VCGH Vcg Holding Corp. (MM)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

SCHEDULE 14A

(RULE 14a-101)

INFORMATION REQUIRED IN
PROXY STATEMENT
SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No.)

Filed by the Registrant þ
Filed by a Party other than the Registrant o

Check the appropriate box:

þ		Preliminary Proxy Statement.
o		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)).
o		Definitive Proxy Statement.
o		Definitive Additional Materials.
o		Soliciting Material Pursuant to §240.14a-12.

 

VCG HOLDING CORP.

(Name of Registrant as Specified in its Charter)

 

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box):

o		No fee required.
þ		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

	(1)		Title of each class of securities to which transaction applies:
			VCG Holding Corp. common stock, par value $0.0001 per share
	(2)		Aggregate number of securities to which transaction applies:
			11,153,193 shares of VCG’s common stock.
	(3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
			Calculated solely for the purpose of determining the filing fee. The maximum aggregate transaction value was determined based upon the product of (i) 11,153,193 shares of VCG’s common stock (based on the number of shares outstanding on December 23, 2010), multiplied by (ii) the merger consideration of $2.25 per share (the “Total Consideration”). No consideration will be paid for any option because the exercise price of all outstanding options exceeds the per share merger consideration. The filing fee, calculated in accordance with Section 14(g) of the Securities Exchange Act of 1934, as amended, and Rule 0-11(c)(1) promulgated thereunder, was determined by multiplying the Total Consideration by the applicable fee at the time of payment.
	(4)		Proposed maximum aggregate value of transaction:
			$25,094,684.25
	(5)		Total fee paid:
			$1,789.25

o		Fee paid previously with preliminary materials.
o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.

	(1)		Amount Previously Paid:
	(2)		Form, Schedule or Registration Statement No.:
	(3)		Filing Party:
	(4)		Date Filed:

 

PRELIMINARY COPY SUBJECT TO COMPLETION — DATED DECEMBER 23, 2010

 

SPECIAL MEETING OF SHAREHOLDERS

[ * ], 2011

 

[ * ], 2011

 

Dear Fellow Shareholder:

 

You are cordially invited to attend a special meeting of shareholders of VCG Holding Corp., a Colorado corporation, to be held on [ * ], 2011 at [ * ] Mountain time, at [ * ] Lakewood, Colorado. The accompanying proxy statement provides information regarding the matters to be acted on at the special meeting, including any adjournment or postponement thereof.

 

At the special meeting, you will be asked to consider and vote upon a proposal to approve the Agreement and Plan of Merger that we entered into on November 9, 2010 with Family Dog, LLC, a Colorado limited liability company, its wholly-owned subsidiary, FD Acquisition Co., our Chairman of the Board and Chief Executive Officer, Troy Lowrie, and our President and Chief Operating Officer, Micheal Ocello. If both (i) holders of record of a majority of VCG Holding Corp.’s outstanding common stock, as of [ * ], and (ii) a majority of the votes actually cast at the special meeting, vote to adopt and approve the merger agreement, and the other conditions in the merger agreement are satisfied or waived, FD Acquisition Co. will be merged with and into VCG Holding Corp. and VCG Holding Corp. will survive as a privately-held, wholly-owned subsidiary of Family Dog, LLC. The votes cast by shares of VCG Holding Corp.’s common stock beneficially owned by Messrs. Lowrie and Ocello will not be taken into account for purposes of determining whether the requisite shareholder vote in clause (ii) has been received, which we refer to in the accompanying proxy statement as the “majority of the minority” shareholder approval or vote.

 

Pursuant to the terms of the Agreement and Plan of Merger, if the merger agreement is approved and the merger is consummated, each share of VCG Holding Corp.’s common stock (except for shares held by us, Messrs. Lowrie and Ocello, certain of their affiliates, and shareholders 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). In addition, all outstanding options to purchase VCG Holding Corp.’s common stock will be cancelled at the effective time of the merger without any consideration either because they are unvested, or, in the case of vested options, the per share exercise price of all outstanding options is greater than the merger consideration of $2.25 per share. Based on the closing sale price for VCG Holding Corp.’s common stock on July 21, 2010, the last trading day before public announcement of the proposal that resulted in the merger agreement, the merger consideration represented a 36.4% premium over the price per share of VCG Holding Corp.’s common stock prior to the announcement of the execution of the merger agreement.

 

On November 9, 2010, our board of directors, after considering numerous factors, including the unanimous determination and recommendation of a special committee comprised entirely of independent directors, unanimously determined (with Mr. Lowrie taking no part in the vote) that the Agreement and Plan of Merger is advisable, fair to and in the best interests of VCG Holding Corp. and our shareholders. In arriving at their determination and recommendation, our board of directors and the special committee of our board of directors carefully considered a number of factors which are described in the accompanying proxy statement. Our board of directors unanimously recommends (with Mr. Lowrie taking no part in such recommendation) that you vote “FOR” the approval of the Agreement and Plan of Merger.

When you consider the recommendation of our board of directors to approve the Agreement and Plan of Merger, you should be aware that some of our directors and executive officers have interests in the merger that may be different from, or in addition to, the interests of our shareholders generally.

 

The accompanying proxy statement provides you with detailed information about the special meeting and the Agreement and Plan of Merger. You are urged to read the entire document carefully. You may also obtain more information about us from documents we have previously filed with the Securities and Exchange Commission.

 

Regardless of the number of shares you own, your vote is very important.

 

If you fail to vote on the Agreement and Plan of Merger, the effect will be the same as if you had voted against the approval of the Agreement and Plan of Merger for purposes of calculating whether a majority of the outstanding shares of our common stock entitled to vote at the special meeting have voted to approve the Merger Proposal, but will be neutral with respect to calculating whether a majority of the minority shareholders has approved the Merger Proposal, as further described in the accompanying proxy statement. Once you have read the accompanying proxy statement, please vote on the proposals submitted to our shareholders at the special meeting, whether or not you plan to attend the meeting, by signing, dating and mailing the enclosed proxy card or by voting your shares by Internet at [ * ] using the instructions on your proxy card. If you receive more than one proxy card because you own shares that are registered in different names or through entities, please vote all of your shares shown on all of your proxy cards. If your shares are held in “street name,” your broker will be unable to vote your shares without instructions from you. You should instruct your broker to vote your shares, following the procedures provided to you by your broker. Failure to instruct your broker to vote your shares will have exactly the same effect as if you failed to vote as described above.

 

Voting by proxy will not prevent you from voting your shares in person in the manner described in the accompanying proxy statement if you subsequently choose to attend the special meeting in person.

 

On behalf of your board of directors, thank you for your cooperation and support.

 

Sincerely,

 

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE MERGER, OR PASSED UPON THE FAIRNESS OR MERITS OF THE AGREEMENT AND PLAN OF MERGER OR THE ADEQUACY OR ACCURACY OF THE INFORMATION CONTAINED IN THE ENCLOSED PROXY STATEMENT. ANY CONTRARY REPRESENTATION IS A CRIMINAL OFFENSE.

 

The accompanying proxy statement is dated [ * ], 2011, and it and the proxy card are first being mailed to shareholders on or about [ * ], 2011.

 

VCG HOLDING CORP.

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON [ * ], 2011.

 

To the Shareholders of VCG Holding Corp.:

 

A special meeting of shareholders of VCG Holding Corp., a Colorado corporation (“VCG”) will be held at [ * ] Lakewood, Colorado, on [ * ], 2011 at [ * ], Mountain Time, for the following purposes:

 

1. To consider and vote on a proposal to adopt and approve the Agreement and Plan of Merger, dated as of November 9, 2010, by and among VCG Holding Corp., Family Dog, LLC, FD Acquisition Co., Troy Lowrie and Micheal Ocello.

 

2. To consider and vote on a proposal to approve any motion to adjourn or postpone the special meeting to another time or place if necessary to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the foregoing proposal.

 

3. To transact such other business as may properly come before the special meeting or any adjournment or postponement thereof.

 

The accompanying proxy statement further describes the matters to be considered at the special meeting. A copy of the merger agreement has been included as Appendix A to this proxy statement.

 

Our board of directors unanimously recommends (with Mr. Lowrie taking no part in such recommendation) that you vote “FOR” proposals 1 and 2.

 

When you consider the recommendation of our board of directors to approve the merger agreement, you should be aware that some of our directors and executive officers have interests in the merger that are different from, or in addition to, the interests of our unaffiliated shareholders.

 

Our board of directors has set [ * ], 2011 as the record date for the special meeting. Only holders of record of shares of VCG’s common stock at the close of business on [ * ], 2011 will be entitled to notice of and to vote at the special meeting and any adjournment or postponement thereof. The special meeting will begin promptly at [ * ], Mountain Time.

 

Regardless of the number of shares you own, your vote is very important. The affirmative vote of both (i) the holders of a majority of the outstanding shares of VCG’s common stock entitled to vote at the special meeting, and (ii) a majority of the votes actually cast at the special meeting is required to adopt and approve the merger agreement. Any votes cast by shares beneficially owned by either of Messrs. Lowrie or Ocello will not be taken into account for any purpose when determining whether the requisite vote set forth in clause (ii) has been achieved (e.g. in calculating votes cast in favor or total votes cast). The affirmative vote of the votes actually cast at the special meeting is required to adopt and approve any adjournment or postponement proposal.

 

Holders of our common stock who do not vote in favor of the adoption of the merger agreement are entitled to assert dissenters’ rights under Article 113 of the Colorado Business Corporation Act, subject to the provisions of such act. Those asserting their dissenters’ rights will have the right to obtain payment in cash of the fair value of their shares if the merger is completed provided they submit a written notice in compliance with Article 113 of the Colorado Business Corporation Act of their intention to demand payment for their shares prior to the vote on the merger agreement and if they further comply with the Colorado law procedures explained in the accompanying proxy statement. When a record shareholder dissents with respect to the shares held by any one or more beneficial shareholders, each such beneficial shareholder must certify to VCG that the beneficial shareholder and the record shareholder have asserted, or will timely assert, dissenters’ rights as to all such shares as to which there is no limitation on the ability to exercise dissenters’ rights. See “Dissenters’ Rights” beginning on page 71 of the accompanying proxy statement. Article 113 of the Colorado Business Corporation Act is attached as Appendix C to the accompanying proxy statement.

To ensure your representation at the special meeting, please complete and return the enclosed proxy card or submit your proxy by Internet at [ * ]. Please submit your proxy promptly whether or not you expect to attend the special meeting. Submitting a proxy now will not prevent you from being able to vote at the special meeting by attending in person and casting a vote. If you hold your shares in “street name” through a bank, broker or other nominee, you must obtain a legal proxy from such custodian in order to vote in person at the meeting. You should not send in your certificates representing shares of VCG common stock until you receive instructions to do so.

 

By Order of the Board of Directors,

 

 

Tenicia Bradley
Secretary

 

Lakewood, Colorado

TABLE OF CONTENTS

 

 

TABLE OF CONTENTS — (Continued)

 

 

TABLE OF CONTENTS — (Continued)

 

 

TABLE OF CONTENTS — (Continued)

 

PRELIMINARY COPY SUBJECT TO COMPLETION — DATED DECEMBER 23, 2010

 

VCG Holding Corp.

390 Union Boulevard, Suite 540
Lakewood, Colorado 80228

 

PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD [ * ], 2011

 

The board of directors of VCG Holding Corp., a Colorado corporation, is soliciting proxies to be used at our special meeting of shareholders to be held at [ * ] Mountain Time on [ * ], 2011 at [ * ] Lakewood, Colorado. This proxy statement contains important information regarding VCG’s special meeting, the proposals on which you are being asked to vote, information you may find useful in determining how to vote and voting procedures. In this proxy statement, the terms “VCG,” “the Company,” “we,” “our,” and “us” refer to VCG Holding Corp. and its subsidiaries.

 

VCG’s board of directors is sending these proxy materials on or about [ * ], 2011 to all shareholders who owned shares of VCG’s common stock at the close of business on [ * ], which date is also referred to in this proxy statement as the “record date.”

 

The special meeting is held for the following purposes:

 

1. To consider and vote on a proposal to adopt and approve the Agreement and Plan of Merger, dated as of November 9, 2010, by and among VCG Holding Corp., Family Dog, LLC, FD Acquisition Co., Troy Lowrie and Micheal Ocello.

 

2. To consider and vote on a proposal to approve any motion to adjourn or postpone the special meeting to another time or place if necessary to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the foregoing proposal.

 

3. To transact such other business as may properly come before the special meeting or any adjournment or postponement thereof.

 

The following summary and the “Questions and Answers About the Special Meeting” immediately following this summary are intended only to highlight certain information contained elsewhere in this proxy statement. This summary and the following questions and answers section may not contain all the information that is important to you. To more fully understand the proposed merger and the terms of the merger agreement, as well as the other matters described below, you should carefully read this entire proxy statement, all of its appendices, and the documents incorporated by reference into this proxy statement before voting. See “Where You Can Find More Information” on page 83. Where appropriate, we have set forth a page reference directing you to a more complete description of the topics described in this summary. Capitalized terms used but not defined in this summary are defined in the sections referred to in each heading or as otherwise indicated below.

 

The Proposals (see page 53)

 

You are being asked to consider and vote on a proposal to adopt and approve the Agreement and Plan of Merger, dated as of November 9, 2010, by and among VCG, Family Dog, LLC, which we refer to in this proxy statement as “Family Dog,” FD Acquisition Co., Troy Lowrie and Micheal Ocello, as the same may be amended from time to time. We refer to the Agreement and Plan of Merger as the “merger agreement” and we refer to the proposal to approve the merger and the merger agreement as the “Merger Proposal” in this proxy statement. If the shareholders approve the Merger Proposal and the other conditions to the closing of the merger are satisfied or waived, upon closing of the merger, FD Acquisition Co. will be merged with and into VCG and VCG will continue as the surviving corporation. VCG’s current shareholders will no longer have a

direct or indirect equity interest in VCG (unless they are members of Family Dog, such as Messrs. Lowrie and Ocello) and VCG’s common stock will no longer be listed on the NASDAQ Global Market, which we refer to as “NASDAQ” in this proxy statement, as a result of the merger. Throughout this proxy statement we refer to the VCG shareholders, other than Messrs. Lowrie and Ocello and certain of their affiliated entities, as the “unaffiliated shareholders.”

 

You are also being asked to consider and vote on a proposal to approve any motion to adjourn or postpone the special meeting to another time or place if necessary to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the Merger Proposal. We refer to this proposal as the “Adjournment Proposal” in this proxy statement.

 

The Parties to the Merger Agreement (see page 49)

 

VCG is in the business of acquiring, owning and operating nightclubs, which provide premium quality live adult entertainment, and restaurant and beverage services in an up-scale environment.

 

Family Dog was formed solely for purposes of entering into the merger agreement and consummating the transactions contemplated by the merger agreement. Family Dog is owned by Messrs. Lowrie and Ocello and certain accredited investors (as that term is defined in Rule 501 promulgated under the Securities Act of 1933, as amended) who have a pre-existing personal business relationship with Mr. Lowrie or Mr. Ocello and who have delivered to Family Dog executed subscription agreements, investor questionnaires and an executed counterpart signature page to the operating agreement of Family Dog.

 

FD Acquisition Co. is a wholly-owned subsidiary of Family Dog. FD Acquisition Co. was formed solely for purposes of entering into the merger agreement and consummating the transactions contemplated by the merger agreement.

 

Mr. Lowrie has been our Chairman of the Board since April 2002 and our Chief Executive Officer since November 2002.

 

Mr. Ocello has been our President and Chief Operating Officer since April 2002.

 

Mr. Lowrie beneficially owns shares of VCG’s common stock both individually and through Lowrie Management LLLP, an entity owned and controlled by Mr. Lowrie. Mr. Ocello beneficially owns shares of VCG’s common stock both individually and through LTD Investment Group, LLC, an entity owned and controlled by Mr. Ocello. We sometimes refer to Mr. Lowrie, Mr. Ocello, Lowrie Management LLLP and LTD Investment Group, LLC collectively as the “Executive Group” in this proxy statement.

 

If VCG’s shareholders approve the Merger Proposal and the other conditions to the merger are satisfied or waived, in connection with the closing of the merger, Messrs. Lowrie and Ocello will contribute all of their shares of VCG’s common stock, including shares held beneficially through Lowrie Management LLLP, with respect to Mr. Lowrie, and LTD Investment Group, LLC, with respect to Mr. Ocello, to Family Dog in exchange for membership interests in Family Dog.

 

Requisite Shareholder Vote (see page 51)

 

One-third of the votes entitled to be cast on a matter, represented in person or by proxy, constitutes a quorum for the special meeting. If a quorum exists, approval of the Merger Proposal requires the affirmative vote of both (i) the holders of a majority of the outstanding shares of VCG’s common stock entitled to vote at the special meeting, and (ii) under the merger agreement, a majority of the votes actually cast at the special meeting. Any abstaining votes, broker non-votes and votes cast by members of the Executive Group with regard to shares of VCG common stock held by the members of the Executive Group will not be taken into account for any purpose when determining whether the requisite vote set forth in clause (ii) has been achieved (e.g. in calculating votes cast in favor or total votes cast); however, the shares of VCG’s common stock held by the members of the Executive Group will be taken into account for purposes of the requisite vote set forth in clause (i) and establishing a quorum. Further, the members of the Executive Group intend to vote in favor of the Merger Proposal.

If a quorum exists, the Adjournment Proposal is approved if the votes actually cast favoring the Adjournment Proposal exceed the votes cast opposing the Adjournment Proposal.

 

What Shareholders Will Receive in the Merger (see page 53)

 

At the effective time of the merger, each share of common stock held by our shareholders (other than as provided for with respect to shares currently held by the Executive Group) will be cancelled and converted into the right to receive $2.25 in cash, without interest and subject to applicable withholding of taxes. We sometimes refer to this amount in this proxy statement as the “merger consideration.”

 

Based on the closing sale price for VCG common stock on July 21, 2010, the last trading day before public announcement of the proposal that resulted in the merger agreement, the merger consideration represented a 36.4% premium over the price per share of VCG’s common stock and prior to the announcement of the merger agreement.

 

The aggregate value of the merger consideration to be received by the unaffiliated shareholders in the merger is approximately $25.1 million.

 

What Option Holders Will Receive in the Merger (see page 54)

 

At the effective time of the merger, each option to purchase shares of VCG common stock that is outstanding and unexercised will be cancelled and VCG will not be required to make any payments to the holders of such options because the exercise price per share of each such option, in all instances, exceeds the merger consideration.

 

Treatment of Debt in the Merger (see page 54)

 

Before consummation of the merger, Mr. Lowrie will assign, or cause to be assigned, to Family Dog all rights to any debt owed by VCG to him or any of his affiliates in exchange for membership interests in Family Dog (VCG does not currently owe any debt to either Mr. Ocello or Family Dog). In addition, certain other creditors of VCG may elect to assign their rights to debt owed by VCG to them to Family Dog in exchange for membership interests in Family Dog. We refer in this proxy statement to the debt referenced in the two preceding sentences as the “converting debt.” At any time after the approval of the Merger Proposal by VCG’s shareholders but before consummation of the merger, Family Dog, in its sole discretion, may request that VCG convert a portion or all of the debt owed by VCG to Family Dog into shares of VCG common stock. Any debt owed by VCG before consummation of the merger that is not converted as described in this paragraph will remain outstanding.

 

Recommendation of the Special Committee and VCG’s Board of Directors (see page 25)

 

Certain of our officers and directors have interests in the merger that are different from, or in addition to, the interests of VCG’s shareholders generally. Accordingly, our board of directors formed a special committee, which we refer to in this proxy statement as the “Special Committee,” currently comprised of George Sawicki and David Levine, each of whom is a non-management independent director. The members of the Special Committee have no material interest in the merger that differs from the interests of VCG’s unaffiliated shareholders. The Special Committee was charged with reviewing, evaluating and, as appropriate, negotiating or rejecting the Merger Proposal or any alternative proposal in each case as the Special Committee considered to be in the best interests of VCG and its unaffiliated shareholders.

 

The Special Committee has unanimously determined that the merger agreement and the merger are fair to and in the best interests of VCG and its unaffiliated shareholders, and has recommended that VCG’s board of directors approve the merger agreement and that VCG’s shareholders approve the merger agreement and the merger.

After considering many factors, including the unanimous recommendation of the Special Committee, VCG’s board of directors (with Troy Lowrie taking no part in the recommendation or vote) has unanimously:

 

 

Before VCG’s board of directors unanimously approved the merger and the merger agreement, the Special Committee and VCG’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 merger consideration to be received by VCG’s unaffiliated shareholders in the merger is fair to such shareholders from a financial point of view.

 

Accordingly, the Special Committee and VCG’s board of directors (with Mr. Lowrie taking no part in the recommendation) unanimously recommend that you vote “ FOR ” the Merger Proposal. Each of the Special Committee and VCG’s board of directors (with Mr. Lowrie taking no part in the recommendation) also unanimously recommend that you vote “ FOR ” the Adjournment Proposal.

 

Reasons for the Recommendation of the Special Committee and VCG’s Board of Directors (see page 41)

 

Each of the Special Committee and VCG’s board of directors believes that the merger is both procedurally and substantively fair to VCG’s unaffiliated shareholders. Their belief is based upon their knowledge and analysis of VCG, as well as the factors discussed later in this proxy statement in the section entitled “Special Factors — Recommendation of the Special Committee and VCG’s Board of Directors; Reasons for Recommending Approval of the Merger.”

 

Financial Advisor to the Special Committee and its Opinion Issued to the Special Committee and VCG’s Board of Directors (see page 30)

 

North Point Advisors LLC, sometimes referred to in this proxy statement as “North Point Advisors,” served as financial advisor to the Special Committee in connection with the merger transaction.

 

Before approving the merger and the merger agreement, the Special Committee and VCG’s board of directors received an opinion from North Point Advisors, 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 merger consideration to be received by VCG’s shareholders in the merger is fair to such shareholders from a financial point of view. The full text of North Point Advisors’ opinion, which sets forth the procedures followed, assumptions made, matters considered, limits of review undertaken and other matters considered by North Point Advisors in preparing its opinion, is attached as Appendix B to this proxy statement. We strongly recommend that shareholders read carefully the full text of North Point Advisors’ written opinion.

 

North Point Advisors’ opinion addresses only the fairness, from a financial point of view, of the consideration to be received by the holders of VCG’s common stock as of the date of such opinion and does not address any other aspect of the merger. North Point Advisors’ opinion is not intended to be, and does not constitute, advice or a recommendation to VCG’s board of directors, the Special Committee, or any shareholder as to how to act or vote with respect to the Merger Proposal or related matters.

 

Interests of VCG’s Directors and Officers in the Merger (see page 44)

 

If VCG’s shareholders approve the Merger Proposal and the other conditions to the merger are satisfied or waived, in connection with the closing of the merger, Messrs. Lowrie and Ocello and the other members of the Executive Group will contribute all of their shares of VCG common stock to Family Dog (in addition to all debt owed by VCG to Mr. Lowrie’s entity Lowrie Management LLLP). Other than two creditors of VCG (unaffiliated with the Executive Group) who may elect to convert certain debt into membership interests in Family Dog, the balance of the membership interests in Family Dog will be held by accredited investors

within the meaning of Rule 501 promulgated under the Securities Act who have a pre-existing business or personal relationship with Messrs. Lowrie and Ocello. All shares of VCG’s common stock held by Family Dog will be cancelled for no consideration upon consummation of the merger. All options exercisable into shares of VCG’s common stock held by Mr. Ocello will be cancelled for no consideration upon consummation of the merger because the exercise price of such options exceeds the per share merger consideration.

 

If the merger is completed, Messrs. Lowrie and Ocello will hold substantially similar positions with the surviving corporation with substantially similar compensation, except that Mr. Lowrie’s annual salary will be reduced from $700,000 to $200,000.

 

VCG’s current executive officers and directors will be indemnified in respect of their past service, and Family Dog will maintain VCG’s current directors’ and officers’ liability insurance, subject to certain conditions as set forth in the merger agreement.

 

Those of VCG’s current directors and executive officers who do not hold any shares of VCG’s common stock will not receive any consideration upon consummation of the merger.

 

Special Committee Compensation (see page 24)

 

Upon formation of the Special Committee, VCG’s board of directors determined that each member of the Special Committee would receive compensation for service on the Special Committee equal to $2,500 in cash per month, and that the Chairman of the Special Committee would receive additional compensation in an amount equal to $1,000 in cash per month.

 

Certain Effects of the Merger (see page 41)

 

Upon consummation of the merger:

 

 

Further, after consummation of the merger:

 

 

Conditions to the Merger (see page 66)

 

Completion of the merger is subject to a number of closing conditions, including, but not limited to:

 

 

 

At any time before the merger, Family Dog and FD Acquisition Co. may waive the closing conditions applicable to VCG and VCG may waive the conditions applicable to Family Dog, FD Acquisition Co., Mr. Lowrie and Mr. Ocello. Under Colorado law, the Merger Proposal must be approved by the holders of a majority of the outstanding shares of VCG’s common stock entitled to vote at the special meeting and this condition cannot be waived by the parties. While circumstances may change, the parties do not currently expect that any conditions will be waived.

 

Restrictions on Solicitation, Acquisition Proposals and Changes in Recommendation (see page 62)

 

Under the merger agreement, and during its term, VCG is prohibited from initiating, soliciting, facilitating or encouraging any inquiry or the making of any proposal that constitutes or would reasonably be expected to lead to an Acquisition Proposal (as defined under “The Merger Agreement — Restrictions on Solicitation, Acquisition Proposals and Changes in Recommendation”). Further, VCG may not participate in any substantive discussions or negotiations regarding, or furnish to any person any information or data with respect to VCG, or otherwise cooperate with or take any other action to facilitate, any proposal that constitutes, or would reasonably be expected to lead to, any Acquisition Proposal, or requires VCG to abandon, terminate or fail to consummate the merger or any other transactions contemplated by the merger agreement.

 

Notwithstanding the foregoing, under certain circumstances, VCG may respond to a bona fide unsolicited Acquisition Proposal or terminate the merger agreement and enter into an acquisition agreement with respect to a Superior Acquisition (as defined under “The Merger Agreement — Restrictions on Solicitation, Acquisition Proposals and Changes in Recommendation”), so long as VCG complies with certain terms of the merger agreement described under “The Merger Agreement — Restrictions on Solicitation, Acquisition Proposals and Changes in Recommendation.”

 

VCG’s board of directors may not withdraw or modify its recommendation that VCG’s shareholders approve and adopt the Merger Proposal or approve or recommend an Acquisition Proposal unless it determines in good faith that the failure to do so would present a substantial risk of being inconsistent with the fulfillment of its fiduciary duties under applicable law.

 

Termination of the Merger Agreement (see page 68)

 

The merger agreement also grants the parties certain termination rights. The merger agreement may be terminated:

 

 

 

Termination Fees (see page 69)

 

The merger agreement provides for the payment of termination fees in certain instances in the event that the merger agreement is terminated.

 

Payable by VCG

 

VCG will be required to pay Family Dog a termination fee in the amount $1,000,000 in the event that:

 

 

The termination fee payable by VCG is reduced to $600,000 in the event that VCG terminates the merger agreement to enter into a Company Acquisition Agreement involving a Superior Acquisition Proposal from certain identified parties with which VCG or North Point Advisors has been in contact to discuss a potential change in control transaction involving VCG and such party.

 

Payable by Family Dog

 

Family Dog will be required to pay VCG a termination fee in the amount $1,000,000 in the event that VCG terminates the merger agreement (i) if the merger is not consummated on or before the outside dates described under “Summary Term Sheet — Termination of the Merger Agreement” above, or (ii) if Family Dog, FD Acquisition Co. or either of Troy Lowrie or Micheal Ocello breaches or fails to perform in any material respect any of its covenants contained in the merger agreement, which breach or failure to perform (A) would give rise to the failure of certain of VCG’s closing conditions, and (B) cannot be or has not been cured within 30 days after the giving of written notice of such breach, and, in the case of each of clauses (i) and (ii), as a result of Family Dog not being able to secure financing for the merger, provided that at the time of such termination all of the closing conditions applicable to all of the parties’ obligations as well as Family Dog’s and FD Acquisition Co.’s obligations have been satisfied and VCG is not in material breach of the merger agreement.

Financing of the Merger (see page 46)

 

The total amount of funds necessary to consummate the merger is anticipated to be approximately $25,000,000, and transaction expenses of Family Dog are anticipated to be approximately $600,000.

 

Family Dog intends to finance the merger (including fees, expenses and transaction costs) in substantial part from the proceeds of the private placement contemplated by the subscription agreements received by Family Dog from various accredited investors (as that term is defined in Rule 501 promulgated under the Securities Act) who have a pre-existing personal or business relationship with Mr. Lowrie or Mr. Ocello. Family Dog has not delivered subscription documents to, and has not accepted subscriptions from, persons other than accredited investors who have a personal or business relationship with either Mr. Lowrie or Mr. Ocello. Family Dog may also finance a portion of the merger consideration and the related transaction fees from lines of credit and other committed funds provided by other affiliates of Family Dog, Mr. Lowrie or Mr. Ocello, and from funds held by (or otherwise available to) VCG at the time of the merger, including VCG’s cash on hand. Family Dog has received commitments pursuant to subscription agreements from such accredited investors, in an amount that, together with the financial resources described in the previous sentence, is sufficient to finance the merger and the anticipated transaction expenses. In particular, the total amount subscribed for by accredited investors is $19,200,000. The remaining portion of the merger consideration will come from a line of credit available to Lowrie Management, LLLP in an amount of $2,650,000, plus projected cash on hand of VCG in the amount of $3,800,000. In light of the subscriptions received, and the other available sources of funds, Family Dog is no longer accepting new subscriptions from additional investors.

 

Material U.S. Federal Income Tax Consequences (see page 48)

 

In general, a shareholder’s receipt of cash in exchange for shares of VCG’s common stock in the merger will be a taxable sale transaction for U.S. federal income tax purposes. Because tax consequences of the merger will depend on each shareholder’s particular circumstances, each shareholder should consult his, her or its tax advisor for a full understanding of the applicable U.S. federal, state, local and non-U.S. tax consequences of the merger.

 

Litigation Related to the Merger (see page 48)

 

There is ongoing litigation in Colorado state court challenging the Merger Proposal. The litigation was brought derivatively on behalf of VCG and as a class action on behalf of the named plaintiffs and other similarly situated shareholders against Mr. Lowrie, various entities affiliated with Mr. Lowrie, the members of VCG’s board of directors and VCG (as a nominal defendant). The plaintiffs allege, among other things, that the directors breached fiduciary duties and that Mr. Lowrie has conflicts of interest in connection with the Merger Proposal. The plaintiffs seek, among other relief, to prevent the merger from occurring, an order requiring the directors to fulfill their fiduciary duties, damages, and an award of fees. Resolution of this litigation is not a condition to closing of the merger.

 

Dissenters’ Rights (see page 70)

 

VCG’s shareholders are entitled to dissent from the merger and obtain payment of the fair value of their shares of VCG’s common stock if and when the merger is effectuated. A shareholder who wishes to assert dissenters’ rights must: (i) cause VCG to receive before the vote is taken on the merger at the special meeting, written notice of the shareholder’s intention to demand payment for the shareholder’s shares if the merger is effectuated, and (ii) not vote the shares in favor of the merger agreement and the merger.

 

THE PROVISIONS OF ARTICLE 113 OF THE COLORADO BUSINESS CORPORATION ACT GOVERNING DISSENTERS’ RIGHTS ARE COMPLEX AND TECHNICAL IN NATURE. SHAREHOLDERS DESIRING TO EXERCISE DISSENTERS’ RIGHTS MAY WISH TO CONSULT COUNSEL, BECAUSE THE FAILURE TO COMPLY STRICTLY WITH THESE PROVISIONS WILL RESULT IN THE LOSS OF THEIR DISSENTERS’ RIGHTS.

 

The following questions and answers are intended to address briefly some commonly asked questions regarding the Merger Proposal and the special meeting. These questions and answers may not address all questions that may be important to you as our shareholder. Please refer to the “Summary Term Sheet” and the more detailed information contained elsewhere in this proxy statement, and the documents incorporated by reference into this proxy statement, which you should read carefully and in their entirety.

 

 

 

The merger agreement is attached as Appendix A to this proxy statement. We strongly recommend that you carefully read the merger agreement in its entirety. The terms of the merger agreement are further described under “The Merger Agreement” beginning on page 53.

 

If your shares are held in “street name” by your broker, bank or other nominee, and you plan to attend the special meeting, you must present proof of your ownership of our common stock, such as a bank or brokerage account statement, to be admitted to the meeting. You also must present at the meeting a proxy issued to you by the holder of record of your shares.

 

 

If a quorum exists, the Adjournment Proposal is approved if the votes actually cast favoring the Adjournment Proposal exceed the votes cast opposing the Adjournment Proposal.

 

 

 

 

If your shares are held in an account at a broker or other nominee, you must contact your broker or other nominee to change your vote.

 

 

For the Adjournment Proposal, you may vote “ FOR ,” “ AGAINST ” or “ ABSTAIN .” Abstentions will be neutral with respect to the Adjournment Proposal, which requires that the votes actually cast favoring the Adjournment Proposal exceed the votes cast opposing the Adjournment Proposal.

 

If you sign your proxy card without indicating your vote, your shares will be voted “ FOR ” the approval of the Merger Proposal and the Adjournment Proposal, and in accordance with the recommendations of our board of directors on any other matters properly brought before the special meeting for a vote.

 

Abstentions and broker non votes count for purposes of determination whether a quorum exists.

 

 

 

 

 

Certain statements in this proxy statement, the documents attached hereto and the documents incorporated by reference in this proxy statement are forward-looking statements. These include statements as to such things as our financial condition, results of operations, plans, objectives, future performance and business, as well as forward-looking statements relating to the merger. Such forward-looking statements are based on current expectations, estimates, assumptions and projections about our business and the proposed merger, the accurate prediction of which may be difficult and involve assessment of events beyond our control. All forward-looking statements speak only as of the date hereof and, unless required by law, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements can be identified by forward-looking language, including words such as “believes,” “anticipates,” “expects,” “estimates,” “intends,” “may,” “plans,” “projects,” “will,” “continues,” “predicts” and similar expressions, or negative of these words. 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. The following risks related to our business, among others, could cause or contribute to actual results differing materially from those described in the forward-looking statements:

 

 

 

The Proposal Initially Made in November 2009

 

On November 3, 2009, Mr. Lowrie and Lowrie Management LLLP, on behalf of Family Dog, presented to VCG’s board of directors a proposal (the “Proposal”) to acquire all of the outstanding shares of VCG’s common stock (other than shares owned by members of the Executive Group) in a cash merger transaction. The consideration proposed in the Proposal was $2.10 per share of VCG’s common stock.

 

Following receipt of the Proposal, VCG’s board of directors established the Special Committee consisting solely of independent directors to evaluate the Proposal. The members of the Special Committee appointed in November 2009 were George Sawicki (Chairman), Kenton Sieckman and Carolyn Romero. The Special Committee then retained independent legal counsel and retained North Point Advisors to serve as the financial advisor to the Special Committee.

 

On December 3, 2009, at the request of the Special Committee, VCG, Mr. Lowrie and Mr. Lowrie’s affiliated entities (Lowrie Management LLLP and Family Dog) entered into a Confidentiality and Standstill Agreement (the “Standstill Agreement”). Pursuant to the Standstill Agreement, Mr. Lowrie and his affiliated entities agreed that, unless otherwise agreed to by the Special Committee, they would not, among other things, (i) acquire additional securities of VCG, (ii) enter into any merger or business combination involving VCG or make or participate in any proxy solicitation related thereto, or (iii) advise, assist or encourage any other persons in connection with any of the foregoing. The term of the Standstill Agreement was until the earliest of

(i) 12 months from the date of the Standstill Agreement, (ii) the date of execution of any definitive agreement with respect to the Proposal, or (iii) 180 days after written notice by Mr. Lowrie’s investor group of the cessation of negotiations with respect to the Proposal.

 

On December 16, 2009, after consultation with its legal and financial advisors, the Special Committee determined that the terms of the Proposal were inadequate. The Special Committee then directed North Point Advisors to contact any parties that had either previously expressed an interest or might potentially be interested in pursuing a transaction with VCG.

 

Following the Special Committee’s instructions, North Point Advisors contacted nine potential strategic buyers and 26 potential financial buyers for VCG.

 

As a result of the marketing process conducted by North Point Advisors, the Special Committee negotiated and approved a non-binding letter of intent (the “Rick’s LOI”) with Rick’s Cabaret International, Inc. (“Rick’s”) and Mr. Lowrie, which was executed by VCG, Rick’s, Mr. Lowrie and Lowrie Management LLLP on February 16, 2010. Rick’s is a publicly traded company (NASDAQ symbol: RICK) which operates upscale adult nightclubs serving primarily businessmen and professionals in the United States. No other party contacted by North Point Advisors submitted an acquisition proposal for VCG.

 

The Rick’s LOI proposed that Rick’s would acquire all of the outstanding shares of common stock of VCG in a stock-for-stock merger transaction. Pursuant to the Rick’s LOI, VCG’s shareholders were to receive shares of Rick’s common stock in exchange for their shares of VCG’s common stock. The number of Rick’s shares to be received would be based on an exchange ratio that varied based upon the then current trading price of Rick’s stock. VCG’s shareholders, for example, would have received Rick’s stock valued at $2.20 for each share of VCG’s common stock if the average trading price of Rick’s stock (as of the time of closing) was between $8.00 and $10.00 per share. If the average trading price of Rick’s stock (as of the time of closing) was above $19.95, then VCG’s shareholders would have received Rick’s stock valued at $3.80 for each share of VCG’s common stock. Rick’s also would have had the right to terminate the transaction if the average trading price of Rick’s stock (as of the time of closing) was less than $8.00 per share.

 

At the time of the February 16, 2010 announcement, the average price of Rick’s common stock under the Rick’s LOI would have been equal to $11.76 per share, and VCG’s shareholders would have received Rick’s stock valued at $2.66 per share of VCG’s common stock.

 

On April 1, 2010, VCG and Rick’s announced that the Rick’s LOI had expired, in accordance with its terms, on March 31, 2010, with no definitive acquisition agreement being executed by the parties to the Rick’s LOI. Prior to this announcement, the closing price of Rick’s common stock on March 31, 2010 was $12.80 per share. Rick’s stock price declined subsequent to the announcement. On December 21, 2010, the closing price of Rick’s common stock was $8.41.

 

Selected Developments after Expiration of the Rick’s LOI and before the Reaffirmed Proposal

 

Following the expiration of the Rick’s LOI and the dissolution of the Special Committee in April 2010, VCG’s board of directors authorized the repurchase of up to $1 million of VCG common stock. In June and July 2010, VCG repurchased an aggregate of 551,155 shares of its common stock under the repurchase program for an aggregate of $930,082.87.

 

On July 16, 2010, our board of directors approved and one of VCG’s subsidiaries sold to an entity affiliated with Rick’s (i) the building in which VCG previously operated Jaguar’s Gold Club Fort Worth located in Fort Worth, Texas, and (ii) all assets associated with the club, excluding cash. The purchase price paid at closing consisted of $1,000,000 in cash and the transfer from the purchaser to VCG of 467,497 shares of VCG’s common stock previously held by the purchaser.

These two events were taken into consideration by North Point Advisors, VCG’s board of directors and the Special Committee when evaluating the reaffirmed Proposal, as discussed below.

 

The Reaffirmed Proposal Made in July 2010

 

On July 20, 2010, Mr. Lowrie and Lowrie Management LLLP, on behalf of Family Dog, delivered to VCG’s board of directors a letter reaffirming Family Dog’s willingness to pursue the transactions contemplated by the Proposal on the terms originally set forth therein. As before, the Proposal was to acquire all of the outstanding shares of common stock of VCG (other than shares owned by the Executive Group) in a cash merger transaction and the consideration proposed in the Proposal was $2.10 per share.

 

On July 21, 2010, VCG’s board of directors held a telephonic meeting (without the presence of Messrs. Lowrie and Ocello), with a representative of Brownstein Hyatt Farber Schreck, LLP, VCG’s outside counsel (“BHFS”), also participating. After discussing the reaffirmed Proposal, VCG’s board of directors also discussed the advisability of reconstituting the Special Committee consisting of independent directors to evaluate the Proposal.

 

VCG’s board of directors present at the telephonic meeting unanimously resolved to reconstitute the Special Committee with three of VCG’s independent directors. The members of the Special Committee appointed by VCG’s board of directors in July 2010 (with Messrs. Lowrie and Ocello taking no part in the vote) were George Sawicki, Carolyn Romero and David Levine, with Mr. Sawicki serving as chairman. Mr. Levine joined VCG’s board of directors in July 2010, succeeding Kenton Sieckman, who had resigned from VCG’s board of directors as of June 30, 2010.

 

VCG’s board of directors (other than Messrs. Lowrie and Ocello) determined that each member of the Special Committee would receive compensation for service on the Special Committee equal to $2,500 in cash per month, and that the Chairman of the Special Committee would receive additional compensation in an amount equal to $1,000 in cash per month.

 

The resolutions adopted by VCG’s board of directors (other than Messrs. Lowrie and Ocello) delegated to the Special Committee the exclusive power and authority to, among other things, (i) consider, evaluate, investigate and negotiate the terms and conditions of the Proposal, (ii) reject or discontinue pursuing the Proposal if the Special Committee, upon the review of the advice and recommendations of its legal, financial and other advisors, determined that pursuing the Proposal was not in the best interests of VCG’s shareholders, (iii) explore, consider and negotiate the terms and conditions of any potential transactions other than the Proposal, and (iv) make reports and recommendations to the entire board of directors as to the Proposal or any other alternative transaction or strategic alternative. The resolutions also empowered the Special Committee to retain legal, financial and other advisors to assist the Special Committee in the fulfillment of its duties.

 

On July 22, 2010, VCG issued a press release and a Current Report on Form 8-K announcing the receipt of the reaffirmed Proposal. The press release also announced the reconstitution of the Special Committee.

 

Following the July 21, 2010 board of directors meeting, the Special Committee members met with representatives of several law firms to consider which law firm should serve as counsel to the Special Committee. The Special Committee members interviewed potential counsel with respect to each firm’s experience in mergers and acquisitions transactions, and its experience in representing special committees in considering going private acquisition proposals made by directors, officers or shareholders. After the completion of the interview process, the Special Committee determined to retain Faegre & Benson LLP (“Faegre”) as its legal counsel. The Special Committee made its decision to retain Faegre based on a number of factors, including the reputation and experience of Faegre in mergers and acquisitions transactions, and its experience in representing special committees in considering going private acquisition proposals made by directors, officers or shareholders.

 

On July 30, 2010, the Special Committee held a telephonic meeting. Representatives of Faegre and North Point Advisors participated in this meeting. Faegre reviewed with the Special Committee the terms of the reaffirmed Proposal and the power and authority delegated to it by VCG’s board of directors. Faegre also reviewed with the Special Committee the legal duties of members of the Special Committee in evaluating the

Proposal or any other strategic alternatives. Following the meeting, Faegre sent the Special Committee members a memorandum describing these matters in further detail.

 

During this meeting, the Special Committee discussed which investment bank should serve as financial advisor to the Special Committee. It was noted that the Special Committee had retained North Point Advisors as financial advisor in connection with the initial Proposal made in 2009 and also with respect to the proposed 2010 merger transaction with Rick’s. Due to this prior engagement, the Special Committee noted that North Point Advisors was very familiar with VCG and would be in a position to quickly get up to speed with respect to the reaffirmed Proposal. It was also noted that North Point Advisors was a leading investment banking firm in the retail, restaurant and entertainment industries and had experience in a number of going private transactions.

 

Faegre noted that even though North Point Advisors’ prior engagement letter had expired pursuant to its terms, under the “tail” provisions of North Point Advisors’ expired engagement letter, North Point Advisors would be entitled (even if they were not re-engaged) to a full contingent transaction fee if the Proposal was consummated within a certain period of time. Faegre also noted that North Point Advisors was willing to be re-engaged by the Special Committee without the payment of any additional retainer amounts by re-instating the prior North Point Advisors engagement letter with no changes in terms (except for the extension of the term until December 31, 2010). North Point Advisor’s engagement letter also provided that the fee payable by VCG upon North Point Advisor’s delivery of the fairness opinion was separate from the contingent transaction fee. After discussion and consideration of various factors, the Special Committee agreed to retain North Point Advisors as the financial advisor to the Special Committee. Subsequent to the meeting, an extension of the North Point Advisors engagement letter was executed on behalf of the Special Committee.

 

Next, the Special Committee discussed the existing Standstill Agreement, which had been executed in 2009 after the Proposal had initially been made. Faegre noted that the Standstill Agreement was in effect and that its terms and restrictions had not been amended or waived by the Special Committee. Faegre also noted that in reaffirming the Proposal, Mr. Lowrie had agreed to having the Special Committee reconstituted and to condition the completion of the Proposal on the prior approval of the Special Committee. In doing so and in agreeing to negotiate with the Special Committee, Faegre indicated that Mr. Lowrie was acting consistent with the Standstill Agreement, which was designed to prevent Mr. Lowrie from purchasing shares of VCG’s common stock and also from attempting to acquire VCG (or control of VCG) without negotiating with and receiving approval from the Special Committee and VCG’s board of directors. After discussion, the Special Committee agreed that it would consider the reaffirmed Proposal. But the Special Committee instructed Faegre to inform Mr. Lowrie’s counsel, Kamlet Reichert, LLP (“Kamlet”), that the terms and conditions of the Standstill Agreement continued in full force and effect.

 

The Special Committee then discussed the terms of the reaffirmed Proposal. The reaffirmed Proposal was for $2.10 per share of VCG’s common stock, which was the same price proposed by Mr. Lowrie in 2009 (and which was previously rejected by the Special Committee as inadequate). The Special Committee discussed the extent to which VCG’s current financial and operating condition differed from the circumstances in effect at the time that the initial $2.10 Proposal had been rejected. After discussion, the Special Committee requested that North Point Advisors refresh and update its prior financial analysis for future presentation to the Special Committee. The Special Committee also instructed Faegre to inform Kamlet that the Special Committee’s consideration of the reaffirmed Proposal would take longer than the August 4, 2010 deadline stated in the reaffirmed Proposal.

 

On August 4, 2010, Mr. Lowrie notified the Special Committee that in order to allow sufficient time to consider and review the reaffirmed Proposal, the expiration of the Proposal had been extended to August 20, 2010.

 

On August 6, 2010, VCG issued a press release and a Current Report on Form 8-K announcing the extension of the reaffirmed Proposal. The press release also announced that the Special Committee had retained Faegre as its legal counsel and North Point Advisors as its financial advisor.

On August 6, 2010, the Special Committee held a telephonic meeting. A representative of Faegre participated in this meeting. Mr. McGraw and Mr. Grusin, who are outside directors of VCG but not members of the Special Committee, also participated in this meeting. Those present discussed the terms of the reaffirmed Proposal and also discussed various aspects of VCG’s current financial and operating condition. It was noted that certain aspects of VCG’s condition had improved somewhat since the time of the initial Proposal in 2009. Those present then discussed the terms of the reaffirmed Proposal and noted that the reaffirmed Proposal was for $2.10 per share of VCG’s common stock, which was the same price initially proposed by Mr. Lowrie’s on behalf of Family Dog in November 2009 and rejected as inadequate at that time. After further discussion, the Special Committee instructed Faegre to inform Mr. Lowrie’s counsel that, while no decisions had yet been made, it was likely that the $2.10 offer price eventually would be found inadequate again. Following the meeting, Faegre communicated to Kamlet the Special Committee’s instructions.

 

On August 11, 2010, the Special Committee held a meeting at the Boulder, Colorado offices of Faegre. A representative of Faegre participated in this meeting. At this meeting, the Special Committee members discussed a wide range of potential options for responding to the reaffirmed Proposal. In addition, Faegre discussed with the Special Committee a number of non-price transaction terms that might be requested from Mr. Lowrie during the course of negotiations. Among the topics discussed was the possibility of requiring that any transaction be approved by a majority of VCG’s unaffiliated shareholders (which requirement is often referred to as a “majority of the minority” approval). Also discussed was the possibility of engaging a second investment banking firm (which firm, unlike North Point Advisors, would not be compensated with a significant contingent transaction fee) to deliver a fairness opinion. The consensus of the Special Committee was that both of these measures would enhance the process of considering the reaffirmed Proposal.

 

On August 17, 2010, the Special Committee held a telephonic meeting. Representatives of Faegre and North Point Advisors participated in this meeting. At this meeting, North Point Advisors reviewed with the Special Committee its updated valuation analysis of VCG and of the terms of the reaffirmed Proposal. North Point Advisors reviewed a number of valuation analyses, comparing the updated analyses with the prior versions of the similar analyses that were performed in connection with the initial Proposal, and indicated that it would likely be able to conclude that the $2.10 price was fair from a financial point of view.

 

Following North Point Advisors’ presentation, there was a general discussion among those present. The North Point Advisors representatives then left the meeting. After further discussion, the Special Committee instructed Faegre to inform Kamlet that the Special Committee had determined that the $2.10 offer was inadequate and that the reaffirmed Proposal had been rejected. The Special Committee also requested North Point Advisors to begin to contact any parties that had either previously expressed an interest or might potentially be interested in pursuing a transaction with VCG. Following the meeting, Faegre communicated the Special Committee’s instructions to Kamlet and North Point Advisors.

 

On August 18, 2010, the Special Committee held a telephonic meeting. A representative of Faegre participated in this meeting. At this meeting, Faegre reported that Mr. Lowrie had requested that the Special Committee provide additional substantive feedback on the reaffirmed Proposal beyond the conclusion that the $2.10 price was inadequate. After discussion, the Special Committee instructed Faegre and North Point Advisors to develop an expanded response to the terms of the reaffirmed Proposal. The Special Committee instructed Faegre to inform Kamlet that the response would include the views of the Special Committee on valuation, but would also include the Committee’s view on other non-price transaction terms such as termination fees, majority of the minority shareholder approval and no shop provisions.

 

On August 20, 2010, VCG issued a press release and a Current Report on Form 8-K announcing that the Special Committee had informed Mr. Lowrie that it had determined, with input from its advisors, that the terms of the Proposal were currently inadequate. The press release also announced that the Special Committee had directed North Point Advisors to begin to contact any parties that had either previously expressed an interest or might potentially be interested in pursuing a transaction with VCG.

 

Following the August 20, 2010 Special Committee meeting, Faegre and North Point Advisors developed a draft of the substantive response to the reaffirmed Proposal. North Point Advisors also began to contact

potentially interested parties. The Special Committee also asked North Point Advisors to perform an additional valuation analysis related to the potential sale value of VCG’s individual club locations.

 

On August 27, 2010, the Special Committee held a telephonic meeting. Representatives of Faegre and North Point Advisors participated in this meeting. At this meeting, North Point Advisors reported that so far no other party contacted by North Point Advisors had expressed interest in exploring an acquisition proposal for VCG. North Point Advisors also reported on the additional valuation analysis that had been requested by the Special Committee. That analysis indicated that a breakup or liquidation of VCG (meaning sales of the individual clubs operated by VCG followed by a distribution of the net proceeds) was unlikely to result in proceeds to shareholders in excess of the $2.10 price currently being offered.

 

The Special Committee then discussed potential responses to the reaffirmed Proposal. North Point Advisors indicated that it would likely be able to conclude that the $2.10 price was fair from a financial point of view, but recommended that the Special Committee respond to Mr. Lowrie on both price and also on other transaction terms.

 

On September 2, 2010, the Special Committee held a telephonic meeting. A representative of Faegre participated in this meeting. At this meeting, the Special Committee discussed the draft substantive response which had been prepared by Faegre and North Point Advisors, including a discussion of price as well as other non-price transaction terms. The Special Committee determined to continue these discussions at a meeting to be held the next day.

 

On September 3, 2010, the Special Committee held a telephonic meeting. A representative of Faegre participated in this meeting. Mr. McGraw and Mr. Grusin, who are outside directors of VCG but not members of the Special Committee, also participated in this meeting.

 

At this meeting, Faegre reviewed with those present the main points in the draft substantive response which had been prepared by Faegre and North Point Advisors, including the “majority of the minority” shareholder approval, that no financing contingency should be included in the merger agreement, that a reverse termination fee should be payable by Family Dog in the event that the financing for the transaction could not be obtained, and that VCG should be able to consider alternative acquisition proposals. The group also discussed what the response of the Special Committee should be regarding price. After extensive discussion, the group decided not to make a counter offer to the $2.10 price, but instead instructed Faegre to communicate to Kamlet and Mr. Lowrie a number of data points regarding valuation and to encourage Mr. Lowrie to respond with an increased price.

 

Following the September 3, 2010 meeting, Faegre communicated the Special Committee’s instructions to Kamlet. In response, Kamlet requested that the Special Committee and Mr. Lowrie have a direct meeting where both sides could discuss the Proposal further in detail with each other. The Special Committee agreed to this request.

 

On September 10, 2010, VCG announced that Ms. Romero had notified VCG’s board of directors of her intent to resign from her position as director and as a member of the Special Committee effective October 31, 2010. Ms. Romero informed VCG’s board of directors that her resignation was not due to any disagreement with VCG or related to the Proposal, but was attributable solely to personal reasons.

 

On September 22, 2010, the Special Committee met with Mr. Lowrie at the Boulder, Colorado offices of Faegre. Mr. McGraw, Mr. Grusin and representatives of Faegre and Kamlet also participated in this meeting. At this meeting, Mr. Lowrie made a presentation regarding his view of the benefits of the reaffirmed Proposal to VCG and its unaffiliated shareholders. Mr. Lowrie’s presentation included a discussion of VCG’s shareholder base and institutional ownership, current challenges facing VCG’s business, VCG’s outstanding debt and VCG’s upcoming debt maturities. While the meeting did not include a specific negotiation regarding price or terms, some of the board members present did express varying views on the valuation of VCG. There was also a detailed discussion of the Special Committee’s insistence that any transaction would have to be conditioned upon a “majority of the minority” shareholder approval.

Following the September 22, 2010 meeting, Faegre and Kamlet further discussed the topics raised during the September 22, 2010 meeting. Kamlet conveyed that Mr. Lowrie had instructed Kamlet to prepare a draft merger agreement for review and comment by Faegre and the Special Committee prior to further discussion of price.

 

On September 29, 2010, Kamlet delivered to Faegre an initial draft of a proposed merger agreement with respect to the reaffirmed Proposal. Faegre distributed copies of the draft to the members of the Special Committee. The price per share was left blank in the draft merger agreement.

 

On October 5, 2010, the Special Committee held a brief telephonic meeting. A representative of Faegre participated in this meeting. At this meeting, the Special Committee discussed again the advantages and disadvantages of engaging a second investment banking firm (which firm, unlike North Point Advisors, would not be compensated with a significant contingent transaction fee) to deliver a fairness opinion. No decision on this issue was made at that meeting.

 

On October 11, 2010, Faegre transmitted to Kamlet suggested revisions to the initial draft of the proposed merger agreement. Faegre’s revisions did not include a suggested price.

 

On October 15, 2010, Kamlet delivered to Faegre a revised draft of a proposed merger agreement with respect to the reaffirmed Proposal. The revised draft included a per share price that had been increased to $2.20, as well as a provision for approval by a majority of the minority shareholders. Faegre distributed copies of the draft to the members of the Special Committee.

 

On October 17, 2010, the Special Committee held a telephonic meeting. Representatives of Faegre and North Point Advisors participated in this meeting. Mr. McGraw and Mr. Grusin also participated. Faegre reported that, other than price, there were no significant business issues remaining regarding the revised draft merger agreement.

 

North Point Advisors then reported on the status of the “market check” which it had commenced in late August. North Point Advisors reported that it had made over 50 outgoing calls to over 25 parties that might potentially be interested in pursuing a transaction with VCG. North Point Advisors reported that one party indicated that it might be interested in acquiring one or two of VCG’s clubs in selected markets, but was not interested in an acquisition proposal for the entire company. No other party contacted expressed any interest in exploring an acquisition proposal for VCG.

 

At this meeting, North Point Advisors reviewed with the Special Committee its valuation analysis of VCG, which had been updated to reflect the $2.20 increased offer price. At the conclusion of its presentation, North Point Advisors indicated that it would likely be able to conclude that the $2.20 price was fair from a financial point of view.

 

Following North Point Advisors’ presentation, there was a general discussion among those present regarding the increased $2.20 price. There was not a consensus among the directors at the meeting on whether the $2.20 price should be approved. After further discussion, the Special Committee instructed Faegre to make a counter offer to Mr. Lowrie of a $2.50 price. Following the meeting, Faegre communicated the Special Committee’s instructions to Kamlet.

 

Following the October 17, 2010 meeting, there were a number of discussions between Kamlet and Faegre regarding the $2.20 price. Kamlet informed Faegre on several occasions that the increased $2.20 price was Mr. Lowrie’s “last and best offer.” In response, Faegre communicated that it was unlikely that the Special Committee and VCG’s board of directors would unanimously approve the $2.20 price. Faegre also communicated that if the $2.20 price were to be approved by the Special Committee and VCG’s board of directors, such approval would likely not be unanimous. During this time period, Kamlet and Faegre discussed and explored a number of alternatives that might facilitate an approval in connection with a $2.20 price. Among the options discussed were having the transaction approved by only a majority of the Special Committee or VCG’s board of directors; having the Special Committee or VCG’s board of directors submit the transaction to VCG’s shareholders without a board recommendation (as permitted by Colorado corporate law); or having the Special Committee or Board approve the transaction only after receipt of a fairness opinion from a second

investment banking firm other than North Point Advisors. No agreement was reached on any of these alternatives.

 

On October 27, 2010, the Special Committee held a telephonic meeting. Representatives of Faegre and North Point Advisors participated in this meeting. Faegre reported that Mr. Lowrie had not raised his price beyond the $2.20 offered ten days previously. At this meeting, North Point Advisors reviewed with the Special Committee its valuation analysis of VCG, which had been updated to exclude certain significant non-recurring charges from VCG’s actual and projected financial performance. At the conclusion of its presentation, North Point Advisors again indicated that it would likely be able to conclude that the $2.20 price was fair from a financial point of view. No decisions were made at this meeting.

 

On October 29, 2010, the Special Committee held another telephonic meeting. Representatives of Faegre and North Point Advisors participated in this meeting. There was a general discussion among those present regarding the $2.20 price. Again, there was not a consensus among the directors at the meeting on whether the $2.20 price should be approved. After further discussion, the Special Committee instructed Faegre to make a counter offer to Mr. Lowrie of a $2.30 price. In addition, the Special Committee stated that any approval of the proposed $2.30 price would be conditioned upon receipt of a fairness opinion from a second investment banking firm other than North Point Advisors. Following the meeting, Faegre communicated the Special Committee’s instructions to Kamlet.

 

On October 31, 2010, Ms. Romero’s previously contemplated resignation from VCG’s board of directors and Special Committee became effective. Ms. Romero did not take part in any discussions regarding the reaffirmed Proposal following her resignation. On the same day, Mr. Ocello also resigned from VCG’s board of directors effective immediately in order for VCG to comply with NASDAQ Marketplace Listing Rule 5605(b)(1), which requires that listed companies have a majority of board members be independent.

 

On November 1, 2010, there were numerous telephone discussions regarding the Special Committee’s instructions from the October 29, 2010 meeting. Kamlet reported that Mr. Lowrie was not willing to increase his price above $2.20. In addition, Kamlet reported that Mr. Lowrie was concerned about the additional expense and time delay that would be involved with retaining a second investment banking firm to give a fairness opinion.

 

On the morning of November 2, 2010, Kamlet informed Faegre that Mr. Lowrie was willing to increase his price to $2.25 but only in the event that the additional expense for VCG and time delay associated with a second investment banking firm could be avoided.

 

On the afternoon of November 2, 2010, the Special Committee held a telephonic meeting. A representative of Faegre participated in this meeting. There was a general discussion among those present regarding the $2.25 price and the revised offer which had been received. After discussion, the Special Committee indicated that it would be willing to agree to the revised offer and concluded that a fairness opinion from a second investment banking firm other than North Point Advisors was not necessary in light of the increase in price and the strength of North Point Advisors’ fairness opinion. Mr. McGraw and Mr. Grusin then joined the meeting. After further discussion, the four members of VCG’s board of directors participating in the meeting indicated that they would be willing to agree to the revised offer. Following the meeting, Faegre communicated the Special Committee’s instructions to Kamlet.

 

During the period from November 3 through November 9, 2010, representatives of Kamlet and Faegre exchanged and negotiated several subsequent drafts of the merger agreement. BHFS received a draft of the agreement on November 3, 2010 and provided comments to Faegre on November 5, 2010 and November 9, 2010. The merger agreement was then finalized.

 

On the morning of November 9, 2010, the Special Committee held a telephonic meeting. Representatives of Faegre and North Point Advisors participated in this meeting. Faegre made a presentation to the Special Committee regarding the legal duties of members of the Special Committee in evaluating the reaffirmed Proposal. The Special Committee then received a presentation from North Point Advisors including financial analyses of the proposed transaction. The representatives from North Point Advisors reviewed with the Special

Committee the background of the transaction, including the negotiations that led to Mr. Lowrie’s best and final offer.

 

North Point Advisors then delivered its oral opinion, subsequently confirmed in writing, to the effect that, based upon and subject to the limitations and qualifications set forth in its written opinion, the $2.25 per share merger consideration to be received by VCG’s unaffiliated shareholders was fair, from a financial point of view, to such shareholders. With the benefit of the presentations and after discussion, the Special Committee unanimously determined that the merger agreement and the transactions contemplated thereby are advisable, fair to and in the best interests of VCG and its unaffiliated shareholders, approved the merger agreement and the transactions contemplated thereby and recommended that VCG’s shareholders approve and adopt the merger agreement. The Special Committee further recommended that VCG’s board of directors approve the proposed transaction, including the merger agreement and the other transactions contemplated thereby, and that VCG’s board of directors recommend to VCG’s shareholders that they approve and adopt the merger agreement.

 

Thereafter, on the afternoon of November 9, 2010, VCG’s board of directors met telephonically to receive and deliberate upon the report of the Special Committee. Representatives of Faegre, BHFS and North Point Advisors were also present at the meeting. The Special Committee, together with Faegre and North Point Advisors, reported to VCG’s board of directors on the process undertaken by the Special Committee and the Special Committee’s review of the merger agreement, and unanimously recommended to VCG’s board of directors that VCG’s board of directors accept the offer of $2.25 per share for VCG’s common stock held by the unaffiliated shareholders and approve and adopt the merger agreement and the other transactions contemplated thereby.

 

After the presentation of the report, and responses to questions posed by various members of VCG’s board of directors to the Special Committee and its advisors, VCG’s board of directors (other than Mr. Lowrie) unanimously determined that the merger, the merger agreement and the transactions contemplated thereby are advisable, fair to and in the best interests of VCG and its unaffiliated shareholders, approved the merger, the merger agreement and the transactions contemplated thereby and recommended that VCG’s shareholders approve and adopt the merger agreement.

 

The definitive merger agreement was then executed by the parties. VCG thereafter announced the proposed transaction on November 10, 2010.

 

On July 21, 2010, VCG’s board of directors (with Messrs. Lowrie and Ocello abstaining) unanimously resolved to reconstitute the Special Committee composed of three of VCG’s independent, non-employee directors and delegated to the Special Committee the exclusive power and authority to, among other things, (i) consider, evaluate, investigate and negotiate the terms and conditions of the Proposal, (ii) reject or discontinue pursuing the Proposal if the Special Committee, upon the review of the advice and recommendations of its legal, financial and other advisors, determines that pursuing the Proposal is not in the best interests of VCG’s shareholders, (iii) explore, consider and negotiate the terms and conditions of any potential transactions other than the Proposal, and (iv) make reports and recommendations to the entire Board as to the Proposal or any other alternative transaction or strategic alternative. VCG’s board of directors appointed George Sawicki (Chairman), Carolyn Romero and David Levine to serve on the Special Committee. See “Special Factors — Background of the Merger” for more information about the formation and authority of the Special Committee.

 

VCG’s board of directors determined that each member of the Special Committee would receive compensation for service on the Special Committee equal to $2,500 in cash per month, and that the Chairman of the Special Committee would receive additional compensation in an amount equal to $1,000 in cash per month. VCG paid Ms. Romero a total of $15,000 in cash for her service on the Special Committee for the period November 3, 2009 through April 30, 2010 and $10,000 for the period July 20, 2010 to October 31, 2010, the date on which her resignation became effective. Mr. Sieckman received a total of $15,000 in cash for his service on the Special Committee for the period November 3, 2009 through April 30, 2010. Mr. Levine

received a total of $15,000 in cash for his service on the Special Committee from July 20, 2010 through the date of this Proxy Statement. Mr. Sawicki received a total of $21,000 in cash for his service as Chairman of the Special Committee for the period November 3, 2009 through April 30, 2010 and $21,000 for the period July 20, 2010 through the date of this Proxy Statement.

 

The Special Committee

 

The Special Committee, on behalf of VCG as authorized by VCG’s board of directors, by unanimous vote at a meeting held on November 9, 2010 and after a presentation by its financial advisor, determined that the merger, the merger agreement and the transactions contemplated thereby are advisable, fair to and in the best interests of VCG and its unaffiliated shareholders. The Special Committee approved the merger, the merger agreement and the transactions contemplated thereby and recommended that VCG’s shareholders approve and adopt the merger agreement. The Special Committee also recommended that VCG’s board of directors approve the proposed transaction, including the merger, the merger agreement and the other transactions contemplated thereby, and recommend to VCG’s shareholders that they approve and adopt the merger agreement.

 

In the course of the Special Committee reaching the determinations and making the recommendations described above, the Special Committee considered the following factors as being generally positive or favorable in coming to its determinations and recommendations:

 

 

 

 

 

 

In the course of the Special Committee’s reaching the determinations and making the recommendations described above, the Special Committee considered the following factors to be generally negative or unfavorable in making its determinations and recommendations:

 

 

 

In the course of reaching the determinations and decisions, and making the recommendations, described above, the Special Committee considered the following factors relating to the procedural safeguards that the Special Committee believes were present to ensure the fairness of the merger and to permit the Special Committee to represent the interests of VCG’s unaffiliated shareholders, each of which the Special Committee believes supports its decision and provides assurance of the fairness of the merger to VCG’s unaffiliated shareholders:

 

 

 

The foregoing discussion of the information and factors considered by the Special Committee addresses the material factors considered by the Special Committee in its consideration of the merger agreement. In view of the variety of factors considered in connection with its evaluation of the merger agreement and the merger, the Special Committee did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its determination and recommendation. In addition, individual Special Committee members may have given different weights to factors. The Special Committee approved the merger agreement and the merger and recommended approval and adoption of the merger agreement based upon the totality of the information presented to and considered by it. The Special Committee conducted extensive discussions of, among other things, the factors described above, including asking extensive questions of VCG’s management and the Special Committee’s financial and legal advisors, and unanimously determined that the merger is both procedurally and substantively fair to and in the best interests of VCG’s unaffiliated shareholders, and to recommend to VCG’s board of directors that it approve the merger agreement and the merger.

 

VCG’s Board of Directors.

 

On November 9, 2010, VCG’s board of directors met to consider the reports and recommendations of the Special Committee with respect to the merger agreement. The Special Committee reported to VCG’s board of

directors on its review of the proposed transaction and the merger agreement. On the basis of the Special Committee’s recommendations and the other factors described below, VCG’s board of directors expressly adopted the Special Committee’s unanimous conclusion and analysis with respect to the fairness of the transaction and unanimously (with Mr. Lowrie taking no part in the vote or the recommendation) determined that the merger agreement and the merger are advisable, fair to and in the best interests of VCG’s unaffiliated shareholders, approved the merger, the merger agreement and the transactions contemplated thereby and recommended that VCG’s shareholders approve and adopt the merger agreement.

 

In the course of VCG’s board of directors reaching the determinations and making the recommendations described above, VCG’s board of directors considered (with Mr. Lowrie taking no part in such considerations) the following factors:

 

 

The foregoing discussion of the information and factors considered by VCG’s board of directors includes the material factors considered by VCG’s board of directors. In view of the variety of factors considered in connection with its evaluation of the merger, VCG’s board of directors did not find it practicable to, and did not quantify or otherwise, assign relative weights to the specific factors considered in reaching its determination and recommendation. In addition, individual directors may have given different weights to different factors. VCG’s board of directors unanimously approved (with Mr. Lowrie taking no part in the vote or the recommendation) the merger agreement and the merger and recommended approval and adoption of the merger agreement based upon the totality of the information presented to and considered by it.

 

Other than as described in this proxy statement, VCG’s board of directors is not aware of any firm offers by any other person during the prior two years for a merger or consolidation of VCG with another company, the sale or transfer of all or substantially all of VCG’s assets or a purchase of VCG’s securities that would enable such person to exercise control of VCG.

 

VCG’s board of directors (with Mr. Lowrie taking no part in such recommendation) recommends that you vote “ FOR ” the approval and adoption of the merger agreement.

 

The Special Committee retained North Point Advisors to act as its financial advisor, and, if requested, to render to the Special Committee an opinion as to the fairness, from a financial point of view, to VCG’s shareholders (other than the members of the Executive Group) of the $2.25 per share in cash to be paid in the merger. At the November 9, 2010 meeting of the Special Committee, North Point Advisors delivered to the Special Committee its oral opinion, which opinion was subsequently confirmed in writing, to the effect that, as of the date and based upon and subject to the qualifications and conditions set forth in the written opinion, the consideration of $2.25 in cash per share was fair, from a financial point of view, to VCG’s shareholders (other than the members of the Executive Group).

 

The full text of the North Point Advisors written opinion dated November 9, 2010, which sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by North Point Advisors in rendering its opinion, is attached as Appendix B to this proxy statement and is incorporated in its entirety herein by reference. VCG’s shareholders are urged to, and should, carefully read the North Point Advisors written opinion in its entirety. The North Point Advisors opinion addresses only the fairness, from a financial point of view and as of the date of the opinion, to VCG’s shareholders (other than the members of the Executive Group) of the $2.25 per share in cash to be paid in the merger. North Point Advisors’ written opinion was directed to the Special Committee and was not intended to be, and does not constitute, a recommendation as to how any of VCG’s shareholders should vote with respect to the merger or any other matter.

In connection with rendering the opinion described above and performing its related financial analyses, North Point Advisors:

 

 

In addition, North Point Advisors performed a discounted cash flows analysis for VCG on a stand-alone basis. North Point Advisors conducted such other analyses, examinations and inquiries and considered such other financial, economic and market criteria as it deemed necessary in arriving at its opinion. North Point Advisors also conducted discussions with members of senior management and representatives of VCG concerning the financial condition, historical and current operating results, business and prospects for VCG, as well as its business and prospects on a stand-alone basis.

 

The following is a summary of the material financial analyses performed by North Point Advisors in connection with the preparation of its fairness opinion, which was reviewed with the Special Committee at a meeting held on November 9, 2010 and was formally delivered to the Special Committee at such meeting. The preparation of analyses and a fairness opinion is a complex analytic process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, this summary does not purport to be a complete description of the analyses performed by North Point Advisors or of its presentations to the Special Committee on November 9, 2010.

 

This summary includes information presented in tabular format, which tables must be read together with the text of each analysis summary, and considered as a whole, in order to fully understand the financial analyses presented by North Point Advisors. The tables alone do not constitute a complete summary of the financial analyses. The order in which these analyses are presented below, and the results of those analyses, should not be taken as any indication of the relative importance or weight given to these analyses by North Point Advisors or the Special Committee. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before November 9, 2010, and is not necessarily indicative of current market conditions.

 

North Point Advisors reviewed the historical price range for VCG’s common stock at one month, six months and one year prior to the November 10, 2010 public announcement of the execution of the merger agreement. This analysis indicated that the price per share of VCG common stock to be paid to VCG’s shareholders pursuant to the merger agreement represented a 36.4% premium over the price per share of VCG ’s common stock on July 21, 2010, the last trading day before public announcement of the proposal that resulted in the merger agreement (or a 20.9% premium over the closing price per share of VCG ’s common stock on November 9, 2010, the last trading day before public announcement of the execution of the merger agreement) and a 39.4% premium over the volume weighted average share price for the 30 calendar days prior to the public announcement of the execution of the merger agreement on July 21, 2010. In addition, this

analysis indicated that the $2.25 price falls above the high end of the one month equity value range and the six month equity value range, and at the midpoint of the 12 month equity value range.

 

North Point Advisors reviewed and compared certain financial information and valuation multiples for VCG to corresponding financial information and public market multiples for the following publicly traded corporations in the entertainment industry and also in the micro-cap restaurant industry (defined as casual dining companies with a market capitalization between $25 million and $200 million).

 

Entertainment Companies:

 

Bowl America Inc.;
Dover Motorsports Inc.;
Flanigan’s Enterprises Inc.;
Gaylord Entertainment Co.;
Rick’s Cabaret International, Inc.; and
The Marcus Corporation.

 

Microcap Restaurants:

 

Ark Restaurants Corp.;
Benihana Inc.;
J. Alexander’s Corp.;
Kona Grill Inc.;
McCormick & Schmick’s; and
O’Charley’s Inc.

 

Although most of the selected companies are not directly comparable to VCG, the companies included were chosen because they are publicly traded companies with operations that for purposes of analysis may be considered similar to VCG’s operations. North Point Advisors considered Rick’s (as the only other publicly traded operator of adult entertainment gentlemen’s clubs) to be the single company most comparable to VCG. North Point Advisors also considered the group of microcap restaurants to be more comparable to VCG than the group of entertainment companies.

 

North Point Advisors calculated various financial multiples for such comparable companies based on ratio of such companies’ operating data (obtained from SEC filings and Capital IQ estimates as of November 9, 2010) to the (i) enterprise value of such companies, and (ii) the equity value per share of such companies. North Point Advisors reviewed the third quartile, average, median and first quartile statistics for the comparable companies grouping to determine appropriate high and low multiples for each statistic.

 

North Point Advisors then compared the range of the first to third quartiles of such multiples with the multiples obtained for VCG. VCG’s multiples were calculated based on the ratio of VCG’s operating data (provided by VCG’s management) to an implied enterprise value of $64.0 million (based on the $2.25 per share merger consideration) and then taking into account VCG’s net debt of $27.2 million as of September 30, 2010.) With respect to the comparable companies, North Point Advisors calculated:

 

 

The results of these analyses are summarized in the table below. Because North Point Advisors deemed the group of microcap restaurants to be more comparable to VCG than the group of entertainment companies, the table below only shows the data derived from the microcap restaurant grouping.

 

 

Ratios are considered not material (designated by “NM” in the table above) if they are negative or greater than 25.

 

Based on the first to third quartile range for these multiples, the resulting implied enterprise value for VCG ranged from $48.3 million to $67.9 million, and the resulting implied equity value per share ranged from $1.30 to $2.50. North Point Advisors compared this range of enterprise values to the implied enterprise value of $64.0 million contemplated by the merger agreement and compared this range of equity values per share to the per share consideration to be paid pursuant to the merger agreement of $2.25.

 

North Point Advisors also calculated the same various financial multiples for Rick’s, which North Point Advisors considered the company most comparable to VCG. The results of the analyses for Rick’s are summarized as follows:

 

 

Based on the above multiples for Rick’s, the resulting implied enterprise value for VCG ranged from $36.6 million to $56.4 million, and the resulting implied equity value per share ranged from $0.58 to $1.80. North Point Advisors compared this range of enterprise values to the implied enterprise value of $64.0 million contemplated by the merger agreement and compared this range of equity values per share to the per share consideration to be paid pursuant to the merger agreement of $2.25.

 

North Point Advisors reviewed the terms of certain recent merger and acquisition transactions reported in SEC filings, public company disclosures, press releases, industry and popular press reports, databases and other sources relating to the following selected transactions (listed by target/acquiror) in the following industries announced since 2004:

 

Restaurants with Performance Issues:

 

Clubs/Entertainment Related:

 

 

For each of the selected transactions, North Point Advisors calculated and compared multiples for the target companies based on the ratio of the enterprise value to the latest 12 months net sales and the enterprise value to the latest 12 months EBITDA. North Point Advisors reviewed the third quartile and first quartile statistics for the precedent transactions grouping to determine appropriate high and low multiples for each statistic.

 

The results of these analyses are summarized in the table below. Because North Point Advisors deemed the transactions from the group of restaurants with performance issues to be more comparable to VCG than the group of club/entertainment related transactions, the table below only shows that data derived from the restaurants with performance issues grouping.

 

Based on the first to third quartile range for these multiples, the resulting implied enterprise value for VCG ranged from $59.1 million to $73.7 million and the resulting implied equity value per share ranged from $1.96 to $2.85. North Point Advisors compared this range of enterprise values to the implied enterprise value of $64.0 million contemplated by the merger agreement and compared this range of equity values per share to the per share consideration to be paid pursuant to the merger agreement of $2.25.

 

Based on the first to third quartile range of such premiums paid for these companies, the resulting implied equity value per share ranged from $2.02 to $2.57. North Point Advisors compared this range of equity values per share to the per share consideration to be paid pursuant to the merger agreement of $2.25.

 

In addition, North Point Advisors indicated that the $2.25 price per share of VCG’s common stock to be paid to VCG’s shareholders pursuant to the merger represented a premium of 36.4% based on the $1.65 closing price per share on July 21, 2010, the last trading day before public announcement of the proposal that resulted in the merger agreement.

 

North Point Advisors analyzed the premium paid for acquired public entities in the retail and consumer spaces since 2005 with deal values between $10 million and $1 billion, relative to the target’s stock prices one day, one week and one month prior to the date that the transaction was announced. North Point Advisors reviewed the third quartile, average, median and first quartile statistics for the premiums paid on comparable acquisitions to determine appropriate high and low multiples for each statistic. The following table presents the result of this analysis:

 

 

North Point Advisors performed three different discounted cash flow analyses on VCG. For these analyses, North Point Advisors used VCG’s management projections for 2010 and projections developed by North Point Advisors and approved by management for 2011 through 2015 (referred to in this proxy statement as the “Management Case”). North Point Advisors then also developed a “Downside Case” using more conservative assumptions than those contained in the Management Case and also an “Upside Case” using more aggressive conservative assumptions than those contained in the Management Case.

 

North Point Advisors calculated implied prices per share of VCG’s common stock using illustrative terminal values in the year 2015 based on multiples ranging from 5.0x EBITDA to 7.0x EBITDA. These illustrative terminal values were then discounted to calculate implied indications of present values using discount rates ranging from 15.0% to 20.0%. The various ranges for discount rates were chosen based on analyses of VCG’s weighted average of cost of capital. Using the Management Case, the resulting implied equity values per share ranged from $0.87 to $2.01. Using the Downside Case, the resulting implied equity values per share ranged from $0.13 to $0.88. Using the Upside Case, the resulting implied equity values per share ranged from $1.63 to $3.15. North Point Advisors compared this range of equity values per share to the per share consideration to be paid pursuant to the merger agreement of $2.25.

 

North Point Advisors performed an illustrative leveraged buyout analysis using financial information provided by VCG’s management and projections and financing assumptions based on North Point Advisors’ estimates. Assuming the refinancing of all of VCG’s existing debt upon a transaction and hypothetical required internal rates of return ranging from 20% to 30% to a financial buyer, and hypothetical financial buyer enterprise value to EBITDA exit multiples ranging from 5.0x to 7.0x, the foregoing analysis implied a current

enterprise value for VCG of $42.9 million to $50.5 million, or a price per share range of $0.98 to $1.45. North Point Advisors noted that the merger consideration of $2.25 per share was above this range.

 

North Point Advisors performed an illustrative breakup analysis, which was designed to show what proceeds could be distributed to VCG’s shareholders assuming that VCG (i) could sell all of its clubs at the same EBITDA multiple that VCG paid when such clubs were acquired, and (ii) all such proceeds could be distributed to shareholders with no corporate taxes being paid by VCG. Using such assumptions, North Point Advisors applied such multiples to the 2010 estimated EBITDA for each club and calculated that the maximum distributable amount would be $1.93 per share.

 

The summary of North Point Advisors’ analyses set forth above does not contain a complete description of these analyses, but does summarize the material analyses performed by North Point Advisors in rendering its opinion. The above summary is qualified in its entirety by reference to the written opinion of North Point Advisors attached as Appendix B to this proxy statement. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. North Point Advisors believes that its analyses and the summary set forth above must be considered as a whole and that selecting portions of its analyses or of the summary, without considering the analyses as a whole or all of the factors included in its analyses, would create an incomplete view of the processes underlying the analyses set forth in the North Point Advisors written opinion. In arriving at its opinion, North Point Advisors considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis. Instead, North Point Advisors made its determination as to fairness on the basis of its experience and financial judgment after considering the results of all of its analyses. The fact that any specific analysis has been referred to in the summary above is not meant to indicate that this analysis was given greater weight than any other analysis. No company or transaction used in the above analyses as a comparison is directly comparable to VCG or the transactions contemplated by the merger agreement.

 

North Point Advisors performed its analyses solely for purposes of providing its opinion to the Special Committee. In performing its analyses, North Point Advisors made numerous assumptions with respect to industry performance, general business and economic conditions and other matters. Certain of the analyses performed by North Point Advisors are based upon forecasts of future results furnished to North Point Advisors by VCG’s management, which are not necessarily indicative of actual future results and may be significantly more or less favorable than actual future results. These forecasts are inherently subject to uncertainty because, among other things, they are based upon numerous factors or events beyond the control of the parties or their respective advisors. North Point Advisors does not assume responsibility if future results are materially different from forecasted results.

 

North Point Advisors has relied upon and assumed, without assuming liability or responsibility for independent verification, the accuracy and completeness of all information that was publicly available or was furnished, or otherwise made available, to it or discussed with or reviewed by it. North Point Advisors has further relied upon the assurances of VCG’s management that the financial information provided has been prepared on a reasonable basis in accordance with industry practice and that VCG’s management is not aware of any information or facts that would make any information provided to North Point Advisors incomplete or misleading. Without limiting the generality of the foregoing, for the purpose of its opinion, North Point Advisors has assumed that with respect to financial forecasts, estimates and other forward-looking information reviewed by it, that such information has been reasonably prepared based on assumptions reflecting the best currently available estimates and judgments of VCG’s management as to the expected future results of VCG’s operations and financial condition to which such financial forecasts, estimates and other forward-looking information relate. North Point Advisors expresses no opinion as to any such financial forecasts, estimates or forward-looking information or the assumptions on which they were based. With VCG’s consent, North Point Advisors has relied on advice of the outside counsel to the Special Committee and VCG’s independent

accountants, and on the assumptions of VCG’s management, as to all accounting, legal, tax and financial reporting matters with respect to VCG and the merger agreement.

 

North Point Advisors assumed that the merger would be completed on the terms set forth in the merger agreement reviewed by North Point Advisors, without amendments and with full satisfaction of all covenants and conditions without any waiver. North Point Advisors expressed no opinion regarding whether the necessary approvals or other conditions to the consummation of the merger will be obtained or satisfied.

 

North Point Advisors did not assume responsibility for performing, and did not perform any appraisals or valuations of specific assets or liabilities of VCG. North Point Advisors expresses no opinion regarding the liquidation value (except to the extent described above under “Breakup Analysis’) or solvency of any entity. North Point Advisors did not undertake any independent analysis of any outstanding, pending or threatened litigation, regulatory action, possible unasserted claims or other contingent liabilities to which VCG, or any of its respective affiliates, are a party or may be subject. At the direction of the Special Committee, and with its consent, North Point Advisors’ opinion made no assumption concerning, and therefore did not consider, the potential effects of litigation, claims, investigations, or possible assertions of claims, or the outcomes or damages arising out of any such matters.

 

North Point Advisors’ opinion was necessarily based on the information available to it and the facts and circumstances as they existed and were subject to evaluation as of the date of the opinion. Events occurring after the date of the opinion could materially affect the assumptions used by North Point Advisors in preparing its opinion. North Point Advisors expresses no opinion as to the prices at which VCG’s shares of common stock have traded or may trade following announcement of the transaction or at any time after the date of the opinion. North Point Advisors has not undertaken and is not obligated to affirm or revise its opinion or otherwise comment on any events occurring after the date it was rendered.

 

North Point Advisors was not requested to opine as to, and the opinion does not address, the basic business decision to proceed with the merger or the transactions contemplated by the merger agreement, the pre-signing process conducted by VCG, the merits of the transaction compared to any alternative business strategy or transaction that may be available to VCG, the Executive Group’s ability to fund the merger consideration, any other terms contemplated by the merger agreement or the fairness of the amount or nature of the compensation to the VCG’s officers, directors or employees, or any class of such persons, relative to the compensation to be received by holders of VCG’s common stock. North Point Advisors did not express any opinion as to whether any alternative transaction might produce consideration for VCG’s shareholders in excess of the consideration.

 

North Point Advisors is regularly engaged as a financial advisor in connection with mergers and acquisitions, underwritings and secondary distributions of securities and private placements. The Special Committee selected North Point Advisors to render its fairness opinion in connection with the transactions contemplated by the merger agreement on the basis of its experience and reputation in acting as a financial advisor in connection with mergers and acquisitions.

 

North Point Advisors was engaged by VCG to render an opinion to the Special Committee and will receive an opinion fee of $250,000, which is not contingent upon the consummation of the merger. In the ordinary course of its business, North Point Advisors and its affiliates may actively trade securities of VCG for its own account or the account of its customers and, accordingly, may at any time hold a long or short position in such securities. North Point Advisors may also, in the future, provide investment banking and financial advisory services to VCG, the Executive Group or entities that are affiliated with VCG or the Executive Group, for which it would expect to receive compensation.

 

North Point Advisors’ written opinion was one of many factors taken into consideration by the Special Committee and VCG’s board of directors in making the determination to approve the merger agreement and recommend that VCG’s shareholders vote in favor of the Merger Proposal.

 

Under the rules governing “going-private” transactions, Family Dog, FD Acquisition Co., Mr. Lowrie and Mr. Ocello are required to express their beliefs as to the substantive and procedural fairness of the merger to VCG’s unaffiliated shareholders. Family Dog, FD Acquisition Co., Mr. Lowrie and Mr. Ocello are making the statements included in this subsection solely for the purposes of complying with the requirements of Rule 13e-3 and related rules promulgated under the Exchange Act. The views of Family Dog, FD Acquisition Co., Mr. Lowrie and Mr. Ocello as to the fairness of the proposed merger should not be construed as a recommendation to any of shareholders as to how such shareholder should vote on the Merger Proposal.

 

Family Dog, FD Acquisition Co., Mr. Lowrie and Mr. Ocello believe that the terms and conditions of the merger are substantively fair to VCG and its unaffiliated shareholders, based on the following substantive factors:

 

Current Market Price.   The price of $2.25 per share to be paid in the merger represents a premium of approximately 36.4% over the reported closing price for the shares on July 21, 2010, the last trading day before the public announcement of Mr. Lowrie’s reaffirmed Proposal, and 20.9% over the closing price of VCG’s common stock on November 9, 2010, the last trading day before it was publicly announced that VCG had entered into the merger agreement.

 

Cash Consideration.   The merger will provide consideration to VCG ’s shareholders entirely in cash, which will allow them to pursue other investment alternatives.

 

Premiums Represented.   The price of $2.25 per share is within the range of the premiums paid over pre-proposal market prices in other transactions considered by Messrs. Lowrie and Ocello.

 

Comparable Companies.   The ratio of the merger consideration of $2.25 per share to VCG earnings is within the range of the price-to-earnings ratios of other adult entertainment providers.

 

Market Receptiveness to Adult Entertainment Providers.   The public securities markets have not been responsive to improvements by adult entertainment providers and appear to be influenced by concerns over stock price volatility and other factors not within a company’s control. After consummation of the merger, VCG’s current unaffiliated shareholders (unless they are members of Family Dog) will no longer own any VCG’s common stock and, therefore, the merger will eliminate this concern about future price pressure on VCG’s common stock.

 

Comparable Transactions.   Family Dog, FD Acquisition Co. and Messrs. Lowrie and Ocello reviewed similar precedent transactions in the same or similar industry as well as the VCG’s historical financial performance, its financial results and historical market prices of its shares and believe that the merger consideration is fair based on that review; and

 

Opinion of North Point Advisors.   Before the Special Committee and VCG’s board of directors approved the merger, North Point Advisors, the Special Committee’s financial advisor, delivered its opinion to the Special Committee and VCG’s board of directors, which was subsequently confirmed in writing, that as of the date of its opinion and based upon and subject to the factors and assumptions set forth in its opinion, the merger consideration of $2.25 per share in cash to be received by the holders of VCG’s common stock (other than the Executive Group) under the merger agreement is fair from a financial point of view to such holders.

 

Family Dog, FD Acquisition Co., Mr. Lowrie and Mr. Ocello believe that the terms and conditions of the merger are procedurally fair to VCG and its unaffiliated shareholders, based on the following procedural factors:

 

Approval of Disinterested Shareholders.   The merger agreement explicitly requires the affirmative vote of both (i) the holders of a majority of the outstanding shares of VCG’s common stock entitled to vote at the special meeting, and (ii) a majority of the votes actually cast at the special meeting. Any votes cast by members of the Executive Group with regard to shares of VCG common stock held by the members of the Executive Group will not be taken into account for any purpose when determining whether the requisite

majority of the minority shareholder vote set forth in clause (ii) has been achieved (e.g., in calculating votes cast in favor or total votes cast).

 

Opportunity for Third Party Bids.   The Special Committee directed North Point Advisors to contact potential financial and strategic buyers to determine their interest in making a competing bid for VCG and publicly announced it was doing so. No firm proposals resulted from this process.

 

Opportunity to Change Recommendation.   Although the merger agreement requires VCG to stop seeking other proposals, it permits a change in the recommendation of the Special Committee and VCG’s board of directors in response to a bona fide unsolicited proposal if necessary to comply with their fiduciary duties to shareholders.

 

The interests of our unaffiliated shareholders were represented by the Special Committee comprised of independent, non-employee directors, which had the exclusive authority to review, evaluate and negotiate the terms and conditions of the merger agreement on behalf of VCG, with the assistance of the Special Committee’s financial and legal advisors. Accordingly, Family Dog, FD Acquisition Co., Mr. Lowrie and Mr. Ocello did not engage a financial advisor for the purpose of reviewing and evaluating the merits of the proposed merger from the unaffiliated shareholders’ viewpoint. Family Dog, FD Acquisition Co., Mr. Lowrie and Mr. Ocello believe that the merger agreement and the merger are substantively and procedurally fair to the unaffiliated shareholders on the basis of the factors described above in this section under “Position of Family Dog, FD Acquisition Co., Mr. Lowrie and Mr. Ocello as to fairness,” as well as the factors described under “Special Factors — Recommendation of the Special Committee and VCG’s Board of Directors; Reasons for Recommending Approval of the Merger Agreement” and agree with the analyses and conclusions of the Special Committee and VCG’s board of directors, based upon the reasonableness of those analyses and conclusions, which they adopt, and their respective knowledge of VCG, as well as the factors considered by, and the findings of, the Special Committee and VCG’s board of directors with respect to the fairness of the merger to such unaffiliated shareholders. In addition, Family Dog, FD Acquisition Co., Mr. Lowrie and Mr. Ocello considered the fact that the Special Committee received an opinion from North Point Advisors to the effect that based upon and subject to the limitations and qualifications set forth in the written opinion, as of the date of the opinion, the merger consideration of $2.25 in cash per share of VCG’s common stock that is to be received by the unaffiliated shareholders in the merger is fair, from a financial point of view, to such shareholders. See “Special Factors — Recommendation of the Special Committee and VCG’s Board of Directors; Reasons for Recommending Approval of the Merger Agreement.”

 

The foregoing discussion of the information and factors considered and given weight by Family Dog, FD Acquisition Co., Mr. Lowrie and Mr. Ocello in connection with the fairness of the merger agreement and the merger is not intended to be exhaustive but is believed to include all material factors they considered. Family Dog, FD Acquisition Co., Mr. Lowrie and Mr. Ocello did not find it practicable to, and did not, quantify or otherwise attach relative weights to the foregoing factors in reaching their position as to the fairness of the merger agreement and the merger. Family Dog, FD Acquisition Co., Mr. Lowrie and Mr. Ocello believe that the foregoing factors provide a reasonable basis for their belief that the merger is fair to VCG and its unaffiliated shareholders.

 

The primary purpose of the merger for Messrs. Lowrie and Ocello is to benefit from VCG’s future earnings and growth after VCG’s common stock ceases to be publicly traded through their ownership of membership interests of Family Dog. Messrs. Lowrie and Ocello believe that structuring the transaction in such a manner is preferable to other transaction structures because it will enable the acquisition of all shares of VCG’s common stock at the same time and it represents an opportunity for VCG’s unaffiliated shareholders to immediately receive a substantial premium for their shares based upon the closing price for VCG’s common stock on July 21, 2010, the last trading day before public announcement of the proposal that resulted in the merger agreement. In addition, Messrs. Lowrie and Ocello believe that, following the merger, VCG will have greater operating flexibility, allowing management to concentrate on long-term growth, reduce VCG’s focus on the quarter-to-quarter performance, as often emphasized by the public markets, and pursue alternatives that

VCG would not have as a public company, such as the ability to pursue transactions without focusing on the market reaction or risk profile of VCG’s unaffiliated shareholders with respect to such transactions.

 

If the proposed merger is completed, VCG will become a direct subsidiary of Family Dog. For Family Dog and FD Acquisition Co., the purpose of the merger is to effectuate the transactions contemplated by the merger agreement.

 

The purpose of the merger for VCG is to enable VCG’s shareholders (other than Family Dog (who at the time of the consummation of the merger will hold all shares of VCG’s common stock currently beneficially owned by the Executive Group) and shareholders who properly exercise their dissenters’ rights under Colorado law) to immediately realize the value of their investment in VCG through their receipt of the per share merger consideration of $2.25 in cash, representing a premium of approximately (i) 36.4% over the closing price of our common stock on July 21, 2010, the last trading day before Mr. Lowrie’s reaffirmed Proposal was made public, and (ii) 20.9% over the closing price of VCG’s common stock on November 9, 2010, the last trading day before it was publicly announced that VCG had entered into the merger agreement. For the reasons discussed under “Special Factors — Recommendation of the Special Committee and Board of Directors; Reasons for Recommending Approval of the Merger Agreement,” VCG’s board of directors unanimously determined (with Mr. Lowrie taking no part in the vote or recommendation) that the merger agreement and the merger are advisable, fair to and in the best interests of VCG and its unaffiliated shareholders.

 

It is expected that, upon consummation of the merger, VCG’s operations will be conducted substantially in the same manner as they currently are being conducted except that VCG’s common stock will cease to be publicly traded and will no longer be listed on any exchange or quotation system, including NASDAQ, so price quotations will no longer be available. Further, VCG will not be subject to many of the obligations and constraints, and the related direct and indirect costs, associated with having publicly traded equity securities, and VCG will cease to continue to file periodic reports with the Securities and Exchange Commission.

 

Following the merger, VCG will continue to evaluate and review its business and operations and may develop new plans and proposals or elect to pursue acquisitions or other opportunities that it considers appropriate to maximize its value.

 

VCG has in the past and recently been approached by third parties unaffiliated with the Executive Group indicating an interest in potentially purchasing certain clubs owned and operated by VCG. While VCG has not entered into any agreement or letter of intent with respect to any such potential divestiture, VCG and Family Dog will continue to evaluate such proposals after the merger to the extent they become available and are on favorable terms to VCG.

 

While Mr. Lowrie, Mr. Ocello and Family Dog will retain the ability to modify employee compensation, the merger agreement requires that VCG benefits remain at substantially the same level for at least one year following the merger. No additional or improved benefits to VCG managers have been agreed to or promised in connection with the merger.

 

Except as disclosed in this proxy statement, none of Family Dog, FD Acquisition Co., Mr. Lowrie and Mr. Ocello has any present plans or proposals that would result in an extraordinary corporate transaction, such as a merger, liquidation, relocation of operations, or sale or transfer of a material amount of assets, involving VCG or its subsidiaries, or any material changes in VCG’s indebtedness or capitalization, business or composition of its management or personnel.

 

If the merger is consummated, FD Acquisition Co. will be merged with and into VCG, and VCG will continue as the surviving corporation. Following the consummation of the merger, all of VCG’s issued and outstanding common stock will be owned by Family Dog. Upon consummation of the merger, each share of

VCG’s common stock issued and outstanding immediately prior to the effective time of the merger (other than shares held by Family Dog, held in treasury by VCG or owned by shareholders who properly exercise their dissenters’ rights under Colorado law) will be cancelled and converted automatically into the right to receive $2.25 in cash, without interest. At the effective time of the merger, each option to purchase shares of VCG common stock that is outstanding and unexercised will be cancelled and VCG will not be required to make any payments to the holders of such options because the exercise price per share of each such option, in all instances, exceeds the merger consideration. See “The Merger Agreement — Treatment of Stock Options” for a further description of the treatment of stock options in the merger.

 

As part of, or in connection with, the merger: (i) the members of the Executive Group will transfer all shares of VCG’s common stock they hold (a total of 5,138,878 shares) to Family Dog in exchange for membership interests in Family Dog, (ii) Mr. Lowrie will, and certain other creditors of VCG may elect to, assign to Family Dog their rights to certain debt owed to each by VCG in exchange for membership interests in Family Dog, and (iii) as further described under “The Merger Agreement — Contribution of VCG Common Stock to Family Dog and Conversion of Debt Held by Family Dog,” Family Dog may elect to cancel the indebtedness of VCG transferred to it from such parties in exchange for shares of VCG’s common stock. In connection with the transfer of shares of VCG common stock by the Executive Group to Family Dog, Mr. Lowrie will transfer such common stock held by him individually to Lowrie Management LLLP, which will then transfer the aggregate number of shares of VCG’s common stock held by it (including the shares transferred in this way by Mr. Lowrie) to Family Dog in exchange for membership interests in Family Dog.

 

Upon consummation of the merger and the transactions contemplated above, Family Dog will own all of VCG’s issued and outstanding shares of common stock. A table detailing the expected capitalization of VCG and Family Dog following the merger is set forth under “Special Factors — Arrangements with Respect to VCG and Family Dog Following the Merger.”

 

A primary benefit of the merger to VCG’s shareholders (other than members of the Executive Group) will be the right of such shareholders to receive a cash payment of $2.25, without interest, for each share of VCG’s common stock held by such shareholders as described above, an approximately 36.4% premium over the reported closing price for the shares on July 21, 2010, the last trading day before the public announcement of Mr. Lowrie’s reaffirmed Proposal, and an approximately 20.9% premium over the closing price of VCG’s common stock on November 9, 2010, the last trading day prior to the public announcement of the execution of the merger agreement. Additionally, such shareholders will avoid the risk of any possible decrease in our future earnings, growth or value, and the risks related to our additional leverage, following the merger.

 

The primary detriments of the merger to such shareholders include the lack of interest of such shareholders in VCG’s potential future earnings, growth or value. Additionally, the receipt of cash in exchange for shares of VCG’s common stock pursuant to the merger agreement will generally be a taxable sale transaction for U.S. federal income tax purposes to those of VCG’s shareholders who surrender shares of VCG’s common stock in the merger.

 

In connection with the merger, the members of the Executive Group will receive benefits and be subject to obligations that are different from, or in addition to, the benefits of VCG’s shareholders generally. These benefits and detriments arise from (i) the right to a continued ownership interest in VCG following the consummation of the merger, and (ii) continued employment with VCG.

 

The primary benefits of the merger to the members of the Executive Group and the members of Family Dog, based on their ownership of membership interests in Family Dog, include their respective interests in VCG’s potential future earnings and growth which, if VCG successfully executes its business strategies, could be substantial. Additionally, following the merger, VCG will be a private company, and as such will be relieved of the burdens imposed on companies with publicly traded equity, including the requirements and restrictions on trading that VCG’s directors, officers and beneficial owners of more than 10% of VCG’s common stock face as a result of the provisions of Section 16 of the Exchange Act. Additionally, following the merger, Mr. Lowrie will retain his position as Chief Executive Officer and Mr. Ocello will retain his position as President and Chief Operating Officer of VCG as the surviving corporation.

The primary detriments of the merger to the members of the Executive Group and the members of Family Dog include the fact that all of the risk of any possible decrease in the surviving corporation’s earnings, growth or value, and all of the risks related to VCG’s current and future indebtedness, after the merger will be borne by Family Dog. Additionally, the investment in Family Dog and VCG, as the surviving corporation, will not be liquid, with no public trading market for such securities, and the equity securities of Family Dog will be subject to restrictions on transfer.

 

VCG’s common stock is currently registered under the Exchange Act and is quoted on the NASDAQ Global Market under the symbol “VCGH.” As a result of the merger, VCG, as the surviving corporation, will become a privately held corporation, and there will be no public market for VCG’s common stock. After the merger, VCG’s common stock will cease to be quoted on NASDAQ, and price quotations with respect to sales of shares of VCG’s common stock in the public market will no longer be available.

 

If the merger is not approved by VCG’s shareholders or if the merger is not consummated for any other reason, shareholders will not receive any payment for their shares in connection with the merger. Instead, VCG will remain a public company and its common stock will continue to be listed and traded on NASDAQ. In addition, if the merger is not consummated, VCG expects that, management will operate VCG’s business in a manner similar to the manner in which it is being operated today and that our shareholders will continue to be subject to the same risks and opportunities as they currently are.

 

From time to time, VCG’s board of directors will evaluate and review, among other things, VCG’s business operations, properties, dividend policy and capitalization and make such changes as are deemed appropriate and continue to seek to identify strategic alternatives to enhance shareholders’ value. If the merger agreement is not approved by VCG’s shareholders or if the merger is not consummated for any other reason, there can be no assurance that any other transaction that is found acceptable will be offered, or that VCG’s business, prospects, results of operations or stock price will not be adversely impacted or that VCG’s management team will remain intact. In addition, if the merger is not consummated, it is anticipated that Mr. Lowrie will continue to hold a significant interest in VCG and might be able to effectively control whether an alternative change in control transaction could be approved by VCG’s shareholders.

 

In connection with, the merger: (i) the members of the Executive Group will transfer all of their respective shares of common stock of VCG (a total of 5,138,878 shares) to Family Dog in exchange for membership interests in Family Dog, (ii) Mr. Lowrie will, and two other creditors of VCG may elect to, assign to Family Dog their rights to certain debt owed to each by VCG in exchange for membership interests in Family Dog; and (iii) as further described under “The Merger Agreement — Contribution of VCG Common Stock to Family Dog and Conversion of Debt Held by Family Dog,” Family Dog may elect to cancel the indebtedness of VCG transferred to it from such parties in exchange for shares of VCG’s common stock. In connection with the transfer of shares of VCG common stock by the Executive Group to Family Dog, Mr. Lowrie will transfer such common stock held by him individually to Lowrie Management LLLP, which will then transfer the aggregate number of shares of VCG’s common stock held by it (including the shares transferred in this way by Mr. Lowrie) to Family Dog in exchange for membership interests in Family Dog.

 

Additional information about Messrs. Lowrie’s and Ocello’s interests in the merger in their capacities as officers and, in the case of Mr. Lowrie, a director, of VCG is set forth under “Special Factors — Interests of VCG’s Directors and Officers in the Merger.”

 

Pursuant to the merger agreement, (i) the members of the board of directors of the surviving corporation will be the same as the sole director of FD Acquisition Co., Mr. Lowrie, immediately prior to the consummation of the merger, and (ii) the officers of the surviving corporation will be the same as the officers of FD Acquisition Co., Messrs. Lowrie and Ocello, immediately prior to the consummation of the merger.

Other than Messrs. Lowrie and Ocello, it is not currently contemplated that any of VCG’s current directors or executive officers will serve as a director, manager or executive officer of either Family Dog or VCG after consummation of the merger.

 

Each of VCG’s current directors are named parties to certain litigation relating to the current proposed merger which was filed in Jefferson County, Colorado. The litigation is currently pending and a resolution of this litigation is not a condition to the closing of the merger. See “The Merger Agreement — Litigation Related to the Merger.”

 

Directors McGraw, Grusin, Sawicki and Levine hold no stock options to purchase shares of VCG’s common stock. Mr. Ocello currently holds 10,000 vested options to purchase shares of VCG’s common stock. Each option to purchase shares of VCG common stock that is outstanding, unexercised, and vested at the effective time of the merger will be cancelled and the holders of such options will be entitled to receive an amount (without interest), in cash, equal to the product of the number of shares subject to each such option multiplied by the excess, if any, of the merger consideration over the exercise price per share of each such option, less applicable withholding taxes. The exercise prices of all outstanding stock options are substantially above $2.25. Accordingly, at the closing of the merger, such stock options will be cancelled without any payment.

 

Mr. Grusin beneficially owns approximately $410,000 aggregate principal amount of VCG’s outstanding debt. Mr. McGraw beneficially owns $50,000 aggregate principal amount of the VCG’s outstanding debt. The debt held by Messrs. Grusin and McGraw will remain outstanding after consummation of the merger under their respective terms and conditions.

 

Mr. Lowrie beneficially owns through Lowrie Management LLLP $5,700,000 aggregate principal amount of VCG’s outstanding debt. Before or contemporaneously with the completion of the merger, Mr. Lowrie will assign to Family Dog all rights to approximately $3,000,000 debt owed by VCG to him in exchange for membership interests in Family Dog. Mr. Lowrie intends to use the remaining $2,700,000 of the debt owed by VCG to him to purchase from VCGH Real Estate Holdings, Inc., a wholly owned subsidiary of VCG, the real property on which two of the VCG’s nightclubs are located. The real property consists of the land and buildings on and in which PT’s ^® Showclub in Indianapolis, Indiana and PT’s ^® Brooklyn in Brooklyn, Illinois are located. Lowrie Management LLLP will purchase the land and building associated with PT’s ^® Showclub in Indianapolis, Indiana for $2,200,000 and the land and building associated with PT’s ^® Brooklyn in Brooklyn, Illinois for $500,000. The purchase price for the Indianapolis, Indiana property was based on an appraisal received from an appraisal firm. The purchase price for the Brooklyn, Illinois property was calculated based on a 12% return under the current lease terms. Lowrie Management LLLP will pay for the real estate by canceling certain promissory notes issued by VCG with an outstanding principal balance of $2,700,000. Lowrie Management LLLP will then assume the leases that are currently in place for both premises, with the same terms and conditions going forward after the closing of the acquisition of the two properties.

 

Mr. Lowrie and Mr. Ocello will contribute to Family Dog all shares of VCG’s common stock they beneficially own immediately before the effective time of the merger in exchange for equity ownership interests in Family Dog. At the effective time of the merger, any such shares held by Family Dog will be cancelled without any cash payment or other consideration.

 

Each of Mr. Lowrie and Mr. Ocello is a party to an employment agreement that would provide such executive officer benefits in the amount of approximately $2,610,000 and $2,416,000, respectively, upon a change of control. Each of the employment agreements will be terminated immediately prior to the merger and no change of control or other payments, except for unpaid salaries, bonuses and health benefits or similar arrangements, will be due and payable from VCG after the merger under the employment agreements.

 

In addition, Mr. Lowrie will retain his position as Chief Executive Officer and Mr. Ocello will retain his position as President and Chief Operating Officer of the surviving corporation following the merger.

 

From and after the effective time of the merger, Family Dog will, and will cause the surviving corporation to, indemnify and hold harmless to the fullest extent permitted under applicable law each of VCG’s present and former directors and officers (who are referred to in this proxy statement as an “indemnified party”) against any costs, expenses (including reasonable attorneys’ fees), judgments, fines, losses, claims, damages, liabilities and amounts paid in settlement in connection with any claim, action, suit, proceeding or investigation arising out of, pertaining to any facts or events existing or occurring at or prior to the effective time of the merger, including the merger and the other transactions contemplated by the merger agreement and any acts or omissions in connection with such persons serving as an officer or director of VCG. If any such claim, action, suit, proceeding or investigation occurs, Family Dog or the surviving corporation will advance to each indemnified party the expenses it incurs in defending against any such event to the fullest extent permitted by applicable law. No indemnification or advancement, however, shall be made if it is ultimately determined by a court of competent jurisdiction (which determination has become final and is not subject to appeal) that the advancement or indemnification of the indemnified party is prohibited by applicable law.

 

For a period of six years from the effective time of the merger, the articles of incorporation and bylaws of the surviving corporation will contain provisions no less favorable with respect to director and officer exculpation, indemnification and advancement of expenses than are set forth in VCG’s current articles of incorporation and bylaws.

 

Family Dog or the surviving corporation will maintain or purchase tail policies to VCG’s current directors’ and officers’ liability insurance, which tail policies (i) will be effective for a period of six years after the effective time of the merger with respect to claims arising from acts or omissions occurring prior to the effective time of the merger with respect to those persons who are currently covered by our directors’ and officers’ liability insurance, and (ii) will contain terms with respect to coverage and amount no less favorable, in the aggregate, than those of such policy or policies as in effect on the date of the original merger agreement. If the tail policies described in the immediately preceding sentence cannot be obtained or can only be obtained by paying aggregate premiums in excess of 150% of the aggregate annual amount currently paid by us for such coverage, the surviving corporation will only be required to provide as much coverage as can be obtained by paying aggregate premiums equal to 150% of the aggregate annual amount currently paid by VCG for such coverage.

 

In connection with the merger, VCG will become a privately held company. Following the consummation of the merger, all of the issued and outstanding shares of VCG’s common stock will be held by Family Dog. Membership interests of Family Dog will be held by members of the Executive Group, certain creditors of VCG that elect to assign their indebtedness of VCG to Family Dog, and accredited investors (as that term is defined in Rule 501 promulgated under the Securities Act) who have a pre-existing personal or business relationship with Messrs. Lowrie or Ocello.

 

The table below sets forth the expected capitalization of VCG and Family Dog following the merger.

 

 

 

 

 

The total amount of funds necessary to consummate the merger is anticipated to be approximately $25,000,000, and transaction expenses of Family Dog are anticipated to be approximately $600,000.

 

Family Dog intends to finance the merger (including fees, expenses and transaction costs) in substantial part from the proceeds of the private placement contemplated by the subscription agreements received by Family Dog from various accredited investors (as that term is defined in Rule 501 promulgated under the Securities Act) who have a pre-existing personal or business relationship with Mr. Lowrie or Mr. Ocello. Family Dog has not delivered subscription documents to, and has not accepted subscriptions from, persons other than accredited investors who have a personal or business relationship with either Mr. Lowrie or Mr. Ocello. Family Dog may also finance a portion of the merger consideration and the related transaction fees from lines of credit and other committed funds provided by other affiliates of Family Dog, Mr. Lowrie or Mr. Ocello, and from funds held by (or otherwise available to) VCG at the time of the merger, including VCG’s cash on hand. Family Dog has received commitments pursuant to subscription agreements from such accredited investors in an amount that, together with the financial resources described in the previous sentence, is sufficient to finance the merger and the anticipated transaction expenses. In particular, the total amount subscribed for by accredited investors is $19,200,000. The remaining portion of the merger consideration will come from a line of credit available to Lowrie Management LLLP in an amount of $2,650,000, plus projected cash on hand of VCG in the amount of $3,800,000. In light of the subscriptions received, and the other available sources of funds, Family Dog is no longer accepting new subscriptions from additional investors.

Estimated Fees and Expenses

 

Whether or not the merger is consummated and except as otherwise provided in this proxy statement, each party to the merger agreement will bear its respective fees and expenses incurred in connection with the merger. Estimated fees and expenses to be incurred by VCG in connection with the merger are as follows:

 

 

The merger agreement provides that it is a condition to the obligations of Family Dog and FD Acquisition Co. to consummate the merger that all foreign or domestic governmental consents, orders and approvals required for the consummation of the merger, the transactions contemplated by the merger agreement, and transfer of any licenses related to the operations of VCG’s business as currently conducted or presently planned to be conducted, including VCG’s licenses and permits under liquor laws and sexually oriented business laws, have been obtained and be in effect at the effective time of the merger. Further, the merger agreement provides that VCG shall use all reasonable efforts to obtain all third party consents to the merger required under any liquor, sexually oriented business and amusement licenses and permits, as well as a city business license for one of VCG’s clubs.

The following discussion summarizes the material regulatory requirements that VCG believes relate to the merger, although the parties to the merger agreement may determine that additional consents from or notifications to governmental agencies are necessary or appropriate.

 

Liquor Licenses

 

The adult entertainment industry is subject to extensive state and local government regulation relating to the sale of alcoholic beverages. Alcoholic beverage control regulations require each of VCG’s nightclubs to apply for and obtain from state authorities a license to sell alcohol on the premises. VCG currently has all of the liquor licenses required to operate its business and these licenses will not be terminated as a result of the merger. However, if VCG does not consummate the merger and instead consummates an alternative transaction, the party making the proposal for an alternative transaction would be required to obtain new liquor licenses in many of the states in which VCG operates to the extent it does not already have such licenses.

 

Sexually Oriented Business Licenses and Entertainment Licenses

 

The adult entertainment industry is subject to extensive municipal licensing requirements related to the operation of businesses that provide live, nude or semi-nude entertainment. Most of the localities that VCG operates in requires us to have a Sexually Orientated Business, Amusement, or an Adult Cabaret license. VCG currently holds all of the licenses required to operate the businesses, and no new applications will need to be approved in order to continue our operations as a result of the merger.

 

If we do not consummate the merger and instead consummate an alternative transaction, the party or parties making the alternative transaction would be required to complete the application process to obtain new licenses in every jurisdiction where VCG operates. However, due to recent zoning changes in Texas, we do not believe that a party or parties making such alternative transaction would be granted the necessary licenses to maintain VCG’s current operations in Texas unless Mr. Lowrie was part of the group making the alternative transaction.

 

Other Regulatory Approvals

 

In addition to those regulatory approvals described above, VCG must obtain approvals, make filings and provide notices required under the federal securities laws and file a statement of merger with the Colorado Secretary of State upon the consummation of the merger.

 

The merger will be accounted for as a “purchase transaction” for financial accounting purposes.

 

Receipt of the merger consideration will be a taxable transaction for U.S. federal income tax purposes under the Internal Revenue Code of 1986, as amended, and may be a taxable transaction for foreign, state, and local income tax purposes as well. For U.S. federal income tax purposes, each shareholder will recognize gain or loss measured by the difference between the amount of cash received in the merger and such shareholder’s tax basis in the shares of common stock exchanged for the merger consideration, provided that it is possible that if a shareholder is related, under applicable attribution rules, to a person deemed to own shares of the surviving corporation after the merger, all the cash you receive could be treated as a dividend of the surviving corporation. Each shareholder should consult his, her or its own tax advisor regarding the U.S. federal income tax consequences of the merger, as well as any tax consequences under state, local, or foreign laws.

 

On July 30, 2010, a complaint was filed in Colorado state court, First Judicial District, Jefferson County District Court, challenging the proposal to acquire 100% of the shares of VCG’s common stock received from Family Dog and Lowrie Management LLLP. VCG received a copy of the complaint on August 13, 2010. The

complaint was filed by David Cohen, Timothy Cunningham, Gene Harris, Dean R. Jakubczak and William C. Steppacher, Jr. derivatively on behalf of VCG and as a class action on behalf of themselves and other similarly situated shareholders against Mr. Lowrie, Family Dog, FD Acquisition Co., Lowrie Investment Management, Inc., Lowrie Management LLLP, each of the individual members of VCG’s board of directors and VCG (as a nominal defendant). In the complaint, the plaintiffs alleged, among other things, that the individual directors breached their fiduciary duties under Colorado law and that Mr. Lowrie has conflicts of interest in connection with the proposal. The plaintiffs sought, among other relief, certification of the lawsuit as a class action with the plaintiffs as class representatives, an injunction preventing VCG’s board of directors from accepting the proposal, an order requiring the directors to fulfill their fiduciary duties, an accounting of alleged damages the VCG’s board of directors accepts the proposal and an award of the plaintiffs’ attorneys’ and experts’ fees. Neither VCG nor any of the individual defendants were ever served with process. Resolution of this litigation is not a condition to closing of the merger.

 

On October 19, 2010, the court issued an Order re Failure to Prosecute, directing the plaintiffs to show cause why the complaint should not be dismissed for failure to prosecute and giving the plaintiffs until November 19, 2010 to make such a showing, in the absence of which the case will be dismissed without prejudice and without further notice.

 

On November 19, 2010, plaintiffs responded to the court’s Order re Failure to Prosecute arguing that their counsel had “actively litigated” the case to date and requesting that the court not dismiss their case for failure to prosecute. Plaintiffs simultaneously filed an amended complaint making essentially the same allegations as those in the July 30, 2010 complaint, raising the same causes of action and seeking the same relief. VCG filed an opposition to plaintiffs’ response to the Order re Failure to Prosecute, and plaintiffs filed a reply in support of their position. On December 21, 2010, the court discharged its Order re Failure to Prosecute and allowed the plaintiffs to proceed with their amended complaint. VCG believes that the allegations set forth in the amended complaint are baseless and intends to mount a vigorous defense. At the same time as it discharged the Order re Failure to Prosecute, the court ordered plaintiffs to file a memorandum of law addressing whether plaintiffs’ counsel has a conflict of interest in advocating both a class action and a derivative action in the same lawsuit. Plaintiffs have until January 15, 2011 to file their memorandum, after which the defendants have 15 days to respond, if they so choose.

 

VCG

 

We are in the business of acquiring, owning and operating nightclubs, which provide premium quality live adult entertainment, and restaurant and beverage services in an up-scale environment. As of September 30, 2010, we, through our subsidiaries, own and operate nineteen nightclubs in Indiana, Illinois, Colorado, Texas, North Carolina, Minnesota, Kentucky, Maine, Florida, and California. We operate in one reportable segment.

 

VCG was incorporated under the laws of the State of Colorado in 1998, but did not begin its operations until April 2002. Our principal executive offices are located at 390 Union Blvd., Suite 540, Lakewood, Colorado 80228. The telephone number of our principal executive offices is (303) 934-2424 and our website address is www.vcgh.com. Information contained on our website does not constitute a part of this proxy statement.

 

Family Dog

 

Family Dog is a Colorado limited liability company formed solely for purposes of entering into the merger agreement and consummating the transactions contemplated by the merger agreement. Family Dog has not conducted any activities to date other than activities incidental to its formation and in connection with the transactions contemplated by the merger agreement.

 

Lowrie Investment Management, Inc., a Colorado corporation wholly-owned by Mr. Lowrie, will initially serve as the manager of Family Dog. Mr. Lowrie serves as the President of Lowrie Investment Management,

Inc. Mr. Lowrie serves as the President, Secretary and Treasurer of Family Dog. The material occupations, positions, offices or employment during the past five years of Mr. Lowrie are set forth below.

 

Family Dog’s business address is 390 Union Blvd., Suite 540, Lakewood, CO 80228 and its telephone number is (303) 934-2424.

 

FD Acquisition Co.

 

FD Acquisition Co. is a Colorado corporation and a wholly-owned subsidiary of Family Dog. FD Acquisition Co. was formed solely for purposes of entering into the merger agreement and consummating the transactions contemplated by the merger agreement. FD Acquisition Co. has not conducted any activities to date other than activities incidental to its formation and in connection with the transactions contemplated by the merger agreement.

 

Mr. Lowrie is FD Acquisition Co.’s sole director and serves as FD Acquisition Co.’s President, Secretary and Treasurer. The material occupations, positions, offices or employment during the past five years of Mr. Lowrie are set forth below.

 

FD Acquisition Co.’s business address is 390 Union Blvd., Suite 540, Lakewood, CO 80228 and its telephone number is (303) 934-2424.

 

Troy Lowrie

 

Mr. Lowrie has been our Chairman of the Board since April 2002 and Chief Executive Officer since November 2002. Further details about Mr. Lowrie’s professional background are set forth under “Other Important Information Regarding Us — Our Directors and Executive Officers.” Mr. Lowrie is a U.S. citizen.

 

The business address for Mr. Lowrie is 390 Union Blvd., Suite 540, Lakewood, Colorado 80228 and his business telephone number is (303) 934-2424.

 

Micheal Ocello

 

Mr. Ocello has been our President and Chief Operating Officer since April 2002. Further details about Mr. Ocello’s professional background are set forth “Other Important Information Regarding Us — Our Directors and Executive Officers.” Mr. Ocello is a U.S. citizen.

 

The business address for Mr. Ocello is 6161 Clifton Oaks Place, St. Louis, Missouri 63129 and his business telephone number is (618) 271-9420.

 

Executive Group

 

Mr. Lowrie beneficially owns shares of VCG’s common stock through Lowrie Management LLLP, an entity owned and controlled by Mr. Lowrie. Mr. Ocello beneficially owns shares of VCG’s common stock through LTD Investment Group, LLC, an entity owned and controlled by Mr. Ocello. We sometimes refer to Mr. Lowrie, Mr. Ocello, Lowrie Management LLLP and LTD Investment Group, LLC collectively as the “Executive Group” in this proxy statement.

 

Legal Proceedings

 

During the past five years, none of Family Dog, FD Acquisition Co., Lowrie Investment Management, Inc., Lowrie Management LLLP, LTD Investment Group LLC, Unique Entertainment Consultants, Inc., Mr. Lowrie or Mr. Ocello has been (i) convicted in a criminal proceeding, or (ii) party to any judicial or administrative proceeding 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.

 

This proxy statement is being furnished to VCG’s shareholders in connection with the solicitation of proxies on behalf of VCG’s board of directors for use at the special meeting of shareholders to be held on [ * ], 2011.

 

At the special meeting, you will be asked to:

 

1. To adopt and approve the Merger Proposal;

 

2. To approve the Adjournment Proposal; and

 

3. To transact such other business as may properly come before the special meeting or any adjournment or postponement thereof.

 

Acting on the recommendation of the Special Committee and based on its own evaluation of the Merger Proposal, VCG’s board of directors (with Mr. Lowrie, our Chairman of the Board and Chief Executive Officer, taking no part in the vote) has determined that the merger agreement and the merger is fair to, and in the best interests of, VCG and VCG’s unaffiliated shareholders. Consequently, VCG’s board of directors (with Mr. Lowrie taking no part in the recommendation) has adopted and approved the merger agreement and the merger, and recommends that shareholders vote “ FOR ” approval of the Merger Proposal.

 

VCG’s board of directors has fixed the close of business on [ * ], 2011 as the record date to determine the shareholders entitled to receive notice of, and to vote at, the special meeting. As of the close of business on the record date, VCG has outstanding 16,292,071 shares of common stock held of record by approximately [ * ] registered holders. Mr. Lowrie and Mr. Ocello beneficially own an aggregate of 5,138,878 shares, or 31.54%, of VCG’s common stock. Each outstanding share of common stock on the record date is entitled to one vote on all matters coming before the special meeting. The presence, either in person or by proxy, of one-third of the issued and outstanding shares of common stock entitled to vote at the special meeting is necessary to constitute a quorum for the transaction of business at the special meeting. Messrs. Lowrie and Ocello intend to attend the special meeting and the shares of VCG’s common stock beneficially owned by them will be counted towards the quorum. Shares held in street name that are present at the meeting will be counted for purposes of determining whether a quorum has been achieved at the special meeting.

 

If a quorum exists, approval of the Merger Proposal requires the affirmative vote of both (i) the holders of a majority of the outstanding shares of VCG’s common stock entitled to vote at the special meeting, or [ * ] shares, and (ii) a majority of the votes actually cast at the special meeting of VCG’s shareholders. Any abstaining votes, broker non-votes and votes cast by members of the Executive Group with regard to shares of VCG common stock held by the members of the Executive Group will not be taken into account for any purpose when determining whether the requisite vote set forth in clause (ii) has been achieved (e.g. in calculating votes cast in favor or total votes cast).

 

If a quorum exists, the Adjournment Proposal is approved if the votes actually cast favoring the Adjournment Proposal exceed the votes cast opposing the Adjournment Proposal.

 

At the special meeting, the results of shareholder voting will be tabulated by the inspector of elections appointed for the special meeting. All shares of common stock represented at the special meeting by properly executed or submitted proxies received prior to or at the special meeting, unless previously revoked, will be

voted at the special meeting in accordance with the instructions on the proxies. Unless contrary instructions are indicated, proxies will be voted “ FOR ” the approval of the Merger Proposal and “ FOR ” the approval of the Adjournment Proposal.

 

Other than the Merger Proposal and the Adjournment Proposal, VCG does not know of any matters that are to come before the special meeting. If any other matters are properly presented at the special meeting for action, the persons named in the enclosed proxy will have discretion to vote on such matters in accordance with their best judgment.

 

Properly authenticated proxies voted “abstain” at the special meeting will be counted for purposes of determining whether a quorum has been achieved at the special meeting. Abstentions will have same effect as if voted against the Merger Proposal with respect to the requisite shareholder vote set forth in clause (i) above but will be neutral with respect to the requisite shareholder vote set forth in clause (ii) above. Abstentions will be neutral with respect to the Adjournment Proposal, which requires that the votes actually cast favoring the Adjournment Proposal exceed the votes cast opposing the Adjournment Proposal.

 

In addition, if your shares are held in the name of a broker, bank or other nominee, your broker, bank or other nominee will not be entitled to vote your shares on the Merger Proposal in the absence of specific instructions, which, if not given, will have the effect as if you abstained as described above. Your broker, bank or other nominee will be entitled to vote your shares on the Adjournment Proposal even in the absence of specific instructions on how to vote.

 

Shares that are not represented at the special meeting will have same effect as if voted against the Merger Proposal with respect to the requisite shareholder vote set forth in clause (i) above but will be neutral with respect to the requisite shareholder vote set forth in clause (ii) above.

 

Giving a proxy does not preclude a shareholder’s right to vote in person if the shareholder giving the proxy so desires. A shareholder has the unconditional right to revoke his, her, or its proxy at any time prior to voting at the special meeting and may do so in any of the following ways:

 

 

Your attendance at the special meeting alone will not revoke any proxy. If you choose to change your vote, you must take the described action, and the applicable notice must be received, no later than the beginning of the special meeting.

 

If your shares are held in an account at a broker, banker or other nominee, you should contact your broker, banker or other nominee to change your vote.

 

The enclosed proxy is solicited on behalf of VCG’s board of directors. The cost of preparing, assembling, and mailing this proxy statement, the Notice of Special Meeting and the enclosed proxy will be borne by VCG. VCG is requesting that banks, brokers and other custodians, nominees and fiduciaries forward copies of the proxy materials to their principals and request authority for the execution of proxies. VCG may reimburse these persons for their expenses in so doing. The directors, officers and employees of VCG and its subsidiaries may also solicit by telephone, facsimile, electric mail or in person. Such directors, officers, and employees will not be additionally compensated for this solicitation, but may be reimbursed for out-of-pocket expenses incurred.

VCG has not authorized any person to provide any information or make any representation not contained in this proxy statement. You should not rely on any such information or representation as having been authorized.

 

If the Merger Proposal is approved and the merger is consummated, holders of common stock will be sent instructions regarding the surrender of their certificates representing shares of VCG’s common stock. Shareholders should not send their stock certificates until they receive these instructions. For more information on the surrender of stock certificates please see the section entitled “The Merger Agreement — Procedure for Payment for the Shares of VCG’s Common Stock” in the proxy statement.

 

VCG does not currently intend to propose adjournment at the special meeting if there are sufficient votes to approve the Merger Proposal. If there are insufficient votes to approve the Merger Proposal, the special meeting may be adjourned or postponed to another time or place if the votes actually cast favoring the Adjournment Proposal exceed the votes cast opposing the Adjournment Proposal at the special meeting. If the special meeting is adjourned to a date more than 60 days later than the date of the original special meeting, VCG’s board of directors is required to fix a new record date.

 

This section describes the material terms of the merger agreement. The description in this section and elsewhere in this proxy statement is qualified in its entirety by reference to the merger agreement, a copy of which is attached as Appendix A and incorporated by reference into this proxy statement. We encourage you to read the merger agreement carefully and in its entirety before deciding to approve the Merger Proposal.

 

The representations and warranties described below and included in the merger agreement were made by the parties to each other as of specific dates. The assertions embodied in those representations and warranties were made solely for purposes of the merger agreement and may be subject to important qualifications and limitations agreed to by the parties in connection with negotiating its terms. Moreover, the representations and warranties may be subject to a contractual standard of materiality that may be different from what may be viewed as material to shareholders, or may have been used for the purpose of allocating risk between the parties rather than establishing matters as facts. The merger agreement is described in this proxy statement and included as Appendix A only to provide you with information regarding its terms and conditions, and not to provide any other factual information regarding the parties or their respective businesses. VCG will provide additional disclosure in its public reports filed with the Securities and Exchange Commission to the extent that it is aware of the existence of any material facts that are required to be disclosed under U.S. federal securities laws and that might otherwise contradict the representations and warranties in the merger agreement and will update such disclosure as required by U.S. federal securities laws.

 

Subject to the terms and conditions of the merger agreement and in accordance with Colorado law, FD Acquisition Co. will merge with and into VCG, and VCG will survive the merger as a wholly-owned, privately-held subsidiary of Family Dog.

 

As the surviving corporation, VCG will continue to exist following the merger. Upon consummation of the merger, VCG’s articles of incorporation, as in effect immediately before the merger, will become the articles of incorporation of the surviving corporation until thereafter amended in accordance with their terms and applicable law. VCG’s bylaws, as in effect immediately prior to the merger, will be the bylaws of the surviving corporation until thereafter amended in accordance with their terms and applicable law. FD Acquisition Co.’s sole director, Mr. Lowrie, will serve as the initial director of the surviving corporation and FD Acquisition Co.’s sole officer, Mr. Lowrie, will be the initial officer of the surviving corporation. It is

contemplated that Mr. Ocello will serve as an officer of the surviving corporation after consummation of the merger.

 

The closing of the merger will take place on the second business day following the satisfaction (or, to the extent permitted by law, waiver by the party or parties entitled to the benefits thereof) of all of the conditions set forth in the merger agreement (see summary under “The Merger Agreement — Conditions to the Merger”), or on such other time and date as will be agreed in writing between Family Dog and VCG.

 

The merger will be effective in accordance with applicable law as the statement of merger is duly filed with the Secretary of State of the State of Colorado, or at such later time as FD Acquisition Co. and VCG will agree and specify in the statement of merger.

 

Upon completion of the merger, each share of VCG common stock issued and outstanding immediately prior to the effective time of the merger, other than shares held by Family Dog, by shareholders who properly exercise dissenters’ rights under Colorado law and in treasury by VCG, will be automatically cancelled and converted into the right to receive $2.25 in cash, without interest (less applicable withholding taxes). It is contemplated that, before the effective time of the merger, the members of the Executive Group will contribute all of the shares of VCG’s common stock held by them to Family Dog.

 

Each share of VCG common stock that is issued and held in the treasury of VCG or issued and outstanding and owned by Family Dog, including any shares issued to Family Dog in exchange for Family Dog’s agreement to issue membership interests in Family Dog in exchange for converting and cancelling VCG’s debt as described under “The Merger Agreement — Contribution of VCG Common Stock to Family Dog and Conversion of Debt Held by Family Dog,” will automatically be cancelled and retired and will cease to exist, and no consideration will be delivered or deliverable.

 

Each share of VCG common stock issued and outstanding and owned by a shareholders who properly exercised dissenters’ rights under Colorado law, will be paid in accordance with Colorado law, unless that dissenting shareholder loses its ability to exercise its rights as a dissenting shareholder under Colorado law, in which case the dissenting shareholder will receive the merger consideration.

 

Upon completion of the merger, each share of FD Acquisition Co.’s capital stock issued and outstanding immediately prior to the effective time of the merger, will be converted into one fully paid and non-assessable share of common stock of the surviving corporation.

 

Before completion of the merger, it is contemplated that each member of the Executive Group will contribute to Family Dog all of the shares of VCG common stock held by such member in exchange for membership interests in Family Dog.

 

Further, before completion of the merger, it is contemplated that each member of the Executive Group will assign to Family Dog such member’s rights to any debt owed by VCG to such member in exchange for membership interests in Family Dog. In addition as described elsewhere in this proxy statement, two other creditors of VCG (unaffiliated with the Executive Group) may elect to assign their rights to debt owed by VCG to them to Family Dog in exchange for membership interests in Family Dog. At any time after the approval of the Merger Proposal by VCG’s shareholders in the manner described elsewhere in this proxy statement, but before closing of the merger, and in exchange for Family Dog’s agreement to cancel VCG’s obligations with respect to this converting debt, at Family Dog’s election, VCG will issue to Family Dog a number of shares of VCG common stock, equal to: (i) the aggregate outstanding principal balance and all unpaid accrued interest on the converting debt, divided by (ii) the per share merger consideration.

 

Each option to purchase shares of VCG’s common stock that is outstanding and unvested at the effective time of the merger will be terminated in compliance with the terms of VCG’s 2002 Stock Option and Stock Bonus Plan, 2003 Stock Option and Stock Bonus Plan and 2004 Stock Option and Appreciation Rights Plan (collectively referred to in this proxy statement as the “Company Stock Plans”), respectively, and the holders of such options will be entitled to no merger consideration.

 

Each option to purchase shares of VCG’s common stock that is outstanding, unexercised, and vested at the effective time of the merger will be cancelled and the holders of such options will be entitled to receive an amount (without interest), in cash, equal to the product of the number of shares subject to each such option multiplied by the excess, if any, of the merger consideration over the exercise price per share of each such option, less applicable withholding taxes.

 

However, the exercise prices of all options outstanding exceed the merger consideration. Accordingly, VCG will not be required to make any payments for options upon consummation of the merger.

 

The Company Stock Plans will be terminated at the effective time of the merger.

 

The merger consideration is generally fixed and will not change based on the price per share of VCG’s common stock, as reported on NASDAQ. However, the merger consideration will be appropriately adjusted to reflect fully the effect of any stock split, reverse stock split, stock dividend, distribution, recapitalization, redenomination, recapitalization, split-up, combination, exchange of shares, subdivision, or other similar transaction with respect to VCG’s common stock prior to the effective time of the merger, if any.

 

Before the effective time of the merger, FD Acquisition Co. will designate JPMorgan Chase Bank, N.A. or another party reasonably acceptable to VCG to act as the paying agent for the payment of the merger consideration upon surrender of stock certificates representing shares of VCG’s common stock. Promptly following the effective time of the merger, Family Dog will cause the surviving corporation to deposit or cause to be deposited with the paying agent, for the benefit of VCG’s shareholders, cash in an amount sufficient to pay the merger consideration payable to holders of VCG’s common stock. All of the fees and expense of the paying agent will be borne by the surviving corporation.

 

Promptly after the effective time of the merger, but no later than five days after the effective time of the merger, Family Dog and the surviving corporation will cause the paying agent to mail to each holder of record of VCG’s common stock immediately prior to the effective time of the merger a letter of transmittal and instructions for use in effecting the surrender of certificates of VCG’s common stock and receiving payment therefor. YOU SHOULD NOT SEND IN YOUR STOCK CERTIFICATES UNTIL YOU RECEIVE A LETTER OF TRANSMITTAL AND INSTRUCTIONS. DO NOT SEND CERTIFICATES WITH THE ENCLOSED PROXY CARD, AND DO NOT SEND YOUR STOCK CERTIFICATE TO THE PAYING AGENT WITHOUT A PROPERLY COMPLETED LETTER OF TRANSMITTAL.

 

Upon the surrender to the paying agent of a duly executed letter of transmittal, the certificate(s) representing shares of VCG’s common stock, and any other items specified by the letter of transmittal, the surrendering shareholder will be paid, in exchange for each share of common stock represented by the certificate, cash in an amount, subject to any applicable withholding taxes, equal to the product of the number of shares represented by the letter of transmittal multiplied by the merger consideration, and the surrendered certificate(s) will be cancelled.

 

In the event of a transfer of ownership of shares of common stock that is not registered in VCG’s transfer records, payment may be made to a person other than the person in whose name the surrendered stock certificate is registered, if such stock certificate is properly endorsed or otherwise in proper form for transfer and the person requesting such payment shall pay any transfer or other taxes required by reason of the

payment to a person other than the registered holder of such stock certificate or establish to the satisfaction of the surviving corporation or the paying agent that such tax has been paid or is not applicable.

 

The paying agent may invest the funds received to pay the merger consideration only in certain types of investments, as further described in the merger agreement, and as directed by Family Dog and the surviving corporation. Any interest and other income resulting from such investments will be paid to the surviving corporation.

 

The surviving corporation is entitled to require that the paying agent deliver to the surviving corporation any portion of the funds that remain unclaimed by the former shareholders of VCG one year after the effective time of the merger. After that date, subject to abandoned property, escheat, or other similar laws, holders of stock certificates who have not previously complied with the instructions to exchange their certificates will be entitled to look only to the surviving corporation for payment of their claim for merger consideration.

 

Until surrendered as contemplated by the merger agreement, each stock certificate will be deemed at any time after the effective time of the merger to represent only the right to receive upon such surrender the amount of cash, without interest, into which the shares of VCG common stock previously represented by such stock certificate have been converted pursuant to the terms of the merger agreement. No interest will be paid or accrue on the cash payable upon surrender of any stock certificate.

 

In the event that your stock certificate has been lost, stolen or destroyed, you must make an affidavit to that fact and deliver such affidavit and an indemnity, in a form satisfactory to Family Dog, against any claim that may be made against Family Dog, the surviving corporation or the paying agent with respect to the stock certificate alleged to have been lost, stolen or destroyed. The affidavit and indemnity shall be delivered to the paying agent or, following the first anniversary of the effective time of the merger, the surviving corporation, who shall pay in exchange for such lost, stolen or destroyed certificate the merger consideration.

 

Shareholders’ dissenters’ rights are further described under “Dissenters’ Rights.”

 

The merger agreement contains representations and warranties made by VCG to Family Dog and FD Acquisition Co. and representations and warranties made by Family Dog, FD Acquisition Co., Troy Lowrie and Micheal Ocello to VCG. The assertions embodied in those representations and warranties were made solely for purposes of the merger agreement and may be subject to important qualifications and limitations agreed to by the parties in connection with negotiating the terms of the merger agreement. Moreover, some of those representations and warranties may not be accurate or complete as of any particular date because they are subject to a contractual standard of materiality or Company Material Adverse Effect (as defined below) different from that generally applicable to public disclosures to shareholders or used for the purpose of allocating risk between the parties to the merger agreement rather than establishing matters of fact. For the foregoing reasons, you should not rely on the representations and warranties contained in the merger agreement as statements of factual information.

 

The representations and warranties of VCG relate to, among other things:

 

 

 

Many of VCG’s representations and warranties are qualified by a “Company Material Adverse Effect” standard. The merger agreement defines “Company Material Adverse Effect” as any event, development, change or circumstance arising after the date of the merger agreement that, either individually or in the aggregate, has caused or would reasonably be expected to cause a material adverse effect on the financial condition, assets, liabilities (contingent or otherwise) or business of VCG and its subsidiaries taken as a whole. Notwithstanding the foregoing, the following, alone or in combination, will not be deemed to constitute a Company Material Adverse Effect for purposes of the merger agreement:

 

 

The representations and warranties of Family Dog and FD Acquisition Co. relate to, among other things:

 

 

 

The representations and warranties of each of Mr. Lowrie and Mr. Ocello relate to, among other things:

 

 

The merger agreement provides that if two specified individuals vote in favor of the Merger Proposal at the special meeting of VCG’s shareholders, then prior to the sixth month anniversary of the closing, Family Dog will not issue any debt or equity securities to such individuals (other than existing debt owed by VCG to such individuals as of the date of the merger agreement, including any extensions of such debt). The specified individuals are current shareholders of VCG; one is a sibling and the other is a business associate of

Mr. Lowrie’s. This provision in the merger agreement reflects the Special Committee’s belief that these two individuals should be excluded from the majority of the minority vote if they become investors in Family Dog at or immediately after closing. Further, Family Dog may not issue any equity securities to any person who was a member of VCG’s board of directors prior to the consummation of the merger, other than to Messrs. Lowrie and Ocello, during the six months after the consummation of the merger.

 

VCG and its subsidiaries are subject to restrictions on their conduct and operations until the merger is completed. VCG has agreed, and agreed to cause each of its subsidiaries, to conduct its business in the usual, regular and ordinary course in substantially the same manner as previously conducted or proposed to be conducted and use commercially reasonable efforts to preserve intact its current business organization, to keep available the services of their respective current officers and employees, and keep its relationships with their respective customers, suppliers, licensors, licensees, distributors and others having business dealings with them, except as otherwise expressly permitted or contemplated by the merger agreement, required by law or with Family Dog’s prior written consent (such consent not to be unreasonably withheld, conditioned or delayed). Notwithstanding the foregoing, the merger agreement provides that any action taken or failure to act by or at the express direction of either of Mr. Lowrie or Mr. Ocello that would otherwise constitute a breach of the foregoing shall not be deemed to constitute such breach.

 

In addition, VCG has agreed, except as expressly permitted or contemplated by the merger agreement, required by law or with the prior written consent of Family Dog, from the date of the merger agreement until the consummation of the merger, to not, and will cause each of its subsidiaries to not, do any of the following:

 

 

 

Except as otherwise (i) expressly permitted or contemplated by the merger agreement, (ii) required by law, or (iii) with the prior written consent of VCG, acting through the Special Committee (such consent not to be unreasonably withheld, conditioned or delayed), with respect to the foregoing covenants, (A) neither Mr. Lowrie nor Mr. Ocello will cause VCG or any of its subsidiaries to take or refrain from taking any action that would constitute a breach of the foregoing, and (B) Family Dog, FD Acquisition Co., Mr. Lowrie, Mr. Ocello or any or their respective affiliates may not enter into, modify or terminate any contract with VCG or any of its subsidiaries.

 

From the date of the merger agreement until the completion of the merger, each of VCG, Family Dog, FD Acquisition Co., Mr. Lowrie and Mr. Ocello shall use commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary under applicable laws required for the consummation of the merger, and to effect all necessary filings, consents, waivers, authorizations, permits and approvals from governmental entities and other third parties required for the consummation of the merger.

 

The merger agreement requires VCG to, as soon as reasonably practicable following the date of the merger agreement, and in any event within 10 business days after such date, prepare this proxy statement and, subject to certain provisions, use reasonable best efforts to clear comments, if any, received from the Securities and Exchange Commission. The parties shall jointly prepare and file Schedule 13E-3 with the Securities and Exchange Commission and use commercially reasonable efforts to have it cleared by the Securities and Exchange Commission as promptly as reasonably practicable after filing.

 

The merger agreement provides that this proxy statement shall include VCG’s board of directors’ recommendation that VCG’s shareholders approve and adopt the merger agreement and the merger at the special meeting of VCG’s shareholders (this recommendation is referred to in this proxy statement as the

“Company Recommendation”) and no change in Company Recommendation may be made except as permitted under the merger agreement.

 

The merger agreement also requires VCG to call a meeting of shareholders for the purpose of obtaining shareholder approval of the Merger Proposal, to be held as soon as reasonably practicable after the date of the merger agreement. In connection with the shareholders’ meeting, VCG shall use its commercially reasonable efforts to solicit proxies in favor of the adoption and approval of the Merger Proposal and shall take all other action necessary to secure such approval, as further described elsewhere in this proxy statement.

 

VCG may adjourn or postpone the special meeting of shareholders to the extent necessary to ensure that any necessary supplement or amendment to this proxy statement is provided to VCG’s public shareholders in advance of a vote on the Merger Proposal or, if as of the time for which VCG shareholders’ meeting is originally scheduled (as set forth in this proxy statement) there are insufficient shares of VCG common stock represented (either in person or by proxy) to constitute a quorum necessary to conduct the business of the special meeting of shareholders.

 

VCG is required to terminate all Company Stock Plans as of the effective time of the merger, and the provisions in any other benefit plan providing for the issuance, transfer or grant of any capital stock of VCG or any interest in respect of any capital stock of VCG will be deleted as of the effective time of the merger. VCG will ensure that, following the effective time of the merger, no holder of a VCG stock option or any participant in any Company Stock Plans will have any right thereunder to acquire any capital stock of VCG or the surviving corporation. VCG terminated its stock repurchase program before execution of the merger agreement, as required by the terms of the merger agreement.

 

The treatment of stock options in the merger is described under “The Merger Agreement — Treatment of Stock Options.”

 

From and after the effective time of the merger and subject to the limitations set forth in the merger agreement, Family Dog will, and will cause the surviving corporation to, to the fullest extent permitted under applicable law, indemnify and hold harmless each present and former director and officer of VCG, against any costs or expenses (including reasonable attorneys’ fees), judgments, fines, losses, claims, damages, liabilities and amounts paid in settlement in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to any facts or events existing or occurring at or prior to the effective time of the merger. The foregoing obligation to indemnify does not apply to any claims, actions, suits, proceedings or investigations for which VCG is prohibited from providing indemnification under Colorado law or VCG’s organizational documents.

 

From and after the effective time of the merger, Family Dog will, and will cause the surviving corporation to, advance expenses (including the costs and expenses of any investigation or preparation incurred in connection therewith) to an indemnified party, as incurred, to the fullest extent permitted under applicable law.

 

The merger agreement also provides that Family Dog will, or will cause the surviving corporation to, obtain or maintain in effect six-year “tail” policies to VCG’s current directors’ and officers’ liability insurance on terms with respect to coverage and amount no less favorable, in the aggregate, than those of such policy or policies as in effect as of the date of the merger agreement. If such “tail” policies cannot be maintained or obtained or can only be maintained or obtained by paying aggregate premiums in excess of 150% of the aggregate annual amount currently paid by VCG for such coverage, then the surviving corporation will only be required to purchase as much insurance coverage as can be maintained or obtained by paying aggregate premiums equal to 150% of the aggregate annual amount currently paid by VCG for such coverage.

 

Successors and assigns of Family Dog or the surviving corporation shall assume all of the indemnification and insurance obligations of Family Dog or the surviving corporation set forth in the merger agreement if Family Dog or the surviving corporation or any of their respective successors or assigns (i) consolidate with or

merge with or into any other corporation or entity and will not be the continuing or Surviving Corporation or entity, or (ii) transfer all or substantially all of its properties or assets to any person.

 

All provisions relating to exculpation, advancement of expenses and indemnification for acts or omissions occurring prior to the effective time of the merger existing in favor of each present and former director and officer of VCG as provided in the organizational and governance documents of VCG or any of its subsidiaries, or under any applicable agreements or documents, shall remain in full force and effect, and Family Dog and the surviving corporation shall continue to honor such provisions, for a period of the lesser of: (i) the remaining term of any such applicable agreement or document, or (ii) six years commencing at the effective time of the merger, to the fullest extent permitted by applicable law.

 

The merger agreement contains certain other covenants and agreements, including agreements relating to the following:

 

 

The parties to the merger agreement have agreed to use their reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner reasonably practicable, the merger and the transactions contemplated by the merger agreement, including (i) the obtaining of all necessary actions or no actions, waivers, consents and approvals from governmental entities and the making of all necessary registrations and filings (including filings with governmental entities, if any) and the taking of all reasonable steps as may be necessary to obtain an approval or waiver from, or to avoid an action or proceeding by, any governmental entity, including under applicable liquor laws and sexually oriented business laws, (ii) the obtaining of all necessary consents, approvals or waivers from third parties, (iii) making all necessary filings, and thereafter making any other required submissions, with respect to the merger agreement and the merger required under the Hart-Scott Rodino Act and any related governmental request thereunder and under any other applicable law, (iv) the defending of any lawsuits or other legal proceedings, whether judicial or administrative, challenging the merger agreement, the merger or the consummation of the transactions contemplated by the merger agreement, including seeking to have any stay or temporary restraining order entered by any court or other governmental entity vacated or reversed, and (v) the execution and delivery of any additional instruments necessary to consummate the merger and to fully carry out the purposes of the merger agreement.

 

The parties to the merger agreement are required to cooperate with each other in connection with the making of all such filings, including providing copies of all such documents to the non-filing party and its advisors prior to filing and, if requested, to accept all reasonable additions, deletions or changes suggested in connection therewith. Further, the parties to the merger agreement are required to use their respective reasonable best efforts to furnish to each other all information required for any application or other filing to be made pursuant to the rules and regulations of any applicable law in connection with the transactions contemplated by the merger agreement.

 

Between the date of the merger agreement and the effective time of the merger, VCG shall use all reasonable efforts to obtain all third party consents to the merger required under any liquor, sexually oriented business and amusement licenses and permits, as well as a city business license for one of VCG’s clubs.

 

Notwithstanding the foregoing, nothing in the merger agreement shall require any party to agree to any substantial limitation on its operations or to dispose of any significant asset or collection of assets.

 

The merger agreement requires that the parties give prompt notice to the other parties upon the discovery of any fact or circumstance that, or the occurrence or non-occurrence of any event the occurrence or non-occurrence of which, would reasonably likely to cause or result in any of the closing conditions in the merger agreement not being satisfied.

 

The surviving corporation will pay all stock transfer, real estate transfer, documentary, stamp, recording and other similar taxes (including interest, penalties and additions to any such taxes) incurred in connection with the merger.

 

VCG has agreed not to, and has agreed to cause its subsidiaries not to directly or indirectly:

 

 

Notwithstanding the foregoing, before shareholder approval of the Merger Proposal, VCG may, in response to a bona fide written Acquisition Proposal that did not result from a breach of, and subject to compliance with the terms of the merger agreement:

 

 

VCG will provide Family Dog with a written summary of the material terms and conditions of each Acquisition Proposal received as promptly as practicable after the receipt by VCG of any Acquisition Proposal or any inquiry with respect to, or that would reasonably be expected to lead to, any Acquisition Proposal. VCG will keep Family Dog informed on a reasonably current basis of the status of any such Acquisition Proposal, including any changes to the price or other material terms and conditions thereof.

 

Neither VCG’s board of directors nor any committee thereof (including the Special Committee) may, directly or indirectly, withdraw or modify (or publicly propose to withdraw or modify) in any manner adverse to Family Dog the recommendation of VCG’s board of directors that VCG’s shareholders approve and adopt the Merger Proposal or approve or recommend (or publicly propose to approve or recommend) an Acquisition Proposal unless it determines in good faith, by resolution duly adopted after consultation with its outside legal counsel and North Point Advisors, that the failure to do so would present a substantial risk of being inconsistent with the fulfillment of its fiduciary duties under applicable law. Notwithstanding any such withdrawal or modification, the merger agreement shall be submitted to VCG’s shareholders at the special meeting of shareholders for the purpose of adopting the merger agreement and approving the merger, unless

the merger agreement is terminated and VCG pays a termination fee to Family Dog, as further described under “The Merger Agreement — Expenses and Termination Fees.”

 

If at any time before the shareholders have approved the Merger Proposal and the merger in the manner required in the merger agreement, VCG receives an Acquisition Proposal that the Special Committee (or VCG’s board of directors) concludes in good faith after consultation with its outside legal counsel and North Point Advisors constitutes a Superior Acquisition Proposal, then VCG’s board of directors and/or the Special Committee may:

 

 

However, in both instances, VCG may not terminate the merger agreement pursuant to Section 8.01(f) of the merger agreement unless (i) the Special Committee first has provided prior written notice to Family Dog that the Special Committee is prepared to terminate the merger agreement in response to a Superior Acquisition Proposal, which notice shall attach the most current version of any written agreement relating to the transaction that constitutes such Superior Acquisition Proposal, and (ii) Family Dog does not make, within five business days after the receipt of such notice, a proposal that the Special Committee determines in good faith, after consultation with its outside legal counsel and North Point Advisors, is at least as favorable to the unaffiliated shareholders as such Superior Acquisition Proposal.

 

Nothing in the non-solicitation provisions of the merger agreement prevents VCG from complying with the Exchange Act, including Rules 14d-9 and 14e-2 promulgated thereunder, in respect of any Acquisition Proposal or otherwise making any disclosure to VCG’s shareholders if the Special Committee or board of directors determines in good faith, by resolution duly adopted after consultation with its outside counsel, that the failure to make such disclosure (i) would breach its fiduciary duties to the shareholders of VCG under applicable law, or (ii) would be inconsistent with its obligations under applicable securities laws and regulations (including the rules and regulations of NASDAQ).

 

Family Dog, FD Acquisition Co. Mr. Lowrie, Mr. Ocello and their respective affiliates (other than VCG and its subsidiaries) may not take any action with the purpose of discouraging or preventing any person from making an Acquisition Proposal or, once made, from continuing to pursue such Acquisition Proposal but this obligation shall not prevent them from enforcing their rights under the merger agreement or any other agreement that Mr. Lowrie, Mr. Ocello or their respective affiliates have entered into, or any rights arising out of their ownership of VCG common stock.

 

For purposes of the merger agreement, “Acquisition Proposal” means any proposal relating to:

 

 

For purposes of the merger agreement, “Company Acquisition Agreement” means, with respect to any Acquisition Proposal, any written term sheet, letter of intent, memorandum of understanding, merger

agreement or other agreement, arrangement or understanding which is approved by the Special Committee or VCG’s board of directors and duly authorized and executed by VCG.

 

For purposes of the merger agreement, “Superior Acquisition Proposal” means any bona fide written proposal or offer made by a Third Party in respect of an Acquisition Proposal, which the Special Committee determines in good faith, by resolution duly adopted after consultation with its outside counsel and North Point Advisors, would result in a transaction that if consummated would be more favorable from a financial point of view to the public shareholders than the Merger Proposal (including any proposal by Family Dog to amend the terms of the merger agreement), and is reasonably capable of being consummated on the terms so proposed taking into account all financial, regulatory, legal and other aspects of such proposal.

 

Each of Family Dog, FD Acquisition Co., Mr. Lowrie and Mr. Ocello have agreed from the execution and delivery of the merger agreement until the earlier of the termination of the merger agreement and the effective time of the merger agreement, that:

 

 

Family Dog, FD Acquisition Co., Mr. Lowrie and Mr. Ocello have waived, to the full extent of the law, and agreed not to assert, any dissenters’ rights pursuant to Colorado law or any similar rights in connection with the merger with respect to any and all shares of VCG common stock they beneficially own.

 

VCG has agreed to give Family Dog the opportunity to participate in the defense or settlement of, and keep Family Dog reasonably informed regarding, any shareholder litigation against VCG and/or its directors relating to the transactions contemplated by the merger agreement. VCG has further agreed not to settle or offer to settle any litigation commenced prior to or after the date of the merger agreement against VCG or any of its directors or executive officers by any shareholder of VCG relating to the merger agreement, the merger, any other transaction contemplated thereby or otherwise, without the prior written consent of Family Dog, which consent shall not be unreasonably withheld.

 

Prior to the consummation of the merger, VCG will deliver to Family Dog written resignations of each of the directors then serving on VCG’s board of directors and each officer of VCG.

 

Family Dog is obligated under the merger agreement to use good faith efforts to secure the financing necessary and required to consummate the transaction contemplated by the merger agreement. While consummation of the merger is not expressly conditioned on Family Dog obtaining financing, failure of Family Dog to obtain financing gives VCG, under certain circumstances, the right to terminate the merger agreement and, if that were to occur, may obligate Family Dog to pay a termination fee to VCG, as further described as further described below under “The Merger Agreement — Termination Rights” and “The Merger Agreement — Expenses and Termination Fees”. The financing of Family Dog is further described under “Special Factors — Financing of the Merger”.

 

The parties to the merger agreement will consummate the merger only if the conditions set forth in the merger agreement are satisfied or waived, where permissible.

 

Conditions to all of the Parties’ Obligations

 

The conditions to each party’s obligation include the following:

 

 

Conditions to Family Dog’s and FD Acquisition Co.’s Obligations

 

The conditions to Family Dog’s and FD Acquisition Co.’s obligation include the following:

 

 

 

Conditions to VCG’s Obligations

 

The conditions to VCG’s obligation include the following:

 

 

The merger agreement also grants the parties certain termination rights. The merger agreement may be terminated at any time before the effective time of the merger, whether before or after shareholder approval has been obtained:

 

 

 

In the event of termination of the merger agreement, the merger becomes void and of no effect, without any liability or obligation on the part of the parties, other than (i) the representations and warranties regarding brokers’ fees and related matters set forth in Section 3.07 and 4.01(g) of the merger agreement, (ii) the obligation of Family Dog and FD Acquisition Co. to keep confidential any information received under the merger agreement under the last sentence of Section 6.02 of the merger agreement, (iii) Section 8.02 of the merger agreement providing for the effects of termination of the merger agreement and the survival of certain obligations after termination, and (iv) Article IX of the merger agreement containing general provisions governing the merger agreement, which provisions described in clauses (i) through (iv) shall survive such termination, and except to the extent that such termination results from the willful breach by a party of any representation, warranty or covenant set forth in the merger agreement. The merger agreement also provides that VCG shall not be deemed to have breached any representation, warranty or covenant set forth in the merger agreement to the extent that such breach is a result of the direction of either of Mr. Lowrie or Mr. Ocello.

 

Except as otherwise provided below, all fees and expenses incurred in connection with the merger agreement, the merger and the other transactions contemplated by the merger agreement will be paid by the party incurring such fees or expenses, whether or not the merger is consummated.

 

The merger agreement provides for the payment of termination fees in certain instances in the event that the merger agreement is terminated.

 

VCG Termination Fees

 

VCG will be required to pay Family Dog a termination fee in the amount $1,000,000 in the event that:

 

 

 

The termination fee payable by VCG is reduced to $600,000 in the event that VCG terminates the merger agreement to enter into a Company Acquisition Agreement involving a Superior Acquisition Proposal from certain identified parties with which VCG or North Point Advisors has been in contact to discuss a potential change in control transaction involving VCG and such party.

 

Family Dog Termination Fees

 

Family Dog will be required to pay VCG a termination fee in the amount $1,000,000 in the event that VCG terminates the merger agreement (i) if the merger is not consummated on or before the outside dates described under “The Merger Agreement — Termination Rights” above or (ii) if Family Dog, FD Acquisition Co. or either of Troy Lowrie or Micheal Ocello breaches or fails to perform in any material respect any of its covenants contained in the merger agreement, which breach or failure to perform (A) would give rise to the failure of a condition set forth in Section 7.03(a) or Section 7.03(b) of the merger agreement (as described above under “The Merger Agreement — Conditions to the Merger — Conditions to VCG’s Obligations”), and (B) cannot be or has not been cured within 30 days after the giving of written notice to Family Dog or FD Acquisition Co. of such breach, and in the case of each of clauses (i) and (ii), as a result of Family Dog not being able to secure financing for the merger (provided that at the time of such termination all of the closing conditions applicable to all of the parties obligations and Family Dog’s and FD Acquisition Co.’s obligations, described under “The Merger Agreement — Conditions to the Merger” above, have been satisfied and VCG is not in material breach of the merger agreement).

 

The merger agreement may be amended by the parties at any time before or after receipt of shareholder approval except that (i) any amendment to the amendment provision of the merger provision requires the approval of the Special Committee, or VCG’s board of directors in the case of a deadlock on the Special Committee, and (ii) after receipt of shareholder approval, the parties may not amend the merger agreement without shareholder approval of such amendment if the amendment by law requires shareholder approval.

At any time before the effective time of the merger, the parties to the merger agreement may (a) extend the time for the performance of any of the obligations or other acts of the other parties, (b) waive any inaccuracies in the representations and warranties contained in the merger agreement or in any document delivered pursuant to the merger agreement, or (c) waive compliance with any of the agreements or conditions contained in the merger agreement (other than the condition that the Merger Proposal be approved by VCG’s shareholders). Any such extension or waiver by VCG requires the approval of the Special Committee.

 

The following is a summary of dissenters’ rights available to VCG’s shareholders, which summary is not intended to be a complete statement of applicable Colorado law and is qualified in its entirety by reference to Article 113 of the Colorado Business Corporation Act, which is set forth in its entirety as Appendix C and incorporated by reference into this proxy statement.

 

THE PROVISIONS OF ARTICLE 113 ARE COMPLEX AND TECHNICAL IN NATURE. SHAREHOLDERS DESIRING TO EXERCISE DISSENTERS’ RIGHTS MAY WISH TO CONSULT COUNSEL BECAUSE THE FAILURE TO COMPLY STRICTLY WITH THESE PROVISIONS WILL RESULT IN THE LOSS OF THEIR DISSENTERS’ RIGHTS.

 

VCG’s shareholders are entitled to dissent from the merger and obtain payment of the fair value of their shares if and when the merger is effectuated. “Fair value,” with respect to a dissenters’ shares, means the value of the shares immediately before the effective time of the merger, excluding any appreciation or depreciation in anticipation of the merger except to the extent that exclusion would be inequitable. Under Article 113 of the Colorado Business Corporation Act, a shareholder entitled to dissent and obtain payment for his, her or its shares may not also challenge the corporate action creating the right to dissent unless the action is unlawful or fraudulent with respect to the shareholder or VCG.

 

Under Section 7-113-103(1) of the Colorado Business Corporation Act, a record shareholder may assert dissenters’ rights as to fewer than all shares registered in the record shareholder’s name only if the record shareholder dissents with respect to all shares beneficially owned by any one person and causes VCG to receive written notice which states such dissent and the name, address and federal taxpayer identification number, if any, of each person on whose behalf the record shareholder asserts dissenters’ rights.

 

Section 7-113-103(2) of the Colorado Business Corporation Act provides that a beneficial shareholder may assert dissenters’ rights as to the shares held on the beneficial shareholder’s behalf only if (i) the beneficial shareholder causes VCG to receive the record shareholder’s written consent to the dissent not later than the time the beneficial shareholder asserts dissenters’ rights, and (ii) the beneficial shareholder dissents with respect to all shares beneficially owned by the beneficial shareholder.

 

VCG will require that, when a record shareholder dissents with respect to the shares held by any one or more beneficial shareholders, each such beneficial shareholder must certify to VCG that the beneficial shareholder and the record shareholder have asserted, or will timely assert, dissenters’ rights as to all such shares as to which there is no limitation on the ability to exercise dissenters’ rights.

 

The notice accompanying this proxy statement states that VCG’s shareholders are entitled to assert dissenters’ rights under Article 113 of the Colorado Business Corporation Act. A shareholder who wishes to assert dissenters’ rights shall: (i) cause VCG to receive before the vote is taken on the Merger Proposal at the special meeting, written notice of the shareholder’s intention to demand payment for the shareholder’s shares if the merger is effectuated, and (ii) not vote the shares in favor of the Merger Proposal. A shareholder who does not satisfy the foregoing requirements will not be entitled to demand payment for his, her or its shares under Article 113 of the Colorado Business Corporation Act.

 

If the merger is approved at the special meeting, VCG will send written notice to dissenters who are entitled to demand payment for their shares. The notice required by VCG will be given no later than 10 days after the effective time of the merger and will: (i) state that the merger was authorized and state the effective time or proposed effective date of the merger, (ii) set forth an address at which VCG will receive payment demands and the address of a place where certificates must be deposited, (iii) inform holders of un-certificated shares to what extent transfer of the shares will be restricted after the payment demand is received, (iv) supply a form for demanding payment, which form will request a dissenter to state an address to which payment is to be made, (v) set the date by which VCG must receive the payment demand and certificates for shares, which date will not be less than 30 days after the date the notice is given, (vi) state that if a record shareholder dissents with respect to the shares held by any one or more beneficial shareholders, each such beneficial shareholder must certify to VCG that the beneficial shareholder and the record shareholder or record shareholders of all shares owned beneficially by the beneficial shareholder have asserted, or will timely assert, dissenters’ rights as to all such shares as to which there is no limitation of the ability to exercise dissenters’ rights, and (vii) be accompanied by a copy of Article 113 of the Colorado Business Corporation Act.

 

A shareholder who is given a dissenters’ notice to assert dissenters’ rights and who wishes to assets dissenters’ rights will, in accordance with the terms of the dissenters’ notice, (i) cause VCG to receive a payment demand (which may be a demand form supplied by VCG and duly completed or other acceptable writing), and (ii) deposit the shareholder’s stock certificates. A shareholder who demands payment in accordance with the foregoing retains all rights of a shareholder, except the right to transfer the shares, until the effective time of the merger, and has only the right to receive payment for the shares after the effective time. A demand for payment and deposit of certificates is irrevocable except as set forth under “Dissenters’ Rights — If Dissenter is Dissatisfied with Offer,” and if the effective time of the merger does not occur within 60 days after the date set by VCG by which it must receive the payment demand, VCG will return the deposited certificates and release the transfer restrictions imposed. If the effective time of the merger occurs more than 60 days after the date set by VCG by which it must receive the payment demand, then VCG will send a new dissenters’ notice. A shareholder who does not demand payment and deposit his, her or its VCG share certificates as required by the date or dates set forth in the dissenters’ notice will not be entitled to demand payment for his, her or its shares of VCG common stock under Article 113 of the Colorado Business Corporation Act, in which case, pursuant to the merger agreement, he, she or it will receive cash consideration for each of his, her or its shares equal to the per share price received by non-dissenting shareholders.

 

At the effective time of the merger or upon receipt of a payment demand, whichever is later, VCG will pay each dissenter who complied with the notice requirements referenced in the preceding paragraph, VCG’s estimate of the fair value of the dissenters’ shares plus accrued interest. Payment shall be accompanied by an audited balance sheet as of the end of VCG’s most recent fiscal year or, if not available, the balance sheet as of the end of a fiscal year ending not more than 16 months before the date of payment, an audited income statement for that year, an audited statement of changes in shareholders’ equity for that year and an audited statement of cash flow for that year, as well as the latest available financial statements, if any, for the interim period, which interim financial statements need not be audited. Payment will also be accompanied by a statement of the estimate by VCG of the fair value of the shares and an explanation of how the interest was calculated, along with a statement of the dissenters’ right to demand payment and a copy of Article 113 of the Colorado Business Corporation Act. With respect to a dissenter who acquired beneficial ownership of his, her or its shares after VCG’s first announcement of the terms of the Merger Proposal on November 10, 2010, or who does not certify that his, her or its shares were acquired before that date, VCG may, in lieu of making the payment described above, offer to make such payment if the dissenter agrees to accept it in full satisfaction of the demand.

 

If a dissenter disagrees with VCG’s payment or offer, such dissenter may give notice to VCG in writing of the dissenters’ estimate of the fair value of the dissenters’ shares and of the amount of interest due and may demand payment of such estimate, less any payment made prior thereto, or reject VCG’s offer and demand payment of the fair value of the shares and interest due if: (i) the dissenter believes that the amount paid or offered is less than the fair value of the shares or that the interest due was incorrectly calculated, (ii) VCG fails to make payment within 60 days after the date set by VCG by which it must receive the payment demand, or (iii) VCG does not return deposited certificates or release the transfer restrictions imposed on un-certificated shares if the effective time of the merger does not occur within 60 days after the date set by VCG by which it must receive the payment demand from shareholders asserting dissenters’ rights. A dissenter waives the right to demand payment under this paragraph unless he, she or it causes VCG to receive the notice referenced in this paragraph within 30 days after VCG makes or offers payment for the shares of the dissenter, in which event, such dissenter will receive all cash for his, her or its shares in an amount equal to the amount paid or offered by VCG.

 

If a demand for payment made by a dissenter as set forth above is unresolved, VCG may, within 60 days after receiving the payment demand, commence a proceeding and petition a court to determine the fair value of the shares and accrued interest. If VCG does not commence the proceeding within the 60 day period, it shall pay to each dissenter whose demand remains unresolved the amount demanded. VCG must commence any proceeding described above in the First Judicial District, Jefferson County District Court. VCG must make all dissenters whose demands remain unresolved parties to the proceeding as in an action against their shares, and all parties shall be served with a copy of the petition. Jurisdiction in which the proceeding is commenced is plenary and exclusive. One or more persons may be appointed by the court as appraisers to receive evidence and recommend a decision on the question of fair value. The appraisers will have the power described in the court order appointing them. The parties to the proceeding will be entitled to the same discovery rights as parties in other civil proceedings. Each dissenter made a party to the proceeding will be entitled to judgment for the amount, if any, by which the court finds the fair value of the dissenters’ shares, plus interest, to exceed the amount paid by VCG, or for the fair value, plus interest, of a dissenters’ shares for which VCG elected to withhold payment.

 

The court in an appraisal proceeding shall determine all costs of the proceeding, including the reasonable compensation and expenses of appraisers appointed by the court. The court will assess the costs against VCG; except that the court may assess costs against all or some of the dissenters, in the amount the court finds equitable, to the extent the court finds that the dissenters acted arbitrarily, vexatiously, or not in good faith in demanding payment. The court may also assess the fees and expenses of counsel and experts for the respective parties, in amounts the court finds equitable: (i) against VCG and in favor of the dissenters if the court finds that VCG did not substantially comply with its obligations under the dissenters’ rights statute, or (ii) against either VCG or one or more dissenters, in favor of any other party, if the court finds that the party against whom the fees and expenses are assessed acted arbitrarily, vexatiously or not in good faith with respect to the rights provided by Article 113 of the Colorado Business Corporation Act. If the court finds that the services of counsel for any dissenter were of substantial benefit to the other dissenters similarly situated, and that the fees for those services should not be assessed against VCG, the court may award to such counsel reasonable fees to be paid out of the amount awarded to the dissenters who were benefited.

 

Any written notice required to be sent to VCG by a shareholder electing to exercise his or her dissenters’ rights under Article 113 of the Colorado Business Corporation Act should be sent to Corporate Secretary at the headquarters of VCG Holding Corp., 390 Union Boulevard, Suite 540, Lakewood, Colorado 80228.

OTHER MATTERS

 

VCG’s board of directors does not know of any other matters to be presented for action at the special meeting other than as described in this proxy statement. If any other business should properly come before the meeting, the persons named in the accompanying form of proxy intend to vote thereon in accordance with their best judgment unless they are directed to do otherwise.

Future Shareholder Proposals

 

If the merger is consummated, there will be no public shareholders of VCG and no public participation in any future meeting of shareholders of VCG. However, if the merger is not consummated, VCG’s current shareholders will continue to be entitled to attend and participate in VCG’s shareholder meetings.

 

Under Exchange Act Rule 14a-8(e), for a proposal to be included with a company’s annual meeting proxy statement, the proposals must be received at the company’s principal executive offices not less than 120 calendar days before the date of the company’s proxy statements released to shareholders in connection with the previous year’s annual meeting. However, Rule 14a-8(e) also provides that if a company did not hold an annual meeting the previous year, or if the date of the current year’s annual meeting has been changed by more than 30 days from the date of the previous year’s meeting, then the deadline is a reasonable time before the company begins to print and send its proxy materials.

 

VCG held its 2010 annual meeting of shareholders on June 10, 2010 and VCG’s proxy statement for the 2010 annual meeting of shareholders was dated April 30, 2010. Accordingly, VCG must receive a proposal to be included with VCG’s proxy statement for the 2011 annual meeting on or before December 31, 2010.

 

Notice of a shareholder proposal submitted outside the processes of Exchange Act Rule 14a-8 is considered untimely if a company does not have notice of such proposal at least 45 days before the date on which the company first sent its proxy materials for the prior year’s annual meeting of shareholders under Exchange Act Rule 14a-4(c)(1). However, Rule 14a-4(c)(1) also provides that if during the prior year the company did not hold an annual meeting, or if the date of the meeting has changed more than 30 days from the prior year, then notice must be received a reasonable time before the registrant sends its proxy materials for the current year.

 

VCG sent its proxy materials for the 2010 annual meeting of shareholders on or about May 5, 2010. Accordingly, VCG must receive notice of a shareholder proposal submitted outside the processes of Exchange Act Rule 14a-8 for the 2011 annual meeting on or before March 21, 2011 for it to be considered timely.

 

The Securities and Exchange Commission has adopted rules that permit companies and intermediaries such as brokers to satisfy delivery requirements for proxy statements with respect to two or more shareholders sharing the same address by delivering a single proxy statement addressed to those shareholders. This process, which is commonly referred to as “householding,” potentially provides extra convenience for shareholders and cost savings for us.

 

If you are now receiving multiple copies of our proxy materials and would like to have only one copy of these documents delivered to your household in the future, please call, email or write to us at (303) 934-2424, tbradley@vcgh.com , or VCG Holding Corp., 390 Union Blvd., Suite 540, Lakewood, Colorado 80228, Attention: Corporate Secretary.

 

Biographical Information about Our Directors and Executive Officers

 

The merger agreement provides that upon consummation of the merger, FD Acquisition Co.’s sole director and officer, Mr. Lowrie, will become the initial director and officer of the surviving corporation. It is also contemplated that Mr. Ocello will become an officer of the surviving corporation after consummation of the merger.

 

The following table sets forth information about VCG’s directors and certain of its executive officers as of the date of this proxy statement and provides their respective ages and positions with VCG. 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.

 

 

 

 

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., which is the sole manager of Family Dog and also the general partner of Lowrie Management LLLP, a Colorado limited liability limited partnership, which formerly owned and operated adult entertainment nightclubs and is now an investment entity. Mr. Lowrie was the owner and President of International Entertainment Consultants, Inc. (“IEC”), a company engaged in the business of managing adult entertainment nightclubs, from 1982 to October 2003, when it was acquired by 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.

 

Micheal Ocello.   Mr. Ocello has been the President and Chief Operating Officer of VCG since April 2002. He served as a director of VCG between since April 2002 and October 2010. Mr. Ocello is the owner and President of Unique Entertainment Consultants, Inc., of St. Louis, Missouri, a management company that has specialized in the management of nightclubs since 1995. The principal address and phone number for Unique Entertainment Consultants, Inc., of St. Louis, Missouri is 6161 Clifton Oaks Pl. and (618) 271-9420. Mr. Ocello has been affiliated with IEC in a managerial capacity since 1982. He is currently the President of IEC. Mr. Ocello is also the managing member of LTD Investment Group, LLC, a Missouri limited liability company used by Mr. Ocello for investment purposes. LTD Investment Group, LLC currently owns 158,000 shares of our common stock, all of which will be contributed to Family Dog in connection with the

transactions contemplated by the merger agreement. He is President of the Association of Club Executives (ACE National, the national trade association for the adult nightclub industry), a private company, President of the Illinois Club Owners Association, a private company, and past Vice Chairman and current Board member of Missouri’s Small Business Regulatory Fairness Board, a private company. Mr. Ocello has served as a commissioned police officer for the Village of Brooklyn, Illinois since early 2009.

 

Robert McGraw, Jr.   Mr. McGraw has been a director of VCG since November 2002. A Certified Public Accountant since 1982, Mr. McGraw is President of McGraw and McGraw CPA, PC of Westminster, Colorado. The principal address and phone number for McGraw and McGraw CPA, PC is 7260 Osceloa Street and 303-427-6641. Mr. McGraw’s firm specializes in accounting for restaurants, lounges, and small businesses. The practice consists of income tax preparation, financial statement preparation, and small business consulting. Mr. McGraw is currently licensed in the State of Colorado and is a member of the American Institute of Certified Public Accountants and Colorado Society of Certified Public Accountants. Mr. McGraw served on VCG’s Audit Committee for half the 2009 year and still serves on VCG’s Compensation and Governance and Nominating Committee, and is an independent member of VCG’s board of directors. Mr. McGraw’s accounting and financial experience, among other factors, led VCG’s board of directors to conclude that he should serve as a director. Mr. McGraw is a U.S. citizen.

 

Martin Grusin.   Mr. Grusin has been a director of VCG since July 2005. Mr. Grusin has practiced law as an attorney for his firm the Law Office of Martin Grusin, P.C. since 1973. The principal address and phone number for Martin Grusin, P.C. is 780 Ridge Lake Blvd., Ste #202 Memphis, TN 38120 and (901) 682-3450. Mr. Grusin serves on no committees because of his involvement in merger and acquisition activity for VCG and its subsidiaries. Mr. Grusin is not considered to be an independent member of VCG’s board of directors. Mr. Grusin’s legal, merger and acquisition experience, as well as experience as a director of other public companies, among other factors, led VCG’s board of directors to conclude that he should serve as a director. Mr. Grusin is a U.S. citizen.

 

George Sawicki.   Mr. Sawicki has been a director of VCG since June 2008. Mr. Sawicki is a sole practitioner of law but he has served as in-house counsel for Zed, formerly 9 Squared, a mobile media solutions company from 2007 through 2010. The principal address and phone number for Zed is 1999 Broadway, Suite 1250, Denver, CO 80202 and (720) 889-0016 Mr. Sawicki has previously served as in-house counsel for Playboy Enterprises, Inc., an adult entertainment company from 2006 through 2007, and New Frontier Media, Inc., a producer and distributor of adult themed and general motion picture entertainment from 2003 through 2006. The principal address and phone number for Playboy Enterprises, Inc. is 680 N. Lake Shore Dr #1500, Chicago, IL 60611 and (312) 751-8000 and the principal address and phone number for New Frontier Media, Inc. is 7007 Winchester Circle, Suite 200, Boulder, CO 80301 and (303) 444-0900. Mr. Sawicki has worked as legal counsel with the areas of corporate governance, patent, e-commerce, entertainment and marketing organizations, managing complex transactions, and legal compliance consulting. Mr. Sawicki serves on the Audit, Compensation (Chair), and Governance and Nominating Committee (Chair) and is an independent member of VCG’s board of directors. Mr. Sawicki’s experience as legal counsel for the adult industry, among other factors, led VCG’s board of directors to conclude that he should serve as a director. Mr. Sawicki is a U.S. citizen.

 

David Levine.   Mr. Levine has been a director since July 2010. Mr. Levine is a business consultant but has served as Chairman and Chief Executive Officer of ResortQuest International, a former NYSE-listed company that provided vacation rental, property management, and real estate services. The principal address and phone number for ResortQuest International is 546 Mary Esther Cut-Off NW, Suite 3, Fort Walton Beach, FL 32548 and (800) 862-4853. During his tenure (1998-2002), ResortQuest became the industry’s leading brand name, operating 32 integrated companies in 51 resort locations throughout North America and Hawaii. Prior to launching ResortQuest, Mr. Levine served as President and Chief Operating Officer (1994-1998) of Equity Inns, Inc., a former NYSE-listed REIT that specialized in lodging-related acquisitions. Mr. Levine is the Chair of and the Financial Expert on VCG’s Audit Committee and serves on VCG’s Compensation and Governance and Nominating Committees. He is an independent member of VCG’s board of directors. Mr. Levine is a U.S. citizen.

 

There are no material proceedings to which any director, executive officer or affiliate of VCG, any owner of record or beneficial owner of more than five percent of any class of voting securities of VCG, or any associate of any such director, executive officer, affiliate or security holder is a party adverse to VCG or has a material interest adverse to VCG or any of its subsidiaries.

 

To the best of our knowledge, none of the following events have occurred during the past ten years that are material to an evaluation of the ability or integrity of any director or executive officer of VCG:

 

 

 

 

The following table sets forth our selected consolidated financial information for the years ended December 31, 2009, 2008, 2007, 2006, 2005 and as of and for the nine months ended September 30, 2010 and 2009. The information as of December 31, 2009 and 2008 is derived from our consolidated financial statements from our Annual Report on Form 10-K for the year ended December 31, 2009, which is included as Appendix D to this proxy statement and incorporated herein by reference, which have been audited by Causey Demgen & Moore Inc., as independent registered public accountants. The information as of and for the nine months ended September 30, 2010 and 2009 is derived from our unaudited consolidated financial statements from our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010, which is included as Appendix E to this proxy statement and incorporated herein by reference, and include, in the opinion of management, all adjustments, consisting only of normal, recurring adjustments, necessary for a fair presentation of the information. The information as of December 31, 2007, 2006 and 2005 and for the years ended December 31, 2006 and 2005 is derived from our audited consolidated financial statements, which are not incorporated by reference into this proxy statement.

 

The selected consolidated financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, including the related notes, incorporated by reference into this proxy statement from our Annual Report on Form 10-K for the year ended December 31, 2009 and from our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010.

 

Discontinued Operations

 

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