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 March 31, 2006
--- Transition Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to _____________
________________________________________________________________________________
Commission File Number: 0-27006
-------
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
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act): YES NO [X]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: August 18, 2008: 5,731,778
---------------------------
Transitional Small Business Disclosure Format (check one): YES NO [X]
Million Dollar Saloon, Inc.
Form 10-QSB for the Quarter ended March 31, 2006
Index
Page
Part I - Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 17
Item 3 Controls and Procedures 21
Part II - Other Information
Item 1 Legal Proceedings 21
Item 2 Recent Sales of Unregistered Securities and Use of Proceeds 23
Item 3 Defaults Upon Senior Securities 23
Item 4 Submission of Matters to a Vote of Security Holders 23
Item 5 Other Information 23
Item 6 Exhibits 23
Signatures 23
2
Part I
Item 1 - Financial Statements
Million Dollar Saloon, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2006 and 2005
(Unaudited)
March 31, March 31,
2006 2005
--------- ---------
ASSETS
------
Current Assets
Cash on hand and in bank $ 975,039 $ 793,068
Marketable securities 52,147 50,033
Federal income tax refund receivable 41,000 81,624
Inventory 17,305 23,321
Prepaid expenses 2,827 --
--------- ---------
Total current assets 1,096,818 965,046
--------- ---------
Property and Equipment - At Cost
Buildings and related improvements 1,526,424 1,473,356
Furniture and equipment 451,093 451,093
--------- ---------
1,977,517 1,924,449
Less accumulated depreciation (1,467,910) (1,385,540)
--------- ---------
509,607 538,909
Land 210,000 210,000
--------- ---------
Net property and equipment 719,607 748,909
--------- ---------
Other Assets
Land held for future development 2,661,546 2,661,546
Property and equipment held for sale 870,930 870,930
Operations agreement, net of accumulated
amortization of approximately $393,800 and
$211,940, respectively 606,200 788,640
Loan costs, net of accumulated amortization
of approximately $1,468 and $629, respectively 8,803 9,660
Security deposits and other 1,725 1,725
--------- ---------
Total other assets 4,149,204 4,331,921
--------- ---------
Total Assets $5,965,629 $6,045,876
========== ==========
- 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
3
Million Dollar Saloon, Inc. and Subsidiaries
Consolidated Balance Sheets - Continued
March 31, 2006 and 2005
(Unaudited)
March 31, March 31,
2006 2005
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities
Current maturities of long-term mortgage note payable $ 167,481 $ 86,552
Current maturities of long-term lawsuit settlement payable 70,550 62,202
Accounts payable - trade 13,944 15,211
Accrued liabilities 80,719 85,200
Contract payable to affiliated entities 1,000,000 1,000,000
Accrued interest payable to affiliated entities 233,333 153,333
Tenant deposits -- --
--------- ---------
Total current liabilities 1,566,027 1,402,498
--------- ---------
Long-Term Liabilities
Mortgage note payable - long-term portion 1,649,737 1,816,840
Lawsuit settlement payable - long-term portion 204,297 352,824
Deferred tax liability 243,618 264,876
--------- ---------
Total liabilities 3,663,679 3,837,038
--------- ---------
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 2,296,218 2,203,106
--------- ---------
Total shareholders' equity 2,301,950 2,208,838
--------- ---------
Total Liabilities and Shareholders' Equity $5,965,629 $6,045,876
========== ==========
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
4
Million Dollar Saloon, Inc. and Subsidiaries
Consolidated Statements of Income
Three months ended March 31, 2006 and 2005
(Unaudited)
Three months Three months
ended ended
March 31, March 31,
2006 2005
------------ ------------
Revenues
Bar and restaurant sales $ 757,137 $ 826,028
Rental income 102,000 110,500
------------ ------------
Total revenues 859,137 936,528
------------ ------------
Cost of Sales - Bar and Restaurant Operations 330,037 354,392
------------ ------------
Gross Profit 529,100 582,136
------------ ------------
Operating Expenses
General and administrative expenses 350,859 262,799
Depreciation and amortization 67,664 63,681
------------ ------------
Total operating expenses 418,523 326,480
------------ ------------
Income from Operations 110,577 255,656
Other Income (Expenses)
Interest and other miscellaneous 6,945 498
Lawsuit settlement -- (415,026)
------------ ------------
Income before Income Taxes 117,522 (158,872)
Income Tax (Expense) Benefit
Currently (payable) refundable (14,500) 45,300
Deferred -- --
------------ ------------
Net Income (Loss) 103,022 (113,572)
Other Comprehensive Income -- --
------------ ------------
Comprehensive Income $ 103,022 $(113,572)
============ ============
Earnings per share of common stock outstanding,
computed on net income - basic and fully diluted $ 0.02 $ (0.02)
============ ============
Weighted-average number of shares outstanding 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
5
Million Dollar Saloon, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three months ended March 31, 2006 and 2005
(Unaudited)
Three months Three months
ended ended
March 31, March 31,
2006 2005
------------ ------------
Cash Flows from Operating Activities
Net Income (Loss) $ 103,022 $ (113,672)
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 67,835 63,681
Unrealized loss on marketable securities (153) --
(Increase) decrease in
Accounts receivable - trade and other -- (8,500)
Income taxes receivable (32,375) (45,300)
Inventory 8,080 (2,105)
Prepaid expenses (1,881) 1,963
Increase (decrease) in
Accounts payable and other liabilities (25,329) 399,891
Lawsuit settlement payable (72,500) --
Accrued interest payable to affiliated entities 20,000 20,000
------------ ------------
Net cash provided by operating activities 66,699 315,998
------------ ------------
Cash Flows from Investing Activities
Purchases of property and equipment -- --
Cash received from sale of marketable securities -- (496)
Cash paid for marketable securities (600) --
Cash paid for land held for future development -- --
------------ ------------
Net cash used in investing activities (600) (496)
------------ ------------
Cash Flows from Financing Activities
Principal paid on long-term mortgage note payable (21,237) (21,517)
Cash received (paid) on note payable to officer -- --
------------ ------------
Net cash provided by financing activities (21,237) (21,517)
------------ ------------
Increase in Cash and Cash Equivalents 44,862 293,985
Cash at beginning of period 930,177 499,083
------------ ------------
Cash at end of period $ 975,039 $ 793,068
============ ============
Supplemental Disclosures of Interest and Income Taxes Paid
Interest paid during the period $ 34,520 $ 30,741
============ ============
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
6
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2006 and 2005
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)". In
conjunction with an October 2002 Settlement Agreement with the City of Dallas,
Texas, the Company's adult entertainment lounge and restaurant, Million Dollar
Saloon, may operate in its present "non-conforming location" with a mandatory
closing date of July 31, 2009.
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, 2005. 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, 2006.
7
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2006 and 2005
NOTE B - Preparation of Financial Statements - Continued
These financial statements reflect the books and records of Million Dollar
Saloon, Inc., Furrh, Inc., Tempo Tamers, Inc., Corporation Lex and Don, Inc. for
each of the three month periods ended March 31, 2006 and 2005, respectively. All
significant intercompany transactions have been eliminated in combination. The
consolidated entities are referred to as Company.
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, 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.
8
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2006 and 2005
NOTE C - Summary of Significant Accounting Policies - Continued
3. Accounts Receivable and Revenue Recognition - continued
-------------------------------------------
Since December 31, 2000, all rental property lessors 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.
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 March 31, 2006 and 2005, and subsequent thereto, 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.
9
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2006 and 2005
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.
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 lease with an
entity controlled by Duncan Burch. In accordance with the Settlement Agreement,
the 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 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. 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.
10
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2006 and 2005
NOTE D - Related Party Transactions - Continued
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.
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.
In conjunction with the October 2002 Settlement Agreement with the City of
Dallas, Texas, as discussed previously, the Company entered into negotiations
between the Company's wholly-owned subsidiary, Tempo Tamers, Inc., Mainstage,
Inc. (Mainstage), an entity controlled by Nick Mehmeti, the Company's President,
which operated a non-conforming adult cabaret located in Dallas, Texas, called
P.T.'s and Allen-Burch, Inc. (Allen Burch), an entity controlled by Duncan
Burch, a Company officer and significant shareholder, also operating a
non-conforming adult cabaret known as The Fare. These negotiations were
initiated to determine which of these non-conforming entities would continue
operating in a "non-conforming location".
In May 2003, these three affiliated parties granted the exclusive right to
negotiate with the City of Dallas, Texas to Tempo Tamers, Inc. for the
continuance of the operations of The Million Dollar Saloon as a sexually
oriented business in a "non-conforming location."
This Settlement Agreement provided that, in the event that the City of Dallas,
Texas granted The Million Dollar Saloon the exclusive right to continue
operating as an adult cabaret in a "non-conforming location" for a six (6) year
period, Tempo Tamers would pay $500,000 each to Mainstage and Allen Burch and
Mainstage and Allen-Burch would each discontinue the operation of their
respective sexually oriented businesses.
In May 2003, the City of Dallas agreed to allow Tempo Tamers to continue to
operate The Million Dollar Saloon at its current location through the last day
of July 2009. Mainstage and Allen Burch then agreed with the City of Dallas,
Texas to discontinue the respective operations of Mainstage and The Fare,
respectively, as sexually oriented business in January and March, 2004,
respectively.
The cessation of operations by Mainstage and Allen Burch triggered the $500,000
payment clause to each entity as set forth in the May 2003 Settlement Agreement.
The aggregate $1,000,000 payment has been accrued in the accompanying financial
statements, bears interest at 8.0% per annum and is being amortized to
operations over the 67 month term from the triggering event date(s) through the
mandatory closing date of The Million Dollar Saloon in it's present
"non-conforming location" on July 31, 2009.
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.
11
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2006 and 2005
NOTE E - Fair Value of Financial Instruments - Continued
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 various financial institutions
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 years ended December 31, 2005 and
2004 and the period through March 31, 2006, respectively, the various operating
companies maintained deposits in these financial institutions with credit risk
exposures in excess of statutory FDIC coverage. The Company has incurred no
losses during 2005 and 2004, and subsequent thereto, as a result of any of these
unsecured situations.
NOTE G - Marketable Securities
Marketable securities as of March 31, 2006 and 2005 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
--------- --------- --------
March 31, 2006
Aggregate fair value $ 52,147 $ -- $ --
Gross unrealized holding gain $ 153 $ -- $ --
Gross unrealized holding losses $ -- $ -- $ --
Amortized cost basis $ 51,994 $ -- $ --
March 31, 2005
Aggregate fair value $ 50,033 $ -- $ --
Gross unrealized holding gains $ -- $ -- $ --
Gross unrealized holding losses $ -- $ -- $ --
Amortized cost basis $ 50,033 $ -- $ --
The net unrealized holding gains and (losses) on trading securities which have
been included in the statement of operations were approximately $-0- and $-0-
for the each of the respective three month periods ended March 31, 2006 and
2005.
NOTE H - Property and Equipment
Property and equipment consists of the following at March 31, 2006 and 2005:
March 31, March 31,
2005 2005 Estimated life
---------- ---------- --------------
Buildings and related improvements $1,526,424 $1,473,356 55 months - 40 years
Furniture and equipment 451,093 451,093 55 months - 10 years
---------- ----------
1,977,517 1,924,449
Less accumulated depreciation (1,467,910) (1,385,540)
---------- ----------
509,607 538,909
Land 210,000 210,000
---------- ----------
Net property and equipment $ 719,607 $ 748,909
========== ==========
12
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2006 and 2005
NOTE H - Property and Equipment - Continued
Depreciation expense for the three months ended March 31, 2006 and 2005 was
approximately $22,199 and $18,216, 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 initally 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.
On January 29, 2004, the Company obtained permanent long-term mortgage financing
to retire the $2,156,713 note payable issued at the initial closing. The new
note was for an initial 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% for all subsequent periods
that the debt is outstanding. The interest rate adjusts every 12th month,
commencing on January 29, 2005. The long-term mortgage note requires payments of
principal and accrued interest 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
long-term mortgage note matures on January 29, 2019 and 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.
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.
As of March 31, 2006 and 2005, the Company owes approximately $1,817,218 and
$1,903,392 on the long-term mortgage note payable, respectively.
Future maturities of the long-term mortgage note payable are as follows:
Year ending Principal
December 31 due
----------- ---------
2006 $ 92,082
2007 96,931
2008 103,203
2009 111,918
2010-2014 678,465
2015-2019 755,856
---------
Total $1,838,455
=========
13
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2006 and 2005
NOTE J - Property and Equipment held for Sale
During the 3rd quarter of Calendar 2004, Company management listed the real
estate and other significant assets owned by Corporation Lex for sale through a
commercial real estate brokerage firm and reclassified the net carrying values
at the listing date to "Property and Equipment held for Sale" in the
accompanying financial statements.
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", the Company
follows the policy of evaluating all qualifying assets as of the end of each
reporting quarter. As of March 31, 2006, management has determined that no
impairment of the carrying value of property and equipment held for sale was
necessary.
This property was sold on February 5, 2008 for net proceeds of approximately
$896,000, resulting in a recognized gain at the date of sale of approximately
$25,000.
NOTE K - Operations Agreement
Contract Payable to Affiliated Entities
In conjunction with the October 2002 Settlement Agreement with the City of
Dallas, Texas, as discussed previously, the Company entered into negotiations
between the Company's wholly-owned subsidiary, Tempo Tamers, Inc., Mainstage,
Inc. (Mainstage), an entity controlled by Nick Mehmeti, the Company's President,
which operated a non-conforming adult cabaret located in Dallas, Texas, called
P.T.'s and Allen-Burch, Inc. (Allen Burch), an entity controlled by Duncan
Burch, a Company officer and significant shareholder, also operating a
non-conforming adult cabaret known as The Fare. These negotiations were
initiated to determine which of these non-conforming entities would continue
operating in a "non-conforming location".
In May 2003, these three affiliated parties granted the exclusive right to
negotiate with the City of Dallas, Texas to Tempo Tamers, Inc. for the
continuance of the operations of The Million Dollar Saloon as a sexually
oriented business in a "non-conforming location."
This Settlement Agreement provided that, in the event that the City of Dallas,
Texas granted The Million Dollar Saloon the exclusive right to continue
operating as an adult cabaret in a "non-conforming location" for a six (6) year
period, Tempo Tamers would pay $500,000 each to Mainstage and Allen Burch and
Mainstage and Allen-Burch would each discontinue the operation of their
respective sexually oriented businesses.
In May 2003, the City of Dallas agreed to allow Tempo Tamers to continue to
operate The Million Dollar Saloon at its current location through the last day
of July 2009. Mainstage and Allen Burch then agreed with the City of Dallas,
Texas to discontinue the respective operations of Mainstage and The Fare,
respectively, as sexually oriented business in January and March, 2004,
respectively.
The cessation of operations by Mainstage and Allen Burch triggered the $500,000
payment clause to each entity as set forth in the May 2003 Settlement Agreement.
The aggregate $1,000,000 payment has been accrued in the accompanying financial
statements, bears interest at 8.0% per annum and is being amortized to
operations over the 67 month term from the triggering event date(s) through the
mandatory closing date of The Million Dollar Saloon in it's present
"non-conforming location" on July 31, 2009.
(Remainder of this page left blank intentionally)
14
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2006 and 2005
NOTE L - Income Taxes
The components of income tax expense (benefit) for each of the three month
periods ended March 31, 2006 and 2005, respectively, are as follows:
Three months Three months
ended ended
March 31, March 31,
2006 2005
------------ ------------
Federal:
Current $ 14,500 $ (45,300)
Deferred -- --
------------ ------------
14,500 (45,300)
------------ ------------
State:
Current -- --
Deferred -- --
------------ ------------
-- --
------------ ------------
Total $ 14,500 $ (45,300)
============ ============
The Company's income tax expense (benefit) for each of the three month periods
ended March 31, 2006 and 2005, respectively, differed from the statutory federal
rate of 34 percent as follows:
Three months Three months
ended ended
March 31, March 31,
2006 2005
---------- ----------
Statutory rate applied to earnings before income taxes $ 40,000 $(38,600)
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 (25,500) (6,700)
---------- ----------
Income tax expense $ 14,500 $ (45,300)
========== ==========
The deferred current tax asset and non-current deferred tax liability on March
31, 2006 and 2005, respectively, balance sheet consists of the following:
March 31, March 31,
2006 2005
--------- ---------
Non-current deferred tax liability $(243,618) $(264,877)
========= =========
The non-current deferred tax liability results from the usage of statutory
accelerated tax depreciation and amortization methods.
NOTE M- 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.
15
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2006 and 2005
NOTE O - Contingencies
1) City of Dallas licensing
In conjunction with an October 2002 Settlement Agreement with the City of
Dallas, Texas, the Company entered into negotiations between the Company's
wholly-owned subsidiary, Tempo Tamers, Inc., Mainstage, Inc. (Mainstage),
an entity controlled by Nick Mehmeti, the Company's President, which
operated a non-conforming adult cabaret located in Dallas, Texas, called
P.T.'s and Allen-Burch, Inc. (Allen Burch), an entity controlled by Duncan
Burch, a Company officer and significant shareholder, also operating a
non-conforming adult cabaret known as The Fare. These negotiations were
initiated to determine which of these non-conforming entities would
continue operating in a "non-conforming location". In May 2003, these three
affiliated parties granted the exclusive right to negotiate with the City
of Dallas, Texas to Tempo Tamers, Inc. for the continuance of the
operations of The Million Dollar Saloon as a sexually oriented business in
a "non-conforming location." This Settlement Agreement provided that, in
the event that the City of Dallas, Texas granted The Million Dollar Saloon
the exclusive right to continue operating as an adult cabaret in a
"non-conforming location" for a six (6) year period, Tempo Tamers would pay
$500,000 each to Mainstage and Allen Burch and Mainstage and Allen-Burch
would each discontinue the operation of their respective sexually oriented
businesses. In May 2003, the City of Dallas, Texas agreed to allow Tempo
Tamers to continue to operate The Million Dollar Saloon at its current
location through the last day of July 2009. Mainstage and Allen Burch then
agreed with the City of Dallas, Texas to discontinue the respective
operations of Mainstage and The Fare, respectively, as sexually oriented
business in January and March, 2004, respectively. The cessation of
operations by Mainstage and Allen Burch triggered the $500,000 payment
clause to each entity as set forth in the May 2003 Settlement Agreement.
The aggregate $1,000,000 payment has been accrued in the Company's
financial statements and is being amortized to operations over the 67 month
term from the triggering event date(s) through the mandatory closing date
of The Million Dollar Saloon in it's present "non-conforming location" on
July 31, 2009.
2) "John Doe I" v. Tempo Tamers Beverage Company, Inc. dba Million Dollar
Saloon and Christopher John Thornton, Dallas County Texas District Court
Cause No. 05-02015; filed February 24, 2005 and settled on October 20,
2005. Plaintiff "Doe I" filed a wrongful death/survivor claim under Section
2.02 of the Texas Alcoholic Beverage Code (dram shop). The suit alleged
that a customer of the Company's Tempo Tamers, Inc. subsidiary (dba Million
Dollar Saloon) (Club) was served in violation of Section 2.02 resulting in
a motor vehicle collision causing the wrongful death of "Doe I's" spouse.
While the Company's wholly-owned subsidiary denied all allegations; the
case was settled on October 20, 2005 under a sealed confidentiality
agreement. The settlement was for the gross sum of $460,000 to be paid as
follows: $50,000 on the signing of the settlement documents, $50,000 on or
about January 13, 2006 and $7,500 per month starting on November 1, 2005
through October 1, 2009. The settlement is non-interest bearing and, per
the requirements of generally accepted accounting principles, has been
discounted at the Prime Rate of 6.75% to yield a net settlement of
approximately $415,026, exclusive of imputed interest. The entire
discounted settlement was charged to operations on the October 2005
settlement date.
3) "John Doe II" v. Tempo Tamers, Inc. dba Million Dollar Saloon; Dallas
County Texas 44th District Court Cause No. 04-09918-A; filed September 24,
2004. Clarendon American Insurance Company v. Tempo Tamers, Inc. dba
Million Dollar Saloon; Dallas County Texas 44th District Court Cause No.
06-11838; filed November 17, 2006.
This is a suit for damages/loss of consortium brought by Plaintiffs under
Section 2.02 of the Texas Alcoholic Beverage Code. The Plaintiff claimed he
was served by Club employees in violation of Section 2.02 resulting in a
motorcycle accident whereby he sustained head injuries and has medical
bills over $300,000.00. The Plaintiff further asserted to have no or
diminished capacity to continue his professional profession. The Company's
wholly-owned subsidiary, Tempo Tamers, Inc., vigorously denied the
allegations and asserted that the Plaintiff's accident was primarily, if
not exclusively, of his own doing and asserted that the Plaintiff was more
than 50% responsible for his injuries and that the only valid cause of
action was pursuant to Section 2.02. The Company denied all liability.
In 2006, the Company's insurance carrier (Clarendon) sued the Company
claiming that they had no obligation to pay the claim of the plaintiffs in
the Dryer litigation.
16
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
March 31, 2006 and 2005
NOTE O - Litigation - Continued
In 2007, the Company, without an admission of liability, settled all claims
in a confidential settlement agreement whereby Tempo Tamers, Inc. agreed to
reimburse Clarendon $25,000 of the monies Clarendon paid to Plaintiffs, in
five (5) monthly installments of $5,000 each, with the first monthly
installment to be paid on November 1, 2007 and the last installment to be
paid on March 1, 2008. Thereafter, Tempo Tamers, Inc. agreed to pay Doe II
and Doe II's counsel the total sum of $75,000, to be paid in 15 monthly
installments of $5,000 each, commencing on April 1, 2008 with the final
installment to be paid on July 1, 2009. The effect and settlement of these
actions was charged to operations on the November 2007 settlement date.
4) Cody Staus and Kelly Nowlin v. Million Dollar Saloon Inc. dba Million
Dollar Saloon; Dallas County Texas District Court Cause No.; 05-04622-K,
filed May 10, 2005. This case was brought by Plaintiffs Staus and Nowlin
claiming they were assaulted by employees/security of Million Dollar Saloon
and seek actual and punitive damages. This matter was settled in June 2006
for an aggregate $10,000 cash to all Plaintiffs and charged to operations
at the settlement date.
5) Beatrice Hunter v. Tempo Tamers, Inc. and Tempo Tamers Beverage Company
Cause # 06-12954 in the116th Judicial District Court for Dallas County
Texas, filed December 28, 2006.
This case was originally brought by a person injured in a car accident with
an alleged customer of the Club against Million Dollar Saloon, Inc.
alleging a variety of causes of action including violations under Section
2.02 of the Texas Alcoholic Beverage Code, negligence, gross negligence and
other allegations. Million Dollar Saloon, Inc. claimed that it was not
liable as it did not operate the Club and claimed that Section 2.02 was the
only valid cause of action and injuries were due to the conduct of the
driver of the woman's car to an extent to bar any recovery against the
club. The initial case was dismissed against Million Dollar Saloon Inc.
when a settlement was reached between the Plaintiff and alleged customer. A
new lawsuit was thereafter refiled against Tempo Tamers Inc. and Tempo
Tamers Beverage Company Inc. This case is scheduled for a jury trial to
commence on August 11, 2008 and the ultimate outcome is not determinable at
this time. Management is aggressively defending these actions and no
material impact to the Company's financial condition is anticipated at this
time.
6) Texas Alcoholic Beverage Commission v. Tempo Tamers Beverage Company Inc.
This is Administrative action brought by a state regulatory agency against
a non subsidiary corporation which provides Tempo Tamers, Inc. with liquor
permitting and services for the Tempo Tamers, Inc.'s business operations
known as "Million Dollar Saloon".
This Action is being vigorously contested by the Company and the potential
outcome of this administrative action is not determinable at this time.
Management is aggressively defending these actions and no material impact
to the Company's financial condition is anticipated at this time; however,
a finding against Tempo Tamers Beverage Company, Inc. could have a
significant detrimental impact on the operation of the Club.
From time-to-time, in the ordinary course of business, the Company has become
and may become party to other lawsuits. The outcome of this litigation, existing
or future, if any, is not determinable at this time. Management is aggressively
defending any current actions and anticipates agressively defending future
actions, if any. Accordingly, no material impact to the Company's financial
condition is anticipated.
(Remainder of this page left blank intentionally)
17
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
Three months ended March 31, 2006 as compared to three months ended March
---------------------------------------------------------------------------
31, 2005
--------
Bar and restaurant sales decreased by approximately $69,000 (or
approximately 8.35%) in the three months ended March 31, 2006. Bar and
restaurant sales were approximately $757,000 for the three months ended
March 31, 2006 as compared to approximately $826,000 for the three months
ended March 31, 2005. The decrease over the comparable period from the
preceding year is directly attributable to overall fluctuations in visitor
traffic to the Dallas-Ft. Worth Metroplex 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. Further, the Company's agreement with the City of Dallas
requires the Million Dollar Saloon to cease business operations as an adult
sexually oriented business at the close of business on July 31, 2009.
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.
18
The Company's rental income was relatively constant with approximately
$102,000 for the three months ended March 31, 2006 as compared to
approximately $110,500 for the comparable three month period ended March
31, 2005. All of the leases were/are with entities controlled by Duncan
Burch, one of the Company's controlling shareholders. The Corporation Lex
property was vacant through February 2008 when it was sold for an
approximate gain of $25,000 over the carrying value in the accompanying
financial statements. The rental real estate 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.
Although the Company is seeking a long-term lease for the Don, Inc.
property on terms 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 lease 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 could have a material
adverse effect on the revenues of the Company.
Cost of sales decreased to approximately $330,000 for the three months
ended March 31, 2006 as compared to approximately $354,000 for the same
period of 2005. Gross profit percentages were virtually identical at
approximately 61.59% (approximately $529,000) for the three months ended
March 31, 2006 versus 61.46% (approximately $565,000) for the three months
ended March 31, 2005. 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 $351,000 for the
three months ended March 31, 2006 as compared to approximately $263,000 for
the comparable period of 2005. Management is of the opinion that G&A
expenses should remain relatively constant in future periods with
fluctuations in energy costs, professional fees and marketing activities.
Management continues to monitor its expenditure levels to achieve optimum
financial results.
Pursuant to an October 20, 2005 settlement of a lawsuit filed on February
24, 2005, the Company has accrued the discounted present value of
approximately $415,026 at the prime interest rate of 6.75% to yield the
gross agreed-upon settlement of $460,000.
Net income (loss) before income taxes was approximately $103,000 for the
three months ended March 31, 2006 versus approximately $(159,000) for the
three months ended March 31, 2005. After-tax net income increased by
approximately $216,000 from approximately $(113,500) for the three months
ended March 31, 2005 to approximately $103,000 for the same period ended
March 31, 2006. The Company experienced earnings per share of approximately
$0.02 and $(0.02) for each of the respective three month periods ended
March 31, 2006 and 2005, 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 March 31, 2006, December 31, 2005 and March 31, 2005, the Company has
working capital of approximately $(469,000), $(522,000) and $(437,000). The
sole contributor to the Company's working capital deficit is a $1,000,000
payable to related parties, bearing interest at 8.0% per annum, related to
an Operating Agreement which was triggered with the City of Dallas granting
a non-confirming operating permit to the Company through July 31, 2009 and
the closing of two competing operations owned and controlled by the
Company's controlling shareholders.
The Company achieved positive cash flows from operations of approximately
$67,000 and $316,000 for the three months ended March 31, 2006 and 2005,
respectively, as compared to $73,000 for the year ended December 31, 2005.
19
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.
The Company, in accordance with an agreement with the City of Dallas,
Texas, will cease operating the Million Dollar Saloon at the close of
business on July 31, 2009. This event will have a deterimental impact on
the Company's liquidity and business operations.
(4) Capital Resources
On October 20, 2005, the Company's wholly-owned subsidiary, Tempo Tamers,
Inc., settled a lawsuit filed on February 24, 2005 for the gross sum of
$460,000 to be paid as follows: $50,000 on the signing of the settlement
documents, $50,000 on or about January 13, 2006 and $7,500 per month
starting on November 1, 2005 through October 1, 2009. The settlement is
non-interest bearing and, per the requirements of generally accepted
accounting principles, has been discounted at the Prime Rate of 6.75% to
yield a net settlement of approximately $415,026, exclusive of imputed
interest. The entire discounted settlement was charged to operations in the
accompanying financial statements on the settlement date.
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 initally 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.
On January 29, 2004, the Company obtained permanent long-term mortgage
financing to retire the $2,156,713 note payable issued at the initial
closing. The new note was for an initial 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% for all subsequent periods that the debt is outstanding. The
interest rate adjusts every 12th month, commencing on January 29, 2005. The
long-term mortgage note requires payments of principal and accrued interest
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 long-term mortgage
note matures on January 29, 2019 and 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.
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.
As of March 31, 2006 and 2005, the Company owes approximately $1,817,218
and $1,903,392 on the long-term mortgage note payable, respectively.
20
(5) Recent Accounting Pronouncements
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
1) City of Dallas licensing
In conjunction with an October 2002 Settlement Agreement with the City of
Dallas, Texas, the Company entered into negotiations between the Company's
wholly-owned subsidiary, Tempo Tamers, Inc., Mainstage, Inc. (Mainstage),
an entity controlled by Nick Mehmeti, the Company's President, which
operated a non-conforming adult cabaret located in Dallas, Texas, called
P.T.'s and Allen-Burch, Inc. (Allen Burch), an entity controlled by Duncan
Burch, a Company officer and significant shareholder, also operating a
non-conforming adult cabaret known as The Fare. These negotiations were
initiated to determine which of these non-conforming entities would
continue operating in a "non-conforming location". In May 2003, these three
affiliated parties granted the exclusive right to negotiate with the City
of Dallas, Texas to Tempo Tamers, Inc. for the continuance of the
operations of The Million Dollar Saloon as a sexually oriented business in
a "non-conforming location." This Settlement Agreement provided that, in
the event that the City of Dallas, Texas granted The Million Dollar Saloon
the exclusive right to continue operating as an adult cabaret in a
"non-conforming location" for a six (6) year period, Tempo Tamers would pay
$500,000 each to Mainstage and Allen Burch and Mainstage and Allen-Burch
would each discontinue the operation of their respective sexually oriented
businesses. In May 2003, the City of Dallas, Texas agreed to allow Tempo
Tamers to continue to operate The Million Dollar Saloon at its current
location through the last day of July 2009. Mainstage and Allen Burch then
agreed with the City of Dallas, Texas to discontinue the respective
operations of Mainstage and The Fare, respectively, as sexually oriented
business in January and March, 2004, respectively. The cessation of
operations by Mainstage and Allen Burch triggered the $500,000 payment
clause to each entity as set forth in the May 2003 Settlement Agreement.
The aggregate $1,000,000 payment has been accrued in the Company's
financial statements and is being amortized to operations over the 67 month
term from the triggering event date(s) through the mandatory closing date
of The Million Dollar Saloon in it's present "non-conforming location" on
July 31, 2009.
21
2) "John Doe I" v. Tempo Tamers Beverage Company, Inc. dba Million Dollar
Saloon and Christopher John Thornton, Dallas County Texas District Court
Cause No. 05-02015; filed February 24, 2005 and settled on October 20,
2005. Plaintiff "Doe I" filed a wrongful death/survivor claim under Section
2.02 of the Texas Alcoholic Beverage Code (dram shop). The suit alleged
that a customer of the Company's Tempo Tamers, Inc. subsidiary (dba Million
Dollar Saloon) (Club) was served in violation of Section 2.02 resulting in
a motor vehicle collision causing the wrongful death of "Doe I's" spouse.
While the Company's wholly-owned subsidiary denied all allegations; the
case was settled on October 20, 2005 under a sealed confidentiality
agreement. The settlement was for the gross sum of $460,000 to be paid as
follows: $50,000 on the signing of the settlement documents, $50,000 on or
about January 13, 2006 and $7,500 per month starting on November 1, 2005
through October 1, 2009. The settlement is non-interest bearing and, per
the requirements of generally accepted accounting principles, has been
discounted at the Prime Rate of 6.75% to yield a net settlement of
approximately $415,026, exclusive of imputed interest. The entire
discounted settlement was charged to operations on the October 2005
settlement date.
3) "John Doe II" v. Tempo Tamers, Inc. dba Million Dollar Saloon; Dallas
County Texas 44th District Court Cause No. 04-09918-A; filed September 24,
2004. Clarendon American Insurance Company v. Tempo Tamers, Inc. dba
Million Dollar Saloon; Dallas County Texas 44th District Court Cause No.
06-11838; filed November 17, 2006.
This is a suit for damages/loss of consortium brought by Plaintiffs under
Section 2.02 of the Texas Alcoholic Beverage Code. The Plaintiff claimed he
was served by Club employees in violation of Section 2.02 resulting in a
motorcycle accident whereby he sustained head injuries and has medical
bills over $300,000.00. The Plaintiff further asserted to have no or
diminished capacity to continue his professional profession. The Company's
wholly-owned subsidiary, Tempo Tamers, Inc., vigorously denied the
allegations and asserted that the Plaintiff's accident was primarily, if
not exclusively, of his own doing and asserted that the Plaintiff was more
than 50% responsible for his injuries and that the only valid cause of
action was pursuant to Section 2.02. The Company denied all liability.
In 2006, the Company's insurance carrier (Clarendon) sued the Company
claiming that they had no obligation to pay the claim of the plaintiffs in
the Dryer litigation.
In 2007, the Company, without an admission of liability, settled all claims
in a confidential settlement agreement whereby Tempo Tamers, Inc. agreed to
reimburse Clarendon $25,000 of the monies Clarendon paid to Plaintiffs, in
five (5) monthly installments of $5,000 each, with the first monthly
installment to be paid on November 1, 2007 and the last installment to be
paid on March 1, 2008. Thereafter, Tempo Tamers, Inc. agreed to pay Doe II
and Doe II's counsel the total sum of $75,000, to be paid in 15 monthly
installments of $5,000 each, commencing on April 1, 2008 with the final
installment to be paid on July 1, 2009. The effect and settlement of these
actions was charged to operations on the November 2007 settlement date.
4) Cody Staus and Kelly Nowlin v. Million Dollar Saloon Inc. dba Million
Dollar Saloon; Dallas County Texas District Court Cause No.; 05-04622-K,
filed May 10, 2005. This case was brought by Plaintiffs Staus and Nowlin
claiming they were assaulted by employees/security of Million Dollar Saloon
and seek actual and punitive damages. This matter was settled in June 2006
for an aggregate $10,000 cash to all Plaintiffs and charged to operations
at the settlement date.
5) Beatrice Hunter v. Tempo Tamers, Inc. and Tempo Tamers Beverage Company
Cause # 06-12954 in the116th Judicial District Court for Dallas County
Texas, filed December 28, 2006.
This case was originally brought by a person injured in a car accident with
an alleged customer of the Club against Million Dollar Saloon, Inc.
alleging a variety of causes of action including violations under Section
2.02 of the Texas Alcoholic Beverage Code, negligence, gross negligence and
other allegations. Million Dollar Saloon, Inc. claimed that it was not
liable as it did not operate the Club and claimed that Section 2.02 was the
only valid cause of action and injuries were due to the conduct of the
driver of the woman's car to an extent to bar any recovery against the
club. The initial case was dismissed against Million Dollar Saloon Inc.
when a settlement was reached between the Plaintiff and alleged customer. A
new lawsuit was thereafter refiled against Tempo Tamers Inc. and Tempo
Tamers Beverage Company Inc. This case is scheduled for a jury trial to
commence on August 11, 2008 and the ultimate outcome is not determinable at
this time. Management is aggressively defending these actions and no
material impact to the Company's financial condition is anticipated at this
time.
22
6) Texas Alcoholic Beverage Commission v. Tempo Tamers Beverage Company Inc.
This is Administrative action brought by a state regulatory agency against
a non subsidiary corporation which provides Tempo Tamers, Inc. with liquor
permitting and services for the Tempo Tamers, Inc.'s business operations
known as "Million Dollar Saloon".
This Action is being vigorously contested by the Company and the potential
outcome of this administrative action is not determinable at this time.
Management is aggressively defending these actions and no material impact
to the Company's financial condition is anticipated at this time; however,
a finding against Tempo Tamers Beverage Company, Inc. could have a
significant detrimental impact on the operation of the Club.
Item 2 - Recent Sales of Unregistered Securities and Use of Proceeds
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
In conjunction with an October 2002 Settlement Agreement with the City of
Dallas, Texas, the Company's adult entertainment lounge and restaurant,
Million Dollar Saloon, may operate in its present "non-conforming location"
with a mandatory closing date of July 31, 2009.
Item 6 - Exhibits
Exhibits
--------
31.1 Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
________________________________________________________________________________
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 18, 2008 /s/ Nick Mehmeti
--------------- ---------------------------
Nick Mehmeti
Chief Executive Officer,
Chief Financial Officer and
and Director
23