UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
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(Mark one)
X Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
- ------ Act of 1934
For the quarterly period ended September 30, 2002
Transition Report Under Section 13 or 15(d) of the Securities Exchange
- ------ Act of 1934
For the transition period from ______________ to _____________
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Commission File Number: 0-27006
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Million Dollar Saloon, Inc.
(Exact name of small business issuer as specified in its charter)
Nevada 13-3428657
- ---------------------------- ----------------------------
(State of incorporation) IRS Employer ID Number)
6848 Greenville Avenue, Dallas, TX 75231
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(Address of principal executive offices)
(214) 691-6757
--------------
(Issuer's telephone number)
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: November 4, 2002: 5,731,778
---------------------------
Transitional Small Business Disclosure Format (check one): YES NO X
--- ---
Million Dollar Saloon, Inc.
Form 10-QSB for the Quarter ended September 30, 2002
Table of Contents
Page
----
Part I - Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 12
Part II - Other Information
Item 1 Legal Proceedings 14
Item 2 Changes in Securities 14
Item 3 Defaults Upon Senior Securities 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 5 Other Information 14
Item 6 Exhibits and Reports on Form 8-K 14
Signatures 15
2
Item 1 - Part 1 - Financial Statements
Million Dollar Saloon, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2002 and 2001
(Unaudited)
Assets
------
September 30, September 30,
2002 2001
------------- -------------
Current Assets
Cash on hand and in bank $ 1,089,750 $ 865,869
Accounts receivable - trade 92,867 --
Inventory 21,903 26,987
Prepaid expenses 98,629 4,179
------------- -------------
Total current assets 1,303,149 897,035
------------- -------------
Property and Equipment - At Cost
Buildings and related improvements 2,017,514 2,017,514
Furniture and equipment 867,453 867,453
------------- -------------
2,884,967 2,884,967
Less accumulated depreciation (1,878,702) (1,786,795)
------------- -------------
1,006,265 1,098,175
Land 741,487 741,487
------------- -------------
Net property and equipment 1,747,752 1,839,659
------------- -------------
Other Assets
Other 4,725 5,475
------------- -------------
Total Assets $ 3,055,626 $ 2,742,169
============= =============
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
Accounts payable - trade $ 12,885 $ 23,565
Accrued liabilities 42,260 63,209
Federal income taxes payable 116,014 33,489
Tenant deposits 6,500 6,500
------------- -------------
Total current liabilities 177,659 126,763
------------- -------------
Long-term Liabilities
Deferred tax liability 134,524 133,101
------------- -------------
Total liabilities 312,183 259,864
------------- -------------
Commitments and Contingencies
Shareholders' Equity
Preferred stock - $0.001 par value. 5,000,000 shares authorized
None issued and outstanding -- --
Common stock - $0.001 par value. 50,000,000 shares authorized
5,731,778 issued and outstanding, respectively 5,732 5,732
Retained earnings 2,737,711 2,476,573
------------- -------------
Total shareholders' equity 2,743,443 2,482,305
------------- -------------
Total Liabilities and Shareholders' Equity $ 3,055,626 $ 2,742,169
============= =============
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
3
Million Dollar Saloon, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
Nine and Three months ended September 30, 2002 and 2001
(Unaudited)
Nine months Nine months Three months Three months
ended ended ended ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Revenues
Bar and restaurant sales $ 2,699,352 $ 2,463,931 $ 855,893 $ 762,654
Rental income 424,920 387,446 137,775 125,775
------------- ------------- ------------- -------------
Total revenues 3,124,272 2,851,377 993,668 888,429
------------- ------------- ------------- -------------
Cost of Sales - Bar and
Restaurant Operations 1,694,772 1,647,296 581,955 460,399
------------- ------------- ------------- -------------
Gross Profit 1,429,500 1,204,081 411,713 428,030
------------- ------------- ------------- -------------
Operating Expenses
General and administrative 993,437 996,430 350,717 328,576
Interest 207 -- 207 --
Depreciation and amortization 68,721 68,546 22,907 22,849
------------- ------------- ------------- -------------
Total operating expenses 1,062,365 1,064,976 373,831 351,425
------------- ------------- ------------- -------------
Income from Operations 367,135 139,105 37,882 76,605
Other Income (Expenses)
Interest and other miscellaneous 6,590 21,242 (3,647) 5,552
------------- ------------- ------------- -------------
Income before Income Taxes 373,725 160,347 34,235 82,157
Income tax (expense)
Currently payable (126,000) (66,630) (33,428) (44,511)
Deferred -- -- -- --
------------- ------------- ------------- -------------
Net Income 247,725 93,717 807 37,646
Other comprehensive income -- -- -- --
------------- ------------- ------------- -------------
Comprehensive Income $ 247,725 $ 93,717 $ 807 $ 37,646
============= ============= ============= =============
Earnings per share of common
stock outstanding computed
on net income - basic and
fully diluted $ 0.04 $ 0.02 nil $ 0.01
============= ============= ============= =============
Weighted-average number
of shares outstanding -
basic and fully diluted 5,731,778 5,731,778 5,731,778 5,731,778
============= ============= ============= =============
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
4
Million Dollar Saloon, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended September 30, 2002 and 2001
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
2002 2001
------------- -------------
Cash Flows from Operating Activities
Net income $ 247,725 $ 93,717
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 68,721 68,546
(Increase) decrease in
Accounts receivable - trade and other (36,001) 8,737
Federal income taxes receivable -- 33,141
Inventory (2,486) (4,143)
Prepaid expenses (98,626) (4,179)
Increase (decrease) in
Accounts payable and other accrued liabilities (69,982) (87,490)
Income taxes payable 41,614 33,489
------------- -------------
Net cash provided by operating activities 150,965 141,818
------------- -------------
Cash Flows from Investing Activities
Principal collections on note receivable -- --
Purchases of property and equipment -- (2,992)
------------- -------------
Net cash provided by investing activities -- (2,992)
------------- -------------
Cash Flows from Financing Activities
Principal payments on long-term notes payable -- --
Dividends paid -- --
------------- -------------
Net cash used in financing activities -- --
------------- -------------
Increase in Cash and Cash Equivalents 150,965 138,826
Cash and cash equivalents at beginning of period 938,785 727,043
------------- -------------
Cash and cash equivalents at end of period $ 1,089,750 $ 865,869
============= =============
Supplemental Disclosures of Interest and Income Taxes Paid
Interest paid during the period $ -- $ --
============= =============
Income taxes paid $ 207 $ --
============= =============
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
5
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE A - Background and Organization
Million Dollar Saloon, Inc. (MDS) was incorporated under the laws of the State
of Nevada on September 28, 1987. MDS is a holding company providing management
support to its operating subsidiaries: Furrh, Inc., Tempo Tamers, Inc., Don,
Inc. and Corporation Lex.
Furrh, Inc. (Furrh) was incorporated under the laws of the State of Texas on
February 25, 1974. Furrh provides management services to Tempo Tamers, Inc, its
wholly-owned subsidiary. Tempo Tamers, Inc. (Tempo), was incorporated under the
laws of the State of Texas on July 3, 1978. Tempo operates an adult
entertainment lounge and restaurant facility, located in Dallas, Texas, under
the registered trademark and trade name "Million Dollar Saloon(R)".
Don, Inc. (Don) was incorporated under the laws of the State of Texas on
November 8, 1973. Don owns and manages commercial rental property located in
Tarrant County, Texas.
Corporation Lex (Lex) was incorporated under the laws of the State of Texas on
November 30, 1984. Lex owns and manages commercial rental property located in
Dallas County, Texas.
These financial statements reflect the books and records of Million Dollar
Saloon, Inc., Furrh, Inc., Tempo Tamers, Inc., Corporation Lex and Don, Inc. for
the years ended December 31, 2001 and 2000, respectively. All significant
intercompany transactions have been eliminated in combination. The consolidated
entities are referred to as Company.
During interim periods, the Company follows the accounting policies set forth in
its annual audited financial statements filed with the U. S. Securities and
Exchange Commission on its Annual Report on Form 10-KSB for the year ended
December 31, 2001. The information presented within these interim financial
statements may not include all disclosures required by generally accepted
accounting principles and the users of financial information provided for
interim periods should refer to the annual financial information and footnotes
when reviewing the interim financial results presented herein.
In the opinion of management, the accompanying interim financial statements,
prepared in accordance with the U. S. Securities and Exchange Commission's
instructions for Form 10-QSB, are unaudited and contain all material
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the financial condition, results of operations and cash flows of
the Company for the respective interim periods presented. The current period
results of operations are not necessarily indicative of results which ultimately
will be reported for the full fiscal year ending December 31, 2002.
The preparation of 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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B - Preparation of Financial Statements
The Company follows the accrual basis of accounting in accordance with
accounting principles generally accepted in the United States of America and has
adopted a year-end of December 31.
During interim periods, the Company follows the accounting policies set forth in
its annual audited financial statements filed with the U. S. Securities and
Exchange Commission on its Annual Report on Form 10-KSB for the year ended
December 31, 2001. The information presented within these interim financial
statements may not include all disclosures required by accounting principles
generally accepted in the United States of America and the users of financial
information provided for interim periods should refer to the annual financial
information and footnotes when reviewing the interim financial results presented
herein.
6
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
NOTE B - Preparation of Financial Statements - Continued
In the opinion of management, the accompanying interim financial statements,
prepared in accordance with the U. S. Securities and Exchange Commission's
instructions for Form 10-QSB, are unaudited and contain all material
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the financial condition, results of operations and cash flows of
the Company for the respective interim periods presented. The current period
results of operations are not necessarily indicative of results which ultimately
will be reported for the full fiscal year ending December 31, 2002.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Management further acknowledges that it is solely responsible for adopting sound
accounting practices, establishing and maintaining a system of internal
accounting control and preventing and detecting fraud. The Company's system of
internal accounting control is designed to assure, among other items, that 1)
recorded transactions are valid; 2) valid transactions are recorded; and 3)
transactions are recorded in the proper period in a timely manner to produce
financial statements which present fairly the financial condition, results of
operations and cash flows of the Company for the respective periods being
presented
NOTE C - Summary of Significant Accounting Policies
1. Cash and Cash Equivalents
-------------------------
For Statement of Cash Flows purposes, the Company considers all cash on
hand and in banks, including accounts in book overdraft positions,
certificates of deposit and other highly-liquid investments with maturities
of three months or less, when purchased, to be cash and cash equivalents.
Cash overdraft positions may occur from time to time due to the timing of
making bank deposits and releasing checks, in accordance with the Company's
cash management policies.
2. Accounts Receivable and Revenue Recognition
-------------------------------------------
In the normal course of business, the Company extends unsecured credit to
virtually all of its tenants related to rental property operations and
accepts cash or nationally issued bankcards as payment for goods and
services in its adult lounge and entertainment facility. Bankcard charges
are normally paid by the clearing institution within three to fourteen days
from the date of presentation by the Company.
All lessors of Company rental property are entities controlled by a Company
shareholder, officer and director. All lease rental payments are due in
advance on the first day of the week for that week. All properties are
located either in Dallas or Tarrant County, Texas.
Because of the credit risk involved, management has provided an allowance
for doubtful accounts which reflects its opinion of amounts which will
eventually become uncollectible. In the event of complete non-performance,
the maximum exposure to the Company is the recorded amount of trade
accounts receivable shown on the balance sheet at the date of
non-performance.
7
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
NOTE C - Summary of Significant Accounting Policies - Continued
3. Inventory
---------
Inventory consists of food and liquor consumables necessary in the
operation of Tempo's adult lounge and entertainment facility. These items
are valued at the lower of cost or market using the first-in, first-out
method of accounting.
4. Property and Equipment
----------------------
Property and equipment is recorded at cost and is depreciated on a
straight-line basis, over the estimated useful lives (generally 5 to 40
years) of the respective asset. Major additions and betterments are
capitalized and depreciated over the estimated useful lives of the related
assets. Maintenance, repairs, and minor improvements are charged to expense
as incurred.
5. Trademark rights
----------------
Amounts paid in conjunction with the acquisition and retention of the
trademark "Million Dollar Saloon(R)" have been capitalized. The life of the
registration is twenty years from its affirmation in 1988 and may be
extended as allowed by applicable law at that point in time. This trademark
has been assigned Registration No. 1,509,636 by the U. S. Patent and
Trademark Office. The Company amortizes the trademark over a 10-year life
using the straight-line method.
6. Income Taxes
------------
The Company files a consolidated Federal Income Tax return and utilizes the
asset and liability method of accounting for income taxes. The deferred tax
asset and deferred tax liability accounts, as recorded when material to the
financial statements, are entirely the result of temporary differences. No
valuation allowance was provided against deferred tax assets. Temporary
differences represent differences in the recognition of assets and
liabilities for tax and financial reporting purposes, primarily accumulated
depreciation and amortization.
7. Earnings per share
------------------
Basic earnings (loss) per share is computed by dividing the net income
(loss) by the weighted-average number of shares of common stock and common
stock equivalents (primarily outstanding options and warrants). Common
stock equivalents represent the dilutive effect of the assumed exercise of
the outstanding stock options and warrants, using the treasury stock
method. The calculation of fully diluted earnings (loss) per share assumes
the dilutive effect of the exercise of outstanding options and warrants at
either the beginning of the respective period presented or the date of
issuance, whichever is later. As of September 30, 2002 and 2001,
respectively, the Company has no outstanding stock warrants, options or
convertible securities which could be considered as dilutive for purposes
of the loss per share calculation.
NOTE D - Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and notes
payable, as applicable, approximates fair value due to the short term nature of
these items and/or the current interest rates payable in relation to current
market conditions.
8
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
NOTE D - Fair Value of Financial Instruments - Continued
Interest rate risk is the risk that the Company's earnings are subject to
fluctuations in interest rates on either investments or on debt and is fully
dependent upon the volatility of these rates. The Company does not use
derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company's earnings are subject to
fluctuations in interest rates or foreign exchange rates and are fully dependent
upon the volatility of these rates. The company does not use derivative
instruments to moderate its exposure to financial risk, if any.
NOTE E - Concentrations of Credit Risk
The Company maintains its cash accounts in a financial institution subject to
insurance coverage issued by the Federal Deposit Insurance Corporation (FDIC).
Under FDIC rules, the Company and its subsidiaries are entitled to aggregate
coverage of $100,000 per account type per separate legal entity per financial
institution. During the nine and three months ended September 30, 2001 and 2000,
respectively, the various operating companies had deposits in a financial
institution with credit risk exposures in excess of statutory FDIC coverage. The
Company has incurred no losses during 2002 or 2001 as a result of any of these
unsecured situations.
NOTE F - Property and Equipment
Property and equipment consists of the following at September 30, 2002 and 2001:
September 30, September 30,
2002 2001 Estimated life
------------- ------------- --------------
Buildings and related improvements 2,017,514 $ 2,017,514 15-40 years
Furniture and equipment 867,453 867,453 5-10 years
------------- -------------
2,884,967 2,884,967
Less accumulated depreciation (1,878,702) (1,786,795)
------------- -------------
1,006,265 1,098,175
Land 741,487 741,487
------------- -------------
Net property and equipment $ 1,747,752 $ 1,839,659
============= =============
Depreciation expense for the nine months ended September 30,2002 and 2001 was
$68,721 and $68,546, respectively.
(Remainder of this page left blank intentionally)
9
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
NOTE G - Income Taxes
The components of income tax expense (benefit) for the nine months ended
September 30, 2002 and 2001, respectively, are as follows:
Nine months Nine months
ended ended
September 30, September 30,
2002 2001
------------- -------------
Federal:
Current $ 126,000 $ 66,630
Deferred -- --
------------- -------------
126,000 66,630
------------- -------------
State:
Current -- --
Deferred -- --
------------- -------------
-- --
------------- -------------
Total $ 126,000 $ 66,630
============= =============
The Company's income tax expense (benefit) for the nine months ended September
30, 2002 and 2001, respectively, differed from the statutory federal rate of 34
percent as follows:
Nine months Nine months
ended ended
September 30, September 30,
2002 2001
------------- -------------
Statutory rate applied to earnings before income taxes $ 127,100 $ 54,500
Increase (decrease) in income taxes resulting from:
State income taxes -- --
Deferred income taxes -- --
Estimated proposed adjustments on IRS audit
of prior year returns (21,000) --
Effect of incremental tax brackets and the
application of business tax credits 19,900 12,130
------------- -------------
Income tax expense $ 126,000 $ 66,630
============= =============
The deferred current tax asset and non-current deferred tax liability as of
September 30, 2002 and 2001, respectively, consists of the following:
September 30, September 30,
2002 2001
------------- -------------
Non-current deferred tax liability $ (134,524) $ (133,101)
============= =============
The non-current deferred tax liability results from the usage of statutory
accelerated tax depreciation and amortization methods.
NOTE H - Capital Stock Transactions
On March 19, 1998, the Company entered into a Stock Purchase Agreement
(Agreement) with an unrelated individual. The Agreement contained a "second
closing" clause, as amended, whereby the individual may acquire an additional
400,000 shares of restricted, unregistered common stock at a price of $1.10 per
share on or before the close of business on October 18, 2004. As of September
30, 2002 and subsequent thereto, no shares of common stock have been issued in
accordance with the "second closing" portion of the Agreement.
10
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
NOTE I - Commitments
The Company leases commercial real estate to entities controlled by a Company
shareholder, officer and director on both short and long-term operating leases.
The leases require minimum weekly lease payments, plus reimbursement for annual
property taxes. The respective tenants are responsible for normal maintenance
and repairs, insurance and other direct operating expenses related to the
property. As of December 31, 2001, future minimum non-cancellable lease revenues
are as follows:
Year ending
December 31, Amount
------------ ----------
2002 $ 294,200
2003 169,750
----------
Total $ 463,950
==========
NOTE J - Segment Information
The Company operates with a centralized management structure and has two
identifiable operating segments: an adult entertainment lounge and restaurant
located in Dallas, Texas and commercial rental real estate located in Dallas and
Tarrant Counties, Texas. All revenues are generated operations in these
geographic areas. As of September 30, 2002 and 2001, respectively, all rental
revenues are derived from entities controlled by a Company shareholder, officer
and director. Approximately 13.60% and 13.59% of total revenues for the nine
months ended September 30, 2002 and 2001, respectively, came from related
parties.
Restaurant Rental General and
facility real estate administrative Total
-------------- -------------- -------------- --------------
Nine months ended September 30, 2002
Revenue from external customers $ 2,699,352 $ -- $ -- $ 2,699,352
Revenue from related parties -- 424,920 -- 424,920
Revenue (expenses) from/to
intercompany sources (180,000) -- 180,000 --
Interest income -- 4,590 2,000 6,590
Interest expense -- 207 -- 207
Depreciation and amortization 24,465 44,256 -- 68,721
Income tax expense (benefit) 5,590 119,730 680 126,000
Segment assets 478,298 2,208,197 369,131 3,055,626
Fixed asset expenditures -- -- -- --
Nine months ended September 30, 2000
Revenue from external customers $ 2,991,784 $ -- $ -- $ 2,991,784
Revenue from related parties -- 515,075 -- 515,075
Revenue (expenses) from/to
intercompany sources (180,000) 180,000 -- --
Interest income -- 440 26,371 26,811
Interest expense -- -- 2,129 2,129
Depreciation and amortization 19,404 51,398 7,532 78,334
Income tax expense (benefit) (10,558) 163,345 2,963 155,750
Segment assets 260,504 2,310,434 350,329 2,921,267
Fixed asset expenditures 48,403 -- -- 48,403
11
Part I - Item 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(4) Caution Regarding Forward-Looking Information
Certain statements contained in this annual filing, including, without
limitation, statements containing the words "believes", "anticipates", "expects"
and words of similar import, constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
Such factors include, among others, the following: international, national and
local general economic and market conditions: demographic changes; the ability
of the Company to sustain, manage or forecast its growth; the ability of the
Company to successfully make and integrate acquisitions; raw material costs and
availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this Form 10-QSB and investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
(5) Results of Operations
Bar and restaurant operations increased slightly from $2,464,000 for the nine
months ended September 30, 2001 to approximately $2,700,000 for the nine months
ended September 30, 2002.
As discussed in Part II - Legal Proceedings, the Company is a participant in
litigation against the City of Dallas, Texas where the Company and other
operators of adult cabarets within the City of Dallas are contesting the
constitutionality of certain provisions of the Dallas Sexually Oriented Business
Ordinance (the "Ordinance") which impacts the Company's and other operators'
license to do business as an adult cabaret in Dallas. The Company remains of the
opinion that it will prevail on its constitutional claims.
However, as an interim measure, the City of Dallas initiated various enforcement
actions and on-premises monitoring of conduct within the Company's and other
facilities which has negatively impacted both patronage and revenues in all
adult entertainment facilities within the City of Dallas during the first
quarter of 2001 and periods subsequent thereto. As of the date of this filing
and pending the ultimate outcome of the pending litigation, management is unable
to assess the long-term impact of these regulatory actions.
Management's continues to direct it's efforts towards customer service and
increasing sales through effective marketing and advertising methods to maintain
and increase its bar and restaurant patronage and comply with current regulatory
conditions and environment.
The Company's rental income increased slightly from approximately $387,000 for
the first nine months of 2001 as compared to approximately $425,000 for the
first nine months of 2002. All rental income is received from entities
controlled by Duncan Burch, one of the Company's controlling shareholders . On
January 30, 2001, the Company's Board of Directors approved an amendment to the
lease agreement covering the property owned by Corporation Lex. The amendment
provides that effective January 1, 2001, the base rental will be reduced from
$4,750 per week to $1,000 per week. Additionally, the amended lease will provide
that the Company, as Landlord, shall receive 10% of the gross revenues generated
from the business located at the property, payable quarterly, until termination
of the lease in May 2002. As of September 30, 2002, the Company is due
approximately $93,000 in additional rents over and above the required weekly
payment as calculated on the gross sales of the tenant.
12
The modification of this lease agreement was the result of negotiations between
the Company and representatives of the tenant, who is affiliated with the
Company's controlling shareholder. Such modifications were requested by the
tenant as a result of decreasing revenues of the tenant's adult cabaret
operation located on the property. The tenant continues to advise the Company
that the lessee may be compelled to close its business operations.
Cost of sales were relatively constant at approximately $1,695,000 for the first
nine months of 2002 as compared to approximately $1,647,000 for the first nine
months of 2001. The Company experiences fluctuations in cost of sales
expenditures, specifically beverage, food and entertainer costs, based on
staffing levels and patronage. Both of these variable costs are constantly
monitored by management for expenditure control. Gross profit percentages remain
relatively constant at 45.75% (approximately $1,430,000) for the first nine
months of 2002 versus 42.23% ($1,204,000) for the first nine months of 2001.
Cost controls over purchasing, inventory management protocols and labor
management are continuously monitored to improve gross profit percentages.
General and administrative expenses declined by approximately $3,000 in the
first nine months of 2002 versus the first nine months of 2001. The Company
continues to experience relatively constant expenditure levels for general
operating expenses. Management continues to monitor its expenditure levels to
achieve optimum financial results.
During the third quarter, as a result of adjustments arising from an Internal
Revenue Service examination of the Company's consolidated income tax returns for
the years ended December 31, 1999, 2000, and 2001, the Company accrued
approximately $21,000 in additional income taxes and related interest due as a
current charge to operations.
Net income before income taxes was approximately $374,000 for the first nine
months of 2002 versus approximately $139,000 for the first nine months of 2001.
After-tax net income increased by approximately $154,000 from approximately
$94,000 for the first nine months of 2001 to approximately $247,000 for the
first nine months of 2000. The Company experienced earnings per share of
approximately $0.04 and $0.02 per share for the first nine months of 2002 and
2001, respectively.
(3) Liquidity
As of September 30, 2002, the Company has working capital of approximately
$1,125,000 as compared to approximately $809,000 at December 31, 2001 and
approximately $770,000 at September 30, 2001. The Company achieved positive cash
flows from operations of approximately $151,000 for the first nine months of
2002 versus approximately $142,000 for the first nine months of 2001.
The Company has identified no significant capital requirements for 2002, other
than normal repair and replacement activity at the Company's commercial rental
properties and the adult entertainment lounge and restaurant facility. Liquidity
requirements mandated by future business expansions or acquisitions, if any are
specifically identified or undertaken, are not readily determinable at this time
as no substantive plans have been formulated by management.
Future operating liquidity and debt service are expected to be sustained from
continuing operations. Additionally, management is of the opinion that there is
additional potential availability of incremental mortgage debt and the
opportunity for the sale of additional common stock through either private
placements or secondary public offerings.
For all periods prior to 2001, the Company treats and has consistently treated
all entertainers as employees whereas other similar facilities may or may have
treated their entertainers as independent contractors. For a period during 2001,
as a result of certain related court and/or tax rulings, the Company began
treating all entertainers as independent contractors, including the maintenance
and issuance of Form 1099, as required by the Internal Revenue Service and the
Department of Labor. The Company currently, and for the foreseeable future,
treats all entertainers as employees . For the 2001 period where entertainers
were treated as independent contractors, this brief change in employment policy
and treatment created a decline in both dance revenues and entertainer
compensation as all table dances were negotiated directly between the
entertainer and the Company's patrons. Management is of the opinion that it's
actions, policies and procedures, as predicated on promulgated court and
administrative rulings, were appropriate; however, the current position allows
for better control over personnel staffing levels and costs and better
monitoring of compliance with local laws and regulations.
13
Part II - Other Information
Item 1 - Legal Proceedings
Case No. 3-00-CV-2500-H; Adventure Plus, Inc., Millennium Restaurant Group,
Inc., D/B/A Cabaret Royale, et al. v. City of Dallas, Inc.; United States
District Court, Northern District of Texas, Dallas Division
This is an action where the Company and other operators of adult cabarets
within the City of Dallas are contesting the constitutionality of certain
provisions of the Dallas Sexually Oriented Business Ordinance (the
"Ordinance") which impacts the Company's and other operators' license to do
business as an adult cabaret in Dallas. The Company is of the opinion that
it will prevail on its constitutional claims. In January, 2001, as a result
of a trial setting, the City of Dallas has agreed to re-write the contested
provisions of the Ordinance, so any impact, if any, on the operations of
the Company, will not be known until October 2002. However, the Company
reasonably believes that the Ordinance will be amended so as to have no
material adverse impact on the Company's future operations. There can be no
assurance that the City of Dallas will in fact amend the Ordinance to an
extent that the Ordinance will not have any material adverse effect on the
Company's business operations or that in the future the City of Dallas will
modify the Ordinance to an extent that the Ordinance will not have any
material adverse effect on the Company's business operations.
The Company may from time to time be a party to various other legal actions
arising in the ordinary course of its business. The Company is not currently
involved in any such actions that it believes will have a material adverse
effect on its results of operations or financial condition.
Item 2 - Changes in Securities
None
Item 3 - Defaults on Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
The Company has held no regularly scheduled, called or special meetings of
shareholders during the reporting period.
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
Exhibits
--------
99.1 CEO/CFO Certification Pursuant to 18 USC, Section 1330, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Reports on Form 8-K
-------------------
None
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Million Dollar Saloon, Inc.
Dated: November 4, 2002 /s/ Nick Mehmeti
---------------- ---------------------------
Nick Mehmeti
Chief Executive Officer,
Chief Financial Officer
and Director
15