UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
- --------------------------------------------------------------------------------
(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, 2003
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
(Address of principal executive offices)
(214) 691-6757
(Issuer's telephone number)
- --------------------------------------------------------------------------------
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 17, 2003: 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, 2003
Table of Contents
Page
----
Part I - Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 14
Item 3 Controls and Procedures 16
Part II - Other Information
Item 1 Legal Proceedings 16
Item 2 Changes in Securities 16
Item 3 Defaults Upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 5 Other Information 17
Item 6 Exhibits and Reports on Form 8-K 17
Signatures 17
2
Part I
Item 1 - Financial Statements
Million Dollar Saloon, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2003 and 2002
(Unaudited)
September 30, September 30,
2003 2002
------------- -------------
ASSETS
Current Assets
Cash on hand and in bank $ 131,652 $ 1,089,750
Marketable securities 385,270 --
Accounts receivable
Trade 133,770 92,867
Prepaid income taxes 16,450 --
Inventory 34,377 21,903
Prepaid expenses 142,830 98,629
------------- -------------
Total current assets 844,349 1,303,149
------------- -------------
Property and Equipment - At Cost
Buildings and related improvements 2,096,714 2,017,514
Furniture and equipment 889,699 867,452
------------- -------------
2,986,413 2,884,966
Less accumulated depreciation (1,953,623) (1,878,702)
------------- -------------
1,032,790 1,029,174
Land 741,488 741,488
------------- -------------
Net property and equipment 1,774,278 1,747,752
------------- -------------
Other Assets
Land held for future development 2,649,786 --
Deposits and other 1,725 4,725
------------- -------------
Total other assets 2,651,511 4,725
------------- -------------
Total Assets $ 5,247,475 $ 3,055,626
============= =============
- Continued -
The consolidated 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
consolidated financial statements.
3
Million Dollar Saloon, Inc. and Subsidiaries
Consolidated Balance Sheets - Continued
September 30, 2003 and 2002
(Unaudited)
September 30, September 30,
2003 2002
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Note payable $ 2,156,714 $ --
Loan from officer 140,000 --
Accounts payable - trade 23,734 12,885
Accrued liabilities 61,825 42,260
Federal income taxes payable -- 116,014
Tenant deposits 6,500 6,500
------------- -------------
Total current liabilities 2,388,773 177,659
------------- -------------
Long-Term Liabilities
Deferred tax liability 288,916 134,524
------------- -------------
Total liabilities 2,677,689 312,183
------------- -------------
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 shares issued and outstanding 5,732 5,732
Retained earnings 2,564,054 2,737,711
------------- -------------
Total shareholders' equity 2,569,786 2,743,443
------------- -------------
Total Liabilities and Shareholders' Equity $ 5,247,475 $ 3,055,626
============= =============
The consolidated 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
consolidated financial statements.
4
Million Dollar Saloon, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
Nine and Three months ended September 30, 2003 and 2002
(Unaudited)
Nine months Nine months Three months Three months
ended ended ended ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Revenues
Bar and restaurant sales $ 2,541,912 $ 2,699,352 $ 835,416 $ 885,893
Rental income 442,959 424,920 126,050 127,775
------------- ------------- ------------- -------------
Total revenues 2,984,871 3,124,272 961,466 993,668
------------- ------------- ------------- -------------
Cost of Sales - Bar and
Restaurant Operations 1,465,881 1,694,772 507,383 581,955
------------- ------------- ------------- -------------
Gross Profit 1,518,990 1,429,500 454,083 411,713
------------- ------------- ------------- -------------
Operating Expenses
General and administrative expenses 1,274,853 993,437 458,133 350,717
Interest 110,106 207 44,052 207
Depreciation and amortization 68,042 68,721 22,663 22,907
------------- ------------- ------------- -------------
Total operating expenses 1,453,001 1,062,365 524,848 362,486
------------- ------------- ------------- -------------
Income (Loss) from Operations 65,989 367,135 (70,765) 37,882
Other Income (Expenses)
Interest and other miscellaneous 12,640 6,590 4,773 (3,647)
Unrealized gain on marketable securities 6,462 -- -- --
------------- ------------- ------------- -------------
Income (Loss) before Income Taxes 85 091 373,725 (65,992) 34,235
Income Tax (Expense) Benefit
Currently payable (20,000) (126,000) 35,000 (33,428)
Deferred -- -- -- --
------------- ------------- ------------- -------------
Net Income (Loss) 65,091 247,725 (30,992) 807
Other Comprehensive Income -- -- -- --
------------- ------------- ------------- -------------
Comprehensive Income (Loss) $ 65,091 $ 247,725 $ (30,992) $ 807
============= ============= ============= =============
Earnings per share of common stock
outstanding, computed on net income
- basic and fully diluted $ 0.01 $ 0.04 $ (0.01) nil
============= ============= ============= =============
Weighted-average number
of shares outstanding 5,731,778 5,731,778 5,731,778 5,731,778
============= ============= ============= =============
The consolidated 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
consolidated financial statements.
5
Million Dollar Saloon, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended September 30, 2003 and 2002
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
2003 2002
------------- -------------
Cash Flows from Operating Activities
Net income $ 65,091 $ 247,725
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 68,042 68,721
Unrealized loss on marketable securities (6,462) --
(Increase) decrease in
Accounts receivable - trade and other (65,242) (36,001)
Inventory 13,710 --
Prepaid expenses (99,087) (98,626)
Increase (decrease) in
Accounts payable and other liabilities (229,532) (69,982)
Federal income taxes payable (14,950) 41,614
Unearned revenues (9,500) --
------------- -------------
Net cash provided by operating activities (277,930) 150,965
------------- -------------
Cash Flows from Investing Activities
Purchases of property and equipment (8,788) --
Cash paid for land held for future development (493,072) --
------------- -------------
Net cash used in investing activities (501,860) --
------------- -------------
Cash Flows from Financing Activities
Cash received on note payable to officer 140,000 --
Cash paid for marketable securities (11,715) --
------------- -------------
Net cash provided by financing activities 128,285 --
------------- -------------
Increase in Cash and Cash Equivalents (651,505) 150,965
Cash at beginning of period 783,157 938,785
------------- -------------
Cash at end of period $ 131,652 $ 1,089,750
============= =============
Supplemental Disclosures of Interest and Income Taxes Paid
Interest paid during the period $ 110,106 $ --
============= =============
Income taxes paid (refunded) $ 34,950 $ --
============= =============
The consolidated 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
consolidated financial statements.
6
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.
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.
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
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, 2002. 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, 2003
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 nine months ended September 30, 2003 and 2002, respectively. All significant
intercompany transactions have been eliminated in combination. The consolidated
entities are referred to as Company.
7
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
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. Marketable Securities
---------------------
Investments in the equity securities of other companies, including mutual
fund investments, that have readily determinable fair values (as defined in
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115) are
classified, at the date of acquisition, into three categories and accounted
for as follows:
Trading Securities - Equity securities that are bought and held principally
for the purpose of selling them in the near term are reported at fair
value. Unrealized gains and losses are included in earnings.
Available-for-Sale Securities - Equity securities not classified in other
categories are reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of
shareholders' equity.
Held-to-Maturity Securities - Equity securities that the Company has the
positive intent and ability to hold to maturity are reported at amortized
cost.
Other investments that do not have a readily determinable fair value are
recorded at amortized cost.
The Company evaluates the carrying value of all marketable securities
classified as "held-to-maturity" or "other investments that do not have a
readily determinable fair value" on a quarterly basis in accordance with
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Any permanent impairment, if
any, is charged to operations in the quarter in which the determination of
impairment is made.
For purposes of computing realized gains and losses, the specific
identification method is used.
3. 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.
Since December 31, 2000, all lessors of Company rental property are
entities controlled by a Company controlling shareholder, officer and
director. All lease rental payments are due in advance on the first day of
the week for that week. All revenue sources are located either in Dallas or
Tarrant County, Texas.
8
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
NOTE C - Summary of Significant Accounting Policies - Continued
3. Accounts Receivable and Revenue Recognition - continued
-------------------------------------------
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.
4. 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.
5. 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.
6. 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.
On December 31, 2002, in accordance with Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", Management reflected an impairment equivalent to 100% of the
unamortized balance (approximately $2,250) against the carrying value of
this asset.
7. 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.
9
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
NOTE C - Summary of Significant Accounting Policies - Continued
8. 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, 2003 and 2002,
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.
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 months ended September 30, 2003 and 2002,
respectively, the various operating companies had deposits in financial
institutions with credit risk exposures in excess of statutory FDIC coverage.
The Company has incurred no losses during 2003 and 2002 as a result of any of
these unsecured situations.
NOTE F - Marketable Securities
Marketable securities as of September 30, 2003 consist entirely of an investment
in a money market instrument-based mutual funds and are summarized as follows:
Available Held to
Trading for sale Maturity
--------- --------- -----------
Aggregate fair value $ 378,808 $ -- $ --
Gross unrealized holding gains $ 6,462 $ -- $ --
Gross unrealized holding losses $ -- $ -- $ --
Amortized cost basis $ 385,270 $ -- $ --
The net unrealized holding gains and losses on trading securities which have
been included in the statement of operations were approximately $6,462 for the
nine months ended September 30, 2003.
10
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
NOTE G - Property and Equipment
Property and equipment consists of the following at September 30, 2003 and 2002,
respectively.
September 30, September 30,
2003 2002 Estimated life
------------- ------------- --------------
Buildings and related improvements 2,096,714 2,017,514 15-40 years
Furniture and equipment 889,699 867,452 5-10 years
------------- -------------
2,986,413 2,884,966
Less accumulated depreciation (1,953,623) (1,878,702)
------------- -------------
1,032,790 1,029,174
Land 741,488 741,488
------------- -------------
Net property and equipment $ 1,774,278 $ 1,747,752
============= =============
Depreciation expense for the nine months ended September 30, 2003 and 2002 was
approximately $68,042 and $68,721, respectively.
NOTE H - Land Held for Future Development
Note Payable
Loan from Officer
On February 14, 2003, the Company purchased 6.695 acres of undeveloped property
located in Dallas, Texas. The purchase price was approximately $2,650,312,
including closing expenses of approximately $53,599.
The Company paid $493,072 cash, inclusive of a $140,000 loan to the Company from
Duncan Burch, an officer and director of the Company, and issued to the seller a
one-year note in the principal amount of $2,156,713 with 8% annual interest. The
payment of the note is secured with a lien against the property granted to the
note holder by the Company. The interest on the note is payable monthly
(approximately $14,678 per month) beginning April 1, 2003 with the principal
amount due and payable on February 1, 2004.
The Company will be required to pay approximately $132,000 during Calendar 2003
to service this debt.
The property is undeveloped and suitable for commercial development. Although
the Company has not determined the usage of the land, the Company may use a
portion of the land for an adult cabaret and sell the remaining undeveloped
property to a third party. The development of the property will be subject to
the Company obtaining a construction loan. The Company does not currently know
the amount of the loan it will need to develop this property or whether it will
be able to obtain a sufficient loan for development of the property or, if
obtained, whether the terms of the loan will be favorable to the Company.
The Company intends to seek long-term financing for the purchased property
before the principal note is due in February 2004. If the Company is unable to
obtain long-term financing, the Company may have to sell the property to pay the
note. There can be no assurance that the property can be sold for the total
amount of the note. The sale of the property for less than the Company's
purchase price will result in a loss which may materially impact the Company's
future financial condition and results of operations.
11
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
NOTE H - Income Taxes
The components of income tax expense (benefit) for the nine months ended
September 30, 2003 and 2002, respectively, are as follows:
Nine months Nine months
ended ended
September 30, September 30,
2003 2002
------------- -------------
Federal:
Current $ 20,000 $ 126,000
Deferred -- --
------------- -------------
20,000 126,000
------------- -------------
State:
Current -- --
Deferred -- --
------------- -------------
-- --
------------- -------------
Total $ 20,000 $ 126,000
============= =============
The Company's income tax expense (benefit) for the nine months ended September
30, 2003 and 2002, respectively, differed from the statutory federal rate of 34
percent as follows:
Nine months Nine months
ended ended
September 30, September 30,
2003 2002
------------- -------------
Statutory rate applied to earnings before income taxes $ 22,000 $ 127,100
Increase (decrease) in income taxes resulting from:
State income taxes -- --
Deferred income taxes -- --
Estimated proposed adjustments on IRS audit
of prior years returns -- (21,000)
Effect of incremental tax brackets and the
application of business tax credits (2,000) 19,900
------------- -------------
Income tax expense $ 20,000 $ 126,000
============= =============
The deferred current tax asset and non-current deferred tax liability on
September 30, 2003 and 2002 balance sheets, respectively, consist of the
following:
September 30, September 30,
2003 2002
------------- -------------
Non-current deferred tax liability $ (288,916) $ (133,101)
============= =============
The non-current deferred tax liability results from the usage of statutory
accelerated tax depreciation and amortization methods.
12
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
NOTE I - 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, 2003, no shares of common stock have been issued in accordance with the
"second closing" portion of the Agreement.
NOTE J - 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, 2002, future minimum non-cancellable lease revenues
are as follows:
Year ending
December 31, Amount
------------ --------
2003 $169,750
========
NOTE K - 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, 2003 and 2002, respectively, all rental
revenues are derived from entities controlled by a Company controlling
shareholder, officer and director. Approximately 13.8% and 16.5% of total
revenues for Calendar 2002 and 2001, respectively, came from related parties.
Restaurant Rental General and
facility real estate administrative Total
-------------- -------------- -------------- --------------
Nine months ended September 30, 2003
- ------------------------------------
Revenue from external customers $ 2,541,912 $ -- $ -- $ 2,541,912
Revenue from related parties -- 442,959 -- 442,959
Revenue (expenses) from/to
intercompany sources (180,000) (326,000) 506,000 --
Interest income -- 893 11,747 12,640
Interest expense -- -- 110,106 110,106
Depreciation and amortization 23,785 56,004 -- 68,042
Income tax expense (benefit) (8,100) 22,000 6,100 20,000
Segment assets 423,078 1,868,171 2,956,226 5,247,475
Fixed asset expenditures 8,788 -- 2,649,786 2,658,574
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 -- -- -- --
13
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
(6) 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.
(7) Results of Operations
Nine months ended September 30, 2003 as compared to Nine months ended September
- --------------------------------------------------------------------------------
30, 2002
- --------
Bar and restaurant sales declined by approximately $157,000 (or 5.82)% in the
nine months ended September 30, 2003. Bar and restaurant sales were
approximately $2,542,000 for the nine months ended September 30, 2003 as
compared to approximately $2,699,000 in the comparable period of 2002. The
decrease was attributable to overall fluctuations in visitor traffic to the
Dallas-Ft. Worth Metroplex and local patronage. While the Company's facility
holds a valid "sexually oriented business" license issued by the City of Dallas,
Texas; the City of Dallas, Texas continues to pursue enforcement of its Sexually
Oriented Business Ordinance. This Ordinance restricts the attire and dancing
activities at the Company's Million Dollar Saloon, and other local adult
cabarets, which has resulted in a decrease in patron attendance at the Company's
facilities.
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 by approximately $18,000 to approximately
$443,000 for the first nine months of 2003 as compared to approximately $425,000
in the same period of Calendar 2002. All of the leases are with 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, a Company
subsidiary. 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 provided that the Company, as landlord, shall receive 10% of
the gross revenues generated from the business located at the property, payable
quarterly. Since the scheduled expiration of this lease in May 2002, the lessee
has been on a month-to-month basis at the same rental rate. As of September 30,
2003, the Company is due approximately $134,000 in additional rents over and
above the required weekly payment as calculated on the gross sales of the
related party tenant. As a part of the settlement with the City of Dallas
related to the location and operation of sexually oriented businesses, the
tenant of the Corporation Lex property ceased operations on July 31, 2003. The
tenant also cancelled the month-to-month lease as of that date. At the present
time, this property is vacant and available for lease. Management is uncertain
of the future use or ability to obtain a suitable tenant on this property.
14
Cost of sales decreased to approximately $1,466,000 for the nine months ended
September 30, 2003 as compared to approximately $1,695,000 for the same nine
month period of 2002. Gross profit percentages remain relatively constant at
50.89% (approximately $1,519,000) for the nine months ended September 30, 2003
versus 45.75% (approximately $1,430,000) for the nine months ended September 30,
2002. Fluctuations in the Company's gross profit percentages react to and
parallel the key areas of management focus for cost of sales expenditure control
- - principally personnel staffing levels and food and beverage costs. These
areas, specifically cost controls over purchasing, inventory management
protocols and labor management, are continuously monitored to maintain the
Company's gross profit percentages.
General and administrative expenses were approximately $1,275,000 for the first
nine months ended September 30, 2003 as compared to approximately $993,000 for
the comparable nine month period of 2002. The increase was attributable to
increased professional fees for investigation of possible business acquisition
targets and increased legal expenses as a result of ongoing litigation and
issues related to the City of Dallas Sexually Oriented Business Ordinance.
Further, the Company experienced increases in executive compensation during 2002
which continue into 2003. The Company anticipates relatively constant
expenditure levels for general operating expenses in future periods and
management continues to monitor its expenditure levels to achieve optimum
financial results.
Net income before income taxes was approximately $85,000 for the first nine
months ended September 30, 2003 versus approximately $374,000 for the first nine
months ended September 30, 2002. After-tax net income decreased by approximately
$86,000 from approximately $248,000 for the first nine months ended September
30, 2002 to approximately $65,000 for the same period in Calendar 2003. The
Company experienced earnings per share of approximately $0.01 and $0.04 per
share for each of the respective nine month periods ended September 30, 2003 and
2002, respectively.
As a general rule, the Company's adult cabaret operations experience
unpredictable fluctuations as a result of the overall discretionary spending
habits related to the U. S. economy, visitation levels related to visitor,
convention and business travel levels and impacts related to the City of Dallas'
various enforcement actions and on-premises monitoring of entertainer conduct.
Management makes it's best efforts to timely adjust its expenditure levels to
these events as they occur in order to maintain profitability.
(3) Liquidity
As of September 30, 2003, the Company has working capital of approximately
($1,444,000) as compared to approximately $981,000 at December 31, 2002 and
approximately $1,125,000 at September 30, 2002. The Company achieved positive
(negative) cash flows from operations of approximately $(278,000) for the first
nine months of 2003 versus approximately $151,000 for the first nine months of
Calendar 2002. The deterioration of the Company's working capital is directly
related to the note payable given to acquire land held for future development
which matures in February 2004.
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.
At September 30, 2003, the Company is due approximately $134,000 in accrued
percentage rent from an entity owned by a controlling shareholder of the Company
on the Corporation Lex property. At this time, it is uncertain if the related
party will pay the Company the funds due under the modified lease agreement, as
discussed in previous sections. In the event this amount is not paid, the
Company will realize a charge to operations equal to the accrued amount for the
related party bad debt expense.
(4) Capital Resources
On February 14, 2003, the Company purchased 6.695 acres of undeveloped property
located in Dallas, Texas. The purchase price was approximately $2,650,312,
including closing expenses of approximately $53,599.
The Company paid $493,072 cash, inclusive of a $140,000 loan to the Company from
Duncan Burch, an officer and director of the Company, and issued to the seller a
one-year note in the principal amount of $2,156,713 with 8% annual interest. The
payment of the note is secured with a lien against the property granted to the
note holder by the Company.
15
The interest on the note is payable monthly (approximately $14,678 per month)
beginning April 1, 2003 with the principal amount due and payable on February 1,
2004.
The Company will be required to pay approximately $132,000 during Calendar 2003
to service this debt.
The property is undeveloped and suitable for commercial development. Although
the Company has not determined the usage of the land, the Company may use a
portion of the land for an adult cabaret and sell the remaining undeveloped
property to a third party. The development of the property will be subject to
the Company obtaining a construction loan. The Company does not currently know
the amount of the loan it will need to develop this property or whether it will
be able to obtain a sufficient loan for development of the property or, if
obtained, whether the terms of the loan will be favorable to the Company.
The Company intends to seek long-term financing for the purchased property
before the principal note is due in February 2004. If the Company is unable to
obtain long-term financing, the Company may have to sell the property to pay the
note. There can be no assurance that the property can be sold for the total
amount of the note. The sale of the property for less than the Company's
purchase price will result in a loss which may materially impact the Company's
future financial condition and results of operations.
The Company has identified no other significant capital requirements for 2003,
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.
Item 3 - Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to
the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's management, including the Company's
President, Chief Executive and Chief Financial Officer. Based upon that
evaluation, the Company's President, Chief Executive and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls or in
other factors, which could significantly affect internal controls subsequent to
the date the Company carried out its evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive and Chief Financial Officer as appropriate, to allow timely decisions
regarding required disclosure.
Part II - Other Information
Item 1 - Legal Proceedings
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 and believes any, if any, future events should not
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.
16
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
Exhibits
- --------
31.1 Certifications Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1 Certifications Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
Reports on Form 8-K
- -------------------
None
- --------------------------------------------------------------------------------
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 17, 2003 /s/ Nick Mehmeti
----------------- ---------------------------
Nick Mehmeti
Chief Operating Officer
and Director
17