SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT
UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
COMMISSION FILE NUMBER 0-23251
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SFORZA ENTERPRISES INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0705377
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
222 CLEMATIS STREET, SUITE 202 33401
WEST PALM BEACH, FLORIDA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (561) 366-0027
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Indicate by a 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 March 31, 1999, 1,710,000 shares of the issuer's Common Stock, $.01
par value, were outstanding.
<PAGE>
SFORZA ENTERPRISES INC.
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheet--March 31, 1999 1
Consolidated Statements of Income for the three months ended
March 31, 1999 and 1998 2
Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and 1998 3
Notes to Interim Consolidated Financial Statements 4 - 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation 6 - 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 11
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SFORZA ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31, 1999
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 546,688
Inventories 67,652
Other current assets 95,440
-----------
Total current assets 709,780
Investments in unconsolidated affiliates 2,577,548
Property and equipment, net 895,216
Other assets, net 24,711
-----------
Total assets $ 4,207,255
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 219,983
Accrued expenses 212,204
Installment note payable 1,546
Current portion of obligations under capital leases 17,796
-----------
Total current liabilities 451,529
Obligations under capital leases - net 15,655
-----------
Total liabilities 467,184
-----------
Shareholders' equity:
Common stock, $.01 par value 17,100
Additional paid in capital 5,097,064
Retained earnings (deficit) (1,374,093)
-----------
Total shareholders' equity 3,740,071
-----------
Total liabilities and shareholders' equity $ 4,207,255
===========
</TABLE>
See notes to interim consolidated financial statements.
1
<PAGE>
SFORZA ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
Net sales $1,258,772 $1,132,844
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Cost and expenses:
Cost of sales 621,836 541,330
Operating expenses 582,966 555,496
Interest expense, net 1,770 --
---------- ----------
Total cost and expenses 1,206,572 1,096,826
---------- ----------
Operating income 52,200 36,018
Other income:
Other income 3,487 6,823
Equity in earnings of unconsolidated affiliates 27,963 17,470
---------- ----------
Income before provision for income taxes 83,650 60,311
Income tax expense -- --
---------- ----------
Net income $ 83,650 $ 60,311
========== ==========
Basic net income per common share $ .05 $ .03
========== ==========
Weighted average common shares outstanding 1,710,000 1,710,000
========== ==========
</TABLE>
See notes to interim consolidated financial statements.
2
<PAGE>
SFORZA ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 83,650 $ 60,311
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in losses of unconsolidated affiliates (27,963) (17,470)
Depreciation and amortization 42,562 36,300
Decrease in inventories 1,494 9,612
Decrease in other current assets 37,958 35,236
Decrease in accounts payable (63,339) (124,901)
Increase in accrued expenses 52,140 38,022
--------- ---------
Net cash provided by operating activities 126,502 37,110
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (13,082) (39,890)
Decrease in other assets 2,806 257
Investments in unconsolidated affiliates -- (3,486)
--------- ---------
Net cash used in investing activities (10,276) (43,119)
--------- ---------
Cash flows from financing activities:
Principal payments on installment note payable (896) (6,130)
Principal payments on obligations under
capital leases (8,128) (5,429)
--------- ---------
Net cash used in financing activities (9,014) (11,559)
--------- ---------
Net increase (decrease) in cash and cash equivalents 107,212 (17,568)
Cash and cash equivalents, beginning of period 439,476 591,269
--------- ---------
Cash and cash equivalents, end of period $ 546,688 $ 573,701
========= =========
</TABLE>
See notes to interim consolidated financial statements.
3
<PAGE>
SFORZA ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Basis of Presentation
The consolidated statements as of March 31, 1999 and for the three months ended
March 31, 1999 and 1998 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 March 31,
1999 are not necessarily indicative of the results to be obtained for the full
fiscal year ending December 31, 1999.
Investments in Unconsolidated Affiliates
On December 30, 1997, the Company acquired 51% limited partnership interests in
each of four limited partnerships for an aggregate of $3,000,000, pursuant to a
subscription partnership interest agreement (the Subscription Agreement). Each
of the limited partnerships operates or is planned to operate a Max's Grille
Restaurant at separate locations in South Florida. The business of the limited
partnerships is governed by identical limited partnership agreements which vest
overall management and control of the limited partnerships to Unique Restaurant
Concepts, Inc. (URCI) through management agreements with URCI executed by each
of the limited partnerships. The Company accounts for the investments in the
limited partnerships using the equity method.
Income Taxes
No income tax expense is recorded in the statements of income for the three
months ended March 31, 1999 and 1998 for the Company's operating income as a
result of loss carryforwards, approximating $965,000 at March 31, 1999 which
expire through 2013. Additionally, no income tax benefit is recognized in either
period for the loss carryforwards due to the Company's limited operating
history. Management intends to recognize the loss carryforwards when they are
realized or it determines that it is more likely than not that such loss
carryforwards will be realized.
Stock Options Granted
During February 1999, the Company granted options to purchase 12,000 shares at
$1.00 per share which become exercisable on December 31, 1999 pursuant to the
equity incentive plan (the Plan). The Company also granted options to purchase
40,000 shares under the Plan at $4.44 per share; 20,000 of which become
exercisable in October 1999 and 20,000 of which become exercisable in October
2000. In addition, during February 1999, the Company granted non qualified,
non-plan options to purchase 30,000 shares at $2.50 per share, of which 15,000
become exercisable in October 1999 and 15,000 become exercisable in October
2000. No compensation expense was recorded in connection with the granting of
these options.
Earnings (Net Loss) per Common Share
Earnings per common share is computed in accordance with Financial Accounting
Standards Board Statement 128 (FAS 128). Basic earnings per common share
excludes dilution and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period.
4
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Diluted earnings per share reflects, where appropriate, the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the Company's earnings. The Company utilizes the
treasury stock method for computing diluted earnings per share. The effects of
this calculation are anti-dilutive for the three months ended March 31, 1999 and
1998, since the exercise prices exceed the average market price. Therefore,
diluted earnings per share for the three months ended March 31, 1999 and 1998 is
not presented. Securities that could potentially dilute basic earnings per share
in future periods include outstanding options to purchase 75,000 shares at $5.00
per share, options to purchase 65,000 shares at $11.63 per share, options to
purchase 12,000 shares at $1.00 per share, options to purchase 40,000 shares at
$4.44 per share, options to purchase 30,000 shares at $2.50 per share and
warrants to purchase 650,000 shares at $9.50 per share.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-QSB under Item 2, "Management's Discussion
and Analysis of Financial Condition and Results of Operation", 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; and technological
difficulties associated with the Company's management information systems; and
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; and other
factors referenced in this Form 10-QSB and the Company's Form 10-KSB for the
fiscal year ended December 31, 1998.
General Comments
Sforza Enterprises Inc. and subsidiaries (the "Company") operate Sforza
Ristorante, a full-service northern Italian restaurant, which opened in February
1996, and My Martini Grille, a full-service up-scale grill which opened in
February 1997. Both restaurants are located in downtown West Palm Beach,
Florida.
On December 30, 1997, the Company acquired 51% limited partnership interests in
each of four limited partnerships which operate or are planned to operate Max's
Grille Restaurants in separate South Florida locations for $3,000,000. The first
Max's Grille Restaurant began operations in May 1997, the second opened in June
1998 and the third in October 1998. The remaining Max's Grille location has not
been determined. The investments are accounted for using the equity method.
This management's discussion and analysis of financial condition and results of
operation should be read in conjunction with the Company's unaudited
consolidated financial statements and notes thereto presented elsewhere herein.
Equity Method of Accounting
The Company has 51% limited partnership interests in each of four limited
partnerships which operate or plan to operate Max's Grille restaurants at
separate locations. Because the Company does not exercise control over the
limited partnerships, the Company's investments are accounted for using the
equity method of accounting. As a result, the revenue and expenses of these
restaurants are not incorporated into the consolidated revenue and expenses for
Sforza Enterprises Inc. Instead, 51% of the profit or losses from the limited
partnerships is recognized in results of operations as "equity in earnings of
unconsolidated affiliates."
6
<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
revenue. The results of operations for the three months ended March 31, 1999 are
not necessarily indicative of the results to be expected for the year ending
December 31, 1999.
Comparative Operational Percentages
Stated as a Percentage of Net Sales
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------
March March
31, 1999 31, 1998
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<S> <C> <C>
Net sales 100.0% 100.0%
----- -----
Cost & expenses:
Cost of sales 49.4% 47.8%
Operating expenses 46.3% 49.0%
Interest expense, net 0.1% -%
----- -----
Total cost & expenses 95.8% 96.8%
----- -----
Operating profit 4.2% 3.2%
Other income, net .3% .6%
Equity in earnings of unconsolidated affiliates 2.2% 1.5%
----- -----
Income before income taxes 6.7% 5.3%
Income tax expense -% -%
----- -----
Net income 6.7% 5.3%
===== =====
</TABLE>
Net Sales
The Company's net sales consist of the food and beverage sales realized by the
restaurants it operates. The first restaurant, Sforza Ristorante, opened in
February 1996 and the second restaurant, My Martini Grille, opened in February
1997. The restaurants are in adjacent locations in downtown West Palm Beach,
Florida. Net sales increased from $1,132,844 for the three months ended March
31, 1998 to $1,258,772 for the three months ended March 31, 1999, representing
an increase of 11.1%. The increase in net sales from 1998 to 1999 was due to the
increased customer counts at both West Palm Beach restaurants. Sforza
Ristorante's net sales were $606,628 for the three months ended March 31, 1999
and $543,910 for the three months ended March 31, 1998. My Martini Grille's net
sales were $652,144 for the three months ended March 31, 1999 and $588,934 for
the three months ended March 1998. The increases in Sforza Ristorante's and My
Martini's net sales were 11.5% and 10.7%, respectively, from 1998 to 1999.
7
<PAGE>
Cost of Sales
Cost of sales includes the cost of food and beverages sold and the salaries and
wages related to food preparation and service. Cost of sales increased from
$541,330 for the three months ended March 31, 1998 to $621,836 for the three
months ended March 31, 1999, a 14.9% increase. This is primarily a result of
increased sales at both locations.
The cost of sales for Sforza Ristorante as a percentage of net sales was 51.9%
for the three months ended March 31, 1999 and 50.8% for the three months ended
March 31, 1998. Cost of sales for My Martini Grille was 49.0% for the three
months ended March 31, 1999 and 44.9% for the three months ended March 31, 1998.
Management is continuing its evaluation of the menu offerings and pricing
structure in an attempt to maximize the sales and profits from its restaurants.
Total cost of sales, expressed as a percentage of net sales, was 49.4% in 1999
and 47.8% in 1998.
Operating Expenses
Operating expenses include other salaries and wages, rent and other occupancy
expenses, advertising, repairs and maintenance, general supplies, depreciation
and amortization, management fees and administrative expenses. Operating
expenses increased by $27,470 from $555,496 in the three months ended March 31,
1998 to $582,966 in the three months ended March 31, 1999, a 4.9% increase. This
increase is primarily due to additional costs incurred as a result of increased
sales and costs incurred to improve the Company's management of the restaurants.
Such expenses totaled 49.0% and 46.3% of net sales in 1998 and 1999,
respectively.
During the three months ended March 31, 1998, the Company incurred management
fees of $12,703, pursuant to arrangements with URCI which terminated on October
31, 1998. Depreciation and amortization totaled $42,562 for the three months
ended 1999 and $36,300 for the three months ended March 31, 1998.
Equity in Earnings of Unconsolidated Affiliates
On December 30, 1997, the Company acquired 51% equity interests in each of four
limited partnerships which operate or are planned to operate Max's Grille
Restaurants. One of the restaurants was operating as of March 31, 1998 and two
additional restaurants were opened during 1998. The Company's investments are
accounted for using the equity method. See "Liquidity and Capital Resources"
below for combined, summarized financial information for the limited
partnerships.
The Company's share of the combined income of the limited partnerships' income
for the three months ended March 31, 1999 was $27,963 as compared to $17,470 for
the three months ended March 31, 1998. The increase is primarily due to two
additional restaurants operating during the three months ended March 31, 1999.
URCI continues to evaluate each restaurant's operations in an attempt to
maximize the sales and profits at each location.
Other Income
Other income for the three months ended March 31, 1999 and 1998 principally
consists of interest earned.
8
<PAGE>
Income Tax Expense
The Company reported net losses for federal income tax purposes for the years
ended December 31, 1998 and 1997 and, at March 31, 1999, has available net
operating loss carryforwards approximating $995,000 which may be used to reduce
future taxable income. The tax benefit from the operating loss carryforwards was
offset by a valuation allowance at March 31, 1999 and 1998 and, accordingly, no
net deferred tax assets are recognized in the accompanying financial statements.
Interest Expense, Net
Interest incurred principally relates to capital leases for equipment.
Net Income
As a result of the above, the Company's net income attributable to common
shareholders was $83,650 and $60,311 for the three months ended March 31, 1999
and 1998, respectively.
Liquidity and Capital Resources
The Company's operating restaurants are located in West Palm Beach, Florida and
are therefore subject to the relative 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 two
company-owned restaurants and the three restaurants operated by the limited
partnerships (see below) was provided by public and private common stock
offerings.
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 net proceeds from its common
stock offerings will be sufficient to meet the Company's working capital
requirements and anticipated capital expenditures through 1999.
On December 30, 1997, the Company acquired 51% limited partnership interests in
each of four limited partnerships for an aggregate of $3,000,000 pursuant to a
partnership interest subscription agreement. Each of the limited partnerships
operates or is planned to operate Max's Grill Restaurants at a separate location
in South Florida. The business of the limited partnerships is governed by
identical limited partnership agreements (the Agreements) which vest overall
management and control of the partnerships in URCI through management agreements
executed by each of the limited partnerships. The Agreements provide for the
return of approximately $600,000 of the Company's investment during 1999 in the
event the fourth restaurant is not developed. The Agreements do not require the
partners to make loans to the partnerships or additional contributions to
capital.
The investments in the limited partnerships are accounted for under the equity
method of accounting. Summarized combined balance sheet information for the
limited partnerships as of March 31, 1999 follows:
9
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<TABLE>
<CAPTION>
<S> <C>
Assets:
Current assets $1,135,540
Property and equipment, net 1,933,792
Other assets 29,716
----------
Total assets $3,099,048
==========
Liabilities and equity:
Current liabilities $ 992,230
Long-term debt 139,585
Partners' equity 1,967,233
----------
Total liabilities and equity $3,099,048
==========
</TABLE>
Summarized combined results of operations for the limited partnerships for the
three months ended March 31, 1999 and March 31, 1998 are presented as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net sales $2,577,644 $ 980,971
========== ==========
Net income $ 68,104 $ 34,255
========== ==========
</TABLE>
Impact of Inflation
The Company has not operated in a highly inflationary period and its management
does not believe that inflation has had a material effect on sales or expenses.
As operating expenses increase, the Company expects to recover increased costs
by increasing prices, to the extent permitted by competition. Because the
Company's business is somewhat dependent on tourism in Florida, any significant
decrease in tourism caused by inflation would likely have a material adverse
effect on revenue and profitability.
Year 2000 Issue
The Company recognizes the need to ensure its operations will not be adversely
impacted by year 2000 software failures. Management has addressed the issue and
believes its operating systems to be year 2000 compliant. The Company is in the
process of contacting its suppliers to determine whether such vendors are year
2000 compliant and the potential effect, if any, on the Company. The Company has
not yet determined the full extent to which it is vulnerable to the failure by
its key vendors to remediate year 2000 compliance issues. There can be no
assurance that the failure of the Company's vendors to be year 2000 compliant
would not have a material adverse affect on the Company's business, financial
condition, or results of operations.
10
<PAGE>
PART II. FINANCIAL 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.
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 ENTERPRISES INC.
Date: April 27, 1999
By: /s/
----------------------------------------
Jay Visconti, President
By: /s/
----------------------------------------
Vincent Holland, Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 546688
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 67652
<CURRENT-ASSETS> 95440
<PP&E> 1275587
<DEPRECIATION> 380371
<TOTAL-ASSETS> 4207255
<CURRENT-LIABILITIES> 451529
<BONDS> 15655
0
0
<COMMON> 17100
<OTHER-SE> 3639321
<TOTAL-LIABILITY-AND-EQUITY> 4207255
<SALES> 1258772
<TOTAL-REVENUES> 1258772
<CGS> 621836
<TOTAL-COSTS> 621836
<OTHER-EXPENSES> 582966
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1770
<INCOME-PRETAX> 83650
<INCOME-TAX> 0
<INCOME-CONTINUING> 83650
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 83650
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
