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

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

Check the appropriate box:

o		Preliminary Proxy Statement.
o		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)).
þ		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.
o		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

þ		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:

 

SPECIAL MEETING OF SHAREHOLDERS

April 11, 2011

 

March 18, 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 April 11, 2011 at 1:30 p.m. Mountain time, at the Sheraton Denver West Hotel located at 360 Union Boulevard, Lakewood, Colorado 80228. 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, as subsequently amended on March 17, 2011 by Amendment No. 1 to Agreement and Plan of Merger, 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 March 21, 2011, 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, as amended, 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, as amended.

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, as amended, the effect will be the same as if you had voted against the approval of the Agreement and Plan of Merger, as amended, 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 https://materials.proxyvote.com/91821k 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, AS AMENDED, 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 March 18, 2011, and it and the proxy card are first being mailed to shareholders on or about March 21, 2011.

 

 

VCG HOLDING CORP.

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON April 11, 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 the Sheraton Denver West Hotel located at 360 Union Boulevard, Lakewood, Colorado 80228, on April 11, 2011 at 1:30 p.m., 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, as amended by Amendment No. 1 to Agreement and Plan of Merger, dated as of March 17, 2011, 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 and Amendment No. 1 to Agreement and Plan of Merger have been included as Appendix A and Appendix B , respectively, 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, as amended, 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 March 21, 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 March 21, 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 1:30 p.m., 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, as amended. 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, as amended, 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, as amended, 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 79 of the accompanying proxy statement. Article 113 of the Colorado Business Corporation Act is attached as Appendix E 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 https://materials.proxyvote.com/91821K. 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)

 

 

VCG Holding Corp.

390 Union Boulevard, Suite 540
Lakewood, Colorado 80228

 

PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 11, 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 1:30 p.m. Mountain Time on April 11, 2011 at the Sheraton Denver West Hotel located at 360 Union Boulevard, Lakewood, Colorado 80228. 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 March 21, 2011 to all shareholders who owned shares of VCG’s common stock at the close of business on March 21, 2011, which date is 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, as amended by Amendment No. 1 to Agreement and Plan of Merger, dated as of March 17, 2011, 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 amended, 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 95. 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 61)

 

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, as amended by Amendment No. 1 to Agreement and Plan of Merger, dated as of March 17, 2011, 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 amended by Amendment No. 1 to Agreement and Plan of Merger, dated as of March 17, 2011, 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 “non-Executive Group 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 57)

 

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 currently owned by Messrs. Lowrie and Ocello. 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 or business relationship with either 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, will also become owners of Family Dog at the time such investors deliver to Family Dog the total amount of the purchase price for the membership interests subscribed for by such investors.

 

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 controlled by Mr. Lowrie. Mr. Lowrie is the managing partner of Lowrie Management LLLP and has sole voting and dispositive power of the shares of VCG’s common stock owned by Lowrie Management LLLP. Mr. Lowrie is also the President of Lowrie Investment Management, Inc., which is one of the two general partners of Lowrie Management LLLP; the second general partner of Lowrie Management LLLP has no power or authority other than to execute a life insurance policy. 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. Mr. Ocello is the sole member and manager of LTD Investment Group, LLC. We sometimes refer to Mr. Lowrie, Mr. Ocello, Lowrie Management LLLP, Lowrie Investment Management, Inc. 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 59)

 

On the record date, there were 16,292,071 shares of VCG’s common stock outstanding, of which the Executive Group beneficially owns 5,138,878 shares or 31.5%. 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 determining 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. The vote required by clause (ii) is sometimes referred to in this proxy statement as the “majority of the minority” shareholder approval or vote.

 

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 62)

 

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 members of 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 as the “merger consideration” in this proxy statement.

 

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 non-Executive Group shareholders in the merger is approximately $25.1 million.

 

What Option Holders Will Receive in the Merger (see page 63)

 

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 62)

 

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 (other than the debt used to purchase certain real property from one of VCG’s subsidiaries, as further disclosed under “Special Factors — Real Estate Transaction Involving Mr. Lowrie.”) in exchange for membership interests in Family Dog. VCG does not currently owe any debt to any of the other members of the Executive Group. 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 after the merger.

 

Recommendation of the Special Committee, VCG’s Board of Directors and VCG’s Executive Officers (see page 27)

 

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 the non-Executive Group 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.

 

None of our executive officers, consisting of Messrs. Lowrie and Ocello, has made a recommendation with respect to how your should vote on the Merger Proposal.

 

Reasons for the Recommendation of the Special Committee and VCG’s Board of Directors (see page 27)

 

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, VCG’s Board of Directors and VCG’s Executive Officers; 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 32)

 

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 non-Executive Group shareholders in the merger is fair to such shareholders from a financial point of view. The full text of North Point Advisors’ opinion, as supplemented, 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 C and Appendix D 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 non-Executive Group shareholders 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 48)

 

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 the debt used to purchase certain real property from one of VCG’s subsidiaries, as further disclosed under “Special Factors — Real Estate Transaction Involving Mr. Lowrie.”). 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 either Mr. Lowrie or Mr. Ocello and any creditors of VCG who elect to assign to Family Dog certain debt owed to them by VCG in exchange for membership interests in Family Dog. As of the date hereof, no creditor of VCG (other than Lowrie Management LLLP) has elected to assign its rights to debt owed by VCG to such creditor and it is not currently anticipated that any other creditors will. 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 essentially the same 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.

 

In connection with the merger, it is expected that Mr. Lowrie will use part of the debt owed to Lowrie Management LLLP by VCG to purchase certain real property from one of VCG’s subsidiaries, as further disclosed under “Special Factors — Real Estate Transaction Involving Mr. Lowrie.”

 

Special Committee Compensation (see page 26)

 

Upon formation of the Special Committee, 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.

 

Position of Family Dog, FD Acquisition Co., Lowrie Management LLLP, Lowrie Investment Management, Inc., LTD Investment Group, LLC, Mr. Lowrie and Mr. Ocello as to Fairness; Provisions for Unaffiliated Shareholders (see pages 42 and 49)

 

Each of Family Dog, FD Acquisition Co., Lowrie Management LLLP, Lowrie Investment Management, Inc., LTD Investment Group, LLC, Mr. Lowrie and Mr. Ocello believes that the merger is fair (both substantively and procedurally) to VCG’s unaffiliated shareholders.

 

An unaffiliated representative was not retained to act solely on behalf of VCG’s unaffiliated shareholders for purposes of negotiating the terms of the transaction or preparing a report concerning the fairness of the transaction. VCG’s board of directors formed the Special Committee, consisting solely of independent, non-employee directors, to, among other things, evaluate whether the merger agreement and the merger were fair (both substantively and procedurally) to and in the best interests of VCG and its unaffiliated stockholders.

 

Certain Effects of the Merger (see page 45)

 

Upon consummation of the merger:

 

 

Further, after consummation of the merger:

 

 

Conditions to the Merger (see page 74)

 

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, other than in connection with the ongoing federal litigation challenging the Merger Proposal as disclosed under “Litigation Relating to the Merger.”

 

Restrictions on Solicitation, Acquisition Proposals and Changes in Recommendation (see page 71)

 

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 76)

 

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

 

 

 

 

Termination Fees (see page 77)

 

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 an Acquisition Proposal is made to the non-Executive Group shareholders and thereafter the merger agreement is terminated by either Family Dog or VCG if the merger is not consummated on or before the outside dates described under “Summary Term Sheet — Termination of the Merger Agreement” above or VCG’s shareholders do not approve the Merger Proposal at the special meeting of VCG’s shareholders or any adjournment and reconvening thereof, and within 12 months after such termination, VCG enters into, or publicly announces the intention to enter into, a definitive agreement with respect to any Acquisition Proposal, or consummates the transactions contemplated by such Acquisition Proposal (provided, that the percentages set forth in the defined term “Acquisition Proposal” (see “The Merger Agreement — Restrictions on Solicitation, Acquisition Proposals and Changes in Recommendation”) shall be deemed to be 50%).

 

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. However, pursuant to the terms of Amendment No. 1 to Agreement and Plan of Merger, such termination fee will be reduced to $100,000 upon the execution of the contemplated memorandum of understanding among the parties in and to the actions in the Colorado District Court, Jefferson County and in the United States District Court for the District of Colorado described under “Special Factors — Litigation Related to the Merger”.

 

Payable by Family Dog

 

Family Dog will be required to pay VCG a termination fee in the amount of $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 pages 50 and 74)

 

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 either 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 pre-existing personal or business relationship with either Mr. Lowrie or Mr. Ocello. The total amount subscribed for by accredited investors is $19,200,000. Family Dog expects to finance the remaining 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 light of the subscriptions received, and the other available sources of funds, Family Dog is no longer accepting new subscriptions from additional investors.

 

Accounting Treatment of the Merger (see page 52)

 

The merger will be recorded at its fair market value as a “purchase transaction” for financial accounting purposes.

 

Material U.S. Federal Income Tax Consequences (see page 52)

 

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 individual 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 54)

 

There is ongoing litigation in Colorado state and federal courts challenging the Merger Proposal. The two lawsuits were brought as class actions on behalf of the named plaintiffs and other similarly situated shareholders against Mr. Lowrie, various entities affiliated with Mr. Lowrie and the current as well as certain former members of VCG’s board of directors. The plaintiffs allege, among other things, that the merger consideration of $2.25 per share payable to VCG’s non-Executive Group shareholders upon the closing of the merger, if at all, is inadequate, 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. The merger agreement contains a condition to closing that there be, among other things, no pending or threatened lawsuits challenging the transactions contemplated by the merger agreement, other than the lawsuit filed in Colorado state court referred to above. The Executive Group has agreed to waive this closing condition with respect to the federal lawsuit referred to above.

 

On or about March 18, 2011, counsel for the plaintiffs and defendants to the state and federal lawsuits mentioned above agreed in principle to the terms of a memorandum of understanding outlining the terms of the agreement to settle and dismiss the two lawsuits.

 

Dissenters’ Rights (see page 79)

 

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 and its accompanying amendment are attached as Appendix A and Appendix B , respectively, 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 61.

 

 

 

 

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 your shares are held in an account at a broker, bank or other nominee, you must contact your broker, bank 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.

 

 

 

 

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 discussed and concluded that it would be advisable for it to retain independent legal counsel and an independent financial advisor. The Special Committee then retained independent legal counsel.

 

After retaining its independent legal counsel, the Special Committee commenced a process to determine which investment bank should serve as financial advisor to the Special Committee. The Special Committee sought recommendations for investment banking firms from its members, VCG’s Chief Financial Officer, VCG’s outside legal counsel and the Special Committee’s independent legal counsel. This process resulted in a list of investment banking firms which were contacted and invited to submit proposals. From the investment banking firms contacted, eight proposals were received.

 

Thereafter, VCG’s Chief Financial Officer, VCG’s outside legal counsel and the Special Committee’s independent legal counsel reviewed the proposals received. VCG’s Chief Financial Officer and the Special Committee’s independent legal counsel had discussions with each of the firms that had submitted a proposal. In these discussions, questions were asked about each firm’s qualifications to serve as financial advisor to the Special Committee and also about their industry experience and any potential conflicts of interest that such firms might have. The submitted terms for the proposed engagement were also discussed. After the completion of the discussions, the Special Committee met to discuss the findings.

 

At this meeting, the Special Committee’s independent legal counsel reviewed the terms of the proposals received and the discussions which had been conducted with the various investment banking firms. After discussion, the Special Committee indicated that North Point Advisors appeared to be the leading candidate for the engagement. It was 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. Also, North Point Advisors was independent, had no conflicts with any of the parties to the merger agreement, and had never represented VCG or the any member of the Executive Group.

 

It was also noted that, in the course of discussions, North Point Advisors had been willing to structure its fee proposal so that amounts would be payable in increments (one time retainer fee, strategic analysis fee, fairness opinion fee, and transaction fee) at various points throughout a potential transaction process. That structure would permit VCG to control its fee payment obligations in the event that a transaction did not proceed or if the process would extend out over a long period of time. The Special Committee also noted that the overall level of fees proposed by North Point Advisors was within the mid-range of the fees proposed by the other investment banking firms as a group.

 

The Special Committee directed its independent legal counsel to negotiate further the terms of North Point Advisors’ proposal to serve as the Special Committee’s financial advisor. The engagement letter negotiated provided for a $50,000 non-refundable retainer fee, a $100,000 strategic alternatives analysis fee, a $250,000 fairness opinion fee and a transaction fee measured by the consideration to be paid in the merger if the merger were consummated. The retainer fee and the strategic alternatives analysis fee would be credited against the transaction fee payable to North Point Advisors if a transaction was ultimately consummated. The fairness opinion fee, however, would not be credited against the transaction fee.

The Special Committee and North Point Advisors subsequently executed an engagement agreement on December 4, 2009.

 

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 and would have received Rick’s stock valued at $2.44 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 $10.01 and $11.00 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 of the Rick’s LOI, 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.

 

In the course of negotiating the Rick’s LOI, it became apparent to the parties to it that VCG would be unable to obtain certain unrelated third party consents necessary for the transfer of certain assets in the contemplated transaction with Rick’s. VCG and Rick’s were unable to negotiate a mutually acceptable solution to this issue. As a result, 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. Between April 1, 2010 and March 17, 2011, the closing price of Rick’s common stock has fluctuated between a low of $6.05 and a high of $13.15. On March 17, 2011, the closing price of Rick’s common stock was $9.75.

 

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, 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 reaffirmed Proposal was to acquire all of the outstanding shares of common stock of VCG (other than shares owned by the members of the Executive Group) in a cash merger transaction and the consideration proposed in the reaffirmed 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 reaffirmed 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 reaffirmed Proposal, (ii) reject or discontinue pursuing the reaffirmed Proposal if the Special Committee, upon the review of the advice and recommendations of its legal, financial and other advisors, determined that pursuing the reaffirmed 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 reaffirmed Proposal, and (iv) make reports and recommendations to the entire board of directors as to the reaffirmed 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 reaffirmed 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*( (“Mr. Lowrie’s Counsel”), that the terms and conditions of the Standstill Agreement continued in full force and effect.

 

 

(*Effective as of January 1, 2011, the attorneys of Kamlet Reichert, LLP joined the firm of Lathrop & Gage LLP.

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 at that time). 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 Mr. Lowrie’s Counsel 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 for the Special Committee to consider and review the reaffirmed Proposal, the expiration of the reaffirmed 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 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 Mr. Lowrie’s Counsel 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 non-Executive Group 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. The presentation provided by North Point Advisors also included an analysis of several potential strategic alternatives available to VCG, including: maintaining the status quo as a public company, recapitalizing the company, negotiating the proposed management buyout offer, conducting strategic acquisitions, selling VCG to an unaffiliated third party, and liquidating VCG’s assets.

 

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 Mr. Lowrie’s Counsel 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 instructed Faegre to request that North Point Advisors begin contacting any parties that either had 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 Mr. Lowrie’s Counsel 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 to work with North Point Advisors to develop an expanded response to the terms of the reaffirmed Proposal. The Special Committee instructed Faegre to inform Mr. Lowrie’s Counsel 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 either had 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. On September 1, 2010, North Point Advisors distributed a written copy of this additional analysis to the Special Committee and its counsel.

 

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 non-price 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 Mr. Lowrie’s Counsel 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 Mr. Lowrie’s Counsel. In response, Mr. Lowrie’s Counsel requested that the Special Committee and Mr. Lowrie have a direct meeting where both sides could discuss the reaffirmed 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 reaffirmed 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 Mr. Lowrie’s Counsel 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 non-Executive Group 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 Mr. Lowrie’s Counsel further discussed the topics raised during the September 22, 2010 meeting. Mr. Lowrie’s Counsel conveyed that Mr. Lowrie had instructed it 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, Mr. Lowrie’s Counsel 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 Mr. Lowrie’s Counsel suggested revisions to the initial draft of the proposed merger agreement. Faegre’s revisions did not include a suggested price.

 

On October 15, 2010, Mr. Lowrie’s Counsel 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 orally discussed with the Special Committee its valuation analysis of VCG, which it had 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 Mr. Lowrie’s Counsel.

 

Following the October 17, 2010 meeting, there were a number of discussions between Mr. Lowrie’s Counsel and Faegre regarding the $2.20 price. Mr. Lowrie’s Counsel 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, Mr. Lowrie’s Counsel 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 Mr. Lowrie’s Counsel.

 

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. Mr. Lowrie’s Counsel reported that Mr. Lowrie was not willing to increase his price above $2.20. In addition, Mr. Lowrie’s Counsel 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, Mr. Lowrie’s Counsel 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 Mr. Lowrie’s Counsel.

 

During the period from November 3 through November 9, 2010, representatives of Mr. Lowrie’s Counsel 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 non-Executive Group 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 non-Executive Group 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 December 27, 2010, VCG received an unsolicited offer in the form of a written letter of intent from Rick’s for the acquisition of Schiek’s Palace Royale, VCG’s club in Minneapolis, Minnesota, also referred to as “Schiek’s” in this proxy statement. Following receipt of this offer, VCG’s board of directors directed the Special Committee to (i) evaluate the offer which had been received, (ii) if appropriate, commence discussions with Rick’s in an attempt to explore whether mutually agreeable terms could be reached, and (iii) consider the impact of the proposed Schiek’s transaction on the pending merger and on the interests of VCG’s non-Executive Group shareholders.

 

During January and February, VCG’s representatives negotiated the terms of the proposed Schiek’s transaction with Rick’s while keeping the Special Committee apprised of the status of these discussions. By late February, those discussions had resulted in an offer from Rick’s to acquire Schiek’s for a purchase price of $3,050,000. The Special Committee determined that such proposed price represented an attractive valuation for Schiek’s and recommended that (i) VCG’s board of directors approve a letter of intent with Rick’s relating to Schiek’s and (ii) VCG commence the negotiation of definitive agreements for such proposed transaction. VCG’s board of directors thereafter unanimously approved the revised, non-binding (except for certain provisions discussed below) letter of intent on February 18, 2011 and VCG countersigned the letter of intent on the same date. On March 3, 2010, VCG and Rick’s executed an amendment to the letter of intent to provide that Rick’s would also acquire the real property on which Schiek’s is operated from the owner thereof as more fully described below.

 

During this time period, the Special Committee also had discussions with the Executive Group regarding the impact of the proposed Schiek’s transaction on the pending merger. The Special Committee believed that the purchase price finally negotiated by VCG for Schiek’s was higher than might otherwise have been expected in light of, among other things, the Company’s perceived current value of the club based on recent financial performance, the value originally attributed to the club in North Point Advisors’ breakup analysis and the price received upon the sale of VCG’s Ft. Worth club to Ricks in July 2010. The Special Committee, therefore, communicated to the Executive Group a request that some portion of the proceeds from Schiek’s should be paid out to the non-Executive Group shareholders, either in the form of an increase to the $2.25 merger consideration or in the form of a special dividend.

 

In response, the Executive Group informed the Special Committee that it was not willing to pay any additional consideration to the non-Executive Group shareholders beyond the $2.25 provided for in the merger agreement. During the course of these discussions, the Executive Group noted that the merger agreement did not contain any provisions which provided for an adjustment of the merger consideration (upwards or downwards) based upon events occurring subsequent to the execution of the merger agreement. To that end, the Executive Group highlighted certain offsetting negative developments since the execution of the merger agreement such as the additional lawsuit that was filed in federal court with respect to the Proposal, which resulted in significant cost and distraction to the Company, and new developments in unrelated litigation affecting certain of the Company’s clubs. The Executive Group also noted that the merger agreement did not specifically require the Special Committee’s approval for the Schiek’s transaction to be pursued by VCG.

 

The Executive Group, however, did express a willingness to consider non-purchase price revisions to the merger agreement. As a result of these discussions, the parties agreed to provide that the settlement of the federal court shareholder class action lawsuit (which had been filed subsequent to the merger agreement date) would not be a considered a condition to the closing of the merger. The merger agreement already provided, at the request of the Special Committee, that the settlement of the Colorado state court class action lawsuit (which had been filed prior to the merger agreement date) was not a condition to closing. The Special Committee believed that this change would be beneficial in providing additional certainty regarding the closing of the merger.

 

In connection with its analysis and discussions, the Special Committee asked its financial advisor to provide an updated valuation analysis which would give effect to the proposed Schiek’s transaction, and which would also give effect to any other developments which had occurred since the date of the merger agreement. On March 1, 2011, North Point Advisors delivered its updated analysis to the Special Committee. Based upon this analysis, North Point Advisors also delivered a supplemental opinion letter. That supplemental opinion letter stated that, taking into account the additional information reflected in the updated analysis (including the proposed Schiek’s transaction), North Point Advisors confirmed its conclusion that the merger consideration of $2.25 per share to be received by VCG’s non-Executive Group shareholders in the merger continued to be fair, from a financial point of view, to such shareholders. A copy of North Point Advisors’ supplemental opinion letter is attached as Appendix D to this proxy statement.

 

Following receipt of the supplemental opinion letter from North Point Advisors, the Special Committee determined that the consummation of the proposed Schiek’s transaction, on the terms set forth in the letter of intent was in the best interest of VCG and its shareholders and recommended it for approval to VCG’s board of directors.

 

The letter of intent provides that a newly-formed subsidiary of Rick’s would acquire substantially all of the assets of Classic Affairs, Inc., a wholly-owned subsidiary of VCG that owns and operates Schiek’s, for $3,050,000 in cash payable at closing. Assets excluded from the sale include, but are not limited to, cash, cash equivalents, prepaid expenses, deposits, security deposits, leased assets unless the leases are assumed and certain software and license agreements. The purchaser and Rick’s would not assume any of Classic Affairs, Inc.’s liabilities other than any assigned leases.

 

Classic Affairs, Inc. currently leases the building in which the club is operated from 4th Street Partnership LLLP, of which VCG’s wholly-owned subsidiary VCG Real Estate Holdings, Inc. is the general partner. VCG is currently the guarantor of Classic Affairs, Inc.’s obligations under the lease. The letter of intent provides that a wholly-owned subsidiary of Rick’s would acquire from 4th Street Partnership LLLP the real property on which Schiek’s is operated for a purchase price of $3,250,000. Upon the sale of the real property, the existing lease would be terminated and VCG’s guaranty of the lease would be released.

 

Pursuant to the letter of intent, the definitive agreement for the sale of Schiek’s would contain ordinary and customary provisions for agreements of this nature, such as representations, warranties, closing conditions, covenants and indemnification obligations. The letter of intent provides that the purchaser’s obligation to close the acquisition would be subject to the following closing conditions: (i) the purchaser shall possess all necessary permits and other authorizations needed to operate an establishment serving liquor and providing live female semi-nude entertainment at the club and all such permits and authorizations shall be in good order, without any administrative action pending or concluded that may challenge or present an obstacle to the continued performance of semi-nude entertainment at the club, (ii) all permits, zoning classifications or authorizations necessary to operate an establishment serving liquor and providing live female semi-nude entertainment at the club shall be transferred to the purchaser at the closing, (iii) Classic Affairs, Inc.’s financial records shall be maintained and exist in a manner to allow for an audit by and as determined by Rick’s, (iv) 4th Street Partnership LLLP shall sell the real property on which Schiek’s is operated to one of Rick’s wholly-owned subsidiaries and the existing lease for the premises shall be terminated, (v) VCG and certain of VCG’s affiliates shall enter into a covenant not to compete with Schiek’s prohibiting them from operating an establishment providing live female nude or semi-nude adult entertainment in Minneapolis, Minnesota or in the surrounding area for a period of five years after the closing, and (vi) the sale and all related transactions shall have been approved by the board of directors or other governing body of each of the parties.

 

The obligation of VCG and Classic Affairs, Inc. to close the sale would be subject to the following closing conditions: (i) VCG and certain of VCG’s affiliates shall enter into a covenant not to compete with Schiek’s prohibiting them from operating an establishment providing live female nude or semi-nude adult entertainment in Minneapolis, Minnesota or in the surrounding area for a period of five years after the closing, (ii) VCG shall be released as the guarantor of Classic Affairs, Inc.’s obligations under the lease for the building in which Schiek’s is operated at the closing, (iii) the sale and all related transactions shall have been approved by the board of directors or other governing body of each of the parties, and (iv) 4th Street

Partnership LLLP shall sell the real property on which Schiek’s is operated to one of Rick’s wholly-owned subsidiaries and the existing lease for the premises shall be terminated.

 

The letter of intent contains a binding provision prohibiting VCG and Classic Affairs, Inc. from offering to sell or soliciting any offer to purchase or engaging in any discussion or activities of any nature whatsoever, directly or indirectly, involving in any manner the actual or potential sale, transfer, encumbrance, pledge, collateralization or hypothecation of Schiek’s until the letter of intent is terminated. The letter of intent contains other customary covenants concerning, including, but not limited to, access to information, operation of the business between execution of the letter of intent and termination thereof, confidentiality and transaction expenses. The confidentiality and expenses covenants are binding on the parties.

 

The letter of intent will terminate if (i) the parties are unable to agree on the terms of the definitive agreement for the sale by March 15, 2011, and (ii) any state or federal agency having jurisdiction over approval of the sale disapproves of any part of the transaction.

 

Pursuant to Section 5.01(g) of the merger agreement, VCG may not sell any assets without Family Dog’s prior written consent (which consent may not be unreasonably withheld, conditioned or delayed). Family Dog consented to the execution of the letter of intent.

 

VCG and Rick’s expect to execute a definitive agreement for the sale on or before March 15, 2011. The letter of intent provides that the closing of the sale would occur five business days after the date on which the purchaser has been issued all licenses required to operate an adult cabaret conducting topless entertainment and serving alcoholic beverages. The parties do not expect to close the sale of Schiek’s prior to the consummation of VCG’s merger and going private transaction.

 

As further discussed under “Special Factors — Litigation Related to the Merger,” on or about March 18, 2011, counsel for the plaintiffs and defendants to the state and federal lawsuits agreed in principle to the terms of a memorandum of understanding outlining the terms of an agreement to settle and dismiss the ongoing litigation in Colorado state and federal courts challenging the Merger Proposal. In anticipation of the execution of the memorandum of understanding, the parties to the merger agreement amended the merger agreement on March 17, 2011. Upon the execution of the memorandum of understanding, Amendment No. 1 to Agreement and Plan of Merger will reduce, from $600,000 to $100,000, the termination fee payable by VCG to Family Dog in the event VCG terminates the merger agreement to enter into a Company Acquisition Agreement (as defined in the merger agreement) involving a Superior Acquisition Proposal (as defined in the merger agreement) from certain identified parties that have previously been in contact with North Point Advisors to discuss a potential change in control transaction involving VCG. A copy of Amendment No. 1 to Agreement and Plan of Merger is attached as Appendix B to this proxy statement.

 

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 (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. 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 $20,000 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 $28,000 for the period July 20, 2010 through the date of this Proxy Statement.

 

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.

 

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.

 

None of VCG’s executive officers, consisting of Messrs. Lowrie and Ocello, has made a recommendation with respect to how VCG’s shareholders should vote on the Merger Proposal.

 

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).

 

At the request of the Special Committee, North Point Advisors also delivered a supplemental opinion letter dated March 1, 2011. This supplemental opinion letter confirmed the conclusion of North Point Advisors that the merger consideration continued to be fair, from a financial point of view, to VCG’s non-Executive Group shareholders.

 

The full text of the North Point Advisors written opinion dated November 9, 2010, as supplemented on March 1, 2011, 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 C and Appendix D 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 respective dates of the opinion, as supplemented, 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 (i) its initial 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 and (ii) the supplemental opinion letter which was delivered to the Special Committee on March 1, 2011. 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 or March 1, 2011.

 

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 22.9% 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 November 10, 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. The operations of the microcap restaurants were considered somewhat similar to VCG’s operations since both involve food sales, sales of alcoholic and other beverages and operation of a number of different locations. The microcap restaurants were also similar to VCG in terms of overall revenues and the number of locations operated. The entertainment companies (other than Rick’s) were considered to be a less comparable group because those companies varied significantly in size and also in terms of the type of entertainment and services offered, such as stock car racing, movie theaters, bowling and lodging.

 

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 and $25.0 million as of December 31, 2010 (pro forma). With respect to the comparable companies, North Point Advisors calculated:

 

 

 

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

 

At November 9, 2010

 

 

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 at November 9, 2010 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.

 

At March 1, 2011

 

 

Based on the first to third quartile range for these multiples, the resulting implied enterprise value for VCG at March 1, 2011 ranged from $48.3 million to $70.3 million, and the resulting implied equity value per share ranged from $1.43 to $2.78. North Point Advisors compared this range of enterprise values to the implied enterprise value of $61.7 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 Risk’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 at November 9, 2010 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.

 

Based on the above multiples for Rick’s, the resulting implied enterprise value for VCG at March 1, 2011 ranged from $43.3 million to $68.6 million, and the resulting implied equity value per share ranged from $1.12 to $2.67. North Point Advisors compared this range of enterprise values to the implied enterprise value of $61.7 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:

 

 

 

 

The companies in the group of “restaurants with performance issues” were restaurant companies characterized by either negative sales growth, negative comparable sales growth, decreased profitability, or a combination of the three. Many of these companies also had unclear prospects for growth in the near and long term, often as a result of the negative trends. Because many of these factors also apply to VCG, North Point Advisors concluded that the transactions for this group were more comparable to VCG’s proposed transaction than were the transactions from the “club/entertainment related” group.

 

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 tables 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 tables below only show that data derived from the restaurants with performance issues grouping.

 

At November 9, 2010

 

 

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.

 

At March 1, 2011

 

 

Based on the first to third quartile range for these multiples, the resulting implied enterprise value for VCG ranged from $60.1 million to $73.5 million and the resulting implied equity value per share ranged from $2.15 to $2.98. North Point Advisors compared this range of enterprise values to the implied enterprise value of $61.7 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 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:

 

 

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.

Because this analysis was based on VCG’s stock price for periods preceding the November 10, 2010 public announcement of the execution of the merger agreement, the data in the table above were the same for the analysis at November 9, 2010 and at March 1, 2011.

 

North Point Advisors performed three different discounted cash flow analyses on VCG in connection with its November 9, 2010 opinion and its March 1, 2011 supplemental opinion letter. For these analyses, North Point Advisors used VCG’s management projections for 2010 (or actual preliminary results, in the case of the March 1, 2011 analysis and supplemental opinion letter) and projections developed by North Point Advisors and approved by management for 2011 through 2015 (referred to in this proxy statement as the “2010 Management Case” and the “2011 Management Case”, respectively). North Point Advisors then also developed a “Downside Case” using more conservative assumptions than those contained in the applicable Management Case and also an “Upside Case” using more aggressive assumptions than those contained in the applicable Management Case. The financial projections included in the 2010 and 2011 Management Case, the 2010 and 2011 Upside Case and the 2010 and 2011 Downside Case are set forth under “Other Important Information Regarding Us — Projected Financial Information.”

 

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 2010 Management Case, the resulting implied equity values per share at November 9, 2010, ranged from $0.87 to $2.01. Using the 2010 Downside Case, the resulting implied equity values per share at November 9, 2010, ranged from $0.13 to $0.88. Using the 2010 Upside Case, the resulting implied equity values per share at November 9, 2011, ranged from $1.63 to $3.15.

 

Using the 2011 Management Case, the resulting implied equity values per share at March 1, 2011, ranged from $1.85 to $3.29. Using the 2011 Downside Case, the resulting implied equity values per share at March 1, 2011, ranged from $0.67 to $1.52. Using the 2011 Upside Case, the resulting implied equity values per share at March 1, 2011, ranged from $2.48 to $4.22.

 

North Point Advisors compared all of the foregoing ranges 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 at November 9, 2010 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. The foregoing analysis implied at March 1, 2011 a current enterprise value for VCG of $54.0 million to $65.3 million, or a price per share range of $1.78 to $2.47.

 

North Point Advisors compared the foregoing ranges of values per share to the merger consideration of $2.25 per share.

 

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 (or preliminary actual) EBITDA for each club and calculated that the maximum distributable amount would be $1.93 per share at November 9, 2010. At March 1, 2011 (and giving pro forma effect to the sale of VCG’s Minneapolis, Minnesota club), North Point Advisors calculated such amount at $2.11 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, as supplemented, attached as Appendix C and Appendix D 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 projections of future results furnished to North Point Advisors by VCG’s management, further discussed under “Other Important Information Regarding Us — Projected Financial Information,” which are not necessarily indicative of actual future results and may be significantly more or less favorable than actual future results. These projections 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 projected 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 projections, 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 projections, estimates and other forward-looking information relate. North Point Advisors expresses no opinion as to any such financial projections, 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 dates of its opinion and supplemental opinion letter. Events occurring after such dates 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 the Special Committee as its exclusive financial advisor in connection with evaluating the going private transaction and VCG’s strategic alternatives, and to render an opinion addressing the fairness, from a financial point of view, to VCG’s non-Executive Group shareholders of the $2.25 per share in cash to be paid in the merger. As compensation for these services, VCG has paid to North Point Advisors (i) a retainer fee of $50,000, (ii) a strategic alternatives analysis fee of $100,000 and (iii) an opinion fee of $250,000. In addition, if the sale of VCG is closed, North Point Advisors is entitled to receive a transaction fee equal to (A) 1.0% of the aggregate consideration realized by VCG and its shareholders in connection with such transaction, if such aggregate consideration is equal to or less than the aggregate consideration as described in the Proposal, or (B) 1.0% of the aggregate consideration described in the Proposal plus 4.5% of the aggregate consideration in excess thereof, if the aggregate consideration is greater than the aggregate consideration described in the Proposal. The retainer fee and the strategic alternatives analysis fee, but not the opinion fee, will be applied as credits against any transaction fee payable in connection with the engagement. None of the retainer fee, strategic alternatives analysis fee or the opinion fee are contingent upon the consummation of the merger or the conclusions reached in the opinion.

 

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., Lowrie Management LLLP, Lowrie Investment Management, Inc., LTD Investment Group, LLC, 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., Lowrie Management LLLP, Lowrie Investment Management, Inc., LTD Investment Group, LLC, 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 Securities Exchange Act of 1934 as amended. The views of Family Dog, FD Acquisition Co., Lowrie Management LLLP, Lowrie Investment Management, Inc., LTD Investment Group, LLC, Mr. Lowrie and Mr. Ocello as to the fairness of the proposed merger should not be construed as a recommendation to any of VCG’s shareholders as to how such shareholder should vote on the Merger Proposal.

 

Family Dog, FD Acquisition Co., Lowrie Management LLLP, Lowrie Investment Management, Inc., LTD Investment Group, LLC, 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, the non-Executive Group 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., Lowrie Management LLLP, Lowrie Investment Management, Inc., LTD Investment Group, LLC, Mr. Lowrie and Mr. 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.

 

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 members of the Executive Group) under the merger agreement is fair from a financial point of view to such holders.

Family Dog, FD Acquisition Co., Lowrie Management LLLP, Lowrie Investment Management, Inc., LTD Investment Group, LLC, 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 VCG’s 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., Lowrie Management LLLP, Lowrie Investment Management, Inc., LTD Investment Group, LLC, 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., Lowrie Management LLLP, Lowrie Investment Management, Inc., LTD Investment Group, LLC, 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., Lowrie Management LLLP, Lowrie Investment Management, Inc., LTD Investment Group, LLC, Mr. Lowrie and Mr. Ocello as to fairness,” as well as the factors described under “Special Factors — Recommendation of the Special Committee, VCG’s Board of Directors and VCG’s Executive Officers; 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., Lowrie Management LLLP, Lowrie Investment Management, Inc., LTD Investment Group, LLC, 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 non-Executive Group shareholders in the merger is fair, from a financial point of view, to such shareholders. See “Special Factors — Recommendation of the Special Committee, VCG’s Board of Directors and Executive Officers; 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., Lowrie Management LLLP, Lowrie Investment Management, Inc., LTD Investment Group, LLC, Mr. Lowrie and Mr. Ocello in connection with evaluating the fairness of the merger agreement and the merger is not intended to be exhaustive but includes all the material factors they considered. Family Dog, FD Acquisition Co., Lowrie Management LLLP, Lowrie Investment Management, Inc., LTD Investment Group, LLC, 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., Lowrie Management LLLP, Lowrie Investment Management,

Inc., LTD Investment Group, LLC, 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 in 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 the outstanding shares of VCG’s common stock at the same time and it presents an opportunity for VCG’s non-Executive Group 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 reaffirmed Proposal. 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 non-Executive Group 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 non-Executive Group 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 members of 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, except with respect to the letter of intent received from Rick’s for the acquisition of VCG’s club in Minneapolis, Minnesota, 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.

 

No additional or improved benefits to VCG’s management 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. As of the date hereof, no creditor of VCG (other than Lowrie Management LLLP) has elected to assign its rights to debt owed by VCG to such creditor to Family Dog in exchange for membership interests in Family Dog, and it is not currently anticipated that any other creditors will. In connection with the transfer of shares of VCG common stock by the members of 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.”

 

If the merger is consummated, VCG’s non-Executive Group shareholders (unless they are members of Family Dog) will have no interest in VCG’s net book value or net earnings after the merger. The table below sets forth the direct and indirect interests in VCG’s book value and net earnings of the members of the Executive group prior to and immediately following the merger, based on VCG’s net book value as of December 31, 2009 and September 30, 2010 and net income for the fiscal year ended December 31 2009.

 

 

 

 

 

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 per share 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 (unless they are members of Family Dog). 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 cause Lowrie Management LLLP to assign to Family Dog the rights to certain debt owed to it 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. As of the date hereof, no creditor of VCG (other than Lowrie Management LLLP) has elected to assign its rights to debt owed by VCG to such creditor to Family Dog in exchange for membership interests in Family Dog, and it is not currently anticipated that any other creditors will. In connection with the transfer of shares of VCG common stock by the members of 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 (who are our only executive officers), it is not currently anticipated 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. The litigation is currently pending and a resolution of this litigation is not a condition to the closing of the merger. See “Special Factors — 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 cause Lowrie Management LLLP to assign to Family Dog all rights to approximately $3,000,000 of the debt owed by VCG to Lowrie Management LLLP 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 Lowrie Management LLLP to purchase certain real property from one of VCG’s subsidiaries, as further disclosed under “Special Factors — Real Estate Transaction Involving Mr. Lowrie.”

 

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 membership 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.

 

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 cause Lowrie Management LLLP to assign to Family Dog all rights to approximately $3,000,000 of the debt owed by VCG to Lowrie Management LLLP in exchange for membership interests in Family Dog. At the closing of the merger or soon thereafter, Mr. Lowrie intends to use the remaining $2,700,000 of the debt owed by VCG to Lowrie Management LLLP to purchase from VCG 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 on the current rent payable under the 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. In the event that the merger is not consummated, Mr. Lowrie may not purchase the two properties from VCG Real Estate Holdings, Inc., in which event the debt owed by VCG to Lowrie Management LLLP will remain outstanding under its current terms and conditions.

 

No provision has been made to grant our unaffiliated shareholders access to the corporate files of VCG or the other parties to the merger agreement, or to obtain counsel or appraisal services at the expense of VCG or such other parties. Further, an unaffiliated representative was not retained to act solely on behalf of VCG’s unaffiliated shareholders for purposes of negotiating the terms of the transaction or preparing a report concerning the fairness of the transaction. VCG’s board of directors formed the Special Committee, consisting solely of independent, non-employee directors, to review and consider the terms and conditions of the merger agreement and the transactions contemplated by the merger agreement, including the merger. The Special Committee unanimously determined that the merger agreement and the transactions contemplated by the merger agreement, including the merger, are advisable, fair (both substantively and procedurally) to and in the best interests of VCG and its unaffiliated shareholders, and recommended that VCG’s board of directors approve and declare the advisability of the merger agreement and the transactions contemplated by the merger agreement, including the merger, and recommend that VCG’s shareholders approve the Merger Proposal.

 

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 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 either Mr. Lowrie or Mr. 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 either 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. The total amount subscribed for by accredited investors is $19,200,000. Family Dog expects to finance the remaining portion of the merger consideration and the related transaction costs 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. If the financing sources described in the preceding sentence turn out to be unavailable, Family Dog intends to raise any funds necessary by incurring debt from current lenders of either VCG or Lowrie Management LLLP. In light of the subscriptions received, and the other available sources of funds, Family Dog is no longer accepting new subscriptions from additional investors.

 

Lowrie Management LLLP has available to it a line of credit of up to $2,606,500, all of which is currently available, pursuant to the terms of a Business Loan Agreement, dated August 28, 2009, as amended by a change in terms agreement dated February 28, 2011, entered into with Citywide Banks, which agreement we sometimes refer to herein as the “Citywide Loan Agreement.” Lowrie Management LLLP issued a Promissory Note, dated August 28, 2008, to Citywide Banks as evidence of this indebtedness, which promissory note we sometimes refer to herein as the “Citywide Note.” All amounts advanced to Lowrie Management LLLP pursuant to the Citywide Loan Agreement and the Citywide Note are secured by (i) a first Deed of Trust, as modified by the change in terms agreement, on the property where the PT’s ^® Showclub in Denver, Colorado conducts its business and (ii) a first Deed of Trust, as modified by the change in terms agreement, on the property where The Penthouse Club ^® in Denver, Colorado conducts its business. Both properties are owned by Lowrie Management LLLP and leased to VCG. In addition, Mr. Lowrie is personally guaranteeing the repayment of all amounts advanced pursuant to the Citywide Loan Agreement and the Citywide Note. Pursuant to the terms of the Citywide Loan Agreement and the Citywide Note, all amounts advanced to Lowrie Management LLLP accrue interest at variable interest rate equal to 0.500 percentage points over the prime rate as published in the Wall Street Journal, but, in no event, will the interest rate be less than 6.0% per year. As of the date hereof, the effective interest rate is 6%. The maturity date of the loan is September 16, 2011.

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.

 

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.

 

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.

 

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. Under this method, the acquisition of VCG’s common stock is recorded at its fair market value where “fair market value” is defined as the total amount paid for the transaction. The acquisition related costs of the acquirer are expensed in the periods in which the costs are incurred and the services are received, unless costs directly relate to the issuance of debt or equity securities.

 

The following is a general summary of certain material U.S. federal income tax consequences of the merger that should be generally applicable to holders of shares of VCG common stock upon the exchange of shares of VCG common stock for cash pursuant to the merger. This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations, administrative rulings and court decisions, all as in effect as of the date hereof and all of which are subject to differing interpretations and/or change at any time (possibly with retroactive effect). Any such change could affect the accuracy of the statements and conclusions set forth in this summary. This summary does not address all U.S. federal income tax consequences that may be relevant to particular shareholders in light of their particular individual circumstances or to shareholders who are subject to special rules, such as (i) holders of shares of VCG common stock received in connection with the exercise of employee stock options or otherwise as compensation, (ii) holders that validly exercise their dissenters’ rights under Colorado law, and (iii) holders subject to special

treatment under U.S. federal income tax law (such as insurance companies, banks, tax-exempt entities, financial institutions, broker-dealers, partnerships, S corporations or other pass-through entities, mutual funds, traders in securities who elect the mark-to-market method of accounting, tax-deferred or other retirement plans or accounts, holders subject to the alternative minimum tax, U.S. persons that have a functional currency other than the U.S. dollar, certain former citizens or residents of the United States or holders that hold shares of VCG common stock as part of a hedge, straddle, integration, constructive sale or conversion transaction). In addition, except as specifically described below, this summary does not discuss any consequences to those of VCG’s current shareholders who will beneficially or constructively own an equity interest in Family Dog or VCG after the merger, to holders of options to purchase shares of VCG common stock, any aspect of state, local or foreign tax law that may be applicable to any holder of shares of VCG common stock, or any U.S. federal tax considerations other than U.S. federal income tax considerations. This summary assumes that holders own shares of VCG common stock as capital assets.

 

The following summary is limited to the U.S. federal income tax consequences relevant to a beneficial owner of shares of VCG common stock that is (i) a citizen or resident of the United States, (ii) a domestic corporation (or any other entity or arrangement treated as a corporation for U.S. federal income tax purposes), (iii) any estate, the income of which is subject to U.S. federal income tax regardless of its source, or (iv) any trust if (a) a court within the United States is able to exercise primary supervision over the administration of the trust and (b) one or more U.S. persons have the authority to control all substantial decisions of the trust.

 

If a partnership (including any entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds shares of VCG common stock, the tax treatment of a holder that is a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. Such holders should consult their own tax advisors regarding the tax consequences of accepting the cash in exchange for their shares of VCG common stock pursuant to the merger.

 

We have not sought and will not seek any opinion of counsel or any ruling from the Internal Revenue Service with respect to the merger transaction or the matters discussed herein. We urge holders of shares of VCG common stock to consult their own tax advisors with respect to the specific tax consequences to them in connection with the merger in light of their own particular circumstances, including the tax consequences under state, local, foreign and other tax laws.

 

For U.S. federal income tax purposes, FD Acquisition Co. should be disregarded as a transitory entity, and the merger of FD Acquisition Co. with and into VCG, with VCG surviving, should be treated as a taxable sale of stock to holders of our common stock and should not be treated as a taxable transaction to VCG, Family Dog, FD Acquisition Co., Lowrie Management LLLP, Lowrie Investment Management, Inc., LTD Investment Group, LLC, Troy Lowrie and Micheal Ocello. As further discussed below, we intend to take the position that, as a result of the merger, holders of our common stock should be treated for U.S. federal income tax purposes as if they (i) sold a portion of their stock to Family Dog for cash, and (ii) had a portion of their stock redeemed by VCG for cash.

 

Due to the lack of legislative, judicial or other interpretive authority on this matter, it is unclear how the allocation of proceeds between the deemed sale and deemed redemption portions of the transaction should be determined. We intend to take the position that (i) the portion of our common stock that is converted, by reason of the merger, into the cash proceeds provided directly or indirectly by Family Dog is being sold for cash, and (ii) the portion of our common stock that is converted, by reason of the merger, into the cash proceeds provided directly or indirectly by VCG is being redeemed for cash by VCG. There can be no assurance, however, that the Internal Revenue Service will agree with such allocation.

 

The exchange of shares of VCG common stock for cash pursuant to the merger will be a taxable transaction for U.S. federal income tax purposes, and a holder of our shares of common stock who receives cash for shares of VCG common stock pursuant to the merger will generally recognize gain or loss, if any,

equal to the difference between the amount of cash received and the holder’s adjusted tax basis in the shares of VCG common stock. Gain or loss must be determined separately for each block of shares (i.e., shares acquired at the same cost in a single transaction). Such gain or loss will be capital gain or loss, and will be long-term capital gain or loss if such holder’s holding period for the shares of VCG common stock is more than one year at the time of the exchange of such holder’s shares of VCG common stock for cash. Long-term capital gains recognized by an individual holder generally are subject to tax at a lower rate than short-term capital gains or ordinary income. There are limitations on the deductibility of capital losses. Holders of our common stock should consult their tax advisors regarding the determination and allocation of their tax basis in their stock surrendered in the merger.

 

Payments made with respect to shares of VCG common stock exchanged for cash in the merger may be subject to information reporting, and such payments will be subject to U.S. federal backup withholding tax unless the holder (i) furnishes an accurate tax identification number or otherwise complies with applicable U.S. information reporting or certification requirements (typically, by completing and signing an IRS Form W-9), or (ii) is a corporation or other exempt recipient and, when required, demonstrates such fact. Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules may be refunded or credited against a holder’s U.S. federal income tax liability, if any, provided that such holder furnishes the required information to the Internal Revenue Service in a timely manner.

 

The U.S. federal income tax consequences of the merger are also discussed under “Special Factors — Certain Effects of the Merger.”

 

On July 30, 2010, a complaint was filed in Colorado state court, First Judicial District, Jefferson County District Court, challenging the reaffirmed 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, Mr. Ocello, Martin A. Grusin, Robert J. Mcgraw, Jr., Carolyn Romero, George Sawicki, David Levine, Family Dog, FD Acquisition Co., Lowrie Investment Management, Inc., Lowrie Management LLLP, and VCG (as a nominal defendant). The plaintiffs’ complaint has since been amended twice.

 

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

 

VCG believes that the allegations in the second amended complaint are baseless and intends to mount a vigorous defense. Resolution of the state action is not a condition to closing of the merger.

 

On January 28, 2011, VCG moved to stay the state court proceedings pending the resolution of the parallel federal lawsuit described below on the grounds that the two actions are substantially the same, arise

out of the same operative facts, seek the same relief, and trying both actions would be a waste of both judicial and corporate resources. The plaintiffs oppose the motion to stay. On February 11, 2011, the plaintiffs moved for expedited discovery; defendants filed a reply in opposition to that motion on February 24, 2011 and filed a reply to the motion for expedited discovery on March 1, 2011. The court has not yet ruled on either motion.

 

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

 

On January 28, 2011, VCG filed its answer to the federal complaint denying the material allegations therein and denying that the plaintiff is entitled to judgment on any of his claims or any relief whatsoever. VCG’s answer also asserts certain defenses. As with the second amended state law complaint, VCG believes that the allegations in the federal complaint are baseless and intends to mount a vigorous defense. The merger agreement contains a condition to closing that there be, among other things, no pending or threatened lawsuits challenging the transactions contemplated by the merger agreement, other than the lawsuit filed in Colorado state court referred to above. The Executive Group has agreed to waive this closing condition with respect to the federal lawsuit referred to above.

 

On or about March 18, 2011, counsel for the plaintiffs and defendants to the state and federal lawsuits mentioned above agreed in principle to the terms of a memorandum of understanding outlining the terms of an agreement to settle and dismiss these lawsuits. The material terms of the memorandum of understanding were approved by VCG’s board of directors (with Mr. Lowrie abstaining from the vote), the Special Committee, all of the defendants and some of the plaintiffs. Plaintiffs’ counsel has not yet been able to contact all of the plaintiffs to obtain their approval. In addition to the approval of the various parties to the memorandum of understanding and pursuant to the terms of the merger agreement (see “The Merger Agreement — Shareholder Litigation”), VCG’s settlement of the lawsuits was subject to the consent of Family Dog. Family Dog has consented to VCG’s execution and delivery of the memorandum of understanding and the settlement of the lawsuits contemplated thereby. The terms of the memorandum of understanding are conditioned upon final approval by the state court.

 

The material terms of the memorandum of understanding agreed upon in principle among counsel for the plaintiffs and defendants are as follows:

 

 

 

 

 

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:

 

 

 

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 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 (the sole officer) and the sole director 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. 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.

 

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.

 

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.

 

Mr. Lowrie is the managing partner of Lowrie Management LLLP and has sole voting and dispositive power of the shares of VCG’s common stock owned by Lowrie Management LLLP. Mr. Lowrie is also the President of Lowrie Investment Management, Inc., which is one of the two general partners of Lowrie Management LLLP; the second general partner of Lowrie Management LLLP has no power or authority other than to execute a life insurance policy. 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. Mr. Ocello is the sole member and manager of LTD Investment Group, LLC. We sometimes refer to Mr. Lowrie, Mr. Ocello, Lowrie Management LLLP, Lowrie Investment Management, Inc. and LTD Investment Group, LLC collectively as the “Executive Group” in this proxy statement.

 

 

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 April 11, 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. The reasons for their recommendation are discussed under “Special Factors — Recommendation of the Special Committee, VCG’s Board of Directors and VCG’s Executive Officers; Reasons for Recommending Approval of the Merger.” None of our executive officers, consisting of Messrs. Lowrie and Ocello, has made a recommendation with respect to how VCG’s shareholders should vote on the Merger Proposal.

 

VCG’s board of directors has fixed the close of business on March 21, 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 184 registered holders. Mr. Lowrie and Mr. Ocello beneficially own an aggregate of 5,138,878 shares, or 31.5%, 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 8,146,036 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 by VCG, 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, and its accompanying amendment, copies of which are attached as Appendix A and Appendix B, respectively, 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 summary of the terms of the merger agreement is intended to provide information about the terms of the merger. The terms and information in the merger agreement should not be relied on as disclosures about us without consideration to the entirety of public disclosure by us as set forth in all of our public reports with the SEC. The terms of the merger agreement (such as the representations and warranties) govern the contractual rights and relationships, and allocate risks, between the parties in relation to the merger. In particular, the representations and warranties made by the parties to each other in the merger agreement have been negotiated between the parties with the principal purpose of setting forth their respective rights with respect to their obligation to close the merger should events or circumstances change or be different from those stated in the representations and warranties. Matters may change from the state of affairs contemplated by the representations and warranties. 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 shareholder who properly exercised dissenters’ rights under Colorado law, will be paid in accordance with Colorado law, unless such 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 Mr. Lowrie will cause Lowrie Management LLLP to assign to Family Dog all rights to any debt owed by VCG to Lowrie Management LLLP (other than the debt used to purchase certain real property from one of VCG’s subsidiaries, as further disclosed under “Special Factors — Real Estate Transaction Involving Mr. Lowrie.”) 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. As of the date hereof, no other creditor has elected to assign its rights to debt owed by VCG to such creditor to Family Dog in exchange for membership interests in Family Dog and it is not currently anticipated that any other creditors will. 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 a 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.

 

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.