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 June 30, 2004
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)
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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: August 7, 2004: 5,731,778
-------------------------
Transitional Small Business Disclosure Format (check one): YES NO X
--- ---
Million Dollar Saloon, Inc.
Form 10-QSB for the Quarter ended June 30, 2004
Table of Contents
Page
----
Part I - Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 15
Item 3 Controls and Procedures 18
Part II - Other Information
Item 1 Legal Proceedings 18
Item 2 Changes in Securities 19
Item 3 Defaults Upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6 Exhibits and Reports on Form 8-K 19
Signatures 19
2
Part I
Item 1 - Financial Statements
Million Dollar Saloon, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2004 and 2003
(Unaudited)
June 30, 2004 June 30, 2003
------------- -------------
ASSETS
------
Current Assets
Cash on hand and in bank $ 385,763 $ 227,480
Marketable securities 42,890 380,512
Accounts receivable - trade 8,500 133,770
Federal income tax refunds receivable 145,000 --
Inventory 34,377 34,377
Prepaid expenses 73,740 109,687
------------- -------------
Total current assets 690,270 885,826
------------- -------------
Property and Equipment - At Cost
Buildings and related improvements 2,095,915 2,096,714
Furniture and equipment 891,149 889,699
------------- -------------
2,987,064 2,986,413
Less accumulated depreciation (2,048,174) (1,953,623)
------------- -------------
938,890 1,032,790
Land 741,488 741,488
------------- -------------
Net property and equipment 1,680,378 1,774,278
------------- -------------
Other Assets
Land held for future development 2,649,786 2,649,786
Deposits and other 1,725 1,725
------------- -------------
Total other assets 2,651,511 2,651,511
------------- -------------
Total Assets $ 5,022,159 $ 5,311,615
============= =============
- 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
June 30, 2004 and 2003
(Unaudited)
June 30, 2004 June 30, 2003
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities
Note payable $ -- $ 2,156,714
Current maturities of long-term mortgage note payable 62,421 --
Loan from officer -- 140,000
Accounts payable - trade 14,609 35,259
Accrued liabilities 49,559 49,954
Federal income taxes payable 160,000 33,494
Tenant deposits 6,500 6,500
------------- -------------
Total current liabilities 293,089 2,421,921
------------- -------------
Long-Term Liabilities
Long-term mortgage note payable, net of current maturities 1,834,783 --
Deferred tax liability 281,062 288,916
------------- -------------
Total liabilities 2,408,934 2,710,837
------------- -------------
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 2,607,493 2,595,046
------------- -------------
Total shareholders' equity 2,613,225 2,600,778
------------- -------------
Total Liabilities and Shareholders' Equity $ 5,022,159 $ 5,311,615
============= =============
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)
Six and Three months ended June 30, 2004 and 2003
(Unaudited)
Six months Six months Three months Three months
ended ended ended ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------- ------------- ------------- -------------
Revenues
Bar and restaurant sales $ 1,998,474 $ 1,706,496 $ 951,986 $ 838,764
Rental income 237,113 316,909 110,500 155,755
------------- ------------- ------------- -------------
Total revenues 2,235,587 2,023,405 1,062,486 994,539
------------- ------------- ------------- -------------
Cost of Sales - Bar and
Restaurant Operations 1,054,285 958,498 507,630 481,634
------------- ------------- ------------- -------------
Gross Profit 1,181,302 1,064,907 554,856 512,905
------------- ------------- ------------- -------------
Operating Expenses
General and administrative expenses 651,992 882,774 411,127 509,979
Depreciation and amortization 43,532 45,379 21,692 22,699
------------- ------------- ------------- -------------
Total operating expenses 695,524 928,153 432,819 532,678
------------- ------------- ------------- -------------
Income (Loss) from Operations 485,778 136,754 122,037 (19,773)
Other Income (Expenses)
Interest and other miscellaneous 2,969 7,867 376 3,436
Unrealized gain on marketable securities -- 6,462 -- --
------------- ------------- ------------- -------------
Income (Loss) before Income Taxes 488,747 151,083 122,413 (11,384)
Income Tax (Expense) Benefit
Currently payable (160,000) (55,000) (45,646) --
Deferred -- -- -- --
------------- ------------- ------------- -------------
Net Income (Loss) 328,747 96,083 76,767 (11,384)
Other Comprehensive Income -- -- -- --
------------- ------------- ------------- -------------
Comprehensive Income (Loss) $ 328,747 $ 96,083 $ 76,767 $ (11,384)
============= ============= ============= =============
Earnings per share of common stock
outstanding, computed on net income
- basic and fully diluted $ 0.06 $ 0.02 $ 0.01 $ 0.00
============= ============= ============= =============
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
Six months ended June 30, 2004 and 2003
(Unaudited)
Six months Six months
ended ended
June 30, 2004 June 30, 2003
------------- -------------
Cash Flows from Operating Activities
Net income $ 328,747 $ 96,083
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 43,532 45,379
Unrealized loss on marketable securities -- (6,462)
(Increase) decrease in
Accounts receivable - trade and other -- (65,242)
Inventory (9,025) 13,710
Prepaid expenses (70,200) (65,944)
Increase (decrease) in
Accounts payable and other liabilities (147,641) (229,877)
Federal income taxes payable 160,000 34,994
Unearned revenues -- (9,500)
------------- -------------
Net cash provided by operating activities 305,413 (186,859)
------------- -------------
Cash Flows from Investing Activities
Purchases of property and equipment -- (8,789)
Cash received from sale of marketable securities 347,029 --
Cash paid for land held for future development -- (493,072)
------------- -------------
Net cash used in investing activities 347,029 (501,861)
------------- -------------
Cash Flows from Financing Activities
Principal paid on long-term mortgage note payable (259,210) --
Cash received on note payable to officer (140,000) 140,000
Cash paid for marketable securities -- (6,957)
------------- -------------
Net cash provided by financing activities (399,510) 133,043
------------- -------------
Increase in Cash and Cash Equivalents 252,932 (555,677)
Cash at beginning of period 132,831 783,157
------------- -------------
Cash at end of period $ 385,763 $ 227,480
============= =============
Supplemental Disclosures of Interest and Income Taxes Paid
Interest paid during the period $ 52,816 $ 20,006
============= =============
Income taxes paid (refunded) $ -- $ --
============= =============
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, 2003. 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, 2004.
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 six and three months ended June 30, 2004 and 2003, 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. 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) available to common shareholders by the weighted-average number of
common shares outstanding during the respective period presented in our
accompanying financial statements. Fully diluted earnings (loss) per share
is computed similar to basic income (loss) per share except that the
denominator is increased to include the number of 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, at either the
beginning of the respective period presented or the date of issuance,
whichever is later, and only if the common stock equivalents are considered
dilutive based upon the Company's net income (loss) position at the
calculation date.
At June 30, 2004 and 2003, the Company had no common stock equivalents
outstanding.
NOTE D - Related Party Transactions
Since a change in majority shareholders of the Company in 2000, the rental
properties of Corporation Lex and Don, Inc. have been subject to leases with
entities controlled by Duncan Burch, an officer, director and controlling
shareholder of the Company. These respective leases were in place prior to the
2000 change in control.
9
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
NOTE D - Related Party Transactions - Continued
In October 2002, Duncan Burch, Nick Mehmeti (officers and directors of the
Company) and certain of their affiliated businesses (the "Clubs") entered into a
Compromise Settlement Agreement and Mutual Releases (the "Settlement Agreement")
with the City of Dallas to settle pending litigation, claims and disputes
between the parties arising out of the operation of the Clubs in alleged
violation of the Dallas City Code, including the Sexually Oriented Business
Ordinance. The Settlement Agreement did not involve the Company's Million Dollar
Saloon nor did the Settlement Agreement affect the operation of the Million
Dollar Saloon.
However, the Settlement Agreement did affect the usage of the Company's property
owned by Corporation Lex, which was subject to a month-to-month basis. In
accordance with the Settlement Agreement, lessee agreed to terminate the
operation of the adult cabaret business at the Corporation Lex property by July
31, 2003. The entity controlled by Duncan Burch concurrently tendered notice to
the Company that the associated lease would be terminated on July 31, 2003 as a
result of this action.
The Company and its subsidiary, Corporation Lex, signed the Settlement Agreement
for a limited purpose. The Company and Corporation Lex are not bound by the
terms of the Settlement Agreement except that Corporation Lex has agreed it will
not allow the Clubs to use the property, as or in support of, a sexually
oriented business, dance hall, business featuring exotic striptease, business
featuring scantily clad employees, individuals or performers, any business
featuring individuals, employees, licensees, or independent contractors
displaying specified anatomical areas or engaging in specified sexual
activities, or operation by the Clubs of a business in any other manner
circumventing or frustrating, or intending to circumvent or frustrate the intent
of Chapter 41A and 51A of the Dallas City Code. The Company and/or Corporation
Lex may lease the premises for any other lawful purpose.
Since January 1, 2001, the renegotiated lease between Corporation Lex and the
entity controlled by Duncan Burch contained a percentage rent clause whereby
Corporation Lex would receive a base rental equal to 10% of the gross revenues
generated from the business located at the property, less State Liquor and State
Sales Taxes, payable quarterly, with a minimum weekly payment of $1,000 which
will be credited against the quarterly percentage rent due. The minimum weekly
rent payment shall not be less than $1,000 per week. During Calendar 2003 and
2002, approximately $31,000 and $52,000 of lease payments were received by the
Company for this property.
In March 2004, the Company received the required supporting documentation from
the lessee to validate the percentage rents due for Calendar 2002 and through
July 31, 2003, which caused a significant upward revision of our estimate for
amounts due in Calendar 2002, which was adjusted during the 4th quarter of
Calendar 2003. As of July 31, 2003, the lessee owed percentage rent as follows:
Year ended
December 31, Amount due
------------ ----------
2001 $ 42,952
2002 98,000
2003 107,513
----------
$ 248,465
==========
In December 31, 2003, the Company's Board of Directors accepted notice from the
lessee, controlled by Duncan Burch, an officer, director and controlling
shareholder, that the percentage rent due to the Company would not be paid.
Accordingly, the Company recognized a charge to operations of approximately
$248,465 as bad debt expense from uncollectible trade accounts receivable on
December 31, 2003.
The property owned by Don, Inc. is also subject to a lease with a separate
entity controlled by Duncan Burch, an officer, director and controlling
shareholder of the Company. This lease expired in August 2003 and is being
continued on a month-to-month basis at the final contractual rental rate of
approximately $8,500 per week. The lessee has not indicated to the Company
whether a new long-term lease will be negotiated on this property.
10
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
NOTE D - Related Party Transactions - Continued
On February 14, 2003, Duncan Burch advanced the Company $140,000 for use in
closing the acquisition of certain property being held for future development.
This advance was non-interest bearing and due upon demand. On January 29, 2004,
the Company refinanced the subject property and repaid Mr. Burch the entire
$140,000 at closing of the refinancing.
NOTE E - 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 F - 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 six months ended June 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 Calendar 2002, Calendar 2003 and through June 30, 2004
as a result of any of these unsecured situations.
NOTE G - Marketable Securities
Marketable securities as of June 30, 2004 and 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
--------- --------- ---------
June 30, 2004
Aggregate fair value $ 42,890 $ -- $ --
Gross unrealized holding gains $ -- $ -- $ --
Gross unrealized holding losses $ -- $ -- $ --
Amortized cost basis $ 42,890 $ -- $ --
June 30, 2003
Aggregate fair value $ 374,050 $ -- $ --
Gross unrealized holding gains $ 6,462 $ -- $ --
Gross unrealized holding losses $ -- $ -- $ --
Amortized cost basis $ 380,512 $ -- $ --
The net unrealized holding gains and losses on trading securities which have
been included in the statement of operations were approximately $-0- and $6,462
for the six months ended June 30, 2004 and 2003, respectively.
11
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
NOTE H - Property and Equipment
Property and equipment consists of the following at June 30, 2004 and 2003,
respectively.
June 30, June 30,
2004 2003 Estimated life
----------- ----------- --------------
Buildings and related improvements $ 2,095,913 $ 2,096,714 15-40 years
Furniture and equipment 891,150 889,699 5-10 years
----------- -----------
2,987,063 2,986,413
Less accumulated depreciation (2,048,174) (1,953,623)
----------- -----------
938,889 1,032,790
Land 741,488 741,488
----------- -----------
Net property and equipment $ 1,680,377 $ 1,774,278
=========== ===========
Depreciation expense for the six months ended June 30, 2004 and 2003 was
approximately $43,532 and $45,379, respectively.
NOTE I - Land Held for Future Development
Note Payable
Loan from Officer
Long-term Mortgage Note Payable
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 paid approximately $153,800 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.
On January 29, 2004, the Company obtained permanent long-term financing to
retire the $2,156,713 note payable issued at the initial closing. The new note
is for a principal balance of $2,000,000 and bears interest at 6.50% for the
first year and then adjusts to 1.0% above the Wall Street Journal published
prime rate, rounded to the nearest 0.125%. The interest rate adjusts every 12th
month, commencing on January 29, 2005. The new note requires payments of
principal and accrued interest in the amount of approximately $17,426 monthly,
commencing on February 29, 2004. As this is a variable interest rate note, the
payments may change after the 12th payment and after every succeeding 12th
payment. The new note matures on January 29, 2019. Further, the note is secured
by underlying land and the separate personal guaranty of each of the Company's
officers, directors and controlling shareholders; Duncan Burch and Nick Mehmeti.
12
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
NOTE J - Income Taxes
The components of income tax expense (benefit) for the six months ended June 30,
2004 and 2003, respectively, are as follows:
Six months Six months
ended ended
June 30, 2004 June 30, 2003
------------- -------------
Federal:
Current $ 160,000 $ 55,000
Deferred -- --
------------- -------------
160,000 55,000
------------- -------------
State:
Current -- --
Deferred -- --
------------- -------------
-- --
------------- -------------
Total $ 160,000 $ 55,000
============= =============
The Company's income tax expense (benefit) for the six months ended June 30,
2004 and 2003, respectively, differed from the statutory federal rate of 34
percent as follows:
Six months Six months
ended ended
June 30, 2004 June 30, 2003
------------- -------------
Statutory rate applied to earnings before income taxes $ 166,173 $ 51,368
Increase (decrease) in income taxes resulting from:
State income taxes -- --
Deferred income taxes -- --
Effect of incremental tax brackets and the
application of business tax credits (6,173) 3,632
------------- -------------
Income tax expense $ 160,000 $ 55,000
============= =============
The deferred current tax asset and non-current deferred tax liability on June
30, 2004 and 2003, respectively, balance sheet consists of the following:
June 30, June 30,
2004 2003
--------- ---------
Non-current deferred tax liability $(281,062) $(288,916)
========= =========
The non-current deferred tax liability results from the usage of statutory
accelerated tax depreciation and amortization methods.
NOTE K - 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 June 30,
2003, no shares of common stock have been issued in accordance with the "second
closing" portion of the Agreement.
13
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
NOTE L - Commitments
The rental property owned by Don, Inc. is subject to a lease with a separate
entity controlled by Duncan Burch, an officer, director and controlling
shareholder of the Company. This lease expired in August 2003 and is being
continued on a month-to-month basis at the final contractual rental rate of
approximately $8,500 per week. The lessee has not indicated to the Company
whether a new long-term lease will be negotiated on this property. The lessee is
also for normal maintenance and repairs, insurance and other direct operating
expenses related to the property.
NOTE M - 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 June 30, 2004 and 2003, respectively, all rental
revenues are derived from entities controlled by a Company controlling
shareholder, officer and director. Approximately 18.2 and 13.8% of total
revenues for Calendar 2003 and 2002, respectively, were derived from these
related parties.
Restaurant Rental General and
facility real estate administrative Total
-------------- -------------- -------------- --------------
Six months ended June 30, 2004
Revenue from external customers $ 1,998,474 $ -- $ -- $ 1,998,474
Revenue from related parties -- 237,113 -- 237,113
Revenue (expenses) from/to
intercompany sources (120,000) (127,868) 247,868 --
Interest income -- -- 2,969 2,696
Interest expense -- -- 52,816 52,816
Depreciation and amortization 14,028 29,504 -- 43,532
Income tax expense (benefit) 65,565 25,474 68,961 160,000
Segment assets 581,397 973,178 3,467,584 5,022,159
Fixed asset expenditures -- -- -- --
Six months ended June 30, 2003
Revenue from external customers $ 1,706,496 $ -- $ -- $ 1,706,496
Revenue from related parties -- 316,909 -- 316,909
Revenue (expenses) from/to
intercompany sources (120,000) (185,000) 305,000 --
Interest income -- 886 6,981 7,867
Interest expense -- -- 66,054 66,054
Depreciation and amortization 15,897 29,482 -- 45,379
Income tax expense (benefit) 28,220 22,210 4,570 55,000
Segment assets 494,037 1,780,968 3,036,610 5,311,615
Fixed asset expenditures 8,789 -- 2,649,786 2,658,575
14
Part I - Item 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(1) 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.
(2) Results of Operations
Six months ended June 30, 2004 as compared to six months ended June 30, 2003
- ----------------------------------------------------------------------------
Bar and restaurant sales increased by approximately $292,000 (or 17.1)% in the
six months ended June 30, 2004. Bar and restaurant sales were approximately
$1,998,500 for the six months ended June 30, 2004 as compared to approximately
$1,706,500 for the six months ended June 30, 2003. The increase over the
comparable period from the preceding year is directly attributable to overall
fluctuations in visitor traffic to the Dallas-Ft. Worth Metroplex during the
first quarter of Calendar 2004 and the effects of shifts in economic and ethnic
populations in the immediate geographical area of the Company's location. 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
vigorous 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 unpredictable
fluctuations in patron attendance at the Company's facilities.
The Company's operating location, when originally built, was in one of the
dynamic retail and entertainment corridors within the City of Dallas, Texas. At
the current time, the expansion of the City into other geographic areas has
contributed to a diversification of retail and entertainment districts within
the City. These newer areas have received better reception from the patronage
traffic than the Company's current location which has suffered from City neglect
in infrastructure maintenance, the introduction of economically depressed foot
traffic as a result of available mass transit facilities and a shift in economic
and ethnic population in the immediate vicinity of the Company's club.
While the City of Dallas' efforts against the Company's principal business
activity, the lack of efforts by the City of Dallas to maintain a degree of
economic and ethnic diversity and prosperity in the vicinity of the Company's
facility may contribute to further revenue deterioration in future periods.
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 decreased by approximately $80,000 to approximately
$237,000 for the six months ended June 30, 2004 as compared to approximately
$317,000 in the same period of Calendar 2003. All of the leases were/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
15
amendment to the lease agreement covering the property owned by Corporation Lex,
a Company subsidiary. The amendment provided that effective January 1, 2001, the
base rental was 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, less
State Liquor and State Sales Taxes, payable quarterly, with a minimum weekly
payment of $1,000 which will be credited against the quarterly percentage rent
due. During Calendar 2003 and 2002, approximately $31,000 and $52,000 of lease
payments were received by the Company for this property.
In March 2004, the Company received the required supporting documentation from
the lessee to validate the percentage rents due for Calendar 2002 and through
July 31, 2003. This previously unprovided information caused a significant
upward revision of our estimate for amounts due for percentage rent in Calendar
2002, which was recognized as a 4th quarter 2003 event in our financial
statements, given the events discussed in subsequent paragraphs. As of July 31,
2003, the lessee owed percentage rent as follows:
Year ended
December 31, Amount due
------------ ----------
2001 $ 42,952
2002 98,000
2003 107,513
----------
$ 248,465
==========
In December 2003, the Company's Board of Directors accepted notice from the
lessee, an entity controlled by Duncan Burch, an officer, director and
controlling shareholder, that the percentage rent due to the Company would not
be paid. Accordingly, the Company recognized a charge to operations on December
31, 2003 of approximately $248,465 as bad debt expense from uncollectible trade
accounts receivable.
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.
Our rental real estate owned by Don, Inc. is also subject to a lease with a
separate entity controlled by Duncan Burch, an officer, director and controlling
shareholder of the Company. This lease expired in August 2003 and is being
continued on a month-to-month basis at the final contractual rental rate of
approximately $8,500 per week..The Company has been advised that the tenant does
not intend to renew the Fort Worth lease with the current terms. Instead, the
tenant has requested to renegotiate the lease terms. As of the date of this
filing, no formal lease has been negotiated. There can be no assurance that the
Company will be able to obtain terms similar to the current lease or that tenant
will agree to the terms of a new lease.
Although the Company is seeking lease terms for both properties that are at
least comparable to terms for similar properties in the geographic area, there
can be no assurance that the Company will be able to renew its leases with
entities controlled by Mr. Burch or any other unaffiliated third-party, or if
renewed, that the terms of the leases will be as favorable to the Company as it
could have obtained from an unaffiliated party. The failure of the Company to
obtain long-term lease agreements with Mr. Burch, or other third parties, with
terms at least comparable to the existing lease arrangements will have a
material adverse effect on the revenues of the Company.
Cost of sales increased to approximately $1,054,000 for the six months ended
June 30, 2004 as compared to approximately $958,000 for the same period of 2003.
Gross profit percentages remain relatively constant at 52.84% (approximately
$1,181,000) for the six months ended June 30, 2004 versus 52.63% (approximately
$1,065,000) for the six months ended June 30, 2003. 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 $696,000 for the six
months ended June 30, 2004 as compared to approximately $883,000 for the
comparable period of 2002. The decrease was attributable to the lack of
expenditures related to professional fees for investigation of possible business
acquisition targets and 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 payments to our executive and operating officers have continued at
consistent levels as noted in our Form 10-KSB for the year ended December 31,
2003 through the current date. 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.
16
During 2003, the Company expended approximately $328,200 in legal and
professional fees (approximately $189,300 - legal and approximately $138,900 -
auditing) for due diligence procedures related to a proposed acquisition by the
Company of certain businesses and properties owned by Duncan Burch and Nick
Mehmeti, personally, or by entities owned or controlled by Mr. Burch or Mr.
Mehmeti. The Company has discontinued all activity related to this proposed
acquisition.
Net income before income taxes was approximately $489,000 for the six months
ended June 30, 2004 versus approximately $151,000 for the six months ended June
30, 2003. After-tax net income increased by approximately $233,000 from
approximately $96,000 for the six months ended June 30, 2003 to approximately
$329,000 for the same period ended June 30, 2004. The Company experienced
earnings per share of approximately $0.06 and $0.02 for each of the respective
six month periods ended June 30, 2004 and 2003, 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
and the condition of the surrounding environment as maintained and monitored by
the City of Dallas, Texas. 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 June 30, 2004, December 31, 2003 and June 30, 2003, the Company has
working capital of approximately $397,000, $347,000 and $621,000 (exclusive of a
note payable which was refinanced on January 29, 2004), respectively. The
Company achieved positive (negative) cash flows from operations of approximately
$305,000 and $(187,000) for the six months ended June 30, 2004 and 2003,
respectively, as compared to $(276,000) for the year ended December 31, 2003.
The deterioration of the Company's working capital is directly related to the
cash expended to acquire land for future development and for Calendar 2003
expenditures related to the abandoned acquisition efforts on facilities owned
and/or controlled by the Company's controlling shareholders; Duncan Burch and
Nick Mehmeti.
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.
On January 29, 2004, the Company refinanced the initial acquisition debt related
to land held for future development. The new permanent long-term financing
retired the entire initial short-term $2,156,713 note payable issued at the
initial closing. The new note is for a principal balance of $2,000,000 and bears
interest at 6.50% for the first year and then adjusts to 1.0% above the Wall
Street Journal published prime rate, rounded to the nearest 0.125%. The interest
rate adjusts every 12th month, commencing on January 29, 2005. The new note
requires payments of principal and accrued interest in the amount of
approximately $17,426 monthly, commencing on February 29, 2004. As this is a
variable interest rate note, the payments may change after the 12th payment and
after every succeeding 12th payment. The new note matures on January 29, 2019.
The long-term note is secured by underlying land and the separate personal
guaranty of each of the Company's officers, directors and controlling
shareholders; Duncan Burch and Nick Mehmeti.
(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
17
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 paid approximately $153,800 during Calendar 2003 to service the
initial short-term 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 has also paid an additional sum of approximately $366,000 at the
closing of the permanent long-term financing in January 2004.
The Company has identified no other significant capital requirements for 2004,
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.
The Company knows of no new accounting releases or pronouncements that will have
any impact upon the Company's financial statements upon adoption.
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
and Chief Executive Officer along with the Company's Chief Financial Officer.
Based upon that evaluation, the Company's President and Chief Executive Officer
along with the Company's 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 Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding required disclosure.
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 is contesting the constitutionality of
certain provisions of a Dallas Municipal Ordinance which impacts its
license to do business as an adult cabaret. The Company is of the opinion
that it will prevail on its constitutional claims. In August, 2001, the
City amended the contested provisions of the ordinance; however, there
still remain certain constitutional infirmities, and the Company is of the
opinion that the ordinance remains subject to constitutional challenge and
will have no adverse impact on the Company's operations. In March 2004, the
18
City agreed to further amend pertinent portions of the ordinance in an
attempt to resolve the constitutional infirmities. The case is not set for
trial.
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
--------
31.1 ertification pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32.1 Certification 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: August 7, 2004 /s/ Nick Mehmeti
-------------- ---------------------------
Nick Mehmeti
Chief Executive Officer,
Chief Financial Officer and
and Director
19