10-K 1 mds10k123107.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-K (Mark one) [X] Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended December 31, 2007 [ ] Transition Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 For the transition period from ______________ to _____________ Commission File Number: 0-27006 Million Dollar Saloon, Inc. (Exact name of small business issuer as specified in its charter) Nevada 13-3428657 (State of incorporation) (IRS Employer ID Number) 6848 Greenville Avenue, Dallas, Texas 75231 (Address of principal executive offices) (214) 691-6757 (Issuer's telephone number) Securities registered under Section 12 (b) of the Exchange Act - None Securities registered under Section 12(g) of the Exchange Act: - Common Stock - $0.001 par value Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X] Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] 1 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes [ ] No [X] The aggregate market value of voting and non-voting common equity held by non-affiliates as of June 25, 2009 was approximately $96,362 based upon 1,606,038 shares held by non-affiliates and a closing market price of $0.06 per share as reported on www.bigcharts.com for January 13, 2010. As of January 13, 2010, there were 5,731,778 shares of Common Stock issued and outstanding. 2 Million Dollar Saloon, Inc. Index to Contents Page Number Part I Item 1 Business 3 Item 1A Risk Factors 8 Item 2 Properties 8 Item 3 Legal Proceedings 8 Item 4 Submission of Matters to a Vote of Security Holders 10 Part II Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 10 Item 6 Selected Financial Data 11 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 7A Quantitative and Qualitative Disclosures About Market Risk 15 Item 8 Financial Statements and Supplementary Data F-1 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 16 Item 9A Controls and Procedures 16 Part III Item 10 Directors, Executive Officers and Corporate Governance 17 Item 11 Executive Compensation 19 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 20 Item 13 Certain Relationships and Related Transactions, and Director Independence 21 Item 14 Principal Accountant Fees and Services 22 Part IV Item 15 Exhibits and Financial Statement Schedules 22 Signatures 51 3 Caution Regarding Forward-Looking Information --------------------------------------------- Certain statements contained in this Form 10-K, including, without limitation, statements containing the words "believes", "anticipates", "expects" and words of similar import, constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: international, national and local general economic and market conditions: demographic changes; the ability of the Company to sustain, manage or forecast its growth; the ability of the Company to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other factors referenced in this and previous filings. Given these uncertainties, readers of this Form 10-K and investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein whether to reflect new information, future results, events, developments or otherwise. PART I 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. The Company owns and operates an adult cabaret in Dallas, Texas and owns one other commercial properties located in the Dallas-Fort Worth Metroplex. 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 the Company's 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 owned commercial rental property located in Dallas County, Texas through February 2008. The Company's principal offices are located at 6848 Greenville Avenue, Dallas, Texas 75231, and its telephone number is (214) 691-6757. Unless otherwise indicated, the "Company" refers to the Company, each of its wholly-owned subsidiaries and Tempo. The Company's common stock is traded on the OTC Bulletin Board under the symbol "MLDS". The Company is based in Dallas, Texas and currently conducts business in two distinct areas: o Owning and operating an adult cabaret. o Owning and managing commercial real estate. 4 In conjunction with an October 2002 Settlement Agreement with the City of Dallas, Texas, the Company's adult entertainment lounge and restaurant, Million Dollar Saloon, operated in its present "non-conforming location" with a mandatory closing date of July 31, 2009. Business closure Effective at the close of business on July 31, 2009, the Company ceased all operations of Tempo Tamers, Inc. and the Company's adult entertainment lounge and restaurant, Million Dollar Saloon. Purchase of Real Estate On February 14, 2003, the Company purchased 6.695 acres of undeveloped property located in Dallas, Texas. The purchase price was approximately $2,650,312, including closing expenses of approximately $53,599. The Company paid $493,072 cash, which included a $140,000 unsecured, non-interest bearing advance to the Company from Duncan Burch, a controlling shareholder, officer and director of the Company, and issued to the seller a one-year note in the principal amount of $2,156,713 with 8% annual interest. The payment of the note is secured with a lien against the property granted to the note holder by the Company. The interest on the note is payable monthly (approximately $14,678 per month) beginning April 1, 2003 with the principal amount due and payable on February 1, 2004. In January 2004, the Company obtained permanent long-term financing from Citizens National Bank, Waxahachie, Texas, and used the proceeds to pay off in full the original note payable to the seller. The term loan had an original balance of $2,000,000 and initially bore interest at 6.5% for the first year and then adjusts to 1% above the published prime rate. The interest rate adjusts every 12 months commencing January 29, 2005. The note required initial monthly principal and interest payments of $17,426. As this is a variable interest rate note, the payments may change after the 12th payment and every succeeding 12th payment thereafter. The note matures on January 29, 2019. The note is secured by the underlying land and the separate personal guaranty of Duncan Burch and Nick Mehmeti, each a Company officer, director and controlling shareholder. The property is undeveloped and suitable for commercial development. Although the Company has not determined the usage of the land, the Company may, subject to zoning and permissible use statutes, use a portion of the land for an adult cabaret and sell the remaining undeveloped property to a third party. The development of the property will be subject to the Company obtaining a construction loan. The Company does not currently know the amount of the loan it will need to develop this property or whether it will be able to obtain a sufficient loan for development of the property or, if obtained, whether the terms of the loan will be favorable to the Company. Adult Cabaret 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. Although the Company, in February 2003, purchased 6.6 acres of undeveloped land in Dallas, Texas, the Company has not determined whether the land will be developed as an adult cabaret or for other purposes. Other than the recent purchase of the Dallas, Texas property, no specific locations for potential additional Million Dollar Saloons have been identified. In conjunction with an October 2002 Settlement Agreement with the City of Dallas, Texas, the Company entered into negotiations between the Company's wholly-owned subsidiary, Tempo Tamers, Inc., Mainstage, Inc. (Mainstage), an entity controlled by Nick Mehmeti, the Company's President, which operated a non-conforming adult cabaret located in Dallas, Texas, called P.T.'s and Allen-Burch, Inc. (Allen Burch), an entity controlled by Duncan Burch, a Company officer and significant shareholder, also operating a non-conforming adult cabaret known as The Fare. These negotiations were initiated to determine which of these non-conforming entities would continue operating in a "non-conforming location". In May 2003, these three affiliated parties granted the exclusive right to negotiate with the City of Dallas, Texas to Tempo Tamers, Inc. for the continuance of the operations of the Million Dollar Saloon as a sexually oriented business in a "non-conforming location." 5 This Settlement Agreement provided that, in the event that the City of Dallas, Texas granted The Million Dollar Saloon the exclusive right to continue operating as an adult cabaret in a "non-conforming location" for a six (6) year period, Tempo Tamers would pay $500,000 each to Mainstage and Allen Burch and Mainstage and Allen-Burch would each discontinue the operation of their respective sexually oriented businesses. In May 2003, the City of Dallas agreed to allow Tempo Tamers to continue to operate The Million Dollar Saloon at its current location through the last day of July 2009. Mainstage and Allen Burch then agreed with the City of Dallas, Texas to discontinue the respective operations of Mainstage and The Fare, respectively, as sexually oriented business in January and March, 2004, respectively. The cessation of operations by Mainstage and Allen Burch triggered the $500,000 payment clause to each entity as set forth in the May 2003 Settlement Agreement. The aggregate $1,000,000 payment has been accrued in the Company's financial statements and is being amortized to operations over the 67 month term from the triggering event date(s) through the mandatory closing date of The Million Dollar Saloon in it's present "non-conforming location" on July 31, 2009. To reiterate, in conjunction with an October 2002 Settlement Agreement with the City of Dallas, Texas, the Company's adult entertainment lounge and restaurant, Million Dollar Saloon, may operate in its present "non-conforming location" with a mandatory closing date of July 31, 2009. 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. The guidelines are intended to maintain a high standard of professionalism among the performers and 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 the best interest of the Company and its long-term market position. Compliance Policies - The Company's management has policies in place intended to ensure 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. 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. Club supervisory personnel review various credit card charges, including those purchasing "house" money or charges with total charges above an in-house floor limit as a control to ensure collection of the charges and to minimize challenges and or chargebacks initiated by patrons after leaving the premises. 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 with 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 a 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. 6 Controls - Operational and accounting controls are essential to the successful management of a cash intensive nightclub and bar business. The Company uses a combination of nightclub-oriented accounting software and physical inventory control mechanisms intended to maintain 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 monitor and control the nightclub. Management controls, restricts and supervises carefully all personnel with cash handling responsibilities. Management personnel reconcile deposits of cash and credit card receipts to produce a detailed daily income report. Daily computer reports alert management of any variances from expected financial results based on historical norms. Atmosphere - We believe that the Million Dollar Saloon maintains an elegant atmosphere through its Mediterranean decor theme and other customer related amenities. We believe the furniture and furnishings in the Million Dollar Saloon contribute to the atmosphere equivalent to that of an upscale restaurant. The club offers a gourmet menu, two cigar humidors and an extensive champagne and fine wine list. The sound system design provides quality high-energy music levels that also permit easy conversation to 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 its sound and light systems. Management regularly monitors the environment of the Million Dollar Saloon for appropriate music selection, customer service, and upscale appearance, and ambience. "VIP" Area - To provide service for the upper-end of the business market segment, the Company maintains a spacious VIP mezzanine encompassing the entire upstairs public 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 a maximum 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 a maximum of 250 persons. The lower level also offers "The Blue Room", a private entertainment space for bachelor and other large group activities. Advertising and Promotion - The Company's marketing philosophy is to position 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 other promotional activities are regularly employed so that the public recognizes the Million Dollar Saloon name. This facility was closed at the close of business on July 31, 2009. Future Expansion The Company has not determined evaluated or identified any specific locations outside of the Dallas market or conducted any efforts related to future expansion, but it believes, based upon its experience, that opportunities for expansion exist primarily in metropolitan areas in the Southwest United States. The aforementioned approximately 6.6 acre tract located in Dallas, Texas may be suitable for relocation of the club subsequent to the expiration of its operating permit in July 2009; however, these plans are subject to change based on municipal changes in zoning, neighboring businesses or developments or societal norms. The Company may expand through the acquisition of sports bars, casual clubs and adult cabarets that may use the trademark "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. At the present time, the Company has no definitive expansion, relocation or other plans for the operation of the existing facility after July 31, 2009 or any other conceptual facility in the future. 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, 7 Texas, certain of which may enjoy recognition that equals or exceeds that of the Million Dollar Saloon and may be owned or controlled by either Duncan Burch or Nick Mehmeti, the Company's officers, directors and controlling shareholders. While there may be local governmental restrictions on the location of a "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 several are in direct competition with the Million Dollar Saloon. Some of the competitive adult cabarets are owned by corporations controlled by or affiliated with Nick Mehmeti and Duncan Burch, who are officers and directors of the Company. The Company believes that the combination of its existing name recognition and its distinctive and unique entertainment environment will allow the Company to effectively compete within this industry. Governmental Regulations The Company is subject to various federal, state and local laws affecting its business activities. In Texas, the authority to issue a permit to sell alcoholic beverages is governed by the Texas Alcoholic Beverage Commission ("TABC"). The TABC has the authority, in its discretion, to issue appropriate permits. The Company, through a management agreement with Tempo Tamers Beverage Company, Inc., an affiliated corporation, operates its business under a Texas Mixed Beverage Permit and Late Hours Permit (the "Permits"). These Permits are subject to annual renewal, provided the Company and its affiliated corporation have 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 failure of the Company to obtain a renewal of its Permits would have a material adverse effect upon the financial condition and prospects of the Company. In 2008, the Texas Alcoholic Beverage Commission initiated a regulatory action against Tempo Tamers Beverage Company, Inc. styled "Texas Alcoholic Beverage Commission v. Tempo Tamers Beverage Company Inc." This Action is being vigorously contested by the Company and the potential outcome of this administrative action is not determinable at this time. Management is aggressively defending these actions and no material impact to the Company's financial condition is anticipated at this time; however, a finding against Tempo Tamers Beverage Company, Inc. could have a significant detrimental impact on the operation of the Million Dollar Saloon. 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. In conjunction with an October 2002 Settlement Agreement with the City of Dallas, Texas, the Company entered into negotiations between the Company's wholly-owned subsidiary, Tempo Tamers, Inc., Mainstage, Inc. (Mainstage), an entity controlled by Nick Mehmeti, the Company's President, which operated a non-conforming adult cabaret located in Dallas, Texas, called P.T.'s and Allen-Burch, Inc. (Allen Burch), an entity controlled by Duncan Burch, a Company officer and significant shareholder, also operating a non-conforming adult cabaret known as The Fare. These negotiations were initiated to determine which of these non-conforming entities would continue operating in a "non-conforming location". 8 In May 2003, these three affiliated parties granted the exclusive right to negotiate with the City of Dallas, Texas to Tempo Tamers, Inc. for the continuance of the operations of the Million Dollar Saloon as a sexually oriented business in a "non-conforming location." This Settlement Agreement provided that, in the event that the City of Dallas, Texas granted the Million Dollar Saloon the exclusive right to continue operating as an adult cabaret in a "non-conforming location" for a six (6) year period, Tempo Tamers would pay $500,000 each to Mainstage and Allen Burch and Mainstage and Allen-Burch would each discontinue the operation of their respective sexually oriented businesses. In May 2003, the City of Dallas agreed to allow Tempo Tamers to continue to operate the Million Dollar Saloon at its current location through the last day of July 2009. Mainstage and Allen Burch then agreed with the City of Dallas, Texas to discontinue the respective operations of Mainstage and The Fare, respectively, as sexually oriented business in January and March, 2004, respectively. The cessation of operations by Mainstage and Allen Burch triggered the $500,000 payment clause to each entity as set forth in the May 2003 Settlement Agreement. The aggregate $1,000,000 payment has been accrued in the accompanying financial statements and is being amortized to operations over the 67 month term from the triggering event date(s) through the mandatory closing date of the Million Dollar Saloon in it's present "non-conforming location" on July 31, 2009. To reiterate, in conjunction with an October 2002 Settlement Agreement with the City of Dallas, Texas, the Company's adult entertainment lounge and restaurant, Million Dollar Saloon, may operate in its present "non-conforming location" with a mandatory closing date of July 31, 2009. Beginning January 1, 2008, the Million Dollar Saloon became subject to a new state law requiring a $5 surcharge for every club visitor. A lawsuit has been filed by the Texas Entertainment Association, an organization to which we are a member, alleging the fee amounts to be an unconstitutional tax. This tax could discourage certain potential customers from visiting the Million Dollar Saloon. Employees As of May 29, 2009, the Company had approximately 19 full-time employees, of which 10 were in management positions, including corporate and administrative operations and 9 were engaged in food and beverage service, including bartenders and waitresses. The Company also employed 28 part-time employees who were engaged in food and beverage service and 14 part-time employees who were engaged in club operations. Contract entertainers numbered approximately 94 working on both full and part time schedules, as individually determined by the contractor. None of the Company's employees are represented by a union and the Company considers its employee relations to be good. Insurance The Company maintains insurance in amounts it considers adequate for property damage. The Company does not maintain personal injury liquor liability insurance for exposures or 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. 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. Commercial Real Estate 9 The Company owns a total of three (3) properties in the Dallas-Fort Worth Metroplex. One facility is Company operated, the Million Dollar Saloon, located in Dallas, Texas. The second property is owned by Don, Inc. and is located in Fort Worth, Texas. This property is leased to an entity controlled by Duncan Burch, an officer and director of the Company, for the operation of an adult cabaret. The third property consists of 6.6 acres of undeveloped real estate located in Dallas, Texas. The Company has not determined the best and ultimate use of this undeveloped property. 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. Management believes that all of its properties are adequately covered by insurance. Risk Factors Not required for a Smaller Reporting Company. Item 2 - Description of Property 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 $3,600. The Company occupies the premises for its corporate offices on a month-to-month basis. Based on current local market conditions and available information, management is of the belief that it will be able to relocate to a comparable location at a comparable cost if necessary. 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 Fort Worth, Texas facility is owned by Don, Inc. and is leased to an entity controlled by Duncan Burch, an officer and director of the Company, for the operation of an adult cabaret. The property is a stand-alone structure and is 100% occupied with a single tenant. The property is subject to a month-to-month lease that requires the tenant to pay a weekly rental of $8,500. The following is a summary of the terms, conditions and operating parameters of the referenced properties: Location/Address ---------------- 3601 State Highway 157 Ft. Worth, Texas ---------------- Owner Don, Inc. Square footage Building 4,850 Real estate tract 60,398 Mortgages None Lease expiration Month-to-month Scheduled rentals $8,500 per week Effective annual rental per square foot (Total lease term) $91.13 Gross book basis (including land) $160,447 Net book basis (including land) $43,235 Federal income tax basis (excluding land) $16,724 Depreciation method and life ACRS-15 years 10 Item 3 - Legal Proceedings 1) City of Dallas licensing In conjunction with an October 2002 Settlement Agreement with the City of Dallas, Texas, the Company entered into negotiations between the Company's wholly-owned subsidiary, Tempo Tamers, Inc., Mainstage, Inc. (Mainstage), an entity controlled by Nick Mehmeti, the Company's President, which operated a non-conforming adult cabaret located in Dallas, Texas, called P.T.'s and Allen-Burch, Inc. (Allen Burch), an entity controlled by Duncan Burch, a Company officer and significant shareholder, also operating a non-conforming adult cabaret known as The Fare. These negotiations were initiated to determine which of these non-conforming entities would continue operating in a "non-conforming location". In May 2003, these three affiliated parties granted the exclusive right to negotiate with the City of Dallas, Texas to Tempo Tamers, Inc. for the continuance of the operations of The Million Dollar Saloon as a sexually oriented business in a "non-conforming location." This Settlement Agreement provided that, in the event that the City of Dallas, Texas granted The Million Dollar Saloon the exclusive right to continue operating as an adult cabaret in a "non-conforming location" for a six (6) year period, Tempo Tamers would pay $500,000 each to Mainstage and Allen Burch and Mainstage and Allen-Burch would each discontinue the operation of their respective sexually oriented businesses. In May 2003, the City of Dallas, Texas agreed to allow Tempo Tamers to continue to operate The Million Dollar Saloon at its current location through the last day of July 2009. Mainstage and Allen Burch then agreed with the City of Dallas, Texas to discontinue the respective operations of Mainstage and The Fare, respectively, as sexually oriented business in January and March, 2004, respectively. The cessation of operations by Mainstage and Allen Burch triggered the $500,000 payment clause to each entity as set forth in the May 2003 Settlement Agreement. The aggregate $1,000,000 payment has been accrued in the Company's financial statements and is being amortized to operations over the 67 month term from the triggering event date(s) through the mandatory closing date of The Million Dollar Saloon in it's present "non-conforming location" on July 31, 2009. 2) "John Doe I" v. Tempo Tamers Beverage Company, Inc. dba Million Dollar Saloon and Christopher John Thornton, Dallas County Texas District Court Cause No. 05-02015; filed February 24, 2005 and settled on October 20, 2005. Plaintiff "Doe I" filed a wrongful death/survivor claim under Section 2.02 of the Texas Alcoholic Beverage Code (dram shop). The suit alleged that a customer of the Company's Tempo Tamers, Inc. subsidiary (dba Million Dollar Saloon) (Club) was served in violation of Section 2.02 resulting in a motor vehicle collision causing the wrongful death of "Doe I's" spouse. While the Company's wholly-owned subsidiary denied all allegations; the case was settled on October 20, 2005 under a sealed confidentiality agreement. The settlement was for the gross sum of $460,000 to be paid as follows: $50,000 on the signing of the settlement documents, $50,000 on or about January 13, 2006 and $7,500 per month starting on November 1, 2005 through October 1, 2009. The settlement is non-interest bearing and, per the requirements of generally accepted accounting principles, has been discounted at the Prime Rate of 6.75% to yield a net settlement of approximately $415,026, exclusive of imputed interest. The entire discounted settlement was charged to operations on the October 2005 settlement date. 3) "John Doe II" v. Tempo Tamers, Inc. dba Million Dollar Saloon; Dallas County Texas 44th District Court Cause No. 04-09918-A; filed September 24, 2004. Clarendon American Insurance Company v. Tempo Tamers, Inc. dba Million Dollar Saloon; Dallas County Texas 44th District Court Cause No. 06-11838; filed November 17, 2006. This is a suit for damages/loss of consortium brought by Plaintiffs under Section 2.02 of the Texas Alcoholic Beverage Code. The Plaintiff claimed he was served by Club employees in violation of Section 2.02 resulting in a motorcycle accident whereby he sustained head injuries and has medical bills over $300,000. The Plaintiff further asserted to have no or diminished capacity to continue his profession. The Company's wholly-owned subsidiary, Tempo Tamers, Inc., vigorously denied the allegations and asserted that the Plaintiff's accident was primarily, if not exclusively, of his own doing and asserted that the Plaintiff was more than 50% responsible for his injuries and that the only valid cause of action was pursuant to Section 2.02. The Company denied all liability. 11 In 2006, the Company's insurance carrier (Clarendon) sued the Company claiming that they had no obligation to pay the claim of the plaintiffs in the "John Doe II" litigation. In 2007, the Company, without an admission of liability, settled all claims in a confidential settlement agreement whereby Tempo Tamers, Inc. agreed to reimburse Clarendon $25,000 of the monies Clarendon paid to Plaintiffs, in five (5) monthly installments of $5,000 each, with the first monthly installment to be paid on November 1, 2007 and the last installment to be paid on March 1, 2008. Thereafter, Tempo Tamers, Inc. agreed to pay Doe II and Doe II's counsel the total sum of $75,000, to be paid in 15 monthly installments of $5,000 each, commencing on April 1, 2008 with the final installment to be paid on July 1, 2009. The effect and settlement of these actions was charged to operations on the November 2007 settlement date. 4) Cody Staus and Kelly Nowlin v. Million Dollar Saloon Inc. dba Million Dollar Saloon; Dallas County Texas District Court Cause No.; 05-04622-K, filed May 10, 2005. This case was brought by Plaintiffs Staus and Nowlin claiming they were assaulted by employees/security of Million Dollar Saloon and seek actual and punitive damages. This matter was settled in June 2006 for an aggregate $10,000 cash to all Plaintiffs and charged to operations at the settlement date. 5) Beatrice Hunter v. Tempo Tamers, Inc. and Tempo Tamers Beverage Company Cause # 06-12954 in the116th Judicial District Court for Dallas County Texas, filed December 28, 2006. This case was originally brought by a person injured in a car accident with an alleged customer of the Club against Million Dollar Saloon, Inc. alleging a variety of causes of action including violations under Section 2.02 of the Texas Alcoholic Beverage Code, negligence, gross negligence and other allegations. Million Dollar Saloon, Inc. claimed that it was not liable as it did not operate the Club and claimed that Section 2.02 was the only valid cause of action and injuries were due to the conduct of the driver of the woman's car to an extent to bar any recovery against the club. The initial case was dismissed against Million Dollar Saloon Inc. when a settlement was reached between the Plaintiff and alleged customer. A new lawsuit was thereafter refiled against Tempo Tamers Inc. and Tempo Tamers Beverage Company Inc. This case is scheduled for a jury trial to commence on August 11, 2008 and the ultimate outcome is not determinable at this time. Management is aggressively defending these actions and no material impact to the Company's financial condition is anticipated at this time. 6) Furrh Inc. v. Charlene McCartney et al., Cause #06-01564 in the 193rd District Court for Dallas County, Texas. This was a claim by Furrh Inc. against its landlord for offices and parking for contracting to sell the leasehold without allowing Furrh Inc. the opportunity to exercise its right of first refusal under the party's lease. Counterclaims were filed. The case was settled and dismissed with Furrh Inc. allowing the sale with concessions to allow use of the offices and parking to continue as long as the adjacent property owned by Furrh Inc can be operated as a SOB by the Lessee. 7) Texas Alcoholic Beverage Commission v. Tempo Tamers Beverage Company Inc. This is Administrative action brought by a state regulatory agency against a non subsidiary corporation which provides Tempo Tamers, Inc. with liquor permitting and services for the Tempo Tamers, Inc.'s business operations known as "Million Dollar Saloon". This Action is being vigorously contested by the Company and the potential outcome of this administrative action is not determinable at this time. Management is aggressively defending these actions and no material impact to the Company's financial condition is anticipated at this time; however, a finding against Tempo Tamers Beverage Company, Inc. could have a significant detrimental impact on the operation of the Club. From time-to-time, in the ordinary course of business, the Company has become and may become party to other lawsuits. The outcome of this litigation, existing or future, if any, is not determinable at this time. Management is aggressively 12 defending any current actions and anticipates aggressively defending future actions, if any. Accordingly, no material impact to the Company's financial condition is anticipated. Item 4 - Submission of Matters to a Vote of Security Holders The Company has not conducted any meetings of shareholders during the preceding quarter or periods subsequent thereto. PART II Item 5 - Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Transfer Agent Our independent stock transfer agent is Securities Transfer Corporation. Their address is 2591 Dallas Parkway, Suite 102, Frisco, TX 75034. Their phone number is (469) 633-0101 and their fax number is (469) 633-0088. Market for Trading As of May 29, 2009, the Company had approximately 800 holders of record, exclusive of shares held in "street name", of its Common Stock and had 5,731,778 issued and outstanding shares of Common Stock. The Company's Common Stock has been quoted on The OTC Bulletin Board under symbol "MLDS" since January 29, 1996. The following table sets forth the quarterly average high and low closing bid prices per share for the Common Stock: High Low Fiscal year ending December 31, 2006 Quarter ended March 31, 2006 $0.20 $0.15 Quarter ended June 30, 2006 0.30 0.16 Quarter ended September 30, 2006 0.20 0.15 Quarter ended December 31, 2006 0.25 0.15 Fiscal year ended December 31, 2007 Quarter ended March 31, 2007 $0.23 $0.19 Quarter ended June 30, 2007 0.25 0.19 Quarter ended September 30, 2007 0.25 0.19 Quarter ended December 31, 2007 0.25 0.19 Fiscal year ended December 31, 2008 Quarter ended March 31, 2008 $0.28 $0.19 Quarter ended June 30, 2008 0.25 0.20 Quarter ended September 30, 2008 0.20 0.09 Quarter ended December 31, 2008 0.14 0.09 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. The reported closing price of the Company's common stock, based on the last reported trade of approximately 15,000 shares on May 29, 2009 was $0.14 per share. 13 Common Stock The Company's Articles of Incorporation authorize the issuance of up to 50,000,000 shares of $0.001 par value Common Stock. Each record holder of Common Stock is entitled to one vote for each share held on all matters properly submitted to the stockholders for their vote. The Company's Articles of Incorporation do not permit for cumulative voting for the election of directors. Holders of outstanding shares of Common Stock are entitled to such dividends as may be declared from time to time by the Board of Directors out of legally available funds; and, in the event of liquidation, dissolution or winding up of the affairs of the Company, holders are entitled to receive, ratably, the net assets of the Company available to stockholders after distribution is made to the preferred stockholders, if any, who are given preferred rights upon liquidation. Holders of outstanding shares of Common Stock have no preemptive, conversion or redemption rights. All of the issued and outstanding shares of Common Stock are, and all unissued shares when offered and sold will be, duly authorized, validly issued, fully paid, and non-assessable. To the extent that additional shares of the Company's Common Stock are issued, the relative interests of then existing stockholders may be diluted. Recent issuances of Unregistered Securities None Dividend policy No dividends have been paid in the most recent fiscal year and the Company's Board of Directors does not anticipate paying dividends in the foreseeable future. It is the current policy to retain all earnings, if any, to support current operations. Item 6 - Selected Financial Data Not applicable Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the financial statements and related notes included elsewhere in this annual report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the sections entitled "Risk Factors" and "Caution Regarding Forward-Looking Information" appearing elsewhere in this annual report on Form 10-K. (1) Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We have identified certain of these policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by our management. We analyze our estimates including those related to marketable securities, accounts receivable, revenue recognition, 14 inventory, and income taxes, and base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: Marketable Securities --------------------- Investments in the equity securities of other companies, including mutual fund investments, that have readily determinable fair values (as defined in Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115) are classified, at the date of acquisition, into three categories and accounted for as follows: Trading Securities - Equity securities that are bought and held principally for the purpose of selling them in the near term are reported at fair value. Unrealized gains and losses are included in earnings. Available-for-Sale Securities - Equity securities not classified in other categories are reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity. Held-to-Maturity Securities - Equity securities that the Company has the positive intent and ability to hold to maturity are reported at amortized cost. Other investments that do not have a readily determinable fair value are recorded at amortized cost. The Company evaluates the carrying value of all marketable securities classified as "held-to-maturity" or "other investments that do not have a readily determinable fair value" on a quarterly basis in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Any permanent impairment, if any, is charged to operations in the quarter in which the determination of impairment is made. For purposes of computing realized gains and losses, the specific identification method is used. Accounts Receivable and Revenue Recognition ------------------------------------------- In the normal course of business, the Company extends unsecured credit to virtually all of its tenants related to rental property operations and accepts cash or nationally issued bankcards as payment for goods and services in its adult lounge and entertainment facility. Bankcard charges are normally paid by the clearing institution within three to fourteen days from the date of presentation by the Company. Since December 31, 2000, all rental property lessors are entities controlled by a Company controlling shareholder, officer and director. All lease rental payments are due in advance on the first day of the week for that week. All revenue sources are located either in Dallas or Tarrant County, Texas. Because of the credit risk involved, management has provided an allowance for doubtful accounts which reflects its opinion of amounts which will eventually become uncollectible. In the event of complete non-performance, the maximum exposure to the Company is the recorded amount of trade accounts receivable shown on the balance sheet at the date of non-performance. 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. 15 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. (2) Results of Operations Year ended December 31, 2007 as compared to Year ended December 31, 2006 ------------------------------------------------------------------------ Bar and restaurant sales increased by approximately $167,000 (or +6.6%) in the year ended December 31, 2007. Bar and restaurant sales were approximately $2,705,000 for the year ended December 31, 2007 as compared to approximately $2,538,000 for 2006. Management is of the opinion that the overall fluctuations in visitor traffic to the Dallas-Ft. Worth Metroplex and the effects of changes in the economic and ethnic populations in the immediate geographic area of the Company's physical location has stabilized. The Company experienced deteriorating revenues during the fiscal years ended December 31, 2006 and 2005. Given the demographics, mobility and economic conditions of the City of Dallas and the specific location of the Million Dollar Saloon, management is unable to predict any future trend with any degree of certainty. In May 2003, the City of Dallas agreed to allow Tempo Tamers to continue to operate the Million Dollar Saloon at its current location through the last day of July 2009. While the Company's facility holds a valid "sexually oriented business" license issued by the City of Dallas, Texas; the City of Dallas, Texas continues to pursue vigorous enforcement of its Sexually Oriented Business Ordinance. This Ordinance restricts the attire and dancing activities at the Company's Million Dollar Saloon, and other local adult cabarets, which has resulted in unpredictable fluctuations in patron attendance at the Company's facilities. The Company's operating location, when originally built, was in one of the most dynamic retail and entertainment corridors within the City of Dallas, Texas. At the current time, the expansion of the City into other geographic areas has contributed to a diversification of retail and entertainment districts within the City. These newer areas have received better reception from the patronage traffic than the Company's current location which has suffered from City neglect in infrastructure maintenance, the introduction of economically depressed foot traffic as a result of available mass transit facilities and a shift in economic and ethnic population in the immediate vicinity of the Company's club. While the City of Dallas' efforts against the Company's principal business activity, the lack of efforts by the City of Dallas to maintain a degree of economic and ethnic diversity and prosperity in the vicinity of the Company's facility may contribute to further revenue deterioration in future periods. Further, due to the Company's agreement with the City of Dallas, Texas, all operations in the current format at the Million Dollar Saloon will cease on July 31, 2009. Management's continues to direct it's efforts towards customer service and increasing sales through effective marketing and advertising methods to maintain and increase its bar and restaurant patronage and comply with current regulatory conditions and environment. The Company's rental income declined nominally to approximately $442,000 for the year ended December 31, 2007 as compared to approximately $441,000 for Calendar 2006. All of the leases were/are with entities controlled by Duncan Burch, one of the Company's controlling shareholders. During Calendar 2004, Management reclassified the net carrying value, approximately $871,000, to "Property and equipment held for sale" in the Company's financial statements on the date of listing for sale. This property was sold on February 5, 2008 for net proceeds of approximately $896,000, resulting in a net gain at the time of sale of approximately $61,000. Accordingly, management did not and has not provided a loss or impairment of the recorded carrying value as of the date of the accompanying financial statements. 16 Our rental real estate owned by Don, Inc. is also subject to a lease with a separate entity controlled by Duncan Burch, an officer, director and controlling shareholder of the Company. This lease expired in August 2003 and is being continued on a month-to-month basis at the final contractual rental rate of approximately $8,500 per week. This arrangement continues in this fashion through the date of this filing. Although the Company is seeking either an outright sale or long-term lease on these properties, respectively, that are at least comparable to terms for similar properties in the geographic area, there is no assurance that the Company will be able to renew its lease with the entity controlled by Mr. Burch or any other unaffiliated third-party, or if renewed, that the terms of the lease will be as favorable to the Company as it could have obtained from an unaffiliated party. The failure of the Company to obtain a long-term lease agreement with Mr. Burch, or other third parties, with terms at least comparable to the existing lease arrangements will have a material adverse effect on the revenues of the Company. Cost of sales increased slightly by approximately $37,000 from approximately $1,034,000 for the year ended December 31, 2006 to approximately $1,061,000 for the year ended December 31, 2007. Gross profit percentages improved to approximately 66.3% (approximately $2,086,000) for the year ended December 31, 2007 versus 65.3% (approximately $1,946,000) for the year ended December 31, 2006. Fluctuations in the Company's gross profit percentages react to and parallel the key areas of management focus for cost of sales expenditure control - principally personnel staffing levels and food and beverage costs. These areas, specifically cost controls over purchasing, inventory management protocols and labor management, are continuously monitored to maintain the Company's gross profit percentages. General and administrative expenses were approximately $1,853,000 for the year ended December 31, 2007 as compared to approximately $1,876,000 for 2006. Management attention to expenditures of all types caused the Company to experience a relatively flat expenditure level for overhead expenses. Management; however, is continually aware of inflationary pressures in the economy, fluctuating legal expenses as a result of ongoing litigation and the general nature of a litigious society and issues related to the City of Dallas Sexually Oriented Business Ordinance. Further, the Company's executive compensation remains relatively stable and is anticipated to remain stable into the foreseeable future. The Company anticipates relatively constant expenditure levels for general operating expenses in future periods and management continues to monitor its expenditure levels to achieve optimum financial results. The Company experienced net income before income taxes was approximately $192,000 for the year ended December 31, 2007 versus approximately $65,000 for Calendar 2006. The increase in income before income taxes is directly attributable to our increase in gross profit in operating the Million Dollar Saloon. After-tax net income increased by approximately $19,000 from approximately $106,000 for the year ended December 31, 2007 as compared to approximately $87,000 for Calendar 2006. The Company experienced earnings per share of approximately $0.02 and $0.02 per share for each of the years ended December 31, 2007 and 2006, respectively. As a general rule, the Company's adult cabaret operations experience unpredictable fluctuations as a result of the overall discretionary spending habits related to the U. S. economy, visitation levels related to tourism, convention and business travel levels and impacts related to the City of Dallas' various enforcement actions and on-premises monitoring of entertainer conduct. Management makes it's best efforts to timely adjust its expenditure levels to these events as they occur in order to maintain profitability. (3) Liquidity As of December 31, 2007 and 2006, the Company has working capital of approximately $(160,,000) and $(355,000). The Company achieved positive cash flows from operations of approximately $231,000 for Calendar 2007 as compared to approximately$180,000 for 2006. The Company's working capital is directly related to the cash expended and future debt service requirements to acquire land for future development. Additionally, the Company incurred a liability of approximately $1,000,000 ($500,000 each) to two entities controlled by the Company's controlling shareholders, Nick Mehmeti and Duncan Burch related to the securing of an 17 operating license for the Company's Million Dollar Saloon operation in a "non-conforming location" through July 31, 2009. This debt was retired from the proceeds of the sale of land in Calendar 2008. Future operating liquidity and debt service are expected to be sustained from continuing operations. Additionally, management is of the opinion that there is additional potential availability of incremental mortgage debt and the opportunity for the sale of additional common stock through either private placements or secondary public offerings. On January 29, 2004, the Company obtained permanent long-term financing from Citizens National Bank, Waxahachie, Texas, and used the proceeds to pay off in full the original note payable to the seller. The term loan had an original balance of $2,000,000 and initially bore interest at 6.5% for the first year and then adjusts to 1% above the published prime rate. The interest rate adjusts every 12 months commencing January 29, 2005. The note required initial monthly principal and interest payments of $17,426. As this is a variable interest rate note, the payments may change after the 12th payment and every succeeding 12th payment thereafter. The note matures on January 29, 2019. The note is secured by the underlying land and the separate personal guaranty of Duncan Burch and Nick Mehmeti, each a Company officer, director and controlling shareholder. Our primary source of liquidity is generated from ongoing operations. Our liquidity beyond July 2009 will be greatly diminished after the closing of the Million Dollar Saloon. (4) Capital Resources On February 14, 2003, the Company purchased 6.695 acres of undeveloped property located in Dallas, Texas. The purchase price was approximately $2,650,312, including closing expenses of approximately $53,599. The Company paid $493,072 cash, inclusive of a $140,000 loan to the Company from Duncan Burch, an officer and director of the Company, and issued to the seller a one-year note in the principal amount of $2,156,713 with 8% annual interest. This debt was paid in full with proceeds of the $2,000,000 long-term mortgage note refinancing. The Company paid approximately $153,800 during Calendar 2003 and approximately $14,700 during Calendar 2004 to service this initial short-term debt. The property is undeveloped and suitable for commercial development. Although the Company has not determined the usage of the land, the Company may, subject to zoning and permissible use statutes, use a portion of the land for an adult cabaret and sell the remaining undeveloped property to a third party. The development of the property will be subject to the Company obtaining a construction loan. The Company does not currently know the amount of the loan it will need to develop this property or whether it will be able to obtain a sufficient loan for development of the property or, if obtained, whether the terms of the loan will be favorable to the Company. The Company has also remitted approximately $366,000 at the closing of the permanent long-term financing in January 2004 for closing costs, interim interest, loan origination fees and other ancillary items. The Company has identified no other significant capital requirements for 2004, other than normal repair and replacement activity at the Company's commercial rental properties and the adult entertainment lounge and restaurant facility. Liquidity requirements mandated by future business expansions or acquisitions, if any are specifically identified or undertaken, are not readily determinable at this time as no substantive plans have been formulated by management. (5) Accounting Pronouncements The Company knows of no new accounting releases or pronouncements that will have any impact upon the Company's financial condition or position upon adoption. Item 7 - Index to Financial Statements 18 The required financial statements begin on page F-1 of this document. Item 7A - Quantitative and Qualitative Disclosures about Market Risk The carrying amount of cash, accounts receivable, accounts payable and notes payable, as applicable, approximates fair value due to the short term nature of these items and/or the current interest rates payable in relation to current market conditions. Interest rate risk is the risk that the Company's earnings are subject to fluctuations in interest rates on either investments or on debt and is fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to interest rate risk, if any. Financial risk is the risk that the Company's earnings are subject to fluctuations in interest rates or foreign exchange rates and are fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to financial risk, if any. Item 8 - Financial Statements and Supplementary Data The required financial statements begin on page F-1 of this document. Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None Item 9A - Controls and Procedures Disclosure Controls and Procedures. Our management, under the supervision and with the participation of our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15 promulgated under the Exchange Act as of the end of the period covered by this Annual Report. Based on such evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management's Annual Report on Internal Control over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Internal control over financial reporting is defined under the Exchange Act as a process designed by, or under the supervision of, our CEO and CFO and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: -- Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; 19 -- Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and -- Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitation, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. Accordingly, even an effective system of internal control over financial reporting will provide only reasonable assurance with respect to financial statement preparation. Our management, with the participation of our CEO and CFO, evaluated the effectiveness of the Company's internal control over financial reporting as of December 31, 2007. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework. Based on this evaluation and those criteria, our management, with the participation of our CEO and CFO, concluded that, as of December 31, 2007, our internal control over financial reporting was effective. This Annual Report does not include an attestation report of our registered public accounting firm regarding our internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management's report in this Annual Report. Changes in Internal Control over Financial Reporting. There have not been any changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) that occurred during the quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART III Item 10 - Directors, Executive Officers and Corporate Governance 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 shareholders 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 the annual meeting of directors following the annual meeting of shareholders or until their respective successors are duly elected and qualified or their earlier resignation or removal. Name Age Position ------------ ------- -------------------------- Nick Mehmeti 53 President, Chief Executive Officer, Chief Financial Officer and Director Duncan Burch 53 Executive Vice President and Director Dewanna Ross 55 Secretary/Treasurer Nick Mehmeti - Mr.Mehmeti has served as the Company's President, Chief Executive Officer and a director since January 2000 and as the Company's Chief Financial Officer since March 2, 2001. Mr. Mehmeti, his affiliates and his affiliated companies have owned and operated restaurants and adult cabarets in the Dallas-Fort Worth Metroplex for more than 15 years. Mr. Mehmeti will devote as much of his time as is necessary to perform his duties as President, Chief Executive Officer, Chief Financial Officer and a director of the Company. 20 Duncan Burch - Mr. Burch has served as the Company's Executive Vice President and a director since January 2000. Mr. Burch, his affiliates and his affiliated companies have owned and operated restaurants and adult cabarets in the Dallas-Fort Worth Metroplex for at least the past ten years. Mr. Burch will devote as much of his time as is necessary to perform his duties as an officer and a director of the Company. Dewanna Ross - Ms. Ross has served in various positions with the Company since 1995. Ms. Ross served as a director of the Company from 1995 until January 2002. She served as President and Chief Executive Officer of the Company from July 1999 to January 2000. She served as Vice President of Operations and Chief Operating Officer of the Company from January 19, 2000 to January 10, 2002. She currently serves as Secretary-Treasurer of the Company. Ms. Ross is responsible for the development of the corporate procedures, including the hiring and training of corporate staff and the day-to-day operations of the Company's Million Dollar Saloon. Ms. Ross has also served as an officer and operator of a private club and as an officer of other businesses. Ms. Ross has a Bachelor of Arts degree from the University of Texas at Dallas. Board of Directors and Committees We are managed under the direction of our board of directors. The size of our board of directors is set at three members, and we currently have three directors, all of whom are employees of the Company. During the fiscal year ended December 31, 2007, the Board held only one meeting - its annual meeting. The Company does not have a standing audit committee, compensation committee or nominating committee or any other committee. The Company does not have an independent audit committee financial expert, as defined in Item 407(d)(5). The Company currently does not pay a director fee for attending scheduled and special meetings of the Board of Directors. The Company pays expenses of all of its directors in attending meetings. Identifying and Evaluating Nominees for Directors Our board of directors does not have a standing nominating committee. The entire board of directors participates in the consideration of director nominees. Our board of directors does not consider it necessary to establish a nominating committee because our board of directors is relatively small in size and believes it can operate more effectively in concert. Further, because there has not been turnover on our board of directors, there has been no need to nominate new directors. In the event that vacancies are anticipated or otherwise arise, our board of directors will consider various potential candidates. Our board of directors anticipates that it would utilize a variety of methods for identifying and evaluating nominees for director. Candidates may come to the attention of our board of directors through current board members, professional search firms, stockholders or other persons. These candidates would be evaluated at regular or special meetings of our board of directors and may be considered at any point during the year. Our board of directors will consider stockholder nominations for director candidates upon written submission of such recommendation to our corporate secretary along with, among other things, the nominee's qualifications and certain biographical information regarding the nominee, such nominee's written consent to serving as a director if elected and being named in any proxy or information statement and certain information regarding the status of the stockholder submitting the recommendation, all in the manner required by our amended and restated bylaws and the applicable rules and regulations promulgated under the Securities Exchange Act of 1934, as amended. Following verification of the stockholder status of persons proposing candidates, recommendations will be aggregated and considered by our board of directors at a regularly scheduled or special meeting. If any materials are provided by a stockholder in connection with the nomination of a director candidate, such materials will be forwarded to our board of directors. Communications with the Board 21 Individuals may communicate with the Company's Board of Directors or individual directors by writing to the Company's Secretary at 6848 Greenville Avenue, Dallas, Texas 7231. The Secretary will review all such correspondence and forward to the Board of Directors a summary of all such correspondence and copies of all correspondence that, in the opinion of the Secretary, relates to the functions of the Board or committees thereof or that he otherwise determines requires their attention. Directors may review a log of all such correspondence received by the Company and request copies. Concerns relating to accounting, internal control over financial reporting or auditing matters will be immediately brought to the attention of the Board of Directors and handled in accordance with its procedures established with respect to such matters. Code of Ethics The Company's Board of Directors have adopted a Code of Ethics which applies to its Chief Executive Officer and Chief Financial Officer has filed as an exhibit to our Form 10-K in a prior period. A copy of the code of ethics is available in print without charge to any person who sends a request to the office of the Secretary of the Company at 6848 Greenville Avenue, Dallas, Texas 75231. Indemnification of Officers and Directors. The Company's By-Laws provide for the indemnification of its, directors, officers, employees, and agents, under certain circumstances, against attorney's fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of the Company. The Company will also bear the expenses of such litigation for any of its directors, officers, employees, or agents, upon such persons promise to repay the Company therefor if it is ultimately determined that any such person shall not have been entitled to indemnification. This indemnification policy could result in substantial expenditures by the Company, which it may be unable to recoup. Director Independence and Conflicts of Interest None of our directors are independent directors under NASDAQ or AMEX general independence rules and under the independence rules applicable to audit committees, nominating committees and compensation committees. Non of our directors are "non-employee directors" as defined by Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, or "outside directors" as defined by Section 162(m) of the Internal Revenue Code. None of the officers of the Company will devote of their respective time to the affairs of the Company than is deemed necessary by them. Mr. Mehmeti and Mr. Burch have ownership interests in other business ventures which are in direct competition with the Company. These business interests present potential conflicts of interest with those of the Company and its stockholders. There will be occasions when the time requirements of the Company's business conflict with the demands of the officers' other business and investment activities. Such conflicts may require that the Company attempt to employ additional personnel. There is no assurance that the services of such persons will be available or that they can be obtained upon terms favorable to the Company. The Company has adopted a policy under which any consulting or finders fee that may be paid to a third party for consulting services to assist management in evaluating a prospective business opportunity would be paid in stock rather than in cash, if deemed beneficial to the Company. Accordingly, the Company is unable to predict whether, or in what amount, such stock issuance might be made. However, through the filing date of this report, no such shares have been issued pursuant to arrangements of this nature. Section 16(a) Beneficial Ownership Compliance 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. 22

Option Grants In Last Fiscal Year There were no grants of stock options to any officer or director of the Company during the fiscal year ended December 31, 2007, 2006 and 2005, respectively. 23 Option Exercises And Holdings The Company does not have a stock option plan. Except as disclosed in "Security Ownership of Certain Beneficial Owners and Management," no officer, director or employee of the Company holds any stock options to purchase shares of Common Stock of the Company. Committees of the Board of Directors and Director Compensation There are no audit, compensation or other committees of the Board of Directors of the Company. The Company currently does not pay a director fee for attending scheduled and special meetings of the Board of Directors. The Company pays expenses of all of its directors in attending meetings. Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The following table sets forth certain information as of the filing date of this Annual Report relating to the beneficial ownership (as defined by the rules of the Securities and Exchange Commission) 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) the President and Chief Executive Officer of the Company for the year ended December 31, 2004, and (iv) each named executive officer of the Company, and (v) all executive officers and directors of the Company as a group. % of Class Name and address Number of Shares Beneficially Owned (1) ---------------- ---------------- ------------------ Nick Mehmeti (2) 1,675,787 (3) 29.24% Duncan Burch (2) 1,675,787 (3) 29.24% The Irrevocable Equity Trust No. 1 J. M. Tibbals, Trustee (4) 451,558 7.88% Ronald A. Zlatniski (5) 322,610 5.63% Dewanna Ross (2) 4,000 0.70% All Officers and Directors as a Group 3,355,574 58.54% (1) Beneficial ownership is determined in accordance with the SEC's rules. In determining the percent of Common Stock owned by a person (a) the numerator is the number of shares of Common Stock beneficially owned by the person, including shares the beneficial ownership of which may be acquired within 60 days upon the exercise of options or warrants or conversion of convertible securities, and (b) the denominator is the total of (I) the 5,731,778 shares in the aggregate of Common Stock on the filing date of this Annual Report and (ii) any shares of Common Stock which the person has the right to acquire within 60 days upon the exercise of options or warrants or conversion of convertible securities. Neither the numerator nor the denominator includes shares which may be issued upon the exercise of any options or warrants or the conversion of any other convertible securities held by any other person. (2) Mr. Mehmeti is the President, Chief Executive Officer, Chief Financial Officer and a director of the Company and Mr. Burch is the Executive Vice President and a director of the Company. Ms. Ross is the Corporate Secretary/Treasurer. The mailing address for these individuals is c/o the Company, 6848 Greenville Ave., Dallas, Texas 75231. (3) Excludes an expired option to purchase 400,000 shares of the Common Stock of the Company for $440,000 ($1.10 per share) which was jointly owned by Messrs. Mehmeti and Burch and could have been exercised in whole or in part at any time through October 18, 2004 when such option expired. 24 (4) 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. (5) The mailing address for Mr. Zlatniski is 1450 Raleigh Road, Suite 300, Chapel Hill, NC 27517. Changes in Control There are currently no arrangements which may result in a change in control of the Company. Item 13 - Certain Relationships and Related Transactions, and Director Independence The Company provides management support and conducts its business operations through its wholly-owned operating subsidiaries: Furrh, Inc., Tempo Tamers, Inc. ("Tempo Tamers"), Don, Inc. and Corporation Lex ("Lex"). The Company owns and operates an adult cabaret in Dallas, Texas and owns and manages two other commercial properties located in the Dallas-Fort Worth Metroplex. Tempo Tamers owns and operates an adult cabaret at 6826 Greenville, Avenue in Dallas, Texas operates under the registered trademark and trade name "Million Dollar Saloon (R)." The 6826 Greenville Avenue location is, and has been, a "non-conforming location" under the Dallas Sexually Oriented Business Ordinance since 1986 due to the fact that 6826 Greenville Avenue is within 1,000 feet of a residentially zoned property. Various other sexually oriented businesses, including those owned or controlled by entities owned by Duncan Burch, Executive Vice President and a director of the Company, and/or Nick Mehmeti, President, Chief Executive Officer, Chief Financial Officer and a Director of the Company, were likewise in "non-conforming locations." While many of these locations had previously been successful in obtaining locational exemptions from the Dallas Sexually Oriented Business Ordinance so as to allow their continued operation as sexually oriented businesses, the City of Dallas recently proposed legislation to eliminate the possibility of a locational exemption. Despite years of intensive and expensive litigation funded primarily by entities owned by Messrs. Burch and Mehmeti, the City of Dallas is moving toward closure of all sexually oriented businesses in "non-conforming locations." Accordingly, the Company, through Tempo Tamers, and other similarly situated operators of sexually oriented businesses entered into settlement negotiations with the City of Dallas. During those negotiations, it became the view of the Company and operators of other sexually oriented businesses in "non-conforming locations" that the City would allow one such sexually oriented business to remain in business in a "non-conforming location" for a limited period of time, if all of the other sexually oriented businesses operating in "non-conforming locations" ceased operations. In October, 2002, entities controlled by Mr. Burch entered into a settlement agreement with the City of Dallas which provides for the closure of the sexually oriented business known as Chicas Locas, which is operated by an affiliate of Mr. Burch, and Baby Dolls Saloon which is also operated by an affiliate of Mr. Burch. Chicas Locas was the tenant of the Company's property located at 3021 W. Northwest Highway in Dallas, Texas. Nick Mehmeti, the Company and its subsidiary, Corporation Lex, the record owner of the 3021 W. Northwest Highway, signed the settlement agreement for limited purposes. In accordance with the settlement agreement and an agreement reached between Corporation Lex and Chicas Locas, Chicas Locas agreed to terminate the lease and the Company agreed not to allow the operation of an adult cabaret business at its 3021 W. Northwest Highway property after July 31, 2003. Chicas Locas ended its month-to-month lease arrangements with the Company regarding the 3021 W. Northwest Highway property and vacated the premises effective July 31, 2003. During 2002, the Company received $52,000 in lease payments for this property from Chicas Locas. Chicas Locas owed approximately $69,000 at December 31, 2002 and $137,000 at July 31, 2003 on the lease for accrued, unpaid rent for this property. Pursuant to their agreement, Corporation Lex agreed to forego the accrued, unpaid rent from the 3021 W. Northwest Highway property. The Company sold this property in February 2008. Thereafter, negotiations began between Mainstage, Inc. d/b/a P.T.'s ("Mainstage"), an entity controlled by Nick Mehmeti which operated a non-conforming adult cabaret called P.T.'s, Allen-Burch, Inc. ("Allen Burch"), an entity controlled by Duncan Burch operating a non-conforming adult cabaret known as The Fare, and Tempo Tamers regarding which of these non-conforming entities would negotiate with the City of Dallas to become the sexually oriented business to continue operating in a "non-conforming location." Pursuant to a settlement agreement entered into in May 2003, Tempo Tamers, Mainstage, and Allen Burch, Tempo Tamers was granted the exclusive right to negotiate with the City of Dallas to continue to operate the Million Dollar Saloon as a sexually 25 oriented business in a "non-conforming location." The settlement agreement provided that, in the event that the city granted the Million Dollar Saloon the exclusive right to continue operating as an adult cabaret in a "non-conforming location" for a six (6) year period, Tempo Tamers would pay $500,000 to each of P.T.'s and Allen Burch, and they would each discontinue the operation of sexually oriented businesses. In May 2003, the City of Dallas agreed to allow Tempo Tamers to continue to operate The Million Dollar Saloon at its current location until July 2009. Mainstage and Allen Burch agreed to discontinue operations of P.T.'s and The Fare, respectively, as sexually oriented business in January and March, 2004. To reiterate, in conjunction with an October 2002 Settlement Agreement with the City of Dallas, Texas, the Company's adult entertainment lounge and restaurant, Million Dollar Saloon, may operate in its present "non-conforming location" with a mandatory closing date of July 31, 2009. On February 14, 2003, the Company purchased 6.695 acres of undeveloped property located in Dallas, Texas. Although the Company has not yet determined the ultimate usage of the land, the Company knows that it will be necessary to relocate the Million Dollar Saloon in 2009 if the facility is to remain in business. The Company may elect to use a portion of this new land to relocate the Million Dollar Saloon, subject to zoning and permit restrictions, and/or sell or lease any remaining properties to third parties. Item 14 - Principal Accountant Fees and Services The Company paid or accrued the following fees in each of the prior two fiscal years to it's principal accountant, Blanchfield, Kober & Company, PC of Hauppauge, NY: Year ended Year ended December 31, December 31, 2007 2006 ------- ------- Audit fees $34,618 $ 9,112 Audit-related fees -- -- Tax fees -- -- All other fees -- -- ------- ------- Totals $34,618 $ 9,112 ======= ======= The Company has no formal audit committee. However, the entire Board of Directors (Board) is the Company's defacto audit committee. In discharging its oversight responsibility as to the audit process, the Board obtained from the independent auditors a formal written statement describing all relationships between the auditors and the Company that might bear on the auditors' independence as required by the appropriate Professional Standards issued by the Public Company Accounting Oversight Board, the U. S. Securities and Exchange Commission and/or the American Institute of Certified Public Accountants. The Board discussed with the auditors any relationships that may impact their objectivity and independence, including fees for non-audit services, and satisfied itself as to the auditors' independence. The Board also discussed with management, the internal auditors and the independent auditors the quality and adequacy of the Company's internal controls. The Board discussed and reviewed with the independent auditors all matters required to be discussed by auditing standards generally accepted in the United States of America. The Board reviewed the audited consolidated financial statements of the Company as of and for the year ended December 31, 2007 and 2006, with management and the independent auditors. Management has the sole ultimate responsibility for the preparation of the Company's financial statements and the independent auditors have the responsibility for their examination of those statements. 26 Based on the above-mentioned review and discussions with the independent auditors and management, the Board of Directors approved the Company's audited consolidated financial statements and recommended that they be included in its Annual Report on Form 10-K for the year ended December 31, 2007, for filing with the Securities and Exchange Commission. The Company's principal accountant, Blanchfield, Kober & Company, P. C., did not engage any other persons or firms other than the principal accountant's full-time, permanent employees. Item 15 - Exhibits, Financial Statement Schedules Exhibits 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. (*) 3(iii) Amended and Restated Bylaws of the Company effective July 9, 1999 (**) 4.1 Specimen Common Stock Certificate. (*) 10.1 Leases of Properties. (*) 10.2 Promissory Note for $750,000 with Abrams Centre National Bank dated September 22, 1995. (*) 10.3 Modification of Lease Agreement dated January 31, 2001 between Corporation Lex and MD II Entertainment, Inc. (***) 10.4 Promissory Note dated February 14, 2003 (the "Note") in the principal amount of $2,156,713.50 payable by the Company to One Stemmons Land Limited Partnership with interest at 8% per annum, interest payable monthly, with a single principal payment due and payable on February 1, 2004. (+) 10.5 Deed of Trust, dated February 14, 2003, signed by the Company granting a security interest in 6.6 acres of undeveloped real estate in Dallas, Texas to secure payment of the Note. (+) 10.6 Special Warranty Deed with Vendor's Lien dated February 14, 2002 relating to 6.6 acres of real estate located in Dallas, Texas. (+) 10.7 Promissory Note, dated January 29, 2004, in the principal amount of $2,000,000 payable by the Company to Citizens National Bank in Waxahachie, Texas. (o) 10.8 Deed of Trust, dated January 29, 2004, signed by the Company granting a security interest in 6.6 acres of undeveloped real estate in Dallas, Texas, to secure payment of the note payable to Citizens National Bank in Waxahachie, Texas (o) 14.1 Code of Ethics (z) 21.1 Subsidiaries of the Company. (*) 31.1 Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002 - Chief Executive and Financial Officer. 32.1 Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002 - Chief Executive and Financial Officer. 27 -------------- * Incorporated by reference to the Company's Form 10-SB filed December 26, 1995. ** Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1999. *** Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001. + Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002. o Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003. z Incorporated by reference to the Company's Annual report on Form 10-KSB for the fiscal year ended December 31, 2004. (Remainder of this page left blank intentionally) (Financial statements follow on the next page, beginning F-1) 28 MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Report of Registered Independent Public Accounting Firm F-2 Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 2007 and 2006 F-3 Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2007 and 2006 F-5 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2007 and 2006 F-7 Consolidated Statements of Cash Flows for the years ended December 31, 2007 and 2006 F-8 Notes to Consolidated Financial Statements F-10 F-1 Letterhead of Blanchfield, Meyer, Kober & Rizzo, LLP REPORT OF REGISTERED INDEPENDENT CERTIFIED PUBLIC ACCOUNTING FIRM 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, 2007 and 2006 and the related consolidated statements of income and comprehensive income, changes in shareholders' equity, and cash flows for each of the years ended December 31, 2007 and 2006, respectively. 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 audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audit provides a reasonable basis for our opinion. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such 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, 2007 and 2006 and the results of its operations and its cash flows for each of the years ended December 31, 2007 and 2006, respectively, in conformity with generally accepted accounting principles generally accepted in the United States of America. /s/ Blanchfield, Kober & Company, LLP ------------------------------------- BLANCHFIELD, KOBER & COMPANY, LLP Hauppauge, New York December 28, 2008 (except for Note Q as to which the date is January 10, 2010) F-2

The accompanying notes are an integral part of these consolidated financial statements. F-9 MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2007 and 2006 NOTE A - Background and Organization Million Dollar Saloon, Inc. (MDS) was incorporated under the laws of the State of Nevada on September 28, 1987. MDS is a holding company providing management support to its operating subsidiaries: Furrh, Inc., Tempo Tamers, Inc., Don, Inc. and Corporation Lex. Furrh, Inc. (Furrh) was incorporated under the laws of the State of Texas on February 25, 1974. Furrh provides management services to Tempo Tamers, Inc, its wholly-owned subsidiary. Tempo Tamers, Inc. (Tempo), was incorporated under the laws of the State of Texas on July 3, 1978. Tempo operates an adult entertainment lounge and restaurant facility, located in Dallas, Texas, under the registered trademark and trade name "Million Dollar Saloon(R)". In conjunction with an October 2002 Settlement Agreement with the City of Dallas, Texas, the Company's adult entertainment lounge and restaurant, Million Dollar Saloon, may operate in its present "non-conforming location" with a mandatory closing date of July 31, 2009. Don, Inc. (Don) was incorporated under the laws of the State of Texas on November 8, 1973. Don owns and manages commercial rental property located in Tarrant County, Texas. Corporation Lex (Lex) was incorporated under the laws of the State of Texas on November 30, 1984. Lex owns and manages commercial rental property located in Dallas County, Texas. NOTE B - Preparation of Financial Statements The Company follows the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America and has adopted a year-end of December 31. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company's system of internal accounting control is designed to assure, among other items, that 1) recorded transactions are valid; 2) valid transactions are recorded; and 3) transactions are recorded in the proper period in a timely manner to produce financial statements which present fairly the financial condition, results of operations and cash flows of the Company for the respective periods being presented 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, 2007 and 2006, respectively. All significant intercompany transactions have been eliminated in combination. The consolidated entities are referred to as Company. (Remainder of this page left blank intentionally) F-10 MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2007 and 2006 NOTE C - Summary of Significant Accounting Policies 1. Cash and Cash Equivalents ------------------------- For Statement of Cash Flows purposes, the Company considers all cash on hand and in banks, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents. Cash overdraft positions may occur from time to time due to the timing of making bank deposits and releasing checks, in accordance with the Company's cash management policies. 2. Marketable Securities --------------------- Investments in the equity securities of other companies, including mutual fund investments, that have readily determinable fair values (as defined in Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115) are classified, at the date of acquisition, into three categories and accounted for as follows: Trading Securities - Equity securities that are bought and held principally for the purpose of selling them in the near term are reported at fair value. Unrealized gains and losses are included in earnings. Available-for-Sale Securities - Equity securities not classified in other categories are reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity. Held-to-Maturity Securities - Equity securities that the Company has the positive intent and ability to hold to maturity are reported at amortized cost. Other investments that do not have a readily determinable fair value are recorded at amortized cost. The Company evaluates the carrying value of all marketable securities classified as "held-to-maturity" or "other investments that do not have a readily determinable fair value" on a quarterly basis in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Any permanent impairment, if any, is charged to operations in the quarter in which the determination of impairment is made. For purposes of computing realized gains and losses, the specific identification method is used. 3. Accounts Receivable and Revenue Recognition ------------------------------------------- In the normal course of business, the Company extends unsecured credit to virtually all of its tenants related to rental property operations and accepts cash or nationally issued bankcards as payment for goods and services in its adult lounge and entertainment facility. Bankcard charges are normally paid by the clearing institution within three to fourteen days from the date of presentation by the Company. Since December 31, 2000, all rental property lessors are entities controlled by a Company controlling shareholder, officer and director. All lease rental payments are due in advance on the first day of the week for that week. All revenue sources are located either in Dallas or Tarrant County, Texas. F-11 MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2007 and 2006 NOTE C - Summary of Significant Accounting Policies - Continued 3. Accounts Receivable and Revenue Recognition - continued ------------------------------------------------------- Because of the credit risk involved, management has provided an allowance for doubtful accounts which reflects its opinion of amounts which will eventually become uncollectible. In the event of complete non-performance, the maximum exposure to the Company is the recorded amount of trade accounts receivable shown on the balance sheet at the date of non-performance. 4. Inventory --------- Inventory consists of food and liquor consumables necessary in the operation of Tempo's adult lounge and entertainment facility. These items are valued at the lower of cost or market using the first-in, first-out method of accounting. 5. Property and Equipment ---------------------- Property and equipment is recorded at cost and is depreciated on a straight-line basis, over the estimated useful lives (generally 5 to 40 years) of the respective asset. Major additions and betterments are capitalized and depreciated over the estimated useful lives of the related assets. Maintenance, repairs, and minor improvements are charged to expense as incurred. 6. Income Taxes ------------ The Company files a consolidated Federal Income Tax return and utilizes the asset and liability method of accounting for income taxes. The deferred tax asset and deferred tax liability accounts, as recorded when material to the financial statements, are entirely the result of temporary differences. No valuation allowance was provided against deferred tax assets. Temporary differences represent differences in the recognition of assets and liabilities for tax and financial reporting purposes, primarily accumulated depreciation and amortization. 7. Earnings per share ------------------ Basic earnings (loss) per share is computed by dividing the net income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the respective period presented in our accompanying financial statements. Fully diluted earnings (loss) per share is computed similar to basic income (loss) per share except that the denominator is increased to include the number of common stock equivalents (primarily outstanding options and warrants). Common stock equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the treasury stock method, at either the beginning of the respective period presented or the date of issuance, whichever is later, and only if the common stock equivalents are considered dilutive based upon the Company's net income (loss) position at the calculation date. At December 31, 2007 and 2006, and subsequent thereto, the Company has no outstanding stock warrants, options or convertible securities which could be considered as dilutive for purposes of the loss per share calculation. 8. Pending and/or New Accounting Pronouncements -------------------------------------------- The Company is of the opinion that any pending accounting pronouncements, either in the adoption phase or not yet required to be adopted, will not have a significant impact on the Company's financial position or results of operations. F-12 MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2007 and 2006 NOTE D - Related Party Transactions Since a change in majority shareholders of the Company in 2000, the rental properties of Corporation Lex and Don, Inc. have been subject to leases with entities controlled by Duncan Burch, an officer, director and controlling shareholder of the Company. These respective leases were in place prior to the 2000 change in control. In October 2002, Duncan Burch, Nick Mehmeti (officers and directors of the Company) and certain of their affiliated businesses (the "Clubs") entered into a Compromise Settlement Agreement and Mutual Releases (the "Settlement Agreement") with the City of Dallas to settle pending litigation, claims and disputes between the parties arising out of the operation of the Clubs in alleged violation of the Dallas City Code, including the Sexually Oriented Business Ordinance. The Settlement Agreement did not involve the Company's Million Dollar Saloon nor did the Settlement Agreement affect the operation of the Million Dollar Saloon. However, the Settlement Agreement did affect the usage of the Company's property owned by Corporation Lex, which was subject to a month-to-month basis. In accordance with the Settlement Agreement, lessee agreed to terminate the operation of the adult cabaret business at the Corporation Lex property by July 31, 2003. The entity controlled by Duncan Burch concurrently tendered notice to the Company that the associated lease would be terminated on July 31, 2003 as a result of this action. The Company and its subsidiary, Corporation Lex, signed the Settlement Agreement for a limited purpose. The Company and Corporation Lex are not bound by the terms of the Settlement Agreement except that Corporation Lex has agreed it will not allow the Clubs to use the property, as or in support of, a sexually oriented business, dance hall, business featuring exotic striptease, business featuring scantily clad employees, individuals or performers, any business featuring individuals, employees, licensees, or independent contractors displaying specified anatomical areas or engaging in specified sexual activities, or operation by the Clubs of a business in any other manner circumventing or frustrating, or intending to circumvent or frustrate the intent of Chapter 41A and 51A of the Dallas City Code. The Company and/or Corporation Lex may lease the premises for any other lawful purpose. The property owned by Don, Inc. is also subject to a lease with a separate entity controlled by Duncan Burch, an officer, director and controlling shareholder of the Company. This lease expired in August 2003 and is being continued on a month-to-month basis at the final contractual rental rate of approximately $8,500 per week. This lease has converted to a month-to-month basis. In conjunction with the October 2002 Settlement Agreement with the City of Dallas, Texas, as discussed previously, the Company entered into negotiations between the Company's wholly-owned subsidiary, Tempo Tamers, Inc., Mainstage, Inc. (Mainstage), an entity controlled by Nick Mehmeti, the Company's President, which operated a non-conforming adult cabaret located in Dallas, Texas, called P.T.'s and Allen-Burch, Inc. (Allen Burch), an entity controlled by Duncan Burch, a Company officer and significant shareholder, also operating a non-conforming adult cabaret known as The Fare. These negotiations were initiated to determine which of these non-conforming entities would continue operating in a "non-conforming location". In May 2003, these three affiliated parties granted the exclusive right to negotiate with the City of Dallas, Texas to Tempo Tamers, Inc. for the continuance of the operations of The Million Dollar Saloon as a sexually oriented business in a "non-conforming location." This Settlement Agreement provided that, in the event that the City of Dallas, Texas granted The Million Dollar Saloon the exclusive right to continue operating as an adult cabaret in a "non-conforming location" for a six (6) year period, Tempo Tamers would pay $500,000 each to Mainstage and Allen Burch and Mainstage and Allen-Burch would each discontinue the operation of their respective sexually oriented businesses. F-13 MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2007 and 2006 NOTE D - Related Party Transactions - Continued In May 2003, the City of Dallas agreed to allow Tempo Tamers to continue to operate The Million Dollar Saloon at its current location through the last day of July 2009. Mainstage and Allen Burch then agreed with the City of Dallas, Texas to discontinue the respective operations of Mainstage and The Fare, respectively, as sexually oriented business in January and March, 2004, respectively. The cessation of operations by Mainstage and Allen Burch triggered the $500,000 payment clause to each entity as set forth in the May 2003 Settlement Agreement. The aggregate $1,000,000 payment has been accrued in the accompanying financial statements, bears interest at 8.0% per annum and is being amortized to operations over the 67 month term from the triggering event date(s) through the mandatory closing date of The Million Dollar Saloon in it's present "non-conforming location" on July 31, 2009. As of December 31, 2007, the $1,000,000 aggregate payable has been accrued in the accompanying financial statements and all accrued interest payable was paid in full on December 31, 2007. NOTE E - Fair Value of Financial Instruments The carrying amount of cash, accounts receivable, accounts payable and notes payable, as applicable, approximates fair value due to the short term nature of these items and/or the current interest rates payable in relation to current market conditions. Interest rate risk is the risk that the Company's earnings are subject to fluctuations in interest rates on either investments or on debt and is fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to interest rate risk, if any. Financial risk is the risk that the Company's earnings are subject to fluctuations in interest rates or foreign exchange rates and are fully dependent upon the volatility of these rates. The company does not use derivative instruments to moderate its exposure to financial risk, if any. NOTE F - Concentrations of Credit Risk The Company maintains its cash accounts in various financial institutions subject to insurance coverage issued by the Federal Deposit Insurance Corporation (FDIC). Under FDIC rules, the Company and its subsidiaries are entitled to aggregate coverage of $250,000 per account type per separate legal entity per financial institution. During the years ended December 31, 2007 and 2006, respectively, the various operating companies maintained deposits in these financial institutions with credit risk exposures in excess of statutory FDIC coverage. The Company has incurred no losses during 2007 and 2006, and subsequent thereto, as a result of any of these unsecured situations. NOTE G - Marketable Securities Marketable securities as of December 31, 2007 and 2006 consist entirely of an investment in a money market instrument-based mutual funds and are summarized as follows: Available Held to Trading for sale Maturity ------- -------- -------- December 31, 2007 ----------------- Aggregate fair value $ - $ - $ - Gross unrealized holding gain $ - $ - $ - Gross unrealized holding losses $ - $ - $ - Amortized cost basis $ - $ - $ - F-14 MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2007 and 2006 NOTE G - Marketable Securities - Continued Available Held to Trading for sale Maturity ------- -------- -------- December 31, 2006 ----------------- Aggregate fair value $51,394 $ - $ - Gross unrealized holding gains $ 151 $ - $ - Gross unrealized holding losses $ - $ - $ - Amortized cost basis $51,243 $ - $ - The net unrealized holding gains or (losses) on trading securities which have been included in the statement of operations were approximately $-0- and $(106) for the each of the respective years ended December 31, 2007 and 2006, respectively. NOTE H - Property and Equipment Property and equipment consists of the following at December 31, 2007 and 2006: December 31, December 31, 2007 2006 Estimated life ----------- ----------- -------------- Buildings and related improvements $ 1,526,424 $ 1,526,424 15-40 years Furniture and equipment 466,070 464,880 5-10 years ----------- ----------- 1992,494 1,991,304 Less accumulated depreciation (1,625,313) (1,534,507) ----------- ----------- 367,181 456,797 Land 210,000 210,000 ----------- ----------- Net property and equipment $ 577,181 $ 666,797 =========== =========== Depreciation expense for the years ended December 31, 2007 and 2006 was approximately $90,806 and $88,796, respectively. NOTE I - Land Held for Future Development Long-term Mortgage Note Payable On February 14, 2003, the Company purchased 6.695 acres of undeveloped property located in Dallas, Texas. The purchase price was approximately $2,650,312, including closing expenses of approximately $53,599. The Company paid $493,072 cash, inclusive of a $140,000 loan to the Company from Duncan Burch, an officer and director of the Company, and issued to the seller a one-year note in the principal amount of $2,156,713 with 8% annual interest. The payment of the note is secured with a lien against the property granted to the note holder by the Company. The interest on the note is payable monthly (approximately $14,678 per month) beginning April 1, 2003 with the principal amount due and payable on February 1, 2004. This debt was refinanced on January 29, 2004 and paid in full. The property is undeveloped and suitable for commercial development. Although the Company has not determined the usage of the land, the Company may use a portion of the land for an adult cabaret and sell the remaining undeveloped property to a third party. The development of the property will be subject to the Company obtaining a construction loan. The Company does not currently know the amount of the loan it will need to develop this property or whether it will be able to obtain a sufficient loan for development of the property or, if obtained, whether the terms of the loan will be favorable to the Company. F-15 MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2007 and 2006 NOTE I - Land Held for Future Development - Continued Long-term Mortgage Note Payable On January 29, 2004, the Company obtained permanent long-term mortgage financing to retire the $2,156,713 note payable issued at the initial closing. The new note was for an initial principal balance of $2,000,000 and bears interest at 6.50% for the first year and then adjusts to 1.0% above the Wall Street Journal published prime rate, rounded to the nearest 0.125% for all subsequent periods that the debt is outstanding. The interest rate adjusts every 12th month, commencing on January 29, 2005. The long-term mortgage note requires payments of principal and accrued interest of approximately $17,426 monthly, commencing on February 29, 2004. As this is a variable interest rate note, the payments may change after the 12th payment and after every succeeding 12th payment. The long-term mortgage note matures on January 29, 2019 and is secured by underlying land and the separate personal guaranty of each of the Company's officers, directors and controlling shareholders; Duncan Burch and Nick Mehmeti. As of December 31, 2007 and 2006, respectively, the Company owed approximately $1,672,530 and $1,755,956 on the long-term mortgage note payable. Future maturities of the long-term mortgage note payable are as follows: Year ending Principal December 31 due ----------- ----------- 2008 $ 103,203 2009 111,918 2010 119,212 2011 126,227 2012-2016 773,083 2017-2019 438,887 ---------- Total $1,672,530 ========== NOTE J - Property and Equipment held for Sale During the 3rd quarter of Calendar 2004, Company management listed the real estate and other significant assets owned by Corporation Lex for sale through a commercial real estate brokerage firm and reclassified the net carrying values at the listing date to "Property and Equipment held for Sale" in the accompanying financial statements. In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the Company follows the policy of evaluating all qualifying assets as of the end of each reporting quarter. As of December 31, 2004, management has determined that no impairment of the carrying value of property and equipment held for sale was necessary. This property was sold on February 5, 2008 for net proceeds of approximately $896,000, resulting in a recognized gain at the date of sale of approximately $61,000. F-16 MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2007 and 2006 NOTE K - Operations Agreement Contract Payable to Affiliated Entities In conjunction with the October 2002 Settlement Agreement with the City of Dallas, Texas, as discussed previously, the Company entered into negotiations between the Company's wholly-owned subsidiary, Tempo Tamers, Inc., Mainstage, Inc. (Mainstage), an entity controlled by Nick Mehmeti, the Company's President, which operated a non-conforming adult cabaret located in Dallas, Texas, called P.T.'s and Allen-Burch, Inc. (Allen Burch), an entity controlled by Duncan Burch, a Company officer and significant shareholder, also operating a non-conforming adult cabaret known as The Fare. These negotiations were initiated to determine which of these non-conforming entities would continue operating in a "non-conforming location". In May 2003, these three affiliated parties granted the exclusive right to negotiate with the City of Dallas, Texas to Tempo Tamers, Inc. for the continuance of the operations of The Million Dollar Saloon as a sexually oriented business in a "non-conforming location." This Settlement Agreement provided that, in the event that the City of Dallas, Texas granted The Million Dollar Saloon the exclusive right to continue operating as an adult cabaret in a "non-conforming location" for a six (6) year period, Tempo Tamers would pay $500,000 each to Mainstage and Allen Burch and Mainstage and Allen-Burch would each discontinue the operation of their respective sexually oriented businesses. In May 2003, the City of Dallas agreed to allow Tempo Tamers to continue to operate The Million Dollar Saloon at its current location through the last day of July 2009. Mainstage and Allen Burch then agreed with the City of Dallas, Texas to discontinue the respective operations of Mainstage and The Fare, respectively, as sexually oriented business in January and March, 2004, respectively. The cessation of operations by Mainstage and Allen Burch triggered the $500,000 payment clause to each entity as set forth in the May 2003 Settlement Agreement. The aggregate $1,000,000 payment has been accrued in the accompanying financial statements, bears interest at 8.0% per annum and is being amortized to operations over the 67 month term from the triggering event date(s) through the mandatory closing date of The Million Dollar Saloon in it's present "non-conforming location" on July 31, 2009. During each of the years ended December 31, 2007 and 2006, the Company paid approximately $293,000 and $-0- in accrued interest payable on this Agreement. NOTE L - Income Taxes The components of income tax expense (benefit) for the years ended December 31, 2007 and 2006, respectively, are as follows: Year ended Year ended December 31, December 31, 2007 2006 --------- --------- Federal: Current $ 111,973 $ (2,040) Deferred (25,788) (19,658) --------- --------- 86,185 (21,698) --------- --------- State: Current -- -- Deferred -- -- --------- --------- -- -- --------- --------- Total $ 86,185 $ (21,698) ========= ========= F-17 MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2007 and 2006 NOTE L - Income Taxes - Continued The Company's income tax expense (benefit) for the years ended December 31, 2006 and 2005, respectively, differed from the statutory federal rate of 34 percent as follows: Year ended Year ended December 31, December 31, 2007 2006 -------- -------- Statutory rate applied to earnings before income taxes $ 65,400 $ 22,200 Increase (decrease) in income taxes resulting from: State income taxes -- -- Deferred income taxes (25,788) (19,658) Effect of incremental tax brackets and the application of business tax credits 46,573 (24,240) -------- -------- Income tax expense $ 86,185 $(21,698) ======== ======== The deferred current tax asset and non-current deferred tax liability on December 31, 2007 and 2006, respectively, balance sheet consists of the following: Year ended Year ended December 31, December 31, 2007 2006 -------- -------- Non-current deferred tax liability $(198,173) $(154,770) ========= ========= The non-current deferred tax liability results from the usage of statutory accelerated tax depreciation and amortization methods. NOTE M - Commitments The rental property owned by Don, Inc. is subject to a lease with a separate entity controlled by Duncan Burch, an officer, director and controlling shareholder of the Company. This lease expired in August 2003 and is being continued on a month-to-month basis at the final contractual rental rate of approximately $8,500 per week. The lessee has not indicated to the Company whether a new long-term lease will be negotiated on this property. The lessee is also for normal maintenance and repairs, insurance and other direct operating expenses related to the property. NOTE N - Litigation 1) City of Dallas licensing In conjunction with an October 2002 Settlement Agreement with the City of Dallas, Texas, the Company entered into negotiations between the Company's wholly-owned subsidiary, Tempo Tamers, Inc., Mainstage, Inc. (Mainstage), an entity controlled by Nick Mehmeti, the Company's President, which operated a non-conforming adult cabaret located in Dallas, Texas, called P.T.'s and Allen-Burch, Inc. (Allen Burch), an entity controlled by Duncan Burch, a Company officer and significant shareholder, also operating a non-conforming adult cabaret known as The Fare. These negotiations were initiated to determine which of these non-conforming entities would continue operating in a "non-conforming location". In May 2003, these three affiliated parties granted the exclusive right to negotiate with the City of Dallas, Texas to Tempo Tamers, Inc. for the continuance of the operations of The Million Dollar Saloon as a sexually oriented business in a "non-conforming location." F-18 MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2007 and 2006 NOTE N - Litigation - Continued This Settlement Agreement provided that, in the event that the City of Dallas, Texas granted The Million Dollar Saloon the exclusive right to continue operating as an adult cabaret in a "non-conforming location" for a six (6) year period, Tempo Tamers would pay $500,000 each to Mainstage and Allen Burch and Mainstage and Allen-Burch would each discontinue the operation of their respective sexually oriented businesses. In May 2003, the City of Dallas, Texas agreed to allow Tempo Tamers to continue to operate The Million Dollar Saloon at its current location through the last day of July 2009. Mainstage and Allen Burch then agreed with the City of Dallas, Texas to discontinue the respective operations of Mainstage and The Fare, respectively, as sexually oriented business in January and March, 2004, respectively. The cessation of operations by Mainstage and Allen Burch triggered the $500,000 payment clause to each entity as set forth in the May 2003 Settlement Agreement. The aggregate $1,000,000 payment has been accrued in the Company's financial statements and is being amortized to operations over the 67 month term from the triggering event date(s) through the mandatory closing date of The Million Dollar Saloon in it's present "non-conforming location" on July 31, 2009. 2) "John Doe I" v. Tempo Tamers Beverage Company, Inc. dba Million Dollar Saloon and Christopher John Thornton, Dallas County Texas District Court Cause No. 05-02015; filed February 24, 2005 and settled on October 20, 2005. Plaintiff "Doe I" filed a wrongful death/survivor claim under Section 2.02 of the Texas Alcoholic Beverage Code (dram shop). The suit alleged that a customer of the Company's Tempo Tamers, Inc. subsidiary (dba Million Dollar Saloon) (Club) was served in violation of Section 2.02 resulting in a motor vehicle collision causing the wrongful death of "Doe I's" spouse. While the Company's wholly-owned subsidiary denied all allegations; the case was settled on October 20, 2005 under a sealed confidentiality agreement. The settlement was for the gross sum of $460,000 to be paid as follows: $50,000 on the signing of the settlement documents, $50,000 on or about January 13, 2006 and $7,500 per month starting on November 1, 2005 through October 1, 2009. The settlement is non-interest bearing and, per the requirements of generally accepted accounting principles, has been discounted at the Prime Rate of 6.75% to yield a net settlement of approximately $415,026, exclusive of imputed interest. The entire discounted settlement was charged to operations on the October 2005 settlement date. 3) "John Doe II" v. Tempo Tamers, Inc. dba Million Dollar Saloon; Dallas County Texas 44th District Court Cause No. 04-09918-A; filed September 24, 2004. Clarendon American Insurance Company v. Tempo Tamers, Inc. dba Million Dollar Saloon; Dallas County Texas 44th District Court Cause No. 06-11838; filed November 17, 2006. This is a suit for damages/loss of consortium brought by Plaintiffs under Section 2.02 of the Texas Alcoholic Beverage Code. The Plaintiff claimed he was served by Club employees in violation of Section 2.02 resulting in a motorcycle accident whereby he sustained head injuries and has medical bills over $300,000. The Plaintiff further asserted to have no or diminished capacity to continue his profession. The Company's wholly-owned subsidiary, Tempo Tamers, Inc., vigorously denied the allegations and asserted that the Plaintiff's accident was primarily, if not exclusively, of his own doing and asserted that the Plaintiff was more than 50% responsible for his injuries and that the only valid cause of action was pursuant to Section 2.02. The Company denied all liability. F-19 In 2006, the Company's insurance carrier (Clarendon) sued the Company claiming that they had no obligation to pay the claim of the plaintiffs in the "John Doe II" litigation. In 2007, the Company, without an admission of liability, settled all claims in a confidential settlement agreement whereby Tempo Tamers, Inc. agreed to reimburse Clarendon $25,000 of the monies Clarendon paid to Plaintiffs, in five (5) monthly installments of $5,000 each, with the first monthly installment to be paid on November 1, 2007 and the last installment to be paid on March 1, 2008. Thereafter, Tempo Tamers, Inc. agreed to pay Doe II and Doe II's counsel the total sum of $75,000, to be paid in 15 monthly installments of $5,000 each, commencing on April 1, 2008 with the final installment to be paid on July 1, 2009. The effect and settlement of these actions was charged to operations on the November 2007 settlement date. F-20 MILLION DOLLAR SALOON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED December 31, 2007 and 2006 NOTE N - Litigation - Continued 4) Cody Staus and Kelly Nowlin v. Million Dollar Saloon Inc. dba Million Dollar Saloon; Dallas County Texas District Court Cause No.; 05-04622-K, filed May 10, 2005. This case was brought by Plaintiffs Staus and Nowlin claiming they were assaulted by employees/security of Million Dollar Saloon and seek actual and punitive damages. This matter was settled in June 2006 for an aggregate $10,000 cash to all Plaintiffs and charged to operations at the settlement date. 5) Beatrice Hunter v. Tempo Tamers, Inc. and Tempo Tamers Beverage Company Cause # 06-12954 in the116th Judicial District Court for Dallas County Texas, filed December 28, 2006. This case was originally brought by a person injured in a car accident with an alleged customer of the Club against Million Dollar Saloon, Inc. alleging a variety of causes of action including violations under Section 2.02 of the Texas Alcoholic Beverage Code, negligence, gross negligence and other allegations. Million Dollar Saloon, Inc. claimed that it was not liable as it did not operate the Club and claimed that Section 2.02 was the only valid cause of action and injuries were due to the conduct of the driver of the woman's car to an extent to bar any recovery against the club. The initial case was dismissed against Million Dollar Saloon Inc. when a settlement was reached between the Plaintiff and alleged customer. A new lawsuit was thereafter refiled against Tempo Tamers Inc. and Tempo Tamers Beverage Company Inc. This case is scheduled for a jury trial to commence on August 11, 2008 and the ultimate outcome is not determinable at this time. Management is aggressively defending these actions and no material impact to the Company's financial condition is anticipated at this time. 6) Texas Alcoholic Beverage Commission v. Tempo Tamers Beverage Company Inc. This is Administrative action brought by a state regulatory agency against a non subsidiary corporation which provides Tempo Tamers, Inc. with liquor permitting and services for the Tempo Tamers, Inc.'s business operations known as "Million Dollar Saloon". This Action is being vigorously contested by the Company and the potential outcome of this administrative action is not determinable at this time. Management is aggressively defending these actions and no material impact to the Company's financial condition is anticipated at this time; however, a finding against Tempo Tamers Beverage Company, Inc. could have a significant detrimental impact on the operation of the Club. From time-to-time, in the ordinary course of business, the Company has become and may become party to other lawsuits. The outcome of this litigation, existing or future, if any, is not determinable at this time. Management is aggressively defending any current actions and anticipates aggressively defending future actions, if any. Accordingly, no material impact to the Company's financial condition is anticipated. NOTE O - Segment Information The Company operates with a centralized management structure and has two identifiable operating segments: an adult entertainment lounge and restaurant located in Dallas, Texas and commercial rental real estate located in Dallas and Tarrant Counties, Texas. All revenues are generated operations in these geographic areas. As of December 31, 2007 and 2006, respectively, all rental revenues are derived from entities controlled by Duncan Burch, an officer, director and controlling shareholder. Approximately 14.0% and 14.8% of total revenues for 2007 and 2006, respectively, were derived from these related parties. F-21

NOTE Q - Subsequent Events On July 31, 2009, in accordance with an agreement with the City of Dallas, the Company ceased all operations associated with the Million Dollar Saloon and Tempo Tamers, Inc. Management has evaluated all activity of the Company through January 13, 2010 (the issue date of the financial statements) and concluded that no subsequent events, other than disclosed above, have occurred that would require recognition in the financial statements or disclosure in the notes to financial statements. (Remainder of this page left blank intentionally) (Signatures follow on next page) F-23 SIGNATURES In accord with Section 13 or 15(d) of the Securities Act of 1933, as amended, the Company caused this report to be signed on its behalf by the undersigned, thereto duly authorized. Million Dollar Saloon, Inc. Dated: January 14, 2010 By: /s/ Nick Mehmeti ---------------- ----------------------------- Nick Mehmeti Chairman, Chief Executive Officer, Chief Financial Officer and Director In accordance with the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date as indicated. Dated: January 14, 2010 By: /s/ Nick Mehmeti ---------------- ----------------------------- Nick Mehmeti Chairman, Chief Executive Officer, Chief Financial Officer and Director Dated: January 14, 2010 By: /s/ Duncan Burch ---------------- ---------------------------- Duncan Burch Executive Vice President and Director Dated: January 14, 2010 By: /s/ Dewanna Ross ---------------- --------------------------- Dewanna Ross Secretary and Treasurer 51

MILLION DOLLAR SALOON INC 10-K