UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(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, 2008
[ ] 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 registrant 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 [ ] NO [X]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). YES [ ] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
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: January 13, 2010: 5,731,778
---------------------------
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
1
Million Dollar Saloon, Inc.
Form 10-Q for the Quarter ended June 30, 2008
Table of Contents
Page
----
Part I - Financial Information
Item 1 - Financial Statements 3
Item 2 - Management's Discussion and Analysis or Plan of Operation 18
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 21
Item 4 - 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
June 30, 2008 and December 31, 2007
(Unaudited) (Audited)
June 30, December 31,
2008 2007
----------- -----------
ASSETS
------
Current Assets
Cash on hand and in bank $ 1,303,518 $ 1,211,293
Inventory 39,690 62,840
Prepaid expenses 1,312 10,040
----------- -----------
Total current assets 1,344,520 1,284,173
----------- -----------
Property and Equipment - At Cost
Buildings and related improvements 1,526,424 1,526,424
Furniture and equipment 466,070 466,070
----------- -----------
1,992,494 1,992,494
Less accumulated depreciation (1,670,715) (1,625,313)
----------- -----------
321,779 367,181
Land 210,000 210,000
----------- -----------
Net property and equipment 531,779 577,181
----------- -----------
Other Assets
Land held for future development 2,661,546 2,661,546
Property and equipment held for sale -- 870,930
Operations agreement, net of accumulated
amortization of approximately $802,985
and $712,055, respectively 97,015 287,945
Loan costs, net of accumulated amortization
of approximately $3,030 and $2,687, respectively 7,259 7,602
Security deposits and other 1,725 1,725
----------- -----------
Total other assets 2,867,545 3,829,748
----------- -----------
Total Assets $ 4,743,844 $ 5,691,102
=========== ===========
- Continued -
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
3
Million Dollar Saloon, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2008 and December 31, 2007
(Unaudited) (Audited)
June 30, December 31,
2008 2007
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities
Current maturities of long-term mortgage note payable $ 103,203 $ 103,203
Current maturities of long-term lawsuit settlement payable 152,037 152,037
Accounts payable - trade 18,977 43,095
Accrued liabilities 89,983 90,475
Federal income taxes payable 187,500 55,000
Contract payable to affiliated entities -- 1,000 000
Accrued interest payable to affiliated entities -- --
---------- ----------
Total current liabilities 551,700 1,443,810
---------- ----------
Long-Term Liabilities
Long-term mortgage note payable, net of current maturities 1,520,291 1,569,327
Long-term lawsuit settlement payable 17,734 87,734
Deferred tax liability 82,763 198,173
---------- ----------
Total liabilities 2,172,488 3,299,044
---------- ----------
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, respectively. 5,732 5,732
Retained earnings 2,565,624 2,386,326
---------- ----------
Total shareholders' equity 2,571,356 2,392,058
---------- ----------
Total Liabilities and Shareholders' Equity $4,743,844 $5,691,102
========== ==========
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
4
Million Dollar Saloon, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
Six and Three months ended June 30, 2008 and 2007
(Unaudited)
Six months Six months Three months Three months
ended ended ended ended
June 30, 2008 June 30, 2007 June 30, 2008 June 30, 2007
----------- ----------- ----------- -----------
Revenues
Bar and restaurant sales $ 1,389,487 $ 1,482,650 $ 697,673 $ 772,413
Rental income 228,394 229,500 110,500 119,000
----------- ----------- ----------- -----------
Total revenues 1,617,881 1,712,150 891,413 891,413
----------- ----------- ----------- -----------
Cost of Sales - Bar and
Restaurant Operations 698,191 651,851 349,040 387,236
----------- ----------- ----------- -----------
Gross Profit 919,690 1,060,299 449,133 504,177
----------- ----------- ----------- -----------
Operating Expenses
General and administrative expenses 526,634 599,699 253,612 265,097
Interest expense 90,358 118,708 36,667 58,575
Depreciation and amortization 136,333 133,913 68,168 66,955
----------- ----------- ----------- -----------
Total operating expenses 753,325 842,320 358,447 392,185
----------- ----------- ----------- -----------
Income from Operations 166,365 217,979 90,686 111,992
Other Income (Expenses)
Interest and other miscellaneous 21,271 17,834 12,695 8,907
Sale of property easement -- 16,007 -- 16,007
Gain on sale of land and building 61,736 -- -- --
----------- ----------- ----------- -----------
Income before Income Taxes 249,372 251,820 103,381 136,906
Income Tax (Expense) Benefit
Currently payable/refundable (185,484) (81,500) (33,184) (53,499)
Deferred
-- -- -- 115,410
----------- ----------- ----------- -----------
Net Income 179,298 170,320 70,197 83,407
Other Comprehensive Income -- -- -- --
----------- ----------- ----------- -----------
Comprehensive Income $ 179,298 $ 170,320 $ 70,197 $ 83,407
=========== =========== =========== ===========
Earnings per share of common stock
outstanding, computed on net income
- basic and fully diluted $ 0.03 $ 0.03 $ 0.01 $ 0.01
=========== =========== =========== ===========
Weighted-average number
of shares outstanding 5,731,778 5,731,778 5,731,778 5,731,778
=========== =========== =========== ===========
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
5
Million Dollar Saloon, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six months ended June 30, 2008 and 2007
(Unaudited)
Six months Six months
ended ended
June 30, 2008 June 30, 2007
----------- -----------
Cash Flows from Operating Activities
Net Income $ 179,298 $ 170,320
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 136,676 134,256
Gain on sale of land and building (61,736) --
Gain on sale of easement -- (16,007)
Closing and other costs related to sale of land and building 36,778 --
(Increase) decrease in
Accounts receivable - trade and other -- --
Income taxes receivable -- 120,423
Inventory 23,150 10,631
Prepaid expenses 8,728 (964)
Increase (decrease) in
Accounts payable and other liabilities (24,611) (37,716)
Federal income taxes payable 132,500 24,526
Lawsuit settlement payable (70,000) (45,000)
Accrued interest payable to affiliated entities -- 39,671
----------- -----------
Net cash provided by operating activities 245,373 400,140
----------- -----------
Cash Flows from Investing Activities
Cash received on sale of land and building 895,888 --
Cash received from sale of property easement -- 16,007
Purchases of property and equipment -- (1,191)
Cash paid for marketable securities -- (1,581)
----------- -----------
Net cash used in investing activities 895,888 13,235
----------- -----------
Cash Flows from Financing Activities
Cash paid on operating agreement payable to related parties (1,000,000) --
Principal paid on long-term mortgage note payable (49,036) (41,218)
----------- -----------
Net cash provided by financing activities (1,049,036) (41,218)
----------- -----------
Increase in Cash and Cash Equivalents 92,225 372,157
Cash at beginning of period 1,211,293 1,010,743
----------- -----------
Cash at end of period $ 1,303,518 $ 1,382,900
=========== ===========
Supplemental Disclosures of Interest and Income Taxes Paid
Interest paid during the period $ 90,015 $ 38,404
=========== ===========
Income taxes paid (refunded) $ 52,984 $ --
=========== ===========
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these financial statements.
6
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2008 and 2007
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-K for the year ended
December 31, 2007. 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, 2008.
7
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
June 30, 2008 and 2007
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
the respective periods ended June 30, 2008 and 2007, 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. 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 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.
3. Inventory
---------
Inventory consists of food and liquor consumables necessary in the
operation of Tempo's adult lounge and entertainment facility. These items
are valued at the lower of cost or market using the first-in, first-out
method of accounting.
4. Property and Equipment
----------------------
Property and equipment is recorded at cost and is depreciated on a
straight-line basis, over the estimated useful lives (generally 5 to 40
years) of the respective asset. Major additions and betterments are
capitalized and depreciated over the estimated useful lives of the related
assets. Maintenance, repairs, and minor improvements are charged to expense
as incurred.
5. Income Taxes
------------
The Company files income tax returns in the United States of America and
various states, as appropriate and applicable. With few exceptions, the
Company is no longer subject to U.S. federal, state and local, as
applicable, income tax examinations by regulatory taxing authorities for
years before 2005. The Company does not anticipate any examinations of
returns filed for periods ending after December 31, 2004.
8
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
June 30, 2008 and 2007
NOTE C - Summary of Significant Accounting Policies - Continued
5. Income Taxes - continued
-------------
The Company uses the asset and liability method of accounting for income
taxes. At June 30, 2008 and December 31, 2007, respectively, the deferred
tax asset and deferred tax liability accounts, as recorded when material to
the financial statements, are entirely the result of temporary differences.
Temporary differences generally represent differences in the recognition of
assets and liabilities for tax and financial reporting purposes, primarily
accumulated depreciation and amortization, allowance for doubtful accounts
and vacation accruals.
The Company adopted the provisions of FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes", on October 1, 2007. FASB
Interpretation No. 48 requires the recognition of potential liabilities as
a result of management's acceptance of potentially uncertain positions for
income tax treatment on a "more-likely-than-not" probability of an
assessment upon examination by a respective taxing authority. As a result
of the implementation of Interpretation 48, the Company did not incur any
liability for unrecognized tax benefits.
6. 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, 2008 and 2007, and subsequent thereto, the Company has no
outstanding stock warrants, options or convertible securities which could
be considered as dilutive for purposes of the earnings per share
calculation.
7. Pending and/or New Accounting Pronouncements
--------------------------------------------
The Company is of the opinion that any pending accounting pronouncements,
either in the adoption phase or not yet required to be adopted, will not
have a significant impact on the Company's financial position or results of
operations.
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.
9
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
June 30, 2008 and 2007
NOTE D - Related Party Transactions - Continued
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.
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. This lease has converted to a month-to-month
basis.
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. As of June 30, 2008, the $1,000,000
aggregate payable has been accrued in the accompanying financial statements and
all accrued interest payable has been paid in full through December 31, 2007.
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.
10
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
June 30, 2008 and 2007
NOTE E - Fair Value of Financial Instruments - Continued
Interest rate risk is the risk that the Company's earnings are subject to
fluctuations in interest rates on either investments or on debt and is fully
dependent upon the volatility of these rates. The Company does not use
derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company's earnings are subject to
fluctuations in interest rates or foreign exchange rates and are fully dependent
upon the volatility of these rates. The company does not use derivative
instruments to moderate its exposure to financial risk, if any.
NOTE 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 the listed aggregate coverage per account type per separate legal
entity per financial institution. During the period ended June 30, 2008 and for
each of the years ended December 31, 2007 and 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 as a result of any of these unsecured situations.
NOTE G - Property and Equipment
Property and equipment consists of the following at June 30, 2008 and December
31, 2007:
June 30, December 31, Estimated
2008 2007 life
----------- ----------- -----------
Buildings and related improvements $ 1,526,424 $ 1,526,424 15-40 years
Furniture and equipment 466,070 466,070 5-10 years
----------- -----------
1,992,494 1,992,494
Less accumulated depreciation (1,670,716) (1,625,313)
----------- -----------
321,779 367,181
Land 210,000 210,000
----------- -----------
Net property and equipment $ 531,779 $ 577,181
=========== ===========
Depreciation expense for the six months ended June 30, 2008 and 2007,
respectively, was approximately $45,403 and $42,983.
NOTE H - Land Held for Future Development
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 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 if it will be able to
develop the property, acquire a construction loan in an amount sufficient to
facilitate development or if obtained, whether the terms of the loan will be
favorable to the Company.
11
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
June 30, 2008 and 2007
NOTE H - Land Held for Future Development - Continued
Long-term Mortgage Note Payable
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.
As of June 30, 2008 and December 31, 2007, respectively, the Company owed
approximately $1,623,494 and $1,672,530 on the long-term mortgage note payable.
Future maturities of the long-term mortgage note payable are as follows:
Year ending Principal
December 31 due
----------- -----------
2008 $ 103,203
2009 111,918
2010 119,212
2011 126,227
2012-2016 773,083
2017-2019 438,887
----------
Total $1,672,530
==========
NOTE I - 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.
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
$62,000.
NOTE J - 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."
12
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
June 30, 2008 and 2007
NOTE J - Operations Agreement
Contract Payable to Affiliated Entities - Continued
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.
During the six months ended June 30, 2008 and 2007, respectively, the Company
paid or accrued approximately $26,667 and $39,671 in interest payable on this
Agreement. During the quarter ended June 30, 2008, the Company paid this
indebtedness and all accrued, but unpaid, interest payable in full.
NOTE K - Income Taxes
The components of income tax expense (benefit) for the six month periods ended
June 30, 2008 and 2007, respectively, are as follows:
Six months Six months
ended ended
June 30, June 30,
2008 2007
---------- ---------
Federal:
Current $ 152,300 $ 28,001
Deferred (115,410) --
--------- ---------
36,890 28,001
--------- ---------
State:
Current -- --
Deferred -- --
--------- ---------
-- --
--------- ---------
Total $ 36,890 $ (21,698)
========= =========
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13
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
June 30, 2008 and 2007
NOTE K - Income Taxes - Continued
The Company's income tax expense (benefit) for each of the six month periods
ended June 30, 2008 and 2007, respectively, differed from the statutory federal
rate of 34 percent as follows:
Six months Six months
ended ended
March 31, March 31,
2008 2007
---------- ---------
Statutory rate applied to earnings before income taxes $ 84,800 $ 85,600
Increase (decrease) in income taxes resulting from:
State income taxes -- --
Deferred income taxes (115,410) --
Effect of reversal of timing differences related
to sale of land and building 103,000
Effect of incremental tax brackets and the
application of business tax credits (2,316) (4,100)
--------- ---------
Income tax expense $ 70,074 $ 81,500
========= =========
The deferred current tax asset and non-current deferred tax liability on June
30, 2008 and December 31, 2007, respectively, balance sheet consists of the
following:
June 30, December 31,
2008 2007
-------- ---------
Non-current deferred tax liability $(82,763) $(198,173)
======== =========
The non-current deferred tax liability results from the usage of statutory
accelerated tax depreciation and amortization methods.
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 - Litigation
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."
14
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
June 30, 2008 and 2007
NOTE M - Litigation - Continued
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. The Plaintiff further asserted to have no or
diminished capacity to continue his 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 "John Doe II" 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.
15
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
June 30, 2008 and 2007
NOTE M - Litigation - Continued
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) Furrh Inc. v. Charlene McCartney et al., Cause #06-01564 in the 193rd
District Court for Dallas County, Texas.
This was a claim by Furrh Inc. against its landlord for offices and parking
for contracting to sell the leasehold without allowing Furrh Inc. the
opportunity to exercise its right of first refusal under the party's lease.
Counterclaims were filed. The case was settled and dismissed with Furrh
Inc. allowing the sale with concessions to allow use of the offices and
parking to continue as long as the adjacent property owned by Furrh Inc can
be operated as a SOB by the Lessee.
7) 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 aggressively defending future
actions, if any. Accordingly, no material impact to the Company's financial
condition is anticipated.
NOTE N - 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, 2008 and December 31, 2007, respectively, all
rental revenues are derived from entities controlled by Duncan Burch, an
officer, director and controlling shareholder. Approximately 14.8% and 14.8% of
total revenues for 2007 and 2006, respectively, were derived from these related
parties.
NOTE O - Subsequent Events
On July 31, 2009, in accordance with an agreement with the City of Dallas, the
Company ceased all operations associated with the Million Dollar Saloon and
Tempo Tamers, Inc.
16
Million Dollar Saloon, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
June 30, 2008 and 2007
NOTE O - Subsequent Events - Continued
Management has evaluated all activity of the Company through January 13, 2010
(the issue date of the financial statements) and concluded that no subsequent
events, other than disclosed above, have occurred that would require recognition
in the financial statements or disclosure in the notes to financial statements.
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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 Form 10-Q, 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-Q 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 whether to reflect new information, future results, events, developments
or otherwise.
(2) Results of Operations
Bar and restaurant sales decreased by approximately $94,000 for the six months
ended June 30, 2008 as compared to the six month period ended June 30, 2007. The
Company experienced net revenues of approximately $1,389,000 in the 2008 period
as compared to approximately $1,483,000 for the 2007 period.
Management is of the opinion that the overall fluctuations in visitor traffic to
the Dallas-Ft. Worth Metroplex and the effects of changes in the economic and
ethnic populations in the immediate geographic area of the Company's physical
location has stabilized. The Company experienced deteriorating revenues during
the fiscal years ended December 31, 2006 and 2005. Given the demographics,
mobility and economic conditions of the City of Dallas and the specific location
of the Million Dollar Saloon, management is unable to predict any future trend
with any degree of certainty.
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. 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 most
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, due to the Company's agreement with the City of Dallas, Texas, all
operations in the current format at the Million Dollar Saloon will cease 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.
The Company's rental income was relatively consistent at $228,000 for the six
months ended June 30, 2008 as compared to approximately $229,000 for the
comparable six months ended June 30, 2007. The difference relates directly to
the differences in recovered property taxes paid by Don, Inc. on the rental
18
property and reimbursed by the related party lessee. Due to the uncertainty of
collection and the fact that this is a related party transaction, the Company
records the reimbursement in the accompanying financial statements upon receipt
of the funds. All of the leases were/are with entities controlled by Duncan
Burch, one of the Company's controlling shareholders.
During Calendar 2004, Management reclassified the net carrying value,
approximately $871,000, to "Property and equipment held for sale" in the
Company's financial statements on the date of listing for sale. This property
was sold on February 5, 2008 for net proceeds of approximately $896,000,
resulting in a net gain at the time of sale of approximately $61,000.
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. This arrangement continues in this fashion
through the date of this filing.
Although the Company is seeking either an outright sale or long-term lease on
these properties, respectively, that are at least comparable to terms for
similar properties in the geographic area, there is no assurance that the
Company will be able to renew its lease with the entity controlled by Mr. Burch
or any other unaffiliated third-party, or if renewed, that the terms of the
lease will be as favorable to the Company as it could have obtained from an
unaffiliated party. The failure of the Company to obtain a long-term lease
agreement 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 slightly by approximately $46,000 from approximately
$652,000 for the six months ended June 30, 2007 to approximately $698,000 for
the six months ended June 30, 2008. Gross profit percentages declined to
approximately 56.9% (approximately $920,000) for the six months ended June 30,
2008 versus 61.9% (approximately $1,060,000) for the six months ended June 30,
2007. 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 $526,600 for the six
months ended June 30, 2008 as compared to approximately $599,700 for the
comparable period ended June 30, 2007. Management attention to expenditures of
all types caused the Company to experience a relatively flat expenditure level
for overhead expenses. Management; however, is continually aware of inflationary
pressures in the economy, fluctuating legal expenses as a result of ongoing
litigation and the general nature of a litigious society and issues related to
the City of Dallas Sexually Oriented Business Ordinance. Further, the Company's
executive compensation remains relatively stable and is anticipated to remain
stable into the foreseeable future. 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.
The Company experienced net income before income taxes was approximately
$249,000 for the six months ended June 30, 2008 versus approximately $252,000
for the comparable period ended June 30, 2007. After-tax net income increased
nominally from approximately $170,000 for the six months ended June 30, 2007 as
compared to approximately $179,000 for the comparable period ended June 30,
2008. The Company experienced earnings per share of approximately $0.03 and
$0.03 per share for each of the six month periods ended June 30, 2008 and 2007,
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 tourism,
convention and business travel levels and impacts related to the City of Dallas'
various enforcement actions and on-premises monitoring of entertainer conduct.
Management makes it's best efforts to timely adjust its expenditure levels to
these events as they occur in order to maintain profitability.
(3) Liquidity
As of June 30, 2008 and December 31, 2007, the Company has working capital of
approximately $793,000 and $(160,000). The Company achieved positive cash flows
from operations of approximately $245,000 for the six months ended June 30, 2008
as compared to approximately $400,000 for the comparable period in 2007.
The Company's working capital is directly related to the cash expended and
future debt service requirements to acquire land for future development.
Additionally, the Company incurred a liability of approximately $1,000,000
($500,000 each) to two entities controlled by the Company's controlling
shareholders, Nick Mehmeti and Duncan Burch related to the securing of an
operating license for the Company's Million Dollar Saloon operation in a
"non-conforming location" through July 31, 2009. This debt was retired in full
using the proceeds of the sale of land in the second quarter of Calendar 2008.
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 obtained permanent long-term financing from
Citizens National Bank, Waxahachie, Texas, and used the proceeds to pay off in
full the original note payable to the seller. The term loan had an original
balance of $2,000,000 and initially bore interest at 6.5% for the first year and
then adjusts to 1% above the published prime rate. The interest rate adjusts
every 12 months commencing January 29, 2005. The note required initial monthly
principal and interest payments of $17,426. As this is a variable interest rate
note, the payments may change after the 12th payment and every succeeding 12th
payment thereafter. The note matures on January 29, 2019. The note is secured by
the underlying land and the separate personal guaranty of Duncan Burch and Nick
Mehmeti, each a Company officer, director and controlling shareholder.
Our primary source of liquidity is generated from ongoing operations. Our
liquidity beyond July 2009 will be greatly diminished after the closing of the
Million Dollar Saloon on July 31, 2009.
(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 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 if it will be able to
develop the property, acquire a construction loan in an amount sufficient to
facilitate development or if obtained, whether the terms of the loan will be
favorable to the Company.
The property is undeveloped and suitable for commercial development. Although
the Company has not determined the usage of the land, the Company may, subject
to zoning and permissible use statutes, 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 identified no other significant capital requirements for 2008,
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.
(5) Critical Accounting Policies
Our financial statements and related public financial information are based on
the application of accounting principles generally accepted in the United States
("GAAP"). GAAP requires the use of estimates; assumptions, judgments and
subjective interpretations of accounting principles that have an impact on the
assets, liabilities, revenue and expense amounts reported. These estimates can
also affect supplemental information contained in our external disclosures
including information regarding contingencies, risk and financial condition. We
believe our use of estimates and underlying accounting assumptions adhere to
GAAP and are consistently and conservatively applied. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results may differ materially from
these estimates under different assumptions or conditions. We continue to
monitor significant estimates made during the preparation of our financial
statements.
Our significant accounting policies are summarized in Note C of our financial
statements. While all these significant accounting policies impact our financial
condition and results of operations, we view certain of these policies as
critical. Policies determined to be critical are those policies that have the
most significant impact on our financial statements and require management to
use a greater degree of judgment and estimates. Actual results may differ from
those estimates. Our management believes that given current facts and
circumstances, it is unlikely that applying any other reasonable judgments or
estimate methodologies would cause effect on our consolidated results of
operations, financial position or liquidity for the periods presented in this
report.
(6) Accounting Pronouncements
The Company knows of no new accounting releases or pronouncements that will have
any impact upon the Company's financial condition or position upon adoption.
20
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
In future periods, the Company may become subject to certain market risks,
including changes in interest rates and currency exchange rates. At the present
time, the Company has no identified exposure and does not undertake any specific
actions to limit exposures, if any.
Item 4 - Controls and Procedures
1. Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer,
we conducted an evaluation of our disclosure controls and procedures, as
such term is defined under Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (Exchange Act), as of June 30, 2008. Based
on this evaluation, our principal executive officer and principal financial
officer concluded that our disclosure controls and procedures are effective
in alerting them on a timely basis to material information relating to our
Company required to be included in our reports filed or submitted under the
Exchange Act.
2. Changes in Internal Controls
There were no significant changes (including corrective actions with regard
to significant deficiencies or material weaknesses) in our internal
controls over financial reporting that occurred during the quarter ended
June 30, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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.
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
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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. The Plaintiff further asserted to have no or
diminished capacity to continue his 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 "John Doe II" 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.
6) Furrh Inc. v. Charlene McCartney et al., Cause #06-01564 in the 193rd
District Court for Dallas County, Texas.
This was a claim by Furrh Inc. against its landlord for offices and parking
for contracting to sell the leasehold without allowing Furrh Inc. the
opportunity to exercise its right of first refusal under the party's lease.
Counterclaims were filed. The case was settled and dismissed with Furrh
Inc. allowing the sale with concessions to allow use of the offices and
parking to continue as long as the adjacent property owned by Furrh Inc can
be operated as a SOB by the Lessee.
7) 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".
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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 aggressively defending future
actions, if any. Accordingly, no material impact to the Company's financial
condition is anticipated.
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
--------
31.1Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002
32.1Certification 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: January 14, 2010 /s/ Nick Mehmeti
---------------- ---------------------------
Nick Mehmeti
Chief Executive Officer,
Chief Financial Officer and
and Director
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