PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
VCG Holding Corp.
Consolidated Balance Sheet
s
Unaudited
|
|
December 31,
|
|
September 30,
|
|
|
|
2006
|
|
2007
|
|
Assets
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
Cash & cash
equivalents
|
|
$
|
2,011,178
|
|
$
|
2,731,437
|
|
Investments
|
|
259,652
|
|
308,834
|
|
Other
receivables
|
|
250,458
|
|
461,382
|
|
Inventories
|
|
450,784
|
|
662,652
|
|
Prepaid expenses
|
|
274,325
|
|
274,049
|
|
Income taxes
receivable
|
|
272,244
|
|
272,244
|
|
Total Current
Assets
|
|
3,518,641
|
|
4,710,598
|
|
Property,
Plant and Equipment
|
|
|
|
|
|
Property, plant
and equipment
|
|
14,032,998
|
|
31,153,242
|
|
Less accumulated
depreciation
|
|
2,007,371
|
|
(7,034,055
|
)
|
Net property,
plant and equipment
|
|
12,025,627
|
|
24,119,187
|
|
Other
Assets
|
|
|
|
|
|
Other
receivables long-term
|
|
78,205
|
|
|
|
Deposits
|
|
961,129
|
|
1,487,355
|
|
License costs
|
|
15,169,928
|
|
2,392,675
|
|
Loan fees, net
|
|
126,944
|
|
106,105
|
|
Goodwill
|
|
75,628
|
|
50,300,198
|
|
Plans and
drawings
|
|
2,591,068
|
|
75,628
|
|
Deferred
offering costs
|
|
32,528
|
|
37,011
|
|
Covenant not to
compete
|
|
|
|
10,000
|
|
Total Other
Assets
|
|
19,535,430
|
|
54,408,972
|
|
Total
Assets
|
|
$
|
35,079,698
|
|
$
|
83,238,757
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
Accounts payable
trade
|
|
$
|
566,707
|
|
$
|
628,089
|
|
Accrued expenses
|
|
414,209
|
|
1,085,448
|
|
Deferred revenue
|
|
41,226
|
|
162,662
|
|
Current portion
of capitalized lease
|
|
949,664
|
|
|
|
Current portion
of long-term debt
|
|
1,811,533
|
|
11,259,552
|
|
Total current
liabilities
|
|
3,783,339
|
|
13,135,751
|
|
Long-term
Debt
|
|
|
|
|
|
Deferred income
taxes
|
|
200,000
|
|
656,000
|
|
Liabilities to
be disposed of
|
|
99,144
|
|
|
|
Capitalized
lease
|
|
28,455
|
|
|
|
Long-term debt
|
|
17,202,105
|
|
19,876,557
|
|
Total long-term
debt
|
|
17,529,704
|
|
20,532,557
|
|
Minority
Interest Liability
|
|
646,032
|
|
4,635,178
|
|
Redeemable
Preferred Stock
|
|
|
|
|
|
Preferred stock
$.0001 par value; 1,000,000 shares authorized; 32,500 (2006) and -0- (2007)
issued and outstanding
|
|
325,000
|
|
|
|
Stockholders
Equity
|
|
|
|
|
|
Common stock $.0001
par value; 50,000,000 shares authorized; 12,165,441 (2006) and 16,890,653
(2007) shares issued and outstanding Common Stock
|
|
1,265
|
|
1,693
|
|
Paid-in capital
|
|
15,235,465
|
|
41,741,405
|
|
Treasury stock
|
|
|
|
(257,732
|
)
|
Retained
earnings
|
|
(2,441,107
|
)
|
3,449,905
|
|
Total
stockholders equity
|
|
12,795,623
|
|
44,935,271
|
|
Total
Liabilities and Stockholders Equity
|
|
$
|
35,079,698
|
|
$
|
83,238,757
|
|
The accompanying notes are an integral part of the financial statements
3
VCG Holding Corp.
Consolidated Statements of Income
Unaudited
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Sales of
alcoholic beverages
|
|
1,885,517
|
|
5,350,924
|
|
5,671,405
|
|
13,197,154
|
|
Sales of food
and merchandise
|
|
222,752
|
|
645,183
|
|
781,749
|
|
1,536,961
|
|
Service revenue
|
|
1,006,506
|
|
4,251,364
|
|
2,942,246
|
|
9,402,356
|
|
Management fees
and other income
|
|
1,026,215
|
|
651,916
|
|
3,258,424
|
|
2,667,288
|
|
Total revenue
|
|
4,140,990
|
|
10,899,387
|
|
12,653,824
|
|
26,803,759
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
Cost of goods
sold
|
|
584,716
|
|
1,438,290
|
|
1,888,801
|
|
3,612,060
|
|
Salaries and
wages
|
|
1,200,900
|
|
2,091,462
|
|
3,703,059
|
|
5,586,606
|
|
Other general
and administrative
|
|
|
|
|
|
|
|
|
|
Taxes and
permits
|
|
98,504
|
|
430,582
|
|
306,284
|
|
1,025,091
|
|
Charge card and
bank fees
|
|
62,399
|
|
146,461
|
|
186,219
|
|
308,162
|
|
Rent
|
|
160,974
|
|
1,061,935
|
|
608,887
|
|
2,577,105
|
|
Legal and
professional
|
|
42,666
|
|
102,213
|
|
205,080
|
|
475,176
|
|
Advertising and
marketing
|
|
124,883
|
|
486,171
|
|
370,115
|
|
1,134,094
|
|
Other
|
|
806,775
|
|
790,610
|
|
2,321,472
|
|
3,381,018
|
|
Depreciation
& amortization
|
|
214,440
|
|
339,889
|
|
646,373
|
|
845,653
|
|
Total operating
expenses
|
|
3,296,257
|
|
6,887,613
|
|
10,236,290
|
|
18,944,965
|
|
Income
from operations
|
|
844,733
|
|
4,011,774
|
|
2,417,534
|
|
7,858,794
|
|
Other
income (expenses)
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(354,594
|
)
|
(707,758
|
)
|
(1,035,693
|
)
|
(1,826,444
|
)
|
Interest income
|
|
5,412
|
|
30,311
|
|
12,574
|
|
320,529
|
|
Unrealized gain
(loss) on marketable securities
|
|
(2,500
|
)
|
(8,934
|
)
|
2,200
|
|
|
|
Gain on sale of
assets
|
|
|
|
|
|
44,184
|
|
190,256
|
|
Total Other
Income (Expenses)
|
|
(351,682
|
)
|
(686,381
|
)
|
(976,735
|
)
|
(1,315,659
|
)
|
Income
from continuing operations before income taxes
|
|
493,051
|
|
3,325,393
|
|
1,440,799
|
|
6,543,135
|
|
Income tax
expense current
|
|
|
|
|
|
|
|
|
|
Income tax
expense deferred
|
|
|
|
(106,000
|
)
|
|
|
(456,000
|
)
|
Total income
taxes
|
|
|
|
(106,000
|
)
|
|
|
(456,000
|
)
|
Minority
interest
|
|
(39,879
|
)
|
(80,584
|
)
|
(84,859
|
)
|
(173,400
|
)
|
Net income
from continuing operations
|
|
453,172
|
|
3,138,809
|
|
1,355,940
|
|
5,913,735
|
|
Discontinued
operations
|
|
|
|
|
|
|
|
|
|
Loss from
operations of discontinued operating segment
|
|
|
|
(22,723
|
)
|
|
|
(22,723
|
)
|
Income tax
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
|
(22,723
|
)
|
|
|
(22,723
|
)
|
Net
Income
|
|
453,172
|
|
3,116,086
|
|
1,355,940
|
|
5,891,012
|
|
Preferred stock
dividends
|
|
(204,733
|
)
|
|
|
(651,988
|
)
|
|
|
Net
income (loss) applicable to common shareholders
|
|
248,439
|
|
3,116,086
|
|
703,952
|
|
5,891,012
|
|
Earnings
(loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic income per
common share
|
|
|
|
|
|
|
|
|
|
Income from
continuing operations
|
|
0.05
|
|
0.19
|
|
0.16
|
|
0.44
|
|
(Loss) from
discontinued operations
|
|
|
|
|
|
|
|
|
|
Preferred stock
dividend
|
|
(0.02
|
)
|
|
|
(0.08
|
)
|
|
|
Net income
applicable to common shareholders
|
|
0.03
|
|
0.19
|
|
0.08
|
|
0.44
|
|
Fully diluted
income per common share
|
|
|
|
|
|
|
|
|
|
Net income from
continuing operations
|
|
0.05
|
|
0.19
|
|
0.16
|
|
0.44
|
|
(Loss) from
discontinued operations
|
|
|
|
|
|
|
|
|
|
Preferred stock
dividend
|
|
(0.02
|
)
|
|
|
(0.08
|
)
|
|
|
Net income
applicable to common shareholder
|
|
0.03
|
|
0.19
|
|
0.08
|
|
0.44
|
|
Weighted average
shares outstanding
|
|
8,800,243
|
|
16,970,404
|
|
8,714,497
|
|
13,357,204
|
|
Fully diluted
weighted average shares outstanding
|
|
8,800,243
|
|
16,976,747
|
|
8,714,497
|
|
13,359,318
|
|
The accompanying notes are an integral part of the financial statements
4
VCG Holding Corp.
Statement of Stockholders
Equity
For the Nine Months Ended September 30, 2007
Unaudited
|
|
|
|
|
|
Additional
Paid-in
Capital
|
|
Treasury
Stock
|
|
Retained
|
|
Total
Stockholders
Equity
|
|
|
|
Common
Stock
|
|
|
(Deficit)
Earnings
|
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
Balances,
December 31, 2006
|
|
12,645,441
|
|
1,265
|
|
15,235,465
|
|
|
|
(2,441,107
|
)
|
12,795,623
|
|
Sale of common
stock for cash
|
|
3,246,772
|
|
324
|
|
21,200,890
|
|
|
|
|
|
21,201,214
|
|
Conversation of
preferred stock to common stock
|
|
88,798
|
|
9
|
|
324,991
|
|
|
|
|
|
325,000
|
|
Offering costs
|
|
|
|
|
|
(124,347
|
)
|
|
|
|
|
(124,347
|
)
|
Cashless warrants
|
|
162,212
|
|
17
|
|
(17
|
)
|
|
|
|
|
|
|
Common stock
issued for General Partnership interest
|
|
200,000
|
|
20
|
|
2,228,286
|
|
|
|
|
|
2,228,306
|
|
Common stock
issued for limited partnership interest
|
|
38,235
|
|
3
|
|
326,906
|
|
|
|
|
|
326,909
|
|
Common stock
issued for common stock of Kentucky Restaurant Concepts, Inc.
|
|
800,000
|
|
80
|
|
4,391,920
|
|
|
|
|
|
4,392,000
|
|
Cancel common
stock for part payment on sale of Epicurean Enterprises, LLC
|
|
(300,000
|
)
|
(30
|
)
|
(2,369,970
|
)
|
|
|
|
|
(2,370,000
|
)
|
Issue warrants
for services
|
|
|
|
|
|
61,372
|
|
|
|
|
|
61,372
|
|
Issue common
stock for services
|
|
49,195
|
|
5
|
|
465,909
|
|
|
|
|
|
465,914
|
|
Repurchase of
common stock (Treasury Stock)
|
|
(40,000
|
)
|
|
|
|
|
(257,732
|
)
|
|
|
(257,732
|
)
|
Net income for
the nine months ended, September 30, 2007
|
|
|
|
1,693
|
|
|
|
|
|
5,891,012
|
|
5,891,012
|
|
Balances,
September 30, 2007
|
|
16,890,653
|
|
1,693
|
|
41,741,405
|
|
(257,732
|
)
|
3,449,905
|
|
44,935,271
|
|
The accompanying notes are an integral part of the financial statements.
5
VCG Holding Corp.
Consolidated Statement of Cash Flow
For the Nine Months Ended September 30, 2007
Unaudited
|
|
September 30,
|
|
|
|
2006
|
|
2007
|
|
Net
income
|
|
$
|
1,355,940
|
|
$
|
5,891,012
|
|
Adjustments to
reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Stocks and
warrants issued for services
|
|
|
|
527,286
|
|
Depreciation and
amortization
|
|
799,982
|
|
845,643
|
|
(Increase)
decrease in other receivables
|
|
61,197
|
|
(210,924
|
)
|
(Increase)
decrease in inventory
|
|
17,580
|
|
(211,868
|
)
|
(Increase)
decrease in prepaid expenses
|
|
98,397
|
|
276
|
|
(Increase)
decrease in other current assets
|
|
|
|
|
|
(Gain) loss on
disposition of assets
|
|
(44,184
|
)
|
(179,189
|
)
|
Unrealized
(gain) loss on marketable securities
|
|
(2,200
|
)
|
|
|
Increase
(decrease) in trade accounts payable
|
|
(100,574
|
)
|
61,382
|
|
Increase
(decrease) in deferred taxes payable
|
|
|
|
456,000
|
|
Increase
(decrease) in deferred revenue
|
|
9,848
|
|
121,436
|
|
Increase
(decrease) in accrued expenses
|
|
(286,096
|
)
|
572,095
|
|
Net cash
provided by operating activities
|
|
1,909,890
|
|
7,873,149
|
|
Investing
Activities
|
|
|
|
|
|
Investments
|
|
10,299
|
|
(49,182
|
)
|
Goodwill
|
|
|
|
(27,683,055
|
)
|
Purchases of
equipment and leasehold improvements
|
|
|
|
(15,330,014
|
)
|
Costs of
licenses
|
|
|
|
198,393
|
|
Deposits
|
|
(105,171
|
)
|
(526,226
|
)
|
Covenant not to
compete
|
|
|
|
(10,000
|
)
|
Proceeds from
disposition of assets
|
|
434,897
|
|
200,000
|
|
Net cash used by
investing activities
|
|
183,974
|
|
(43,200,084
|
)
|
Financing
Activities
|
|
|
|
|
|
Cost of loan
fees
|
|
(14,883
|
)
|
20,839
|
|
Deferred
offering costs
|
|
|
|
(128,830
|
)
|
Payments on
notes receivable
|
|
99,555
|
|
78,205
|
|
Payment on
capitalized lease
|
|
(40,837
|
)
|
(978,119
|
)
|
Proceeds from
mortgage payable
|
|
6,232,086
|
|
|
|
Payments on
mortgage payable
|
|
(6,264,735
|
)
|
|
|
Loan from
related party
|
|
|
|
12,122,471
|
|
Minority
Interest
|
|
|
|
3,989,146
|
|
Purchase of
treasury stock
|
|
|
|
(257,732
|
)
|
Preferred stock
dividend
|
|
(601,552
|
)
|
|
|
Redemption of
preferred stock
|
|
(1,253,167
|
)
|
|
|
Proceeds from
additional paid in capital
|
|
|
|
21,201,214
|
|
Net cash
provided (used) by financing activities
|
|
(1,843,533
|
)
|
36,047,194
|
|
Net
increase in cash
|
|
250,331
|
|
720,259
|
|
Cash
beginning of period
|
|
547,937
|
|
2,011,178
|
|
Cash
end of period
|
|
$
|
798,268
|
|
$
|
2,731,437
|
|
Interest paid
|
|
$
|
887,974
|
|
$
|
1,826,444
|
|
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
Amortization of
preferred stock offering costs
|
|
$
|
50,436
|
|
$
|
124,347
|
|
Common stock
issued for services
|
|
$
|
165,833
|
|
$
|
527,286
|
|
Preferred stock
converted to common stock
|
|
$
|
254,811
|
|
$
|
325,000
|
|
Purchased
general partnership interests for common stock
|
|
$
|
300,000
|
|
$
|
2,555,192
|
|
Purchase common
stock of wholly owned subsidiary for common stock
|
|
$
|
30,300
|
|
$
|
4,392,000
|
|
Cancelled common
stock for payment of Epicurean
|
|
|
|
|
$
|
(2,370,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial statements.
6
VCG
Holding Corp.
Notes To
Consolidated Financial Statements
For the Nine months ended
September 30, 2007
Unaudited
1. Summary of
Significant Accounting Policies
Nature of Business
VCG Holding Corp. (VCG or the Company) is an owner, operator and consolidator
of adult nightclubs throughout the United States. The Company currently owns 18 adult
nightclubs and one upscale dance lounge.
The nightclubs are located in Indianapolis, IN., St. Louis, MO., Denver
and Colorado Springs, CO., Ft. Worth, TX., Raleigh, NC., Minneapolis, MN.,
Louisville, KY., and Portland, ME.
Basis of Presentation
The accompanying financial statements have been prepared by the
Company, without audit. In the opinion
of management, the accompanying unaudited consolidated financial statements
contain all adjustments (consisting of only normal recurring accruals)
necessary for fair presentation of the financial position as of December 31,
2006 and September 30, 2007, and the results of operations and cash flows for
the periods ended September 30, 2006 and 2007.
The financial statements included herein have been prepared in
accordance with the rules of The Securities and Exchange Commission for Form
10-QSB and accordingly do not include all footnote disclosures that would
normally be included in financial statements prepared in accordance with
generally accepted accounting principles, although the Company believes that
the disclosures presented are adequate to make the information presented not
misleading. The unaudited financial statements should be read in conjunction
with the audited financial statements and notes thereto included in the Companys
Annual Report on Form 10-KSB for the year ended December 31, 2006.
The Company utilizes a December 31 fiscal year, and references herein
to fiscal 2006 relate to the year ended December 31, 2006, and references to
the first, second, third, and fourth quarter of a fiscal year relate to
the quarters ended March 31, June 30, September 30 and December 31,
respectively, of the related year.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned and majority-owned subsidiaries. All significant inter-company balances and
transactions are eliminated in the consolidation.
Net Income (Loss) Per Common Share
The Company computes net income (loss) per common share in accordance
with Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS
128). SFAS 128 provides for the
calculation of basic and diluted earnings per share. Basic earnings per share includes no dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Dilutive earnings per share reflects the
potential dilution of securities that could share in the earnings of the
Company.
Use of Estimates in the Preparation of Financial
Statements
Preparation of the Companys financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting periods. Accordingly, actual
results could differ from those estimates.
7
2. Acquisitions
and Discontinued Operations
In January 2007, VCG sold its ownership interest of Epicurean
Enterprises, LLC EEP. VCG transferred
some of the building improvements presently attached or are part of the
building into VCG Real Estate Holdings, Inc. VCGRE and other equipment,
inventory related to the Penthouse name, and the Penthouse license agreement to
VCG or subsidiaries as needed for operations.
The board had elected to sell the operations and related partnership,
and rent the building on a twenty year lease to an unrelated third party.
The terms of the sale are $200,000 cash and 300,000 shares of VCG stock
that was held by an unrelated third party for a total sales price of
$2,570,000. VCG had a carrying basis in
the partnership of $2,390,811 and a gain on the transaction of $179,189.
The following reconciles on a summarized basis the results of
operations for the nine months ended September 30, 2006, previously presented
with those presented herein adjusted for the effects of the discontinued
operation discussed above:
|
|
As
|
|
Discontinued
|
|
As
|
|
|
|
previously
|
|
Operations of
|
|
presented
|
|
|
|
reported
|
|
EEP
|
|
herein
|
|
Revenues
|
|
$
|
12,653,824
|
|
$
|
(978,875
|
)
|
$
|
11,674,949
|
|
Operating
expenses
|
|
10,236,290
|
|
(1,230,127
|
)
|
9,006,163
|
|
Income from
operations
|
|
2,417,534
|
|
251,252
|
|
2,668,786
|
|
Other income
(expense)
|
|
(976,735
|
)
|
(22
|
)
|
(976,757
|
)
|
Income tax
expense
|
|
|
|
|
|
|
|
Minority
interest expense
|
|
(84,859
|
)
|
|
|
(84,859
|
)
|
Income from
continuing operations
|
|
1,355,940
|
|
251,230
|
|
1,607,170
|
|
Loss from
discontinued operations
|
|
|
|
(251,230
|
)
|
(251,230
|
)
|
Net income
|
|
$
|
1,355,940
|
|
$
|
|
|
$
|
1,355,940
|
|
The following reconciles on a summarized basis the results of
operations for the three months ended September 30, 2006, previously presented
with those presented herein adjusted for the effects of the discontinued
operation discussed above:
|
|
As
|
|
Discontinued
|
|
As
|
|
|
|
previously
|
|
Operations of
|
|
presented
|
|
|
|
reported
|
|
EEP
|
|
herein
|
|
Revenues
|
|
$
|
4,140,991
|
|
$
|
(293,496
|
)
|
$
|
3,847,495
|
|
Operating
expenses
|
|
3,296,257
|
|
(413,435
|
)
|
2,882,822
|
|
Income from
operations
|
|
844,734
|
|
119,939
|
|
964,673
|
|
Other income
(expense)
|
|
(351,682
|
)
|
556
|
|
(351,126
|
)
|
Income tax
expense
|
|
|
|
|
|
|
|
Minority
interest expense
|
|
(39,879
|
)
|
|
|
(39,879
|
)
|
Income from
continuing operations
|
|
453,173
|
|
120,495
|
|
573,668
|
|
Loss from
discontinued operations
|
|
|
|
(120,495
|
)
|
(120,495
|
)
|
Net income
|
|
$
|
453,173
|
|
$
|
|
|
$
|
453,173
|
|
On October 2, 2006, the Company acquired assets of Consolidated
Restaurants Limited, LLC, a Colorado Limited Liability Company. The acquisition of Consolidated Restaurants
Limited, LLC was accounted for by the purchase method of accounting; therefore
the operations have been included in the accompanying statements of operations
since the date of acquisition. The operations are included as VCG CO Springs,
Inc. The following pro forma financial information includes the consolidated
results of operations as if Consolidated Restaurants Limited, LLC had occurred
at January 1, 2006 and do not purport to be indicative of the results that
would have occurred had the acquisition been made as of that date or of results
which may occur in the future.
On December 31, 2006, the Company acquired the general partnership
interest and a 97% limited partnership interest in Denver Restaurant Concepts,
LP. The acquisition of Denver Restaurant
Concepts, LP was accounted for by the purchase method of accounting; therefore
the operations have been included in the accompanying statements of operations
since the date of acquisition. The
operations are included as Denver Restaurant Concepts, LP. The following pro forma financial information
includes the consolidated results of operations as if Denver Restaurant
Concepts, LP. Had occurred at January 1, 2006 and do not purport to be
indicative of the results that would have occurred had the acquisition been
made as of that date or of results which may occur in the future.
8
On January 1, 2007, the Company acquired 100% of the outstanding common
stock in Kentucky Restaurant Concepts, Inc. and the management agreement from
Restaurant Concepts of Kentucky, LP. The
acquisition of Kentucky Restaurant Concepts, Inc. was accounted for by the
purchase method of accounting; therefore the operations have been included in
the accompanying statements of operations since the date of acquisition. The operations are included as Kentucky
Restaurant Concepts, Inc. The following pro forma financial information
includes the consolidated results of operations as if Kentucky Restaurant
Concepts, Inc. had occurred at January 1, 2006 and do not purport to be indicative
of the results that would have occurred had the acquisition been made as of
that date or of results which may occur in the future.
On January 31, 2007, the Company acquired assets the general
partnership interest and a 87% limited partnership interest in RCC LP. The
acquisition of RCC LP was accounted for by the purchase method of accounting;
therefore the operations have been included in the accompanying statements of
operations since the date of acquisition.
The operations are included as RCC LP. The following pro forma financial
information includes the consolidated results of operations as if RCC LP. had
occurred at January 1, 2006 and do not purport to be indicative of the results
that would have occurred had the acquisition been made as of that date or of
results which may occur in the future.
On January 31, 2007, the Company acquired the general partnership
interest and an 82% limited partnership interest in Cardinal Management
LP. The acquisition of Cardinal
Management LP was accounted for by the purchase method of accounting; therefore
the operations have been included in the accompanying statements of operations
since the date of acquisition. The
operations are included as Cardinal Management LP. The following pro forma
financial information includes the consolidated results of operations as if
Cardinal Management LP had occurred at January 1, 2006 and do not purport to be
indicative of the results that would have occurred had the acquisition been
made as of that date or of results which may occur in the future.
On February 28, 2007, the Company acquired the general partnership
interest and a 99% limited partnership interest in MRC, LP. The acquisition of MRC, LP was accounted for
by the purchase method of accounting; therefore the operations have been
included in the accompanying statements of operations since the date of
acquisition. The operations are included
as MRC, LP. The following pro forma
financial information includes the consolidated results of operations as if
MRC, LP had occurred at January 1, 2006 and do not purport to be indicative of
the results that would have occurred had the acquisition been made as of that
date or of results which may occur in the future.
On February 28, 2007, the Company acquired the general partnership
interest and a 89% limited partnership interest in IRC, LP. The acquisition of IRC, LP was accounted for
by the purchase method of accounting; therefore the operations have been
included in the accompanying statements of operations since the date of acquisition. The operations are included as IRC, LP. The following pro forma financial information
includes the consolidated results of operations as if IRC, LP had occurred at January
1, 2006 and do not purport to be indicative of the results that would have
occurred had the acquisition been made as of that date or of results which may
occur in the future.
On April 1, 2007, the Company acquired the majority of the assets of
Regale, Inc., Raleigh, North Carolina. The acquisition of Regale, Inc. was
accounted for by the purchase method of accounting; therefore the operations
have been included in the accompanying statements of operations since the date
of acquisition. The operations are
included as Raleigh Restaurant Concepts, Inc.
The following pro forma financial information includes the consolidated
results of operations as if Regale, Inc. had occurred at January 1, 2006 and do
not purport to be indicative of the results that would have occurred had the
acquisition been made as of that date or of results which may occur in the
future.
On May 30, 2007, the Company acquired 100% of the common stock,
including the common stock of Classic Affairs, Inc., Minneapolis,
Minnesota. The acquisition of Classic
Affairs, Inc. was accounted for by the purchase method of accounting; therefore
the operations have been included in the accompanying statements of operations
since the date of acquisition. The
following pro forma financial information includes the consolidated results of
operations as if Classic Affairs, Inc. had occurred at January 1, 2006 and do
not purport to be indicative of the results that would have occurred had the
acquisition been made as of that date or of results which may occur in the
future.
9
On September 14, 2007, the Company acquired 100% of the issued and
outstanding stock of KENKEV, Inc., which owns and operates Platinum Plus
located in Portland, Maine. The acquisition of KENKEV, Inc. was accounted for
by the purchase method of accounting; therefore the operations have been
included in the accompanying statements of operations since the date of
acquisition. The operations are included as KENKEV II, Inc. The following pro
forma financial information includes the consolidated results of operations as
if KENKEV II had occurred at January 1, 2006 and do not purport to be
indicative of the results that would have occurred had the acquisition been
made as of that date or of results which may occur in the future.
On September 17, 2007, the Company acquired 100% of the issued and
outstanding membership units of Golden Productions JGC Fort Worth, LLC., which
owns and operates Jaguars Gold Club of Ft. Worth located in Ft. Worth,
Texas. The acquisition of Golden Productions JGC Fort Worth, LLC. was accounted
for by the purchase method of accounting, therefore the operations have been
included in the accompanying statements of operations since the date of
acquisition. The operations are included as Golden Productions JGC Fort Worth,
LLC. The following pro forma financial information includes the consolidated
results of operations as if Golden Productions JGC Fort Worth, LLC had occurred
at January 1, 2006 and do not purport to be indicative of the results that
would have occurred had the acquisition been made as of that date or of results
which may occur in the future.
The following combines the pro forma information for the above
acquisitions and includes the information for each for the applicable periods:
Proformas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months
|
|
Nine months
|
|
|
|
Ended
|
|
Ended
|
|
|
|
September 30, 2006
|
|
September 30, 2007
|
|
Revenue
|
|
17,695,021
|
|
36,561,263
|
|
Net income from
continuing operations
|
|
3,418,257
|
|
9,772,675
|
|
Net income
|
|
3,418,257
|
|
9,772,675
|
|
Earnings per
share
|
|
|
|
|
|
Income from
continuing operations
|
|
0.36
|
|
0.73
|
|
Loss from
discontinued
|
|
0
|
|
0
|
|
Net income
|
|
0.36
|
|
0.73
|
|
Weighted average
shares (diluted)
|
|
9,558,977
|
|
13,359,318
|
|
|
|
Three months
|
|
Three months
|
|
|
|
Ended
|
|
Ended
|
|
|
|
September 30, 2006
|
|
September 30, 2007
|
|
Revenue
|
|
$
|
5,898,340
|
|
$
|
12,187,088
|
|
Net income from
continuing operations
|
|
$
|
1,139,419
|
|
$
|
3,257,558
|
|
Net income
|
|
$
|
1,139,419
|
|
$
|
3,257,558
|
|
Earnings per
share
|
|
|
|
|
|
Income from
continuing operations
|
|
$
|
0.12
|
|
$
|
0.19
|
|
Loss from
discontinued
|
|
0
|
|
0
|
|
Net income
|
|
$
|
0.12
|
|
$
|
0.19
|
|
Weighted average
shares (diluted)
|
|
9,644,723
|
|
16,976,747
|
|
3. Property,
Plant and Equipment
Property, plant and equipment consist of the following:
|
|
December 31,
|
|
September 30,
|
|
|
|
2006
|
|
2007
|
|
Land
|
|
$
|
556,225
|
|
$
|
1,055,539
|
|
Buildings
|
|
7,614,133
|
|
12,873,088
|
|
Leasehold
Improvements
|
|
3,417,645
|
|
10,256,661
|
|
Equipment
|
|
1,518,655
|
|
3,265,398
|
|
Signs
|
|
185,957
|
|
373,428
|
|
Furniture and
fixtures
|
|
740,383
|
|
3,329,128
|
|
|
|
$
|
14,032,998
|
|
$
|
31,153,242.00
|
|
Less accumulated
depreciation and amortization
|
|
(2,007,371
|
)
|
(7,034,055
|
)
|
Net property,
plant and equipment
|
|
$
|
12,025,627
|
|
$
|
24,119,187
|
|
Depreciation and amortization expense was $646,373 and $845,653 for the
nine months ended September 30, 2006 and 2007, respectively.
10
4. Transactions
with Related Parties
The day to day management of all the Companys nightclubs is conducted
through the Companys wholly-owned subsidiary International Entertainment
Consultants, Inc. (IEC). In addition
to managing the clubs owned by the Company, IEC managed clubs owned by Mr.
Lowrie until March 1, 2007. IEC charges
those clubs a management fee which is based on an allocation of the Companys
common expenses incurred in maintaining its regional and corporate club
management functions. Such fees are
included in other income and were $1,918,294 and $2,023,949 for the nine months
ended September 30, 2006 and 2007, respectively, and were $65,430 and $-0- for
the three months ended September 30, 2006 and 2007, respectively.
5. Redeemable
Preferred Stock
During the three months ended June 30, 2007, the Company converted
32,500 shares of its Series A Preferred Stock for 88,798 shares of common stock
at $3.66 per share, or an aggregate of $325,000. At September 30, 2007, there are no shares of
Series A Preferred Stock outstanding.
The redeemable preferred stock offering costs of $297,034 were being
amortized over the holding period before the call or put option. The amortization of the offering costs of $0
and $0 for the nine months ended September 30, 2007 and 2006, respectively, is
included in the preferred stock dividends.
6. Long-Term
Debt
In June 2006, VCG entered into an additional line of credit agreement
with a bank. The new line of credit is
$5,000,000 and has an interest rate of 8.5%, and is due June 28, 2008. The note is secured by VCGs assets, common
stock of VCG owned by Lowrie Management LLLP, and guaranteed by Troy H. Lowrie.
In September 2007, VCG entered into an additional line of credit
agreement with a bank. The new line of credit is $1,600,000 and has an interest
rate of 8.25%, and is due January 30, 2008. The note is cross collateralized
with other notes.
7. 4th Street
Partnership, LLLP Private Placement
The Company offered ownership interests in 4
th
Street
Partnership, LLLP in a private placement.
The private placement is now closed and there was a total 99.9%
ownership that sold for $3,000,000. The
partnership purchased the land and building that houses the club in
Minneapolis, Minnesota. The assets of
the partnership are included in these financial statements.
8. Segment
Information
The following information is presented in accordance with SFAS No 131, Disclosures
about Segments of an Enterprise and Related Information. The Company is engaged in owning and
operating adult nightclubs and the management of adult nightclubs. The Company has identified such segments
based on management responsibility and the nature of the Companys products,
services and costs. There are no major
distinctions in geographical areas served, as all operations are in the United
States. The Company measures segment
profit as income from operations. The
assets and liabilities are those controlled by each reportable segment. The
Company eliminates all inter company revenues and expenses before the
measurement of the segments.
The following table sets forth certain information about each segments
financial information for the nine months ended September 30, 2006 and 2007.
|
|
September 30,
|
|
|
|
2006
|
|
2007
|
|
Business segment sales
|
|
|
|
|
|
Nightclubs
|
|
$
|
10,735,530
|
|
$
|
24,779,810
|
|
Management
|
|
1,918,294
|
|
2,023,949
|
|
|
|
$
|
12,653,824
|
|
$
|
26,803,759
|
|
|
|
|
|
|
|
Business segment operating income
|
|
|
|
|
|
Nightclubs
|
|
$
|
2,405,421
|
|
$
|
7,486,132
|
|
Management
|
|
12,113
|
|
372,662
|
|
|
|
$
|
2,417,534
|
|
$
|
7,858,794
|
|
11
Business segment assets
|
|
|
|
|
|
Nightclubs
|
|
$
|
26,102,226
|
|
$
|
82,552,766
|
|
Management
|
|
623,760
|
|
685,991
|
|
|
|
$
|
26,725,986
|
|
$
|
83,238,757
|
|
|
|
|
|
|
|
Business segment liabilities
|
|
|
|
|
|
Nightclubs
|
|
$
|
14,112,991
|
|
$
|
33,443,426
|
|
Management
|
|
467,106
|
|
224,882
|
|
|
|
$
|
14,580,097
|
|
$
|
33,668,308
|
|
The following table sets forth certain information about each segments
financial information for the three months ended September 30, 2006 and 2007.
|
|
September 30,
|
|
|
|
2006
|
|
2007
|
|
Business segment sales
|
|
|
|
|
|
Nightclubs
|
|
$
|
3,543,386
|
|
$
|
10,310,110
|
|
Management
|
|
597,605
|
|
589,277
|
|
|
|
$
|
4,140,991
|
|
$
|
10,899,387
|
|
|
|
|
|
|
|
Business segment operating income
|
|
|
|
|
|
Nightclubs
|
|
$
|
844,900
|
|
$
|
4,010,759
|
|
Management
|
|
(167
|
)
|
1,015
|
|
|
|
$
|
844,733
|
|
$
|
4,011,774
|
|
9. Subsequent
Event
On October 30, 2007 the Company purchased 100% of the stock of Kenja II
Corp. Pursuant to the terms of the agreement, the Company paid $6.8mm in cash consideration
for the stock. The purchase of the stock included all the necessary assets,
tangible as well as intangible, to operate the night club. The acquisition was funded with $2.0 million
in available cash and through issuance of promissory notes. The transaction
closed on October 30, 2007, whereby the Company took over operations on October
29, 2007.
On October 31, 2007 the Company purchased 100% of the stock of Manana
Productions, Inc. for cash consideration of approximately $6.8 million. The
Company will fund the operations with lines of credit. The purchase included a
25 year lease of the current facility and other tangible and intangible assets.
Item 2. Managements Discussion
and Analysis of Financial Condition
and Results of Operations
The information set
forth hereunder, Managements Discussion and Analysis of Financial Condition
and Results of Operations (the MD&A), presents significant factors
affecting our consolidated operating results, financial condition, liquidity
and capital resources that occurred during the nine months that ended
September 30, 2006 and 2007. Likewise, the MD&A should be read in
conjunction with the financial statements appearing elsewhere in this Form
10-QSB (this Report). In conjunction with this Report, the MD&A discussed
in Form 10-KSB for the year ended December 31, 2006 and filed with The
Securities and Exchange Commission (SEC) on March 31, 2007, should be
referred to when reading this Report.
Safe Harbor Statement
Safe Harbor Statement
under the Private Securities Litigation Reform Act: Statements made in this
Report that relate to future operating periods are subject to important risks
and uncertainties that could cause actual results to differ materially. These
risks could affect certain nightclubs, while certain other risks could affect
all of the Companys nightclubs and/or other business segments.
Forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Exchange Act of 1934, as amended,
are based on the exercise of business judgment as well as assumptions made by,
and information currently available to us. When used in this MD&A, the
words may, will, anticipate, believe, estimate, expect, intend,
and other words of similar import, are intended to help identify
forward-looking statements. One should not place undue reliance on these
forward-looking statements. Such statements reflect our current view of future
events and are subject to certain risks and uncertainties as noted below.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, the Companys actual results could
differ materially from those anticipated in these forward-looking statements.
Although, we believe that our expectations are based on reasonable assumptions;
however, we cannot give any assurance, whatsoever, that our expectations will
materialize.
12
Forward looking statements made herein are based on our current
expectations that could involve a number of risks and uncertainties and
therefore, such expectations should not be considered guarantees of future
performance. Certain of those risk factors that could cause actual results to
differ materially, include, without limitation, the following:
Dependence
on key management personnel.
Competitors
with greater financial resources.
The
impact of competitive pricing.
The
timing of openings of competitors clubs.
The ability of management to execute
acquisition and expansion plans and motivate personnel in the execution of such
plans.
Interruptions
or cancellation of existing contracts.
Adverse
publicity related to the company.
Changes
in the laws governing the operation of adult entertainment businesses.
An
inability to arrange additional debt or equity financing.
Adverse
claims relating to our use of trademarks and/or tradenames.
The
adoption of new, or changes in, accounting principles.
The costs inherent with complying with
new statutes and regulations applicable to public reporting companies, such as
the Sarbanes-Oxley Act of 2002.
Actual results may
differ materially from those set forth in forward-looking statements as a
result of certain of those factors set forth above, including such factors
disclosed under Risk Factors, or any factors as may be included elsewhere in
this Report. More information about factors that potentially could affect our
financial results is included in the Companys filings with the SEC; however,
we are under no obligation, nor do we intend to update, revise or otherwise
publicly release any revisions to these forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
any unanticipated events.
General Overview
It is our desire to
provide all parties who may read this MD&A an understanding of the Companys
past performance, its financial condition and its prospects of going forward in
the future. Accordingly, we will discuss and provide our analysis of the
following:
Overview
of the business.
Critical
accounting policies.
Results
of operations.
Overview
of business segments.
Liquidity
and capital resources.
New
accounting pronouncements.
The Company was
incorporated under the laws of the State of Colorado in 1998, but did not begin
its operations until April, 2002. The Company is engaged in owning and
operating nightclubs which provide quality live adult entertainment, food and beverage
services. Currently, we operate
seventeen
adult entertainment nightclubs and one upscale dance club (collectively
referred to as the Clubs). Three of the Clubs offer full service restaurants
with fine dining and have VIP facilities for its members.
Fourteen
Clubs serve alcoholic beverages.
We believe maximum
profitability and sustained growth in the industry can only be obtained from
owning and operating upscale adult entertainment nightclubs. Our current
strategy is to acquire and upgrade existing adult nightclubs. Likewise, it is
our intent to develop and build upscale nightclubs in areas that are not market
saturated and are open to well-managed upscale clubs.
The Company owns
International Entertainment Consultants, Inc. (IEC), which provides
management services to our nightclubs and, on a fee basis, to non-owned
affiliated nightclubs. IEC was originally formed in 1980; at the time of
acquisition in October, 2003, IEC was owned by Troy H. Lowrie, our Chairman of
the Board and Chief Executive Officer.
In June, 2002, the
Company formed VCG Real Estate Holdings, Inc., a wholly owned subsidiary, that
purchased the land and buildings which house four of our Clubs.
Management has
substantial experience in owning and operating successful adult entertainment
nightclubs and thereby, our management has gained an in-depth knowledge of the
industry in which the Company does business.
13
Since the Company began
its operations, we have acquired the following Clubs:
PTs
Brooklyn in East Saint Louis, Illinois (acquired 2002)
PTs
Nude in Denver, Colorado (acquired 2004)
The
Penthouse Club in Denver, Colorado (acquired 2004)
Diamond
Cabaret in Denver, Colorado (acquired 2004)
The
Penthouse Club in Phoenix, Arizona (opened 2004 and sold in January 2007)
Tabu
(Dance club) in Denver, Colorado (opened June 2005)
PTs®
Appaloosa in Colorado Springs, Colorado (acquired October 2006)
PTs®
Showclub in Denver, Colorado (acquired December 2006)
PTs®
Showclub in Louisville, Kentucky (acquired January 2007)
Roxys
in East Saint Louis, Illinois (acquired February 2007)
PTs®
Showclub in East Saint Louis, Illinois (acquired February 2007)
PTs®
Sports Cabaret St. Louis in East Saint Louis, Illinois (acquired March 2007)
Penthouse
Club St. Louis in East Saint Louis, Illinois (acquired March 2007)
The
Mens Club® in Raleigh, North Carolina (acquired April 2007)
Schieks
Palace Royale in Minneapolis, Minnesota (acquired May 2007)
Platinum
Plus in Portland, Maine (acquired September 2007)
Jaguars
Gold Club in Ft. Worth, Texas (acquired September 2007)
The majority of the
Clubs operate under the branded names
PTs,
Diamond Cabaret
and
The Penthouse
Club
, which are pursuant to non-exclusive licensing agreements.
The aggregate cost of
acquisition for the eighteen operating clubs was approximately 78.0 million.
The day to day
management of the Clubs is conducted through IEC. IEC provides the Clubs with
management and supervisory personnel to oversee operations, hire and contract
for all operating personnel, establish Club policies and procedures, compliance
monitoring, purchasing, accounting and other administrative services, and
prepares financial, operating reports, and income tax returns. IEC charges the
Clubs a management fee based on the Companys common expenses incurred in
maintaining these functions.
We classify the Companys
operations into two reportable segments; the operations of the Clubs and the
management of non-owned adult nightclubs. Financial information on our
reportable segments is presented in Note 8 of the Notes to Consolidated
Financial Statements. In general, we operate the management segment, not with a
view to generate an operating profit from the operations of that segment alone,
but rather with the view that the fees generated from that segment offsets
certain expenses we incur in maintaining our regional and corporate staff and
thereby, it assists us in achieving certain economies of scale in the
management of the Clubs.
Critical Accounting Policies
The following discussion
and analysis of the results of operations and financial condition are based on
the Companys consolidated financial statements that have been prepared in
accordance with accounting principles generally accepted in the United States
of America. Our significant accounting policies are more fully described in
Note 2 of the Notes to the Consolidated Financial Statements, which is
included in our Annual Report, Form 10-KSB for the year ended December 31,
2006. However, certain accounting policies and estimates are particularly
important to the understanding of our financial position and results of
operations and require the application of significant judgment by us. Further,
such accounting policies and estimates can be materially affected by changes
from period to period in economic factors or conditions that are outside our
control. As a result, our accounting policies and estimates are subject to an
inherent degree of uncertainty. In applying these policies, we use our judgment
to determine the appropriate assumptions to be used in the determination of
certain estimates. Those estimates are based on our historical operations,
future business plans and projected financial results and the terms of existing
contracts, observance of trends in the industry, information provided by our
customers, and information available from other outside sources, as may be
appropriate. Actual results may differ from these estimates. Those critical
accounting policies are discussed in Managements Discussion and Analysis of
Financial Position and Results of Operations Critical Accounting Policies,
which is a part of our Annual report found on Form 10-KSB for the year ended
December 31, 2006.
14
Results of Operations - Third Quarter ended September 30, 2006 Compared
to September 30, 2007
Results of Continuing Operations
The following sets forth a comparison of the components of the results
of our continuing operations for the nine months and three months ended
September 30, 2006 and 2007:
|
|
Nine months ending September 30,
|
|
Percentage change
|
|
|
|
2006
|
|
2007
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
Sales of
alcoholic beverages
|
|
5,671,405
|
|
13,197,154
|
|
132.7
|
%
|
Sales of food
and merchandise
|
|
781,749
|
|
1,536,961
|
|
96.6
|
%
|
Service revenue
|
|
2,942,246
|
|
9,402,356
|
|
219.6
|
%
|
Other
|
|
3,258,424
|
|
2,667,288
|
|
(18.1
|
)%
|
Total revenue
|
|
12,653,824
|
|
26,803,759
|
|
111.8
|
%
|
Operating
Expenses
|
|
|
|
|
|
|
|
Cost of goods
sold
|
|
1,888,801
|
|
3,612,060
|
|
91.2
|
%
|
Salaries and
wages
|
|
3,703,059
|
|
5,586,606
|
|
50.9
|
%
|
Management fee
|
|
|
|
|
|
*
|
|
Other general
and administrative
|
|
|
|
|
|
*
|
|
Taxes and
permits
|
|
306,284
|
|
1,025,091
|
|
234.7
|
%
|
Charge card and
bank fees
|
|
186,219
|
|
308,162
|
|
65.5
|
%
|
Rent
|
|
608,887
|
|
2,577,105
|
|
323.2
|
%
|
Legal and professional
|
|
205,080
|
|
475,176
|
|
131.7
|
%
|
Advertising and
marketing
|
|
370,115
|
|
1,134,094
|
|
206.4
|
%
|
Other
|
|
2,321,472
|
|
3,381,018
|
|
45.6
|
%
|
Depreciation
& amortization
|
|
646,373
|
|
845,653
|
|
30.8
|
%
|
Total operating
expenses
|
|
10,236,290
|
|
18,944,965
|
|
93.4
|
%
|
Income
from operations
|
|
2,417,534
|
|
7,858,794
|
|
189.7
|
%
|
Other
income (expenses)
|
|
|
|
|
|
|
|
Interest expense
|
|
(1,035,693
|
)
|
(1,826,444
|
)
|
76.3
|
%
|
Gain on sale of
assets
|
|
44,184
|
|
190,256
|
|
*
|
|
Unrealized gain
on marketable securities
|
|
2,200
|
|
|
|
*
|
|
Interest income
|
|
12,574
|
|
320,529
|
|
2,449.1
|
%
|
Total Other
Income (Expenses)
|
|
(976,735
|
)
|
(1,315,659
|
)
|
34.7
|
%
|
Income
continuing operations before income taxes
|
|
1,440,799
|
|
6,543,135
|
|
354.1
|
%
|
Income tax
expense current
|
|
|
|
|
|
*
|
|
Income tax
expense deferred
|
|
|
|
(456,000
|
)
|
*
|
|
Total income
taxes
|
|
|
|
(456,000
|
)
|
*
|
|
Minority
interest
|
|
(84,859
|
)
|
(173,400
|
)
|
*
|
|
Income
continuing operations
|
|
$
|
1,355,940
|
|
$
|
5,913,735
|
|
336.1
|
%
|
|
|
|
|
|
|
|
|
|
|
* - not meaningful
15
|
|
Three months ending September 30,
|
|
Percentage
change
|
|
|
|
2006
|
|
2007
|
|
|
Revenues
|
|
|
|
|
|
|
|
Sales of
alcoholic beverages
|
|
1,885,517
|
|
5,350,924
|
|
183.8
|
%
|
Sales of food
and merchandise
|
|
222,752
|
|
645,183
|
|
189.6
|
%
|
Service revenue
|
|
1,006,506
|
|
4,251,364
|
|
322.4
|
%
|
Other
|
|
1,026,215
|
|
651,916
|
|
(36.5
|
)%
|
Total revenue
|
|
4,140,990
|
|
10,899,387
|
|
163.2
|
%
|
Operating
Expenses
|
|
|
|
|
|
|
|
Cost of goods
sold
|
|
584,716
|
|
1,438,290
|
|
146.0
|
%
|
Salaries and
wages
|
|
1,200,900
|
|
2,091,462
|
|
74.2
|
%
|
Management fee
|
|
|
|
|
|
*
|
|
Other general
and administrative
|
|
|
|
|
|
|
|
Taxes and
permits
|
|
98,504
|
|
430,582
|
|
48.7
|
%
|
Charge card and
bank fees
|
|
62,399
|
|
146,461
|
|
134.7
|
%
|
Rent
|
|
160,974
|
|
1,061,935
|
|
559.7
|
%
|
Legal and
professional
|
|
42,666
|
|
102,213
|
|
139.6
|
%
|
Advertising and marketing
|
|
124,883
|
|
486,171
|
|
289.3
|
%
|
Other
|
|
806,775
|
|
790,610
|
|
(2.0
|
)%
|
Depreciation
& amortization
|
|
214,440
|
|
339,889
|
|
58.5
|
%
|
Total operating
expenses
|
|
3,296,257
|
|
6,887,613
|
|
108.9
|
%
|
Income
from operations
|
|
844,733
|
|
4,011,774
|
|
374.9
|
%
|
Other
income (expenses)
|
|
|
|
|
|
|
|
Interest expense
|
|
(354,594
|
)
|
(707,758
|
)
|
87.6
|
%
|
Gain on sale of
assets
|
|
|
|
|
|
*
|
|
Unrealized
(loss) on marketable securities
|
|
(2,500
|
)
|
(8,934
|
)
|
*
|
|
Interest income
|
|
5,412
|
|
30,311
|
|
460.1
|
%
|
Total Other
Income (Expenses)
|
|
(351,682
|
)
|
(686,381
|
)
|
95.2
|
%
|
Income
continuing operations before income taxes
|
|
493,051
|
|
3,325,393
|
|
574.5
|
%
|
Income tax
expense current
|
|
|
|
|
|
*
|
|
Income tax
expense deferred
|
|
|
|
350,000
|
|
*
|
|
Total income
taxes
|
|
|
|
350,000
|
|
*
|
|
Minority
interest
|
|
(39,879
|
)
|
(80,584
|
)
|
*
|
|
Income
continuing operations
|
|
$
|
453,172
|
|
$
|
3,594,809
|
|
693.3
|
%
|
|
|
|
|
|
|
|
|
|
|
* - not meaningful
Revenues
Revenue sources
generated by the Clubs include: (i) the sale of alcoholic beverages;
(ii) food and merchandise; (iii) service revenues, which include fees
paid by entertainers to the Clubs for the opportunity to perform at the Clubs;
(iv) fees charged for admission to the Clubs; (v) ATM fees; and
(vi) other ancillary revenues (collectively referred to as Total Revenues).
Total Revenues increased 163% to approximately $10.9 million for the third
quarter of 2007, compared with a year ago, and increased approximately 112% to
$26.8 million for nine months of 2007, compared with nine months of 2006. The
increase in Total Revenues was a result of the Companys continued success in
being able to acquire quality clubs
Cost of Goods Sold
Cost of sales consists
of alcohol, food, and merchandise. Cost of sales increased by approximately 91%
and 146%, for the third quarter and nine months ending 2007, compared to the
same periods a year ago. The upsurge was primarily driven by a substantial
increase in sales volume from our clubs acquired in the first and second
quarters of this year.
Salaries
Salary and wage expense
consist of all labor costs incurred throughout the entire organization. Labor costs increased by approximately 74%
for the third quarter 2007 and approximately 50% for the nine months of 2007,
when compared to the same periods in 2006.
Other General and Administrative Expenses
Taxes and permits
increased by approximately 98% for the third quarter 2007 and increased by
approximately 234% for nine months ending 2007, compared to the same periods in
2006. The increases in taxes and permits were primarily a result of new
acquisitions.
16
Rent, increased
approximately 559% for the third quarter of 2007 and by 323% for the nine
months ending 2007, compared to the same periods in 2006.
Legal and professional expenses
increased by approximately 140% for the third quarter of 2007 and 132% for the nine
months ending 2007, when compared to the same periods for 2006.
Advertising and
marketing expenses increased by approximately 289% for the third quarter and
increased by approximately 206% for the nine months ending 2007, compared to
the same periods in 2006.
Other general and
administrative (G&A) expenses decreased approximately 2% in the third
quarter and increased by approximately 45% for the nine months ending 2007, compared
to the same periods in 2006.
Depreciation and Amortization
Depreciation and
amortization increased by 58% the third quarter 2007 and increased by 30% for
the nine months ending 2007 compared to the same periods in 2006. This increase
is related to the acquisition of certain clubs.
Interest Expense
Interest expense increased approximately 99% during the third quarter
2007 and increased by approximately 76% for the nine months ending 2007,
compared to the same periods in 2006.
The increase in interest expense is a primary result of financing club
acquisitions with debt.
Interest Income
Interest income increased by approx. $25,000 for the third quarter of
2007 and increased by $308,000 for the nine months ending 2007, compared to the
same periods in 2006. The increase in income
is primarily a result of increased cash flow based on the acquisitions of clubs.
Deferred Income Taxes
Deferred income taxes represent the estimate of income taxes due based on
the difference between book net income and income tax for the period reduced by
the remaining net operating loss carry-forward and income tax credits earned
for the nine months ending September 30, 2007.
The deferred income tax expense for the third quarter 2007 was $106,000
and $456,000 for the nine months ending 2007.
Net income from Continuing Operations
As a result of the factors discussed above, net income increased to $3.1
million for the third quarter 2007, compared with $248,439 for the same period
in 2006 and increased to $5.9 million for the nine months ending of 2007,
compared with $703,952 for the same period in 2006.
Net Income Applicable to Common Shareholders and Earnings Per Share
For the third quarter and nine months of 2007, we did not pay or accrue
dividends of any kind. Therefore, net
income applicable to common shareholders for the third quarter and nine months
ending 2007, is approximately $3.1 million and $5.9 million, respectively.
17
Business Segments and Results
The following table sets forth certain information about each segments
financial information for the nine months ending September 30, 2006 and 2007.
|
|
September 30,
|
|
|
|
2006
|
|
2007
|
|
Business segment sales
|
|
|
|
|
|
Nightclubs
|
|
$
|
10,735,530
|
|
$
|
24,779,810
|
|
Management
|
|
1,918,294
|
|
2,023,949
|
|
|
|
$
|
12,653,824
|
|
$
|
26,803,759
|
|
|
|
|
|
|
|
Business segment operating income
|
|
|
|
|
|
Nightclubs
|
|
$
|
2,405,421
|
|
$
|
7,486,132
|
|
Management
|
|
12,113
|
|
372,662
|
|
|
|
$
|
2,417,534
|
|
$
|
7,858,794
|
|
|
|
|
|
|
|
Business segment assets
|
|
|
|
|
|
Nightclubs
|
|
$
|
26,102,226
|
|
$
|
82,552,766
|
|
Management
|
|
623,760
|
|
685,991
|
|
|
|
$
|
26,725,986
|
|
$
|
83,238,757
|
|
|
|
|
|
|
|
Business segment liabilities
|
|
|
|
|
|
Nightclubs
|
|
$
|
14,112,991
|
|
$
|
33,443,426
|
|
Management
|
|
467,106
|
|
224,882
|
|
|
|
$
|
14,580,097
|
|
$
|
33,668,308
|
|
The following table sets forth certain information about each segments
financial information for the three months ended September 30, 2006 and 2007.
|
|
September 30,
|
|
|
|
2006
|
|
2007
|
|
Business segment sales
|
|
|
|
|
|
Nightclubs
|
|
$
|
3,543,385
|
|
$
|
10,310,110
|
|
Management
|
|
597,605
|
|
589,277
|
|
|
|
$
|
4,140,990
|
|
$
|
10,899,387
|
|
|
|
|
|
|
|
Business segment operating income
|
|
|
|
|
|
Nightclubs
|
|
$
|
844,900
|
|
$
|
4,010,759
|
|
Management
|
|
(167
|
)
|
1,015
|
|
|
|
$
|
844,733
|
|
$
|
4,011,774
|
|
The day to day management of all nightclubs is conducted through, our
wholly-owned subsidiary, International Entertainment Consultants, Inc.
(IEC). All nightclubs managed by IEC
are charged for direct expenses and a proportionate share of IECs general
operating and administrative expenses.
IEC provides management and supervisory personnel to oversee operations,
hires and contracts for all operating personnel, establishes club policies and
procedures, compliance monitoring, purchasing, financial and operating reports,
income tax preparation, accounting services and other administrative
needs. The management fees income and
related expenses related to the Companys owned nightclubs have been
eliminated.
18
Liquidity and Capital Resources
The level of current assets and liabilities necessary for nightclub
operations does not materially fluctuate and is very predictable, and we
anticipate that the cash flow from our existing operations will be sufficient
to fund our current level of operations for the next twelve months. However, we have acquired twelve nightclubs during
the period beginning December 31, 2006, for a total cost of approximately $78
million. We funded these acquisitions
primarily through issuances of our common stock (approximately $28 million),
assumption of indebtedness (approximately $25 million), internal funds, and issuance
of notes. The acquisition of additional
clubs will require us to obtain additional debt or equity capital. There can be no assurance that such capital
will continue to be available upon terms that are acceptable to us, if such
financing is available at all. An
inability to obtain such additional financing could have an adverse effect on
our strategy of growth through the acquisition of clubs, the upgrade of
existing clubs and the development and construction of clubs in areas that are
not market saturated and already receptive to well-managed upscale clubs.
Working Capital
At September 30, 2007 and December 31, 2006, the Company had cash and
cash equivalents of approximately $2.7 million and $2.0 million and total
current assets of approximately $4.7 million and $3.5 million,
respectively. Our current liabilities
exceeded our current assets by approximately $8.4 million at September 30, 2007,
compared to the current liabilities exceeding our current assets by
approximately $300,000 at December 31, 2006.
Capital Resources
We had stockholders equity of approximately $44.9 million on September
30, 2007 and approximately $12.8 million at December 31, 2006. The change is the result of income recognized
during the first nine months of 2007, sale of common stock, conversion of
preferred stock, and acquisition of nightclubs for common stock.
The net cash provided by operating activities was approximately $7.8
million for the nine months ending 2007 and $1.7 million for the first six
months of 2006. The increase in the cash flow provided by operations was due to
the increase in our net income for those periods and reduced by the cash flows
used to decrease accounts payables.
Net cash used by investing activities for the nine months ending 2007
was approximately $43.2 million, whereby such use of cash was primarily for the
purchase of Clubs. There was a small
amount of proceeds we received for the disposition of assets of $200,000.
Net cash provided by financing activities for the nine months ending 2007
was approximately $21.2 million. The
majority of the proceeds provided by financing activities were received from
the sale of common stock, resulting in $21.2 million.
Off Balance Sheet Arrangements
We do not currently have any off balance sheet arrangements falling
within the definition of Item 303(c) of Regulation S-B.
Inflation
To date, inflation has not had a material impact on our operations.
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Item 3
. Controls and Procedures
As of September 30, 2007, our Chief Executive Officer and Chief
Financial Officer (the Certifying Officers) conducted evaluations of our
disclosure controls and procedures. As defined under Sections 13a-15(e) and
15d-15(e) of the Exchange Act, the term disclosure controls and procedures
means controls and other procedures of an issuer that are designed to ensure
that information required to be disclosed by the issuer in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SECs rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by an
issuer in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the issuers management, including the
Certifying Officers, to allow timely decisions regarding required disclosure.
Based on this evaluation, the Certifying Officers have concluded that our
disclosure controls and procedures were effective to ensure that material
information is recorded, processed, summarized and reported by our management
on a timely basis in order to comply with our disclosure obligations under the
Exchange Act and the rules and regulations promulgated thereunder.
Further, there were no changes in our internal control over financial
reporting during the first fiscal three quarters that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting
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