U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1996
Commission File Number: 0-27006
MILLION DOLLAR SALOON, INC.
(Name of Small Business Issuer in Its Charter)
Nevada 13-3428657
(State of Incorporation) (IRS Employer
Identification No.)
6848 Greenville Avenue
Dallas, Texas 75231
(Address of Principal Executive Offices, including Zip Code)
(214) 691-6757
(Issuer's Telephone Number, Including Area Code)
--------------------------
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on which Registered
------------------- ---------------------
N/A N/A
Securities registered pursuant to 12(g) of the Exchange Act:
Title of Each Class
-------------------
Common Stock, $.001 par value
Check whether the issuer (i) 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 issuer was required to file such reports), and (ii) has
been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [x]
The issuer's revenues for the fiscal year ended December 31, 1996 were
$3,459,324. The aggregate market value of common stock held by non-affiliates of
the issuer at March 25, 1997, based upon the closing bid price on The OTC
Electronic Bulletin Board on said date, was $1,414,950. As of March 25, 1997,
there were 5,010,084 shares of the issuer's common stock outstanding.
Documents Incorporated by Reference
No documents, other than certain exhibits, have been incorporated by
reference into this report.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Description of Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security-Holders 10
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 11
Item 6. Management's Discussion and Analysis of Plan of Operation 11
Item 7. Financial Statements 14
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 14
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of The Exchange
Act 15
Item 10. Executive Compensation 16
Item 11. Security Ownership of Certain Beneficial Owners and
Management 17
Item 12. Certain Relationships and Related Transactions 17
Item 13. Exhibits and Reports on Form 8-K 18
2
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Operations Prior to October 1995
Million Dollar Saloon, Inc. (the "Company") was incorporated in the State
of Nevada on September 28, 1987 as Goodheart Ventures, Inc. The Company
completed an offering of its securities in November 1988 and subsequently sought
potential business opportunities through either purchase, acquisition or merger
transactions. In 1991, the Company ceased filing reports under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
In connection with its business strategy, the Company identified entities
owned and/or controlled by the Donald G. and Nina Furrh family as candidates for
merger (the "Merger"). A special meeting of the Company's stockholders was held
on September 22, 1995 for the purpose of approving (a) a one-for-12 reverse
split of the Company's outstanding common stock, par value $.001 per share (the
"Common Stock"), which was completed prior to the effective date of the Merger,
(b) the merger agreement with Million Dollar Saloon, Inc., a Texas corporation
("MDS-TX") and (c) amending the Company's Articles of Incorporation to authorize
(i) a class of preferred stock, (ii) a change in the name of the Company from
Goodheart Ventures, Inc. to Million Dollar Saloon, Inc., (iii) the limitation of
the liability of the Company's directors, and (iv) the indemnification of the
Company's officers and directors under certain circumstances. The Merger was
completed and deemed effective on October 5, 1995.
MDS-TX was incorporated in the State of Texas on July 1, 1985, and remained
dormant until September 1995. In September 1995, MDS-TX acquired 100% of the
issued and outstanding capital stock of Furrh, Inc. ("Furrh"), a Texas
corporation organized in February 1974. Furrh owns and manages commercial rental
property located in Dallas County, Texas. Tempo Tamers, Inc., a Texas
corporation organized in 1978 ("Tempo"), is the sole subsidiary of Furrh. Tempo
operates a lounge and entertainment facility in Dallas, Texas under the
registered trademark and trade name "The Million Dollar Saloon". Simultaneously,
MDS-TX acquired 100% of the issued and outstanding capital stock of Corporation
Lex ("Lex") and Don, Inc. ("Don"). Lex, a Texas corporation organized in
November 1984, owns and manages commercial rental property located in Dallas
County, Texas. Don, a Texas corporation organized in November 1973, owns and
manages commercial rental property located in Tarrant County, Texas.
As a result of the Merger, Furrh, Lex and Don became wholly-owned
subsidiaries of the Company. Tempo remains a wholly-owned subsidiary of Furrh.
Unless otherwise indicated, the "Company" refers to the Company, each of its
wholly-owned subsidiaries and Tempo.
Overview of Current Operations
The Company is based in Dallas, Texas and currently conducts business in
two distinct areas:
o Owning and operating an adult cabaret.
o Owning and managing income producing commercial real estate.
Adult Cabaret
Generally. The Company, through Tempo, owns and operates an adult cabaret
under the name "The Million Dollar Saloon." The Million Dollar Saloon opened in
1982 with the intent of establishing a sophisticated entertainment environment
focused on attracting a professional clientele. To enhance the club's appeal to
its target market, The Million Dollar Saloon offers first-class restaurant and
bar service conducive to attracting businessmen and out-of-town convention
clientele. The Company is currently exploring the expansion of the adult cabaret
segment of its business by establishing additional Million Dollar Saloons or
acquiring and operating similar facilities in selected cities. As of the date of
this report, no specific locations have been identified.
3
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Female Entertainment. The topless entertainers at The Million Dollar Saloon
must follow management's policy of high personal appearance and personality
standards. A performer's physical appearance and her ability to present herself
attractively and to converse intelligently with customers is very important to
management. Management insists that the performers at The Million Dollar Saloon
be experienced dancers. The performers dance on the main stage or on small
stages throughout the club. While their performances include topless dancing,
management insists that performers wear elegant attire when not dancing, as
opposed to being scantily dressed as in many other adult cabarets. Management
never allows full nudity in the club. Management provides performers with
guidelines for the manner of dress, hairstyle, makeup and general demeanor.
Guidelines are imposed to maintain a high standard of professionalism among the
performers and to ensure that they always maintain a pleasant, congenial
demeanor. Further, management evaluates each performer's appearance and
performance on a nightly basis and advises them if their dress, makeup,
hairstyle, general appearance or demeanor does not meet the Company's standards.
Though these policies have the effect of limiting the number of performers who
are permitted to dance at The Million Dollar Saloon, the Company believes that
its policy of maintaining these high standards is in its best interest for
long-term market position. Entertainers who have performed at The Million Dollar
Saloon have been featured in various leading men's entertainment magazines.
Compliance Policies. The Company's management has a policy of ensuring that
its business is carried on in conformity with local, state and federal laws. In
particular, the Company's management has a "no tolerance" policy as to illegal
drug use in or around the premises. Posters placed throughout the nightclub
reinforce this policy as do periodic unannounced searches of the entertainer's
lockers. Entertainers and waitresses who arrive for work are not allowed to
leave the premises without the permission of management. Once an entertainer
does leave the premises, she is not allowed to return to work until the next
day. Management continually monitors the behavior of entertainers, waitresses
and customers to ensure that proper standards of behavior are observed. The
Company's management has the power to levy fines on entertainers for breaches of
the Company's rules. In the event an entertainer is fined three times by
management, the entertainer is barred from future performances at The Million
Dollar Saloon.
Management also reviews all credit card charges made by customers while at
The Million Dollar Saloon. Specifically, management has in place a formal policy
which provides that all credit card charges must be approved, in writing, by
management before any charges are accepted. Management is particularly trained
to review credit card charges to ensure that the only credit card charges
approved for payment are for food, drink and entertainment at The Million Dollar
Saloon.
Food and Drink. The Company believes a key to the success of a premier
adult nightclub is a quality, first-class bar and restaurant operation to
complement its adult entertainment. The Company employs a full-time Service
Manager who is in charge of recruiting and training a professional waitress
staff and ensuring that each customer receives prompt and courteous service. The
Company employs a Chef and a Bar Manager. The Bar Manager is responsible for
stocking, inventory control, and scheduling of bar staff. The Company believes
that the operation of a first class restaurant and the provision of premium
wine, liquor and beer are necessary to the operation of a premier adult cabaret.
The Company's restaurant operation is a full service operation which provides
business lunch buffets and a full-scale lunch and dinner menu service offering
hot and cold appetizers, salads, seafood, steak and other entrees. A variety of
premier wines are offered to compliment any customer's lunch or dinner
selection.
4
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Controls. Operational and accounting controls are essential to the
successful operation of a cash intensive nightclub and bar business. The Company
separates management personnel from all cash handling. The Company uses a
combination of accounting and physical inventory control mechanisms to ensure a
high level of integrity in its accounting practices. Computers play a
significant role in capturing and analyzing a variety of information to provide
management with the information necessary to efficiently manage and control the
nightclub. Management personnel reconcile deposits of cash and credit card
receipts each day to a daily income report. Daily computer reports alert
management of any variances from expected financial results based on historical
norms.
Atmosphere. The Million Dollar Saloon maintains a comfortable atmosphere
through its decor and other customer related amenities. The furniture and
furnishings in The Million Dollar Saloon create the feeling of an upscale
restaurant. The sound system design provides quality sound at levels so
conversations can take place. The Million Dollar Saloon also provides a
companion light show and employs a sound and light engineer to upgrade, monitor,
and maintain the sound and light systems. Management constantly monitors the
environment of The Million Dollar Saloon for maintenance, music selection,
entertainer and waitress appearance, and all aspects of customer service.
VIP Area. To emphasize service for the upper-end of the business market,
the Company maintains a VIP room encompassing the upstairs area of The Million
Dollar Saloon facility. The VIP area is opened to individuals who pay an
increased daily admission charge or purchase annual or lifetime admission
passes. The VIP area provides a higher level of luxury in its decor and more
personalized services. The VIP area consists of approximately 1,800 square feet
for food and entertainment purposes and has an occupancy limit of 100 persons.
The downstairs club and dining area consists of approximately 4,500 square feet
for entertainment purposes and can accommodate 250 persons.
Advertising and Promotion. The Company's marketing philosophy is to portray
The Million Dollar Saloon as a premiere adult cabaret providing topless
entertainment in a sophisticated, discreet environment for its patrons. Hotel
publications, local radio, cable television, newspapers, billboards, and a
variety of promotional campaigns ensure that the public recognizes The Million
Dollar Saloon name. The Company is a member of local business organizations and
is accepted by the Dallas Convention & Visitor's Bureau.
Future Expansion
The Company has not determined the precise locations or nature of its
future expansion, but it believes, based upon its experience, that opportunities
for expansion exist. Management is presently researching the gaming and
theatrical production industries as areas for expansion. The Company may expand
through the acquisition of sports bars and casual clubs that would not use the
trademark "The Million Dollar Saloon." In determining which cities may be
suitable locations for expansion, a variety of factors will be considered,
including, but not limited to, the current regulatory environment, the
availability of sites located in high traffic commercial areas suitable for
conversion to The Million Dollar Saloon style cabarets or sports bars or casual
clubs, potential competition in the area, current market conditions and
profitability of other adult cabarets in the city.
Competition
The adult entertainment nightclub industry is highly competitive with
respect to price, service, location, and the professionalism of its
entertainment. The Million Dollar Saloon competes with many locally-owned adult
cabarets in Dallas, Texas, certain of which may enjoy recognition that equals
that of The Million Dollar Saloon. While there may be local governmental
restrictions on the location of a so-called "sexually oriented business", there
are no barriers to entry into the adult cabaret market. There are in excess of
30 adult cabarets located in the Dallas, Texas metropolitan area of which two
are in direct competition with the Company. The Company believes that the
combination of its existing name recognition and its distinctive and unique
entertainment environment will allow the Company to effectively compete within
this industry.
5
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Governmental Regulations
The Company is subject to various federal, state and local laws affecting
its business activities. In Texas, the authority to issue a permit to sell
alcoholic beverages is governed by the Texas Alcoholic Beverage Commission
("TABC"). The TABC has the authority, in its discretion, to issue appropriate
permits. The Company presently holds a Mixed Beverage Permit and a Late Hours
Permit (the "Permits"). These Permits are subject to annual renewal, provided
the Company has complied with all rules and regulations governing the permits.
Renewal of a permit is subject to protest by a law enforcement agency or by a
member of the public. In case of protest, the TABC may hold a hearing for
interested parties to express their views. The TABC has the authority after such
hearing not to issue a renewal of the protested alcoholic beverage permit. The
Company has never been the subject of a protest hearing against the renewal of
its Permits. Other states may have similar laws that may limit the availability
of a permit to sell alcoholic beverages or which may provide for suspension or
revocation of a permit to sell alcoholic beverages in certain circumstances.
Prior to expanding into any new market, the Company will take all steps
necessary to ensure compliance with all licensing and regulatory requirements.
The Company has not lost or been denied a permit by the TABC.
Various groups have increasingly advocated certain restrictions on "happy
hour" and other promotions involving alcoholic beverages. The Company feels its
entertainment value, admittance charge beginning after normal "happy hours" and
its policies of not discounting drink prices are effective tools in promoting
its business. The Company cannot predict whether additional restrictions on the
promotion of sales of alcoholic beverages will be adopted, or if adopted, the
effect of such restrictions on its business.
Beyond various regulatory requirements affecting the sale of alcoholic
beverages, the location of an adult cabaret is subject to restriction by city
ordinance. The Company is subject to "The Sexually Oriented Business Ordinance"
(the "Ordinance") which contains prohibitions on the location of an adult
cabaret. The prohibitions deal generally with distance from schools, churches,
and other sexually oriented businesses and contain restrictions based on the
percentage of residences within the immediate vicinity of the sexually oriented
business. The granting of a Sexually Oriented Business Permit ("Business
Permit") is not subject to discretion; the Business Permit must be granted if
the proposed operation satisfies the requirements of the Ordinance. The Company
has held a Business Permit since passage of the city ordinance. The Business
Permit is valid for a period of one year and is renewable by application of the
permit holder subject to a hearing. The Company has received positive support at
such hearings from business associations, nearby businesses, and residential
neighbors. The Company has not lost or been denied a Business Permit.
Trademarks
"The Million Dollar Saloon" is a trademarked and recognized name. The name
was acquired by purchase before the opening of The Million Dollar Saloon. The
Company is aware of a possible infringement upon the trademark by a facility in
Oklahoma and is considering remedial action if warranted. The possible
infringement has not and is not expected to materially affect operations of the
Company.
Employees and Independent Contractors
As of December 31, 1996, the Company had approximately 70 full-time
employees, of which 12 were in management positions, including corporate and
administrative operations and approximately 58 were engaged in food and beverage
service, including bartenders and waitresses. Entertainers numbered
approximately 130 full and part time. None of the Company's employees are
represented by a union and the Company considers its employee relations to be
good.
In contrast to prevailing industry treatment of entertainers as independent
contractors, the Company classifies its entertainers as employees for both
federal income tax purposes and compliance with the Fair Labor Standards Act. By
classifying its entertainers as employees subject to the income tax withholding
provisions of the Internal Revenue Code and under the Federal Insurance
Contributions Act and the Federal Unemployment Tax Act, the Company avoids the
imposition of penalties for failure to comply with such requirements.
6
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Insurance
The Company maintains insurance in amounts it considers adequate for
personal injury and property damage. The Company does maintain personal injury
liquor liability insurance because the Company may be exposed to potential
liabilities that may be imposed pursuant to the Texas "Dram Shop" statute or
similar "Dram Shop" statutes or common law theories of liability in other states
where the Company may expand. The Texas "Dram Shop" statute provides a person
injured by an intoxicated person the right to recover damages from an
establishment that wrongfully served alcoholic beverages to such person if it
was apparent to the server that the individual being sold, served or provided
with an alcoholic beverage was obviously intoxicated to the extent that he
presented a clear danger to himself and others. An employer is not liable for
the actions of its employee who wrongfully serves an individual if (i) the
employer requires its employees to attend a seller training program approved by
the TABC; (ii) the employee has actually attended such a training program; and
(iii) the employer has not directly or indirectly encouraged the employee to
violate the law. It is the policy of the Company to require that all servers of
alcohol, including management, be certified every two years as servers under a
training program approved by the TABC. Certification gives statutory immunity to
the sellers of alcohol from damage caused to third parties by those who have
consumed alcoholic beverages at such establishment pursuant to the Texas
Alcoholic Beverage Code.
Income Producing Commercial Real Estate
The Company owns three income producing commercial properties, in fee
simple estate, which house adult entertainment nightclubs in the Dallas-Fort
Worth metroplex. Management is of the opinion that all properties, owned and/or
leased are adequately covered by insurance. One facility is Company operated and
the other two are subject to long-term lease agreements and operated by other
third-party operators.
The Company operated facility is located at 6826 Greenville Avenue in
Dallas, Texas and houses The Million Dollar Saloon. The facility consists of a
9,750 square foot building located on an approximate 25,500 square foot tract of
land fronting a major traffic artery in North Central Dallas. The property is
owned by Furrh and is subject to a lien also covering the other leased
properties incurred in connection with a $750,000 long-term note payable to a
bank dated September 22, 1995. See "Properties" and Note F to the Company's
Financial Statements beginning on p. F-1 hereof.
The remaining two properties are leased to unrelated independent operators
which also operate adult entertainment nightclubs in the facilities. All of the
properties are stand-alone structures and, accordingly, are 100% occupied with a
single tenant and, at the present time, are not subject to any plans for
renovation, remodeling or other significant improvement. All properties are
physically located in geographic areas suitable for their current use. There
exist similar properties which could be similarly used in the same geographic
area as the subject properties. The effective rentals vary between locations
because of desirability and attractiveness of locations. See "Properties."
Risk Factors
Certain of the statements contained in this Annual Report on Form 10-KSB
are forward looking statements that involve risks and uncertainties. Such
statements are subject to important factors that could cause actual results to
differ materially, including the following risk factors:
7
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Risk of Adult Cabaret Operations. The adult entertainment, restaurant and
bar industry is a volatile industry. The industry tends to be sensitive to the
general local economy. When local economic conditions are prosperous,
entertainment industry revenues increase, conversely, when local economic
conditions are unfavorable, entertainment industry revenues decline. Customers
who frequent adult cabarets generally follow trends in personal preferences. The
Company continuously monitors trends in its customers' tastes and entertainment
preferences so that, if necessary, it can change its operations and services to
accommodate the changes in trends. Any significant decline in general corporate
conditions or the economy that affect consumer spending could have a material
adverse effect on the Company's business and upon an investment in the Common
Stock.
Risk of Inadequate Financial Controls. A significant part of the revenues
earned by the Company through its adult nightclub operations will be collected
in cash by full and part-time employees. Comprehensive financial controls are
required to minimize the potential loss of revenue through theft or
misappropriation of cash. To the extent that these controls are not structured
or executed properly, significant cash revenues could be lost and profitability
of the Company impaired. The Company believes that it has implemented
significant cash controls, including separating management personnel from
actually handling cash and utilizing a combination of accounting and physical
inventory control devices to deter theft and to ensure a high level of security
within its accounting practices and procedures.
Competition Within the Industry. The adult topless club entertainment
business is highly competitive with respect to price, service, location and the
professionalism of entertainment. The Million Dollar Saloon competes in Dallas
with a number of locally-owned adult cabarets, some of whose names may enjoy
recognition that equals that of The Million Dollar Saloon. Although the Company
believes that it will compete successfully, there can be no assurance that the
Company will be able to maintain its high level of name recognition and prestige
within the marketplace. The Company's success depends on maintaining a high
quality of female entertainers and waitresses. Competition for topless
entertainers in the adult entertainment business is intense. The lack of
availability of quality, personable, attractive entertainers or the Company's
inability to attract and retain other key employees, such as kitchen personnel
and bartenders, could adversely affect the business of the Company.
Management of Growth. For the Company to expand its business operations, it
must continue to improve and expand the expertise of its personnel and must
attract, train and manage qualified managers and employees to oversee and manage
the expanded operations.
It is the intention of the Company to potentially expand its existing
business operations by opening additional topless nightclubs in other
metropolitan areas. The opening of additional topless nightclubs will subject
the Company to a variety of risks associated with rapidly growing companies. In
particular, the Company's growth may place a significant strain on its
accounting systems, internal controls, and oversight of its day-to-day
operations. Although management intends to ensure that its internal controls
remain adequate to meet the demands of further growth, there can be no assurance
that its systems, controls or personnel will be sufficient to meet these
demands. Inadequacies in these areas could have a material adverse effect on the
Company's business, financial condition and results of operations.
Permits Relating to the Sale of Alcohol and Operation of Sexually Oriented
Business. While the Company has never been the subject of a protest hearing
against the renewal of either its Permit or its Business Permit, there can be no
assurance that such a protest could not be made in the future, nor can there be
any assurance that the Permit or the Business Permit would be granted in the
event such a protest was made. Other states may have similar laws which may
limit the availability of a permit to sell alcoholic beverages or operate a
sexually oriented business. The temporary or permanent suspension or revocations
of the Permit or the Business Permit or the inability to obtain permits in areas
of expansion would have a material adverse effect on the revenues, financial
condition and results of operations of the Company.
Limitations on Protection of Service Marks. Rights of the Company to the
trade name "The Million Dollar Saloon" were purchased. No assurance steps taken
by the Company to protect its trade name will be adequate to deter
misappropriation of its protected intellectual property rights. Litigation may
be necessary in the future to protect the Company's rights from infringement,
which may be costly and time consuming. The loss of the intellectual property
rights owned or claimed by the Company could have a material adverse effect on
the Company.
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ITEM 2. PROPERTIES
The Company maintains its corporate office at 6848 Greenville Avenue in
Dallas, Texas. The corporate office is comprised of approximately 2,700 square
feet and is subject to a monthly rental payment of approximately $3,500 under
the terms of a lease agreement which expires in October 1997. Based on current
local market conditions and available information, management is of the belief
that it will either be able to renew the existing lease upon expiration or
relocate to a comparable location at a comparable cost.
The Company owns three facilities, in fee simple estate, which operate as
adult cabarets in the Dallas-Fort Worth metroplex. Management is of the opinion
that all properties, owned and/or leased are adequately covered by insurance.
One facility is Company operated and the other two are subject to long-term
lease agreements and operated by unrelated third-party operators.
The Company operated facility is located at 6826 Greenville Avenue in
Dallas, Texas. The facility consists of a 9,750 square foot building located on
an approximate 25,500 square foot tract of land fronting a major traffic artery
in North Central Dallas. The property is subject to a lien covering two of the
remaining three properties incurred in connection with a $750,000 long-term note
payable to a bank dated September 22, 1995.
The remaining two properties are leased to unrelated independent operators
which also operate adult cabarets in these facilities. All of the properties are
stand-alone structures and, accordingly, are 100% occupied with a single tenant
and, at the present time, are not subject to any plans for renovation,
remodeling or other significant improvement. All properties are physically
located in geographic areas suitable for their current use. The lease rental
amounts are based upon the location and physical condition of the respective
property.
The following is a summary of the terms, conditions and operating
parameters of the two properties being leased from the Company:
<TABLE>
<CAPTION>
<S> <C>
Owning Entity and Location/Address
-------------------------------------------------------------------
Corporation Lex Don, Inc.
3021 Northwest Highway 3601 State Highway 157
Dallas, Texas Fort Worth, Texas
Square footage
Building 8,550 4,850
Total tract 37,162 60,398
Mortgages
Lease expiration May 2002 August 1998
Scheduled rentals $4,250 per week through 5/25/99 $3,250 per week through 8/15/95
$4,750 per week from $3,500 per week from
5/26/99 through 5/23/02 8/16/95 through 8/15/98
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Effective annual rental per square
foot (total lease term) $ 24.33 $ 32.14
Gross book basis (including land) $1,232,548 $138,429
Net book basis (including land) $1,007,026 $ 66,542
Federal income tax basis
(excluding land) $ 675,342 $128,429
Depreciation method and life SL-19 yrs. ACRS-15 yrs.
Ad valorem tax rate per $100 of
valuation $ 2.59 $ 3.14
1996 Ad valorem taxes $ 9,235 $ 6,775
</TABLE>
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(*) exclusive of the 2.5% of gross liquor sales.
Both properties are subject to a lien incurred in connection with a
$750,000 long-term note payable to a bank dated September 22, 1995. The note
bears interest at 11.0% and is payable in monthly installments of approximately
$16,369, including interest. The final payment is due in September 2000. The
note may be prepaid at any time and any prepayment must be accompanied by a
"yield maintenance fee" equal to 4% of the outstanding balance if prepaid prior
to August 31, 1996; 3% if prepaid between September 1, 1996 and August 31, 1997;
2% if prepaid between September 1, 1997 and August 31, 1998; and 1% if prepaid
between September 1, 1997 and August 31, 1999. The proceeds of the loan were
used to retire a $712,000 mortgage note payable with a payoff balance of
approximately $288,000 and a $105,000 mortgage note payable with a payoff
balance of approximately $10,000.
ITEM 3. LEGAL PROCEEDINGS
The Company may from time to time be a party to various legal actions
arising in the ordinary course of its business. The Company is not currently
involved in any actions that it believes will have a material adverse effect on
its results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
During the fourth quarter of fiscal 1996, there were no matters submitted
to a vote of the security-holders, through solicitation of proxies or otherwise.
10
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 31, 1996, the Company had approximately 570 holders of
record of its Common Stock. Outstanding shares of the Company's Common Stock
totaled 5,010,084. The Company's transfer agent is Securities Transfer
Corporation, Dallas, Texas.
The Company's Common Stock began trading on The OTC Electronic Bulletin
Board under symbol "MLDS" on January 29, 1996. The following table sets forth
the quarterly average high and low closing bid prices per share for the Common
Stock.
Common Stock
Fiscal Year Ended
December 31, 1996 High Low
----------------- ---- ---
First Quarter(1) 3.75 3.00
Second Quarter 3.13 3.00
Third Quarter 3.00 1.50
Fourth Quarter 1.75 1.50
- -----------------------------
(1) From January 29, 1996 to March 31, 1996.
The source for the high and low bids quotations is the National Quotation
Bureau, Inc. and does not reflect inter-dealer prices, such quotations are
without retail mark-ups, mark-downs or commissions, and may not represent actual
transactions.
During each quarter of 1996, the Company's Board of Directors declared a
per share cash dividend as follows: first quarter -- $0.03; second quarter --
$0.015; third quarter -- $0.085; and fourth quarter -- $0.03. The total
dividends paid or accrued amounted to approximately $450,908.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
The following discussion should be read in conjunction with the
accompanying financial statements and notes thereto, beginning on page F-1
herein. Further, all discussions relate to the continuing operations of Furrh,
Lex and Don as wholly-owned subsidiaries of the Company.
Results of Operations
Year Ended December 31, 1996 versus December 31, 1995. Bar and restaurant
revenues increased by approximately $250,000 for the year ended December 31,
1996 compared to the year ended December 31, 1995. This increase relates to
higher patronage of the facility and to the changes in entertainer compensation
methods. During 1995, the Company and its competitors changed their method of
entertainer compensation. As a result of this change, the Company experienced
increased entertainment revenues which were partially offset by related
increases in direct labor costs. Costs of sales increased by approximately
$184,000 compared to the same period in 1995. Rental revenues on leased real
estate were declined by approximately $36,000 during 1996 as compared to 1995
due to the bankruptcy of a tenant of a rental property. Management sold this
property for cash in February 1997.
11
<PAGE>
Operating expenses declined by approximately $305,000 in 1996 as compared
to 1995. The principal savings were experienced in reduced management fees paid
in 1995 which were discontinued in September 1995 as a result of the reverse
merger and corporate restructuring transaction. The Company has experienced
expense increases in interest expense due to new notes taken out in the second
quarter of 1996 and the September 1995 corporate restructuring. Further, the
Company has increased depreciation and amortization expenses as a result of the
amortization of costs incurred for the reverse merger and corporate
restructuring in September 1995. All direct rental operating costs remained
constant during the years ended December 31, 1996 and 1995 included as a
component of general and administrative expenses.
Net income increased by approximately $392,000 from approximately $112,000
for the year ended December 31, 1995 to approximately $505,000 for the year
ended December 31, 1996. The weighted-average number of shares of the Company's
Common Stock has remained relatively constant yielding a comparable earnings per
share of $0.10 for the year ended December 31, 1996 as compared to $0.02 per
share for the year ended December 31, 1995.
Year Ended December 31, 1995 versus December 31, 1994. The Company derives
revenues from two principal sources - bar and restaurant operations and rents
from leases on real property. The Company experienced an approximate $263,000
increase in gross bar and restaurant revenues to a total of approximately
$2,751,000 during the year December 31, 1995 from approximately $2,488,000
during the year ended December 31, 1994. This increase is attributable to
increased patronage from local traffic and conventions in the Dallas-Ft. Worth
Metroplex. The Company's real estate rental operations experienced a revenue
decrease of approximately $2,300 from approximately $478,500 for the year ended
December 31, 1994 to approximately $476,200 for the year ended December 31,
1995. This decrease was caused by financial difficulties of one tenant. The
Company has been able to replace this tenant at identical lease terms and
conditions. The overall net total revenues of the Company increased slightly
from approximately $1,573,000 for the year ended December 31, 1994 to
approximately $1,676,000 for the year ended December 31, 1995.
Net bar and restaurant direct operating costs have increased with direct
personnel costs at approximately $1,048,000 versus $878,000 and purchases of
various consumables and supplies at approximately $502,000 versus $515,000 for
the year ended December 31, 1995 and 1994, respectively. During 1995, the
Company changed its method of compensating dancers from a "tip-based" reporting
method to a method whereby dancers are paid a percentage of all reported service
charges collected for individual dances. Under this change in compensation
methodology, the Company experienced increased revenues, which were offset by
related increases in entertainer compensation. Because of this change, the
Company settles with each entertainer at the end of each daily shift and
advances to the employee the pro-rata estimated net compensation. All advances
are reconciled and cleared during the Company's normal bi-weekly payroll cycle.
At December 31, 1995, the Company experienced an increase of approximately
$46,600 in accounts receivable as a result of these advances.
Overall operating expenses increased from approximately $1,427,700 for the
year ended December 31, 1994 to approximately $1,569,900 for the year ended
December 31, 1995. The largest contributors to this increase of approximately
$129,000 was an increase in management fees paid to a related party of
approximately $100,000 prior to the merger of the Company and the operating
subsidiaries and an increase in employer payroll taxes related to the change in
entertainer compensation methods. Management fees paid to a related party ceased
effective October 1, 1995 with the merger of the Company and the operating
subsidiaries.
12
<PAGE>
Additionally, the reorganization of Furrh, Inc. and its subsidiary, Tempo
Tamers, Inc., Corporation Lex and Don, Inc. with and into MDS-TX and the
subsequent merger with the Company provided a structure whereby the cumulative
net operating loss of Furrh, Inc., as of February 28, 1995, in the amount of
approximately $400,000 became usable beyond a reasonable doubt. As a separate
entity, there was no assurance beyond a reasonable doubt that the net operating
loss carry forward would be utilizable by Furrh, Inc. and its subsidiary, and,
accordingly, the deferred tax asset related to this net operating loss carry
forward was fully reserved. Accordingly upon the consummation of the merger, the
Company retroactively recognized a deferred tax asset, of approximately $76,000
as of December 31, 1995 to reflect the economic effect of the future utilization
of this loss carry forward for income tax purposes. As a general rule, the bar
and restaurant operations experience limited seasonality during the summer
months of June, July and August due to the lack of convention activity in
Dallas, Texas and the availability of other recreational and vacation activity
by the patronage. No significant financial impact on the operations is caused by
this repetitive seasonal decline.
During 1995, the Company advanced an additional approximate $17,500 to
officers, directors and/or stockholders, pre-reverse merger between the
operating companies and Goodheart. No advances are anticipated to be made by the
Company in future periods. In September 1995, the two largest balances due from
stockholders were converted to separate formalized notes bearing interest 5.65%
and mature in September 1997. The notes may be repaid with either cash or the
Company's common stock held by the respective stockholder at an agreed-upon
value of $2.00 per share. Both stockholders have adequate share holdings to
completely retire the debt, plus anticipated accrued interest, at the scheduled
maturity date. It is the intent of these stockholders to liquidate the notes
with cash repayments.
Liquidity and Capital Resources
Year Ended December 31, 1996 versus December 31, 1995. As of December 31,
1996, the Company had working capital of approximately $(52,600) as compared to
approximately $(32,300) as of December 31, 1995. The Company has achieved
positive cash flows from operations of approximately $579,000 for the year ended
December 31, 1996 as compared to approximately $167,000 for the year ended
December 31, 1995.
During April 1996, the Company executed a $500,000 note payable to a bank
and placed the proceeds into certificates of deposit as an additional working
capital reserve. The note was retired in October 1996 and required monthly
payments of interest only at an interest rate of 6.50%.
Management believes that working capital is not a true indicator of
liquidity due to the cash nature of the bar and restaurant operations whereby
all direct operating revenues and expenses are settled within five (5) working
days after recognition. The positive cash flows from operations has primarily
been used, in prior periods, for the retirement of debt and distributions to
stockholders. Acquisitions of property and equipment have been nominal during
the year ended December 31, 1996 and totaled approximately $82,000 for Calendar
1995 and $11,000 for Calendar 1994. It is anticipated that no significant future
demands for capital resources exist and only routine repairs and maintenance on
the company-operated facility will be necessary. During Calendar 1995, the
majority of capital expenditures directly related to the exterior and interior
remodeling to modernize and update the overall appearance and atmosphere of the
facility to maintain its quality and reputation within the marketplace. Due to
major freeway construction in the vicinity of the facility, management
anticipates that the remodeled facade will attract additional spontaneous
patronage from increases in traffic caused by freeway diversions and the
completion of a commuter rail system in close proximity to the Company operated
facility. Liquidity requirements mandated by future business acquisitions or
expansions, if any are specifically identified or undertaken, are not readily
determinable at this time as no substantive plans have been formulated by
management. However, management believes that all necessary cash liquidity will
be obtained from existing 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 offerings.
On September 7, 1995, concurrent with the corporate consolidation
previously discussed, MDS-TX sold approximately 124,900 shares of unregistered,
restricted common stock (at $2.00 per share) to unrelated third-party investors
raising $249,800.
13
<PAGE>
On September 22, 1995, MDS-TX obtained a new $750,000 long-term note
payable to a bank in Dallas, Texas. The note bears interest at 11.0% and is
payable in 60 equal installments of approximately $16,369, including interest.
The final payment is due in September 2000. The note may be prepaid at any time
and any prepayment must be accompanied by a "yield maintenance fee" equal to 4%
of the outstanding balance if prepaid prior to August 31, 1996; 3% if prepaid
between September 1, 1996 and August 31, 1997; 2% if prepaid between September
1, 1997 and August 31, 1998; and 1% if prepaid between September 1, 1997 and
August 31, 1999. The proceeds of the loan were used to retire the $712,000
mortgage note payable, maturing in December 1995, with a payoff balance of
approximately $288,000 and the $105,000 mortgage note payable, maturing in July
1996, with a payoff balance of approximately $10,000.
On September 22, 1995, MDS-TX and the Estate of Donald G. Furrh (a majority
stockholder of all involved corporations, pre and post reorganization) exchanged
approximately 325,000 of MDS-TX common stock held by the Estate for MDS-TX's
assumption of $650,000 in debts of the Estate (principally inheritance taxes and
related professional fees). Funds available from the new $750,000 note payable
and the proceeds of the stock sales on September 7, 1995 were used to
immediately retire the assumed debt.
Because of the large volume of cash handled by the bar and restaurant
facility personnel, stringent cash controls have been implemented by the
Company. These procedures have continually evolved since the facility opened in
1982 to take advantage of improving technologies. Management believes that it
will be able to duplicate the financial controls that exist at the existing
facility into future locations, and that these controls will provide sufficient
safeguards to protect the interests of the Company.
The Company treats and has consistently treated all entertainers as
employees whereas other similar facilities may or may have treated their
entertainers as independent contractors. One of the Company's competitors has
been the subject of litigation related to this issue and has had judgments
entered against it by the U.S. Department of Labor. Management believes that as
a result of its initial and continuing policies and procedures, there is an
insignificant risk to both future operations and profitability for any potential
assessment of payroll and related taxes in the future by regulatory authorities
which would have potentially a very significant financial and operational impact
if the Company treated all entertainers as independent contractors.
ITEM 7. FINANCIAL STATEMENTS
The required items are presented as a separate section of this report
beginning on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in accountants since the Merger in 1995 nor have
there been any disagreements with accountants on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.
14
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth certain information about the directors and
executive officers of the Company. All directors of the Company hold office
until the next annual meeting of stockholders or until their successors have
been elected and qualified. Executive officers of the Company are elected by the
Board of Directors to hold office until their respective successors are elected
and qualified.
Name Age Position(s)
Nina Furrh 60 Chairman of the Board and President
Bjorn Heyerdahl 56 Chief Executive Officer and Director
Dewanna Ross 40 Corporate Secretary and Director
Ronald W. Johnston 43 Chief Financial Officer and Director
Sharon Furrh 48 Director
Nina Furrh has served as President of the Furrh family business interests
since 1989. Mrs. Furrh became involved in the daily operations of The Million
Dollar Saloon in September 1992. Mrs. Furrh directs the Company's other real
estate holdings through Furrh Limited Partnership.
Bjorn Heyerdahl has served as the Business Consultant and Financial Advisor
to the Furrh family and Estate of Donald G. Furrh for the past five years. His
duties have included positioning MDS-Texas to become a publicly-traded entity
through the Merger. Mr. Heyerdahl's prior history is that of chief executive
officer and/or director of numerous corporations around the world in endeavors
as diversified as retail chain stores, coal/diamond mining, car rental, safari
ranches, plantations and film production.
Dewanna Ross has served as administrative manager for the Furrh family of
companies since 1976. Ms. Ross was responsible for the development of the
corporate procedures, including the hiring and training of corporate staff. Ms.
Ross has also served as an officer and operator of a private club and as an
officer of other businesses.
Sharon Furrh has served as Vice-President of Furrh since 1992. Sharon Furrh
has been involved as a design consultant for The Million Dollar Saloon, in both
its original construction and in subsequent remodelings. Additionally, Sharon
Furrh has been responsible for advertising, promotions and public relations for
The Million Dollar Saloon.
Ronald W. Johnston, CPA, has served as a consultant to the Company since
September 1992. Mr. Johnston has been a certified public accountant in private
practice and a principal of his own firm since 1990. Mr. Johnston's current firm
serves a wide range of business and individual clients. Mr. Johnston currently
serves as a director of Crash Rescue Equipment Services, Inc., Dallas, Texas.
15
<PAGE>
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and persons who own more than ten percent of a registered
class of the Company's equity securities ("10% holders"), to file with the
Securities and Exchange Commission (the "SEC") initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
the Company. Directors, officers and 10% holders are required by SEC regulation
to furnish the Company with copies of all of the Section 16(a) reports they
file.
Based solely on a review of reports furnished to the Company or written
representatives from the Company's directors and executive officers during the
fiscal year ended December 31, 1996, all Section 16(a) filing requirements
applicable to its directors, officers and 10% holders for such year were
complied with.
ITEM 10. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth, for the years
indicated, all cash compensation paid, distributed or accrued for services,
including salary and bonus amounts, rendered in all capacities for the Company
to its President and Chief Executive Officer. No other executive officer of the
Company received remuneration in excess of $100,000 during the referenced
periods. All other compensation related tables required to be reported have been
omitted as there has been no applicable compensation awarded to, earned by or
paid to any of the Company's executive officers in any fiscal year to be covered
by such tables.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Other Restricted Securities All
Salary/ Annual Stock Underlying LTIP Other
Name/Title Year Bonus Compensation Awards Options/SARs Payouts Compensation
---------- ---- ----- ------------ ------ ------------ ------- ------------
Nina Furrh, President 1996 $ -0- NA NA NA NA 2,150(1)
1995 $ 61,200 NA NA NA NA 58,500(1)
1994 $ 66,000 NA NA NA NA 14,850(1)
Bjorn Heyerdahl, Chief 1996 $ 32,000 NA NA NA NA 8,888(2)
Executive Officer 1995 $ 44,000 NA NA NA NA NA
1994 $ 36,000 NA NA NA NA NA
</TABLE>
- ------------------------------------------
(1) Represents distributions from the Furrh Limited Partnership. See "Item 2 --
Properties."
(2) Represents payment of an auto lease by the Company for the benefit of Mr.
Heyerdahl.
Director Compensation
The Company currently pays a director fee for attending scheduled and
special meetings of the Board of Directors. The Company also pays the expenses
of all of its directors in attending board meetings.
16
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 25, 1997,
with respect to the beneficial ownership of shares of Common Stock by (i) each
person who owns beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each director of the Company, (iii) each executive officer of the
Company and (iv) all executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
<S> <C>
Percentage of
Name(1) Number of Shares(2) Common Stock Owned
- ---- ------------------- ------------------
Estate of Donald G. Furrh 180,776 3.6%
Dona G. Furrh 682,476 13.6%
Joshua Barrett Furrh 548,574 10.9%
Nina J. Furrh 1,960,797 39.1%
Bjorn Heyerdahl 500,001 10.0%
Dewanna Ross 4,000 *
Ronald W. Johnston 1,500 *
Officers and Directors as a group (4 persons) 2,466,298 49.2%
--------- ----
Total 3,878,124 77.4%
========= ====
</TABLE>
- -----------------------------------------
*Less than 1%.
(1) The mailing address for each of the afore-referenced is care of the
Company, 6848 Greenville Avenue, Dallas, Texas 75231.
(2) Unless otherwise indicated, the persons listed have sole voting and
investment powers with respect to all such shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 23, 1995, Bjorn Heyerdahl, prior to becoming Chief Executive
Officer and a director of the Company, acquired 12,000,000 shares of the
Company's pre-reverse split restricted Common Stock from stockholders of the
Company for a consideration of $22,166.50. After the one-for-12 reverse split,
Mr. Heyerdahl surrendered 500,000 shares to the Company as a result of the
Merger negotiations and his negotiations to become Chief Executive Officer,
which surrender was necessary to balance ownership between the existing
pre-Merger stockholders of the Company and the stockholders of MDS-TX.
On September 7, 1995, MDS-TX exchanged 3,925,000 shares of its
unregistered, restricted common stock for 100% of the issued and outstanding
stock of Furrh, Tempo, Lex and Don, respectively. All entities involved in the
exchange shared common ownership, control, and management. The purpose of this
transaction was to consolidate ownership of the entities prior to the Merger.
On September 7, 1995, MDS-TX sold 124,900 shares of its unregistered,
restricted common stock to outside third parties for an aggregate $249,800. The
purpose of this transaction was to provide working capital prior to the Merger.
The parties relied on Section 4(2) of the Securities Act in that such
transactions did not involve a public offering and were thus exempt from the
registration requirements of the Securities Act. No underwriters were used in
connection with the foregoing transactions.
Furrh, Tempo, Lex and Don collectively paid Furrh Limited Partnership, an
entity related by ownership and management, management fees of approximately
$365,000 for the year ended December 31, 1995. Management fees ceased October 1,
1995 upon consummation of the Merger.
17
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C>
(a) Financial Statements and Exhibits Page
--------------------------------- ----
1. Financial Statements. The following financial statements are
----------------------
submitted as part of this report:
Independent Auditor's Report ................................................ F-1
Balance Sheets - December 31, 1996 and 1995 ................................. F-2
Statements of Operations - Years Ended December 31, 1996 and 1995 ........... F-4
Statements of Stockholders' Equity - Years Ended December 31, 1996
and 1995 ................................................................. F-5
Statement of Cash Flows - Years Ended December 31, 1996 and 1995 ............ F-6
Notes to Financial Statements ............................................... F-8
</TABLE>
2. Exhibits
--------
Exhibit
Number Description
------ ------------------------------------------------------------
2.1* Stock Purchase Agreement dated August 23, 1995 by and
between Art Beroff and Bjorn Heyerdahl.
2.2* Stock Purchase Agreement dated August 23, 1995 by and
between Joseph MacDonald, Goodheart Ventures, Inc., and
Bjorn Heyerdahl.
2.3* Stock Purchase Agreement dated September 7, 1995 by and
among Million Dollar Saloon, Inc., Goodheart Ventures, Inc.,
and certain individuals.
2.4* Addendum and Modification to Stock Purchase Agreement dated
September 19, 1995, by and among Million Dollar Saloon,
Inc., Goodheart Ventures, Inc., and certain individuals.
2.5* Stock Exchange Agreement dated September 7, 1995 by and
among Million Dollar Saloon, Inc., Goodheart Ventures, Inc.,
and J.M. Tibbals, Trustee for Irrevocable Equity Trust No.
1.
2.6* Addendum and Modification to Stock Exchange Agreement dated
September 19, 1995, by and among Million Dollar Saloon,
Inc., Goodheart Ventures, Inc., and J.M. Tibbals, Trustee
for Irrevocable Equity Trust No. 1.
2.7* Agreement and Plan of Merger dated October 5, 1995 by and
between Million Dollar Saloon, Inc., a Texas corporation,
and Goodheart Ventures, Inc., a Nevada corporation.
2.8** Addendum and Modification to Stock Purchase Agreement made
and entered into the 7th day of September 1995 by and among
Million Dollar Saloon, Inc., Goodheart Ventures, Inc., and
certain individuals dated October 31, 1995.
3(i)* Articles of Incorporation of The Company, as amended to
date.
18
<PAGE>
Exhibit
Number Description
------ ------------------------------------------------------------
3(ii)* Bylaws of the Company.
4.1* Specimen Common Stock Certificate.
10.1* Leases of Properties.
10.2* Promissory Note for $750,000 with Abrams Centre National
Bank dated September 22, 1995.
21.1* Subsidiaries of the Company.
27.1 Financial Disclosure Schedule.
- ---------------------------
* Incorporated by reference to the Company's Form 10-SB filed December 26, 1995.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the three months ended December
31, 1996.
19
<PAGE>
SIGNATURES
In accordance with Section 13 and 15(d) of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on the 25th day of March, 1997.
MILLION DOLLAR SALOON, INC.
By: /s/ Nina J. Furrh
-------------------------------------
Nina J. Furrh, Chairman of the Board
and President
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons in the capacities and on the dates
indicated:
<TABLE>
<CAPTION>
<S> <C>
Signature Title Date
--------- ----- ----
/s/ Nina J. Furrh Chairman of the Board, President and March 25, 1997
- ----------------------- Director
Nina J. Furrh
/s/ Bjorn Heyerdahl Chief Executive Officer and Director March 25, 1997
- -----------------------
Bjorn Heyerdahl
/s/ Dewanna Ross Corporate Secretary and Director March 25, 1997
- -----------------------
Dewanna Ross
/s/ Ronald W. Johnston Chief Financial Officer and Director March 25, 1997
- -----------------------
Ronald W. Johnston
/s/ Sharon Furrh Director March 25, 1997
- -----------------------
Sharon Furrh
</TABLE>
20
<PAGE>
S. W. HATFIELD + ASSOCIATES
certified public accountants
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Million Dollar Saloon, Inc.
We have audited the consolidated balance sheets of Million Dollar Saloon, Inc.
and Subsidiaries (a Nevada corporation and Texas corporations, respectively) as
of December 31, 1996 and 1995, and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for the years then
ended. These consolidated financial statements are the responsibility of
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Million
Dollar Saloon, Inc. and Subsidiaries as of December 31, 1996 and 1995 and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
S. W. HATFIELD + ASSOCIATES
Dallas, Texas
January 20, 1997
F-1
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
ASSETS
<TABLE>
<CAPTION>
<S> <C>
1996 1995
------------ -----------
CURRENT ASSETS
Cash on hand and in bank $ 267,856 $ 133,374
Note receivable - current portion 21,011 19,660
Accounts receivable
Trade, net of allowance for doubtful accounts
of $-0- and $-0-, respectively - 63,653
Prepaid Federal income taxes - 8,520
Inventory 11,169 9,937
Prepaid expenses 37,718 -
---------- ----------
Total current assets 337,754 235,144
---------- ----------
PROPERTY AND EQUIPMENT
Buildings and related improvements 1,969,411 1,994,730
Furniture and equipment 762,095 755,680
Vehicles 52,728 -
----------- ----------
2,784,234 2,750,410
Less accumulated depreciation (1,381,016) (1,316,679)
----------- ----------
1,403,218 1,433,731
Land 816,487 816,487
----------- ----------
Net property and equipment 2,219,705 2,250,218
----------- ----------
OTHER ASSETS
Note receivable - noncurrent portion 126,219 145,423
Accounts receivable from officers,
shareholders and affiliates 764,576 715,525
Organization costs, net of accumulated
amortization of $19,673 and $4,688,
respectively 55,255 70,240
Loan costs, net of accumulated amortization
of $7,902 and $1,580, respectively 23,705 30,026
Deferred tax asset 61,500 76,160
Other 23,475 9,225
----------- ----------
Total other assets 1,054,730 1,046,599
----------- ----------
TOTAL ASSETS $ 3,612,189 $ 3,531,961
=========== ==========
</TABLE>
- Continued -
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, 1996 and 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C>
1996 1995
------------ -----------
CURRENT LIABILITIES
Current portion of long-term debt $ 158,960 $ 135,911
Accounts payable
Trade 15,948 71,438
Officers, shareholders and affiliates - 2,736
Accrued liabilities 58,666 50,859
Dividends payable 150,303 -
Tenant deposits 6,500 6,500
---------- ----------
Total current liabilities 390,377 267,444
---------- ----------
LONG-TERM LIABILITIES
Long-term debt, net of current maturities 512,423 623,193
Deferred tax liability 94,569 90,213
---------- ----------
Total liabilities 997,369 980,850
---------- ----------
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. 5,010,084 and 5,000,084 issued and
outstanding, respectively. 5,010 5,000
Additional paid-in capital 9,990 -
Retained earnings 2,599,820 2,546,111
--------- ----------
Total shareholders' equity 2,614,820 2,551,111
--------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $3,612,189 $ 3,531,961
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C>
1996 1995
-------------- ------------
REVENUES
Bar and restaurant sales $3,019,148 $2,750,794
Rental income 440,176 476,257
---------- ---------
Total revenues 3,459,324 3,227,051
---------- ---------
COST OF SALES - BAR AND
RESTAURANT OPERATIONS
Direct labor 1,246,401 1,048,290
Purchases 488,512 502,450
---------- ----------
Total cost of sales 1,734,913 1,550,740
---------- ----------
GROSS PROFIT 1,724,411 1,676,311
---------- ----------
OPERATING EXPENSES
Salaries, wages and related expenses 362,598 460,098
Consulting, management and other
professional fees 103,815 386,490
Rental expenses, principally taxes 26,514 53,496
Interest expense 95,549 60,583
Other operating expenses 563,348 497,505
Depreciation and amortization 112,113 111,732
---------- ----------
Total operating expenses 1,263,937 1,569,904
---------- ----------
INCOME FROM OPERATIONS 460,474 106,407
OTHER INCOME (EXPENSES)
Interest income 63,169 43,501
---------- -----------
INCOME BEFORE INCOME TAXES 523,643 149,908
INCOME TAX (EXPENSE) BENEFIT
Currently payable - 6,020
Deferred (19,016) (44,253)
---------- -----------
NET INCOME $ 504,617 $ 111,675
========== ==========
Earnings per share of common stock outstanding $ 0.10 $ 0.02
========== ===========
Weighted-average number of shares outstanding 5,009,456 5,000,084
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C>
Common Stock Additional Treasury Total
------------ paid-in Retained stock shareholders'
# Shares Amount capital earnings at cost equity
-------- ------ ------- -------- ------- ------
Balances at
January 1, 1995 5,082,425 $5,082 $204,583 $2,705,971 $(75,000) $2,840,636
Effect of rounding on
1 for 12 reverse split 93 - - - - -
Post-reverse merger
putback of common
stock by controlling
shareholder (500,000) (500) 500 - - -
Sale of common stock
Pre- reverse merger to
former controlling
Goodheart shareholder 416,666 417 4,583 - - 5,000
Pre-reverse merger stock
of Million Dollar
Saloon, Inc. (Texas) 125,900 126 250,674 - - 250,800
Purchase and retirement
of treasury stock by
Million Dollar Saloon,
Inc. (Texas) (pre-merger) (325,000) (325) (460,140) (189,535) - (650,000)
Retirement of treasury stock
held by Furrh, Inc. (pre-
reverse merger) - - - (75,000) 75,000 -
Issuance of common stock
for payment of under-
writing and merger costs 200,000 200 199,800 - - 200,000
Offset of underwriting and
merger costs - - (200,000) - - (200,000)
Distributions to Furrh
entities shareholders
pre-reverse merger - - - (7,000) - (7,000)
Net income for the year - - - 111,675 - 111,675
--------- ------- --------- --------- ------- ---------
Balances at
December 31, 1995 5,000,084 5,000 - 2,546,111 - 2,551,111
Stock issued for
consulting fees 10,000 10 9,990 - - 10,000
Dividends declared
during the year - - - (450,908) - (450,908)
Net income for the year - - - 504,617 - 504,617
--------- ------- --------- --------- ------- ---------
Balances at
December 31, 1996 5,010,084 $ 5,010 $ 9,990 $2,599,820 $ - $2,614,820
========= ======= ========= ========= ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $504,617 $111,675
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 112,113 111,732
Common stock issued for consulting fees 10,000 -
Interest income from shareholders capitalized as principal (51,787)
Transitional effect of new accounting standard - (115,775)
Fair market value of building given in
exchange for compensation - 3,244
Deferred income taxes 19,016 160,028
(Increase) decrease in
Accounts receivable - trade 63,653 (46,665)
Prepaid income taxes 8,520 (1,986)
Inventory (1,232) 68
Prepaid expenses (37,718) -
Loan costs - (31,606)
Organization costs - (74,928)
Deposits and other assets - 7
Increase (decrease) in
Accounts payable and other accrued liabilities _(47,685) 51,452
------- --------
Net cash provided by operating activities _579,497 167,246
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collections on note receivable 17,853 16,584
Purchases of property and equipment (6,815) (82,108)
Acquisition expenses paid (15,000) -
Cash advances to shareholders and affiliates _ - (17,577)
------- --------
Net cash used in investing activities _ (3,962) (83,101)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal funding on new long-term note payable - 750,000
Net activity on note payable to bank - (343,300)
Payments on long-term debt (140,448) (57,178)
Repayment of advances from shareholders and affiliates - (22,236)
Sale of common stock - 255,800
Purchase of treasury stock - (650,000)
Dividends paid (300,605) -
Cash distributions to shareholders - pre merger _ - (7,000)
------- ---------
Net cash used in financing activities (441,053) (73,914)
-------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 134,482 10,231
Cash and cash equivalents at beginning of year _133,374 123,143
------- ---------
Cash and cash equivalents at end of year $ 267,856 $ 133,374
======== =========
</TABLE>
- Continued -
The accompanying notes are an integral part of these consoldiated financial
statements.
F-6
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
------------ -----------
SUPPLEMENTAL DISCLOSURES OF
INTEREST AND INCOME TAXES PAID
Interest paid on borrowings $ 95,549 $60,583
======= ======
Income taxes paid (refunded) $ (8,520) $(4,024)
======= ======
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Acquisition of a vehicle with long-term debt $ 52,727 $ -
======= =======
Declaration of fourth quarter dividend of $0.03 per share $150,303 $ -
======= =======
</TABLE>
F-7
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE A - BACKGROUND AND ORGANIZATION
Million Dollar Saloon, Inc. (MDS-NV) was incorporated under the laws of the
State of Nevada on September 28, 1987. MDS-NV completed a public sale of its
securities on November 10, 1988 with the issuance of 489,100 shares of its
common stock. Additionally, MDS-NV issued 2,934,600 warrants to purchase one
share of Class A common stock at $0.50 per share and one share of Class B common
stock at $0.75 per share. No warrants were exercised by their holders and all
issued and outstanding warrants have expired.
MDS-NV was formed for the purpose of seeking a suitable merger or acquisition
candidate. MDS-NV's activities have consisted principally of raising capital
and, as such, was a development stage company prior to the transactions
discussed in succeeding paragraphs.
In August 1995, MDS-NV experienced a change in control whereby members of
management of Furrh, Inc. and its wholly-owned subsidiary, Tempo Tamers, Inc.,
Corporation Lex and Don, Inc. became the controlling shareholders of MDS-NV. The
shareholders of all entities then reached an oral agreement with whereby these
companies would become wholly-owned subsidiaries of MDS-NV.
On September 7, 1995, the shareholders of Furrh, Inc., Corporation Lex and Don,
Inc. exchanged 100% of their issued and outstanding stock for a net aggregate
3,925,000 shares of Million Dollar Saloon, Inc., a dormant Texas corporation,
(MDS-TX) owned by the majority shareholders of the respective companies. The
purpose of this transaction was to consolidate the ownership of Furrh, Inc. and
Tempo Tamers, Inc., Corporation Lex and Don, Inc. into a single company to
facilitate the merger with MDS-NV.
MDS-TX merged with and into MDS-NV, which was controlled by members of
management of MDS-TX, effective November 1, 1995. Goodheart Ventures, Inc. also
changed its corporate name to Million Dollar Saloon, Inc. (MDS-NV) on November
1, 1995. Furrh, Inc. and its wholly-owned subsidiary, Tempo Tamers, Inc.,
Corporation Lex and Don, Inc. remain as separate operating entities and are
wholly-owned subsidiaries of MDS-NV.
The combination of Furrh, Inc. and its wholly-owned subsidiary, Tempo Tamers,
Inc., Corporation Lex and Don, Inc. with MDS-TX and the subsequent merger of
MDS-TX with MDS-NV were separately accounted for in accordance with Accounting
Principles Board No. 16 - "Business Combinations", Interpretation #39 for
companies under common control on an "as if pooled" basis. The historical
financial statements of all involved entities have become the historical
consolidated financial statements of MDS-NV.
Furrh, Inc. (Furrh) was incorporated under the laws of the State of Texas on
February 25, 1974. Furrh owns and manages commercial rental property located in
Dallas County, Texas. Furrh's wholly-owned subsidiary, Tempo Tamers, Inc.
(Tempo), was incorporated under the laws of the State of Texas on July 3, 1978.
Tempo operates a lounge and entertainment facility, located in Dallas, Texas,
under the registered trademark and trade name "Million Dollar Saloon(R)".
Additionally, Furrh previously had two other wholly-owned subsidiaries, Don
Investments, Inc. and Tanfastic, Inc. All operations, assets and liabilities of
these two companies were closed and/or liquidated prior to January 1, 1993.
Furrh and Tempo had a February 28 year-end. Concurrent with the previously
discussed consolidation and merger, Furrh and Tempo changed their year-end to
December 31. The amounts utilized in the accompanying financial statements have
been restated to the new year end of December 31.
F-8
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE A - BACKGROUND AND ORGANIZATION - Continued
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. Lex has a December 31 year end.
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. Don has a December 31 year end.
MDS-NV originally had a year-end of August 31. Concurrent with the merger of
MDS-NV and MDS-TX, MDS-NV changed its year-end to December 31 to match that of
its acquired operating companies.
These financial statements reflect the books and records of Million Dollar
Saloon, Inc. (Nevada), Million Dollar Saloon, Inc. (Texas), Furrh, Inc., Tempo
Tamers, Inc., Corporation Lex and Don, Inc. for the years ended December 31,
1996 and 1995, respectively. All significant intercompany transactions have been
eliminated in combination. The consolidated entities are referred to as Company.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Cash and Cash Equivalents
For Statement of Cash Flows purposes, the Company considers all cash on hand
and in banks, including accounts in book overdraft positions, certificates of
deposit and other highly-liquid investments with maturities of three months
or less, when purchased, to be cash and cash equivalents.
Cash overdraft positions may occur from time to time due to the timing of
making bank deposits and releasing checks, in accordance with the Company's
cash management policies.
2. Accounts Receivable and Revenue Recognition
In the normal course of business, the Company extends unsecured credit to
virtually all of its tenants related to rental property operations and
accepts national bankcards as payment for goods and services in its lounge
and entertainment facility. Bankcard charges are normally paid by the
clearing institution within three to fourteen days from the date of
presentation by the Company. All lease rental payments are either due on the
first day of the month in advance for the month or on the first day of the
week in arrears for the previous corresponding period. 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.
F-9
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
3. Inventory
Inventory consists of food and liquor consumables necessary in the operation
of Tempo's 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 10 to 40
years) of the respective asset. Major additions and betterments are
capitalized and depreciated over the remaining estimated useful lives of the
related assets. Maintenance, repairs, and minor improvements are charged to
expense as incurred.
5. Trademark rights
Amounts paid in conjunction with the acquisition and retention of the
trademark "Million Dollar Saloon(R)" have been capitalized. The life of the
registration is twenty years from its affirmation in 1988 and may be
extended as allowed by applicable law at that point in time. This trademark
has been assigned Registration No. 1,509,636 by the U. S. Patent and
Trademark Office. The Company amortizes the trademark over a 10-year life
using the straight-line method.
6. Income Taxes
Pre merger
Furrh and Tempo file a consolidated Federal Income Tax return using a year
end of February 28. Lex files a separate Federal Income Tax return using a
year end of December 31. Don is a "Subchapter S" corporation and,
accordingly, the shareholders of Don are responsible for reporting the
revenues and expenses of this corporation.
Effective January 1, 1992, Furrh and Lex adopted the provisions the
provisions of FASB Statement No. 109 "Accounting for Income Taxes" which
requires the asset and liability method of accounting for income taxes rather
than the deferred method previously required. At December 31, 1994 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, and the anticipated utilization of net
operating loss carryforwards.
Post merger
Effective September 7, 1995, concurrent with the merger of Furrh, Don and Lex
into MDS-TX, the change in control of these operating companies created a
short-year Federal Income Tax return from the previously noted year end
through September 7, 1995 for Furrh, Tempo and Don. Additionally, Don
forfeited its Subchapter S election, effective September 7, 1995. All
entities except Lex will file a consolidated Federal Income Tax return for
the period September 7, 1995 through December 31, 1995. Lex will file as a
separate entity for Calendar 1995 and it is anticipated will be included in
the consolidated Federal Income Tax return for Calendar 1996 and all future
periods.
F-10
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. Income Taxes - continued
Furrh and Tempo have consolidated cumulative net operating losses of
approximately $399,000, as reported on their final consolidated separate
company return for the period ended September 7, 1995, and approximately
$224,000 as of December 31, 1995, for both financial reporting and tax
reporting purposes available to be carried forward to offset future taxable
income. In the event that these operating loss carryforwards are not used,
they will begin to expire in 2008. The capacity to utilize these net
operating loss carryforwards for periods after September 7, 1995, due to the
corporate restructuring and mergers previously discussed, created a deferred
tax asset of approximately $70,000 and $102,000, as of December 31, 1995 and
1994, respectively, utilizing the anticipated marginal incremental tax rate
of 34.0%. Under the requirements of Statement of Financial Accounting
Standards No. 109, the accounting for the reverse merger on an "as-if-pooled"
basis causes the retroactive recognition of the deferred tax asset in each
respective accounting period presented. The cumulative prior period effect of
this adjustment was an increase in retained earnings as of January 1, 1994 of
approximately $62,000. The respective changes in the deferred tax asset
account for the years ended December 31, 1995 and 1994, respectively, are
reflected as a component of deferred income tax (benefit) expense in the
Statement of Income.
Additionally, the forfeiture of its Subchapter S election by Don at September
7, 1995 created a deferred tax liability of approximately $19,975 utilizing
the anticipated marginal incremental tax rate of 34.0%. Per the requirements
of Statement of Financial Accounting Standards No. 109, this amount is
reflected as a component of deferred income tax (benefit) expense in the
Statement of Income for the year ended December 31, 1995.
Further, Furrh, Tempo and Lex have cumulative general business tax credit
carryforwards of approximately $60,000, as of December 31, 1996, available to
offset future tax liabilities, which if not used, begin to expire in 2009.
7. Earnings (loss) per share
Earnings (loss) per share is computed by dividing consolidated net income
(loss) by the composite weighted-average number of shares of common stock
outstanding during the year.
8. Pending Accounting Standards not yet adopted
The Company has not adopted Statement of Financial Accounting Standard Number
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The Company will adopt this standard for the first
quarter of 1996 and anticipates no adverse impact on the financial statements
upon the required implementation of this Standard.
No other issued and unimplemented accounting Standards are either applicable
to the Company or will have a material adverse impact on the financial
statements when implemented.
F-11
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
<TABLE>
<CAPTION>
<S> <C>
NOTE C - NOTE RECEIVABLE
1996 1995
------------ -----------
$220,000 note receivable from an unrelated
individual for the sale of real estate. Interest
at 8.00%. Payable in monthly installments
of approximately $2,669, including interest.
Final payment due in July 2002. Collateralized
by real estate and improvements located in
Dallas County, Texas $147,230 $165,083
Less current portion (21,011) (19,660)
------- -------
Noncurrent portion $126,219 $145,423
======= =======
Future maturities of the note receivable are as follows: Year ending
December 31, Amount
1997 $ 21,011
1998 23,059
1999 24,973
2000 27,045
2001-2002 30,131
Total $ 126,219
========
</TABLE>
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
<S> <C>
1996 1995 Estimated life
------------ ------------ --------------
Buildings and related improvements $1,969,411 $1,994,730 15 - 40 years
Furniture and equipment 762,095 755,680 10 years
Vehicle 52,728 - 3 years
--------- ---------
2,784,234 2,750,410
Less accumulated depreciation (1,381,016) (1,316,679)
--------- ---------
1,403,218 1,433,731
Land 816,487 816,487
--------- ---------
Net property and equipment $2,219,705 $2,250,218
========= =========
</TABLE>
Depreciation expense for the years ended December 31, 1996 and 1995 was
$90,056 and $104,177, respectively.
F-12
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE E - ADVANCES TO/FROM OFFICERS, SHAREHOLDERS AND AFFILIATES
The Company has made net cash advances to various officers, shareholders,
employees and affiliates aggregating approximately $764,600 and $715,500 as of
December 31, 1996 and 1995, respectively and received net advances from
officers, shareholders and affiliates aggregating approximately $2,700 as of
December 31, 1995.
In September 1995, the two largest balances due from two shareholders were
converted to formal notes receivable bearing interest at 5.65%. These notes
mature in September 1997 and all accrued interest and principal is due at that
time. The notes are repayable in either cash or in stock of the Company at an
agreed-upon exchange rate of $2.00 per share. Both shareholders have adequate
share holdings to completely retire the debt, plus anticipated accrued interest,
at the scheduled maturity date. It is the intent of these shareholders to
liquidate the notes with cash repayments.
All advances receivable are due upon demand and bear interest at the statutory
interest rate set by the Internal Revenue Service for related party loans. Due
to the life of the respective receivables, these amounts are classified as
non-current.
NOTE F - LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1996 and 1995,
respectively:
<TABLE>
<CAPTION>
<S> <C>
1996 1995
------------ -----------
$750,000 note payable to a bank. Interest
at 11.0%. Payable in monthly installments
of approximately $16,369, including
interest. Final payment due in September
2000. Collateralized by real estate and
improvements located in Dallas and
Tarrant Counties, Texas. $599,407 $721,469
$52,707 installment note payable to a finance company. Payable in monthly
installments of approximately $1,111, including interest at 9.50%. Final
payment due in April 2001.
Collateralized by a vehicle 47,072 -
$115,000 mortgage note payable to two individuals.
Interest at 12.00%. Payable in monthly installments
of approximately $1,380, including interest. Final
payment due in September 1998. Collateralized
by real estate in Dallas County, Texas. 24,904 37,635
-------- --------
671,383 759,104
Less current portion (158,960) (135,911)
------- -------
Long-term portion $512,423 $623,193
======= =======
</TABLE>
F-13
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE F - LONG-TERM DEBT - Continued
The $750,000 note payable to a bank may be prepaid at any time and any
prepayment must be accompanied by a "yield maintenance fee" equal to 4% of the
outstanding balance if prepaid prior to August 31, 1996; 3% if prepaid between
September 1, 1996 and August 31, 1997; 2% if prepaid between September 1, 1997
and August 31, 1998; and 1% if prepaid between September 1, 1997 and August 31,
1999. The proceeds of this loan were used to retire a$712,000 short-term
mortgage note payable with a payoff balance of approximately $288,000 and
a$105,000 mortgage note payable with a payoff balance of approximately $10,000.
Current maturities of long-term maturities as of December 31, 1996 are as
follows:
Year ending
December 31, Amount
1997 $158,960
1998 175,706
1999 182,033
2000 150,327
2001 4,357
-------
Total $671,383
NOTE G - INCOME TAXES
As of September 7, 1995, concurrent with the reorganization of Furrh, Inc.,
Corporation Lex and Don, Inc. into MDS-TX, the capacity to utilize the net
operating loss carryforward of Furrh, Inc., incurred through the September 7,
1995 reorganization date became more readily determinable. Accordingly, in
accordance with Financial Accounting Standards Board Statement No. 109, MDS-TX,
upon the acquisition of Furrh, Inc., recognized a deferred tax asset to reflect
the future benefit related to the expected utilization of this net operating
loss carryforward. Further, based upon the accounting for the reverse merger on
an "as-if-pooled" basis causes the retroactive recognition of the deferred tax
asset in each respective accounting period presented. The cumulative prior
period effect of this adjustment was an increase in retained earnings as of
January 1, 1994 of approximately $62,000. The respective changes in the deferred
tax asset account for the years ended December 31, 1996 and 1995, respectively,
are reflected as a component of deferred income tax (benefit) expense in the
Statement of Income.
Additionally, the forfeiture of its Subchapter S election by Don at September 7,
1995 created a deferred tax liability of approximately $19,975 utilizing the
anticipated marginal incremental tax rate of 34.0%. Per the requirements of
Statement of Financial Accounting Standards No. 109, this amount is reflected as
a component of deferred income tax (benefit) expense in the Statement of Income
for the year ended December 31, 1995.
F-14
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE G - INCOME TAXES - Continued
The deferred current tax asset and non-current deferred tax liability on the
December 31, 1996 and 1995, respectively, balance sheet consists of the
following:
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, December 31,
1996 1995
--------- --------
Current deferred tax asset $ - $ -
Current deferred tax liability - -
Valuation allowance for current deferred tax asset - -
Net current deferred tax asset $ - $ -
======== =======
Non-current deferred tax asset $ 61,500 $ 76,160
Valuation allowance for non-current deferred tax asset __ - _ -
------ ------
Net non-current deferred tax asset $ 61,500 $ 76,160
======== =======
Non-current deferred tax liability $ (94,569) $(90,213)
======== =======
</TABLE>
The deferred tax asset relates to the anticipated future utilization of
cumulative net operating loss carryforwards and business tax credits of Furrh,
Inc. and its wholly-owned subsidiary, Tempo Tamers, Inc. The non-current
deferred tax liability results from the usage of statutory accelerated tax
depreciation and amortization methods.
The components of income tax expense (benefit) for the years ended December 31,
1996 and 1995, respectively, are as follows:
1996 1995
---- ----
Federal:
Current $ - $(6,020)
Deferred (19,016) 44,253
(19,016) 38,233
State:
Current - -
Deferred - -
- -
Total $(19,016) $38,233
The Company's income tax expense (benefit) for the years ended December 31, 1996
and 1995, respectively, differed from the statutory federal rate of 34 percent
as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
---- ----
Statutory rate applied to earnings (loss) before income taxes $178,039 $37,970
Increase (decrease) in income taxes resulting from:
State income taxes - -
Deferred income taxes (9,077) 44,253
Effect of incremental tax brackets and
utilization of net operating loss carryforwards (149,946) (43,990)
------- ------
Income tax expense $ 19,016 $38,233
======= ======
</TABLE>
F-15
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE G - INCOME TAXES - Continued
Deferred income tax expense (benefit) as of December 31, 1996 and 1995,
respectively, consists of the following components:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
---- ----
Changes in deferred tax assets
Effect of utilization of net operating loss carryforward $14,660 $25,840
Changes in deferred tax liabilities
Effect of forfeiture of Subchapter S
status by Don, Inc. - 19,323
Effect of differences in book and
statutory tax depreciation methods 4,356 910
------ ------
Changes in deferred income tax accounts $19,016 $44,253
====== ======
</TABLE>
NOTE H - CAPITAL STOCK TRANSACTIONS
In August 1995, the Board of Directors of Furrh, Inc., prior to the
consolidation of Furrh into MDS-TX, approved the retirement of 10 shares of
Furrh, Inc. treasury stock which was purchased in 1990 for $75,000. This
retirement was accounted for as a reduction in the carrying value of issued and
outstanding common stock at $10, which equals the par value of the shares and a
reduction of retained earnings of $74,990, in accordance with the tenets of
Accounting Principles Board Opinion No. 6.
On September 7, 1995, the shareholders of Furrh, Inc, Corporation Lex and Don,
Inc. collectively exchanged 100% of the issued and outstanding stock in each
corporation for an aggregate 3,925,000 shares of Million Dollar Saloon, Inc., a
dormant Texas corporation, (MDS-TX) owned by the majority shareholders of the
Company. The purpose of this transaction was to consolidate the ownership of
Furrh, Inc. and Subsidiary, Corporation Lex and Don, Inc. into a single new
company to facilitate the merger with a publicly-held "shell" corporation. The
operating entities of Furrh, Inc. and its subsidiary, Tempo Tamers, Inc.,
Corporation Lex and Don, Inc. became wholly-owned subsidiaries of MDS-TX. No
cash was paid as consideration for this corporate consolidation.
Also, on September 7, 1995, concurrent with the corporate consolidation, MDS-TX
sold under a Stock Purchase Agreement approximately 124,900 shares of
unregistered, restricted common stock at $2.00 per share to unrelated
third-party investors (Shareholders) raising $249,800. These stock sale proceeds
were used to retire debts assumed in the acquisition of treasury stock discussed
in the following paragraph.
This Stock Purchase Agreement was amended on October 31, 1995. The Amended Stock
Purchase Agreement provides that the Shareholders are limited to selling 1/6th
of their holdings per month during each 30-day period after the effective date
of a Form SB-2 Registration Statement being filed by the Company. This
restriction would terminate six (6) months after the effective date of the
Registration Statement.
F-16
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE H - CAPITAL STOCK TRANSACTIONS - Continued
Further, the Amended Stock Purchase Agreement contains the language
"Shareholders shall have the right to sell 1/6 of the Seller Shares that they
own during each 30-day period after the effective date of the Registration
Statement in Form SB-2 for six (6) months. If during any such 30-day period the
[Shareholder] is unable to receive a market price of $3.00 per share for the
Seller Shares that they own, then in such event the Company shall issue to the
[Shareholder] such number of additional shares (the "Additional Shares") of the
Company's Common Stock in order for the value of the Seller Shares owned by the
[Shareholder] that they attempted to sell during the 30-day period to be equal
to $3.00 per share. If at any time during any such 30-day period the closing
market price of the Company's Common Stock equals or exceeds $3.00 per share for
five consecutive trading days and the [Shareholder] did not elect to sell any or
all of its shares subject to being sold during such period, then in such event,
the obligation of the Company to issue Additional Shares shall terminate as to
those shares." The Amended Stock Purchase Agreement further defines the venue
and methodology for determining the share price and it is the understanding and
intent of the Company and the Purchasers that any Additional Shares shall be
issued as restricted and unregistered, pursuant to Rule 144, to the
Shareholder(s).
Per the Amended Stock Purchase Agreement, each 30-day period stands alone and
the obligation to issue Additional Shares is not cumulative. This obligation to
issue Additional Shares shall expire six (6) months after the effective date of
the Form SB-2 Registration Statement.
On September 22, 1995, MDS-TX and the Estate of Don Furrh (a majority
shareholder of all involved corporations, pre- and post-reorganization)
exchanged approximately 325,000 of MDS-TX common stock held by the Estate for
MDS-TX's assumption of $650,000 in debts of the Estate (principally inheritance
taxes and related professional fees). Funds available from the new $750,000 note
payable and the proceeds of the September 7, 1995 stock sales were used to
immediately retire the assumed debt. This treasury stock was immediately retired
by an action of the Board of Directors. This retirement was accounted for as a
reduction in the carrying value of issued and outstanding common stock at $325,
which equals the par value of the shares issued in the combination of Furrh,
Inc. and MDS-TX and a reduction of additional paid-in capital of $649,675, in
accordance with the tenets of Accounting Principles Board Opinion No. 6.
On September 22, 1995, the Shareholders of MDS-NV approved a one-for-twelve
reverse stock split, all share amounts in the accompanying financial statements
reflect the effects of this reverse stock split as of the beginning of the first
period presented.
Also on September 22, 1995, the Shareholders of MDS-NV approved the merger of
MDS-NV with MDS-TX, through the exchange of 4,050,900 post-reverse split shares
of common stock, representing 100% of the issued and outstanding common stock of
MDS-TX, for an equivalent number of shares of MDS-NV.
F-17
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE H - CAPITAL STOCK TRANSACTIONS - Continued
Concurrent with the merger transaction, the controlling shareholder of MDS-NV
(pre-merger) surrendered 500,000 post-reverse split shares of issued and
outstanding common stock to the company with no compensation given for the
surrender. The surrender resulted from the merger negotiations with MDS-TX and
the controlling shareholder's negotiations to become chief executive officer of
the Company. Further, the transaction was necessary to balance the ownership
percentages between the existing pre-merger shareholders of MDS-NV and the
shareholders of MDS-TX. The 500,000 shares were retired by action of the Board
of Directors immediately upon surrender. This transaction was accounted for with
an adjustment to the common stock and additional paid-in capital accounts for
the par value of the surrendered shares.
In June 1995, Furrh, Inc. entered into an agreement with a professional
consulting and financial services firm whereby the consultant would assist
Furrh, Inc. with the location of a suitable publicly-owned `shell' company
merger candidate, raising the requisite equity capital to consummate the merger
and assist the Company in becoming a "fully reporting" company under the
definition of the Securities and Exchange Commission. Furrh, Inc. and the
consultant have agreed that the services provided will be paid with 200,000
shares of post-merger common stock in the resulting public company valued at
$200,000. This transaction is reflected in the accompanying financial statements
and was accounted for as a reduction of paid-in capital as a cost of selling
common stock of MDS-TX for an aggregate $249,800 and the facilitation of merging
MDS-TX into MDS-NV.
In January 1996, the Company issued approximately 10,000 shares of restricted,
unregistered common stock in settlement of a consulting agreement. This
transaction was valued at approximately $10,000, which approximates the fair
market value of the services.
NOTE I - COMMITMENTS AND CONTINGENCIES
The Company leases commercial real estate on long-term operating leases. The
leases require minimum monthly or weekly lease payments, plus reimbursement for
annual property taxes. Additionally, certain of the leases also require the
payment of percentage rent based on various percentages of specified gross sales
of the tenant, as defined in the respective lease agreement, in addition to the
fixed minimum lease payments. The respective tenants are responsible for normal
maintenance and repairs, insurance and other direct operating expenses related
to the property.
As of December 31, 1996, future minimum non-cancelable lease revenues are as
follows:
Year ending
December 31, Amount
1997 $ 374,105
1998 221,000
1999 221,000
2000 247,000
2001 247,000
2002-2005 99,750
Total $1,409,855
F-18
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE I - COMMITMENTS AND CONTINGENCIES - Continued
The Company is the subject of asserted claims of employment discrimination filed
with the Equal Employment Opportunity Commission ("EEOC"). The Company has
responded to the charges of discrimination and replied to all EEOC requests for
information. The ultimate outcome of these matters, at this time, is unknown.
The Company is vigorously contesting each claim of discrimination.
NOTE J - NONMONETARY TRANSACTION
In May 1995, Don, Inc. transferred ownership of a small residential property
located in Dallas County, Texas as a final payment in lieu of cash for
compensation to an unrelated third-party upon the termination of services. Don,
Inc. paid approximately $5,500 for the property in January 1979 and the property
had a book value of approximately $3,200, which approximated the fair market
value of the property, at the date of transfer. Accordingly, due to the
condition and location of the transferred property at the date of transference,
the transaction was accounted for at its historical recorded value and Don, Inc.
recognized a charge of approximately $3,200 at the date of transfer.
NOTE K - RELATED PARTY TRANSACTIONS
For the years ended December 31, 1996 and 1995, respectively, the Company paid
an aggregate of approximately $ - and $365,338 to various entities owned or
controlled by Company shareholders for management fees prior to the
aforementioned reverse merger.
NOTE L - SEGMENT INFORMATION
Selected information relating to the Company's segments for the years ended
December 31, are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
-------------- -------------
Revenues
Bar and restaurant operations $3,019,148 $2,750,794
Rental real estate operations 440,176 476,257
General unallocated corporate matters - -
Operating profit (loss)
Bar and restaurant operations $ 355,161 $ 277,046
Rental real estate operations 427,367 (979)
General unallocated corporate matters (290,876) (169,060)
Identifiable assets
Bar and restaurant operations $1,367,941 $1,133,315
Rental real estate operations 1,849,765 1,441,291
General unallocated corporate matters 394,483 957,355
</TABLE>
F-19
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1996 and 1995
NOTE L - SEGMENT INFORMATION - Continued
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
-------------- --------------
Depreciation and amortization
Bar and restaurant operations $ 60,477 $ 68,759
Rental real estate operations 29,377 42,973
General unallocated corporate matters 22,259 -
Capital expenditures
Bar and restaurant operations $ 6,815 $ 82,108
Rental real estate operations - -
General unallocated corporate matters 52,727 -
</TABLE>
Costs and expenses of the segments are specifically identified where possible
and are otherwise allocated.
F-20
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 267,856
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 11,169
<CURRENT-ASSETS> 337,754
<PP&E> 2,784,234
<DEPRECIATION> 1,381,016
<TOTAL-ASSETS> 3,612,189
<CURRENT-LIABILITIES> 390,377
<BONDS> 0
0
0
<COMMON> 5,010
<OTHER-SE> 2,609,810
<TOTAL-LIABILITY-AND-EQUITY> 3,612,189
<SALES> 3,459,324
<TOTAL-REVENUES> 3,459,324
<CGS> 1,734,913
<TOTAL-COSTS> 1,263,837
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95,549
<INCOME-PRETAX> 523,643
<INCOME-TAX> 18,016
<INCOME-CONTINUING> 504,617
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 504,617
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0
</TABLE>
