SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10QSB
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
COMMISSION FILE NUMBER 0-23251
------------------------
SFORZA ENTERPRISES, INC.
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 65-0705377
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
490 EAST PALMETTO PARK ROAD SUITE 110 33432
BOCA RATON, FLORIDA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (561) 392-0611
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _____
As of June 30, 1998, 1,710,000 shares of the registrant's Common Stock, $.01
par value, were outstanding.
<PAGE>
SFORZA ENTERPRISES, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements (Unaudited):
<S> <C>
Consolidated Balance Sheets--June 30, 1998 ............................................................... 1
Consolidated Statements of Operations--Twenty six weeks ended June 30, 1998 ............................... 2
Consolidated Statements of Cash Flows--Twenty six weeks ended June 30, 1998 ............................... 3
Notes to Consolidated Financial Statements--June 30, 1998 ................................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........... 5 - 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................... 10
Item 6. 8 - K Filings ....................... ............................................................... 10
Signatures................................................................................................... 11
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SFORZA ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, 1998
June 30, June 30,
1998 1997
---------- ----------
<S> <C> <C>
Current assets:
Cash & cash equivalents 363,989 110,502
Accounts receivable 29,470 6,459
Inventories 64,400 94,385
Deferred income taxes 0 13,583
Other current assets 188,955 239,702
---------- ----------
Total current assets 646,814 464,631
Investment in unconsolidated affiliates 3,142,470 0
Property plant & equipment 940,641 913,007
Other assets, net 51,763 225,185
---------- ----------
Total assets 4,781,688 1,602,823
Current liabilities
Notes payable 0 125,000
Accounts payable 121,073 76,372
Accrued expenses 239,990 97,604
Income taxes payable (13,125) 300
Current portion of long term debt 15,406 25,528
Current portion of obligations under capital 15,533 21,156
leases
---------- ----------
Total current liabilities 378,877 345,960
========== ==========
Long term debt - net 0 15,584
Obligations under capital leases - net 29,309 53,597
Deferred rent payable 0 0
Deferred income taxes 0 7,515
---------- ----------
Total liabilities 408,186 422,656
---------- ----------
Series A Convertible Stock 0 400,000
Shareholders' equity
Common stock, $.01 par value 17,100 20,400
Treasury stock 0 0
Partner's equity 0 0
Additional paid in capital 5,097,064 646,150
Retained earnings (760,239) 113,617
---------- ----------
Total shareholders' equity 4,373,502 780,167
---------- ----------
Total liabilities & shareholder's equity 4,781,688 1,602,823
========== ==========
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
SFORZA ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Six Months Ended June 30, 1998 and 1997
THIRTEEN THIRTEEN TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Food Sales 425,592 681,554 981,631 1,466,980
Beverage & Other Sales 581,173 604,051 1,157,978 1,212,923
---------- ---------- ---------- ----------
Net sales 1,006,765 1,285,605 2,139,609 2,679,903
Cost & expenses:
Food Cost 154,486 251,877 343,863 512,387
Beverage Cost 158,568 178,129 313,431 357,440
Direct Supplies 14,503 20,662 32,084 43,286
Direct Labor 171,780 273,122 351,289 577,626
---------- ---------- ---------- ----------
Cost of sales 499,337 723,790 1,040,667 1,490,739
Indirect Labor 70,767 85,993 147,291 138,587
Operating Expenses 412,853 430,025 789,123 813,497
---------- ---------- ---------- ----------
Operating expenses 483,620 516,018 936,414 952,084
G&A Expense 120,021 24,126 222,723 211,661
Interest expense, net 2,155 20,252 2,155 24,500
---------- ---------- ---------- ----------
Total cost & expenses 1,105,133 1,284,186 2,201,959 2,678,984
Operating income (98,368) 1,419 (62,350) 919
Other income (expense):
Other income 21,873 87 28,696 87
Equity in earnings of unconsolidated affiliates (2,600) 0 14,870 0
---------- ---------- ---------- ----------
Income (loss) before provision for income taxes (93,965) 1,506 (33,654) 1,006
Income tax expense ( benefit) (13,125) 300 (13,125) 300
---------- ----------- ----------- -----------
Net income (loss) (80,840) 1,206 (20,529) 706
========== =========== =========== ===========
Earnings per share:
Primary (0.05) 0.00 (0.01) 0.00
Weighted average common shares outstanding 1,710,000 1,088,614 1,710,000 1,042,849
Fully diluted (0.05) 0.00 (0.01) 0.00
Weighted average common shares outstanding 1,710,000 1,148,614 1,710,000 1,099,534
</TABLE>
See notes to interim consolidated financial statements.
2
<PAGE>
SFORZA ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) (20,529) 706
Adjustments to reconcile net income
(loss) to net cash provided by
Operating activities:
Equity in earnings of unconsolidated
Affiliates (14,870)
Depreciation and amortization 72,825 65,123
Increase in accounts receivable (29,471) (4,221)
(Increase) decrease in inventories 5,762 (55,724)
(Increase) decrease in other current
assets (26,108) (184,873)
Increase (decrease) in accounts
payable (73,795) 75,455
Increase in accrued expenses 67,030 12,623
Decrease in unearned revenue 0 (61,759)
Decrease in income taxes payable (13,125) (15,087)
---------- ----------
Net cash provided by operating activities (32,280) (167,757)
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (17,183) (482,633)
Decrease in other assets (18,000) 53,520
Investments in unconsolidated affiliates (127,600) 0
---------- -----------
Net cash used in investing activities (162,783) (429,113)
---------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 0 156,250
Proceeds from issuance of preferred stock 0 400,000
Other Debt Issuance Paroceeds 0 133,250
Repayment of due to shareholders 0 (63,445)
Repayment of notes payable, shareholders 0 (99,103)
Proceeds from issuance of long-term debt
Principal payments on long-term debt (12,412) (12,924)
Principal payments on obligations under
capital leases (19,805) (9,295)
---------- ----------
Net cash provided by financing activities (32,217) 504,733
---------- ----------
Net decrease in cash and cash equivalents (227,280) (92,137)
Cash and cash equivalents, beginning of period 591,269 202,639
---------- ----------
Cash and cash equivalents, end of period 363,989 110,502
========== ==========
Total interest paid during the period 2,155 13,611
========== ==========
Total income taxes paid during the period 0 15,387
========== ==========
</TABLE>
3
<PAGE>
SFORZA ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Basis of Presentation
The consolidated statements as of June 30, 1998 and for the three months ended
June 30, 1998 and 1997 are unaudited; however, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the consolidated financial statements for these interim periods
have been included. The results of the interim period ended June 30, 1998 are
not necessarily indicative of the results to be obtained for the full fiscal
year ending December 31, 1998.
4
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS FORM 10-Q UNDER ITEM 2, "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", WHICH ARE NOT
HISTORICAL FACTS CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND ARE INTENDED TO BE
COVERED BY THE SAFE HARBORS CREATED THEREBY. FORWARD-LOOKING STATEMENTS INVOLVE
KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, AND OTHER FACTORS WHICH MAY CAUSE THE
ACTUAL RESULTS, PERFORMANCE, OR ACHIEVEMENTS OF SFORZA ENTERPRISES, INC. AND ITS
SUBSIDIARIES TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE, OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH
RISKS, UNCERTAINTIES, AND OTHER FACTORS INCLUDE, BUT ARE NOT NECESSARILY LIMITED
TO, THE FOLLOWING: CHANGES IN GENERAL ECONOMIC CONDITIONS WHICH AFFECT CONSUMER
SPENDING PATTERNS FOR RESTAURANT DINING OCCASIONS; INCREASING COMPETITION IN THE
UPSCALE CASUAL DINING SEGMENT OF THE RESTAURANT INDUSTRY; ADVERSE WEATHER
CONDITIONS WHICH CAUSE THE TEMPORARY UNDERUTILIZATION OF OUTDOOR PATIO SEATING
AVAILABLE AT SEVERAL OF THE COMPANY'S RESTAURANTS; EVENTS WHICH INCREASE THE
COST TO DEVELOP AND/OR DELAY THE DEVELOPMENT AND OPENING OF NEW RESTAURANTS;
CHANGES IN THE AVAILABILITY AND/OR COST OF RAW MATERIALS, LABOR, AND OTHER
RESOURCES NECESSARY TO OPERATE THE COMPANY'S RESTAURANTS; THE SUCCESS OF
OPERATING INITIATIVES; DEPTH OF MANAGEMENT; ADVERSE PUBLICITY; TECHNOLOGICAL
DIFFICULTIES ASSOCIATED WITH THE COMPANY'S MANAGEMENT INFORMATION SYSTEMS
INITIATIVES; THE RATE OF GROWTH OF GENERAL AND ADMINISTRATIVE EXPENSES
ASSOCIATED WITH BUILDING A STRENGTHENED CORPORATE INFRASTRUCTURE TO SUPPORT THE
COMPANY'S EXPANDED RESTAURANT OPERATIONS; THE AVAILABILITY, AMOUNT, TYPE, AND
COST OF CAPITAL FOR THE COMPANY AND THE DEPLOYMENT OF SUCH CAPITAL; CHANGES IN,
OR ANY FAILURE TO COMPLY WITH, GOVERNMENTAL REGULATIONS; THE REVALUATION OF ANY
OF THE COMPANY'S ASSETS; THE AMOUNT OF, AND ANY CHANGES TO, TAX RATES; ADVERSE
RULINGS, JUDGMENTS OR SETTLEMENTS INVOLVING LITIGATION OR OTHER LEGAL MATTERS;
AND OTHER FACTORS REFERENCED IN THIS FORM 10-Q AND THE COMPANY'S FORM 10-K FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1997.
GENERAL COMMENTS
As of June 30, 1998, the Company owns and operates two restaurants which are
owned 100% and four additional restaurants which are 51% owned. Of the four
restaurants that are 51% owned two are open and two are in development. Of the
two restaurants in development one is scheduled to open in the current year and
one is scheduled to open in the first quarter of 1999.
The restaurants currently open are:
- --------------------------------------------------------------------------------
Restaurant Location Date Opened
- --------------------------------------------------------------------------------
Sforza's Ristorante West Palm Beach, FL February, 1996
My Martini West Palm Beach, FL February, 1997
Max's Beach Place Fort Lauderdale, FL April 29, 1997
Max's Grille Las Olas Fort Lauderdale, FL June 17, 1998
Riverfront
- --------------------------------------------------------------------------------
The restaurants currently in development are:
- --------------------------------------------------------------------------------
Restaurant Location Scheduled Opening
- --------------------------------------------------------------------------------
Max's Grille Weston , FL October 10, 1998
TBA Winter Park or Tampa, FL April 1, 1999
- --------------------------------------------------------------------------------
Each restaurant is an upscale, high volume, casual dining operation.
The Company's revenues consist primarily of sales from its restaurant
operations. The Company's costs and expenses relate to restaurant sales (cost of
food, beverages and supplies), the management to run the operations and overhead
(operating expenses including labor and occupancy, general and administrative
expenses, depreciation and amortization expenses, and preopening amortization
expense).
EQUITY METHOD OF ACCOUNTING
Because the Company, owns 51% of Max's Beach Place and Max's Grille @ Las Olas
Riverfront and the two restaurants in development, these restaurants are
accounted for via the equity method of accounting. As a result, the revenues and
expenses of these restaurants are not incorporated into the consolidated
revenues and expenses for Sforza Enterprises, Inc. Instead, 51% of the profit of
these restaurants is recognized on the income statement as "Equity in earnings
of unconsolidated affiliates".
The Company is currently negotiating the purchase of the remaining 49% of the
four restaurants which it currently does not own. If consummated, the operating
results of the four restaurants will be included in the Company's financials on
a consolidated basis as of the closing date. There are no assurances that the
acquisition will be consummated.
5
<PAGE>
RESULTS OF OPERATIONS
The following table presents, for the periods indicated the Consolidated
Statements of Operations of the Company expressed as percentages of total
revenues. The results of operations for the twenty-six weeks ended June 30, 1998
are not necessarily indicative of the results to be expected for the full fiscal
year.
<TABLE>
<CAPTION>
Sforza Enterprises, Inc.
Comparative Operational Percentages
Stated as a Percentage of Total Revenue
THIRTEEN THIRTEEN TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Food Sales 42.3% 53.0% 45.9% 54.7%
Beverage & Other Sales 57.7% 47.0% 54.1% 45.3%
----------- ----------- ----------- -----------
Net sales 100.0% 100.0% 100.0% 100.0%
=========== =========== =========== ===========
Cost & expenses:
Food Cost 36.3% 37.0% 35.0% 34.9%
Beverage Cost 27.3% 29.5% 27.1% 29.5%
Direct Supplies 1.4% 1.6% 1.5% 1.6%
Direct Labor 17.1% 21.2% 16.4% 21.6%
----------- ----------- ----------- -----------
Cost of sales 49.6% 56.3% 48.6% 55.6%
Indirect Labor 7.0% 6.7% 6.9% 5.2%
Operating Expenses 41.0% 33.4% 36.9% 30.4%
----------- ----------- ----------- -----------
Operating expenses 48.0% 40.1% 43.8% 35.5%
G&A Expense 11.9% 1.9% 10.4% 7.9%
Interest expense, net 0.2% 1.6% 0.1% 0.9%
----------- ----------- ----------- -----------
Total cost & expenses 109.8% 99.9% 102.9% 100.0%
Operating income -9.8% 0.1% -2.9% 0.0%
----------- ----------- ----------- -----------
Other income (expense):
Other income 2.2% 0.0% 1.3% 0.0%
Equity in earnings of unconsolidated affiliates -0.3% 0.0% 0.7% 0.0%
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes -9.3% 0.1% -1.6% 0.0%
Income tax expense ( benefit) -1.3% 0.0% -0.6% 0.0%
----------- ----------- ----------- -----------
Net income (loss) -8.0% 0.1% -1.0% 0.0%
=========== =========== =========== ===========
</TABLE>
SEASONALITY
The operating restaurants are located in the coastal communities of south east
Florida. As a result, seasonality has an impact on revenues and subsequently the
quarterly profitability. High season runs from approximately November 10 until
April 20. In the second quarter, revenues have historically equaled 21% of the
total annual revenues.
BUDGETTED PROFITABILITY EXCEEDED
As a result of seasonality, profitability fluctuates from quarter to quarter. A
seasonality factor is placed in our budget.
Sforza Enterprises, Inc.
Actual Results versus Budget
<TABLE>
<CAPTION>
THIRTEEN THIRTEEN TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
Actual Budget Actual Budget
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues 1,006,765 873,000 2,139,609 2,022,000
Net Income (Loss) (80,840) (114,000) (20,529) (32,000)
Weighted Average Shares 1,710,000 1,710,000 1,710,000 1,710,000
Outstanding
Earnings per share (0.05) (0.07) (0.01) (0.02)
</TABLE>
6
<PAGE>
THIRTEEN WEEKS ENDED JUNE 30, 1998 COMPARED TO THIRTEEN WEEKS ENDED JUNE 30,
1997
REVENUES
For the thirteen weeks ended June 30, 1998, the Company's total revenues
decreased 21.7% to $1,007k. The sales decrease is the result of increased
competition in the West Palm Beach area resulting from the continued development
of the Clematis Street area. Max's Beach Place, which opened in April, 1997, is
not considered when calculating revenues due to the less than controlling
interest of Max's Beach Place owned by Sforza Enterprises, Inc. Since the
Company owns only 51% of Max's Beach Place, the equity method of accounting was
used in the consolidation process. Had Max's Beach Place been reported on a
consolidated basis, revenues would have increased 65.3% as compared to quarter
ended June 30, 1997. The following is a presentation of what total revenues
would have been if the operating results of Max's Beach Place had been presented
on the consolidated method.
<TABLE>
<CAPTION>
Total
Revenues Revenues per
13 Weeks Ending Consolidated
6/30/98 Ownership % Method
----------------------------------------------------------
<S> <C> <C> <C>
Sforza Enterprises, Inc. 1,006,765 100% 1,132,844
Max's Beach Place 833,551 51% 833,551
Max's Grille @ LORF 159,044 51% 159,044
-----------------
Total Consolidated Revenues 2,125,439
=================
Total Revenues - 13 Weeks Ending 6/30/97 1,285,605
=================
Increase - $ 839,834
Increase - % 65.3%
</TABLE>
DIRECT EXPENSES - COST OF FOOD, BEVERAGES, SUPPLIES AND DIRECT LABOR
During the thirteen weeks ended June 30, 1998, cost of food, beverages and
supplies for the restaurants was $499.3k versus $723.8k for the comparable
period last year. The related decrease of $224.5k is primarily attributable to
menu redesign and management control. The decrease in revenues also attributed
to the decline in food cost. Of the $224.5 decrease in food cost, $157.0k is
attributable to the revenue decrease and $67.5 thousand is attributable to the
improvement in the cost of goods sold percent. As a percentage of restaurant
sales, these costs decreased to 49.6% versus 56.3% for the same period of the
prior year. The menu at the Company's restaurants is a diverse menu and is not
overly dependent on a single commodity. The Company's food production principles
dictates that all items are prepared from the highest quality, fresh food. As a
result, the Company is more dependent upon spot market prices as opposed to
longer term commodity pricing.
With respect to newly opened restaurants, these costs will typically be higher
than normal during the first 90-120 days of operations until the restaurant
staffs become more accustomed to optimally managing and servicing the high sales
volumes typically experienced by the Company's restaurants.
OCCUPANCY AND OTHER EXPENSES
Occupancy and other expenses increased to $483.6k for the thirteen weeks ended
June 30, 1998 versus $516.0k for the same period of the prior year. As a
percentage of total revenues, occupancy and other expenses increased to 48.0%
for the thirteen weeks ended June 30, 1998 versus 40.1% for the same period of
fiscal 1997. The percentage increase is the result of incurring approximately
the same dollar expenses on a smaller revenue base.
7
<PAGE>
OTHER INCOME AND EXPENSE INCLUDING OVERHEAD/GENERAL & ADMINISTRATION
General and administrative expenses consist of corporate support expenses
(salaries and related fringe benefits, travel, and other administrative
expenses), and expenses associated with non-operational properties such as rent
and insurance. General and administrative expenses increased to $120.0k for the
thirteen weeks ended June 30, 1998 from $24.1k for the same period of fiscal
1997, an increase of $95.9k or 398%. As a percentage of total revenues, general
and administrative expenses increased to 11.9% for the thirteen weeks ended June
30, 1998 versus 1.9% for the same period of fiscal 1997. These increases in
expenses were principally attributable to the 1997 numbers being adjusted by a
refund of salaries by the officers of the Company back to the Company. The
refund consisted of six months of salaries. In addition, 1998 expenses have been
adversely impacted by legal and accounting fees associated with the pending
acquisition of the 49% of the joint ventures not currently owned by Sforza
Enterprises, as well as the acquisition of other restaurants.
Sforza Enterprises, Inc.
Analysis of Legal and Accounting Fees
<TABLE>
<CAPTION>
THIRTEEN THIRTEEN TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED WEEKS ENDED WEEKS ENDED
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
Actual Budget Actual Budget
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Legal Fees 21,055 255 45,223 255
Accounting Fees 22,046 4,775 22,416 4,775
------------ ------------ ------------ ------------
Total Legal & Accounting Fees 43,101 5,030 67,639 5,030
============ ============ ============ ============
</TABLE>
The Company plans to continue to strengthen its field supervision and corporate
support infrastructures during the remainder of fiscal 1998 and fiscal 1999 to
support its planned future growth. This strengthening will likely result in a
higher level of general and administrative expenses during those respective
periods. One of the Company's principal objectives for the remainder of fiscal
1998 and fiscal 1999 is to more effectively leverage its operational and
corporate support infrastructure with higher sales volumes through the design
and implementation of turnkey management information systems to be installed at
our operations.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses are incorporated into Operating Expenses
for field operations and into Overhead / G&A line for depreciation and
amortization expenses for support areas.
Depreciation and amortization expenses were $36.5k for the thirteen weeks ended
June 30, 1998 versus $34.5k for the thirteen weeks ended June 30, 1997. As a
percentage of total revenues, depreciation and amortization expenses were 3.6%
for the thirteen weeks ended June 30, 1998 versus 2.7% for the same period of
the prior year. The increase of $2.0k for the thirteen weeks ended June 30, 1998
was principally attributable to the recognition of depreciation expense for new
assets purchased.
As a result of the highly customized and operationally complex nature of the
Company's restaurants, the restaurant preopening process is extensive and costly
relative to that of most chain restaurant operations. Preopening costs, which
often exceed $200k per restaurant, include recruiting, training, relocation and
related costs for developing management and hourly staff for new restaurants, as
well as other costs directly related to the opening of new restaurants.
Preopening costs will vary from location to location depending on a number of
factors including, among others, the proximity of other established Company
restaurants, the size and layout of each location, and the relative difficulty
of the restaurant staffing and training process. As is currently the practice
for many upscale, highly customized and "theme" restaurant entities, the Company
defers its restaurant preopening costs and then amortizes them over the 12-month
period immediately following the opening of the respective restaurants. Total
restaurant preopening amortization will vary from quarter to quarter depending
on the timing of restaurant openings and the number of newer restaurants
amortizing their preopening costs in a given quarter. Currently, the Company is
evaluating its restaurant preopening process with the objective of reducing its
timeframe, intensiveness, and overall cost. However, there can be no assurance
that preopening costs will be minimized for future restaurants.
A new accounting standard is currently under consideration by the American
Institute of Certified Public Accountants which, if adopted, would require a
change in the Company's accounting for preopening costs to an
expense-as-incurred basis. The Company's implementation of a new accounting
principle in this respect would require the recognition of the cumulative effect
of the change in accounting principle as a one-time charge against earnings, net
of any related income tax effect, retroactive to the beginning of the fiscal
year of implementation.
8
<PAGE>
AMORTIZATION OF REAL ESTATE COSTS
The Company currently is developing a site in the West Palm Beach Clematis
Street Area for sale or lease to an outside party. The original lease entered
into is at a rate below the current market. It is managements' opinion that a
developed restaurnat can be sold at a considerable profit or rented at a
considerable value above what the Company is currently paying. Per FAS 67,
certain costs associated with the development and sale of this property have
been capitalized. The Company is currently in active negotiations for the sale
or rent of this property with a number of parties. Management anticipates this
transaction to close in the current fiscal year. Currently, $21,842 of related
expenditures have been capitalized.
TWENTY-SIX WEEKS ENDED JUNE 30, 1998 COMPARED TO TWENTY-SIX WEEKS ENDED JUNE 30,
1997
REVENUES
For the twenty-six weeks ended June 30, 1998, the Company's total revenues
decreased 20.2% to $2,140k. The sales decrease is the result of increased
competition in the West Palm Beach area resulting from the continued development
of the Clematis Street area. Max's Beach Place, which opened in April, 1997, is
not considered when calculating revenues due to the less than controlling
interest of Max's Beach Place owned by Sforza Enterprises, Inc. Since Sforza
Enterprises own only 51% of Max's Beach Place, the equity method of accounting
was used in the consolidation process. Had Max's Beach Place been reported on a
consolidated basis, revenues would have increased 53.5% as compared to the year
to date as of June 30, 1997. The following is a presentation of what total
revenues would have been if the operating results of Max's Beach Place had been
presented on the consolidated method.
<TABLE>
<CAPTION>
Total
Revenues Revenues per
26 Weeks Ending Ownership % Consolidated
6/30/98 Method
----------------------------------------------------------
<S> <C> <C> <C>
Sforza Enterprises, Inc. 2,139,609 100% 2,139,609
Max's Beach Place 1,814,522 51% 1,814,522
Max's Grille @ LORF 159,044 51% 159,044
-----------------
Total Consolidated Revenues 4,113,175
=================
Total Revenues - 26 Weeks Ending 6/30/97 2,679,903
=================
Increase - $ 1,433,272
Increase - % 53.5%
</TABLE>
DIRECT EXPENSES - COST OF FOOD, BEVERAGES, SUPPLIES AND DIRECT LABOR
During the Twenty-six weeks ended June 30, 1998, cost of food, beverages and
supplies for the restaurants was $1,040.7k versus $1,490.7k for the comparable
period last year. The related decrease of $450.1k is primarily attributable to
menu redesign and management control. The decrease in revenues also attributed
to the decline in food cost. Of the $450.1 decrease in food cost, $300.4k is
attributable to the revenue decrease and $149.7 thousand is attributable to the
improvement in the cost of goods sold percent. As a percentage of restaurant
sales, these costs decreased to 48.6% versus 55.6% for the same period of the
prior year.
OCCUPANCY AND OTHER EXPENSES
Occupancy and other expenses increased to $936.4k for the Twenty-six weeks ended
June 30, 1998 versus $952.1k for the same period of the prior year. As a
percentage of total revenues, occupancy and other expenses increased to 43.8%
for the twenty-six weeks ended June 30, 1998 versus 35.5% for the same period of
fiscal 1997. The percentage increase is the result of incurring approximately
the same dollar expenses on a smaller revenue base.
OTHER INCOME AND EXPENSE INCLUDING OVERHEAD / GENERAL & ADMINISTRATION
General and administrative expenses consist of corporate support expenses
(salaries and related fringe benefits, travel, and other administrative
expenses), and expenses associated with non-operational properties such as rent
and insurance. General and administrative expenses increased to $222.7 thousand
for the twenty-six weeks ended June 30, 1998 from $211.7k for the same period of
fiscal 1997, an increase of $11.0k or 5.2%. As a percentage of total revenues,
general and administrative expenses increased to 10.4% for the twenty-six weeks
ended June 30, 1998 versus 7.9% for the same period of fiscal 1997.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses are incorporated into Operating Expenses
for our field operations and into our Overhead / G&A line for depreciation and
amortization expenses for our support areas.
Depreciation and amortization expenses were $72.8k for the twenty-six weeks
ended June 30, 1998 versus $65.1k for the twenty-six weeks ended June 30, 1997.
As a percentage of total revenues, depreciation and amortization expenses were
3.4% for the twenty-six weeks ended June 30, 1998 versus 2.4% for the same
period of the prior year. The increase of $7.7k for the twenty-six weeks ended
June 30, 1998 principally consisted of an increase in restaurant depreciation
expense which was principally attributable to the recognition of depreciation
expense for My Martini Restaurant for 6 months in 1998 and five months in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating restaurants are located in West Palm Beach, Florida and
are therefore subject to the seasonality of the tourist industry in South
Florida. Restaurant sales are expected to be brisk in the tourist season which
is generally from mid-fall to mid-spring and slow during the off-season. The
Company expects to use its cash reserves or working capital generated during its
busy season to fund its operations during the off-season.
The Company's principal financing for the construction and opening of its
restaurants through June 30, 1998, was provided by its shareholders through a
public offering in November, 1997.
The Company does not have an existing arrangement for a credit facility with a
financial institution for short term financing. Management believes that cash
flow generated from operations, together with the above financing transactions
and the net proceeds from the initial public offering will be sufficient to meet
the Company's working capital requirements and anticipated capital expenditures
through 1998.
On December 30, 1997, the Company consummated the acquisition of 51% of the
equity interests in each of four limited partnerships for an aggregate payment
of $3,000,000 pursuant to a partnership interest subscription agreement. Each of
the limited partnerships operates or is planned to operate a Max's Grill
Restaurant at separate locations in South Florida. The investments in the
limited partnerships are accounted for under the equity method of accounting.
Summarized total combined balance sheet information for the limited partnerships
including the 49% portion not owned by the Company as of June 30, 1998 follows:
Assets:
Current assets $ 1,643,950
Property and equipment, net 1,580,220
Other assets 423,550
-----------
Total assets $ 3,575,720
===========
Liabilities and equity:
Current liabilities $ 595,149
Long-term debt 222,220
Partners' equity 2,758,351
-----------
Total liabilities and equity $ 3,575,720
===========
The Company is actively negotiating to purchase the remaining 49% of the four
restaurants which it currently does not own. If consummated, the operating
results of the four restaurants will be included in the Company's financials on
a consolidated basis as of the closing date. There are no assurances that the
acquisition will be consummated.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Currently there are no legal proceedings against the Company that the Company is
aware of or initiated by the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K. None.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SFORZA ENTERPRISE, INC.
Date: August 14, 1998
By: /s/ DENNIS MAX
-------------------------------
Dennis Max
PRESIDENT
By: /s/ FREDERICK J. DREIBHOLZ
-------------------------------
Frederick J. Dreibholz
CHIEF FINANCIAL OFFICER
11
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