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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, 1998
Commission File Number: 0-27006
MILLION DOLLAR SALOON, INC.
(Name of Small Business Issuer in Its Charter
13-3428657
Nevada (IRS Employer
(State of Incorporation) 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, 1998 were
$3,664,188. The aggregate market value of common stock held by non-affiliates of
the issuer at March 1, 1999, based upon the closing bid price on The OTC
Electronic Bulletin Board on said date, was $1,508,598. As of March 1, 1999,
there were 5,731,778 shares of the issuer's common stock outstanding.
Documents Incorporated by Reference
No documents, other than certain exhibits, have been incorporated by
reference into this report.
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TABLE OF CONTENTS
PAGE
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PART I....................................................................................3
ITEM 1. DESCRIPTION OF BUSINESS.................................................3
ITEM 2. PROPERTIES..............................................................8
ITEM 3. LEGAL PROCEEDINGS.......................................................9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS....................10
PART II..................................................................................10
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS................................................................10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION..............11
ITEM 7. FINANCIAL STATEMENTS...................................................14
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................................14
PART III.................................................................................14
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.............14
ITEM 10. EXECUTIVE COMPENSATION................................................15
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.............................................................16
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................17
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K......................................17
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PART I
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 herein.
ITEM 1. DESCRIPTION OF BUSINESS
General
Million Dollar Saloon Inc. (the "Company") was incorporated under
the laws of the State of Nevada on September 28, 1987. The Company provides
management support and conducts its business operations through its wholly-owned
operating subsidiaries: Furrh, Inc., Tempo Tamers, Inc., Don, Inc. and
Corporation Lex.
Furrh, Inc. ("Furrh") was incorporated under the laws of the State
of Texas on February 25, 1974. Furrh provides management services to Tempo
Tamers, Inc. ("Tempo"), its wholly-owned subsidiary. 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 Saloon7."
Don, Inc. ("Don") was incorporated under the laws of the State of Texas
on November 8, 1973. Don owns and manages commercial rental property located in
Tarrant County, Texas.
Corporation Lex ("Lex") was incorporated under the laws of the State of
Texas on November 30, 1984. Lex owns and manages commercial rental property
located in Dallas County, Texas.
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:
Owning and operating an adult cabaret.
Owning and managing income producing commercial real estate.
Adult Cabaret
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General. The Company, through Tempo, owns and operates an adult cabaret
under the name "The Million Dollar Saloon," which is its primary business
operation. 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 restaurant and first-class bar service conducive to
attracting businessmen and out-of-town convention clientele. The Company
continues to explore 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, the Company's policy is that all
credit card charges must be approved, in writing, by management before any
charges are accepted. Management of the club 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 cabaret is a quality, first-class bar and restaurant operation to
complement its adult entertainment. 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. 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 also employs a Chef and a Bar Manager. The Bar Manager is responsible
for stocking, inventory control, and scheduling of bar staff.
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Controls. Operational and accounting controls are essential to the
successful operation of a cash intensive nightclub and bar business. The Company
separates management personnel from all cash handling. The Company uses a
combination of accounting and physical inventory control mechanisms to ensure a
high level of integrity in its accounting practices. Computers play a
significant role in capturing and analyzing a variety of information to provide
management with the information necessary to efficiently manage and control the
nightclub. Management personnel reconcile deposits of cash and credit card
receipts each day to a daily income report. Daily computer reports alert
management of any variances from expected financial results based on historical
norms.
Atmosphere. The Million Dollar Saloon maintains an elegant European
atmosphere through its Italian decor and other customer related amenities. The
furniture and furnishings in The Million Dollar Saloon create the feeling of an
upscale restaurant. The club offers a gourmet menu, two cigar humidors and an
extensive champagne and wine list. The sound system design provides a quality
sound at levels so conversation can take place. The Million Dollar Saloon also
provides a state-of-the-art 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 music
selection, customer service, appearance, and ambience.
VIP Area. To emphasize service for the upper-end of the business
market, the Company maintains a VIP mezzanine 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
memberships. 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 of 100 persons.
Catering to the upscale VIP customer, this area includes "The Champagne Room"
accessible for an additional fee. The downstairs club and dining area consists
of approximately 4,500 square feet for entertainment purposes and can
accommodate 250 persons. The lower level also offers "The Blue Room", an area
for bachelor and other private parties.
Advertising and Promotion. The Company's marketing philosophy is to
portray The Million Dollar Saloon as a premiere adult cabaret providing female
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.
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 primarily in the Southwest United States. Management is
presently researching the gaming and theatrical production industries as
possible areas for expansion. The Company may expand through the acquisition of
sports bars and casual clubs that would not use the trademark "The Million
Dollar Saloon." In determining which cities may be suitable locations for
expansion, a variety of factors will be considered, including, but not limited
to, the current regulatory environment, the availability of sites located in
high traffic commercial areas suitable for conversion to The Million Dollar
Saloon style cabarets or sports bars or casual clubs, potential competition in
the area, current market conditions and profitability of other adult cabarets in
the city.
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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 Million Dollar Saloon. 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
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
believes 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. In Dallas, the Company is subject to "The Sexually Oriented Business
Ordinance" (the "Ordinance") which contains prohibitions on the location of an
adult cabaret. The prohibitions deal generally with distance from schools,
churches, and other sexually oriented businesses and contain restrictions based
on the percentage of residences within the immediate vicinity of the sexually
oriented business. The granting of a Sexually Oriented Business Permit
("Business Permit") is not subject to discretion; the Business Permit must be
granted if the proposed operation satisfies the requirements of the Ordinance.
The Company has held a Business Permit since passage of the city ordinance. The
Business Permit is valid for a period of one year and is renewable by
application of the permit holder subject to a hearing. The Company has received
positive support at such hearings from business associations, nearby businesses,
and residential neighbors. The Company has not lost or been denied a Business
Permit.
Employees and Independent Contractors
As of December 31, 1998, 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.
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In contrast to prevailing industry treatment of entertainers as
independent contractors, the Company classifies its entertainers as employees
for both federal income tax purposes and compliance with the Fair Labor
Standards Act. By classifying its entertainers as employees subject to the
income tax withholding provisions of the Internal Revenue Code and under the
Federal Insurance Contributions Act and the Federal Unemployment Tax Act, the
Company avoids the imposition of penalties for failure to comply with such
requirements.
Insurance
The Company maintains insurance in amounts it considers adequate for
personal injury and property damage. The Company does maintain personal injury
liquor liability insurance because the Company may be exposed to potential
liabilities that may be imposed pursuant to the Texas "Dram Shop" statute or
similar "Dram Shop" statutes or common law theories of liability in other states
where the Company may expand. The Texas "Dram Shop" statute provides a person
injured by an intoxicated person the right to recover damages from an
establishment that wrongfully served alcoholic beverages to such person if it
was apparent to the server that the individual being sold, served or provided
with an alcoholic beverage was obviously intoxicated to the extent that he
presented a clear danger to himself and others. An employer is not liable for
the actions of its employee who wrongfully serves an individual if (i) the
employer requires its employees to attend a seller training program approved by
the TABC; (ii) the employee has actually attended such a training program; and
(iii) the employer has not directly or indirectly encouraged the employee to
violate the law. It is the policy of the Company to require that all servers of
alcohol, including management, be certified every two years as servers under a
training program approved by the TABC. Certification gives statutory immunity to
the sellers of alcohol from damage caused to third parties by those who have
consumed alcoholic beverages at such establishment pursuant to the Texas
Alcoholic Beverage Code.
Income Producing Commercial Real Estate
The Company owns three income producing commercial properties, which
house adult entertainment nightclubs in the Dallas-Fort Worth geographic region.
One facility is Company operated, The Million Dollar Saloon, and the other two
are subject to long-term lease agreements and operated by other third-party
operators.
The Company-operated Million Dollar Saloon is located in North Dallas
and consists of a 9,750 square foot building located on an approximate 25,500
square foot tract of land fronting a major traffic artery. 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 payable to a bank dated September 22,
1995. 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 and, at the present time, are not subject to any
plans for renovation, remodeling or other significant improvement. All
properties are physically located in geographic areas suitable for their current
use. There exist similar properties which could be similarly used in the same
geographic area as the subject properties. The effective rentals vary between
locations because of desirability and attractiveness of locations. Management
believes that all of its properties are adequately covered by insurance. See
"Properties."
The Company may pursue additional purchases of rental real estate.
Management believes that the benefits of adding income producing real estate
without the expansion of management will provide additional income and increase
the asset base of the Company.
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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 and financial condition.
Risk of Inadequate Financial Controls. A significant part of the
revenues earned by the Company through its adult nightclub operations will be
collected in cash by full and part-time employees. Comprehensive financial
controls are required to minimize the potential loss of revenue through theft or
misappropriation of cash. To the extent that these controls are not structured
or executed properly, significant cash revenues could be lost and profitability
of the Company impaired. The Company believes that it has implemented
significant cash controls and is 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 cabaret entertainment
business is highly competitive with respect to price, service, location and the
professionalism of entertainment. The Million Dollar Saloon competes in Dallas
with a number of locally-owned adult cabarets, some of whose names may enjoy
recognition that equals that of The Million Dollar Saloon. Although the Company
believes that due to its strategic location it will be able to compete
successfully with other local adult cabarets, 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 female
entertainers in the adult entertainment business is intense. The lack of
availability of quality, personable, attractive entertainers or the Company's
inability to attract and retain other key employees, such as kitchen personnel
and bartenders, could adversely affect the business of the Company.
Management of Growth. For the Company to expand its business
operations, it must continue to improve and expand the expertise of its
personnel and must attract, train and manage qualified managers and employees to
oversee and manage the expanded operations. The Company intends to expand its
existing business operations by opening additional adult cabarets in other
metropolitan areas. The opening of additional cabarets will subject the Company
to a variety of risks associated with rapidly growing companies. In particular,
the Company's growth may place a significant strain on its accounting systems,
internal controls, and oversight of its day-to-day operations. Although
management intends to ensure that its internal controls remain adequate to meet
the demands of further growth, there can be no assurance that its systems,
controls or personnel will be sufficient to meet these demands. Inadequacies in
these areas could have a material adverse effect on the Company's business,
financial condition and results of operations.
Permits Relating to the Sale of Alcohol and Operation of Sexually
Oriented Business. While the Company has never been the subject of a protest
hearing against the renewal of either its TABC Permits or its Dallas Business
Permit, there can be no assurance that such a protest could not be made in the
future, nor can there be any assurance that the TABC Permits or the Dallas
Business Permit would be granted in the event such a protest was made. Other
states may have similar laws which may limit the availability of a permit to
sell alcoholic beverages or operate a sexually oriented business. The temporary
or permanent suspension or revocations of the TABC Permits or the Dallas
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.
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Limitations on Protection of Service Marks. Rights of the Company to
the trade name "The Million Dollar Saloon" were purchased. There is no assurance
that the Company will be able to protect its trade name to deter
misappropriation of its protected intellectual property rights. Litigation may
be necessary in the future to protect the Company's rights from infringement,
which may be costly and time consuming. The loss of the right to use the trade
name "Million Dollar Saloon" would have a material adverse effect on the Company
and its business operations.
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 on August 31, 1999. Based on
current local market conditions and available information, management is of the
belief that it will either be able to renew the existing lease upon expiration
or relocate to a comparable location at a comparable cost.
The Company owns three facilities which operate as adult cabarets in
the Dallas-Fort Worth geographic region. One facility, the Million Dollar
Saloon, is Company operated while the other two are subject to long-term lease
agreements and operated by unrelated third-party operators.
The Million Dollar Saloon is located in North Dallas and consists of a
9,750 square foot building located on an approximate 25,500 square foot tract of
land fronting a major traffic artery.
The remaining two properties are leased to unrelated independent
operators which also operate adult cabarets in these facilities. All of the
properties are stand-alone structures and, accordingly, are 100% occupied with a
single tenant and, at the present time, are not subject to any plans for
renovation, remodeling or other significant improvement. All properties are
physically located in geographic areas suitable for their current use. The lease
rental amounts are based upon the location and physical condition of the
respective property.
The following is a summary of the terms, conditions and operating
parameters of the two properties being leased from the Company:
Location/Address
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3021 Northwest Highway 3601 State Highway 157
Dallas, Texas Fort Worth, Texas
Square footage
Building 8,550 4,850
Real estate tract 37,162 60,398
Mortgages (1) (1)
Lease expiration May 2002 August 2003
Scheduled rentals $4,250 per week through 5/25/99
$4,750 per week from
5/26/99 through 5/23/02 $8,500 per week
Effective annual rental
per square foot
(total lease term) $24.33 $91.13
Gross book basis
(including land) $1,206,829 $150,447
Net book basis
(including land) $971,905 $72,320
Federal income tax basis
(excluding land) $675,343 $150,447
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Location/Address
---------------------------------------------------
3021 Northwest Highway 3601 State Highway 157
Dallas, Texas Fort Worth, Texas
Depreciation method and
life SL-19 yrs. ACRS-15 yrs.
Ad valorem tax rate per $100
of valuation $2.54 $3.31
1998 Ad valorem taxes $9,745 $7,312
(1) Both properties are subject to a lien incurred in connection with a
$750,000 long-term note payable to a bank dated September 22, 1995. The
note bears interest at 11.0% and is payable in monthly installments of
approximately $16,369, including interest. The final payment is due in
September 2000. The note may be prepaid at any time and any prepayment must
be accompanied by a "yield maintenance fee" equal to 1% if prepaid between
September 1, 1998 and August 31, 1999. At December 31, 1998, the balance of
this mortgage was $310,504. See Footnote G to Consolidated Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company may from time to time be a party to various legal actions
arising in the ordinary course of its business. The Company is not currently
involved in any actions that it believes will have a material adverse effect on
its results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
During the first quarter of fiscal 1999, the Company held its annual
shareholders meeting. Of the Company's 5,761,778 shares of common stock entitled
to vote at the meeting, 3,412,931 shares were represented at the meeting,
approximately 60% of the outstanding shares entitled to vote. The following
matters were submitted to a vote of the shareholders through solicitation of
proxies or otherwise:
--------- ------- -------
For Against Abstain
Election of Board of Directors
Nina J. Furrh 3,412,631 300 0
Ronald W. Johnston 3,412,731 200 0
Sharon Furrh 3,412,731 200 0
Dewanna Ross 3,412,831 100 0
Appointment of S.W. Hatfield + Associates as
Auditors for 1998 3,412,771 135 25
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 31, 1998, the Company had approximately 693 holders of
record of its Common Stock. Outstanding shares of the Company's Common Stock
totaled 5,731,778. The Company's transfer agent is Securities Transfer
Corporation, Dallas, Texas.
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The Company's Common Stock began trading on The OTC Electronic Bulletin
Board under symbol "MLDS" on January 29, 1996. The following table sets forth
the quarterly average high and low closing bid prices per share for the Common
Stock.
Fiscal Year Ended Common Stock
December 31, 1997 --------------------
----------------- High Low
---- ---
First Quarter $1.50 $0.88
Second Quarter $2.00 $1.00
Third Quarter $1.25 $1.06
Fourth Quarter $1.06 $0.75
December 31, 1998
-----------------
First Quarter $0.75 $0.63
Second Quarter $0.66 $0.31
Third Quarter $0.63 $0.31
Fourth Quarter $0.50 $0.28
December 31, 1999
-----------------
First Quarter
(through March 1, 1999) $0.53 $0.38
The source for the high and low closing 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 and have not been adjusted for stock dividends or splits.
During each quarter of 1998 and 1997, the Company's Board of Director
declared a per share cash dividend as follows:
Period 1998 1997
First Quarter $0.010 $0.040
Second Quarter 0.010 0.020
Third Quarter 0.010 0.015
Fourth Quarter 0.010 0.010
----- -----
Total per share $0.040 $0.085
===== =====
Total dividends declared during 1998 and 1997 was approximately
$241,351 and $433,054, respectively.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR 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 herein.
The following discussion should be read in conjunction with the
accompanying consolidated financial statements and notes thereto, beginning on
page F-1 herein.
Results of Operations
Year ended December 31, 1998 as compared to year ended December 31,
1997. Bar and restaurant operations were relatively consistent at approximately
$3.12 million in 1998 compared to approximately $3.11 million in Calendar 1997.
The Company's adult entertainment lounge and restaurant continues to be a
destination of choice for visitors to the Dallas-Ft. Worth Metroplex in
conjunction with various convention and athletic events. Further, the Company
enjoys a quality reputation in the local market for local patronage.
In August 1998, the Company obtained a new five-year lease agreement on
the commercial rental property located on Highway 157 in Fort Worth, Texas. The
new lease provides that the weekly rental payment to the Company will increase
from $4,225 per week to $8,500 per week for the five-year term of the lease.
Cost of sales increased by approximately $90,000 from approximately
$1.71 million in 1997 to approximately $1.81 million in 1998. The increase is
related to an approximately $113,400 increase in direct labor as a result of
normal operating increases in these costs and was offset by an approximate
$19,000 cost savings in purchases of inventories, consumable supplies and
related State excise taxes. The Company experienced gross profit percentages of
approximately 52.1% in 1997 and approximately 50.7% in 1998. The Company is
exploring all possible opportunities to return its gross profit percentages to
those experienced in the previous year.
General and administrative expenses increased by approximately $304,000
from approximately $1.3 million in 1997 to approximately $1.6 million in 1998.
Of this increase, the Company experienced approximately $168,000 in professional
and consulting fees related to the acquisition of additional capital in 1998 and
the exploration of possible business expansion opportunities. Additionally, the
Company experienced an increase of approximately $62,000 in general and
administrative compensation and payroll taxes for the Company's entire
operations. Further, the Company experienced an approximate $79,000 increase in
general operating expenses which were a result of additional advertising and
general inflationary increases in the cost of goods and services in the
Dallas-Ft. Worth Metroplex. The Company monitors all expenses on a monthly basis
to control costs and optimize its operations.
Income from operations in 1998 was approximately $254,000 as compared
to approximately $559,000 in 1997. The Company realized income before income
taxes of approximately $234,000 in 1998 and approximately $660,000 in 1997.
Included in the Company's financial statements is a one-time gain from the sale
of real estate in Calendar 1997 of approximately $48,000 and a one-time charge
to operations of approximately $40,000 for the forgiveness of related party debt
in excess of the agreed upon value of the common stock taken for the retirement
of debt in 1998. Neither of these events are anticipated to recur in future
-12-
<PAGE>
periods. In conjunction with the retirement of the related party debt, the
Company experienced a reduction of interest income of approximately $32,000
between 1998 and 1997. It is anticipated that interest income in future periods
will fluctuate depending on the amount of surplus cash reserves that the Company
may or may not have available for investment.
The Company had earnings per share (both basic and fully diluted)
of approximately $0.02 in 1998 and approximately $0.08 in 1997.
As a general rule, the bar and restaurant operations decrease 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.
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 1977, which is one of the key
factors contributing to the Company's patronage factors. Additionally, due to
scheduled increases, the Company experienced higher rental incomes of
approximately $10,000 during 1997 as compared to 1996.
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 versus
49.9% for 1996. This increase relates directly to the new management controls
over bar inventories. These cost versus sales relationships are anticipated by
management to remain stable for future periods.
General and administrative expenses increased by approximately $36,000
during 1997 versus 1996. This increase relates to increases in advertising and
marketing expenses to offset the decline in convention and meeting driven
traffic and increase locally derived patronage and 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 1997 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.
Liquidity and Capital Resources
Year ended December 31, 1998 as compared to year ended December 31,
1997. As of December 31, 1998, the Company had working capital of approximately
$440,500 as compared to approximately $17,400 as of December 31, 1997. The
Company continues to experience positive cash flows from operations. Net cash
flow from operating activities was approximately $372,000 in 1998 as compared to
approximately $430,000 in 1997.
The Company has identified no significant capital requirements for
1999, other than normal repair and replacement activity at the Company's
commercial rental properties and the adult entertainment lounge and restaurant
facility. Liquidity requirements mandated by future business expansions or
acquisitions, if any are specifically identified or undertaken, are not readily
determinable at this time as no substantive plans have been formulated by
management.
-13-
<PAGE>
The Company anticipates the continuance of dividend payments and paid
approximately $238,000 during 1998, including approximately $54,000 declared in
the fourth quarter of 1997. Further, the Company declared a fourth quarter
dividend in 1998 of approximately $57,000 which was paid in January 1999.
Year ended December 31, 1997 as compared to year ended December 31,
1996. 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 achieved
positive cash flows from operations of approximately $430,000 for 1997 versus
approximately $580,000 for 1996.
The Company has identified no significant capital requirements for the
current annual period. Liquidity requirements mandated by future business
expansions or acquisitions, if any are specifically identified or undertaken,
are not readily determinable at this time as no substantive plans have been
formulated by management.
The Company 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.
General. 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 common
stock through either private placements or secondary offerings.
The Company treats and has consistently treated all entertainers as
employees whereas other similar facilities may or may have treated their
entertainers as independent contractors. Management believes that as a result of
its initial and continuing policies and procedures, there is an insignificant
risk to both future operations and profitability for any potential assessment of
payroll and related taxes in the future by regulatory authorities which would
have potentially a very significant financial and operational impact if the
Company treated all entertainers as independent contractors.
Year 2000 Considerations
The Year 2000 (Y2K) date change is believed to affect virtually all
computers and organizations. The Company has undertaken a comprehensive review
of its information systems, including personal computers, software and
peripheral devices, and its general communications systems. The Company has no
direct electronic links with any customer or supplier. In addition, the Company
has held discussions with certain of its software suppliers with respect to the
Y2K date change. While the Company has not completed its detailed review, as a
preliminary assessment, the Company believes, as of the date of this filing ,
that it will not be required to modify or replace significant portions of its
software and any such modifications or replacements are, or will be, readily
available. The Company anticipates that it will complete its detailed review by
March 31, 1999 and complete any modifications, upgrades or replacements during
the second quarter of 1999.
The Company is also planning to hold discussions with its significant
suppliers, shippers, customers and other external business partners related to
their readiness for the Y2K date change.
The Company does not expect the costs associated with the Y2K date
change compliance to have a material effect on its financial position or its
results of operations. There can be no assurance until January 1, 2000, however,
that all of the Company's systems, and the systems of its suppliers, shippers,
customers or other external business partners will function adequately.
-14-
<PAGE>
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 1995 nor have there
been any disagreements with accountants on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth certain information about the directors
and executive officers of the Company. All directors of the Company hold office
until the next annual meeting of stockholders or until their successors have
been elected and qualified. Executive officers of the Company are elected by the
Board of Directors to hold office until their respective successors are elected
and qualified.
Name Age Position(s)
---- --- -----------
Nina J. Furrh 63 Chief Executive Officer, Chairman of the
Board, President and Director
Dewanna Ross 43 Chief Operating Officer, Vice President of
Operations, Secretary, Treasurer and
Director
Ronald W. Johnston 45 Chief Financial Officer, Vice President
of Finance and Director
Sharon Furrh 50 Vice President of Planning and Development
and Director
Nina Furrh has served as President of the Furrh family business
interests since 1989. Mrs. Furrh became involved in the daily operations of The
Million Dollar Saloon in September 1992. Mrs. Furrh has served as President and
a director of the Company since 1995. In February 1998, she was elected as Chief
Executive Officer and Chairman of the Board.
Dewanna Ross has served as administrative manager for the Furrh family
of companies since 1976. Ms. Ross is responsible for the development of the
corporate procedures, including the hiring and training of corporate staff.
Ms. Ross has also served as an officer and operator of a private club and as an
officer of other businesses. Ms. Ross has been employed by the Company in
various capacities since 1995. In February 1998, she was elected as Chief
Operating Officer of the Company.
Ronald W. Johnston, CPA, has served as a director of the Company since
September 1995 and Chief Financial Officer since 1996. Mr. Johnston has been a
certified public accountant in private practice in Dallas, Texas and a principal
of his own firm since 1990. Mr. Johnston's current firm serves a wide range of
business and individual clients. Mr. Johnston currently serves as a director of
Crash Rescue Equipment Services, Inc. in Dallas, Texas.
Sharon Furrh has been involved as a design consultant for The Million
Dollar Saloon, in both its original construction and in subsequent remodelings.
Additionally, Sharon Furrh is responsible for advertising, promotions and public
relations for the Company. Mrs. Furrh has been employed by the Company in
various capacities since 1995.
-15-
<PAGE>
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and persons who own more than ten percent of a registered
class of the Company's equity securities ("10% holders"), to file with the
Securities and Exchange Commission (the "SEC") initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
the Company. Directors, officers and 10% holders are required by SEC regulation
to furnish the Company with copies of all of the Section 16(a) reports they
file.
Based solely on a review of reports furnished to the Company or written
representatives from the Company's directors and executive officers during the
fiscal year ended December 31, 1998, all Section 16(a) filing requirements
applicable to its directors, officers and 10% holders for such year were
complied with.
ITEM 10. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth, for the years
indicated, all cash compensation paid, distributed or accrued for services,
including salary and bonus amounts, rendered in all capacities for the Company
to its President and Chief Executive Officer. No executive officer of the
Company received remuneration in excess of $100,000 during the referenced
periods. All other compensation related tables required to be reported have been
omitted as there has been no applicable compensation awarded to, earned by or
paid to any of the Company's executive officers in any fiscal year to be covered
by such tables.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long-Term Compensation
--------------------------------------------------
Awards Payouts
--------- ---------
Other Restricted Securities All
Salary/ Annual Stock Underlying LTIP Other
Name/Title Year Bonus Compensation Awards Options/SARs Payouts Compensation
- ---------- ---- ------ ------------ ---------- ------------ ------- ------------
<S> <C> <C> <C>
Nina Furrh, President and 1998 $9,000 NA NA NA NA $ -0-
Chief Executive Officer(1) 1997 $ -0- NA NA NA NA $ -0-
Bjorn Heyerdahl, Chief 1998 $ -0- NA NA NA NA $13,340(2)
Executive Officer(1) 1997 $ -0- NA NA NA NA $13,340(2)
- --------------------------
</TABLE>
(1) Ms. Furrh became Chief Executive Officer in February 1998 upon the
resignation of Mr. Heyerdahl as Chief Executive Officer.
(2) Represents payment of an auto lease by the Company for the benefit of Mr.
Heyerdahl.
Director Compensation
The Company does not currently pay a director fee for attending
scheduled and special meetings of the Board of Directors. The Company pays 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 March 1, 1999
relating to the beneficial ownership of shares of Common Stock by (i) each
person who owns beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each director of the Company, (iii) each executive officer of the
Company, and (iv) all executive officers and directors of the Company as a
group.
-16-
<PAGE>
<TABLE>
Name(1) Number of Percentage of
Shares Common Stock Owned
<S> <C> <C>
Nina J. Furrh(2)(3)(4)................................... 2,004,073(5) 35.0%
Bjorn Heyerdahl(2)....................................... 460,001 8.0%
Sharon Furrh, as Trustee for The Joshua Barrett
Furrh Trust(6).......................................... 266,227 4.6%
Dewanna Ross(7).......................................... 107,050(8) 1.9%
Ronald W. Johnston(9).................................... 1,987 *
Steve Wheeler(10)........................................ 571,176 9.9%
Linda Weaver............................................. 500,000(11) 8.7%
J.M. Tibbals as Trustee for The Irrevocable Equity
Trust No. 1(12)......................................... 451,558 7.8%
Officers and Directors as a group (4 persons)............ 2,379,337(13) 41.5%
-------------------
*Less than 1%
</TABLE>
(1) Unless otherwise indicated, the persons listed have sole voting and
investment powers with respect to all such shares.
(2) The mailing address for such shareholder is c/o the Company, 6848
Greenville Ave., Dallas, Texas 75231.
(3) Nina J. Furrh is the Executrix of the Estate of Donald G. Furrh which owns
180,776 shares. Mrs. Furrh has the power to vote the shares of the Company
owned by the Estate of Donald G. Furrh.
(4) Nina J. Furrh is the President, Chief Executive Officer and a director of
the Company.
(5) Includes the 180,776 shares of Common Stock owned by the Estate of Donald
G. Furrh.
(6) Sharon Furrh is the Vice President of Planning and Development and a
director of the Company and has the authority to vote the shares owned by
The Joshua Barrett Furrh Trust.
(7) Dewanna Ross is the Chief Operating Officer, Vice President of Operations,
Secretary, Treasurer and a director of the Company.
(8) Includes 4,000 shares owned by Ms. Ross and 103,050 shares held in
custodian accounts for the benefit of Travis Weaver, Jackson M. Weaver,
Solon Weaver and Joshua B. Furrh. Ms. Ross disclaims any ownership interest
in the 103,050 shares held in custodian accounts, but she does have voting
authority of such shares.
(9) Mr. Johnston is the Chief Financial Officer, Vice President of Finance and
a director of the Company.
(10) The mailing address for Mr. Wheeler is 2152 West Northwest Highway, Suite
118, Dallas, Texas 75220.
(11) Additionally, Mrs. Weaver has agreed to purchase from the Company 400,000
shares of the Common Stock for $1.10 per share. If the option is exercised
and the additional 400,000 shares are purchased by Mrs. Weaver, she would
own 900,000 shares or approximately 15.7% of the outstanding shares of
Common Stock of the Company. The mailing address for Linda Weaver is 2152
West Northwest Highway, Suite 118, Dallas, Texas 75220.
(12) The mailing address for The Irrevocable Equity Trust No. 1 is c/o J.M.
Tibbals, Arter & Hadden, 1717 Main Street, Suite 4100, Dallas, Texas 75201.
(13) Includes 180,776 shares of Common Stock owned by the Estate of Donald G.
Furrh over which Nina J. Furrh has voting power, 266,227 shares owned by
the Joshua Barrett Trust over which Sharon Furrh has voting power and
103,050 shares held in various custodian accounts over which Dewanna Ross
has voting power.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
-17-
<PAGE>
<TABLE>
<CAPTION>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits Page
--------------------------------- ----
<S> <C> <C>
1. Financial Statements. The following financial statements are submitted as
part of this report:
Independent Auditor's Report F-3
Balance Sheets - December 31, 1998 and 1997 F-4
Statements of Operations - Years Ended December 31, 1998 and 1997 F-6
Statements of Stockholders' Equity - Years Ended December 31, 1998 and 1997 F-7
Statement of Cash Flows - Years Ended December 31, 1998 and 1997 F-8
Notes to Financial Statements F-10
</TABLE>
2. Exhibits
Exhibit
Number Description
------- ------------------------------------------------------------
2.1* Stock Purchase Agreement dated August 23, 1995 by and
between Art Beroff and Bjorn Heyerdahl.
2.2* Stock Purchase Agreement dated August 23, 1995 by and
between Joseph MacDonald, Goodheart Ventures, Inc., and
Bjorn Heyerdahl.
2.3* Stock Purchase Agreement dated September 7, 1995 by and
among Million Dollar Saloon, Inc., Goodheart Ventures, Inc.,
and certain individuals.
2.4* Addendum and Modification to Stock Purchase Agreement dated
September 19, 1995, by and among Million Dollar Saloon,
Inc., Goodheart Ventures, Inc., and certain individuals.
2.5* Stock Exchange Agreement dated September 7, 1995 by and
among Million Dollar Saloon, Inc., Goodheart Ventures, Inc.,
and J.M. Tibbals, Trustee for Irrevocable Equity Trust No.
1.
2.6* Addendum and Modification to Stock Exchange Agreement dated
September 19, 1995, by and among Million Dollar Saloon,
Inc., Goodheart Ventures, Inc., and J.M. Tibbals, Trustee
for Irrevocable Equity Trust No. 1.
2.7* Agreement and Plan of Merger dated October 5, 1995 by and
between Million Dollar Saloon, Inc., a Texas corporation,
and Goodheart Ventures, Inc., a Nevada corporation.
2.8** Addendum and Modification to Stock Purchase Agreement made
and entered into the 7th day of September 1995 by and among
Million Dollar Saloon, Inc., Goodheart Ventures, Inc., and
certain individuals dated October 31, 1995.
3(i)* Articles of Incorporation of The Company, as amended to
date.
3(ii)* Bylaws of the Company.
4.1* Specimen Common Stock Certificate.
10.1* Leases of Properties.
-18-
<PAGE>
10.2* Promissory Note for $750,000 with Abrams Centre National
Bank dated September 22, 1995.
21.1* Subsidiaries of the Company.
27.1 Financial Disclosure Schedule.
- -----------------
* Incorporated by reference to the Company's Form 10-SB filed December 26, 1995.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the three months ended
December 31, 1998.
(The remainder of this page is left blank intentionally)
-19-
<PAGE>
SIGNATURES
In accordance with Section 13 and 15(d) of the Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 3rd day of March, 1999.
MILLION DOLLAR SALOON, INC.
By: /s/ Nina J. Furrh
Nina J. Furrh, Chairman of the Board
and President
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons in the capacities and on the dates
indicated:
<TABLE>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Nina J. Furrh Chief Executive Officer, Chairman of the March 3, 1999
- ---------------------------- Board, President and Director
Nina J. Furrh
/s/ Dewanna Ross Chief Operating Officer, Vice President of March 3, 1999
- ---------------------------- Operations, Secretary, Treasurer and Director
Dewanna Ross
/s/ Ronald W. Johnston Chief Financial Officer, Vice President of March 3, 1999
- ---------------------------- Finance and Director
Ronald W. Johnston
/s/ Sharon Furrh Vice President of Planning March 3, 1999
- ---------------------------- and Development and Director
Sharon Furrh
</TABLE>
-20-
<PAGE>
MILLION DOLLAR
SALOON, INC.
AND SUBSIDIARIES
Financial Statements
and
Auditor's Report
December 31, 1998 and 1997
S. W. HATFIELD , CPA
certified public accountants
Use our past to assist your future sm
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-3
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-4
Consolidated Statements of Income and Comprehensive Income
for the years ended December 31, 1998 and 1997 F-6
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1998 and 1997 F-7
Consolidated Statements of Cash Flows
for the years ended December 31, 1998 and 1997 F-8
Notes to Consolidated Financial Statements F-10
F-2
<PAGE>
S. W. HATFIELD, CPA
certified public accountant
Member: 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, 1998 and 1997, and the related consolidated statements of income
and comprehensive 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, 1998 and 1997 and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
S. W. HATFIELD, CPA
(formerly S. W. HATFIELD + ASSOCIATES)
Dallas, Texas
January 28, 1999
Use our past to assist your future sm
P. O. Box 820395 9002 Green Oaks Circle, 2nd Floor
Dallas, Texas 75382-0395 Dallas, Texas 75243-7212
214-342-9635 (voice) (fax) 214-342-9601
800-244-0639 [email protected]
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
ASSETS
------
1998 1997
----------- -----------
CURRENT ASSETS
Cash on hand and in bank $ 574,817 $ 149,952
Note receivable - current portion 24,480 22,604
Accounts receivable - trade and other 6,671 --
Prepaid Federal income taxes receivable 91,653 37,248
Inventory 18,404 16,097
Prepaid expenses 56,460 73,544
----------- -----------
Total current assets 772,485 299,445
----------- -----------
PROPERTY AND EQUIPMENT
Buildings and related improvements 1,987,515 1,955,132
Furniture and equipment 798,373 757,110
Vehicles 52,728 52,728
----------- -----------
2,838,616 2,764,970
Less accumulated depreciation (1,567,904) (1,475,570)
----------- -----------
1,270,715 1,289,400
Land 741,488 741,488
----------- -----------
Net property and equipment 2,012,203 2,030,888
----------- -----------
OTHER ASSETS
Note receivable - noncurrent portion 79,767 105,442
Accounts receivable from officers,
shareholders and affiliates -- 805,684
Organization costs, net of accumulated
amortization of $49,644 and $34,658,
respectively 25,284 40,270
Loan costs, net of accumulated amortization
of $20,545 and 14,222, respectively 11,062 17,384
Other 6,975 7,725
----------- -----------
Total other assets 123,088 976,505
----------- -----------
TOTAL ASSETS $ 2,907,776 $ 3,306,838
=========== ===========
- Continued -
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, 1998 and 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1997
---------- ----------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt $ 181,905 $ 163,288
Accounts payable - trade 22,443 22,571
Accrued liabilities 63,751 35,622
Dividends payable 57,318 54,095
Tenant deposits 6,500 6,500
---------- ----------
Total current liabilities 331,917 282,076
---------- ----------
LONG-TERM LIABILITIES
Long-term debt, net of current maturities 156,419 334,872
Deferred tax liability 125,056 98,936
---------- ----------
Total liabilities 613,392 715,884
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock - $0.001 par value. 5,000,000 shares
authorized. None issued and outstanding -- --
Common stock - $0.001 par value. 50,000,000 shares
authorized. 5,731,778 and 5,409,451 issued and
outstanding, respectively 5,732 5,409
Additional paid-in capital -- --
Retained earnings 2,288,652 2,585,545
---------- ----------
Total shareholders' equity 2,294,384 2,590,954
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,907,776 $3,306,838
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years ended December 31, 1998 and 1997
1998 1997
----------- -----------
REVENUES
Bar and restaurant sales $ 3,111,513 $ 3,119,557
Rental income 552,675 450,227
----------- -----------
Total revenues 3,664,188 3,569,784
----------- -----------
COST OF SALES - BAR AND
RESTAURANT OPERATIONS
Direct labor 1,277,734 1,163,949
Purchases 528,338 546,971
----------- -----------
Total cost of sales 1,806,072 1,710,920
----------- -----------
GROSS PROFIT 1,858,116 1,858,864
----------- -----------
OPERATING EXPENSES
Salaries, wages and related expenses 384,878 318,106
Consulting, management and other
professional fees 311,691 143,206
Rental expenses, principally taxes 60,354 67,327
Interest expense 55,938 62,342
Other operating expenses 676,407 597,073
Depreciation and amortization 114,385 111,729
----------- -----------
Total operating expenses 1,603,653 1,299,783
----------- -----------
INCOME FROM OPERATIONS 254,463 559,081
OTHER INCOME (EXPENSES)
Gain on sale of property and equipment -- 48,498
Forgiveness of related party debt, principally
accrued interest, in excess of agreed upon
value of common stock taken for repayment (40,337) --
Interest income 20,360 52,065
----------- -----------
INCOME BEFORE INCOME TAXES 234,486 659,644
INCOME TAX (EXPENSE)
Currently payable (68,239) (173,342)
Deferred (26,120) (65,866)
----------- -----------
NET INCOME 140,127 420,436
OTHER COMPREHENSIVE INCOME -- --
----------- -----------
COMPREHENSIVE INCOME $ 140,127 $ 420,436
=========== ===========
Earnings per share of common stock
outstanding, computed on net income -
basic and fully diluted $ 0.02 $ 0.08
=========== ===========
Weighted-average number of shares outstanding 5,901,401 5,073,392
=========== ===========
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 CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1998 and 1997
Additional Total
Common Stock paid-in Retained shareholders'
# shares Amount capital earnings equity
--------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balances at
January 1, 1997 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
Shares sold under
private placement 530,000 530 529,470 -- 530,000
Shares issued for
consulting fees 205,000 205 69,495 -- 69,700
Purchase and retirement of
treasury stock (30,000) (30) (29,970) -- (30,000)
Acquisition of common
stock into treasury as
payment for amounts
due from related parties
and retirement thereof (382,673) (382) (568,995) (195,969) (765,346)
Dividends declared -- -- -- (241,051) (241,051)
Net income for the year -- -- -- 140,127 140,127
----------- ----------- ----------- ----------- -----------
Balances at
December 31, 1998 5,731,778 $ 5,732 $ -- $ 2,288,652 $ 2,294,384
=========== =========== =========== =========== ===========
</TABLE>
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
Years ended December 31, 1998 and 1997
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 140,127 $ 420,436
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 114,385 111,729
Gain on sale of property and equipment -- (48,498)
Common stock issued for consulting fees 69,700 --
Forgiveness of related party debt, principally
accrued interest, in excess of agreed upon
value of common stock taken for repayment 40,337 --
Interest income from shareholders capitalized as principal -- (40,564)
Deferred income taxes 26,120 65,866
(Increase) decrease in
Accounts receivable - trade (6,671) --
Prepaid income taxes (54,405) (37,248)
Inventory (2,307) (4,928)
Prepaid expenses 17,084 (35,826)
Deposits and other assets -- 15,000
Increase (decrease) in
Accounts payable and other accrued liabilities 28,001 (16,422)
--------- ---------
Net cash provided by operating activities 372,371 429,545
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collections on note receivable 23,799 19,184
Proceeds from sale of property and equipment -- 149,374
Purchases of property and equipment (73,641) (1,731)
Cash advances to shareholders and affiliates -- (544)
--------- ---------
Net cash used in investing activities (49,842) (3,962)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt (159,836) (173,223)
Proceeds from sale of common stock 530,000 --
Purchase of treasury stock (30,000) (11,247)
Dividends paid (237,828) (529,262)
--------- ---------
Net cash provided by (used in) financing activities 102,336 (713,732)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 424,865 (117,904)
Cash and cash equivalents at beginning of year 149,952 267,856
--------- ---------
Cash and cash equivalents at end of year $ 574,817 $ 149,952
========= =========
- Continued -
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years ended December 31, 1998 and 1997
1998 1997
--------- --------
SUPPLEMENTAL DISCLOSURES OF
INTEREST AND INCOME TAXES PAID
Interest paid on borrowings $ 55,938 $ 62,342
======== ========
Income taxes paid $ 122,644 $210,590
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Declaration of fourth quarter dividend of $0.01
and $0.01 per share, respectively $ 57,218 $ 54,095
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE A - BACKGROUND AND ORGANIZATION
Million Dollar Saloon, Inc. (MDS) was incorporated under the laws of the State
of Nevada on September 28, 1987. MDS is a holding company providing management
support to its operating subsidiaries: Furrh, Inc., Tempo Tamers, Inc., Don,
Inc. and Corporation Lex.
Furrh, Inc. (Furrh) was incorporated under the laws of the State of Texas on
February 25, 1974. Furrh provides management services to Tempo Tamers, Inc, its
wholly-owned subsidiary. Tempo Tamers, Inc. (Tempo), was incorporated under the
laws of the State of Texas on July 3, 1978. Tempo operates an adult
entertainment lounge and restaurant facility, located in Dallas, Texas, under
the registered trademark and trade name "Million Dollar Saloon(R)".
Don, Inc. (Don) was incorporated under the laws of the State of Texas on
November 8, 1973. Don owns and manages commercial rental property located in
Tarrant County, Texas.
Corporation Lex (Lex) was incorporated under the laws of the State of Texas on
November 30, 1984. Lex owns and manages commercial rental property located in
Dallas County, Texas.
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, 1998 and 1997, respectively. All significant
intercompany transactions have been eliminated in combination. The consolidated
entities are referred to as Company.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Cash and Cash Equivalents
-------------------------
For Statement of Cash Flows purposes, the Company considers all cash on hand
and in banks, including accounts in book overdraft positions, certificates of
deposit and other highly-liquid investments with maturities of three months
or less, when purchased, to be cash and cash equivalents.
Cash overdraft positions may occur from time to time due to the timing of
making bank deposits and releasing checks, in accordance with the Company's
cash management policies.
F-10
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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 adult lounge and entertainment facility. These items are valued at
the lower of cost or market using the first-in, first-out method of
accounting.
4. Property and Equipment
----------------------
Property and equipment is recorded at cost and is depreciated on a
straight-line basis, over the estimated useful lives (generally 5 to 40
years) of the respective asset. Major additions and betterments are
capitalized and depreciated over the estimated useful lives of the related
assets. Maintenance, repairs, and minor improvements are charged to expense
as incurred.
5. 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-11
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
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, 1998 and 1997, 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 was effective for years beginning after December 15,
1997. The Company does not have any components of comprehensive income and
experienced no 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 was effective for financial statements for years beginning
after December 31, 1997 and for interim periods presented after December 31,
1998. The Company did not experience a material impact from this change in
disclosure presentation in its consolidated financial statements upon
adoption of this standard.
F-12
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE C - CONCENTRATIONS OF CREDIT RISK
The Company maintains its cash accounts in a financial institution subject to
insurance coverage issued by the Federal Deposit Insurance Corporation (FDIC).
Under FDIC rules, the Company and its subsidiaries are entitled to aggregate
coverage of $100,000 per account type per separate legal entity per financial
institution. During the year ended December 31, 1998, the entity listed below
had credit risk exposures in excess of statutory FDIC coverage as described
below. No entity had any credit risk exposures during the year ended December
31, 1997.
Highest Low Number of days
exposure exposure with exposure
-------- -------- --------------
Year ended December 31, 1998
Million Dollar Saloon, Inc. $430,523 $350,523 284
The Company has incurred no losses during 1998 as a result of any of these
unsecured situations.
NOTE D - NOTE RECEIVABLE
1998 1997
--------- ---------
$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 $104,247 $128,046
Less current portion (24,480) (22,604)
-------- --------
Noncurrent portion $ 79,767 $105,442
======== ========
Future maturities of the note receivable are as follows:
Year ending
December 31, Amount
------------ -------
1999 $24,480
2000 26,512
2001 28,712
2002 24,543
Total $104,247
========
F-13
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE E - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consists of the following at December 31, 1998 and 1997:
1998 1997 Estimated life
---------- ---------- --------------
<S> <C> <C> <C>
Buildings and related improvements $1,987,515 $1,955,132 15 - 40 years
Furniture and equipment 798,373 757,110 10 years
Vehicle 52,728 52,728 3 years
---------- ----------
2,838,616 2,764,970
Less accumulated depreciation (1,567,904) (1,475,570)
---------- ----------
1,270,715 1,289,400
Land 741,488 741,488
---------- ----------
Net property and equipment $2,012,203 $2,030,888
========= ==========
</TABLE>
Depreciation expense for the years ended December 31, 1998 and 1997 was $92,331
and $89,672, respectively.
NOTE F - ADVANCES TO/FROM OFFICERS, SHAREHOLDERS AND AFFILIATES
The Company has, in prior years, made loans to various affiliates aggregating
approximately $805,680 as of December 31, 1997, including accrued interest.
In September 1995, the balances due from these affiliates were converted to
formal notes receivable bearing interest at 5.65%. These notes matured in
September 1998 and were called by the Company in October 1998. All accrued
interest and principal was payable at maturity. The notes bore 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 were
classified in the accompanying financial statements as non-current.
The notes were repayable in either cash or in stock of the Company at an
agreed-upon exchange rate of $2.00 per share. As of December 31, 1997,
management estimated that both shareholders had adequate collateral to satisfy
repayment of the debt, including anticipated accrued interest, at the scheduled
maturity date. It was the intent of these shareholders to liquidate the notes
with cash repayments.
During 1998, management discontinued the accrual of interest on these advances
when it became apparent that the shareholders were not going to repay the
obligations in cash at the maturity date. The shareholders were unable to
liquidate their holdings at a satisfactory market price and tendered their
holdings of an aggregate 382,673 shares of the Company's common stock in
settlement of the outstanding debts. The Company experienced a charge to
operations approximately equivalent to the 1997 accrued interest income, or
approximately $40,000, for the differential between the agreed upon value of the
shares tendered for payment and the gross carrying value of the debts at
retirement.
F-14
<PAGE>
<TABLE>
<CAPTION>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE G - LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1998 and 1997,
respectively:
1998 1997
--------- --------
<S> <C> <C>
$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. $310,504 $462,862
$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 27,820 35,298
--------- --------
338,324 498,160
Less current portion (181,905) (163,288)
-------- --------
Long-term portion $156,419 $334,872
======== ========
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 1% if
prepaid between September 1, 1998 and August 31, 1999.
Current maturities of long-term maturities as of December 31, 1998 are as
follows:
Year ending
December 31, Amount
------------ --------
1998 $181,905
1999 152,059
2000 4,360
--------
Total $338,324
</TABLE>
F-15
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE H - INCOME TAXES
The deferred current tax asset and non-current deferred tax liability on the
December 31, 1998 and 1997, respectively, balance sheet consists of the
following:
December 31, December 31,
1998 1997
--------- --------
Non-current deferred tax liability $(125,056) $(98,936)
======= ======
The non-current deferred tax liability results from the usage of statutory
accelerated tax depreciation and amortization methods.
The components of income tax expense (benefit) for the years ended December 31,
1998 and 1997, respectively, are as follows:
1998 1997
------- --------
Federal:
Current $68,239 $173,342
Deferred 26,120 65,866
------- -------
94,359 239,208
------- -------
State:
Current - -
Deferred - -
------- -------
- -
------- -------
Total $94,359 $239,208
====== =======
The Company's income tax expense (benefit) for the years ended December 31, 1998
and 1997, respectively, differed from the statutory federal rate of 34 percent
as follows:
1998 1997
------- --------
Statutory rate applied to earnings before income taxes $79,725 $224,279
Increase (decrease) in income taxes resulting from:
State income taxes - -
Deferred income taxes 26,120 65,866
Effect of incremental tax brackets, application
of business tax credits and utilization of
net operating loss carryforwards (11,486) (50,937)
------ ------
Income tax expense $94,359 $239,208
====== =======
F-16
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE H - INCOME TAXES - Continued
Deferred income tax expense as of December 31, 1998 and 1997, respectively,
consists of the following components:
1998 1997
------- -------
Changes in deferred tax assets
Effect of utilization of net operating loss
and business tax credit carryforwards $ - $61,500
Changes in deferred tax liabilities
Effect of differences in book and
statutory tax depreciation methods 26,120 4,366
------ ------
Changes in deferred income tax accounts $26,120 $65,866
====== ======
NOTE I - 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).
F-17
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE I - CAPITAL STOCK TRANSACTIONS - Continued
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.
In June 1997 and April 1998, respectively, the Company purchased and retired
approximately 3,949 and 30,000 shares of issued and outstanding common stock for
approximately $11,247 and $30,000. The retirement was accounted for as a
reduction in the carrying value of issued and outstanding common stock at its
respective par value, a reduction of additional paid-in capital and a reduction
of retained earnings, where appropriate, in accordance with the tenets of
Accounting Principles Board Opinion No. 6.
On March 19, 1998, the Company sold 530,000 shares of restricted, unregistered
common stock to an individual under a Stock Purchase Agreement (Agreement) at a
price of $1.00 per share for total proceeds to the Company of $530,000. The
Agreement also contains a "second closing" clause whereby the individual will
acquire an additional 400,000 shares of equivalent restricted, unregistered
common stock at $1.10 per share for gross proceeds of $440,000, on or before
July 15, 1998. As of December 31, 1998, the individual has not acquired any
additional shares of common stock under the terms of this Agreement.
Further, the Company has granted the individual the option to purchase an
additional 1,000,000 shares of restricted, unregistered common stock at a price
of $1.25 per share on or before February 28, 1999. The option expiration may be
accelerated if the Company's common stock is traded on the NASDAQ Small-Cap
Market or other national exchange and the closing bid price equals or exceeds
$1.75 per share for 10 consecutive trading days (Trading Period). In this event,
the expiration date of the option shall be the 90th day after the Trading Period
and the Company must notify the individual of the acceleration in writing.
On March 19, 1998, concurrent with the Stock Purchase Agreement discussed above,
the Company entered into a Consulting Agreement with a separate individual for
consulting, advisory and management services to be performed as directed by the
Company's Board of Directors. The Consulting Agreement is for a term of one (1)
year and may be terminated by either party with ten (10) days written notice.
The compensation for the Consulting Agreement was paid in restricted,
unregistered common stock of the Company as follows: 150,000 shares as payment
for consulting, advisory and management services to be performed as directed by
the Company's Board of Directors and an additional 55,000 shares upon receipt of
the $530,000 discussed above. An additional 45,000 shares will be issued to the
consultant upon receipt of the $440,000 which was due on or before July 15,
1998.
The Company, upon execution of the Consulting Agreement and receipt of the
$530,000 related to the Stock Purchase Agreement, issued the respective 150,000
and 55,000 shares due under the terms of the Consulting Agreement. These
transactions were valued at approximately $0.34 per share, or an aggregate
$69,700, which approximated the "fair value" of the Company's restricted stock
issued on the transaction date.
F-18
<PAGE>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE I - CAPITAL STOCK TRANSACTIONS - Continued
On October 31, 1998, the Company took an aggregate 382,673 shares of issued and
outstanding common stock from two shareholders, who were former employees,
affiliates and/or management, at an agreed-upon value of approximately $765,000
in satisfaction of notes receivable aggregating approximately $805,000,
including accrued interest through December 31, 1997. The Company discontinued,
during the first quarter of 1998, the accrual of interest due to uncertainties
in the ultimate settlement of this situation at the scheduled maturity date. The
Company experienced a charge to operations approximately equivalent to the 1997
accrued interest income, or approximately $40,000, for the differential between
the agreed upon value of the shares tendered for payment and the gross carrying
value of the debts at retirement. The shares obtained by the Company were
returned to treasury stock status and were concurrently retired by the Company.
This treasury stock retirement was accounted for as a reduction in the carrying
value of issued and outstanding common stock at approximately $383, which equals
the par value of the shares, a reduction of additional paid-in capital of
approximately $569,995 and a reduction of retained earnings of $195,969, in
accordance with the tenets of Accounting Principles Board Opinion No. 6.
NOTE J - COMMITMENTS
The Company leases commercial real estate on long-term operating leases. The
leases require minimum weekly lease payments, plus reimbursement for annual
property taxes. The respective tenants are responsible for normal maintenance
and repairs, insurance and other direct operating expenses related to the
property. As of December 31, 1998, future minimum non-cancellable lease revenues
are as follows:
Year ending
December 31, Amount
------------ ----------
1999 $ 678,000
2000 689,000
2001 689,000
2002 546,500
2003 280,500
---------
Total $2,883,000
F-19
<PAGE>
<TABLE>
<CAPTION>
MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 and 1997
NOTE K - SEGMENT INFORMATION
The Company operates with a centralized management structure and has two
identifiable operating segments: an adult entertainment lounge and restaurant
located in Dallas, Texas and commercial rental real estate located in Dallas and
Tarrant Counties, Texas. All revenues are generated operations in these
geographic areas. The Company has a relationship whereby rental revenues from
various entities under common control comprise approximately 15.0% and 12.6% of
total revenues for 1998 and 1997, respectively.
Restaurant Rental General and
facility real estate administrative Total
----------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Revenue from external customers $ 3,111,513 $ 552,675 $ -- $ 3,664,188
Revenue (expenses) from/to
intercompany sources (240,000) (360,000) 600,000 --
Interest income -- 9,577 10,783 20,360
Interest expense 5,863 -- 50,075 55,938
Depreciation and amortization 34,505 21,469 58,411 114,385
Income tax expense (benefit) (21,867) 34,428 81,798 94,359
Segment assets 501,838 2,036,551 369,387 2,907,776
Fixed asset expenditures 51,627 22,014 -- 73,641
Year ended December 31, 1997
Revenue from external customers $ 3,119,532 $ 450,227 $ 25 $ 3,569,784
Revenue (expenses) from/to
intercompany sources (440,000) (244,500) 684,500 --
Interest income 10,211 31,180 10,674 52,065
Interest expense 2,205 -- 60,137 62,342
Depreciation and amortization 32,145 21,047 58,537 111,729
Income tax expense (benefit) 10,590 57,415 171,203 239,208
Segment assets 550,056 1,935,172 821,610 3,306,838
Fixed asset expenditures 1,731 -- -- 1,731
</TABLE>
F-20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0001002396
<NAME> Million Dollar Saloon, Inc.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 574817
<SECURITIES> 0
<RECEIVABLES> 6671
<ALLOWANCES> 0
<INVENTORY> 18404
<CURRENT-ASSETS> 772485
<PP&E> 3580104
<DEPRECIATION> 1567904
<TOTAL-ASSETS> 2907776
<CURRENT-LIABILITIES> 331917
<BONDS> 0
0
0
<COMMON> 5732
<OTHER-SE> 2288652
<TOTAL-LIABILITY-AND-EQUITY> 2907776
<SALES> 3111513
<TOTAL-REVENUES> 3664188
<CGS> 1806072
<TOTAL-COSTS> 1603653
<OTHER-EXPENSES> 19977
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55938
<INCOME-PRETAX> 234486
<INCOME-TAX> 94359
<INCOME-CONTINUING> 140127
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 140127
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
