance. Every business with customary tipping must report annually on Form 8027 the total sales from food and beverage operations, charge sales, total tips reported, and charge tips reported. The audit resulted in a determination that cash tips for that club were under-reported in the three years examined. The tax assessed, without penalties and interest, as a result of this under-reporting was $61,500. The Company performed an intensive self-audit for 2007, 2008 and 2009 using the same procedures followed by the IRS agent. As a result of the completion of the self-assessment process for the three years under examination, the Company has accrued a tip liability of $207,000 as of December 31, 2009. This estimate involves significant judgment and the actual tax liability may differ materially. Contents

DOL Audit

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

In March 2009, VCG was placed under a similar nationwide DOL audit for all nightclub locations and its corporate office. All locations completed the self-audit in August 2009 and are ~~currently~~ currently working with the DOL to determine what, if any, violations may have occurred. This case is still in ~~the~~ the investigatory state and no final determination can be made at this time of an unfavorable outcome or any potential liability. The Company has accrued $200,000 as of December 31, 2009 ~~for~~ for potential wage/hour violations; however this estimate involves significant judgment and the actual liability may vary materially from this estimate. AThe ~~summary~~Company ~~meeting~~expects ~~has~~a ~~tentatively been~~final ~~scheduled~~resolution ~~with~~in the ~~DOL and counsel on March 15, 2010~~ tosecond ~~finalize~~quarter ~~the~~of ~~liability~~2011. The Company believes it has corrected all processes that resulted in the potential violations.

Self-Insured Health Insurance

The Company is partially self-insured for group health insurance. The accrual is regularly evaluated and adjusted for claims incurred but not reported. Due to the inherent uncertain ~~nature~~ nature of medical claims, the actual cost may materially differ from the $~~200~~112,000 accrued liability as of December 31, ~~2009~~2010.

Income Taxes

We are subject to income taxes in the United States. Tax law requires items to be included in the tax return at different times than when the same items are reflected in the ~~consolidated financial~~Consolidated ~~statements~~Financial Statements. Permanent differences result when either deductible items for U.S. GAAP purposes are not deductible for tax purposes or income recognized for U.S. GAAP purposes is not ~~recognized~~ recognized for tax. Temporary differences reverse over time, such as depreciation, amortization, and net operating loss carry-forwards. As of December 31, ~~2009~~2010, we have an estimated tax net operating loss carry-forward of approximately $2,~~608~~329,000 which is classified as non-current deferred tax asset. Significant judgment is used in determining the timing of utilizing the net operating loss carry-forward, some of which may be utilized in ~~2010~~2011. Based on the evaluation of all ~~available~~ available information, the Company recognizes future tax benefits, such as net operating loss carry-forwards, to the extent that realizing these benefits is considered “more likely than not” to be sustained in accordance with FASB guidance issues in accounting for uncertainty in income taxes recognized.

The timing differences create either deferred tax assets or liabilities. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and 31tax bases of assets and liabilities. The tax rates used to determine deferred tax assets or liabilities are enacted tax rates in effect for the year and manner in which the differences are expected to reverse. Our effective rates differ from the statutory rate primarily due to 2010 permanent differences of approximately $358,000 (tax effected) and tax credits generated of approximately $590,000.

During the course of ordinary business, there are some transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether additional tax will be due. The reserves are established when we believe that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities. We evaluate our ability to realize the tax benefits associated with deferred tax assets by analyzing our future taxable income using both historical and projected future operating results, reversing the existing taxable temporary differences, taxable income in prior carry-back years (if permitted) and the availability of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

As of December 31, 2010, the current portion of the deferred income tax asset was determined to be $837,628 attributable to the Company’s partially self-insured health insurance reserve and indemnification claim accrual and the $2,464,817 non-current deferred income tax asset attributable to other temporary differences.

~~The~~Recently ~~timing~~Issued ~~differences~~Accounting ~~create either deferred tax assets or~~Pronouncements liabilities. Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities. The tax rates used to determine deferred tax assets or liabilities are enacted tax rates in effect for the year and manner in which the differences are expected to reverse. Our effective rates differ from the statutory rate primarily due to 2009 permanent differences of approximately $351,000 (tax affected) and tax credits of approximately $582,000.

~~During~~ In ~~the course of ordinary business~~September 2010, ~~there~~the ~~are~~SEC ~~some transactions~~issued ~~and~~Release ~~calculations~~33-9142 ~~for~~ which amended the ~~ultimate~~SEC’s ~~tax determination~~rules isand ~~uncertain.~~forms Weto remove ~~establish~~the ~~reserves~~requirement for ~~tax-related~~ ~~uncertainties~~issuers ~~based~~that ~~on estimates of whether, additional tax will be due. The reserves~~ are ~~established~~neither ~~when~~accelerated ~~we believe~~filers ~~that~~nor ~~certain~~large ~~positions~~accelerated ~~are likely~~ filers to beobtain ~~challenged~~an ~~and may~~auditor ~~not~~attestation bereport ~~fully sustained~~ on ~~review~~internal bycontrol ~~tax~~over ~~authorities~~financial reporting. WeTherefore, ~~evaluate~~smaller ~~our~~reporting ~~ability~~companies tosuch ~~realize~~as ~~the~~VCG ~~tax~~will ~~benefits~~not ~~associated~~need ~~with deferred~~their ~~tax~~auditors ~~assets~~to bytest ~~analyzing~~internal ~~our~~controls; however, ~~future~~management ~~taxable~~will ~~income~~still ~~using both~~need ~~historical~~to ~~and~~do ~~projected~~its ~~future~~assessment ~~operating~~for ~~results, reversing~~ the ~~existing~~year ~~taxable~~ended ~~temporary differences~~December 31, ~~taxable~~2010. ~~income~~Although inVCG ~~prior~~obtained ~~carry-back~~an ~~years~~audit ~~(if~~opinion ~~permitted)~~on ~~and~~ the ~~availability~~ ofCompany’s ~~tax~~internal ~~planning~~controls ~~strategies.~~over Infinancial ~~the event that we~~reporting ~~change~~for ~~our determination as to~~ the ~~amount~~year ofended ~~deferred~~December 31, ~~tax~~2009, ~~assets that~~we ~~can~~did benot ~~realized,~~obtain wean ~~will~~opinion ~~adjust~~on ~~our~~the ~~valuation~~Company’s ~~allowance~~internal ~~with~~controls aover ~~corresponding~~financial ~~impact~~reporting tofor the ~~provision~~year ~~for~~ended ~~income~~December 31, ~~taxes~~2010 ~~in the~~due ~~period~~to inthis ~~which~~change ~~such~~in ~~determination is made~~the requirement.

As In ~~of December~~January 312010, ~~2009~~the FASB issued ASU 2010-06, ~~the~~Fair ~~current~~Value ~~portion~~Measurements ofand ~~the~~Disclosures (Topic ~~deferred~~820) ~~income~~Improving ~~tax~~Disclosures ~~asset~~about ~~was~~Fair ~~determined~~Value toMeasurements. beThis ~~$76,920 attributable~~update provides amendment to the codification ~~company’s~~regarding ~~partially~~the ~~self~~disclosures ~~insured~~required ~~health~~for fair value measurements. The key amendments ~~insurance~~include: ~~reserve~~(a) a requirement to disclose transfer in and $out of Level 1 and 2; (b) activity in Level 3 should show information about purchases,~~841~~ sales,~~673~~ ~~non-current~~settlements, ~~deferred~~etc. ~~income~~on ~~tax~~a gross basis rather than as ~~asset~~net ~~attributable~~basis; toand ~~other~~(c) additional ~~temporary~~disclosures ~~differences~~about inputs and valuation techniques. The new disclosure requirements are effective for periods beginning after December 31, 2009, except for the gross disclosures of purchases, etc. which is effective for periods beginning after December 15, 2010. The Company adopted this update on January 1, 2010, and it did not have a significant impact on the Consolidated Financial Statements.

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

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

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

Results of Operations

Year Ended December 31, ~~2009~~2010 Compared to Year Ended December 31, ~~2008~~2009

Revenues

The ~~Total~~Company’s revenue, ~~net~~from ofnightclubs ~~sales~~is ~~taxes,~~comprised ~~decreased~~of ~~from~~funds ~~approximately $57,693,000~~received ~~for~~from the ~~year~~sale ~~ended~~of ~~December 31~~alcoholic beverages, ~~2008 to approximately $55~~food,~~040,000~~ ~~for the year ended December 31~~merchandise, ~~2009.~~ ~~The~~service ~~decrease in~~ revenue ~~of approximately $2,653,000 or 4.6% was primarily due to the weak economy~~ and aother ~~reduction in business and convention travel~~income. The ~~high-end~~Company Arecognizes ~~clubs had a decline in~~ revenue ~~of approximately $1,552,000 or 7.3%. These~~at ~~clubs are the most susceptible to the economic recession because~~ point-of-sale ~~their~~(“POS”) ~~business~~upon ~~clientele. Because of~~ the ~~weak~~receipt ~~economy the B format clubs also experienced an overall decline in revenue~~ of ~~approximately~~ ~~$2,462,000~~cash or ~~8.8%.~~charge ~~The Jaguar’s Gold Club in Dallas, Texas and Imperial Showgirls Gentlemen’s Club in Anaheim, California were included in operations for all of 2009, but only for a part of 2008~~card. ~~These acquisitions generated~~ ~~approximately $1,720,000 of additional income in 2009 that was not included in 2008 results.~~

~~Rental~~ Total ~~income~~revenue, ~~received~~net ~~from~~of ~~unrelated~~sales ~~third parties~~taxes, ~~included~~increased ~~in other~~from ~~income, totaled~~ approximately $~~179~~53,202,000 for the year ended December 31, 2009 ~~and~~to approximately $~~288~~55,270,000 for the same period in ~~2008~~2010. ~~This~~The increase in revenue of approximately $2,068,000 or 3.9% was primarily due to the ~~Company~~increase ~~not~~in ~~receiving~~service ~~rental~~revenue. ~~income~~The Company experienced a decrease in ~~2009~~sales onof alcoholic beverages of approximately $1.8 million or 7.9% for the ~~Arizona~~year ~~property~~ended ~~which~~December 31, ~~was~~2010 ~~sold~~compared into ~~July~~the same period in 2009. ~~Rental~~This ~~income~~decrease was due to a change in ~~2008~~spending ~~was~~habits ~~less~~of ~~than~~the 0patrons.5 Service revenue increased by approximately $3,617,000 or 14.1%. ofService ~~total~~revenue ~~income~~includes entertainer payments to perform at the nightclubs, customer admission fees, customer payments for tabs, dance dollar payments and ~~decreased~~suite rentals. The Company’s “A” type nightclubs had an increase in total revenue of approximately $1,254,000 or 6.3%, when compared to the same period in 2009. The Company’s “B” type nightclubs had an increase in total revenue of approximately 0$832,000 or 3.3%, when compared to the same period in 2009. The Company’s “C” type nightclubs had a slight decrease in total revenue of approximately $30,000 or 0.4%.

30 ~~Cost of Goods Sold~~

Cost of Goods sold includes the cost of the alcohol, food, and merchandise we sell to customers. We track cost of goods sold as a percentage of the attributable revenues. Costs of goods sold decreased in 2009 to approximately $5,921,000 or 23.9% of attributable revenue. This compares to approximately $6,980,000 in 2008, or approximately 24.3% of attributable revenue. The decrease is a result of operating two additional all nude nightclubs (C clubs) for the full year of 2009 as compared to 2008. The all nude clubs do not sell alcohol and have a lower cost of goods sold percentage. In addition, the A and B clubs better managed their inventories, reducing the cost of sales percentage by more than the decrease in attributable revenue.

Cost of Goods Sold

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

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


	For the Years Ended
	December 31,
	2010						2009
	Total		“A” Clubs		All Other Clubs		Total		“A” Clubs		All Other Clubs
Sales of alcoholic beverages	$	21,009,283	$	8,221,697	$	12,787,586	$	22,808,436	$	9,007,272	$	13,801,164
Sales of food and merchandise		2,006,147		1,063,242		942,905		1,844,738		985,511		859,227

Total	$	23,015,430	$	9,284,939	$	13,730,491	$	24,653,174	$	9,992,783	$	14,660,391

Cost of goods sold	$	5,999,135	$	2,637,439	$	3,361,696	$	5,877,337	$	2,484,045	$	3,393,292
Cost of goods sold percentage		26.1%		28.4%		24.5%		23.8%		24.9%		23.1%

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

Salaries and Wages

Salaries and wages include hourly wages, management salaries and bonuses. For the year ended December 31, 2010, salaries and wages increased by approximately $~~320,000~~1.7 million or 212.45%, compared to the same period in 2009,. ~~from~~This ~~$13,461,000~~increase ~~for~~was due to the ~~year~~additional ~~ended~~commission ~~December 31~~paid to TLC employees, ~~2008~~which corresponds to ~~approximately~~an ~~$13~~increase in service revenue,~~781,000~~ ~~for~~increased ~~the~~supervisor ~~year~~salaries, ~~ended~~the fee ~~December 31,~~structure ~~2009.~~used ~~This~~to ~~slight~~compensate ~~change~~entertainers ~~can~~in beMinnesota ~~attributable~~ and a severance payment made to ~~the~~a ~~following:~~departing executive officer.

	•	an increase in the federal and state minimum wages ranging from $0.17 to $0.70 per hour from 2008 to 2009;
	•	the estimated accrual of $200,000 for DOL minimum wage violations for 2006 through 2008; offset in part by a reduction in club employee headcount by approximately 85 tipped, minimum wage personnel from December 31, 2008 headcounts.

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

In November 2007, the Company’s Compensation Committee hired an independent consulting firm to determine proper compensation levels for our CEO and President. The study’s results were used to determine the compensation of our President, Micheal Ocello, after he changed his status from consultant to employee in October 2007. Mr. Ocello’s annual salary has remained consistent, without an increase for the twelve months ended December 31, 2009 and 2008.


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

Our CEO and principal stockholder, Troy Lowrie, elected to not receive a salary from the Company’s inception in 2002 until March 2008. At that time, Mr. Lowrie elected to receive a salary of approximately $300,000 annually, only 40% of the salary recommended by the independent salary survey and approved by the Board. In November 2008, Mr. Lowrie elected to increase his salary to $700,000, the full amount approved by the Board. Mr. Lowrie has been paid that salary, without an increase, through 2009.

The percentage of salary to total revenue for the year ended December 31, 2009 was 25.0%. The same percentage for the previous year was 23.3%, an increase of 1.7%. We expect the ongoing percentage of salary to total revenue to continue to be approximately 25% of total revenues.

Other General and Administrative Expenses

Taxes ~~and permits expenses increased by approximately $585~~,~~000 for~~ ~~the year ended December 31~~Permits, ~~2009,~~and ~~compared to the same~~Licenses ~~period in 2008. This 20.2% increase was a result of:~~

~~• increased payroll taxes of $616,000 or 37.9%.~~ This ~~increase~~category includes ~~the~~employment ~~estimated tip audit accrual of $207,000 plus the additional FICA tax already paid on unreported tip from 2006 to 2008 of $61,500 and additional FICA tax paid on reported tips in 2009; • increases in~~ taxes ~~and permits of approximately $72~~,~~000~~ orcosts ~~15.4%.~~associated ~~This~~with ~~category contains club liquor, cabaret or sexually oriented~~ business ~~(“S.O.B.”)~~ licenses, ~~sales tax,~~ and ~~business and health inspection licenses. This category also includes amounts expensed for the Texas Patron Tax~~permits, real ~~paid under protest, in the amounts of approximately $290,000 for the year ended December 31, 2009~~ and ~~$203,000~~personal ~~for the year ended December 31, 2008. Refer to Item 3 Legal Proceedings for additional information; and • decreases in~~ property taxes ofand ~~approximately $103,000 or 12.9%. Property tax valuations were protested in~~ the five clubs located in East St. Louis, resulting in a property tax savings of approximately $30,000. The sale of the Arizona building in July 2009, with annual property taxes of approximately $60,000, reduced the 2009 property tax expense by almost $30,000. Assessed values of club properties were reduced in Texas, ~~with~~Patron ~~a savings of approximately $16,000~~Tax.

~~Charge card and bank fees decreased by approximately $72,000 to a total of approximately $797,000 for the year ended December~~ 31~~, 2009. This is an 8.3% decrease over the same~~ period in 2008. This decrease is attributable to a change in several cities to banks with lower service charges, closing of many bank accounts with little or nominal activity, sharp decrease in wiring funds to avoid wire fees and the use of electronic funds transfers and online banking. Chargeback losses are also down in 2009 by approximately $37,000 due to changes in procedures in processing and fighting customer chargebacks.

Annual rent increased slightly in 2009, to approximately $5,855,000 as of December 31, 2009 compared to $5,798,000 for the same period ending December 31, 2008. This increase of approximately $57,000 or 1.0% is for

~~scheduled~~ The ~~rent~~following ~~increases~~table ~~plus~~shows ~~rents~~the ~~for~~breakdown ~~full~~of ~~year~~the onamounts ~~Manana Entertainment~~paid for taxes, ~~Inc.~~permits and ~~VCG-IS,~~licenses for ~~LLC,~~ the ~~two~~year ~~clubs~~ended ~~acquired during~~December 31, ~~2008~~2010 and 2009, respectively.

Legal fees increased by 33.1% to approximately $1,466,000 for the year ended December 31, 2009 compared to the same period in 2008. This increase is due to litigation involving the Classic Affairs nightclub (see Item 3 Legal Proceedings). The lawsuit has now been dismissed, with prejudice. All related costs have been accrued or paid as of December 31, 2009.


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

	$	3,072,768	$	3,250,176

~~Other~~ Employment ~~professional~~taxes ~~fees~~are based on wages plus reported tips. Employment taxes decreased by approximately $~~572~~286,000 or 20 13.51% infor ~~2009~~the toyear ~~approximately~~ended ~~$2,216,000 at~~ December 31, ~~2009~~ 2010, ~~from~~compared to the ~~previous~~same ~~amount~~period in of2009. ~~$2,788,000~~The indecrease ~~2008.~~is ~~These~~a ~~fees include~~result ~~charges~~of ~~for~~having ~~appraisals,~~accrued ~~broker~~the ~~commissions~~liability for ~~renting~~an Internal Revenue Service ~~company~~(“IRS”) ~~real~~tip ~~estate~~audit in 2009 of approximately $206,000. ~~lobbying~~In ~~fees~~addition, ~~and~~there ~~environment~~was ~~assessments.~~a decrease in reported ~~Other~~tips ~~professional~~corresponding ~~fees~~to inthe ~~2009~~decrease ~~included~~in the ~~following~~sales of alcoholic beverages resulting in a decrease of ~~approximate~~employment ~~amounts:~~taxes of approximately $80,000.

• Business ~~audit~~licenses ~~and~~expense ~~quarterly~~includes ~~review~~costs ~~fees~~ of ~~$210~~maintaining liquor,~~000~~ ~~(see~~cabaret ~~Item 14 Principal Accountant Fees~~ and ~~Services~~other ingeneral business ~~Part~~licenses. ~~III);~~The •business ~~tax~~licenses ~~return~~expense ~~preparation~~increased ~~fees~~by ofapproximately $~~214~~142,000 toor ~~file~~56.8% ~~2008 tax returns, amend all the Company’s federal and state returns filed in 2008~~ for the ~~fiscal~~ year ~~ending~~ended December 31, ~~2007~~2010, ~~and~~compared ~~correct~~to ~~earlier~~the ~~years’~~same ~~state~~period ~~tax~~2009. ~~returns;~~This •increase ~~consultant~~is ~~expenses~~ attributable to ~~test internal controls and document compliance with~~ the ~~Sarbanes-Oxley~~Texas ~~Act~~Sales ofTax ~~2002~~Audit of ~~approximately~~Manana ~~$99,000;~~further •discussed ~~$102,000~~ in ~~marketing~~Note ~~consulting~~12 ~~fee~~of ~~expenses~~the ~~paid~~Notes byto ~~warrants~~the Consolidated ~~that~~Financial ~~expired~~Statements inunder ~~2009;~~“Commitments and •Contingent ~~$290,000~~Liabilities.” ofThe ~~valuation~~audit ~~and~~is complete; ~~impairment~~however, ~~calculation~~the ~~costs~~Company ~~and~~is ~~consulting~~disputing ~~fees~~certain ~~for~~of ~~work related to~~ the ~~SEC~~audit ~~comment~~results. ~~letter~~The ~~and~~Company ~~subsequent~~has ~~amended~~expensed approximately ~~SEC~~$115,000 ~~filings;~~during 2010.

The ~~Approximately~~Company ~~$954,000~~pays inreal ~~expenses~~and ~~were~~personal ~~incurred~~property bytaxes ~~the~~on ~~Company and~~all the ~~Special~~nightclubs ~~Committee in relation to~~ the ~~proposed~~Company ~~going~~operates. ~~private~~Property ~~transaction~~taxes ~~and~~decreased ~~proposed~~by ~~merger~~approximately ~~with Rick’s Cabaret International~~$22,000 ~~Inc.~~or ~~See Footnote~~ 3.4% tofor the ~~Financial~~year ~~Statements.~~ended December 31, 2010, ~~These~~compared ~~costs~~to ~~represent~~the ~~expenses~~same ofperiod ~~the~~in ~~Special~~2009. ~~Committee,~~The ~~legal costs~~decrease ~~billed~~resulted byfrom ~~the~~a ~~legal~~slight ~~counsel~~increase toin the ~~Special Committee,~~property ~~legal~~taxes ~~costs~~on ~~incurred~~most byof ~~the~~our ~~Company~~nightclubs in ~~relation~~2010, towhich ~~both~~was offset by the ~~proposed~~ ~~going~~sale ~~private~~of ~~transaction~~the ~~and~~Arizona ~~proposed~~property ~~merger,~~in ~~and~~2009 ~~costs~~resulting ~~billed~~in ~~and~~a ~~accrued~~decrease ~~from~~of ~~the~~approximately ~~financial advisor to the Special Committee~~$33,000.

~~Advertising~~ The ~~and~~Company ~~marketing~~continues ~~expenses~~to ~~decreased~~accrue ~~by approximately $116,000 or 3.9% over~~ the ~~year~~Texas ~~ended~~Patron ~~December 31,~~Tax ~~2008. This~~and ~~decrease is mostly attributable~~ to ~~more~~file ~~efficient~~quarterly ~~methods of advertising~~returns, ~~including using billboard trucks for mobile~~under ~~advertising~~protest, ~~versus~~with ~~leasing~~the ~~fixed~~State ~~billboard~~of ~~signs.~~Texas ~~Advertising and~~as ~~marketing~~discussed ~~expenses~~in ~~were~~Note ~~approximately~~12 ~~5.1%~~ of ~~total~~the ~~revenues in~~Notes ~~2009~~to ~~and~~the ~~2008.~~Consolidated ~~The Company’s senior management uses this~~Financial ~~metric~~Statements tounder ~~monitor~~“Commitments and ~~control~~Contingent ~~advertising expenses~~Liabilities.”

~~Insurance~~Charge ~~expenses~~Card decreased by approximately $57,000 for the year ended December 31, 2009, a 3.3% decrease over the prior year. This decrease is due to insurance premium savings related to economies of scale and ~~lower~~Bank ~~rates resulting from a~~Fees reduction in claims. Insurance premiums represented approximately 3.0% of total revenues in 2009 and 2008. This percentage is a metric that Company senior management uses to monitor and control insurance expenses.

~~Utilities~~ Credit ~~expenses~~card ~~slightly~~and ~~decreased~~bank infees ~~2009~~include ~~over~~chargebacks to the ~~same period in 2008~~Company. The ~~decrease~~credit ofcard and bank fees decreased by approximately $7251,000 or 6.54% for the year ended December 31, 2010, compared to the ~~was~~same period in 2009. The decrease is a result of ~~milder~~decreased ~~weather~~use inof credit ~~2009~~cards ~~versus~~at ~~the~~most ~~very~~of ~~cold~~our nightclubs ~~winter~~and inthe Company’s purchase of the ~~central~~ATM ~~and~~machine ~~northeast~~located ~~United~~in ~~States~~our California nightclub, thereby no longer paying fees to a third party for its maintenance, and improved procedures in ~~2008~~processing and protesting customer chargebacks.

Rent Repair and maintenance expenses increased from approximately $1,022,000 in 2008 to $1,242,000 in 2009. This increase of $220,000 or 21.5% resulted from repairs and stepped up maintenance on several nightclubs, including repairs to heating/air conditioning systems in Minnesota, Kentucky, Illinois and Colorado. Sprinkler systems were repaired and updated in Raleigh and sewer and drains were repaired in Denver. Electrical wiring and lighting systems were repaired in several clubs as well.

~~General~~ Rent ~~and~~expense ~~administrative~~includes ~~(“G&A”)~~rent ~~expenses include~~payments ~~common~~to ~~office~~landlords, ~~and~~deferred ~~nightclub~~rent ~~expenses~~recorded ~~such~~per ~~as janitorial,~~Accounting ~~supplies,~~Codification ~~security,~~840-10 ~~cast~~ and ~~employee~~840-20 ~~relations, education~~ and ~~training,~~ ~~travel~~the ~~and~~amortization ~~automobile,~~of ~~telephone,~~leasehold rights and ~~internet expenses~~liabilities. ~~Total~~For ~~G&A expenses totaled $5,023,000 for~~ the ~~twelve~~year ~~months~~ ended December 31, ~~2009~~2010, ~~compared~~rent to expense increased by approximately $4245,~~777,~~000 ~~for~~or 4.4% compared to the same ~~time~~ period in ~~2008~~2009. ~~Janitorial~~The ~~expenses~~increase is attributable to normal rent increases, including rent ~~were~~increases ~~the~~where ~~largest~~rent ~~item~~is inbased ~~the~~on ~~G&A~~a percentage of sales.

Legal Fees 34

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

category, totaling approximately $870,000 for the twelve months ended December 31, 2009. This is an increase of approximately $126,000 over the same time period in 2008. The primary reason for this increase is that the two clubs acquired in 2008 were included in a full year’s expenses in 2009. In addition, upholstery and carpet cleaning are included in this account and this has been done semi-annually in most clubs in 2009. Office and nightclub supplies totaled $694,000 for the 12 months ended December 31, 2009, an increase of approximately 9.5% over the same time period for 2008. Automobile and travel also increased by approximately $51,000 for the year ended December 31, 2009 compared to the same period in 2008. Employee education and travel was higher for club personnel, where classes on non-violent security training, club management and classes on the new point of sales POS system were offered to personnel in all clubs. G&A expenses for being a public company included SEC filing fees, investor relations and transfer agent charges totaled approximately $218,000 for the fiscal year ending in 2009. Other ~~unusual~~Professional ~~and~~Fees ~~previously disclosed expenses are included in the G&A total, including abandoned acquisition totaling approximately $52,000 in 2009.~~

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

Advisory Fees Related to Change in Control Proposals

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

Advertising and Marketing

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

Insurance

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

Repairs and Maintenance

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

Other Expenses

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

Depreciation and Amortization

Depreciation and amortization ~~expenses~~expense increased by approximately $1392,~~507~~000 or 0 5.8%, ~~during~~for the year ended December 31, ~~2009~~2010, compared to the same period in ~~2008~~2009. This ~~small~~ increase iswas a result of the ~~point~~installation of ~~sale~~the (“POS”) ~~system~~systems ~~being~~at ~~installed~~our ~~in November~~nightclubs and ~~December 2009. Depreciation on~~ other ~~asset additions~~fixed ~~earlier~~assets inacquired, ~~2009~~including ~~were offset by the end of depreciation~~four ~~expense on the Arizona building that was sold in July 2009~~vehicles.

33 Amortization of non-compete agreements entered into in connection with nightclub acquisitions, is included in depreciation and amortization in the statement of consolidated operations. For the year ended December 31, 2008 amortization of non-competes was $20,761 and $17,035 for the year ended December 31, 2009. All non-compete agreements were included in the acquisition valuation analysis and adjusted accordingly. These adjusted values are being amortized ratably over the life of the agreement.

Interest Expense

Total interest expense decreased by approximately $~~305~~639,000 or ~~approximately~~ 818.15%, ~~during~~for the year ended December 31, ~~2009~~ 2010, compared to the same period in ~~2008~~2009. The ~~decrease in~~ interest expense ~~was~~decrease ais ~~result~~due to repayment of ~~the~~debt ~~Company~~of ~~paying down over approximately~~ $45,~~700~~800,000 ~~in total debt, during 2009, including one promissory note with an annual interest rate of 12%~~.

Gain (Loss) on Sale of Assets ~~Interest Income~~

~~Interest~~ For ~~income decreased by almost $16,000 or 68.4% for~~ the year ended December 31, ~~2009~~2010, ~~when~~there ~~compared~~was toa gain on the ~~same period~~sale inof ~~2008~~assets of $968. ~~This~~The Company isrecorded ~~because~~losses on the ~~Company~~sale ~~made~~or awrite-off ~~decision~~of toassets totaling approximately $75,000 for the ~~spend~~year ~~virtually~~ended ~~all~~December 31, ~~free~~2009. ~~cash~~The previously disclosed loss on ~~paying~~the ~~down~~sale ~~debt~~of orthe ~~buying~~Arizona ~~back~~property ~~the~~totaled ~~Company’s~~almost ~~stock~~$69,000 ~~and~~of ~~because~~that ofloss. ~~interest~~The ~~earned~~remaining in$6,000 ~~2008 on~~was athe ~~federal~~write-off ~~tax~~of ~~refund~~miscellaneous small assets at the nightclubs.

Loss on Sale of Assets

The Company recorded losses on the sale or write-off of assets totaling approximately $75,000 for the year ended December 31, 2009. The previously disclosed loss on the sale of the Arizona property totaled almost $69,000 of that loss. The remaining $6,000 was the write-off of miscellaneous small assets at the clubs.

Income Taxes

For ~~2009~~2010, the current income tax ~~benefit~~expense offor ~~approximately $127,000~~continuing ~~represents~~operations ~~the net~~ of ~~a Federal benefit of~~ approximately $~~274~~171,000 represents ~~offset by~~ state income tax expense ~~of $147,000.~~for ~~Since~~taxes apayable ~~tax~~for ~~net~~those ~~operating~~states ~~loss~~which ofdo ~~$2,529,111~~not ~~was~~allow ~~generated~~consolidated ~~during~~tax ~~2009~~filings, ~~there~~as iswell noas ~~Federal~~minimum ~~income~~taxes ~~tax~~due ~~owed~~in ~~for 2009~~various states. ~~The~~There ~~Federal~~is ~~benefit~~no ~~resulted from the amendment of 2007~~federal ~~tax returns during 2009 and the reconciliation of the 2008 book provision to the tax returns. State~~ income tax ~~expense~~owed ~~primarily represents taxes payable~~ for ~~those~~2010 ~~states~~since ~~which~~approximately do$227,000 ~~not~~of ~~allow consolidated~~the tax ~~filings,~~net asoperating ~~well~~loss ascarry ~~minimum taxes due in~~forward ~~various~~was ~~states~~utilized.

~~Deferred~~ For 2009, the current income tax ~~expense~~benefit infor ~~2009~~continuing ~~included~~operations of approximately $~~466~~134,000 represents the net of ~~deferred~~ ~~income~~a ~~taxes~~federal ~~expense~~benefit asof ~~compared~~approximately to$274,000 aoffset ~~deferred~~by state income tax expense of $140,000. Since a tax ~~benefit~~net operating loss of $112,~~831~~529,~~550~~111 was generated during 2009, there is no federal income tax owed for 2009. The federal benefit resulted from the ~~prior~~amendment ~~year~~of ~~which~~2007 ~~was~~tax ~~substantially~~returns ~~attributable~~during 2009 and the reconciliation of the 2008 book provision to ~~asset~~the tax returns. State income tax expense primarily represents taxes payable for those states which do not allow consolidated tax filings, as well as minimum taxes due in various states.

Deferred income tax expense for continuing operations in 2010 totaled approximately $579,000 as compared to deferred income tax expense for continuing operations of $436,000 for 2009. 35

~~Table of Contents~~Liquidity

~~impairments~~ The amount of ~~$48,006,241.~~cash ~~Our~~flow ~~non-current~~generated ~~portion~~and ofthe ~~deferred income~~working ~~tax~~capital ~~asset~~needs ~~increased~~of bynightclub ~~$1,017,181~~operations ~~during~~do ~~2009~~not materially ~~due~~fluctuate toand ~~the tax~~are ~~net~~predictable. ~~operating~~We ~~loss~~expect ~~generated.~~to ~~This~~meet ~~was~~our ~~partially~~liquidity ~~offset~~needs by for the ~~sale~~next ofyear from ~~the~~existing ~~Arizona~~cash ~~land~~balances and ~~building~~cash ~~during~~flows ~~2009~~from ~~which reduced~~operations. We intend to use our ~~non-current~~cash ~~portion~~flows offor principal ~~deferred~~and ~~income~~interest ~~tax~~payments ~~asset~~on bydebt, capital expenditures in ~~approximately~~certain ~~$780,000~~nightclubs and repairs and maintenance.

The Company has access to a revolving line of credit with Citywide Banks and as of December ~~Net~~31, ~~income~~2010, ~~was~~we had approximately $~~735~~1,~~691~~650,000 ~~for~~in ~~the~~borrowing ~~year~~availability ~~ended~~under ~~December~~this line of credit. In August 312010, the Company extended the maturity date of the revolving line of credit from August ~~2009~~2011 asto ~~compared~~August 2012. ~~with~~All other terms of the line of credit remained unchanged. The terms of the revolving line of credit require the Company to have a net ~~loss~~cash offlow-to-debt ~~$30~~service ratio greater than or equal to 1.2 to 1.0,~~710~~ calculated quarterly. At December 31,~~794~~ ~~for~~2010, ~~2008~~the Company met the covenant ratio required.

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

~~The~~ During ~~amount~~the ofthree ~~cash~~months ~~flow generated~~ and ~~the~~year ~~working~~ended ~~capital~~December 31, ~~needs of~~2010, the ~~nightclub~~Company ~~operations~~continued ~~does~~to ~~not~~be ~~materially~~focused on ~~fluctuate~~using ~~and~~free ~~is predictable.~~cash Weflow ~~expect~~ to ~~meet~~reduce ~~our~~debt ~~liquidity~~and ~~needs~~repurchase ~~for~~Common ~~the~~Stock. ~~next year~~The ~~from~~Company ~~existing~~is ~~cash~~in ~~balances~~the ~~and~~process of ~~cash~~negotiating ~~flows~~extensions ~~from~~on ~~operations. We~~long-term ~~intend~~debt towhich ~~use~~will ~~our~~be ~~cash~~maturing ~~flows~~during ~~for~~the ~~principal~~coming ~~and~~year. ~~interest~~As of ~~payments~~December 31, on2010, debt, ~~capital~~was ~~expenditures~~approximately in$24,923,000, ~~certain~~which ~~clubs~~is approximately $5,825,000 ~~and~~less than ~~repairs~~the ~~and~~total ~~maintenance~~debt inat ~~other~~December 31, ~~clubs~~2009.

Working Capital

At December 31, ~~2009~~2010 and ~~December 31~~2009, ~~2008,~~ the Company had cash of approximately $2,~~677~~654,000 and $2,~~209~~677,000 , respectively. Our total current assets ~~were~~as ~~approximately~~of December 31, 2010 and 2009 were approximately $45,~~884~~064,000 and $47,~~220~~398,000, ~~for the same time period~~respectively. Current liabilities totaled approximately $816,~~004~~674,000 at December 31, ~~2009~~2010 and $79,~~128~~432,000 at December 31, ~~2008~~2009. The Company’s current liabilities exceed its current assets resulting in a negative working capital of approximately $311,~~120~~610,000 at December 31, ~~2009~~2010 and approximately $32,~~108~~034,000 at December 31, ~~2008~~2009. The working capital deficit ~~decreased~~increased by approximately $129,576,000 ~~between~~during ~~the two years~~2010. ~~Our requirement for~~ ~~working~~This ~~capital~~increase is ~~not~~primarily ~~significant~~due ~~since~~to wethe ~~receive~~amount ~~payment~~of ~~for food~~debt ~~and~~that ~~beverage~~has ~~purchases~~maturity dates in ~~cash~~2011 orand ~~credit cards at~~ the ~~time~~ of2010 ~~the~~accrual ~~sale.~~of ~~So we receive~~ the ~~cash~~Acquisition ~~revenue~~Indemnification ~~before~~Claim weof ~~are required to pay our suppliers for these purchases~~$2,134,866.

34 Of the current liabilities at December 31, 2009, none is due to Lowrie Management LLLP. A total of approximately $1,309,000 of current liabilities are guaranteed by Mr. Lowrie and secured by his personal assets. Of that, the Company paid $1,400,000 in full on January 4, 2010. At December 31, 2009, the Company still had $1,280,000 of available and unused funding on its revolving line of credit with one bank and consolidated two loans into one loan with the same bank. The proposed merger transaction and current economic conditions have temporarily suspended the process of negotiating a larger line of credit. We have loans and a line of credit with our lead bank and have no reason to believe that these will not be renewed, when they come due in 2010 to 2014.

In 2009, we made payments on debt totaling approximately $5,175,000, including payments of high-interest rate debt. The Company renegotiated terms on many loans during the fourth quarter of 2008 and first quarter of 2009, extending maturity dates by 12 to 14 months or more. In all instances but one loan, the interest rate and principal amounts did not change, making the extension a modification of the loan, not an extinguishment.

On August 17, 2009, the Company modified the terms of two existing long-term debt obligations totaling $3,872,426 with Citywide Banks. The promissory notes that were consolidated included:

(i) a promissory note executed on May 16, 2006 with a current outstanding principal balance of $1,770,286, bearing interest at 8.5% per annum, with monthly principal and interest payments of approximately $36,156 and with a maturity date of May 16, 2010; and

(ii) a promissory note executed on June 30, 2008 with a current outstanding principal balance of $2,102,140, bearing interest at 6% per annum, with monthly principal and interest payments of approximately $50,403 and with a maturity date of June 30, 2013.

The consolidated replacement promissory note (the “Replacement Note”) in the amount of $3,872,426 bears interest at the rate of 7% per annum, with monthly principal and interest payments of approximately $76,865 and with a maturity date of August 15, 2014. The Replacement Note contains two new covenants. The first new covenant requires acquisitions or additional indebtedness of equal to, or in excess, of $1,000,000 be pre-approved by Citywide Banks. The second new covenant is a financial ratio covenant. This covenant requires the quarterly calculation of net cash flow to debt service in a ratio greater than, or equal to, 1.2 to 1.0. Net cash flow is defined as

~~income~~ Of ~~attributable~~the tocurrent ~~the~~liabilities ~~Company~~at ~~plus~~December 31, ~~depreciation~~2010, none is due to Lowrie Management LLLP. A ~~amortization~~total of approximately $7,080,000 of current liabilities are guaranteed by Mr. Lowrie and ~~interest~~secured by ~~expense~~his personal assets. ~~Net~~At ~~profit~~December 31, ~~excludes~~2010, ~~any intangible~~the ~~impairments~~Company had $1,650,000 of available and ~~related~~unused funding ~~tax~~on ~~effects~~its revolving line of credit with one bank. The ~~Company~~Going isPrivate Transaction has ~~currently~~temporarily insuspended ~~compliance~~the process of negotiating a larger line of credit. We have loans and a line of credit with ~~all~~our ~~debt~~lead ~~covenants~~bank and have no reason to believe that these will not be renewed when they come due in 2012 to 2014.

~~The~~ Net ~~Company~~cash ~~also~~provided ~~extended~~by ~~its~~operating ~~revolving~~activities ~~line of credit with Citywide Banks. The original line of credit (the “Original Line of Credit”)~~ was ~~executed~~approximately ~~on June 29~~$7, ~~2008~~802,000 ~~had~~for ~~a maturity~~the ~~date~~year ~~of June~~ended December 2931, 2010, acompared ~~maximum~~to ~~principal~~approximately ~~amount of~~ $47,~~000~~081,000, ~~and~~for ~~a variable interest rate calculated on~~ the ~~Prime~~ ~~Rate~~same asperiod ~~published~~ in ~~the Wall Street Journal, subject to change daily with a floor of six percent~~2009. ~~The~~Changes ~~replacement line~~in ofoperating ~~credit~~assets ~~(the “Replacement Line of Credit”) has the identical maximum principal amount~~ and ~~interest~~liabilities ~~terms~~generated as$3,460,000 ~~stated in~~cash ~~the~~during ~~Original~~2010, ~~Line~~an ofincrease ~~Credit. Monthly payments vary based on principal outstanding. The maturity date~~ of ~~the Replacement Line~~$2,400,000 ofover ~~Credit is August 15~~2009, ~~2011.~~which ~~The~~was ~~following~~primarily isattributable ~~a description of material changes in the terms of the Replacement Line of Credit compared~~ to the ~~Original~~2010 ~~Line~~accrual of ~~Credit: (i) The Original Line of Credit and~~ the ~~Replacement Line of Credit have the same collateral~~$2, ~~but have been cross collateralized with the collateral for the Replacement Note: the Whole Life Insurance Policy on the life of Troy Lowrie~~100, ~~plus the P&A Select Strategy Fund, LP and the P&A Multi-Sector Fund~~000 ~~II, LP, owned by Lowrie Management LLLP, and~~million ~~(ii) The~~Acquisition ~~Original~~Indemnification ~~Line of Credit covenants required that all advances on the Original Line of Credit be fully repaid for one day every 180 days~~Claim. ~~That covenant was replaced with the~~ ~~same new covenants as indicated for the Replacement Note above.~~

On We ~~September 22,~~have ~~2009,~~been ~~the~~able ~~Company~~to ~~prepaid~~satisfy aour ~~promissory~~needs for working capital and capital expenditures through a ~~note~~combination ~~issued~~of tocash ~~Bryan~~flow Sfrom nightclub operations and debt. ~~Foster~~We ~~(“Foster”)~~expect inthat operations will ~~connection~~continue with ~~VCG’s~~the ~~purchase~~realization of ~~Manana~~assets ~~Entertainment,~~and payment of current liabilities in the ordinary course ~~Inc~~of business. ~~(“Manana”)~~Our ~~from~~working ~~Foster~~capital requirement for working capital is not significant since we receive payment for food and beverage purchases in cash and credit cards at the ~~following~~time ~~manner:~~of sale. We receive the cash revenue before we are required to pay our suppliers for these purchases.

~~(a) a~~ While ~~cash~~we ~~payment~~can ofoffer $1no assurances,~~600,000~~ ~~made~~we bybelieve ~~VCG~~that our existing cash and ~~Manana~~expected cash flow from operations will be sufficient to fund our operations and necessary capital expenditures and to ~~Foster~~service our debt obligations for the foreseeable future. If the Going Private Transaction does not occur and if we are unable to achieve our planned revenues, costs and working capital objectives, we believe that we have the ability to curtail stock repurchases and capital expenditures and will reduce costs to levels that will be sufficient to enable us to meet our cash requirement needs in the upcoming year.

(b) an offset of the amount owed by Black Canyon Highway LLC, the purchaser of the Phoenix, Arizona property to VCG totaling $263,544 against the balance owed by VCG and Manana to Foster under the Foster note.

After the application of the offset and note payments, the outstanding principal balance owed by Black Canyon to VCG at December 31, 2009 under the Black Canyon note is $56,132. The unpaid balance on the Black Canyon note will continue to accrue interest at eight percent per annum. No other terms of the Black Canyon note were changed.

As previously disclosed, in August 2009, the Company renegotiated due dates on five promissory notes, totaling $1,984,612 with original maturity dates from January to November 2010. In all instances, the loans were extended twelve months from their original maturity dates into 2011. No other changes were made to these notes. The Company has shown these promissory notes as long-term debt on the balance sheet. Please see Note 9 in the consolidated financial statements for additional detail on the Company’s debt. The Company is not currently considering any immediate acquisitions because of the proposed merger transaction.

Cash flows generated from operations was $7,081,000, and we had a net increase in cash at the end of the fiscal year ended December 31, 2009. We have been able to satisfy our needs for working capital and capital expenditures through a combination of cash flow from nightclub operations and debt. We expect that operations will continue with the realization of assets and payment of current liabilities in the ordinary course of business.

While we can offer no assurances, we believe that our existing cash and expected cash flow from operations will be sufficient to fund our operations and necessary capital expenditures and to service our debt obligations for the foreseeable future. If the proposed merger does not occur and if we are unable to achieve our planned revenues, costs and working capital objectives, we believe that we have the ability to curtail stock repurchases and capital expenditures and will reduce costs to levels that will be sufficient to enable us to meet our cash requirement needs in the upcoming year.

Capital Resources

We had stockholders’ equity of approximately $28,~~482~~868,~~530~~000 at December 31, ~~2009~~2010 and approximately $28,~~386~~483,~~742~~000 at December 31, ~~2008~~ 2009. The increase of $95385,~~789~~000 ~~increase~~ in stockholders’ equity is ~~primarily~~attributable ato ~~result~~net income of ~~the~~approximately ~~stock~~$2,048,000, ~~buybacks~~offset ~~that~~by ~~occurred~~the ~~and~~stock ~~are described~~buybacks ~~elsewhere in this document. We had stockholders’~~of ~~equity~~approximately of $281,~~482~~730,~~530~~000 atduring ~~December~~the ~~31,~~year ~~2009~~ and ~~$28,386,742~~the ~~at December~~expense ~~31,~~for ~~2008. The~~ stock ~~buybacks~~options ~~described~~of ~~elsewhere~~approximately in$73,000 ~~this~~for ~~document~~the ~~resulted~~year inended anDecember 31, 2010.

Net cash used by investing activities totaled approximately $178,000 and $1.2 million for the years ended December 31, 2010 and 2009, respectively. The Company purchased $1,200,000 of property 37and equipment during 2010, mostly in nightclub remodels and the POS systems. Capital expenditures during 2010 were approximately $254,000 lower than in 2009. The sale of the Ft. Worth nightclub and related assets generated $1,000,000 cash proceeds, which was used to prepay the 14% note payable to Sunshine Mortgage.

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

The following table reconciles net income to EBITDA for the periods ended December 31, 2010 and 2009 and includes amounts related to discontinued operations. EBITDA is normally a presentation of “earnings before interest, taxes, depreciation and amortization.” EBITDA is a non-U.S. GAAP calculation that is frequently used by our investors to measure operating results. EBITDA data is included because the Company understands that such information is considered by investors as an additional basis on evaluating our ability to pay interest, repay debt and make capital expenditures. Management cautions that this EBITDA may not be comparable to similarly titled calculations reported by other companies. Because it is non-U.S. GAAP, EBITDA should not be considered an alternative to operating or net income in measuring company results.

approximate reduction in stock and additional paid-in capital of $625,000. This was offset by net income attributable to VCG of $735,691 for the year ended December 31, 2009.


	For The Year Ended
	December 31,
	2010			2009
Net Income attributable to VCG stockholders	$	2,048,049		$	735,691
Add back:
Depreciation		1,737,248			1,695,277
Amortization of non-compete agreements		14,518			17,035
Amortization of leasehold rights and liabilities, net		(178,102	)		(212,342	)
Interest expense		2,818,010			3,456,616
Total income tax expense		944,345			339,000

EBITDA before non-cash impairment charges	$	7,384,068		$	6,031,277
Add back:
Total non-cash impairment charges		-			2,026,000

Total excluding non-cash impairment charges	$	7,384,068		$	8,057,277

Total revenue (excluding discontinued operations)	$	55,269,961		$	53,201,905
EBITDA as a percentage of revenue		13.4%			15.1%

~~Net~~ Another ~~cash~~non-U.S. ~~provided~~GAAP byfinancial ~~operating~~measurement ~~activities~~used ~~was~~by ~~approximately $7,081,000~~the ininvestment ~~2009~~community ~~compared~~is tofree ~~approximately $11,752,000 in~~cash ~~2008~~flow. The ~~major~~following ~~non-cash~~table ~~activities~~calculates infree ~~2009~~cash ~~were~~flow for the ~~impairment of~~Company ~~indefinite~~for ~~life intangible assets (licenses, goodwill and trademarks) of $1,758,000;~~ the ~~non-cash~~periods ~~impairment~~ended ~~of the~~December ~~Phoenix~~31, ~~Arizona~~2010 ~~land~~ and ~~building~~2009. ofWe ~~$268,000~~use ~~and~~free ~~the provisions~~cash offlow ~~depreciation~~calculations ofas ~~approximately~~one ~~$1,695,000; non-compete~~method ~~amortization~~ of ~~approximately~~cash ~~$17,000~~management ~~and net~~to ~~amortization~~anticipate ofavailable ~~favorable~~cash, ~~lease~~but ~~rights~~caution ~~and~~investors ~~unfavorable~~that ~~lease liabilities~~this offree ~~approximately~~cash ~~$212,000.~~flow ~~The~~calculation ~~amortization~~may ofnot ~~loan~~be ~~fees~~comparable ~~included~~to ansimilarly ~~additional~~titled ~~approximately~~calculations ~~$37,000~~reported ~~related~~by toother ~~the extinguishment~~companies. ~~and~~Because ~~replacement~~this ofis a ~~bank debt, with a new note including an extended due date and modified interest rate~~non-U.S. ~~Accounts~~GAAP ~~payable and accrued expenses also increased by approximately $576~~measure,~~000.~~ ~~There~~free ~~was~~cash ~~also~~flow ashould ~~decrease~~not inbe ~~the deferred~~considered ~~income~~as ~~tax~~an ~~benefit~~alternative ~~of $739,000 due~~ to the ~~income tax~~Consolidated ~~effect~~Statement of ~~the~~Cash ~~sale of the Arizona property offset by the impairment losses~~Flows.

Net cash used by investing activities totaled approximately $1,236,000 for the year ended December 31, 2009. The Company purchased approximately $1,454,000 of property and equipment, mostly in club remodels and the POS system.


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

Free Cash Flow	$	3,185,483	$	3,273,079

Net cash used by financing activities was approximately $5,380,000 for 2009. During 2009, we paid approximately $79,000 in loan fees, compared to approximately $268,000 paid to lenders in 2008. We received approximately $1,212,000 in proceeds from new debt, and paid approximately $5,175,000 in debt in 2009. We repurchased approximately $869,000 of common stock, which was immediately cancelled according to Colorado state law.

The following table reconciles net income or (loss) to EBITDA by quarter. EBITDA is normally a presentation of “earnings before interest, taxes, depreciation, and amortization.” EBITDA is a non-GAAP calculation that is frequently used by our investors to measure operating results. EBITDA data is included because the Company understands that such information is considered by investors as an additional basis on evaluating our ability to pay interest, repay debt, and make capital expenditures. Management cautions that this EBITDA may not be comparable to similarly titled calculations reported by other companies. Because it is non-GAAP, EBITDA should not be considered an alternative to operating or net income in measuring company results.

	December 31,
	2009			2008
Net Income (loss) attributable to VCG	$	735,691		$	(30,710,794	)
Add back:
Depreciation		1,695,277			1,678,043
Amortization of covenants not-to-compete		17,035			20,761
Amortization of leasehold rights and liabilities, net		(212,342	)		(192,067	)
Amortization of loan fees		216,205			448,015
Amortization component 2 goodwill		157,077			144,896
Interest expense		3,456,616			3,761,151
Income taxes		339,000			(11,101,610	)
EBITDA before non-cash impairment charges		6,404,559			35,951,605
Add back:
Non-cash impairment charges		2,026,000			48,006,241
EBITDA excluding non-cash impairment charges	$	8,430,559		$	12,054,636

EBITDA (excluding non-cash impairment charges) decreased $3,404,500 in fiscal year 2009, primarily because of the reduction in income tax benefits from the impairment charges.

Another non-GAAP financial measurement used by the investment community is free cash flow. The following table calculated free cash flow for the Company for the twelve months ended December 31, 2009 and 2008. We use free cash flow calculations as one method of cash management to anticipate available cash, but

cautions investors that this free cash flow calculation may not be comparable to similarly titled calculations reported by other companies. Because this is non-GAAP, free cash flow should not be considered as an alternative to the consolidated statement of cash flows.

EBITDA (excluding non-cash impairment charges)	$	8,430,559	$	12,054,636
Less:
Interest expense		3,456,616		3,761,151
Net income (loss) attributable to noncontrolling interests		476,717		428,614
Total income tax		339,000		(11,101,610	)
Capital expenditures		1,454,478		1,324,252
Free cash flow	$	2,703,748	$	17,642,229

Contractual Obligations and Commercial Commitments

The Company has long-term contractual obligations primarily in the form of operating leases and debt obligations. The following table summarizes our contractual obligations and their ~~aggregate~~ aggregate maturities as well as future minimum rent payments. Future interest payments related to variable interest rate debt were estimated by using the interest rate in effect at December 31, ~~2009~~ 2010.

	Total		~~2010~~2011		~~2011~~2012		~~2012~~2013		~~2013~~2014		~~2014~~2015		Thereafter
Long-term debt	$	30,747,383	$	3,867,344	$	16,842,568	$	7,207,409	$	1,622,791	$	1,198,348	$	8,923
Long-term debt and capital leases	$	24,922,709	$	10,350,988	$	10,293,290	$	2,848,352	$	1,278,040	$	40,993	$	111,046
Interest payments		53,~~542~~399,~~948~~479		2,~~849~~150,~~231~~173		1920,~~963,890~~328		~~531~~243,~~813~~138		~~162~~51,~~794~~185		3412,~~868~~842		~~351~~21,813
Operating leases		~~102~~98,~~264~~265,~~692~~853		3,~~773~~659,~~720~~037		3,~~815~~737,~~037~~601		3,~~893~~792,~~601~~958		3,~~966~~840,~~958~~618		43,~~016~~810,~~618~~090		8279,~~798~~425,~~758~~549

Potential Sale of the Company

On November 39, ~~2009~~2010, the Company ~~received~~entered ainto ~~non-binding letter~~an Agreement and Plan of ~~intent~~Merger (the “~~Proposal~~Merger Agreement”) ~~from~~with ~~the Company’s~~Family ~~Chairman and CEO~~Dog, ~~Troy~~LLC ~~Lowrie, Lowrie Management, LLLP, an entity controlled by Mr. Lowrie, and certain other unidentified investors~~ (~~collectively, the~~ “~~Lowrie Investors~~Parent”), toFD ~~acquire~~Acquisition ~~all of the outstanding common stock of the Company for $2~~Co.10 ~~per share in cash~~ (~~the~~ “~~Going Private~~Merger ~~Transaction~~Sub”)., ~~The Proposal contemplated that~~ the ~~Company~~ ~~would no longer be a public reporting or trading company~~Company’s ~~following~~Chairman ~~the closing~~ of the ~~Going~~Board ~~Private~~and ~~Transaction.~~Chief ~~In response~~Executive toOfficer, ~~the~~Troy ~~Proposal~~Lowrie, ~~the Board formed a Special Committee to review~~ and ~~evaluate~~ the ~~Proposal~~Company’s ~~and~~President ~~to recommend to the~~and ~~Board~~Chief ~~whether~~Operating orOfficer, ~~not~~Micheal ~~to approve or decline the Proposal~~Ocello. ~~On December 16,~~Under ~~2009,~~ the ~~Special~~terms ~~Committee~~of ~~informed~~ the ~~Lowrie~~ ~~Investors~~Merger ~~that it had determined~~Agreement, ~~with~~Merger ~~input~~Sub ~~from its~~will ~~advisors,~~be ~~that~~merged ~~the~~with ~~terms~~and ofinto the ~~Proposal were currently inadequate~~Company, ~~and~~with the ~~Special~~Company ~~Committee~~continuing ~~directed~~as ~~its~~the ~~financial advisors~~surviving tocorporation ~~contact~~and becoming ~~any~~a ~~parties~~wholly-owned ~~that~~subsidiary ~~had~~of ~~either~~Parent ~~previously expressed~~(the an“Merger”). ~~interest~~Parent orand ~~might~~Merger ~~potentially~~Sub beare ~~interested in~~currently ~~pursuing~~owned aand ~~transaction~~controlled ~~with~~by ~~the Company~~Mr. Lowrie.

36 On February 16, 2010, the Company, Rick’s Cabaret International, Inc. (“Rick’s”), Mr. Lowrie, and Lowrie Management, LLLP (collectively with Mr. Lowrie, “Lowrie”), entered into a non-binding (except as to certain provisions, including exclusivity and confidentiality) letter of intent (the “Letter of Intent”). Pursuant to the Letter of Intent, Rick’s agreed to acquire all of the outstanding shares of common stock of the Company and the Company will merge with and into Rick’s or a wholly-owned subsidiary of Rick’s (the “Merger”). In the event the Merger is consummated, the Company will become a subsidiary of Rick’s and the Company’s shareholders will become shareholders of Rick’s. The parties intend that the Merger will be structured to qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as amended.

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

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Not applicable to smaller reporting companies.

Item 8. Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and ~~Stockholders of VCG Holding Corp.~~

We Stockholders ~~have audited the accompanying consolidated balance sheets~~ of ~~VCG~~ Holding Corp. as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2009. We also have audited VCG Holding Corp.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). VCG Holding Corp.’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting (Item 9A.). Our responsibility is to express an opinion on these financial statements and an opinion on the company’s internal control over financial reporting based on our audits.

We ~~conducted~~have ~~our~~audited ~~audits~~the inaccompanying ~~accordance~~consolidated ~~with~~balance ~~the~~sheet ~~standards~~ of ~~the Public~~VCG ~~Company~~Holding ~~Accounting Oversight Board (United States)~~Corp. ~~Those~~as of ~~standards~~December 31, ~~require~~2010, ~~that we plan~~ and ~~perform~~ the ~~audits~~related toconsolidated ~~obtain reasonable assurance about whether the financial~~ statements ~~are free~~ of ~~material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining~~income, onstockholders’ ~~a test basis~~equity, ~~evidence supporting the amounts~~ and ~~disclosures~~cash inflows for the ~~financial~~year ~~statements~~ended December 31, ~~assessing~~2010. ~~the accounting~~VCG ~~principles~~Holding ~~used~~Corp.’s ~~and~~management ~~significant~~is ~~estimates~~responsible ~~made by~~for ~~management,~~these ~~and evaluating the overall~~ financial ~~statement presentation~~statements. Our ~~audit~~responsibility ofis ~~internal~~to ~~control~~express ~~over financial reporting included obtaining~~ an ~~understanding~~opinion ofon ~~internal control~~these ~~over~~ financial ~~reporting, assessing the risk that a~~ ~~material~~statements ~~weakness exists, and testing and evaluating the design and operating effectiveness of internal control~~ based on ~~the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that~~ our ~~audits provide a reasonable basis for our opinions~~audit.

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

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

In our opinion, the Consolidated Financial Statements referred to above present fairly, in all material respects, the consolidated financial position of VCG Holding Corp. as of December 31, 2010, and the consolidated results of its operations and its cash flows for the year ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.

/s/ CAUSEY DEMGEN & MOORE INC.

Denver, Colorado

March 30, 2011

Report of Independent Registered Public Accounting Firm

To the Board of Directors and

Stockholders of VCG Holding Corp.

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

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

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

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

In our opinion, the ~~consolidated~~Consolidated ~~financial~~Financial ~~statements~~Statements referred to above present fairly, in all material respects, the consolidated financial position of VCG Holding Corp. as of December 31, 2009 ~~and 2008~~, and the consolidated results of its operations and its cash flows for ~~each of~~ the ~~years in the two-~~year ~~period~~ ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, VCG Holding Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

~~/s/~~ CAUSEY ~~Causey~~DEMGEN ~~Demgen~~ & ~~Moore~~MOORE ~~Inc~~INC.

Denver, Colorado

March 12, 2010

VCG Holding Corp.

Consolidated Balance Sheets


	December 31,
	2010			2009
Assets
Current Assets
Cash	$	2,653,878		$	2,677,440
Other receivables		198,035			254,333
Income taxes receivable		61,935			594,720
Inventories		855,419			920,192
Prepaid expenses		456,655			354,730
Current portion of deferred income tax asset		837,628			76,920
Assets of business held for sale		-			2,519,962

Total Current Assets		5,063,550			7,398,297

Property and equipment, net		20,742,386			21,016,179
Licenses, net		34,103,622			34,252,018
Goodwill, net		2,279,045			2,279,045
Trade names		452,000			452,000
Favorable lease rights, net		1,576,100			1,647,968
Non-compete agreements, net		8,000			22,000
Other long-term assets		197,592			241,993
Non-current portion of deferred income tax asset		2,464,817			3,841,673

Total Assets	$	66,887,112		$	71,151,173

Liabilities and Equity
Current Liabilities
Accounts payable — trade	$	1,362,430		$	1,750,940
Accrued expenses		4,576,654			1,930,049
Income taxes payable		27,395			67,917
Deferred revenue		139,851			110,010
Current portion of capitalized lease		16,664			-
Current portion of long-term debt		10,258,057			3,805,277
Current portion of long-term debt, related party		76,267			62,067
Current portion of unfavorable lease rights		217,116			217,116
Liabilities of business held for sale		-			1,488,157

Total Current Liabilities		16,674,434			9,431,533

Long-Term Liabilities
Deferred rent		2,154,158			1,521,140
Unfavorable lease rights, net of current portion		4,618,815			4,835,931
Capital lease, net of current portion		87,845			-
Long-term debt, net of current portion		7,439,373			19,751,021
Long-term debt, related party, net of current portion		7,044,504			7,129,018

Total Long-Term Liabilities		21,344,695			33,237,110

Commitments and Contingent Liabilities (Note 12)
Equity
Common stock $.0001 par value; 50,000,000 shares authorized;16,292,071 (2010) and 17,310,723 (2009) shares issued and outstanding		1,629			1,731
Additional paid-in capital		50,275,118			51,932,082
Accumulated deficit		(24,948,814	)		(26,996,863	)

Total VCG Stockholders’ Equity		25,327,933			24,936,950
Noncontrolling interests in consolidated partnerships		3,540,050			3,545,580

Total Equity		28,867,983			28,482,530

Total Liabilities and Equity	$	66,887,112		$	71,151,173

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

VCG Holding Corp.

Consolidated Statements of Income
For the years ended

VCG Holding Corp.


	December 31,
	2010			2009
Revenue
Sales of alcoholic beverages	$	21,009,283		$	22,808,436
Sales of food and merchandise		2,006,147			1,844,738
Service revenue		29,176,688			25,560,047
Other income		3,077,843			2,988,684

Total Revenue		55,269,961			53,201,905

Operating Expenses
Cost of goods sold		5,999,135			5,877,337
Salaries and wages		15,615,313			13,874,720
Acquisition indemnification claim		2,134,866			-
Other general and administrative:
Taxes, permits and licenses		3,072,768			3,250,176
Charge card and bank fees		736,566			787,087
Rent		5,855,941			5,611,343
Legal fees		1,440,466			1,456,463
Other professional fees		2,385,983			2,614,981
Advisory fees related to change in control proposals		407,737			953,517
Advertising and marketing		2,772,839			2,627,948
Insurance		1,774,048			1,595,043
Utilities		982,760			971,962
Repairs and maintenance		1,105,656			1,229,399
Other		3,736,109			3,824,695
Impairment of building and land		-			268,000
Impairment of indefinite-lived intangible assets		-			1,741,000
Impairment of goodwill		-			17,000
Depreciation and amortization		1,685,610			1,593,655

Total Operating Expenses		49,705,797			48,294,326

Income from Operations		5,564,164			4,907,579

Other Income (Expenses)
Interest expense		(2,098,431	)		(2,746,503	)
Interest expense, related party		(719,579	)		(710,113	)
Interest income		6,927			7,382
Gain (loss) on sale of assets		968			(74,669	)

Total Other Expenses		(2,810,115	)		(3,523,903	)

Income Before Income Taxes		2,754,049			1,383,676

Income tax expense (benefit) — current		171,454			(133,808	)
Income tax expense — deferred		578,546			435,808

Total Income Tax Expense		750,000			302,000

Income From Continuing Operations, net of Income Taxes		2,004,049			1,081,676

Income From Discontinued Operations, net of Income Taxes		520,389			130,732

Profit of Consolidated and Affiliated Companies		2,524,438			1,212,408
Net Income Attributable to Noncontrolling Interests		(476,389	)		(476,717	)

Net Income Attributable to VCG	$	2,048,049		$	735,691

Earnings Per Share
Continuing Operations:
Basic and fully diluted income per share attributable to VCG’s stockholders	$	0.09		$	0.03
Discontinued Operations:
Basic and fully diluted earnings per share attributable to VCG’s stockholders	$	0.03		$	0.01
Net Income Attributable to VCG Stockholders:	$	0.12		$	0.04
Basic and fully diluted weighted average shares outstanding		16,805,951			17,541,376

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

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

The accompanying notes are an integral part of the consolidated financial statements.

VCG Holding Corp.

Consolidated Statements of Equity
For the years ended December 31, 2010 and 2009

VCG Holding Corp.


													Noncontrolling
							Additional						Interests in			Total
	Common Stock						Paid-in			Accumulated			Consolidated			Stockholders’
	Shares			Amount			Capital			Deficit			Partnerships			Equity
Balance, December 31, 2008		17,755,378		$	1,775		$	52,557,047		$	(27,732,554	)	$	3,560,474		$	28,386,742
Amortization of warrants for services		-			-			102,288			-			-			102,288
Stock-based compensation		-			-			142,095			-			-			142,095
Repurchase of common stock		(444,655	)		(44	)		(869,348	)		-			-			(869,392	)
Net income for the year ended December 31, 2009		-			-			-			735,691			476,717			1,212,408
Distributions paid to noncontrolling interests		-			-			-						(491,611	)		(491,611	)


Balances, December 31, 2009		17,310,723		$	1,731		$	51,932,082		$	(26,996,863	)	$	3,545,580		$	28,482,530
Amortization of stock-based compensation		-			-			72,922			-			-			72,922
Repurchase of common stock		(551,155	)		(55	)		(935,188	)		-			-			(935,243	)
Common stock received as consideration for club sale		(467,497	)		(47	)		(794,698	)		-			-			(794,745	)
Net income for the year ended December 31, 2010		-			-			-			2,048,049			476,389			2,524,438
Distributions paid to noncontrolling interests		-			-			-			-			(481,919	)		(481,919	)

Balances, December 31, 2010		16,292,071		$	1,629		$	50,275,118		$	(24,948,814	)	$	3,540,050		$	28,867,983

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

For the years ended

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

The accompanying notes are an integral part of the consolidated financial statements.

VCG Holding Corp.

Consolidated Statements of Cash Flows
For the years ended

VCG Holding Corp.


	December 31,
	2010			2009
Operating Activities
Profit of consolidated and affiliated companies	$	2,524,438		$	1,212,408
Adjustments to reconcile profit of consolidated and affiliated companies to net cash provided by operating activities:
Impairment of building and land		-			268,000
Impairment of goodwill		-			17,000
Impairment of indefinite lived intangible assets		-			1,741,000
Depreciation		1,737,248			1,695,277
Amortization of non-compete agreements		14,518			17,035
Amortization of leasehold rights and liabilities, net		(178,102	)		(212,342	)
Amortization of loan fees		65,661			216,205
Stock-based compensation expense		72,922			244,383
Deferred income taxes		764,543			465,896
(Gain) Loss on disposition of assets		(817,002	)		74,669
Accrued interest added to long-term debt		160,605			243,901
Write-off uncollectible deposits		-			7,151
Changes in operating assets and liabilities:
Income taxes and other receivables		589,082			(287,894	)
Inventories		60,322			22,767
Prepaid expenses		(101,925	)		(72,245	)
Accounts payable — trade and accrued expenses		2,258,095			576,380
Income taxes payable		(40,522	)		67,917
Deferred revenue		9,841			555
Deferred rent		661,969			783,165

Net cash provided by operating activities		7,781,693			7,081,228
Investing Activities
Proceeds from divestiture of a club		1,000,000			-
Additions to property and equipment		(1,200,772	)		(1,454,478	)
Deposits		18,740			(19,444	)
Proceeds from sale of assets		4,200			238,241

Net cash used in investing activities		(177,832	)		(1,235,681	)
Financing Activities
Proceeds from debt		100,000			1,212,115
Payments on debt		(5,757,891	)		(4,152,700	)
Proceeds from related party debt		200,000			25,099
Payments on related party debt		(355,958	)		(912,843	)
Net borrowing (payments) on revolving line of credit		(370,000	)		(90,000	)
Payment on capitalized leases		(6,412	)		(19,111	)
Loan fees paid		(40,000	)		(78,724	)
Repurchase of stock		(935,243	)		(869,392	)
Distributions to noncontrolling interests		(481,919	)		(491,611	)


Net cash used in financing activities		(7,647,423	)		(5,377,167	)
Net increase (decrease) in cash		(43,562	)		468,380
Cash beginning of period		2,677,440			2,209,060

Cash end of period	$	2,633,878		$	2,677,440


Supplemental cash flow information:
Income taxes paid in cash	$	319,788		$	225,972

Interest paid in cash	$	2,529,453		$	3,067,195
Non-cash divestiture activities:
Common stock received as partial consideration for Golden	$	794,745
Fair value of liabilities transferred to buyer				$	1,771,854
Issuance of note receivable to buyer				$	322,963
Non-cash investing and financing activities:
Acquisition of vehicles through capital leases and loans	$	204,984

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

For the years ended December 31, 2009 and 2008

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

The accompanying notes are an integral part of the consolidated financial statements.

VCG Holding Corp. Notes to Consolidated Financial Statements

Index ~~Consolidated Statements of Cash Flows~~

For the years ended


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

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

The accompanying notes are an integral part of the consolidated financial statements.

VCG Holding Corp. Notes to Consolidated Financial Statements

Notes to Consolidated Financial Statements

Index

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

VCG Holding Corp.

Notes to Consolidated Financial Statements

1) Description of Business

VCG Holding Corp. (the “Company”) is in the business of acquiring, owning, and operating nightclubs, which provide premium quality live adult entertainment, restaurant, and ~~beverage~~ beverage services in an up-scale environment. As of December 31, ~~2009~~2010, the Company, through its subsidiaries, owns and operates ~~twenty~~19 nightclubs in Indiana, Illinois, Colorado, Texas, North Carolina, Minnesota, Kentucky, Maine, Florida, and California. The Company operates in one ~~reportable~~ reportable segment.

2) Summary of Significant Accounting Policies

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company, ~~and~~ its wholly-owned and majority-owned subsidiaries , and a consolidated variable interest entity. All significant inter-company balances and transactions are eliminated in ~~consolidation~~the Consolidated Financial Statements.

Use of Estimates

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

Cash

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

Asset Held for Sale

Asset held for sale in 2008 consisted of an employee house, purchased by the Company when the employee was transferred to a new nightclub in a new state. The house was sold in 2009 for $107,326.

Other Receivables

Other receivables at December 31, ~~2009~~2010 consist of approximately $~~151~~146,000 ~~deposit~~ due from aprevious owner ~~cancelled~~of ~~acquisition~~Manana Entertainment, Inc. for sales tax assessed on audit relating to sales taxes prior to acquisition, $5634,000 from the sale of the Arizona land and building, and various small receivable amounts ~~due~~for ~~from~~employee ~~property~~advances. ~~insurance~~In ~~damage claims~~2009, ~~credit~~other ~~card~~receivables ~~fees,~~consisted ~~and~~of ~~employee~~approximately ~~advances.~~$151,000 ~~The~~of a ~~December 31~~deposit due from the cancelled acquisition, ~~2008~~$56,000 ~~balance~~from ~~includes~~the sale of the Arizona land and building and other various small receivable amounts ~~for~~ due from property ~~taxes~~insurance damage claims, credit card fees, and employee advances.

Income Tax Receivable

Income tax receivable is the amount due from ~~the~~various ~~IRS~~states for overpayment of estimated income tax deposits made during the year shown. This amount is either refunded to the Company or applied against the first estimated tax deposit due in the next fiscal year.

Inventories

Inventories include alcoholic beverages, food, and Company merchandise. Inventories are stated at the lower of cost or market, where cost is determined by using first-in, first-out method.

VCG Holding Corp.

Notes to Consolidated Financial Statements — (Continued)

Prepaid Expenses

Prepaid expenses represent expenses paid prior to the receipt of the related goods or services. The balance consists primarily of prepaid rent, liquor and other license fees, prepaid ~~memberships~~ memberships and prepaid insurance premiums for the corporate office, and various nightclubs.

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

Property and Equipment

Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated life, listed below.


		Years
Buildings		39
Leasehold improvements		The shorter of useful life or lease term
Vehicles		5
Computers and software		5
Equipment		3 – 10
Furniture and Fixtures		3 – 7
Signs		10

Expenditures for maintenance and repairs are charged to expense as incurred. When an asset is sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and the resulting gain or loss is recognized in the consolidated statement of operations for the respective period.

Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. An impairment loss is is recognized if the carrying amount of the asset exceeds its fair value ~~(see Note 5)~~.

Goodwill

The excess of the purchase over the fair value of assets acquired and liabilities assumed in purchase business combinations is classified as goodwill. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles — Goodwill and Other (“ASC 350”), the Company does not amortize goodwill, but performs impairment tests of the carrying value at least annually. The Company tests goodwill for impairment at the “nightclub” or “reporting unit” level, which is one level below the operating segment.

Intangible Assets

Indefinite life intangible assets, which are stated at cost, are composed of liquor and cabaret or sexually oriented business licenses and trade names. Finite lived assets include non-compete agreements, which are stated at cost less accumulated amortization. Amortization is computed on the straight-line method over term of the non-compete agreement. Intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

Indefinite life intangible assets are tested annually and individually for impairment in accordance with ASC 350~~, for impairment~~. An impairment loss is recognized if the carrying amount of the asset exceeds its fair value.

Favorable Lease Rights and Unfavorable Lease Rights

Favorable lease rights and unfavorable lease liabilities resulted from the fair value analysis of nightclub acquisitions. A favorable lease right occurs when the acquired lease is below ~~market~~ market at the time of acquisition. An unfavorable lease right occurs when the acquired lease payments are above market. The balance is amortized ratably into rent expense over the expected lease term, which includes expected renewals.

VCG Holding Corp.

Notes to Consolidated Financial Statements — (Continued)

unfavorable lease right occurs when the acquired lease payments are above market. The balance is amortized ratably into rent expense over the expected lease term, which includes expected renewals.

Deferred Revenue

Deferred revenue consists of the unearned portion of VIP room memberships. VIP room memberships are amortized into ~~revenues~~ revenue ratably over the one-year life of membership from the date of of purchase.

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

Deferred Rent

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

Revenue Recognition

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

Other income is comprised of fees charged for usage of ATM machines located in nightclubs, ~~credit card charges,~~ VIP memberships, valet parking fees, various fees at nightclubs for services and special events~~, and rental income from third party tenants at certain nightclubs~~. Other income ~~Income~~ also includes non-~~club~~nightclub revenue of rent received from an unrelated third ~~parties in~~party in Indianapolis ~~and Phoenix~~.

Legal Fees ~~Advertising Cost~~

~~Advertising~~ Legal ~~costs~~fees ~~are~~expected ~~expensed~~to asbe incurred ~~and~~in connection with the loss contingency are ~~included~~expensed in the ~~selling,~~period ~~general,~~in ~~and~~which ~~administrative~~they ~~expense~~are incurred.

Advertising Costs

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

Stock-Based Compensation

At December 31, ~~2009~~2010, the Company had stock options outstanding, which are described in Note 11. The Company recognizes stock-based compensation in accordance with FASB ASC Topic 718, Compensation-Stock Compensation (“ASC 718”), which requires the Company to measure the cost of services to be rendered based on the grant-date fair value of the equity award. The compensation expense is recognized over the period an employee is required to provide service in exchange for the award, referred to as the requisite service period.

Income Taxes

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

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

Penalties, if any, related to unrecognized tax liabilities are in other general and administrative on the Statement of Income. Interest expense, if any, related to unrecognized tax 48liabilities are in interest expense on the Statement of Income.

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

Notes to Consolidated Financial Statements — (Continued)

The company files tax returns in the U.S. Federal and various state jurisdictions. The company is no longer subject to U.S. Federal income tax examinations for years prior to 2006 and state and local income tax examinations by tax authorities for years prior to 2005. Penalties, if any, related to unrecognized tax liabilities are in other general and administrative on the Statement of Operations. Interest expense, if any, related to unrecognized tax liabilities are in interest expense on the Statement of Operations.

Earnings per Share

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

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

	Years Ended December 31,
	2009		2008
	2010		2009
Net income	$	735,691	$	(30,710,794	)
Net income attributable to VCG	$	2,048,049	$	735,691
Basic weighted average shares outstanding		1716,~~541~~805,~~376~~951		17,~~925~~541,~~132~~376
Effect of dilutive securities:
Stock warrants		-		221,817
Stock options and warrants		-		-
Stock options		-		-
Basic and dilutive weighted average shares outstanding		16,805,951		17,541,376
Dilutive weighted average shares outstanding		17,541,376		18,146,949
Basic and dilutive earnings per share	$	0.12	$	0.04
Earnings per share:
Basic	$	0.04	$	(1.71	)
Diluted	$	0.04	$	(1.69	)

The Company has excluded ~~262~~options to purchase 231,500 and ~~300~~262,500 ~~stock~~shares ~~options~~of ~~from~~Common Stock for 2010 and 2009, respectively, from its calculation of the effect of dilutive securities, inas they represent anti-dilutive stock options. In 2009, ~~and~~the Company excluded warrants exercisable into ~~2008~~325,376 ~~respectively,~~shares of Common Stock from its calculation of the effect of dilutive securities as they represent anti-dilutive warrants. The exercise prices of these stock options and warrants were substantially above the market price of the Common Stock during each period.

The Company has also excluded 325,376 warrants from its calculation of the effect of dilutive securities in 2009, as they represent anti-dilutive warrants.

Reclassifications

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

Fair Value of Financial Instruments

The carrying value of cash, accounts receivable, and accounts payable approximates fair value due to the short-term nature of these instruments. The carrying amount of the notes payable approximates fair value as the individual borrowings bear interest at rates that approximate market interest rates for similar debt instruments.

Recently Issued Accounting Pronouncements

In ~~June 2009~~September 2010, the ~~Financial~~SEC ~~Accounting~~issued ~~Standards~~Release ~~Board (“FASB”)~~33-9142 ~~established~~which amended the ~~FASB~~SEC’s ~~Accounting~~rules ~~Standards~~and forms to ~~Codificationtm~~remove the requirement for issuers that are neither accelerated filers nor large accelerated filers to obtain an auditor attestation report on internal control over financial reporting. Therefore, ~~(the~~smaller ~~“Codification”)~~reporting companies such as ~~the~~VCG ~~single~~will ~~source~~not ofneed their auditors to test internal controls; ~~authoritative~~however, Umanagement will still need to do its assessment for the year ended December 31, 2010.S. Although VCG obtained an audit opinion on the Company’s internal controls over financial reporting for the year ended December ~~GAAP~~31, ~~recognized~~2009, bywe did not obtain an opinion on the Company’s internal controls over financial reporting for the year ended December 31, 2010 due to this change in the requirement.

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements. This update provides amendment to the 49codification regarding the disclosures required for fair value measurements. The key amendments include: (a) a requirement to disclose transfer in and out of Level 1 and 2; (b) activity in Level 3 should show information about purchases, sales, settlements, etc. on a gross basis rather than as net basis; and (c) additional disclosures about inputs and valuation techniques. The new disclosure requirements are effective for periods beginning after December 31, 2009, except for the gross disclosures of purchases, etc. which is effective for periods beginning after December 15, 2010. The Company adopted this update on January 1, 2010, and it did not have a significant impact on the Consolidated Financial Statements.

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

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

In December 2009, the FASB toissued beASU ~~applied~~2009-17, byConsolidation ~~nongovernmental~~(Topic ~~entities.~~810) ~~Rules~~— ~~and~~Improvements to ~~interpretive~~Financial ~~releases~~Reporting ofby ~~the~~Enterprises ~~Securities~~Involved ~~and~~with ~~Exchange~~Variable ~~Commission (“SEC”)~~Interest ~~under~~Entities. ~~authority~~This ofupdate ~~federal~~amends Topic ~~securities~~810 ~~laws~~and ~~are also~~is ~~sources~~a result of ~~authoritative~~SFAS UNo.S. ~~GAAP~~166, Accounting for ~~SEC~~Transfers of Financial Assets — an ~~registrants~~amendment of FASB Statement No. 140. WeThis standard did not have ~~conformed~~a ~~the~~significant ~~references~~impact inon the Consolidated ~~notes~~Financial ~~to our~~Statements ~~financial~~when ~~statements~~it towas ~~the~~adopted ~~new~~on ~~Codification~~January 1, 2010.

In Management ~~April~~has ~~2009,~~reviewed ~~the~~and ~~FASB~~continues ~~issued~~to anmonitor ~~update~~the topronouncements ~~FASB~~of ~~ASC~~the ~~Topic~~various ~~820,~~financial ~~Fair~~and ~~Value~~regulatory ~~Measurements~~agencies and ~~Disclosures~~is ~~(“ASC 820”),~~currently tonot ~~provide~~aware ~~additional guidance on estimating fair value when the volume and level~~ of ~~transaction~~any ~~activity~~other ~~for~~pronouncements ~~an asset~~that orcould ~~liability~~ have ~~significantly decreased in relation to~~a ~~normal~~material ~~market~~impact ~~activity~~on ~~for~~ the ~~asset~~Company’s orconsolidated ~~liability.~~financial ~~Additional disclosures~~position, ~~are~~results ~~required~~of ~~regarding~~operations ~~fair~~or ~~value in interim and~~cash ~~annual reports~~flows. ~~These provisions are effective for interim and~~ ~~annual periods ending after June 15, 2009.~~

In April 2009, the FASB issued an update to FASB ASC Topic 805, Business Combinations (“ASC 805”) authoritative guidance to require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably determined. If the fair value of such assets or liabilities cannot be reasonably determined, then they would generally be recognized in accordance with certain other pre-existing accounting standards. This guidance also amends the subsequent accounting for assets and liabilities arising from contingencies in a business combination and certain other disclosure requirements. This guidance became effective for assets or liabilities arising from contingencies in business combinations that are consummated on or after October 1, 2009. Accordingly, the Company will record and disclose assets acquired and liabilities assumed in a business combination that arises from contingencies under the revised standard for transactions consummated, if any, after October 1, 2009.

In May 2009, the FASB issued ASC Topic 855, Subsequent Events (“ASC 855”), which provides guidance on events that occur after the balance sheet date but prior to the issuance of the financial statements. ASC 855 distinguishes between events requiring recognition in the financial statements from those that may require disclosure in the financial statements. This guidance is effective for interim and annual periods after June 15, 2009. We adopted this guidance for the quarter ended June 30, 2009. The adoption had no impact on our consolidated financial statements.

In August 2009, the FASB issued Accounting Standard Update (“ASU”) No. 2009-05, Fair Value Measurements and Disclosure Topic 820, Measuring Liabilities at Fair Value authoritative guidance to provide clarification on measuring liabilities at fair value when a quoted price in an active market is not available. In these circumstances, a valuation technique should be applied that uses either the quote of the liability when traded as an asset, the quoted prices for similar liabilities or similar liabilities when traded as assets, or another valuation technique consistent with existing fair value measurement guidance, such as an income approach or a market approach. The new guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This guidance was adopted effective July 1, 2009. The adoption had no impact on our consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-04, Accounting for Various Topics — Technical Corrections to SEC Paragraphs. This update provides updates/corrections to various topics of the codification with regards to the SEC’s position on various matters. There is no new guidance, but it includes adjustments to the SEC’s position on already issued updates. Some of the main topics covered are as follows: 1) Requirements for using push down accounting in an acquisition 2) appropriate balance sheet presentation of unvested, forfeitable equity instruments, which are issued to nonemployees as consideration for future services, and 3) intangible assets arising from insurance contracts acquired in a business combination. The corrections are applicable for 2009 since the updates relate to already issued guidance. The adoption had no impact on our consolidated financial statements.

Issued but not yet effective accounting standards

In June 2009, the FASB issued ASC Topic 810, Consolidation authoritative guidance to require an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. This

VCG Holding Corp.

Notes to Consolidated Financial Statements — (Continued)

guidance requires an ongoing reassessment and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. It requires an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. This guidance is effective for fiscal years beginning after November 15, 2009. VCG is currently assessing the impact that this guidance may have on its Consolidated Financial Statements.

In June 2009, the FASB issued ASC Topic 860, Transfers and Servicing authoritative guidance to improve information and disclosures related to the transfers of financial assets, including securitization transactions, and the continuing risk exposures related to transferred financial assets. The concept of a “qualifying special-purpose entity” is eliminated and the requirements for derecognizing financial assets have been modified. This guidance will be effective for fiscal years beginning after November 15, 2009. We do not expect the adoption of this new guidance will have a significant impact on our Consolidated Financial Statements.

Consolidation of Variable Interest Entities

During 2007, the Company became the .01% General Partner of 4th Street Limited Partnership LLLP (“4th Street”), a limited liability limited partnership that owns a building in Minneapolis, MN that is rented by the Minneapolis nightclub operated by the Company. The land and building, which ~~had~~have a net book value of approximately $2,~~844~~774,000 and $2,~~896~~844,000 at December 31, ~~2009~~2010 and ~~2008~~ 2009, respectively, represent the only assets held by 4th Street. The remaining lease term is for 1716 years. The majority of the 99.9% limited partner interests are held by related parties, ranging from ~~note~~noteholders ~~holder,~~ to stockholders and ~~Directors~~directors. Under the terms of the 4th Street ~~partnership~~ partnership agreement, profits and losses and cash flows are allocated between the General and the Limited Partners based on their respective ownership percentages.

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

	•		the Limited Partners have very limited rights with respect to the management and control of 4th Street;

	•		the Company is the General Partner; and therefore, has control of the partnership;

	•		the Company is the Primary Beneficiary;

	•		the Company has determined that 4th Street is a variable interest entity; and

	•		therefore, the Company has consolidated 4th Street’s assets and included its equity as noncontrolling interest on the consolidated balance sheet.

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

3) Inventories

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


	December 31
	2010		2009
Food and beverage	$	754,593	$	820,534
Tobacco and merchandise		100,826		99,658

Total	$	855,419	$	920,192

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

~~Notes~~4) ~~to Consolidated~~Discontinued ~~Financial~~Operations ~~Statements — (Continued)~~

	December 31
	2009		2008
Food and beverage	$	823,165	$	841,154
Tobacco and merchandise		103,156		107,934
Total	$	926,321	$	949,088

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

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

On Shortly ~~April 14,~~after ~~2008,~~ the Company’s ~~acquired~~acquisition ~~100%~~ of the ~~common stock~~Ft. ofWorth ~~Manana~~Club ~~Entertainment~~in September 2007, ~~Inc~~Ft. ~~(“Manana”)~~Worth enacted ~~and~~a ~~the building~~smoking inban ~~which~~that ~~Manana~~significantly ~~operates~~reduced ~~Jaguar’s~~customer ~~Gold~~volume, ~~Club~~sales ofand profits. The Texas ~~Dallas~~Patron ~~for~~Tax ~~total~~went ~~cash~~into ~~consideration~~effect ofon $4January 1,~~093~~ 2008,~~525~~ ~~and~~which aincreased ~~12% promissory~~the ~~note~~costs inof operating the ~~amount~~Ft. Worth ~~of $2,500,000~~Club. The ~~total~~Company ~~purchase~~sold the Ft. Worth Club because it was not meeting financial targets and ~~price~~the impact of ~~$6,593,525,~~selling ~~including~~it ~~direct~~will ~~acquisition~~improve ~~costs~~total ofCompany financial performance going forward. In ~~$307,914,~~accordance ~~was~~with ~~allocated~~authoritative toaccounting ~~the~~guidance ~~acquired~~for ~~assets~~reporting ~~and~~discontinued ~~liabilities~~operations, the financial results of its Ft. Worth Club are now presented as ~~set~~discontinued ~~forth~~operations for all periods in the ~~following~~Consolidated ~~table:~~Financial Statements.

Cash	$	32,000
Inventories		4,523
Property and equipment		3,166,440
Deposits and other assets		25,000
Goodwill		2,259,581
Licenses		3,501,000
Non-compete agreement		8,000
Unfavorable lease right		(1,390,000	)
Deferred income taxes		(705,105	)
Purchase price	$	6,901,439

Operating results of discontinued operations are as follows:

Goodwill is not amortizable for tax purposes.


	Years ended December 31,
	2010		2009
Revenue	$	843,139	$	1,838,129

Cost of goods sold		18,815		43,717
Salaries and wages		277,352		457,599
Other general and administrative expenses		582,117		1,050,425
Depreciation and amortization		66,156		118,656

Total Operating Expenses		944,440		1,670,397
Gain on sale of business		816,035		-

Income From Discontinued Operations Before Income Taxes		714,734		167,732

Income tax expense		194,345		37,000

Income From Discontinued Operations, Net of Income Taxes	$	520,389	$	130,732


Assets and liabilities held for sale consist of the following:

	December 31, 2009

Inventories	$	6,129
Property and equipment, net		1,929,935
Non-compete agreement, net		1,898
Licenses, net		582,000

Assets of business held for sale	$	2,519,962

Unfavorable lease rights, net	$	1,380,996
Deferred rent		107,161

Liabilities of business held for sale	$	1,488,157

50 On July 28, 2008, the Company acquired the assets of VCG-IS LLC (“VCG-IS”) for cash consideration of $4,005,000 and an 8% promissory note in the principal amount of $3,293,027. VCG-IS operates Imperial Showgirls Gentlemen’s Club in Anaheim, CA. The total purchase price of $7,293,027, including direct acquisition costs of $321,643, was allocated to the acquired assets and liabilities as set forth in the following table:

Property and equipment	$	160,633
Deposits and other assets		7,000
Goodwill		380,037
Trade name		276,000
Licenses		6,546,000
Favorable lease right		250,000
Purchase price	$	7,619,670

The total amount of goodwill amortizable over 15 years for tax purposes is $380,000.

The following pro forma financial information includes the consolidated results of operations as if the 2008 acquisitions had occurred at January 1, 2008, but do not purport to be indicative of the results that would have occurred has the acquisitions been made as of that date or of results which may occur in the future.

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

Notes to Consolidated Financial Statements — (Continued)

	December 31,
Pro forma	2008
Revenue	$	59,816,000
Net income (loss)		(29,800,000	)
Earnings per share
Basic	$	(1.66	)
Diluted	$	(1.64	)

5) Property and Equipment

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

	December 31,
	2009			2008
	2010			2009
Land	$	500,000		$	~~856~~500,~~737~~000
Buildings		119,362,143			149,~~076~~362,~~390~~143
Leasehold improvements		11,~~056~~834,~~795~~023			1011,~~645~~021,~~692~~103
Equipment		3,~~138~~376,~~217~~731			23,~~470~~082,~~848~~474
Vehicles		~~269~~479,~~503~~039			~~138~~269,~~090~~503
Signs		~~308~~311,~~819~~239			~~268~~308,~~726~~819
Furniture and fixtures		12,~~993~~020,~~370~~869			1,~~918~~911,~~126~~270
Assets to be placed in service		~~168~~112,~~245~~120			-168,245
		28,797,092			30,374,609
		27,996,164			26,623,557
Less accumulated depreciation		(57,~~850~~253,~~978~~778	)		(45,~~636~~607,~~221~~378	)
Property and equipment, net	$	2220,~~946~~742,~~114~~386		$	2521,~~738~~016,~~388~~179

Depreciation expense was approximately $1,~~695~~672,000 and $1,~~678~~578,000 for the years~~-ended~~ ended December 31, ~~2009~~2010 and ~~2008~~2009, respectively.

~~The~~ During Company’s land and building in Phoenix was rented by the individual who purchased the operations and ownership interest in our subsidiary Epicurean Enterprises in January 2007. The lessee defaulted on the lease in August 2008. In December 20082010, the Company ~~ordered~~entered aninto ~~appraisal~~two ofcapital ~~the~~leases ~~land~~for ~~and building~~vehicles ~~owned~~totaling ~~in Phoenix~~$110, ~~Arizona~~921. The ~~appraisal was performed~~ byaccumulated anamortization ~~independent~~of ~~third party real estate appraiser who valued~~ the ~~land~~vehicles ~~and~~totaled ~~building at~~ $25,~~600,000.~~858 ~~The~~for ~~Company~~the ~~recognized~~year ~~a noncash~~ended ~~impairment loss of $1,861,200 on~~ December 31, ~~2008~~2010. On July 31, 2009, the Company sold the building and land in Phoenix to a third party for approximately $2,300,000. The Company recognized a non-cash impairment loss of $268,000 during the second quarter of 2009 and an additional $68,800 in selling expenses in the third quarter 2009. The additional selling expenses were recorded as a loss on the sale of the property.

VCG Holding Corp.

Notes to Consolidated Financial Statements — (Continued)

6) Goodwill and Other Intangible Assets

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

	December 31,
	2009							2008
	2010							2009
			Accumulated							Accumulated
	Cost		Amortization			Net		Cost		Amortization			Net
Amortizable intangible assets
Covenant not to compete	$	6156,694	$	(3748,~~796~~694	)	$	238,~~898~~000	$	6156,694	$	(2034,~~761~~694	)	$	4022,~~933~~000
Favorable lease rights		1,820,000		(~~172~~243,~~032~~900	)		1,~~647~~576,~~968~~100		1,820,000		(~~114~~172,~~636~~032	)		1,~~705~~647,~~364~~968
	$	1,~~881~~876,694	$	(~~209~~292,~~828~~594	)	$	1,~~671~~584,~~866~~100	$	1,~~881~~876,694	$	(~~135~~206,~~397~~726	)	$	1,~~746~~669,~~297~~968

Amortization expense for the years ended December 31, ~~2009~~ 2010 and ~~2008~~2009 totaled $7485,~~431~~868 and $9873,~~609~~396, respectively.

At December 31, ~~2009~~2010, definite lived intangible assets are expected to be amortized over a period of one to 2423 years as follows:

Year Ending December 31,
2010	$	86,927
2011	$	75,868
2011		76,755
2012		75,468
2012		75,492
2013		72,268
2013		72,292
2014		71,868
2014		71,892
2015		71,868
Thereafter		1,~~288~~216,~~508~~760
	$	1,~~671~~584,~~866~~100

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

	Goodwill			Licenses			Trade Names
Balance at December 31, 2007	$	17,622,000		$	53,316,734		$	578,000
Club acquisitions in 2008		2,639,618			10,047,000			276,000
Acquisition purchase price adjustments		1,057,898			138,310			-
Component 2 amortization		(144,896	)		-			-
2008 impairment charges		(18,721,496	)		(27,088,855	)		(235,000	)
Balance — December 31, 2008		2,453,122			36,413,189			619,000
Component 2 amortization		(157,077	)		(5,171	)		-
2009 impairment charges		(17,000	)		(1,574,000	)		(167,000	)
Balance at December 31, 2009	$	2,279,045		$	34,834,018		$	452,000

During the year ended December 31, 2009, the Company recorded amortization of component 2 goodwill of $162,248, which reduced the book basis of goodwill by $157,077 and reduced the remaining book basis of licenses by $5,171. During the year ended December 31, 2008, the Company recorded amortization of component 2 goodwill of $144,896, which reduced book basis of goodwill. No impairment on goodwill as taken prior to December 31, 2007. Total accumulated impairment charges are $18,736,496.

In performing the Company’s annual impairment assessment at December 31, 2009 in accordance with ASC Topic 350, the Company recorded a non-cash impairment charge for licenses of $1,574,000 and trade names of

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

~~Notes~~ A ~~to Consolidated~~reconciliation ~~Financial~~of the activity affecting indefinite lived intangible assets is as follows: ~~Statements — (Continued)~~

$167,000. In addition, the Company evaluated its goodwill at December 31, 2009 and recorded a non-cash impairment charge of $17,000.


	Goodwill			Licenses			Trade Names
Balance at December 31, 2008 (net of accumulated impairment losses of $43,434,821)	$	2,453,122		$	35,831,189		$	619,000
Component 2 amortization		(157,077	)		(5,171	)		-
2009 impairment charges		(17,000	)		(1,574,000	)		(167,000	)

Balance at December 31, 2009		2,279,045			34,252,018			452,000
Component 2 amortization		-			(148,396	)		-

Balance at December 31, 2010	$	2,279,045		$	34,103,622		$	452,000

~~For~~ During ~~2008~~the year ended December 31, 2010, the Company recorded aamortization ~~non-cash~~of ~~impairment~~Component ~~charge for~~2 ~~licenses~~goodwill of ~~approximately~~ $27148,~~089~~396,~~000~~ ~~and~~which ~~trade~~reduced ~~names~~book basis of ~~approximately~~ ~~$235,000~~licenses. InDuring ~~addition,~~ the ~~Company~~year ~~evaluated~~ended ~~its goodwill at~~ December 31, 2009, ~~2008~~the ~~and~~Company recorded aamortization ~~non-cash impairment~~of ~~charge~~Component of2 ~~approximately~~goodwill of $18162,~~721~~248,~~000.~~ ~~The~~which ~~total~~reduced the book ~~impairment~~basis ~~charge~~of ~~for~~goodwill ~~2008~~by ~~was~~$157,077 ~~approximately~~and reduced the remaining book basis of licenses by $465,~~045,000~~171.

In performing the Company’s annual impairment assessment at December 31, 2010 in accordance with ASC Topic 350, the Company determined that no impairment had occurred. The fair values of the licenses, trade names, and ~~the~~goodwill ~~reporting units~~were ~~with~~based ~~the~~on ~~impaired~~significant ~~goodwill~~unobservable ~~were~~inputs ~~based~~(level on3) ~~estimated~~using estimated discounted future net cash flows. ~~These~~The impairment charges ~~are~~at December 31, 2009 were a result of a continued weak economy, which resulted in either zero growth or a reduction of estimated future cash flows at the ~~club~~ nightclub level.

7) Other Long-Term Assets

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

	December 31,
	2009		2008
	2010		2009
Loan fees, net	$	~~108~~83,~~866~~205	$	~~246~~108,~~347~~866
Deposits — lease, utility, and taxes		~~133~~114,~~127~~387		~~120~~133,~~834~~127
Acquisition deposit		-		200,000
	$	197,592	$	241,993
	$	241,993	$	567,181

8) Accrued Expenses

The Company’s accrued expenses consisted of the following:

	December 31,
	2009		2008
	2010		2009
Payroll and related expenses	$	1,~~225~~014,~~526~~531	$	~~832~~1,~~802~~225,526
Sales taxes		~~282~~822,~~007~~643		~~297~~282,~~449~~007
Property taxes		~~319~~351,~~773~~054		~~375~~319,~~277~~773
Legal and professional charges		31133,~~344~~973		~~667~~31,~~810~~344
Interest		5435,~~772~~549		8354,~~778~~772
Rent		165,~~627~~200		-16,627
Total	$	1,930,049	$	2,257,116
Indemnification claim and interest		2,213,704		-
Total	$	4,576,654	$	1,930,049

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

9) Long-Term Debt

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

Related Party

	December 31,
Description of Related Party Debt	~~2009~~2010			~~2008~~2009
Note payable to Lowrie Management LLLP, interest at 10%, due monthly, principal due June 2012, collateralized by general assets of Illinois Restaurant Concepts LP and Denver Restaurant Concepts LP, plus the consent to the transfer of the adult permit and liquor license for both clubs upon default.	$	5,700,000		$	-5,700,000
Note payable to Lowrie Family Foundation, a corporation controlled by the Company’s Chairman of the Board and Chief Executive Officer, interest at 10%, interest accrued monthly to principal, but no payments, due August 2013, unsecured.		772,122			698,934
Note payable to the President and Chief Operating Officer with interest at 10%, due monthly, principal due April 2012, unsecured. This note was prepaid in September 2010.		-			100,000
Note payable to a board member with interest at 10%, due monthly, principal due November 2011, unsecured.		50,000			50,000
Note payable to the mother of the Chairman with interest at 10%, monthly principal and interest payments of $4,900 due April 2014, unsecured.		166,517			170,000
Note payable to the mother of the Chairman, with interest at 10%, monthly principal and interest payments of $3,456, due December 2010, unsecured.		-			36,741
Note payable to the mother of the Chairman, with interest at 10%, interest accrues monthly to principal, but no payments, due December 2011, unsecured.		22,049			25,326
Note payable to an affiliate of a current Board member with interest at 10%, due September 2012, collateralized by a personal guarantee from Mr. Lowrie and Lowrie Management LLLP.		410,083			410,084
Total Debt Due, Related Party	$	7,120,771		$	7,191,085
Less Current Portion, Related Party		(76,267	)		(62,067	)
Total Long-Term Debt, Related Party	$	7,044,504		$	7,129,018

VCG Holding Corp.

Notes to Consolidated Financial Statements — (Continued)

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

VCG Holding Corp.

Notes to Consolidated Financial Statements — (Continued)

The rates on all related party transactions are equal to or less than other unsecured or secured notes to unrelated parties.

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

Third Party

	December 31,
Description of Debt	~~2009~~2010			~~2008~~2009
Note payable to Sunshine Mortgage, interest at 14% fixed, due monthly, periodic principal with balance due December 2011, collateralized by one parcel of real property located in Ft. Worth, TX, the common stock of Kenja II, Inc., 238,000 shares of VCG stock, furniture, fixtures and equipment of Kenja II, Inc. and a guarantee from Lowrie Management LLLP.	$	4,700,000		$	5,000,000
Promissory note issued by the Company to Sunshine Mortgage, interest at 14% fixed, due monthly, periodic principal with balance due December 2011, collateralized by the common stock of Kenja II, Inc., furniture, fixtures and equipment of Kenja II, Inc., 238,500 shares of VCG common stock and a guarantee from Lowrie Management LLLP.	$	3,700,000		$	4,700,000
Loan from Citywide Banks, interest at 7% fixed, monthly principal and interest payments of $76,865 due August 15, 2014, collateralized with a life insurance policy on Troy Lowrie and additional securities owned by Mr. Lowrie.		3,654,865			-
Loan from Citywide Banks, interest at 7% fixed, monthly principal and interest payments of $76,865 due August 2014, collateralized with VCG Stock, a life insurance policy on Troy Lowrie and additional securities owned by Mr. Lowrie.		2,969,658			3,654,865
Note payable, interest at 8% fixed, monthly principal and interest payments, due July 2011, collateralized by assets of VCG-IS, LLC.		2,~~915~~621,~~386~~407			32,~~186~~915,~~835~~386
Note payable to Amfirst Bank, variable interest rate calculated at prime subject to a 6% floor, actual rate of 6% at December 31, 2009, monthly principal and interest payments of approximately $55,898, due November 14, 2014, collateralized by UCC Security Agreement of RCC LP, IRC LP, MRC LP , Platinum of Illinois, Inc., Cardinal Management LP,VCG CO Springs, Inc., VCG Real Estate, Inc., Glendale Restaurant Concepts LP, Glenarm Restaurant LLC, the Indiana building, and a guarantee from Lowrie Management LLLP.		2,844,219			3,325,927
Loan from Amfirst Bank, interest at prime (6% floor) (6% at December 31, 2010) plus 1% due monthly, principal and interest payments of $55,898 due November 2014, collateralized by certain security agreements with RCC L.P., Roxy’s Nightclub L.P., IRC L.P., Diamond Cabaret L.P., Platinum of Illinois, Inc., PT’s Brooklyn, MRC L.P., PT’s Sports Cabaret L.P., Cardinal Management L.P., PT’s Showclub L.P., VCG CO Springs, Inc., VCG Real Estate Holdings, Inc., Glendale Restaurant Concepts LP, Glenarm Restaurant LLC, and the mortgage for 7946 Pendleton Pike.		2,332,599			2,844,219
Line of credit from Citywide Banks, variable interest rate calculated at prime subject to a 6% floor, actual rate of 6% at December 31, 2009, due monthly, principal due August 15, 2011, collateralized by Company shares of common stock owned by Lowrie Management LLLP, a life insurance policy on Troy Lowrie, and additional securities owned by Mr. Lowrie.		2,720,000			2,810,000
Line of credit from Citywide Banks, interest at prime (6% at December 31, 2010) plus 0.5% (floor is 6%) due monthly, principal due August 2012, collateralized by Company shares of common stock owned by Lowrie Management LLLP, a life insurance policy on Troy Lowrie and additional securities owned by Mr. Lowrie.		2,350,000			2,720,000
Note payable, variable interest rate calculated at prime subject to a 6% floor, actual rate of 6% at December 31, 2008, due monthly, periodic principal payments with balance due June 2013, collateralized by a P&A Select Strategy Fund and securities owned by Lowrie Management LLLP. This loan was consolidated into a new loan in August 2009.		-			2,375,138
Notes payable to investors, interest at 11%, monthly interest payments, due January 2010, collateralized by the general assets of the Company and a guarantee by Mr. Lowrie.		-			1,400,000
Note payable to Citywide Banks, interest at 8.5%, monthly principal and interest payments of $36,156 with a balloon payment of $2,062,483 due May 16, 2010, collateralized by securities owned by Lowrie Management LLLP. This note was consolidated on August 15, 2009.		-			2,080,527
Note payable, interest at 10% fixed, monthly interest payments, due November 2010, collateralized by the general assets of the Company, the cash flow and 100% stock in Manana Entertainment, Inc.		-			1,086,529
Note payable, interest at 12% fixed, monthly principal and interest payments, with periodic principal payments, due May 2010, collateralized by assets of Manana Entertainment, Inc. The Company paid this note in full in September 2009.		-			1,928,410
Notes payable, interest at 11% fixed, monthly interest payments, due on demand, collateralized by the general assets of the Company, the cash flow and 100% stock in Manana Entertainment, Inc.		150,000			250,000
Note payable, interest at a rate equal to the lesser of(i) twelve percent (12%) or (ii) the rate for ten (10) year Treasury Bills plus four percent (4%). Monthly principal and interest payments of $22,949 due September 2018, collateralized by certain real and personal property of Epicurean. The Company sold the AZ property in July 2009 and transferred this debt to the new owner. VCG agreed to guaranty the Buyer’s performance on the $1,772,000 mortgage note payable. The Buyer and its sole member agreed to indemnify VCG from any losses arising from its guaranty of the same mortgage note.		-			1,847,618
Notes payable, interest at 10%, monthly interest payments, due between November 2009 and September 2013, unsecured.		698,000			998,000
Notes payable, interest at 10%, monthly interest payments, due on demand, unsecured.		200,000			200,000
Various notes payable, interest at 11% fixed, monthly interest payments, due July 2011, collateralized by the general assets and cash flow of the Company and 100% stock in VCG-IS, LLC and a guarantee by Mr. Lowrie		1,000,000			1,000,000
Note payable, interest at 12% fixed due monthly, periodic principal payments with balance due July 2011, collateralized by one parcel of real property located in Ft. Worth, TX and the common stock of Kenja II, Inc. and a guarantee from Lowrie Management LLLP.		1,000,000			1,000,000
Note payable, interest at 10% fixed, monthly principal and interest payments, due August 2013, unsecured.		196,203			214,732
Note payable, interest at 8.5% fixed, monthly principal and interest payments, due October 2011, collateralized by the general assets of the Company and guaranteed by Mr. Lowrie.		98,697			208,295
Note payable to employee, interest at 10%, due November 2011, unsecured.		205,612			186,122
Auto loans payable, interest at 0% to 8.5%, monthly principal and interest payments, due in May 2012 and June 2016, these loans are collateralized by the vehicles purchased.		169,420			102,317
Note payable, interest at prime (6% at December 31, 2010) plus 1% due monthly, principal and interest due January 2011, this note is unsecured.		5,834			75,833
Total Debt Due	$	17,697,430		$	23,556,298
Less Current Portion		(10,258,057	)		(3,805,277	)
Total Long-Term Debt	$	7,439,373		$	19,751,021

54 57

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

There are two covenants that the Company must be in compliance with under the Citywide notes. The first covenant requires the Company get any additional acquisitions or indebtedness of equal to ~~Notes~~or in excess of $1,000,000 pre-approved by Citywide Banks. The second covenant is a financial ratio covenant. This covenant requires the quarterly calculation of net cash flow to debt service in a ~~Consolidated~~ratio ~~Financial~~greater than or equal to 1.2 to 1.0. Net cash flow is defined as income attributable to the ~~Statements — (Continued)~~Company plus depreciation, amortization and interest expense. Net profit excludes any intangible impairments and related tax effects.

	December 31,
Description of Debt	2009			2008
Notes payable to investors, interest at 11%, monthly interest payments, principal due January 2010, collateralized by the general assets of the Company and a guarantee by Mr. Lowrie.		1,400,000			1,400,000
Notes payable, interest at 10% and 11% fixed, monthly interest payments, due November 2010, collateralized by the general assets and cash flow of VCG and 100% stock in Manana Entertainment, Inc.		1,336,529			250,000
Notes payable, interest at 10%, monthly interest payments, principal due between November 2009 and March 2012, unsecured.		1,198,000			1,380,000
Various notes payable, interest at 11% fixed, monthly interest payments, principal due July 2011, collateralized by the general assets and cash flow of VCG and 100% stock in VCG-IS, LLC and a guarantee from Mr. Lowrie.		1,000,000			1,000,000
Note payable, interest at 12% fixed due monthly, periodic principal payments with balance due July 2011, collateralized by one parcel of real property located in Ft. Worth, TX and the common stock of Kenja II, Inc., and a guarantee from Lowrie Management LLLP.		1,000,000			1,000,000
Note payable, interest at 10% fixed, monthly principal and interest payments, due October 2013, unsecured.		214,732			231,957
Note payable to investors, interest at 8.5%, monthly principal and interest payments, due October 20, 2011, collateralized by the general assets of the Company and guaranteed by Mr. Lowrie.		208,295			308,993
Note payable to employee, interest at 10%, due October 2011, unsecured.		186,122			168,480
Auto loans payable, interest at 0%, monthly principal payments, due in May 2012 and October 2015, collateralized by the vehicles purchased.		102,317			-
Note payable, variable interest rate calculated at prime subject to a 6% floor, actual rate of 6% at December 31, 2009, due monthly, principal and interest due January 2011, unsecured.		75,833			145,833
Note payable, variable interest rate calculated at prime subject to a 6% floor, actual rate of 6% at December 31, 2009, principal and interest payments, due December 2009, unsecured.		-			78,393
Total debt due		23,556,298			28,518,111
Less current portion		(3,805,277	)		(2,602,000	)
Total long-term debt	$	19,751,021		$	25,916,111

The table below shows the future maturities of the principal amount of the related party and third party long-term debt as of December 31, 2010:

In conjunction with the refinancing of the two Citywide notes in August 2009, two covenants were added. The first new covenant requires acquisitions or additional indebtedness of equal to or in excess of $1,000,000 be pre-approved by Citywide Banks. The second new covenant is a financial ratio covenant. This covenant requires the quarterly calculation of net cash flow to debt service in a ratio greater than or equal to 1.2 to 1.0. Net cash flow is defined as income attributable to the Company plus depreciation, amortization and interest expense. Net profit excludes any intangible impairments and related tax effects. The Company has been in compliance with all covenants for the year ended December 31, 2009.


2011	$	10,334,324
2012		10,270,949
2013		2,796,251
2014		1,264,638
2015		40,993
Thereafter		111,046

Total	$	24,818,201

At December 31, 2010, the Company had $1,650,000 of available and unused funding on its 58revolving line of credit.

VCG Holding Corp.

Notes to Consolidated Financial Statements — (Continued)

The table below shows the future maturities of the principal amount of the related party and third party long-term debt as of December 31, 2009, including the new note of $100,000 disclosed in the subsequent events footnote:

2010	$	3,867,344
2011		16,942,568
2012		7,207,409
2013		1,622,791
2014		1,198,348
Thereafter		8,923
	$	30,847,383

At December 31, 2009, the Company still had $1,280,000 of available and unused funding on its revolving line of credit. Management believes the carrying amount of our fixed rate debt approximates the fair value at December 31, 2009.

10) Income Taxes

A reconciliation of the Company’s effective ~~income~~ tax rate ~~and~~ on income from continuing operations to the United States ~~Federal~~federal statutory rate for the years then ended is as follows:

	Year Ended December 31,
	2009			2008
	2010			2009
United States federal statutory rate		34.0	%		(34.0	)%
State income taxes, net of Federal income tax benefit		54.26	%		(35.82	)%
Permanent differences		2213.60	%		125.91	%
Utilization of net operating loss		-			(0.4	)
Tax credit generated in the current year		(21.3	) %		(42.0	) %
Tax credits		(37.5	)		(1.0	)
Utilization of net operating loss		(8.2	) %		-	%
Impairment of nondeductible goodwill		-			9.7
Other		5.1	%		(0.5	) %
Other		(2.4	)		0.8
		27.2	%		21.8	%
		21.9	%		(26.8	)%

The Company is entitled to a tax credit for the social security and medicare taxes paid by the Company on its employees’ tip income. This tip tax credit is subject to carry -back and carry -forward provisions of the Internal Revenue Code. At December 31, ~~2009~~2010 and ~~2008~~2009, the Company had ~~has~~ unused tip tax credits of approximately $~~582~~1,195,000 and $~~256~~582,000, respectively, which expire beginning in 2029.

55 ~~At December 31, 2009 and 2008, total deferred tax assets, liabilities, and valuation allowance are as follows:~~

	December 31,
	2009			2008
Licenses, goodwill and other intangible assets	$	1,195,738		$	1,170,697
Favorable/unfavorable leases, net		1,866,569			2,718,507
Property and equipment		(819,743	)		(26,868	)
Accrued cost		76,920			100,105
Net operating loss carryforwards		1,017,181			21,539
Tax credits		581,928			255,613
Net deferred tax asset	$	3,918,593		$	4,239,593

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

~~Notes~~ At toDecember 31, 2010 and 2009, total deferred tax assets, liabilities, and valuation allowance ~~Consolidated~~are ~~Financial~~as follows: ~~Statements — (Continued)~~

The Company has a tax net operating loss carry forward of approximately $2,608,000 as of December 31, 2009, which expires in 2029. Because the Company anticipates being profitable in the future and anticipates being able to utilize its deferred tax assets, no valuation allowance was recorded at December 31, 2009.


	December 31,
	2010			2009
Licenses, Goodwill and other Intangible Assets	$	(283,975	)	$	1,195,738
Favorable/Unfavorable Leases, Net		1,285,424			1,866,569
Property and equipment		(888,560	)		(819,743	)
Accrued costs		5,031			76,920
Litigation related to an acquisition		1,022,324			-
Net operating loss and contributions carryforwards		966,879			1,017,181
Tax credits		1,195,322			581,928

Net deferred tax asset	$	3,302,445		$	3,918,593

We The ~~have~~Company ~~analyzed~~has ~~filing~~a ~~positions~~tax innet ~~all~~operating ofloss ~~the~~carry ~~federal~~forward ~~and state~~of ~~jurisdictions~~approximately ~~where~~$2,329,000 weas ~~are~~of December 31, ~~required~~2010, towhich ~~file~~expires ~~income~~at ~~tax returns.~~various Wedates ~~believe~~beginning ~~that~~in ~~our~~2029. ~~income~~Since ~~tax~~the ~~filing~~Company ~~positions and~~anticipates ~~deductions~~being ~~will~~profitable bein ~~sustained~~the onfuture ~~audit~~ and doanticipates ~~not~~being ~~anticipate~~able ~~any adjustments~~to ~~that~~utilize ~~will~~its ~~result~~deferred intax ~~a material adverse effect on our financial condition~~assets, ~~results of operations or cash flow.~~no ~~Interest~~valuation ~~and~~allowance ~~penalties~~was ~~paid~~recorded inat ~~2009 and 2008 totaled $14~~December 31,~~469~~ ~~and $0, respectively~~2010.

~~The~~ We ~~company~~have ~~files~~analyzed ~~tax~~filing ~~returns~~positions in all of the ~~U.S. Federal~~federal and ~~various~~ state jurisdictions. ~~The~~where ~~company~~we isare required noto ~~longer~~file ~~subject~~income ~~to U~~tax returns.~~S. Federal~~ We believe that our income tax ~~examinations~~filing ~~for~~positions ~~years~~and ~~prior to~~deductions ~~2006~~will ~~and~~be ~~state~~sustained on audit and ~~local~~do ~~income~~not ~~tax~~anticipate ~~examinations~~any byadjustments ~~tax~~that will result in a material ~~authorities~~adverse ~~for~~effect ~~years~~on ~~prior~~our tofinancial ~~2005~~condition, results of operations or cash flow. Penalties paid in 2010 and 2009 totaled $20,048 and $9,296, respectively.

The company files tax returns in the U.S. Federal and various state jurisdictions. The company is no longer subject to U.S. Federal income tax examinations for years prior to 2007 and state and local income tax examinations by tax authorities for years prior to 2006.

On January 10, 2011, the Company received notification from the IRS that they would be conducting an audit of the 2008 consolidated federal income tax return. It is expected that this audit will take place in May 2011.

11) Stockholders’ Equity

Common Stock

Holders of the Company’s ~~common~~Common ~~stock~~Stock are entitled to one vote for each share held of record on all matters. Since the Company’s ~~common~~Common ~~stock~~Stock does not have cumulative voting rights, the holders of shares having more than 50% of the voting power, if they choose to do so, may elect all directors ~~Directors~~ and the holders of the remaining shares would not be able to elect any ~~Directors~~ directors. In the event of a voluntary or involuntary liquidation of our Company, all stockholders are entitled to a prorated distribution of the Company’s assets remaining after payment of claims by creditors and liquidation preferences of any preferred stock. Holders of the Company’s ~~common stock~~Common Stock have no conversion, redemption, or sinking fund rights. All of the outstanding shares of ~~common~~Common ~~stock~~Stock are fully paid and non-assessable.

Preferred Stock

The ~~Board~~board, without further action by the stockholders, is authorized to issue up to 1,000,000 shares of Preferred Stock in one or more series. The ~~Board~~board may, without stockholder approval, determine the dividend rates, redemption prices, preferences on liquidation or dissolution, conversion rights, voting rights, and any other preferences. Because of its broad discretion with respect to the creation and issuance of preferred stock without stockholder approval, the ~~Board could~~board could adversely affect the voting power of the holders of our ~~common stock~~Common Stock and, by issuing shares of Preferred Stock with certain voting, conversion and/or redemption rights, could delay, defer, or prevent an attempt to obtain control of the Company. The ~~Board~~board has authorized the sale of 1,000,000 shares of Class A Preferred. As of December 31, ~~2009~~2010 and ~~2008~~2009, none of the Company’s Series A Preferred Stock was outstanding.

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

Stock Option and Stock Bonus Plans

The Company’s stockholders have approved (ia) the 2002 Stock Option and Stock Bonus Plan, (iib) the 2003 Stock Option and Stock Bonus Plan, and (~~iii~~c) the 2004 Stock Option and Appreciation Rights Plan (collectively, “the Plans”). Under each of the Plans, the Company may grant to ~~designated~~ designated employees, officers, ~~Directors~~directors, advisors, and independent contractors incentive stock options, ~~nonqualified~~ nonqualified stock options, and stock. If options granted under the Plans expire, or are terminated for any reason without being exercised, or bonus shares are forfeited, the shares underlying ~~such~~ ~~option~~such option and/or bonus shares will become available again for issuance under the applicable Plan.

The ~~Compensation~~compensation ~~Committee~~ committee and/or the ~~Board~~ board determines which individuals will receive grants, ~~the~~ the type, size and terms of the grants, the time when the grants are made, and the duration of any applicable exercise or restriction period, including the criteria for vesting and the acceleration of vesting, and the total number of shares of ~~common~~Common ~~stock~~ Stock available for grants.

The stock awards issued under the Plans as of December 31, 2010 were: 60


							Shares to be		Shares
							Issued Upon		Remaining
							Exercise of		Available for
	Shares		Shares		Available		Outstanding		Future
	Authorized		Granted		for Grant		Options		Issuance
2002 Stock Option and Stock Bonus Plan		700,000		699,776		224		—		224
2003 Stock Option and Stock Bonus Plan		250,000		247,292		2,708		—		2,708
2004 Stock Option and Appreciation Rights Plan		1,000,000		93,333		906,667		231,500		644,167

		1,950,000		1,040,401		909,599		231,500		647,099

For the year-ended December 31, 2010, the Company did not issue any stock.

The following is a summary of all stock option transactions under the 2004 Stock Option Plan for the years ended December 31, 2010 and 2009:


			Weighted-Average
	Options		Exercise Price
Outstanding at December 31, 2008		300,500	$	10.37

Granted		-		-

Exercised		-		-

Forfeited		(38,000)		11.42

Outstanding at December 31, 2009		262,500	$	10.21

Granted		-		-

Exercised		-		-

Forfeited		(31,000)		7.35

Outstanding at December 31, 2010		231,500		11.24

Exercisable at December 31, 2010		31,090	$	10.00

As of December 31, 2010, the range of exercise prices for outstanding options was $10.00 — $13.00. The weighted average remaining contractual term as of December 31, 2010 is 6.6 years for the outstanding options under the Plans. There is no aggregate intrinsic value as of December 31, 2010 because the fair market value of the outstanding options is below the weighted average exercise price.

Employee stock options are subject to cancellation upon termination of employment and expire ten years from the date of grant. The options generally vest 20% on the 3rd anniversary and 40% each on the 5th and 7th anniversaries of the date of grant. Options have always been granted at an exercise price significantly above the fair market value of the Common Stock covered by the option on the grant date.

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

Notes to Consolidated Financial Statements — (Continued)

The stock awards issued under the Plans as of December 31, 2009 were:

							Shares to be		Shares
							Issued Upon		Remaining
							Exercise of		Available for
	Shares		Shares		Available		Outstanding		Future
	Authorized		Granted		for Grant		Options		Issuance
2002 Stock Option and Stock Bonus Plan		700,000		699,776		224		-		224
2003 Stock Option and Stock Bonus Plan		250,000		247,292		2,708		-		2,708
2004 Stock Option and Appreciation Rights Plan		1,000,000		93,333		906,667		262,500		644,167
		1,950,000		1,040,401		909,599		262,500		647,099

For the year-ended December 31, 2009, the Company did not issue any stock.

The following is a summary of all stock option transactions under the 2004 Stock Option Plan for the years ended December 31, 2009 and 2008:

				Weighted-Average
	Options			Exercise Price
Outstanding at December 31, 2007		188,000		$	10.00
Granted above fair market value		167,000			11.95
Exercised		-			-
Forfeited		(54,500	)		11.21
Outstanding at December 31, 2008		300,500		$	10.37
Granted		-			-
Exercised		-			-
Forfeited		(38,000	)		11.42
Outstanding at December 31, 2009		262,500		$	10.21
Exercisable at December 31, 2009		-			-

As of December 31, 2009, the range of exercise prices for outstanding options was $6.00 — $13.00. The weighted average remaining contractual term as of December 31, 2009 is 7.7 years for the outstanding options under the Plans. There is no aggregate intrinsic value as of December 31, 2009 because the fair market value of the outstanding options is below the weighted average exercise price.

Employee stock options are subject to cancellation upon termination of employment and expire ten years from the date of grant. The options generally vest 20% on the third anniversary and 40% each on the fifth and seventh anniversaries of the date of grant. Options have historically been granted at an exercise price significantly above the fair market value of the common stock covered by the option on the grant date.

Valuation and Assumptions

The Company adopted FASB ASC Topic 718, Stock Compensation (“ASC 718”), upon its initial stock ~~option~~ option issuance in April 2007. A transition method was not required since there were no outstanding stock options. The Company used the Black-Scholes Option Pricing Model to determine the fair ~~value~~ value of option grants, using the assumptions noted in the following table. Expected volatility was calculated using the Company’s historical stock prices since it became public in ~~October~~ October 2003, averaged with a peer-group’s historical volatility for the one to two years prior to 2003 needed to reflect the six year expected life. The expected option life was determined using the simplified method and represents the period of time that options granted are expected to be outstanding.


	Option Grant Year
	2008			2007
Expected life in years		6.07			6.07
Weighted average expected volatility		62	%		61	%
Weighted average risk free rates		3.5	%		4.6	%
Dividend yield		—			—
Weighted average grant date fair value	$	5.25		$	4.89

~~Table~~ For the years ended December 31, 2010 and 2009, compensation cost charged against income was $72,922 and $142,095, respectively. At December 31, 2010, there was $512,955 of ~~Contents~~total unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options. The assumption for forfeitures increased during 2010 from 25% to 40% based upon the Company’s actual forfeitures experience. This cost is expected to be recognized on a straight-line basis over the remaining weighted average vesting period of approximately four years.

VCG Holding Corp.

Notes to Consolidated Financial Statements — (Continued)

years prior to 2003 needed to reflect the six year expected life. The expected option life was determined using the simplified method and represents the period of time that options granted are expected to be outstanding.

	Option Grant Year
	2008			2007
Expected life in years		6.07			6.07
Weighted average expected volatility		62	%		61	%
Weighted average risk free rates		3.5	%		4.6	%
Dividend yield		-			-
Weighted average grant date fair value	$	5.25		$	4.89

For the years ended December 31, 2009 and 2008, compensation cost charged against income was $142,095 and $233,634, respectively. At December 31, 2009, there was $800,125 of total unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options. The assumption for forfeitures increased during 2009 from 16% to 25% based upon the Company’s actual forfeitures. This cost is expected to be recognized on a straight-line basis over the remaining weighted average vesting period of approximately six years.

Stock Warrants

The Company issued stock warrants in 2004 and 2006. The warrants were exercisable at a range of of prices between $2.00 — $4.00. Each warrant was exercisable into one share of the Company’s Common ~~common stock~~Stock, subject to certain adjustments and was in certain circumstances exercisable on a cashless basis. AtIn ~~December 31~~2009, ~~2008, the Company had warrants representing an aggregate of 325,376 warrants outstanding after 167,000 warrants were exercised. In 2009~~ no warrants were exercised and all unexercised warrants expired in November 2009. There are no warrants outstanding at December 31, ~~2009~~2010. Amortization of warrants issued for services totaled $~~102,288~~0 and $~~122~~102,~~745~~288 for the years ended December 31, ~~2009~~2010 and ~~2008~~2009, respectively.

12) Commitments and Contingencies

Operating Leases

The Company conducts a major part of its nightclub operations from 16 leased facilities, including three under related party leases, and ~~two~~one land ~~leases~~lease. The buildings are under non-cancellable operating leases that expire between January 2015 and January 2062. Most of the operating leases contain provisions where the Company can, at the end of the initial lease term, extend the lease term for between two and 12 twelve additional five or ten-year periods, with fixed rent increases. The land ~~leases~~lease ~~expire~~expires ~~between~~on April 2012 ~~and September 2012~~, but can be extended for four additional ~~five-year terms and 12~~ ~~additional~~ five-year terms~~, respectively~~. In virtually all cases, the Company expects that in the normal course of business, the leases will be renewed for the maximum lease option term. The Company also leases office space in Colorado for the Company’s headquarter location.

Total rent expense for all leased facilities for the year ended December 31, ~~2009~~2010 was approximately $5,~~855~~856,000, of which $~~418~~462,~~500~~000 was paid to Lowrie Management LLLP. Rent expense for the year ended December 31, ~~2008~~2009 was approximately $5,~~798~~611,000 of which $~~414~~418,~~000~~500 was paid to Lowrie Management LLLP.

58 62

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

~~Notes~~ Future ~~to Consolidated~~minimum ~~Financial Statements~~lease payments as of December ~~— (Continued)~~31, 2010 are set forth in the following table:

Future minimum lease payments as of December 31, 2009 are set forth in the following table:


Year Ended December 31,	Related Party		Third Party		Total
2011	$	462,000	$	3,197,037	$	3,659,037
2012		477,000		3,260,601		3,737,601
2013		477,000		3,315,958		3,792,958
2014		481,500		3,359,118		3,840,618
2015		525,000		3,285,090		3,810,090
Thereafter		8,655,000		70,770,548		79,425,548

Total minimum lease payments	$	11,077,500	$	87,188,352	$	98,265,852

Year Ended December 31,	Related Party		Third Party		Total
2010	$	462,000	$	3,311,720	$	3,773,720
2011		462,000		3,353,037		3,815,037
2012		477,000		3,416,601		3,893,601
2013		477,000		3,489,958		3,966,958
2014		481,500		3,535,118		4,016,618
Thereafter		9,180,000		73,618,758		82,798,758
Total minimum lease payments	$	11,539,500	$	90,725,192	$	102,264,692

The Company’s leases typically require that it pay real estate taxes, insurance, and maintenance costs in addition to the minimum rental payments included in the above table. Such costs vary from year to year and totaled $749,000 for 2010 and $790,000 for 2009.

Favorable lease rights represent the approximate fair market value arising from lease rates ~~The~~that ~~Company~~are below market rates as of the date of a nightclub’s ~~leases~~acquisition. ~~typically~~The ~~require~~amount ~~that~~is itbeing amortized ~~pay~~into ~~real estate~~rent ~~taxes,~~expense ~~insurance,~~ratably ~~and~~over ~~maintenance~~the ~~costs~~remaining interm ~~addition~~of to the ~~minimum~~underlying ~~rental~~lease. ~~payments~~Unfavorable lease ~~included~~liability inrepresents the approximate fair market value arising from lease rates that are above ~~table~~market rates as on the date of a nightclub’s acquisition. ~~Such~~Unfavorable lease liabilities are ~~costs~~being ~~vary~~amortized ~~from~~into ~~year~~rent toexpense ~~year~~ratably ~~and~~over ~~totaled~~the ~~$856,000~~remaining ~~for~~term ~~2009~~of ~~and $805,000~~the ~~for~~underlying ~~2008~~lease.

~~Favorable~~ The ~~lease~~Company ~~rights~~subleases ~~represent~~unused space in the ~~approximate~~building ~~fair~~that ~~market value~~also ~~arising~~houses ~~from~~a ~~lease~~nightclub ~~rates~~in Indianapolis. ~~that~~These are ~~below~~operating ~~market~~leases ~~rates~~with asa ~~of the~~contract ~~date~~for ofthe afirst ~~club’s~~year, ~~acquisition.~~and ~~The~~switching ~~amount~~to ~~is being~~a ~~amortized~~month-to-month ~~into~~basis ~~rent~~thereafter. ~~expense~~This ~~ratably~~2008 ~~over~~lessee vacated the ~~remaining~~Indianapolis ~~term~~facility ofin March 2009. ~~the~~Another ~~underlying~~tenant ~~lease.~~moved ~~Unfavorable~~in ~~lease~~beginning ~~liability~~April 2009 ~~represents~~at the ~~approximate~~ ~~fair~~rate ~~market~~of ~~value~~$6,720 ~~arising~~per ~~from~~month, ~~lease~~increasing ~~rates~~to ~~that are~~$9,100 ~~above~~per ~~market~~month ~~rates~~after asSeptember 1, on2009. ~~the~~That ~~date~~lease ofis afor ~~club’s~~12 months ~~acquisition~~and month-to-month thereafter. ~~Unfavorable~~Rental ~~lease~~income ~~liabilities~~earned ~~are~~from ~~being~~the ~~amortized~~Indianapolis ~~into~~facility ~~rent expense~~totaled ~~ratably~~$109,200 ~~over~~in ~~the~~2010 ~~remaining~~and ~~term~~$71,475 ofin ~~the underlying lease~~2009.

~~The~~Guaranty ~~Company leased the Arizona building and land to the purchaser~~ of ~~Epicurean~~Real ~~Enterprises,~~Property ~~LLC for $20,000 per month,~~Loan actually collecting $140,000 in 2008. The lessee defaulted on the lease in August 2008 and the Company fully reserved as bad debt the remaining rent payments due for 2008. The Company did not receive rent from this lessee in 2009. The property was sold in July 2009.

~~The~~ On ~~Company~~July 31, ~~subleases~~2009, ~~unused~~VCG ~~space~~Real inEstate ~~the~~Holdings, ~~buildings~~Inc. ~~that~~(“VCG ~~also~~Real Estate”) sold a piece of real ~~house~~property ~~clubs~~located in ~~Indianapolis~~Phoenix, ~~and~~AZ ~~Denver.~~to ~~These~~Black ~~are~~Canyon ~~operating leases~~Highway ~~with~~LLC, a ~~contract~~Texas ~~for~~limited ~~the~~liability ~~first~~company (“Black ~~year,~~Canyon”). ~~and~~The ~~switching~~property was transferred subject to a loan made by Sacred Ground Resources, ~~month-to-month basis~~LLC, ~~thereafter.~~an ~~Rental~~Arizona ~~income~~limited ~~earned~~liability ~~from~~company (“Sacred Ground”), to VCG Real Estate at the ~~Indianapolis~~time of VCG ~~facility~~Real ~~totaled~~Estate’s ~~$71,475~~acquisition inof ~~2009~~the ~~and~~property ~~$20,365~~from inSacred ~~2008~~Ground. ~~This~~Black ~~2008~~Canyon assumed VCG Real ~~lessee~~Estate’s ~~vacated~~obligations under the ~~Indianapolis~~Sacred ~~facility~~Ground inloan ~~March~~as ~~2009.~~a ~~Another~~part of the sale of the real property and ~~tenant~~the ~~moved~~Company inremains ~~beginning~~as ~~April~~a ~~2009~~guarantor aton the ~~rate~~loan in the event of ~~$6,720~~default ~~per~~by Black Canyon. Black ~~month,~~Canyon ~~increasing~~has agreed to ~~$9,100~~indemnify ~~per~~the ~~month~~Company ~~after~~from ~~September~~any losses arising from the guaranty. As of December 131, ~~2009.~~ ~~The~~2010, ~~new~~the ~~lease~~balance isowed ~~for~~by ~~12 months~~Black ~~and month-~~Canyon to~~-month thereafter~~ Sacred Ground was approximately $1,575,704.

Capitalized Leases ~~Legal Proceedings~~

During 2010, the Company entered into two capital leases for vehicles in the amount of $110,921. Accumulated amortization of the vehicles amounted to $5,858 for year ended December 31, ~~Thee Dollhouse~~2010. ~~Productions~~The ~~Litigation~~current minimum annual commitment under the leases are as follows:

On or around July 24, 2007, VCG Holding Corp. was named in a lawsuit filed in District Court, 191 Judicial District, of Dallas County, Texas. This lawsuit arose out of a VCG acquisition of certain assets belonging to Regale, Inc. (“Regale”) by Raleigh Restaurant Concepts, Inc. (“RRC”), a wholly owned subsidiary of VCG, in Raleigh, N.C. The lawsuit alleges that VCG tortiously interfered with a contract between Michael Joseph Peter and Regale and misappropriated Mr. Peter’s purported trade secrets. On March 30, 2009, the United States District Court for the Eastern District of North Carolina entered an Order granting Summary Judgment to VCG and dismissed Mr. Peter’s claims in their entirety. The Court found that as a matter of law, VCG did not tortiously interfere with Mr. Peter’s contract with Regale and further found that VCG did not misappropriate trade secrets. Mr. Peters did not appeal that ruling and as such, the federal proceedings have concluded.


Year Ending December 31,
2011	$	24,626
2012		24,626
2013		56,645
2014		18,575

Total minimum payments		124,472
Amount representing interest		(19,963	)

Present value of future minimum payments		104,509
Current portion of lease obligation		16,664

Obligation under capital lease	$	87,845

59 Ancillary to this litigation, Thee Dollhouse filed a claim in arbitration on June 2008 against Regale as a result of this transaction, asserting that Regale, by selling its assets to RRC, breached a contract between Thee Dollhouse and Regale. In addition, an assertion was made that one of Regale’s principals tortiously interfered with the contract between Regale and Thee Dollhouse. Regale filed a Motion to Stay Arbitration which was granted in part and denied in part, with the Court staying arbitration as to Regale’s principal and denying the stay as to Regale. As a

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

~~Notes~~Legal toProceedings ~~Consolidated Financial Statements — (Continued)~~

~~result,~~Acquisition ~~the~~Indemnification ~~arbitration~~Claim ~~as to Regale is proceeding. VCG is indemnifying~~ and ~~holding Regale harmless from this claim~~Litigation pursuant to their contract. The arbitration was originally scheduled for late October 2009, however due to illness of one of the principals of the claimant, the arbitration has been adjourned to April 26, 2010. The Company has not accrued any funds for the settlement of this litigation, as the outcome of this dispute cannot be predicted. The Company’s or a successor entity’s, indemnification obligation to Regale will continue even if any of the proposed sale transactions or an alternative transactions is consummated.

On July 24, 2007, VCG Holding Corp. was named in a lawsuit filed in the District Court of Dallas County, Texas. This lawsuit arose out of a VCG acquisition of certain assets belonging to ~~Zajkowski~~Regale, Inc. (“Regale”) by Raleigh Restaurant Concepts, Inc. (“RRC”), a wholly owned subsidiary of etVCG, in Raleigh, N.C. alThe lawsuit alleges that VCG tortiously interfered with a contract between Michael Joseph Peter and Regale and misappropriated Mr. Peter’s vspurported 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 ~~Classic~~dismissed ~~Affairs~~Mr. Peter’s ~~Litigation~~claims in their entirety. The court found that as a matter of law, VCG did not tortiously interfere with Mr. Peter’s contract with Regale and further found that VCG did not misappropriate trade secrets. Mr. Peter did not appeal that ruling and as such, the federal proceedings have concluded.

In Ancillary ~~December~~to ~~2007~~this litigation, Thee Dollhouse N.C., Inc. filed a ~~former~~claim ~~employee~~in ofarbitration ~~VCG’s~~in ~~subsidiary~~June ~~Classic~~2008 ~~Affairs,~~against ~~Eric~~Regale ~~Zajkowski,~~as ~~filed~~ a ~~lawsuit~~result inof ~~Hennepin County~~this ~~District Court~~transaction, ~~Minneapolis~~asserting that Regale, ~~Minnesota~~by ~~against~~selling ~~VCG~~its assets ~~following~~to ~~his~~RRC, ~~termination~~breached ~~from~~a ~~employment~~contract ~~alleging~~between ~~that~~Thee Dollhouse and Regale. In addition, inan assertion was made ~~connection~~that one of Regale’s principals tortiously interfered with ~~his~~the ~~employment,~~contract hebetween ~~was~~Regale ~~subject~~and Thee Dollhouse. Regale filed a Motion to ~~certain employment~~Stay ~~practices~~Arbitration which ~~violated~~was ~~Minnesota~~granted ~~law.~~in ~~The~~part ~~initial~~and denied in part, ~~action~~with ~~and~~the ~~subsequent~~court ~~pleading~~staying ~~asserted~~arbitration ~~that~~as to Regale’s principal and denying the ~~matter~~stay ~~was~~as to Regale. VCG ~~filed~~is asindemnifying aand ~~purported~~holding ~~class~~Regale ~~action.~~harmless ~~Subsequent~~from this claim pursuant to the ~~filing~~terms of the asset ~~Zajkowski’s~~purchase ~~Complaint,~~agreement ~~Zajkowski~~between ~~moved~~Regale toand ~~amend~~RRC. ~~his~~The arbitration hearing was conducted during April, ~~Complaint~~2010. toOn ~~name~~June 28, ~~additional~~2010, ~~Plaintiffs~~the arbitration panel entered an award in favor of Thee Dollhouse N.C., Inc. and ~~later~~against Regale, toInc., ~~name Classic~~awarding ~~Affairs~~Thee asDollhouse adamages ~~party~~in ~~defendant.~~the ~~VCG~~amount ~~and~~of ~~Classic~~$2,102,476, ~~Affairs~~plus ~~have~~costs ~~answered~~of ~~this~~$32,390 ~~complaint~~for ~~denying~~a ~~all~~total ~~liability~~award of $2,134,866, plus interest. ~~Classic Affairs~~The judgment has ~~also~~now been confirmed by the District Court and Regale has filed aan ~~Counter-Complaint~~appeal ~~against~~to the 4th Circuit Court Mrof Appeal. ~~Zajkowski~~ ~~based~~During ~~upon~~2010, ~~matters~~the ~~relating~~Company toaccrued ~~his~~$2,134,866, which is reported in the Consolidated ~~termination~~Statements ~~from~~of ~~employment~~Income ~~with~~as ~~Classic~~Acquisition ~~Affairs~~Indemnification Claim. The Company is accruing interest on this liability.

In On ~~December~~March 22, ~~2008 and early January 2009~~2011, the ~~parties~~Company ~~filed cross-motions for Summary Judgment~~ and ~~Zajkowski~~Mr. Peter ~~filed~~signed a ~~Motion for~~release ~~Class Certification.~~and ~~Following~~settlement ~~the~~agreement pursuant ~~motions,~~to the ~~Court issued~~Indemnification aClaim ~~series~~payment of ~~rulings~~$2,134,866 onplus ~~those Motions~~interest. InIt ~~these~~was ~~rulings, the~~agreed ~~Court has dismissed VCG as a party Defendant — having determined~~ that ~~VCG is not directly liable to Zajkowski~~the orCompany ~~the~~shall ~~other~~be ~~Plaintiffs~~responsible onfor ~~their~~two ~~claims.~~installment ~~The~~payments ~~Court~~of ~~granted Summary~~(i) a ~~Judgment~~payment toof ~~Zajkowski~~$1,000,000 as to ~~one~~be ~~issue, but did not~~paid ~~determine~~on ~~the scope~~ or ~~extent,~~before ~~if any~~April 14, of2011 ~~the~~and ~~alleged~~(ii) a ~~damages, ruling~~payment ~~this~~of ~~issue~~$1,223,934 ~~like~~plus ~~the~~accumulated ~~others,~~interest ~~are~~of ~~questions~~8.5% ~~for~~per annum afrom ~~jury~~March 1, ~~and~~ ~~the~~2011 ~~Court~~until ~~dismissed~~paid ~~two~~on ~~other~~or ~~claims~~before ~~asserted~~August 1, ~~by Zajkowski~~2011. In ~~all~~The ~~other~~total ~~respects,~~settlement ~~the~~amount ~~Court~~can ~~has~~be prepaid ~~denied~~at ~~the~~anytime ~~parties respective~~without ~~Summary~~penalty ~~Judgment~~and ~~motions~~interest.

On July 21, 2009, the Court denied Zajkowski’s and the other Plaintiffs’ Motion for Class Certification. Zajkowski appealed that decision to the Minnesota Court of Appeals and on September 22, 2009, the Court of Appeals denied Plaintiffs request for discretionary review. Plaintiffs have indicated that they do not intend to seek leave to appeal from the Minnesota Supreme Court. The parties have held mediation in November 2009 and the case was resolved. The settlement terms, including the amounts, are confidential. The lawsuit has now been dismissed, with prejudice. All related costs have been accrued or paid as of December 31, 2009.

Texas Patron Tax Litigation

Beginning January 1, 2008, VCG’s Texas ~~clubs~~nightclubs became subject to a new state law requiring the Company to collect a five dollar surcharge for every ~~club~~nightclub visitor. A lawsuit was filed by the Texas Entertainment Association, an organization in which the Company is a member, alleging that the ~~fee~~surcharge is an unconstitutional tax. On March 28, 2008, the ~~Judge~~judge of the District Court of Travis County, Texas ruled that the new state law violates the First Amendment to the U.S. ~~Constitution~~ Constitution and, therefore, the District Court’s order enjoined the state from collecting or assessing the tax. The State of Texas has appealed the District Court’s ruling. ~~When~~Under Texas law, when cities or the State of Texas give notice of appeal, the State ~~supersedes~~ of Texas intervenes and suspends the judgment, including the injunction. Therefore, the judgment of the ~~Travis County~~ District Court of Travis County cannot be enforced until the appeals are completed.

The Company has filed a lawsuit to demand repayment of the paid taxes. On June 5, 2009, the Texas Third Court of Appeals ~~for~~(serving the ~~Third District (~~Austin, Texas area) affirmed the District Court’s ~~judgment~~ judgment that the Sexually Oriented Business ~~Fee~~Tax violated the First Amendment to the U.S. Constitution. The State of Texas appealed the Court of Appeals ruling to the Texas Supreme Court. On ~~August~~February 2612, ~~2009~~2010, the Texas Supreme Court ~~ordered~~granted ~~both sides to submit briefs on~~ the ~~merits. The~~ State’s ~~brief~~Petition ~~was filed~~for onReview. ~~September 25,~~Oral arguments ~~2009~~of ~~and~~ the ~~Texas~~case ~~Entertainment Association’s~~were ~~brief~~heard ~~was filed~~ on ~~October~~March 1525, ~~2009. On February 12~~2010, ~~2010~~and the ~~Texas~~parties ~~Supreme~~are ~~Court~~currently ~~granted~~awaiting ~~the~~a ~~State’s~~decision ~~Petition~~by ~~for~~the ~~Review~~Texas ~~and~~Supreme ~~set oral arguments for March 25, 2010~~Court.

The Company paid the tax for 2008 and the first three quarters of 2009 under protest and expensed the tax for such periods. For each quarter since December 31, 2009, the Company accrued 64the tax and filed the appropriate tax returns, but did not pay the State of Texas. As of December 31, 2010, the Company has approximately $311,000 in accrued but unpaid liabilities for this tax. The Company has paid approximately $401,000, under protest, to the State of Texas since the inception of this tax.

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

~~Notes~~DOL ~~to Consolidated~~Audit ~~Financial Statements —~~ (~~Continued~~PT’s Showclub)

~~The~~ In ~~Company~~March 2009, ~~has~~VCG ~~expensed~~was ~~approximately~~placed ~~$290,000~~under a nationwide Department of Labor (“DOL”) self-audit of employee payroll for ~~the~~all ~~year~~nightclub locations and its corporate office. All locations completed the ~~ended~~self-audit ~~December 31,~~in August 2009 and ~~$203~~are currently working with the DOL to determine what,~~000~~ ~~for~~if any, violations may have occurred. A summary meeting was held with the ~~year~~DOL ~~ended~~and Company counsel on March ~~December~~19, 2010. The DOL presented its preliminary findings of violations. A meeting was held on May 3120, 2010 ~~2008~~in ~~for~~which ~~the~~DOL ~~Texas~~and ~~Patron~~Company ~~Tax~~counsel agreed to continue negotiations at a later date. The Company ~~accrued,~~believes ~~but~~it ~~did~~has ~~not~~corrected ~~pay~~all processes that resulted in the potential violations. This case is ~~fourth~~ still in the investigatory state and no final determination can be made at this time of the outcome ~~quarter~~or ~~estimated~~any ~~tax~~potential liability. ofAfter discussion with Company counsel on this case, the Company accrued $71200,000 as of December 31, 2009, for potential wage/hour violations. ~~The~~This ~~Company~~accrual ~~has~~and any estimate ~~paid,~~of ~~under~~potential ~~protest~~liability have not changed as of December 31, ~~approximately~~2010. ~~$422~~The DOL made an administrative change in investigators,~~000~~ ~~with~~requiring the ~~State~~settlement ofnegotiation to be extended. The Company expects ~~Texas~~to ~~for~~have a resolution by the ~~two~~second ~~year~~quarter ~~period~~of 2011.

~~Department of~~Texas ~~Labor~~Sales ~~and~~Tax ~~Immigration and Customs Enforcement~~Audit ~~Reviews~~

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

In ~~October 2008~~July 2010, ~~PT’s® Showclub~~ inthe ~~Louisville,~~Company KYreceived ~~was~~notice ~~required~~from tothe ~~conduct~~Texas aComptroller’s ~~self-~~Office that the audit ofperiod ~~employee~~would ~~payroll~~be byextended ~~the~~to ~~DOL.~~include ~~After~~the anperiod ~~extensive~~of ~~self-audit~~October 1, it ~~was~~2006 ~~determined~~to ~~that (a)~~April ~~the~~1, ~~club~~2008, ~~incorrectly~~which ~~paid~~period ~~certain~~pre-dates ~~employees~~the ~~for~~Company’s ~~hours~~ownership ~~worked~~of ~~and~~the ~~minimum~~nightclub. ~~wage~~Under ~~amounts and (b)~~ the ~~club~~purchase ~~incorrectly~~agreement ~~charged~~by ~~certain~~which ~~minimum wage~~the ~~employees~~Company ~~for~~acquired ~~their~~the ~~uniforms. As a result~~nightclub, the ~~DOL~~Company ~~required~~is ~~that the~~fully ~~club~~indemnified ~~issue~~by ~~back~~the ~~pay~~seller ~~and~~for ~~refund~~any ~~uniform expenses to qualified~~liability ~~employees~~arising atfor athe ~~total~~pre-acquisition ~~cost of $14,439~~period.

In The ~~March 2009, VCG was placed under a similar nationwide DOL~~ audit ~~for~~is ~~all~~complete; ~~nightclub~~however, ~~locations~~the ~~and~~Company ~~its~~is ~~corporate~~disputing ~~office.~~certain ~~All locations~~of ~~completed~~ the ~~self-~~audit inresults. ~~August~~As ~~2009 and are~~of ~~currently~~December 31, ~~working~~2010, ~~with~~approximately ~~the DOL to determine what~~$283,000 ifwas ~~any~~accrued, ~~violations~~ ~~may~~with ~~have~~an ~~occurred.~~offsetting ~~This~~receivable ~~case is still in the~~of ~~investigatory~~approximately ~~state~~$146,000 ~~and~~expected noto ~~final determination can~~ be ~~made~~collected ~~at this~~from ~~time~~the ofseller. anDuring ~~unfavorable~~February 2011, ~~outcome~~the ~~or any potential liability.~~Company ~~After~~paid ~~discussion~~$173,336 ~~with~~of ~~outside~~the ~~legal~~undisputed ~~counsel~~tax ~~on this case~~assessment, ~~the Company~~of ~~has~~which ~~accrued~~approximately $~~200~~118,000 asrelated ofto ~~December 31, 2009 for~~the ~~potential~~pre-acquisition ~~wage/hour~~period ~~violations.~~and Athe ~~summary~~Company ~~meeting~~is ~~has tentatively~~pursuing ~~been scheduled with~~ the ~~DOL~~seller ~~and~~for ~~counsel~~reimbursement ~~on March 15,~~under ~~2010 to finalize~~ the indemnification ~~liability~~provisions. The Company ~~believes~~ itexpects ~~has~~a ~~corrected~~resolution ~~all~~of ~~processes~~the ~~that~~disputed ~~resulted~~tax inby the second ~~potential~~quarter ~~violations~~of 2011.

~~Immigration and~~Litigation ~~Customs~~Associated ~~Enforcement~~with ~~(“ICE”)~~the ~~Reviews~~Going Private Transaction

On ~~June~~July 30, ~~2009~~2010, ~~PT’s® Showclub~~ ina ~~Portland,~~complaint ~~Maine~~ was ~~served~~filed ain ~~subpoena~~Colorado bystate ~~ICE requesting~~court, ~~documents~~First toJudicial ~~conduct~~District, Jefferson anCounty ~~I-9~~District ~~audit.~~Court, ~~ICE~~challenging ~~requested~~the ~~all original~~Going ~~I-9’s~~Private ~~for~~Transaction. ~~both~~The ~~current~~complaint ~~and~~was ~~past~~filed by ~~employees~~David ~~from September 14~~Cohen, ~~2007~~Timothy ~~(club~~Cunningham, ~~acquisition~~Gene ~~date)~~Harris, toDean ~~June 30, 2009~~R. ~~ICE~~Jakubczak ~~conducted~~and ~~the~~William ~~audit~~C. toSteppacher, ~~ensure~~Jr. derivatively ~~proper~~on ~~use~~behalf of ~~the~~VCG ~~I-9 form~~and toas ~~confirm~~a ~~that~~class ~~the~~action ~~club~~on ~~verified~~behalf ~~employees’~~of ~~right~~themselves ~~to work~~and inother ~~the United States. The club complied with the subpoena~~similarly ~~submitting~~situated ~~all~~stockholders ~~requested~~against ~~documents by July~~Mr. 16Lowrie, ~~2009~~Mr. ~~As of March~~ 12Ocello, ~~2010,~~Martin ~~ICE~~A. isGrusin, ~~still~~Robert ~~reviewing~~J. ~~the~~Mcgraw, ~~requested documents~~Jr., Carolyn ~~This~~Romero, ~~matter~~George isSawicki, ~~still~~David inLevine, ~~its~~Family ~~investigatory~~Dog, ~~stage~~FD ~~and no~~Acquisition ~~determination~~Co., ofLowrie ~~potential violations or liability has been~~Investment ~~made~~Management, Inc., NoLowrie ~~amounts~~Management ~~have~~LLLP, ~~been~~and ~~accrued~~VCG ~~related~~(as toa ~~this~~nominal ~~audit~~defendant). ~~While ICE~~The ~~initially discussed taking this audit to all clubs, no~~plaintiff’s ~~formal~~complaint ~~actions~~has ~~have~~since been ~~taken~~amended ~~by ICE to begin that process~~twice. ~~This audit is still isolated to Maine.~~

The second amended complaint was filed by the plaintiffs on January 15, 2011 and was accepted by the court as of January 24, 2011. In the second amended complaint, the plaintiffs ~~Internal~~challenge the merger agreement and the Going Private Transaction, but they drop their derivative ~~Revenue~~claim ~~Service~~and purport only to bring a class action on behalf of themselves and all similarly situated stockholders. In the second amended complaint, the plaintiffs allege, among other things, that: the Going Private Transaction consideration of $2.25 per share payable to VCG’s non-executive group stockholders upon the closing of the Going Private Transaction, if at all, is inadequate; Mr. Lowrie has a conflict of interest with respect to the Going Private Transaction; the individual defendants have breached their fiduciary duties under Colorado law in connection with the Going Private Transaction; and the proxy statement filed by VCG with the SEC on December 23, 2010 contains certain omissions and misleading statements. The second amended complaint seeks, among other relief, certification of the plaintiffs as class representatives, an injunction directing the members of VCG’s board of directors to comply with their fiduciary duties and enjoining them from consummating the Going Private Transaction, an accounting of alleged damages suffered by the plaintiffs and the class, an award of the costs and disbursements of maintaining the action including reasonable attorneys’ and experts’ fees, and such other relief the court deems just and proper.

~~The~~ On ~~IRS~~January 28, ~~audited PT’s® Showclub~~2011, inVCG ~~Denver~~moved ~~for~~to stay the ~~years~~state ~~2006,~~court ~~2007,~~proceedings ~~and~~pending ~~2008~~the toresolution ~~determine~~of ~~tip~~the ~~reporting~~parallel ~~compliance.~~federal ~~Every~~lawsuit ~~business~~described ~~with customary~~below ~~tipping must report annually~~ on ~~Form 8027~~ the ~~total~~ ~~sales~~grounds ~~from~~that ~~food~~the ~~and~~two ~~beverage~~actions ~~operations,~~are substantially ~~charge~~the ~~sales~~same, ~~total~~ ~~tips~~arise ~~reported,~~out ~~and~~of ~~charge~~the ~~tips~~same ~~reported.~~operative ~~The~~facts, ~~audit~~seek ~~was based~~the ~~upon~~same ~~this~~relief, ~~Form~~and totrying both ~~determine~~actions ~~compliance~~would ~~with~~be ~~the~~a ~~amended Section 3121(q)~~waste of ~~the~~both ~~Internal~~judicial ~~Revenue~~and ~~Code~~corporate resources. The ~~audit~~plaintiffs ~~was~~oppose the ~~conducted~~motion byto anstay. ~~examining~~On February 11, ~~agent~~2011, inthe ~~Denver~~plaintiffs inmoved ~~August~~for ~~and September~~expedited ~~2009~~discovery. The ~~audit~~defendants opposed ~~focused on~~ the ~~data~~motion ~~reported~~for ~~on Form 8027~~expedited ~~and~~discovery. ~~related~~The ~~underlying~~court ~~documentation.~~denied ~~It included~~ the ~~agent~~motion ~~examining~~to ~~information~~stay ~~contained~~and indenied the ~~daily sales~~ ~~packages~~motion ~~generated~~for byexpedited ~~the club~~discovery.

~~The audit resulted in a determination that cash tips for that club were under-reported in the three years examined. The tax assessed as a result of this under-reporting was $~~61~~,500.~~ Penalties and interest were not assessed. The IRS auditor indicated that all other clubs would be audited and recommended that a Point of Sale (“POS”) system should be installed in every club to ensure compliance with IRS regulations. Upon completion of this audit, the Company began an intensive self-audit for the three year period using the same procedures followed by the IRS agent. This resulted in an initial accrual of $394,000 in estimated taxes to cover the estimated liability as of September 30, 2009. Subsequent discussions with the IRS agent removed 2006 from the audit period, replacing that year with 2009. The Company has submitted workpapers prepared for the self-assessment to the IRS agent for the

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

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

~~periods~~ On ~~2007~~January 28, ~~2008~~2011, ~~and~~VCG ~~2009.~~filed ~~The~~its ~~agent~~answer ~~has tentatively indicated that these workpapers and test period could be used~~ to ~~determine~~ the ~~ultimate~~federal ~~tip~~complaint ~~reporting~~denying ~~rate~~the bymaterial allegations ~~club.~~therein Asand adenying ~~result of~~that the ~~completion~~plaintiff ofis ~~the~~entitled ~~self-assessment~~to ~~process~~judgment ~~for~~on ~~the~~any ~~three years~~of ~~under~~his ~~examination,~~claims ~~the Company has reduced the estimated~~or ~~liability~~any byrelief ~~$187,000~~whatsoever. toVCG’s ~~approximately~~answer ~~$207,000~~also asasserts ~~of December 31,~~certain ~~2009~~defenses.

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

In• ~~connection~~the ~~with~~termination ~~the~~fee ~~Proposal~~payable ~~concerning~~by the ~~proposed~~Company ~~Going Private~~to ~~Transaction~~Family Dog, in the event that the Company ~~has~~terminates ~~been~~the ~~served~~Merger ~~with~~Agreement ~~three complaints~~to ~~filed~~enter byinto ~~various~~a ~~plaintiffs,~~Company ~~alleging~~Acquisition ~~that~~Agreement ~~they~~(as ~~bring purported~~defined ~~derivative~~in ~~and~~the ~~class~~Merger ~~action~~Agreement) ~~lawsuits~~involving ~~against~~a Superior Acquisition Proposal (as defined in the ~~Company~~ ~~and~~Merger ~~each~~Agreement) offrom certain parties described in the ~~individual~~Merger ~~members~~Agreement, ofwill be reduced from $600,000 to $100,000; • the ~~Board~~terms ~~on behalf~~of the stipulation of ~~themselves~~settlement will include, among other things and ~~all~~subject ~~others~~to ~~similarly~~certain ~~situated~~terms and ~~derivatively~~ onconditions, ~~behalf~~a full, final, and complete release of ~~the~~any ~~Company~~and all known and unknown claims, ~~which~~liabilities, ~~previously~~or damages, that were brought or could have been ~~reported~~brought in the ~~Company’s~~State ~~Current~~Action ~~Reports~~and ~~on Form 8-K (filed~~the Federal Action, or that relate to the Merger Agreement and the merger, including filings with the SEC onrelating ~~November 19,~~to ~~2009~~the Merger Agreement and the merger; • the Company, ~~November 24~~or its successors, ~~2009~~ will pay any fees and ~~December 7~~expenses of the plaintiffs in such actions awarded by the court up to $67,500, ~~2009)~~following final approval from the state court and petition by the plaintiffs for an award of fees and expenses; and • the Federal Action will be dismissed with prejudice after certification of the class and approval of the stipulation of settlement in the state court action.

On November 13, 2009, the Company was served with a complaint filed by David Cohen in the District Court in Jefferson County, Colorado. In the complaint, Mr. Cohen alleges that he brings the purported class action lawsuit against the Company and each of the individual members of the Board on behalf of the Company’s stockholders. The ~~complaint~~ ~~alleges,~~terms ~~among other things, that Troy Lowrie, the Company’s Chairman~~ of the ~~Board~~MOU ~~and~~are ~~Chief~~conditioned ~~Executive Officer,~~upon ~~has~~final ~~conflicts~~approval ofby ~~interest with respect to~~ the ~~Proposal and~~state ~~that in connection with the Board’s evaluation of the Proposal, the individual defendants have breached their fiduciary duties under Colorado law~~court. ~~The complaint seeks, among~~ other things, certification of Mr. Cohen as class representative, either an injunction enjoining the defendants from consummating or closing the Going Private Transaction, or if the Going Private Transaction is consummated, rescission of the Going Private Transaction, an award of damages in an amount to be determined at trial and an award of reasonable attorneys’ and experts’ fees.

OnJohnson ~~November 20, 2009, the Company was served with a~~Litigation complaint filed by Gene Harris and William C. Steppacher, Jr. in the District Court in Jefferson County, Colorado. In the complaint, the plaintiffs purport to bring a derivative and class action lawsuit against the Company and each of the individual members of the Board on behalf of themselves and all others similarly situated and derivatively on behalf of the Company. The complaint alleges, among other things, that Mr. Lowrie has conflicts of interest with respect to the Proposal and that the individual defendants have breached their fiduciary duties under Colorado law in connection with the Proposal. The complaint seeks, among other things, certification of the plaintiffs as class representatives, an injunction directing the Board members to comply with their fiduciary duties, an accounting to the plaintiffs and the class for alleged damages suffered or to be suffered based on the conduct described in the complaint, an award of the costs and disbursements of maintaining the action, including reasonable attorneys’ and experts’ fees, and such other relief the court deems just and proper.

On ~~December~~October 327, ~~2009~~2010, ~~the~~a ~~Company~~complaint was ~~served with a complaint~~ filed byagainst ~~David~~the J.Company ~~Sutton~~in ~~and~~the ~~Sandra~~United ~~Sutton~~States ~~in the~~ District Court infor ~~Jefferson~~the ~~County,~~District ~~Colorado.~~of ~~In the complaint~~Maine, ~~the~~ ~~plaintiffs~~in ~~purport to bring~~ a ~~class action~~ lawsuit ~~against the~~captioned ~~Company~~Johnson ~~and~~et ~~each~~al. ofv. ~~the~~VCG ~~individual~~Holding ~~members of the Board on behalf of themselves and all others similarly situated~~Corp. The ~~complaint~~Company ~~alleges, among other things, that Mr. Lowrie~~ has ~~conflicts~~ ofnot ~~interest~~been ~~with~~formally ~~respect~~served ~~to the Proposal and that the individual defendants have breached their fiduciary duties under Colorado law in connection~~ with the ~~Proposal. The complaint seeks~~lawsuit, ~~among other things~~however, ~~certification of~~ the ~~plaintiffs as class representatives~~Company, anvia ~~injunction~~its ~~directing the Board to comply with their fiduciary duties and enjoining the Board from consummating the Proposal~~attorneys, ~~imposition of a constructive trust in~~has ~~favor~~agreed ofto ~~the~~accept ~~plaintiffs~~service ~~and the class upon any benefits improperly received by the defendants, an award~~ of the ~~costs and disbursements of maintaining the action, including reasonable attorneys’ and experts’ fees, and such other relief the court deems just and proper~~complaint.

The ~~plaintiffs~~complaint inwas ~~the~~filed ~~three~~by ~~lawsuits~~two ~~have~~former ~~moved~~employees toof ~~consolidate all~~one ~~three~~ of the ~~lawsuits~~Company’s ~~(the~~subsidiaries, ~~“Class Action and~~Kenkev ~~Derivative~~II, ~~Suits”)~~Inc. ~~into~~d/b/a ~~one~~PT’s® ~~suit~~Showclub ~~together~~Portland, ~~with~~Maine awho ~~fourth~~allege that the Company misclassified them as ~~lawsuit~~tipped ~~arising~~minimum ~~out~~wage ofemployees ~~the~~while ~~Proposal~~employed ~~for~~by the ~~proposed~~Company ~~Going Private~~as ~~Transaction~~disk jockeys and, inas ~~which~~a ~~the~~result, failed ~~Company~~to ~~was~~pay ~~not~~all ~~named~~wages due to them under applicable law. The action is plead as a class action and ~~defendant,~~seeks ~~filed~~to certify a class action on ~~December 11,~~behalf ~~2009~~of byall ~~Brandon~~similarly ~~Ostry~~situated inemployees who are employed by the ~~District~~Company ~~Court~~nationwide. inIn ~~Jefferson County~~addition, ~~Colorado~~the ~~against~~two named plaintiffs allege that the Company failed to pay ~~Mr. Lowrie~~them ~~and~~all ~~Lowrie~~wages ~~Management,~~required ~~LLLP.~~to ~~The~~be paid to them under Maine law.

The Company intends to deny all liability in this matter; however, this matter is in its earliest stages and the Company’s ultimate liability cannot be predicted at this time. Discovery 66has just commenced and no evaluation can be made as the merits of this claim. As such, the Company has not accrued anything related to this action.

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

~~Notes~~Louisville ~~to Consolidated~~Ordinance ~~Financial~~Litigation ~~Statements — (Continued)~~

In 2004, Kentucky Restaurant Concepts, Inc. d/b/a PT’s® Showclub (“KRC”) filed suit in the ~~Company~~Jefferson ~~provided~~County ~~additional~~Circuit ~~details~~Court challenging a recently enacted adult regulatory ordinance which would impose significant restrictions on adult entertainment in Jefferson County, Kentucky. The suit challenged the ~~Ostry~~legality, ~~lawsuit~~under inthe ~~its~~Kentucky State Constitution, of certain restrictions that ~~Current~~Jefferson ~~Report~~County was seeking to impose on adult businesses, such as a substantial restriction on ~~Form 8-K filed~~hours ~~with~~of ~~the~~operation, ~~SEC~~a prohibition on ~~December 17~~the sale of alcohol by adult entertainment establishments, ~~2009~~and other similar restrictions, which in the view of management would likely result in decreased revenues. ~~The~~Initially ~~court~~a ~~has~~temporary injunction was issued prohibiting enforcement of the ordinance ~~indicated~~during ~~that~~the itlitigation. ~~will~~After ~~consider~~substantial litigation, the ~~consolidation~~Jefferson ~~motion~~County ifCircuit ~~and~~Court upheld the ~~when~~constitutionality of the ~~plaintiffs~~ordinance, ~~move~~but ~~for~~granted ~~class~~a ~~certification~~stay on its implementation pending appeal. AsKRC along with other co-appellants appealed the order to the Kentucky Court of Appeal who affirmed the constitutionality ~~date~~of the ordinance. Thereafter, KRC and others appealed the decision to the ~~hereof~~Kentucky Supreme Court which held oral argument on the appeal in 2009. On April 22, 2010, the Kentucky ~~plaintiffs~~Supreme Court affirmed in part, reversed in part and remanded the case to the lower court. The Kentucky Supreme Court’s ruling upheld the constitutionality of a majority of the restrictions. KRC and others have ~~not~~appealed ~~yet~~the ~~moved~~Kentucky ~~for~~Supreme ~~class~~Court’s decision to the United ~~certification~~States Supreme Court, which declined to hear the appeal during March 2011.

As The ~~of the date hereof, the~~ Company ~~believes that the allegations made in each of the Class Action and Derivative Suits are baseless and the Company~~ intends to ~~vigorously~~deny ~~defend~~all ~~itself. The~~liability Company has not accrued any reserves for damages or for the settlement of these lawsuits as the outcome of the disputes cannot be predicted. Further, the uncertainty over the potential outcome of the Class Action and Derivative Suits has increased in ~~light of subsequent events. As described elsewhere in~~ this ~~Annual~~matter; ~~Report on Form 10-K~~however, on ~~December 16,~~this ~~2009,~~matter ~~the~~is ~~Special~~in ~~Committee of the~~its ~~Company’s~~earliest ~~Board~~stages ~~rejected the Proposal concerning the proposed Going Private Transaction as then-currently inadequate~~ and, ~~as previously disclosed in~~ the Company’s ~~Current Report~~ultimate ~~on Form 8-K filed~~liability ~~with~~cannot ~~the~~be ~~SEC~~predicted onat ~~February 17,~~this ~~2010,~~time. onDiscovery ~~February 17,~~has ~~2010,~~just ~~the~~commenced ~~Company entered into the Letter of Intent with Rick’s concerning the proposed Merger. Currently, the Class Action~~ and ~~Derivative~~no ~~Suits~~evaluation ~~only pertain~~can tobe ~~the~~made ~~Proposal~~as ~~for~~ the ~~proposed~~merits ~~Going~~of ~~Private Transaction~~this ~~and not the proposed Merger~~claim. ~~However~~As such, ~~it is possible that~~ the ~~plaintiffs in the Class Action and Derivative~~Company ~~Suits~~has ~~will~~not ~~attempt~~accrued toanything ~~amend their complaints to make claims~~ related to ~~the~~this ~~proposed Merger or that these plaintiffs or others persons may file one or more new lawsuits related to it~~action.

~~Pursuant~~ In addition to the ~~terms~~matters ofdescribed above, the Company’s ~~Articles~~is ~~of Incorporation~~involved ~~and~~in ~~stand-alone~~various ~~indemnification~~other ~~agreement the~~legal ~~Company~~proceedings ~~has~~that ~~entered~~arise ~~into~~in ~~with~~the ~~its~~ordinary ~~Directors~~course ~~and~~of ~~executive officers,~~business. ~~the~~The Company ~~may~~believes bethat ~~required~~any toadverse ~~advance expenses to and~~or ~~indemnify~~positive ~~the~~outcome ~~Directors~~of ~~and~~any ~~Mr. Lowrie~~of ~~from~~these ~~expenses involved~~proceedings inwill ~~defending~~not ~~against~~have ~~the~~a ~~lawsuits~~material ~~described~~effect ~~above.~~on ~~The Company has discussed~~ the ~~risks and costs associated with such~~consolidated ~~indemnification~~operations ~~under~~of the ~~heading “Risk Factors~~Company.”

~~The~~Employment ~~Company~~Contracts isand ~~involved~~Termination inof ~~various~~Employment ~~other~~and ~~legal~~Change ~~proceedings that arise~~ in ~~the~~Control ~~ordinary course of business. The Company believes~~Arrangements ~~the outcome of any of these proceedings will not have a material effect on the consolidated operations of the Company.~~

On December 4, 2008, the Company entered into five-year employment agreements with Troy Lowrie, the Company’s Chairman of the Board and Chief Executive Officer, and Micheal Ocello, the Company’s President, Chief Operating Officer. The agreements with each of Mr. Lowrie and Mr. Ocello expire on December 4, 2013, but each has an automatic renewal for an additional five-year period unless either party thereto provides written notice that the agreement shall not be extended and renewed. In the event that the Company does not renew the initial term of an officer’s employment agreement, the Company is required to pay the officer severance in an amount equal to three times the sum of the officer’s base salary in effect upon termination of the employment agreement plus an amount equal to the highest bonus the officer received in the three years before termination, if any.

The employment agreements provide for an annual base salary payable to each officer of $700,000, subject to review at least every 24 months and potential upward adjustments as determined by the Company’s board. In addition, bonuses, if any, are payable at the discretion of the Company’s board. Each officer is entitled to certain benefits such as health, dental, disability, long term care, paid time off, use of a leased automobile and other fringe benefits as well as participation in the Company’s incentive, savings, retirement, profit sharing, perequisites and other programs, as approved by the Company’s board.

Pursuant to the terms of the employment agreements, if an officer’s employment is terminated by reason of such officer’s “death” or “disability,” the Company will continue paying the officer’s base salary plus an amount equal to the highest bonus the officer received in the three years before termination, if any, for a period of one year following such termination. In addition, health insurance coverage for the officer and his family will continue for three years following such termination. In the event that an officer’s employment is terminated as a result of the officer’s “disability,” the Company will also pay certain amounts in respect of the officer’s disability benefits and long-term care policy. If an officer’s employment is terminated for “cause” or without “good reason,” the Company will pay the officer his base salary through the date of termination and will have no further obligations to the officer. Each officer has the right to terminate the employment agreement for “good reason” within nine months following a “change of control” of the Company.

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

If the Company terminates an officer’s employment other than for “cause,” “death,” or “disability,” or an officer terminates his employment for “good reason,” the officer will be entitled to a severance payment equal to three times the sum of the officer’s base salary in effect upon termination plus an amount equal to the highest bonus the officer received in the three years before termination, if any. In addition, health insurance and disability benefits will be paid by the Company for three years (or until such earlier time that the officer accepts other employment) following such termination of employment and certain outstanding but unvested options held by the officer at the time of termination, if any, will become immediately vested and exercisable for a period of 180 days following such termination.

The employment agreements provide that during the employment period and for one year following the termination of the employment agreement by the Company with “cause” or by the officer without “good reason,” each officer may not compete with the Company within a 25-mile radius of any nightclub owned or operated by the Company or any of its affiliates. The employment agreements also contain customary confidentiality, non-solicitation, and non-disparagement covenants.

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

Finally, Mr. Lowrie’s employment agreement provides that if his employment is terminated for any reason, the Company must also take all necessary steps to remove Mr. Lowrie as a guarantor of any Company (or its affiliates) obligations to any third party. In the event that the Company is not successful in doing so, the Company must pay to Mr. Lowrie a cash amount equal to 5% per year of the aggregate amount he is continuously guaranteeing until such time as Mr. Lowrie no longer guarantees the obligations.

13) Fair Value of Financial Instruments

The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. ~~We adopted ASC 820-10 on January 1, 2008.~~ This guidance defines fair value, establishes a framework to measure fair value, and expands disclosures about fair value measurements. ASC 820-10 establishes a fair value hierarchy used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The carrying amounts reported in the accompanying consolidated balance sheets for cash ~~and cash equivalents~~, accounts and other receivables, and trade accounts payable approximate fair value because of the immediate or short-term maturities of these financial instruments. As of December 31, ~~2009~~2010 and ~~2008,~~ 2009, our total debt was approximately $3024,~~747~~923,000 and $3630,~~457~~747,000; , respectively. The total debt had a fair value of $2924,~~748~~508,000 and $3629,~~396~~748,000 at December 31, ~~2009~~2010 and ~~2008;~~2009, respectively. ~~The~~ The fair value of the debt was estimated using significant unobservable inputs (Level 3) and was computed using a discounted cash flow model using estimated market rates, adjusted for our credit risk as of December 31, ~~2009~~2010 and ~~2008~~ 2009.

Our disclosure of the estimated fair value of our financial instruments is made in accordance with the requirements of ASC 825-10, Financial Instruments. The estimated fair value amounts ~~have~~ have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data in order to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts we could realize in a current market exchange. The use of different market assumptions and estimation methodologies may have a material effect on the estimated fair value amounts. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2010 and 2009.

64 67

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

~~Notes~~14) ~~to Consolidated~~Potential ~~Financial~~Sale of the Company ~~Statements — (Continued)~~

~~available~~ On ~~market~~November 9, ~~information~~2010, ~~and~~the ~~appropriate~~Company ~~valuation methodologies.~~entered ~~However,~~into ~~considerable~~an ~~judgment~~Agreement isand ~~required~~Plan ~~to interpret~~of ~~market~~Merger ~~data~~(the in“Merger Agreement”) ~~order~~with toFamily ~~develop~~Dog, ~~the~~LLC ~~estimates~~(“Parent”), ofFD ~~fair value~~Acquisition Co. ~~Accordingly~~(“Merger Sub”), the ~~estimates~~Company’s Chairman ~~presented~~of ~~herein~~the ~~are~~Board ~~not necessarily~~and ~~indicative~~Chief ofExecutive ~~the~~Officer, ~~amounts~~Troy weLowrie, ~~could~~and ~~realize~~the inCompany’s aPresident and ~~current~~Chief ~~market~~Operating ~~exchange~~Officer, Micheal Ocello. ~~The~~Under ~~use~~the terms of ~~different~~the ~~market~~Merger ~~assumptions and~~Agreement, ~~estimation~~Merger ~~methodologies~~Sub ~~may~~will be ~~have~~merged awith ~~material~~and ~~effect~~into on the ~~estimated~~ ~~fair~~Company, ~~value~~with ~~amounts.~~the ~~The~~Company ~~fair~~continuing ~~value~~as ~~estimates~~the ~~presented~~surviving corporation and ~~herein~~becoming ~~are~~a ~~based~~wholly-owned onsubsidiary ~~pertinent~~of ~~information~~Parent ~~available~~(the ~~to management~~“Merger”). asParent ofand ~~December 31,~~Merger ~~2009~~Sub are currently owned and ~~2008~~controlled by Mr. Lowrie.

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

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

The transaction is expected to close in the second quarter of 2011. Upon the closing of the InGoing ~~January~~Private ~~2010~~Transaction, the Company’s ~~entered~~Common ~~into~~Stock awill ~~10%~~no ~~fixed~~longer ~~note~~be ~~with~~traded on the NASDAQ Global anStock ~~individual~~Market inand the ~~amount~~Company ofwill ~~$100,000.~~cease ~~The~~reporting ~~note~~to isthe ~~unsecured, interest~~U.S. ~~only,~~Securities and ~~due~~Exchange ~~January 2011~~Commission.

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

~~As previously reported on the Company’s Current Reports on Form 8-K (filed with the Securities and Exchange Commission (“SEC”~~15) onSubsequent ~~November 4, 2009, November 19,~~Events 2009, November 25, 2009, December 7, 2009 and December 17, 2009), on November 3, 2009, the Company received a non-binding letter of intent (the “Proposal”) from the Company’s Chairman and CEO, Troy Lowrie, Lowrie Management, LLLP, an entity controlled by Mr. Lowrie, and certain other unidentified investors (collectively, the “Lowrie Investors”), to acquire all of the outstanding common stock of the Company for $2.10 per share in cash (the “Going Private Transaction”). The Proposal contemplated that the Company would no longer be a public reporting or trading company following the closing of the Going Private Transaction. In response to the Proposal, the Board formed a Special Committee consisting solely of directors who are independent under the NASDAQ Global Market (“NASDAQ”) independence rules to review and evaluate the Proposal. The Special Committee was formed in order to properly and fairly represent the best interests of the Company’s stockholders in a full and diligent evaluation of the Proposal and any alternatives thereto in order to maximize stockholder value. The members of the Special Committee are George Sawicki, Kenton Sieckman and Carolyn Romero CPA. The Special Committee retained a financial advisor and independent legal counsel to assist the Special Committee in its evaluation of the Proposal and alternatives thereto. On December 16, 2009, the Special Committee informed the Lowrie Investors that it had determined, with input from its advisors, that the terms of the Proposal were currently inadequate, and the Special Committee directed its financial advisors to contact any parties that had either previously expressed an interest or might potentially be interested in pursuing a transaction with the Company.

InRelated ~~connection~~Party with the Proposal, the Company has been served with three complaints (the “Complaints”) filed by various plaintiffs, alleging that they bring purported derivative and class action lawsuits against the Company and each of the individual members of the Board on behalf of themselves and all others similarly situated and derivatively on behalf of the Company, which previously have been reported in the Company’s Current Reports on Form 8Long-~~K (filed~~term ~~with the SEC on November 19, 2009, November 24,~~Debt 2009 and December 7, 2009). The Complaints allege, among other things, that the consideration in the Proposal is inadequate, that Mr. Lowrie has conflicts of interest with respect to the Proposal and that in connection with the Board’s evaluation of the Proposal, the individual defendants have breached their fiduciary duties under Colorado law. The Complaints seek, among other things, certification of the individual plaintiffs as a class representative, either an injunction enjoining the defendants from consummating or closing the Going Private Transaction, or if the Going Private Transaction is consummated, rescission of the Going Private Transaction, an injunction directing the Board members to comply with their fiduciary duties, an award of damages in an amount to be determined at trial, an accounting to the Plaintiffs and the class for alleged damages suffered or to be suffered based on the conduct described in the Complaint, an award of reasonable attorneys’ and experts’ fees, and such other relief the court deems just and proper. As of the date hereof, the Company believes that the allegations set forth in the Complaints are baseless and the Company intends to vigorously defend itself in the lawsuits.

On January 4, 2011, the Company prepaid $100,000 on the $5,700,000 loan from Lowrie Management LLLP. The note is interest only at 10%. The maturity date is June 30, 2012. 68

Third Party Long-term Debt

On January 7, 2011, the Company renegotiated the maturity date on a loan in the amount of $250,000 from due on demand to a maturity date of November 6, 2011. No other changes were made to the terms of the loan. On February 3, 2011, the Company prepaid $50,000 of the balance due.

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

~~Notes~~Execution ~~to Consolidated~~of ~~Financial~~Asset Purchase Agreement for Classic Affairs, Inc. ~~Statements — (Continued)~~

As On ~~reported~~March 22, on2011, the Company’s ~~Current~~and ~~Report~~its ~~on Form 8~~wholly-Kowned subsidiary, Classic Affairs, Inc., a ~~filed~~Minnesota ~~with~~corporation (the ~~SEC~~“Subsidiary”), onentered ~~February 17,~~into ~~2010,~~an Asset Purchase Agreement (the ~~Company~~“Purchase Agreement”) with RCI Dining Services MN (4th Street), Inc., a Minnesota corporation (the “Purchaser”). The Purchaser is a subsidiary of Rick’s Cabaret International, MrInc. ~~Lowrie~~, ~~and~~a ~~Lowrie~~Texas corporation ~~Management~~(“Rick’s”). Pursuant to the Purchase Agreement, ~~LLLP~~the Subsidiary would sell to the ~~(collectively~~Purchaser all assets associated with ~~Mr. Lowrie~~the Subsidiary’s adult entertainment cabaret known as Schiek’s Palace Royale located in Minneapolis, MN (the “~~Lowrie~~Club”), ~~entered~~excluding bank accounts, cash, credit card ~~into~~receipts aand ~~non-binding~~ATM ~~(except~~purchases as toof the closing date, certain ~~provisions~~corporate books and records, ~~including~~certain ~~exclusivity~~software, and ~~confidentiality)~~rights ~~letter~~or ofinterests ~~intent~~in ~~(the~~certain pending or existing litigation. The purchase price to ~~“Letter~~be paid at closing consists of ~~Intent”).~~$3,050,000 ~~Pursuant~~in cash, subject to adjustment, up or down, within 90 days after the ~~Letter~~closing date for the amounts of ~~Intent~~certain liabilities, cash on hand, credit card ~~Rick’s~~receivables, ~~agreed~~prepaid toexpenses ~~acquire~~and ~~all~~other credits existing as of the ~~outstanding~~closing ~~shares~~date. ofThe Purchaser ~~common~~would ~~stock~~not assume any of the ~~Company~~Subsidiary’s ~~and~~liabilities ~~the~~other ~~Company~~than ~~will~~those ~~merge~~associated with ~~and~~any assigned ~~into~~leases ~~Rick’s~~related orto athe ~~wholly-owned~~transferred ~~subsidiary~~assets. The Purchase Agreement contains ordinary and customary provisions for agreements of ~~Rick’s~~this nature, such as representations, warranties, closing conditions, ~~(the~~covenants ~~“Merger”)~~and indemnification obligations. In ~~the~~accordance ~~event~~with the ~~Merger~~Purchase ~~is consummated~~Agreement, closing of the ~~Company~~transaction will ~~become~~take aplace ~~subsidiary~~after all applicable licenses and permits required to operate the Club have been obtained. Further, the closing of ~~Rick’s~~the sale is contingent upon, among other ~~and~~conditions, the ~~Company’s~~Purchaser ~~stockholders~~concluding ~~will~~its ~~become~~due ~~stockholders~~diligence investigation of the Club and the premises ~~Rick’s~~discussed below and being satisfied with the results thereof. The parties ~~intend~~do ~~that~~not expect to close the ~~Merger~~sale ~~will~~of ~~be structured~~the toClub ~~qualify~~before asthe aconsummation ~~tax-free~~of ~~reorganization~~the ~~under~~Going Private Transaction contemplated by the ~~Internal~~Merger ~~Revenue~~Agreement. ~~Code~~If ofthe ~~1986~~closing has not occurred by June 15, as2011, ~~amended~~the Purchase Agreement may be terminated by any party to the Purchase Agreement.

~~Pursuant~~ The toSubsidiary currently leases the ~~Letter~~building ofin ~~Intent,~~which the ~~Company’s stockholders~~Club ~~will~~is ~~receive~~operated ~~shares~~from of4th ~~common~~Street Partnership ~~stock~~LLLP, ofa ~~Rick’s in~~Minnesota ~~exchange~~limited ~~for~~liability ~~their~~limited ~~shares~~partnership (“Fourth Street”), of ~~the~~which the Company’s ~~common~~wholly-owned ~~stock based~~subsidiary onVCG anReal ~~exchange~~Estate ~~ratio~~Holdings, ~~that~~Inc., ~~values~~a ~~each~~Colorado ~~share~~corporation, ofis the ~~Company’s~~general ~~common~~partner ~~stock~~holding ~~between~~a $20.2001% ~~and~~membership $3interest.80 ~~per share.~~ The ~~applicable~~Company ~~exchange~~is ~~ratio~~currently ~~will be determined based on~~ the ~~weighted~~ ~~average~~guarantor ~~closing price~~ of ~~Rick~~the Subsidiary’s ~~common~~obligations ~~stock~~under ~~on NASDAQ for~~ the 20lease. ~~consecutive~~The ~~trading~~Purchase ~~days~~Agreement ~~ending~~provides onthat ~~the~~RCI ~~second~~Holdings, Inc., ~~trading~~a ~~day~~Texas ~~prior~~corporation toand ~~the~~affiliate ~~closing~~ of the ~~Merger.~~Purchaser In (the ~~event~~“Land ~~the price~~Purchaser”), ~~per~~would ~~share~~acquire ~~of Rick’s common stock as determined by~~from ~~this~~Fourth ~~formula~~Street isthe ~~below~~real ~~$8.00,~~property ~~Rick’s~~on ~~may~~which ~~terminate~~ the ~~Merger~~ ~~agreement,~~Club ~~subject~~is tooperated ~~the~~for ~~payment~~a topurchase ~~the~~price ~~Company~~ of ~~a termination~~$3,250,000 ~~fee to be negotiated by the parties~~ in ~~connection~~ ~~with~~cash. Upon the ~~preparation~~sale of the ~~Merger~~real ~~agreement.~~property, ~~Assuming~~ the ~~Merger~~ ~~were~~existing tolease ~~close~~would onbe ~~March 11,~~terminated ~~2010,~~and the ~~weighted~~Company’s ~~average~~guaranty ~~closing price per share~~ of ~~Rick’s common stock for~~ the 20lease ~~consecutive~~would ~~trading~~be ~~days~~released ~~ending~~pursuant onto ~~March 9, 2010 $13.95 per share,~~ the ~~value~~terms of ~~each~~a ~~share~~termination ofagreement ~~the~~to ~~Company’s~~be ~~common~~entered ~~stock~~into ~~under~~at ~~this~~the ~~formula would be $2~~closing.~~85 per share.~~

~~Contemporaneously~~ The ~~with~~Purchase ~~the~~Agreement ~~closing~~also ofrequires ~~the~~that ~~Merger, Rick’s has agreed to acquire 5,770,197 shares of~~ the ~~Company’s~~ common stock held by Lowrie and its affiliates (the “Lowrie Common Stock”) for cash in an amount equal to the lesser of $2.44 per share or the per share value of the common stock received by the Company~~’s stockholders in the Merger. At Lowrie’s election~~, ~~Lowrie may receive Rick’s common stock, at~~ the ~~same exchange ratio received by the Company’s stockholders in the Merger~~Subsidiary, ~~for up to 30% of the Lowrie Common Stock. In addition,~~ Mr. Lowrie ~~will (i) refinance (at a lower interest rate)~~ and ~~continue to~~ ~~carry a $5~~Mr.~~7 million~~ ~~note~~Ocello ~~from~~enter ~~the~~into ~~Company~~a ~~(as~~non-competition ~~acquired~~agreement ~~by Rick’s),~~pursuant ~~(ii) continue~~ to ~~personally~~which ~~guarantee~~they ~~certain Company~~would ~~obligations~~each inagree ~~exchange~~ for a ~~to-be-determined fair~~ ~~market~~period ~~value~~of ~~cash~~five ~~payment~~years ~~for~~not ~~such guarantees, (iii) sell~~ to ~~Rick’s the outstanding capital stock of Club Licensing~~compete, ~~Inc.,~~ aeither ~~wholly-owned~~directly ~~subsidiary~~or ~~of Lowrie Management~~indirectly, ~~LLLP~~with ~~that owns~~ the ~~trademarks “Diamond Cabaret” and “PT’s~~Purchaser,” (the ~~“Trademarks”),~~Club ~~and~~or ~~(iv) enter~~any ~~into~~of atheir ~~three-year consulting agreement with Rick’s (collectively~~affiliates, ~~the~~by ~~“Lowrie Transactions”). In exchange for the Lowrie Transactions~~owning, ~~Lowrie~~participating ~~will~~or ~~receive~~operating ~~the following:~~an ~~(a) a~~establishment ~~to-be-determined~~featuring ~~amount equal to the fair~~live ~~market~~female ~~value~~nude ofor ~~the~~semi-nude ~~restructuring~~entertainment ofin the ~~$5.7 million~~seven ~~note and~~county, ~~continued personal guarantees (currently estimated to be $2 million); (b) a to~~twin-~~be-determined~~city ~~amount~~metropolitan ~~equal~~area ~~to the fair market value~~ of ~~the Trademarks (currently estimated to~~ ~~be $5 million); and (c) payment of $1~~Minneapolis-St.~~0 million over~~ ~~three years and a monthly expense allowance equal to $1~~Paul,~~500 under~~ ~~the~~consisting ~~consulting agreement. Assuming Lowrie elects to be paid solely in cash at a price~~ of ~~$2.44~~Hennepin, ~~per~~Ramsey, ~~share~~Scott, ~~of the Company’s common stock and the fair market value of the Lowrie Transactions is as set forth above (totaling $7.0 million)~~Washington, Lowrie will receive aggregate payments of approximately $26.8 million (which amount includes the restructuring of the existing $5.7 million note held by Mr. Lowrie and excludes payments under the consulting agreement) in connection with the MergerDakota, ofAnoka ~~which approximately $16.8 million will be payable in cash at the closing of the Merger~~ and ~~$10.0 million will be payable pursuant to a~~Carver ~~four-year promissory note from Rick’s bearing interest at 8~~counties.~~0% per annum.~~

The ~~Letter~~Purchase ofAgreement ~~Intent~~prohibits ~~provided~~the ~~for~~Company aand ~~binding exclusivity period through March 12, 2010, which~~ the ~~parties~~Subsidiary ~~have~~from ~~extended~~offering to ~~March 31,~~ ~~2010,~~sell ~~during which time the Company has agreed,~~or onsoliciting ~~behalf~~any ofoffer ~~itself and its representatives,~~ to ~~negotiate exclusively~~purchase ~~with~~or ~~Rick’s~~engaging ~~and~~in ~~has further agreed not to solicit~~ any ~~offer~~discussion or ~~engage~~activities inof any ~~negotiations other than with~~nature ~~Rick’s~~whatsoever, ~~for~~directly ~~the~~or ~~merger~~indirectly, ~~sale~~involving ofin ~~the~~any ~~business~~manner ~~or assets of~~ the ~~Company~~actual or ~~tender~~potential orsale, ~~exchange~~transfer, encumbrance, ~~offer~~pledge, ~~for~~collateralization ~~the~~or ~~Company’s common~~hypothecation ~~stock.~~of In the ~~event~~Club ~~the~~until ~~Company receives an unsolicited offer that is superior to~~ the ~~terms~~closing ofor the ~~Merger (a~~ ~~“Superior~~termination ~~Proposal”) and Rick’s does not amend its offer within five business days~~ of the ~~date~~Purchase onAgreement. ~~which~~The ~~it receives~~Purchase ~~notice~~Agreement ofcontains ~~such~~other ~~Superior~~customary ~~Proposal to be superior to the~~covenants ~~Superior Proposal~~concerning, ~~then~~among ~~the~~other ~~Company~~things, ~~may~~access ~~terminate~~to ~~the~~information, ~~Letter~~operation of ~~Intent.~~ If the ~~Company~~business ~~terminates~~between ~~the Letter~~ execution of ~~Intent~~the ~~due~~letter ~~to its receipt~~ of aintent ~~Superior~~and ~~Proposal,~~termination itthereof ~~has agreed to reimburse Rick’s for its out-of-pocket expenses~~ and ~~fees~~transaction ~~incurred in evaluating and~~expenses.

VCG Holding Corp.

Notes to Consolidated Financial Statements — (Continued)

negotiating the Merger in an amount not to exceed $250,000 in the aggregate. If a definitive Merger agreement is not entered into by March 31, 2010, the Letter of Intent will automatically terminate, unless further extended by the parties.

The Merger agreement is expected to contain customary representations and warranties including the absence of a material adverse change in the business of Rick’s and the Company prior to closing and other customary closing conditions, including but not limited to, the receipt of material consents, the approval of the Merger by the stockholders of Rick’s and the Company and the effectiveness of a registration statement containing a joint proxy statement/prospectus filed with the SEC on Form S-4 to be filed by Rick’s, which, among other things, registers the shares of common stock to be issued to the Company’s stockholders in the Merger. There can be no assurance that the Company, Rick’s and Lowrie will enter into a definitive Merger agreement, that the entry into a definitive Merger agreement, if any, will result in the closing of any transaction or that the terms of any definitive Merger documents will reflect the terms of the proposed Merger as outlined in the Letter of Intent. See the discussion under the heading, “Risk Factors.”

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Effectiveness of Disclosure Controls and Procedures.

Our management, with the participation of our Chief Executive Officer and Acting Principal Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Acting Principal Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report (i) were appropriately designed to provide reasonable assurance of achieving their objectives and (ii) were effective and provided ~~reasonable~~ reasonable assurance that the information required to be disclosed by us in reports filed under the U.S. Securities Exchange Act of 1934, as amended (“Exchange Act”) is (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to our management, including our Chief Executive Officer and Acting Principal Chief Financial Officer, as appropriate to allow timely decisions regarding ~~required~~ required disclosure.

Management’s Annual Report on Internal Control over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act as a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our ~~Board~~board of ~~Directors~~directors, management ~~and~~ and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

	•		pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of our assets;

	•		provide reasonable assurance that transactions are recorded, as necessary, to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

	•		provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

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

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, ~~2009~~ 2010 using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on this assessment using those criteria, our management concluded that, as of December 31, ~~2009~~2010, our internal control over financial reporting was effective. ~~The effectiveness of our internal~~ control over financial reporting as of December 31, 2009 has been audited by Causey Demgen & Moore Inc., our independent registered public accounting firm, as stated in its report, which appears under Item 8.

This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permits the Company to provide only management’s report in this Annual Report.

Changes in Internal Control Over Financial Reporting.

No change in our internal control over financial reporting occurred during our fourth quarter of fiscal ~~2009~~2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.

67 71

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Background of our Directors and Executive Officers

The following table sets forth ~~certain~~ information about our ~~Directors~~ directors and ~~Executive~~certain ~~Officers~~of our executive officers presented as of March 1129, 2011 and provides their respective ages and positions with us. ~~2010~~None of these persons has been convicted in a criminal proceeding during the past five years (excluding traffic violations or similar misdemeanors), and none of these persons has been a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws or a finding of any violation of federal or state securities laws. All of our directors and executive officers are citizens of the United States, and can be reached at VCG Holding Corp, 390 Union Boulevard, Suite 540, Lakewood, Colorado 80228.

Name	Age		Position
				Term
Troy Lowrie(4),(6)		44	Chairman of the Board and Chief Executive Officer
Name	Age		Positions	Expires
Micheal Ocello(4),(6)		50	Director, Chief Operating Officer, and President
Troy Lowrie (4),(6)		45	Chairman of the Board and Chief Executive Officer and Acting Principal Chief Financial Officer		2013
Courtney Cowgill(7)		56	Chief Financial and Accounting Officer, Secretary, and Treasurer
Micheal Ocello (7)		51	Chief Operating Officer and President		-
Robert McGraw, Jr.(2),(3),(5)		55	Director
Robert McGraw, Jr. (2),(3),(5)		56	Director		2013
Carolyn Romero(1),(5)		51	Director
Martin Grusin (6)		67	Director		2012
Martin Grusin(6)		65	Director
George Sawicki (1),(2),(3),(5)		51	Director		2011
Kenton Sieckman(1),(2),(3),(5)		48	Director
David Levine (1),(2),(3),(5)		63	Director		2011
George Sawicki(1),(2),(3),(5)		50	Director

(1)		Member of the ~~Audit~~audit ~~Committee~~committee
(2)		Member of the ~~Governance~~governance and ~~Nominating~~nominating ~~Committee~~committee
(3)		Member of the ~~Compensation~~compensation ~~Committee~~committee
(4)		Member of the Executive ~~Committee~~committee
(5)		Independent ~~Board~~board member
(6)		Non-independent ~~Board~~board member who is currently not serving on any ~~Committee~~committee
(7)		~~Advisor~~Mr. toOcello ~~the~~is ~~Executive~~an ~~Committee~~advisor ~~and~~to ~~Chief Financial and Accounting Officer who joined~~ the ~~Company on June 19, 2008~~board

The Company’s ~~Directors~~directors are elected to hold office for three-year terms and until their respective successors have been duly elected and qualified. ~~At the April 2007 Board of Directors~~ ~~Meeting, the Board voted to amend the Bylaws and to divide the Directors into three classes, one of which includes three Directors and two of which includes two Directors.~~

~~The~~ Our ~~following~~executive ~~table~~officers ~~shows~~serve at the ~~terms~~pleasure of ~~each~~the ~~current~~board ~~Director:~~until their resignation, termination, or death. There are no family relationships among any of our officers and/or directors.

Name		Term
Troy Lowrie		2007 - 2010
Micheal Ocello		2009 - 2012
Robert McGraw Jr.		2007 - 2010
Carolyn Romero		2009 - 2010
Martin Grusin		2009 - 2012
Kenton Sieckman		2008 - 2011
George Sawicki		2008 - 2011

Provided below are descriptions and the backgrounds of our executive officers and directors and their principal occupations for the past five years:

~~Our~~ Troy ~~Executive~~Lowrie. ~~Officers~~Mr. Lowrie ~~serve~~has atbeen the ~~pleasure~~Chairman of the ~~Board~~board ~~until~~since April 2002 and Chief ~~their~~Executive ~~resignation~~Officer since November 2002. Mr. Lowrie is President of Lowrie Investment Management Inc., ~~termination~~which is the sole manager of Family Dog and also one of two general partners of Lowrie Management LLLP, ora ~~death~~Colorado limited liability limited partnership, which formerly owned and operated adult entertainment nightclubs and is now an investment entity. ~~There~~Mr. Lowrie ~~are~~serves noas ~~family~~the ~~relationships~~managing ~~among~~partner ~~any~~of Lowrie Management LLLP and has sole voting and dispositive power of ~~our~~the ~~officers~~shares of VCG’s Common Stock owned by Lowrie Management LLLP. Mr. Lowrie was the owner and~~/or~~ President of ~~Directors~~International Entertainment Consultants, Inc. (“IEC”), a company engaged in the business of managing adult entertainment nightclubs, from 1982 to October 2003, when it was acquired by VCG. Mr. Lowrie is also the President, Secretary and Treasurer of Family Dog and FD Acquisition Co. Mr. Lowrie’s leadership skills and experience in the adult nightclub industry, among other factors, led VCG’s board of directors to conclude that he should serve as a director. Mr. Lowrie is a U.S. citizen.

68 ~~Provided below are descriptions and the backgrounds of our Executive Officers and Directors and their principal occupations for the past five years:~~

Troy Lowrie. Mr. Lowrie has been the Chairman of the Board since April 2002 and Chief Executive Officer since November 2002. Mr. Lowrie is President of Lowrie Investment Management Inc., the General Partner of Lowrie Management LLLP, a Colorado limited liability limited partnership, which formerly owned and operated

~~adult~~ Micheal ~~entertainment~~Ocello. ~~nightclubs~~Mr. Ocello has been the President and isChief ~~now~~Operating anOfficer ~~investment~~of ~~entity.~~VCG since MrApril 2002. He served as a director of VCG between since April ~~Lowrie~~2002 ~~was~~and October 2010. Mr. Ocello is the owner and President of ~~International~~ Unique Entertainment Consultants, Inc., ~~(IEC)~~of St. Louis, Missouri, a management company ~~engaged~~that has specialized in the ~~business~~ management of ~~managing~~nightclubs ~~adult~~since ~~entertainment~~1995. ~~nightclubs~~The principal address and phone number for Unique Entertainment Consultants, ~~from~~Inc., ~~1982 to~~of ~~October~~St. ~~2003~~Louis, ~~when~~Missouri itis ~~was~~6161 Clifton ~~acquired~~Oaks byPl. ~~the~~and ~~Company~~(618) 271-9420. Mr. ~~Lowrie~~Ocello has ~~served~~been asaffiliated ~~President~~with ofIEC ~~Western~~in ~~Country~~a managerial ~~Clubs,~~capacity ~~Inc~~since 1982., aHe ~~public~~is ~~company~~currently ~~specializing~~the inPresident ~~large~~of ~~country~~IEC. Mr. Ocello is also the sole member and ~~western~~manager ~~bars~~of ~~with~~LTD ~~live~~Investment ~~music~~Group, ~~from~~LLC, ~~1992~~a toMissouri ~~1996~~limited ~~and~~liability ~~President~~company ofused by Mr. Ocello for ~~New~~investment ~~Millennium~~purposes. ~~Media~~LTD Investment Group, ~~Inc.~~LLC currently owns 158,000 ashares ~~public~~of ~~company~~our ~~which~~Common ~~sells~~Stock, ~~rotating~~all ~~print~~of ~~advertising~~which ~~equipment~~will ~~and~~be ~~full~~contributed ~~movement~~to ~~video billboards.~~Family ~~Mr. Lowrie~~Dog ~~has~~in aconnection Mwith the transactions contemplated by the merger agreement.A. inHe ~~Finance~~is ~~from~~President of the ~~University~~ Association of ~~Denver~~Club inExecutives ~~Denver~~(ACE National, ~~Colorado~~the national ~~and~~trade association for the adult nightclub industry), a ~~B.A.~~private incompany, ~~Business~~President of the ~~from~~Illinois ~~Fort Lewis~~Club ~~College~~Owners inAssociation, ~~Durango~~a private company, ~~Colorado.~~and past Vice Chairman and current board ~~Mr. Lowrie~~member ~~has~~of ~~not~~Missouri’s ~~served~~Small onBusiness ~~any~~Regulatory ~~other~~Fairness ~~public~~Board, a private company ~~board~~. Mr. ~~Lowrie’s~~Ocello ~~leadership~~has served ~~skills~~as ~~and~~a ~~experience in~~commissioned ~~the~~police ~~adult~~officer ~~nightclub~~for ~~industry,~~the ~~among~~Village ~~other~~of ~~factors~~Brooklyn, ~~led~~Illinois ~~the Board~~since toearly ~~conclude~~2009. ~~that~~Mr. Ocello heis ~~should serve as~~ a ~~director~~U.S. citizen.

~~Micheal~~ Robert ~~Ocello~~McGraw, Jr. Mr. ~~Ocello~~McGraw has been a ~~Director,~~ ~~President,~~director ~~and Chief Operating Officer~~ of ~~the~~VCG ~~Company~~ since ~~April~~ November 2002. ~~Mr. Ocello~~A ~~is the owner and President of~~Certified ~~Unique~~Public ~~Entertainment~~Accountant ~~Consultants,~~since ~~Inc.~~1982, ~~of St~~Mr. ~~Louis, Missouri,~~McGraw ais ~~management~~President ~~company~~of ~~that~~McGraw ~~has~~and ~~specialized~~McGraw inCPA, ~~the management~~PC of ~~nightclubs since 1995~~Westminster, Colorado. ~~Mr. Ocello~~The ~~has~~principal ~~been affiliated~~address ~~with~~and ~~IEC~~phone innumber afor ~~managerial~~McGraw ~~capacity~~and ~~since~~McGraw ~~1982.~~CPA, HePC is ~~currently~~ ~~the~~7260 ~~President~~Osceloa Street ofand ~~IEC~~303-427-6641. ~~Over his career,~~ Mr. ~~Ocello has been affiliated with more than 25 adult entertainment nightclubs including all PT~~McGraw’s~~® Showclubs,~~ ~~Diamond Cabaret®, The~~firm ~~Penthouse Club®, and~~specializes ~~Shotgun Willies located~~ in ~~Denver; PT’s® Showclub~~accounting infor ~~Colorado Springs; The Penthouse Club®~~restaurants, ~~The~~ ~~Platinum Club~~lounges, ~~Roxy’s~~ and ~~PT’s® Showclubs~~small ~~in St~~businesses. ~~Louis;~~ ~~Schieks Palace Royale in Minneapolis;~~ The ~~Men’s~~practice ~~Club~~consists inof ~~Raleigh;~~income ~~Jaguars~~tax inpreparation, ~~Dallas and~~financial ~~Ft. Worth;~~statement ~~Imperial Showgirls Gentlemen’s Club in Anaheim~~preparation, and ~~the~~small ~~Olympic~~business ~~Garden~~consulting. ~~in Las Vegas~~Mr. McGraw He is ~~President~~currently ~~of the~~licensed ~~Association~~in ~~of Club Executives (ACE National,~~ the ~~national trade~~State ~~association for the adult nightclub industry), President~~ of ~~the~~Colorado ~~Illinois Club Owners Association,~~ and ~~past Vice Chairman and current Board member of Missouri’s Small Business Regulatory Fairness Board. He~~ is a ~~past Vice President and board~~ member of the ~~Free~~American ~~Speech~~Institute ~~Coalition. Mr. Ocello attended the University~~ of ~~Missouri,~~Certified ~~Kansas~~Public ~~City~~Accountants ~~from 1977 to 1978~~ and ~~the~~ ~~United~~Colorado ~~States~~Society ~~Military~~of ~~Academy at West Point from 1979 to~~Certified ~~1981~~Public Accountants. Mr. ~~Ocello~~McGraw ~~was~~served ~~originally~~on ~~elected~~VCG’s toaudit ~~the~~committee ~~Mehlville Board of Education in 2006 and was re-elected~~ for anhalf ~~additional three~~the ~~year term in~~ 2009~~. Mr.~~ ~~Ocello~~year ~~has~~and ~~served as a~~still ~~commissioned~~serves ~~Police~~on ~~Officer~~VCG’s ~~for~~compensation ~~the~~and ~~Village~~governance ofand ~~Brooklyn~~nominating committee, ~~Illinois~~ ~~since~~and ~~early~~is ~~2009.~~an ~~Mr. Ocello~~independent ~~has not served on any~~member ~~other~~of ~~public~~VCG’s ~~company~~ board of directors. Mr. ~~Ocello~~McGraw’s ~~industry experience~~accounting and ~~leadership~~financial ~~roles in the adult entertainment industry~~experience, among other factors, led ~~the~~VCG’s ~~Board~~board of directors to conclude that he should serve as a director. Mr. McGraw is a U.S. citizen.

~~Courtney~~ Martin ~~Cowgill~~Grusin. Ms Mr. ~~Cowgill~~Grusin has been ~~Chief~~ ~~Financial~~a ~~and~~director ~~Accounting~~of ~~Officer,~~VCG ~~Corporate Secretary, and Treasurer~~ since ~~June 2008~~July 2005. MsMr. ~~Cowgill~~Grusin ~~served~~has ~~as Chief~~practiced ~~Financial~~law ~~Officer~~as ~~and~~an ~~Treasurer~~attorney offor ~~Oceanic~~his ~~Exploration~~firm ~~Company, a~~the ~~publically~~Law ~~held~~Office ~~oil~~of ~~and~~Martin ~~gas exploration company~~Grusin, ~~from~~P.C. ~~May~~since ~~2003 to June 2008~~1973. ~~She~~The ~~has more than 30 years of accounting~~principal ~~experience,~~address ~~including~~and ~~three~~phone ~~year~~

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