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, 1997
Commission File Number: 0-27450
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, 1997 were
$3,569,784. The aggregate market value of common stock held by non-affiliates of
the issuer at February 15, 1998, based upon the closing bid price on The OTC
Electronic Bulletin Board on said date, was approximately $1,735,440. As of
March 13, 1998, there were 5,409,451 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.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
PAGE
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.......... 12
Item 7. Financial Statements............................................... 14
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.......................................... 15
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................................... 17
</TABLE>
-2-
<PAGE>
PART I
CAUTION REGARDING FORWARD-LOOKING INFORMATION
This annual report contains certain forward-looking statements and
information relating to the Company (as hereinafter defined) that are based on
the beliefs of the Company or management as well as assumptions made by and
information currently available to the Company or management. When used in this
document, the words "anticipate," "believe," "estimate," "expect" and "intend"
and similar expressions, as they relate to the Company or its management, are
intended to identify forward-looking statements. Such statements reflect the
current view of the Company regarding future events and are subject to certain
risks, uncertainties and assumptions, including the risks and uncertainties
noted. Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. In each instance, forward-looking information should be considered in
light of the accompanying meaningful cautionary statements herein.
ITEM 1. DESCRIPTION OF BUSINESS
Million Dollar Saloon, Inc. (the "Company") was initially incorporated in
the State of Nevada on September 28, 1987 as Goodheart Ventures, Inc. The
Company was relatively inactive from 1991 to 1995. Since 1995, the Company has
sought potential business opportunities through either purchase, acquisition or
merger transactions.
In connection with its business strategy, the Company in 1995 identified
the Million Dollar Saloon, Inc., a Texas corporation ("MDS-TX"), as a suitable
candidate for merger (the "MDS-TX Merger"). In September 1995, the Company's
stockholders approved (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 MDS-TX Merger, (b) the merger
agreement with 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 MDS-TX 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 MDS-TX 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.
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.
-3-
<PAGE>
Adult Cabaret
General. The Company, through Tempo, owns and operates an adult cabaret in
Dallas, Texas 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.
Female Entertainment. The 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-
<PAGE>
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. 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 the local regulatory
environment, the availability of sites in high traffic commercial areas suitable
for conversion to The Million Dollar Saloon style cabarets, sports bars or
casual clubs, potential competition in the area, market conditions and
profitability of other similar establishments in the target 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 three
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.
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
-5-
<PAGE>
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"
of Dallas, Texas (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 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. On June 11, 1997, the
City of Dallas denied the Company's application for a Business Permit. The
Company's appeal of the decision was also denied on January 22, 1998. The
Company, on February 2, 1998, obtained an injunction against the City of Dallas
prohibiting the City from deeming the Company's Business Permit as expired until
a trial on the merits could be held, which trial is scheduled to commence on
June 12, 1998. See "Legal Proceedings."
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, 1997, 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, they are 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.
Insurance
The Company maintains insurance in amounts it considers adequate for
personal injury and property damage. The Company also maintains personal injury
liquor liability insurance since 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
-6-
<PAGE>
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 an 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 which house
adult entertainment nightclubs in the Dallas-Fort Worth geographic region.
Management is of the opinion that all properties 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 non-affiliated 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 in connection with a $750,000 long-term note, dated September 22,
1995, payable to a lending institution. See "Properties" and Note F to the
Company's Financial Statements beginning on page 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. All properties are physically located in geographic areas
suitable for their current use. There exist facilities which could be similarly
used in the same geographic area as the Company's properties. The effective
rentals vary between locations because of desirability and attractiveness of
locations. See "Properties."
The Company is currently seeking additional financing from private
investors to provide funds for acquisitions and renovation and remodeling of
existing facilities. There is no assurance that the Company will be able to
obtain such financing or, if obtained, that it will be on favorable terms to the
Company.
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:
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.
Risk of Inadequate Financial Controls. A significant part of the revenues
earned by the Company through its adult cabaret operations is 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
-7-
<PAGE>
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,
Texas 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 be able to 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.
Dependence upon Company's Ability to Manage Growth and Expansion. The
Company's ability to manage its growth, if any, will require it to continue to
improve and expand its management, operational and financial systems and
controls. Any measurable growth in the Company's business will result in
additional demands on its management, administrative, operation, financial and
technical resources. There can be no assurance that the Company will be able to
successfully address these additional demands. There also can be no assurance
that the Company's operating and financial control systems will be adequate to
support its future operations and anticipated growth. Failure to manage the
Company's growth properly could have a material adverse effect upon the
Company's business, financial condition and results of operations. The Company
may also seek potential acquisitions that could complement or expand the
Company's business. In the event the Company were to identify an appropriate
acquisition candidate, there is no assurance that the Company would be able to
successfully negotiate, finance or integrate such acquired properties or
businesses into current operations. Furthermore, such an acquisition could cause
a diversion of management's time and resources. There can be no assurance that a
given acquisition, when consummated, would not materially adversely effect the
Company's business and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Permits Relating to the Sale of Alcohol and Operation of Sexually Oriented
Business. The Company has never been the subject of a protest hearing against
the renewal of its Permits. However, on June 11, 1997, and again on appeal on
January 22, 1998, the City of Dallas denied the Company's application for a
Business Permit. The Company on February 2, 1998 obtained an injunction against
the City of Dallas to prevent the City from deeming the Company's existing
Business Permit as expired until a trial on the merits was completed, which
trial is scheduled for June 1998. There can be no assurance that protests will
not be made in the future, nor can there be any assurance that any future
Permits or Business Permits will be granted in the event any future protests are
made. Other state and local governments 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
Company's Permits 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. See "Legal
Proceedings."
Limitations on Protection of Service Marks. Rights of the Company to the
trade name "The Million Dollar Saloon" were purchased. No assurance can be given
that 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 timeconsuming. The loss of the
intellectual property rights owned or claimed by the Company could have a
material adverse effect on the Company.
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 1998. 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.
-8-
<PAGE>
The Company owns three facilities which operate as adult cabarets in the
Dallas-Fort Worth geographic region. Management is of the opinion that all
properties 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 this and two
additional properties in connection with a $750,000 long-term note, dated
September 22, 1995, payable to a lending institution.
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.
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 Company is currently seeking additional financing from private
investors to provide funds for acquisitions and renovation and remodeling of
existing facilities. There is no assurance that the Company will be able to
obtain such financing or, if obtained, that it will be on favorable terms to the
Company.
The following is a summary of the terms, conditions and operating
parameters of the two properties being leased from the Company:
<TABLE>
<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 (1) (1)
Lease expiration May 2002 August 1998
Scheduled rentals $4,250 per week through 5/25/99 $3,500 per week from
$4,750 per week from 5/26/99 8/16/95 through 8/15/98
through 5/23/02
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) $989,466 $63,667
Federal income tax basis
(excluding land) $221,298 $128,429
Depreciation method and life SL-19 yrs. ACRS-15 yrs.
Ad valorem tax rate per $100 of valuation $2.56 $3.10
1997 Ad valorem taxes $9,100 $6,478
</TABLE>
- --------------------
(1) Both properties are subject to a lien incurred in connection with a
$750,000 long-term note, dated September 22, 1995, payable to a lending
institution. 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 2%
if prepaid between September 1, 1997 and August 31, 1998 and 1% if prepaid
between September 1, 1998 and August 31, 1999.
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.
During 1996, the Company was the subject of asserted claims of employment
discrimination filed with the Equal Employment Opportunity Commission ("EEOC").
The Company responded to the charges of discrimination and replied to all EEOC
requests for information. The Company vigorously contested each claim of
-9-
<PAGE>
discrimination. During the second quarter of 1997, the statutory period for
filing of administrative claims or litigation passed with no action instigated
by either the EEOC or the individuals making the employment discrimination
assertions. However, there can be no assurance that the Company will not be
subject to future claims by the EEOC or any other governmental agencies relating
to its employees or operation of its business.
In May 1997, the Company filed an application with the City of Dallas for
renewal of its Business Permit. On June 11, 1997, the City of Dallas denied the
application for said permit as the City contended that the Company's location
was located within 1,000 feet of a residence district, as prohibited by city
ordinance. The Company in turn filed a request for an exemption from the
locational restrictions contending (i) the location of the Million Dollar Saloon
did not have a detrimental effect on nearby properties or is contrary to the
public safety or welfare, (ii) the granting of the exemption did not violate the
spirit or intent of the city ordinance and (iii) the location of the Million
Dollar Saloon did not downgrade the property values or quality of life in the
adjacent areas. On January 22, 1998, an appeal was heard by the City's Permit
and License Appeals Board, with the Company's appeal being denied. On January
23, 1998, the Company filed suit in the District Court of Dallas County, 298th
Judicial District, under Cause No. DV98-00614 (the "Lawsuit"), alleging that the
City of Dallas improperly denied the Company's application for a Business Permit
in light of the exemptions afforded under Dallas City Code ss. 41A-14. In the
Lawsuit, the Company also sought injunctive relief in order to restrain the City
of Dallas from enforcing the Sexually Oriented Business Code against the
Company. On January 23, 1998, the Company received a temporary restraining order
against the City of Dallas such that the City could not treat the Company's
Business Permit as expired. Subsequently, on February 2, 1998, the court entered
a temporary injunction ordering that the City of Dallas desist and refrain from
treating the Company's Business Permit as expired until a trial on the merits of
the matter could be held, with said trial being scheduled for June 12, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
During the fourth quarter of fiscal 1997, the Company held its annual
shareholders meeting. The following matters were submitted to a vote of the
security-holders, through solicitation of proxies or otherwise:
Election of Directors. On the matter of the election of directors, the
following nominees received the following votes for election and were elected as
directors of the Company:
Nominee For Withheld
-------------------------------- ------------- --------------
Nina J. Furrh 2,986,096 102,000
Bjorn Heyerdahl(1) 2,986,096 102,000
Dewanna Ross 2,986,096 102,000
Ronald W. Johnston 2,986,096 102,000
Sharon Furrh 2,986,096 102,000
- -------------------------
(1) Mr. Heyerdahl resigned as an officer and director of the Company in
February 1998. He continues to serve the Company as a business consultant.
He will be responsible for locating and evaluating potential domestic and
international acquisition opportunities for the Company. He will be paid
fees from time to time based on performance and as approved by the Board of
Directors. See "Part III - Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with Section 16(a) of the Exchange Act."
Ratification of Selection of Accountants. On the matter of ratification of
the selection of S.W. Hatfield & Associates as independent public accountants of
the Company for fiscal 1997, the Company's stockholders approved the selection
as follows:
Votes
-------------------------------------------------------------------------
For Against Abstain
----------------- -------------------------- --------------------------
2,983,881 4,200 100,015
-10-
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 31, 1997, the Company had approximately 651 holders of
record of its Common Stock. Outstanding shares of the Company's Common Stock
totaled 5,409,451. The Company's transfer agent is Securities Transfer
Corporation, 16910 Dallas Parkway, Suite 100, Dallas, Texas 75248.
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 range of high and low closing bid prices per share for the Common Stock for
the periods indicated.
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
Fiscal Year Ended
December 31, 1997
-------------------------------
First Quarter $1.50 $0.88
Second Quarter $2.00 $1.00
Third Quarter $1.25 $1.06
Fourth Quarter $1.06 $0.75
Fiscal Year Ended
December 31, 1998
-------------------------------
First Quarter (through March 4, 1998) $0.75 $0.63
- -------------
(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 1997 and 1996, the Company's Board of Directors
declared a per share cash dividend as follows:
Period 1997 1996
---------------------------- ------------- -------------
First Quarter $0.040 $0.030
Second Quarter 0.020 0.015
Third Quarter 0.015 0.015
Fourth Quarter 0.010 0.030
----- -----
Total per share $0.085 $0.090
====== ======
Total dividends declared during 1997 and 1996 were approximately $433,054
and $450,908, respectively.
-11-
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
Caution regarding forward-looking information
This annual report contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of the Company
or management as well as assumptions made by and information currently available
to the Company or management. When used in this document, the words
"anticipate," "believe," "estimate," "expect" and "intend" and similar
expressions, as they relate to the Company or its management, are intended to
identify forward-looking statements. Such statements reflect the current view of
the Company regarding future events and are subject to certain risks,
uncertainties and assumptions, including the risks and uncertainties noted.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. In each instance, forward-looking information should be considered in
light of the accompanying meaningful cautionary statements hereof.
The following discussion should be read in conjunction with the
accompanying financial statements and notes thereto, beginning on page F-1
herein.
Results of Operations
Year ended December 31, 1997 as compared to year ended December 31, 1996.
Bar and restaurant operations increased by approximately $100,000 for the year
ended December 31, 1997 as compared to the year ended December 31, 1996. During
the second quarter of 1997, management instituted new controls over bar
inventories and the Company experienced increased traffic due to the completion
and opening of a new mass transit rail station near the Company's adult
entertainment operation. This increase was mitigated by lower convention traffic
in the Dallas-Ft. Worth geographic region during 1997, which is one of the key
factors contributing to the Company's patronage numbers. Additionally, due to
scheduled increases, the Company experienced higher rental incomes of
approximately $10,000 during 1997 as compared to the prior year.
Cost of sales increased by approximately $24,000 during 1997 as compared to
1996. This increase is related to increased sales impacting variable costs
related to consumable inventories, supplies and related State excise taxes.
Gross profit percentages increased slightly to 52.1% for 1997 as compared to
49.9% for 1996. This increase relates directly to the new management controls
over bar inventories. The cost of sales as a percentage of total sales is
anticipated by management to remain stable for future periods.
General and administrative expenses increased by approximately $36,000
during 1997 as compared to 1996. This increase relates to increases in
advertising and marketing expenses to attract locally derived patronage to
offset the decline in convention and business meeting driven traffic in Dallas,
Texas during 1997. These expenses increased in 1997 as compared to 1996 as a
result of increased legal and accounting fees related to preliminary
investigations of potential merger and/or acquisition candidates. The Company
has not identified any suitable merger or acquisition candidates as a result of
the preliminary investigations. Management continues to monitor its expenditure
levels to achieve optimum financial results.
Net income before income taxes, excluding the gain on the sale of fixed
assets of approximately $48,500, was approximately $659,600 for 1997 versus
approximately $523,600 for 1996. After-tax net income has decreased by
approximately $84,000 as a direct result of the utilization of all net operating
loss and business tax credit carryforwards on the Company's 1996 income tax
calculation. Overall earnings per share of approximately $0.08 per share were
achieved for 1997 as compared to approximately $0.10 per share for 1996.
Year ended December 31, 1996 as compared to year ended 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
-12-
<PAGE>
offset by related increases in direct labor costs. Costs of sales increased by
approximately $184,000 in 1996 compared to the same period in 1995. Rental
revenues on leased real estate 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.
Operating expenses declined by approximately $305,000 in 1996 as compared
to 1995. The principal savings were experienced in reduced management fees,
which were discontinued in September 1995 as a result of the MDS-TX Merger. The
Company has experienced increases in interest expense due to increased
indebtedness incurred in the second quarter of 1996 and the MDS-TX Merger.
Further, the Company had increased depreciation and amortization expenses as a
result of the amortization of costs incurred for the MDS-TX Merger. 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.
Seasonality
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.
Liquidity and Capital Resources
As of December 31, 1997, the Company had working capital of approximately
$17,400 as compared to $(52,600) at December 31, 1996. The Company generated
positive cash flows from operations of approximately $430,000 for 1997 versus
approximately $580,000 for 1996.
The Company is currently seeking additional financing from private
investors to provide funds for acquisitions and renovation and remodeling of
existing facilities. There is no assurance that the Company will be able to
obtain such financing or, if obtained, that it will be on favorable terms to the
Company.
The Company anticipates the continuance of dividend payments and paid
approximately $529,000 during 1997, including approximately $78,000 declared in
the fourth quarter of 1996. Further, the Company declared a fourth quarter
dividend in 1997 of approximately $54,000 which was paid in January 1998.
Future operating liquidity, debt service and dividend payments are expected
to be sustained from continuing operations. Additionally, management is of the
opinion that there is additional potential availability of incremental mortgage
debt and the opportunity for the sale of additional shares of Common Stock
through either private placements or secondary offerings.
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 were nominal during the
year ended December 31, 1997. 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. 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, if the Company is
successful in obtaining additional financing from private investors through the
issuance of debt and/or equity securities, it intends to use a portion of such
proceeds, if any, for renovation and remodeling costs for its existing
facilities. Management believes that such expenses, if renovation of facilities
is undertaken, will range from $500,000 to $750,000. Management believes that
all necessary cash liquidity, other than renovation expenses, will be obtained
from existing operations.
-13-
<PAGE>
Because of the large volume of cash handled by the bar and restaurant
facility personnel, stringent cash controls have been implemented by the
Company. Management believes that it will be able to duplicate the financial
controls implemented at the existing facility into future locations, and that
these controls will provide sufficient safeguards to protect the interests of
the Company.
Year 2000 Modifications
The Company is currently reviewing its computer systems in order to
evaluate necessary modifications for the year 2000. The Company does not
currently anticipate that it will incur material expenditures to complete any
such modifications.
Other Matters
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130") which established standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS 130 is effective for
years beginning after December 15, 1997. The Company does not anticipate a
material impact to its consolidated financial statements upon adoption of this
standard.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures About Segments of an
Enterprise and Related Information ("SFAS 131") which establishes standards for
the way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes the related disclosures about
products and services, geographic areas and major customers. SFAS 131 replaces
the "industry segment" concept of Financial Accounting Standard No. 14 with a
"management approach" concept as the basis for identifying reportable segments.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997. The Company does not anticipate a material impact to its
consolidated financial statements upon adoption of this standard.
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 MDS-TX Merger nor have
there been any disagreements with accountants on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.
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.
<TABLE>
<S> <C>
Name Age Position(s)
------------------------------------------------------------------------------------------------
Nina J. Furrh(1) 61 Chairman of the Board, Chief Executive Officer and President
-14-
<PAGE>
Dewanna Ross 42 Chief Operating Officer, Vice President of Operations, Secretary,
Treasurer and Director
Ronald W. Johnston 44 Vice President of Finance, Chief Financial Officer and Director
Sharon Furrh 49 Vice President of Planning and Development and Director
</TABLE>
- ----------------------
(1) On February 28, 1998, Bjorn Heyerdahl resigned as Chief Executive Officer
and a director of the Company. Nina J. Furrh, on February 28, 1998, was
elected as Chief Executive Officer to replace Mr. Heyerdahl. Mr. Heyerdahl
will continue to serve the Company as a business consultant. He will be
responsible for locating and evaluating potential domestic and
international acquisition opportunities for the Company, and will be paid
fees from time to time based on performance and as approved by the Board of
Directors.
Nina J. Furrh served as President of Furrh since 1989 and has served as
Chairman of the Board and President of the Company since 1995. In February 1998,
Mrs. Furrh was elected the Chief Executive Officer of the Company. Mrs. Furrh
became involved in the daily operations of The Million Dollar Saloon in December
1988. Mrs. Furrh directs the overall operations and policy of the Company and
its real estate holdings.
Dewanna Ross has served as administrative manager for the Furrh family of
companies since 1976. Ms. Ross has served as an officer and a director of the
Company since 1995. In February 1998, Ms. Ross was elected Chief Operating
Officer by the Board of Directors. She is responsible for the daily operations
of the Company and is principally responsible for supervision of the management
staff of The Million Dollar Saloon. She is also responsible for the development
of corporate procedures and policies, including the hiring and training of
corporate staff.
Sharon Furrh has served as Vice-President of Furrh since 1992. Since 1995,
Ms. Furrh has been a director of the Company. In October 1997, Ms. Furrh was
elected Vice President of Planning and Development. Sharon Furrh has been
involved as a design consultant for The Million Dollar Saloon, in both its
original construction and in subsequent remodelings. Additionally, Ms. Furrh has
been responsible for advertising, promotions and public relations for The
Million Dollar Saloon and other related Company businesses. Sharon Furrh is the
daughter in law of Nina J. Furrh.
Ronald W. Johnston, CPA, has served as a consultant to the Furrh business
entities since September 1992. Mr. Johnston has served as a director and Chief
Financial Officer of the Company since 1995. In October 1997, Mr. Johnston was
elected as a Vice President of Finance of the Company. Mr. Johnston only devotes
such portion of his time as is necessary to perform his duties as Chief
Financial Officer. Mr. Johnston has been a certified public accountant in
private practice and a principal of his own accounting firm in Dallas since
1990. Mr. Johnston's accounting 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.
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
representations from the Company's directors and executive officers during the
fiscal year ended December 31, 1997, all Section 16(a) filing requirements
applicable to its directors and officers for such year were complied with. The
Company has been unable to confirm that certain of its 10% holders, who are not
also officers or directors of the Company, have satisfied their respective
filing requirements under Section 16(a). The Company is making appropriate
inquiries to ensure that all 10% holders have complied with the reporting
requirements of Section 16(a).
ITEM 10. EXECUTIVE COMPENSATION
-15-
<PAGE>
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. The table below does not reflect dividend payments received by the
President and Chief Executive Officer. 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>
Summary Compensation Table
Annual Compensation Long-Term Compensation
----------------------- --------------------------
Awards Payouts
-------------------------- -------
<S> <C> <C> <C>
Other Restricted Securities All
Salary/ Annual Stock Underlying LTIP Other
Name/Title Year Bonus Compensation Awards Options/SARs Payouts Compensation
- --------------------------- ---- -------- ------------- ----------- ------------ ------- ------------
Nina J. Furrh, President(3) 1997 $-0- NA NA NA NA $ -0-(1)
1996 $-0- NA NA NA NA $2,150(1)
1995 $61,200 NA NA NA NA $58,500(1)
Bjorn Heyerdahl, Chief 1997 $-0- NA NA NA NA $13,340(2)
Executive Officer(3) 1996 $32,000 NA NA NA NA $ 8,888(2)
1995 $44,000 NA NA NA NA NA
</TABLE>
- ---------------------
(1) Represents distributions from the Furrh Limited Partnership.
(2) Represents payment of an auto lease by the Company for the benefit of Mr.
Heyerdahl.
(3) Mr. Heyerdahl resigned as an officer and director of the Company in
February 1998. Nina J. Furrh was appointed Chief Executive Officer of the
Company to replace Mr. Heyerdahl upon his resignation. Mr. Heyerdahl will
continue to serve the Company as a business consultant. He will be
responsible for locating and evaluating potential domestic and
international acquisition opportunities for the Company, and he will be
paid fees from time to time based on performance and as approved by the
Board of Directors.
Director Compensation
The Company does not currently pay a director fee for attending scheduled
and special meetings of the Board of Directors. The Company does pay the
expenses of all of its directors in attending board meetings.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as of February 15, 1998,
with respect to the beneficial ownership of shares of Common Stock by (i) each
person who owns beneficially more than five percent 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>
<S> <C>
Percentage of
Name(1) Number of Shares(2) Common Stock Owned
----------------------------------------------------------------------------------------------
Estate of Donald G. Furrh 180,776 3.3%
Dona G. Furrh 582,476 10.8%
Joshua Barrett Furrh Trust(3) 521,474 9.6%
Nina J. Furrh(4) 1,883,297 34.8%
Bjorn Heyerdahl 500,001 9.2%
Dewanna Ross(4) 4,000 *
Ronald W. Johnston(4) 1,987 *
Officers and Directors as a group (4 persons) 1,889,284 34.9%
--------- ----
</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.
-16-
<PAGE>
(3) Sharon Furrh, Vice President of Planning and Development and a director of
the Company, is the trustee of the Joshua Barrett Furrh Trust and has voting
power over the shares of Common Stock of the Company.
(4) Officers and directors of the Company. See "Part III -- Item 9. Directors,
Executive Officers, Promoters, and Control Persons; Compliance with Section
16(a) of the Exchange Act."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no material transactions between the Company and any of its
officers, directors, principal stockholders or their affiliates during 1997.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <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-2
Consolidated Balance Sheets - December 31, 1997 and 1996............................. F-3
Consolidated Statements of Income - Years Ended December 31, 1997 and
1996........................................................................ F-5
Consolidated Statements of Changes in Stockholders' Equity - Years Ended F-6
December 31, 1997 and 1996..................................................
Consolidated Statements of Cash Flows - Years Ended December 31, 1997 and
1996........................................................................ F-7
Notes to Consolidated Financial Statements........................................... F-9
</TABLE>
-17-
<PAGE>
<TABLE>
<S> <C>
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 dated September 7,
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.
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 with the SEC on
December 26, 1995. SEC File No. 0-27450.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the three months ended December
31, 1997.
</TABLE>
-18-
<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 16th day of March, 1998.
MILLION DOLLAR SALOON, INC.
By: /s/ Nina J. Furrh
-------------------------------------------
Nina J. Furrh, Chairman of the Board, Chief
Executive Officer and President
<TABLE>
<CAPTION>
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:
<S> <C> <C>
Signature Title Date
- ----------------------------------------- -------------------------------------------- ---------------
/s/ Nina J. Furrh Chairman of the Board, Chief Executive March 16, 1998
- ----------------------------------------- Officer, President and Director
Nina J. Furrh
/s/ Dewanna Ross Chief Operating Officer, Vice President of March 16, 1998
- ----------------------------------------- Operations, Secretary, Treasurer and Director
Dewanna Ross
/s/ Ronald W. Johnston Vice President of Finance, Chief Financial March 16, 1998
- ----------------------------------------- Officer and Director
Ronald W. Johnston
/s/ Sharon Furrh Vice President of Planning and Development March 16, 1998
- ----------------------------------------- and Director
Sharon Furrh
</TABLE>
-19-
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Income
for the years ended December 31, 1997 and 1996 F-5
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1997 and 1996 F-6
Consolidated Statements of Cash Flows
for the years ended December 31, 1997 and 1996 F-7
Notes to Consolidated Financial Statements F-9
F-1
<PAGE>
S. W. HATFIELD + ASSOCIATES
certified public accountants
Members: American Institute of Certified Public Accountants
SEC Practice Section
Information Technology Section
Texas Society of 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, 1997 and 1996, 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, 1997 and 1996 and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ S.W. HATFIELD + ASSOCIATES
--------------------------
S. W. HATFIELD + ASSOCIATES
Dallas, Texas
January 29, 1998
Use our past to assist your future sm
P. O. Box 820392 o Dallas, Texas 75382-0392 o 214-342-9635
9236 Church Road, Suite 1040 o Dallas, Texas 75231 o 800-244-0639
214-342-9601 (fax) o [email protected] (e-mail)
F-2
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
------
1997 1996
CURRENT ASSETS ----------- -----------
Cash on hand and in bank $ 149,952 $ 267,856
Note receivable - current portion 22,604 21,011
Prepaid Federal income taxes receivable 37,248 --
Inventory 16,097 11,169
Prepaid expenses 73,544 37,718
----------- -----------
Total current assets 299,445 337,754
----------- -----------
PROPERTY AND EQUIPMENT
Buildings and related improvements 1,955,132 1,969,411
Furniture and equipment 757,110 762,095
Vehicles 52,728 52,728
----------- -----------
2,764,970 2,784,234
Less accumulated depreciation (1,475,570) (1,381,016)
----------- -----------
1,289,400 1,403,218
Land 741,488 816,487
----------- -----------
Net property and equipment 2,030,888 2,219,705
----------- -----------
OTHER ASSETS
Note receivable - noncurrent portion 105,442 126,219
Accounts receivable from officers,
shareholders and affiliates 805,684 764,576
Organization costs, net of accumulated
amortization of $34,658 and $19,673,
respectively 40,270 55,255
Loan costs, net of accumulated amortization
of $14,222 and 7,902, respectively 17,384 23,705
Deferred tax asset -- 61,500
Other 7,725 23,475
----------- -----------
Total other assets 976,505 1,054,730
----------- -----------
TOTAL ASSETS $ 3,306,838 $ 3,612,189
=========== ===========
- Continued -
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, 1997 and 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C>
1997 1996
----------- -----------
CURRENT LIABILITIES
Current portion of long-term debt $ 163,288 $ 158,960
Accounts payable - trade 22,571 15,948
Accrued liabilities 35,622 58,666
Dividends payable 54,095 150,303
Tenant deposits 6,500 6,500
---------- ----------
Total current liabilities 282,076 390,377
---------- ----------
LONG-TERM LIABILITIES
Long-term debt, net of current maturities 334,872 512,423
Deferred tax liability 98,936 94,569
---------- ----------
Total liabilities 715,884 997,369
---------- ----------
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. 5,409,451 and 5,010,084 issued and
outstanding, respectively 5,409 5,010
Additional paid-in capital -- 9,990
Retained earnings 2,585,545 2,599,820
---------- ----------
Total shareholders' equity 2,590,954 2,614,820
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $3,306,838 $3,612,189
========== ==========
</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 INCOME
Years ended December 31, 1997 and 1996
1997 1996
----------- -----------
REVENUES
Bar and restaurant sales $ 3,119,557 $ 3,019,148
Rental income 450,227 440,176
----------- -----------
Total revenues 3,569,784 3,459,324
----------- -----------
COST OF SALES - BAR AND
RESTAURANT OPERATIONS
Direct labor 1,163,949 1,246,401
Purchases 546,971 488,512
----------- -----------
Total cost of sales 1,710,920 1,734,913
----------- -----------
GROSS PROFIT 1,858,864 1,724,411
----------- -----------
OPERATING EXPENSES
Salaries, wages and related expenses 318,106 362,598
Consulting, management and other
professional fees 143,206 103,815
Rental expenses, principally taxes 67,327 26,514
Interest expense 62,342 95,549
Other operating expenses 597,073 563,348
Depreciation and amortization 111,729 112,113
----------- -----------
Total operating expenses 1,299,783 1,263,937
----------- -----------
INCOME FROM OPERATIONS 559,081 460,474
OTHER INCOME (EXPENSES)
Gain on sale of property and equipment 48,498 --
Interest income 52,065 63,169
----------- -----------
INCOME BEFORE INCOME TAXES 659,644 523,643
INCOME TAX (EXPENSE) BENEFIT
Currently payable (173,342) --
Deferred (65,866) (19,016)
----------- -----------
NET INCOME $ 420,436 $ 504,617
=========== ===========
Earnings per share of common stock outstanding $0.08 $0.10
===== =====
Weighted-average number of shares outstanding 5,073,392 5,009,456
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1997 and 1996
Additional Total
Common Stock paid-in Retained shareholders'
# shares Amount capital earnings equity
----------- ----------- ----------- ----------- -----------
<S> <C> <C>
Balances at
January 1, 1996 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 -- -- -- (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
Shares issued under terms of
1996 private placement
related to selling price
guarantees 403,116 403 (403) -- --
Acquisition and retirement
of treasury stock (3,749) (4) (9,587) (1,656) (11,247)
Dividends declared -- -- -- (433,055) (433,055)
Net income for the year -- -- -- 420,436 420,436
----------- ----------- ----------- ----------- -----------
Balances at
December 31, 1997 5,409,451 $ 5,409 $ -- $ 2,585,545 $2,590,954
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1996
1997 1996
----------- -----------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 420,436 $ 504,617
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 111,729 112,113
Gain on sale of property and equipment (48,498) --
Common stock issued for consulting fees -- 10,000
Interest income from shareholders capitalized as principal (40,564) (51,787)
Deferred income taxes 65,866 19,016
(Increase) decrease in
Accounts receivable - trade -- 63,653
Prepaid income taxes (37,248) 8,520
Inventory (4,928) (1,232)
Prepaid expenses (35,826) (37,718)
Deposits and other assets 15,000 --
Increase (decrease) in
Accounts payable and other accrued liabilities (16,422) (47,685)
--------- ---------
Net cash provided by operating activities 429,545 579,497
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collections on note receivable 19,184 17,853
Proceeds from sale of property and equipment 149,374 --
Purchases of property and equipment (1,731) (6,815)
Acquisition expenses paid -- (15,000)
Cash advances to shareholders and affiliates (544) --
--------- ---------
Net cash used in investing activities 166,283 (3,962)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt (173,223) (140,448)
Purchase of treasury stock (11,247) --
Dividends paid (529,262) (300,605)
--------- ---------
Net cash used in financing activities (713,732) (441,053)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS (117,904) 134,482
Cash and cash equivalents at beginning of year 267,856 133,374
--------- ---------
Cash and cash equivalents at end of year $ 149,952 $ 267,856
========= =========
</TABLE>
- Continued -
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31, 1997 and 1996
<S> <C>
1997 1996
--------- ---------
SUPPLEMENTAL DISCLOSURES OF
INTEREST AND INCOME TAXES PAID
Interest paid on borrowings $ 62,342 $ 95,549
========= =========
Income taxes paid (refunded) $ 210,590 $ (8,520)
========= =========
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 $0.01
and $0.03 per share, respectively $ 54,095 $ 150,303
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
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. MDS-NV was formed for the purpose of seeking a suitable merger or
acquisition candidate. MDS-NV's activities consisted principally of raising
capital and, as such, was a development stage company prior to the transactions
discussed in succeeding paragraphs.
In September 1995, MDS-NV experienced a change in control and completed a
reverse merger transaction with Million Dollar Saloon, Inc, (a Texas
corporation) and its wholly-owned subsidiaries, Furrh, Inc., Tempo Tamers, Inc.,
Corporation Lex and Don, Inc. All of the wholly-owned subsidiaries of Million
Dollar Saloon, Inc. became the wholly-owned operating 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 reverse
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 an adult entertainment lounge and restaurant facility, located in
Dallas, Texas, under the registered trademark and trade name "Million Dollar
Saloon(R)".
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.
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.
These financial statements reflect the books and records of Million Dollar
Saloon, Inc., Furrh, Inc., Tempo Tamers, Inc., Corporation Lex and Don, Inc. for
the years ended December 31, 1997 and 1996, 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.
F-9
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
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.
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 5 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.
F-10
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. Income Taxes
The Company files a consolidated Federal Income Tax return and utilizes the
asset and liability method of accounting for income taxes. The deferred tax
asset and deferred tax liability accounts, as recorded when material to the
financial statements, are entirely the result of temporary differences. No
valuation allowance was provided against deferred tax assets. Temporary
differences represent differences in the recognition of assets and
liabilities for tax and financial reporting purposes, primarily accumulated
depreciation and amortization.
7. Earnings per share
Earnings per share is computed by dividing consolidated net income by the
composite weighted-average number of shares of common stock outstanding
during the year. As of December 31, 1997 and 1996, the Company has no issued
and outstanding securities, options or warrants that would be deemed
potentially dilutive in the current and future periods.
8. Accounting Standards issued and pending adoption
In June 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income",
(SFAS130) which established standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements. SFAS130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS130 is effective for years beginning after December 15, 1997.
The Company does not anticipate a material impact from this change in
presentation of its consolidated financial statements upon adoption of this
standard.
In June 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information", (SFAS131) which establishes revised
standards for the method in which public business enterprises are to report
information about operating segments in their annual financial statements and
requires those enterprises to report selected information about operating
segments in interim financial reports issued to shareholders. This statement
also revises the related disclosures about products and services, geographic
areas and major customers. SFAS131 replaces the "industry segment" concept
established in Statement of Financial Accounting Standard No. 14 with a
"management approach" concept as the basis for identifying reportable
segments. SFAS131 is effective for financial statements for years beginning
after December 31, 1997 and for interim periods presented after December 31,
1998. The Company does not anticipate a material impact from this change in
disclosure presentation in its consolidated financial statements upon
adoption of this standard.
F-11
<PAGE>
<TABLE>
<CAPTION>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE C - NOTE RECEIVABLE
<S> <C> <C>
1997 1996
----------- -----------
$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 $128,046 $147,230
Less current portion (22,604) (21,011)
-------- --------
Noncurrent portion $105,442 $126,219
======== ========
Future maturities of the note receivable are as follows: Year ending
December 31, Amount
1998 $22,604
1999 24,480
2000 26,512
2001 28,712
2002 25,738
--------
Total $128,046
========
</TABLE>
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1997 and 1996:
1997 1996 Estimated life
------------ ------------ --------------
Buildings and related improvements $ 1,955,132 $ 1,969,411 15 - 40 years
Furniture and equipment 757,110 762,095 10 years
Vehicle 52,728 52,728 3 years
----------- -----------
2,764,970 2,784,234
Less accumulated depreciation (1,475,570) (1,381,016)
----------- -----------
1,289,400 1,403,218
Land 741,488 816,487
----------- -----------
Net property and equipment $ 2,030,888 $ 2,219,705
=========== ===========
Depreciation expense for the years ended December 31, 1997 and 1996 was $89,672
and $90,056, respectively.
F-12
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
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 $805,680 and $764,600 as of
December 31, 1997 and 1996, respectively
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 1998 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 nature of the respective receivables, these amounts are classified in the
accompanying financial statements as non-current.
NOTE F - LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1997 and 1996,
respectively:
1997 1996
--------- ---------
$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. $462,862 $599,407
$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 35,298 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. Paid in
full during 1997 in relation to a sale of the
underlying assets -- 24,904
498,160 671,383
Less current portion (163,288) (158,960)
------- -------
Long-term portion $334,872 $512,423
======== ========
F-13
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
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 2% if
prepaid between September 1, 1997 and August 31, 1998; and 1% if prepaid between
September 1, 1998 and August 31, 1999.
Current maturities of long-term maturities as of December 31, 1997 are as
follows:
Year ending
December 31, Amount
1997 $163,288
1998 182,033
1999 151,064
2000 1,775
--------
Total $498,160
=======
NOTE G - INCOME TAXES
The deferred current tax asset and non-current deferred tax liability on the
December 31, 1997 and 1996, respectively, balance sheet consists of the
following:
<TABLE>
<S> <C> <C>
December 31, December 31,
1997 1996
Non-current deferred tax asset $ - $61,500
Valuation allowance for non-current deferred tax asset - -
-------- ------
Net non-current deferred tax asset $ - $61,500
======== ======
Non-current deferred tax liability $(98,936) $(94,569)
======== ======
</TABLE>
The deferred tax asset related to the anticipated future utilization of
cumulative net operating loss and business tax credit carryforwards of Furrh,
Inc. and its wholly-owned subsidiary, Tempo Tamers, Inc. As of December 31,
1997, all carryforwards have been totally utilized by the Company. The
non-current deferred tax liability results from the usage of statutory
accelerated tax depreciation and amortization methods.
F-14
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
<TABLE>
<CAPTION>
NOTE G - INCOME TAXES - Continued
The components of income tax expense (benefit) for the years ended December 31,
1997 and 1996, respectively, are as follows:
<S> <C> <C>
1997 1996
--------- ---------
Federal:
Current $ 173,342 $ --
Deferred 65,866 (19,016)
--------- ---------
239,208 (19,016)
--------- ---------
State:
Current -- --
Deferred -- --
--------- ---------
Total $ 239,208 $ (19,016)
========= =========
The Company's income tax expense (benefit) for the years ended December 31, 1997
and 1996, respectively, differed from the statutory federal rate of 34 percent
as follows:
1997 1996
--------- --------
Statutory rate applied to earnings (loss) before income taxes $ 224,279 $ 178,309
Increase (decrease) in income taxes resulting from:
State income taxes -- --
Deferred income taxes 65,866 (9,077)
Effect of incremental tax brackets and
utilization of net operating loss carryforwards (50,937) (149,946)
--------- ---------
Income tax expense $ 239,208 $ 19,016
========= =========
Deferred income tax expense (benefit) as of December 31, 1997 and 1996,
respectively, consists of the following components:
1997 1996
--------- ---------
Changes in deferred tax assets
Effect of utilization of net operating loss
and business tax credit carryforwards $ 61,500 $ 14,660
Changes in deferred tax liabilities
Effect of differences in book and
statutory tax depreciation methods 4,366 4,356
--------- ---------
Changes in deferred income tax accounts $ 65,866 $ 19,016
========= =========
</TABLE>
F-15
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE H - CAPITAL STOCK TRANSACTIONS
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.
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.
During 1997, the Company issued an additional 403,116 shares of unregistered,
restricted common stock in final settlement of all obligations under the Amended
Stock Purchase Agreement without additional compensation to the Company. This
transaction was accounted for as a reallocation of the initial proceeds of the
Stock Purchase Agreement.
F-16
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
NOTE H - CAPITAL STOCK TRANSACTIONS - Continued
In June 1997, the Company purchased and retired an aggregate 3,949 shares of
issued and outstanding common stock for approximately $11,247 cash. The
retirement was accounted for as a reduction in the carrying value of issued and
outstanding common stock at approximately $4, which equals the par value of the
shares, a reduction of additional paid-in capital of approximately $9,587 and a
reduction of retained earnings of $1,656, in accordance with the tenets of
Accounting Principles Board Opinion No. 6.
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
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, 1997, future minimum non-cancellable lease
revenues are as follows:
Year ending
December 31, Amount
1998 $ 221,000
1999 221,000
2000 247,000
2001 247,000
2002 99,750
--------
Total $1,188,855
==========
NOTE J - CONTINGENCIES
On January 22, 1998, the City of Dallas, Texas Permit and License Panel (City)
denied a request by the Company for an exemption from Section 41-AC of the
Dallas, Texas City Code. As a result of this action by the City, the Company
filed litigation against the City in the 298th Judicial District Court in Dallas
County, Texas. The Case is labeled 98-00614-M, "Tempo Tamers, Inc. d/b/a Million
Dollar Saloon v. City of Dallas". On January 23, 1998, the Company was granted a
Temporary Restraining Order allowing the Company to maintain the operations of
its adult entertainment facility in Dallas, Texas and prohibiting the City from
recognizing the Company's operating license as "expired". Further, on February
2, 1998, the Company was granted a Temporary Injunction in this matter
addressing items similar in nature to the points discussed in the Temporary
Restraining Order. The trial on the merits of this litigation is scheduled for
June 12, 1998 and is reviewed under the substantive evidence rule.
The Company is of the opinion that it will prevail in this matter based upon the
merits of the case and anticipates no material impact to its operations as a
result of this litigation.
F-17
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1997 and 1996
<TABLE>
<CAPTION>
NOTE J - SEGMENT INFORMATION
Selected information relating to the Company's segments for the years ended
December 31, are as follows:
<S> <C> <C>
1997 1996
--------- ---------
Revenues
Bar and restaurant operations $3,119,557 $3,019,148
Rental real estate operations 450,227 440,176
General unallocated corporate matters - -
Operating profit (loss)
Bar and restaurant operations $377,393 $355,161
Rental real estate operations 338,814 427,367
General unallocated corporate matters (157,126) (290,876)
Identifiable assets
Bar and restaurant operations $1,008,969 $1,367,941
Rental real estate operations 1,288,179 1,849,765
General unallocated corporate matters 77,735 394,483
Depreciation and amortization
Bar and restaurant operations $79,385 $60,477
Rental real estate operations 21,047 29,377
General unallocated corporate matters 11,297 22,259
Capital expenditures
Bar and restaurant operations $1,731 $6,815
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-18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS LEGEND CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
THE DECEMBER 31, 1996 FINANCIAL STATEMENTS CONTAINED IN FORM 10-KSB
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1997.
</LEGEND>
<CIK> 0001002396
<NAME> MILLION DOLLAR SALOON, INC.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 149952
<SECURITIES> 0
<RECEIVABLES> 22604
<ALLOWANCES> 0
<INVENTORY> 16097
<CURRENT-ASSETS> 299445
<PP&E> 3506458
<DEPRECIATION> 1475570
<TOTAL-ASSETS> 3306838
<CURRENT-LIABILITIES> 282076
<BONDS> 0
0
0
<COMMON> 5408
<OTHER-SE> 2585545
<TOTAL-LIABILITY-AND-EQUITY> 3306838
<SALES> 3119557
<TOTAL-REVENUES> 3569784
<CGS> 1710920
<TOTAL-COSTS> 3010703
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62342
<INCOME-PRETAX> 569644
<INCOME-TAX> 239208
<INCOME-CONTINUING> 420436
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 420436
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
