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, 2000
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 207 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, 2000, 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 Condensed Balance Sheet--March 31, 2000 1
Consolidated Condensed Statements of Income for the Three
Months Ended March 31, 2000 and 1999 2
Consolidated Condensed Statements of Cash Flows for the Three
Months Ended March 31, 2000 and 1999 3
Notes to Interim Consolidated Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation 5
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 11
</TABLE>
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<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
SFORZA ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(Unaudited)
March 31, 2000
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 665,684
Inventories 177,125
Other current assets 480,994
-----------
Total current assets 1,323,803
Property and equipment, net 2,331,398
Other assets, net 904,604
-----------
Total assets $ 4,559,805
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 440,891
Accrued expenses 610,995
Current portion of long-term debt 10,222
Current portion of obligations under capital leases 85,607
-----------
Total current liabilities 1,147,715
Long-term debt, net of current portion 56,340
Obligations under capital leases, net of current portion 115,917
-----------
Total liabilities 1,319,972
-----------
Shareholders' equity:
Common stock, $.01 par value 17,100
Additional paid in capital 5,097,064
Retained earnings (deficit) (1,874,331)
-----------
Total shareholders' equity 3,239,833
-----------
Total liabilities and shareholders' equity $ 4,559,805
===========
</TABLE>
See notes to interim consolidated condensed financial statements.
1
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<TABLE>
<CAPTION>
SFORZA ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
For the Three Months Ended March 31, 2000 and 1999
2000 1999
----------- -----------
<S> <C> <C>
Net sales $ 3,748,476 $ 1,258,772
----------- -----------
Cost and expenses:
Cost of sales 1,801,447 621,836
Operating expenses 1,609,822 540,404
Depreciation, amortization, and impairment
loss 173,426 42,562
Interest expense 10,721 1,770
----------- -----------
Total cost and expenses 3,595,416 1,206,572
----------- -----------
Operating income 153,060 52,200
Other income:
Other income 26,695 3,487
Equity in earnings of unconsolidated
affiliates - 27,963
----------- -----------
Income before provision for income taxes 179,755 83,650
Income tax expense - -
----------- -----------
Net income $ 179,755 $ 83,650
=========== ===========
Basic net income per common share $ .11 $ .05
=========== ===========
Diluted net income per common share $ .11 $ .05
=========== ===========
Weighted average common shares outstanding:
Basic 1,710,000 1,710,000
=========== ===========
Diluted 1,711,875 1,710,000
=========== ===========
</TABLE>
See notes to interim consolidated condensed financial statements.
2
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<TABLE>
<CAPTION>
SFORZA ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2000 and 1999
(Unaudited)
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 179,755 $ 83,650
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in earnings of unconsolidated
affiliates - (27,963)
Depreciation, amortization, and impairment
loss 173,426 42,562
Decrease in inventories 31,690 1,494
(Increase) decrease in other current
assets (17,938) 37,958
Decrease in accounts payable (307,248) (63,339)
Increase in accrued expenses 902 52,140
---------- ----------
Net cash provided by operating activities 60,587 126,502
---------- ----------
Cash flows from investing activities:
Purchases of property and equipment (54,966) (13,082)
(Increase) decrease in other assets (489) 2,806
---------- ----------
Net cash used in investing activities (55,455) (10,276)
---------- ----------
Cash flows from financing activities:
Principal payments on long-term debt (3,192) (896)
Principal payments on obligations under
capital leases (23,642) (8,128)
---------- ----------
Net cash used in financing activities (26,834) (9,014)
---------- ----------
Net increase (decrease) in cash and cash
equivalents (21,702) 107,212
Cash and cash equivalents, beginning of period 687,386 439,476
---------- ----------
Cash and cash equivalents, end of period $ 665,684 $ 546,688
========== ==========
</TABLE>
See notes to interim consolidated condensed financial statements.
3
<PAGE>
SFORZA ENTERPRISES INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Basis of Presentation
---------------------
The consolidated condensed financial statements of Sforza Enterprises Inc. and
subsidiaries (the Company) as of March 31, 2000 and for the three months ended
March 31, 2000 and 1999 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 the interim
periods have been included. The results of the interim period ended March 31,
2000 are not necessarily indicative of the results to be obtained for the full
fiscal year ending December 31, 2000.
Investments in Unconsolidated Affiliates
----------------------------------------
On December 30, 1997, the Company acquired 51% limited partnership interests in
each of three limited partnerships for an aggregate of $2,386,000. Each of the
limited partnerships operates a Max's Grille Restaurant at a separate location
in South Florida. The Company accounted for the investments in the limited
partnerships using the equity method through August 5, 1999.
On August 5, 1999, the Company purchased the remaining 49% interests in each of
the three limited partnerships for an aggregate purchase price of $160,000. In
addition, the Company granted the seller options to purchase up to 20,000 shares
of the Company's common stock at $2.50 per share. The Company consolidates the
limited partnerships in its financial statements for periods subsequent to
August 5, 1999. The excess of the Company's aggregate investment in the three
limited partnerships plus the incremental purchase price for the 49% interests,
including transaction costs, over the book value of the net assets acquired was
recorded as goodwill and is being amortized over eight years.
Income Taxes
------------
As of March 31, 2000, the Company has loss carryforwards approximating
$1,200,000, which expire through 2015. The tax benefits from the operating loss
carryforwards are offset by valuation allowances and, accordingly, no net
deferred tax assets are recognized in the accompanying consolidated condensed
balance sheet. 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.
Net Income per Common Share
---------------------------
Net income per common share is computed in accordance with Financial Accounting
Standards Board Statement. 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.
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, 2000 and
1999, since the exercise prices exceed the average market price.
Subsequent Sale of Restaurant
-----------------------------
As of March 31, 2000, the Company recorded an impairment of loss of $30,000 due
to the sale of the business and assets of its sushi restaurant on May 1, 2000.
Total proceeds from the sale of the sushi restaurant, which opened in January
2000, approximated $220,000. The net assets sold are included in other current
assets at their net realizable value in the accompanying consolidated condensed
balance sheet. The restaurant lease was assigned to the purchaser; however, the
Company will remain contingently liable for payments due under the lease.
4
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein 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 mentioned in this Form 10-QSB and the Company's Form 10-KSB for the
fiscal year ended December 31, 1999.
General Comments
Sforza Enterprises Inc. and subsidiaries (the Company) operate Sforza
Ristorante, a full-service northern Italian restaurant, which opened in February
1996, My Martini Grille, a full-service up-scale grill which opened in February
1997, and Sushi Rok, a sushi restaurant opened in January 2000 (see discussion
of subsequent sale below). All three restaurants are located in downtown West
Palm Beach, Florida. In addition, as discussed below, commencing August 6, 1999,
the Company also operates three Max's Grille Restaurants, full-service casual
fine-dining restaurants, located in separate South Florida locations. A summary
of restaurants owned and operated by the Company at March 31, 2000 follows:
<TABLE>
<CAPTION>
Restaurant Name Location Date Opened
--------------- -------- -----------
<S> <C> <C>
Sforza Ristorante West Palm Beach, Florida February 1996
My Martini Grille West Palm Beach, Florida February 1997
Sushi Rok West Palm Beach, Florida January 2000
Max's Beach Place Restaurant Ft. Lauderdale Beach, Florida April 1997
Max's Grille Las Olas Riverfront Restaurant Downtown Ft. Lauderdale, Florida June 1998
Max's Grille Restaurant Weston (West Broward County), Florida October 1998
</TABLE>
5
<PAGE>
The sushi restaurant was subsequently sold on May 1, 2000 (see "Sale of Sushi
Restaurant" below).
On December 30, 1997, the Company acquired 51% limited partnership interests in
each of four limited partnerships which operated or 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 April 1997, the second opened in
June 1998 and the third in October 1998. The business of the limited
partnerships was governed by substantially identical limited partnership
agreements which vested overall management and control of the limited
partnerships to Unique Restaurant Concepts, Inc. (URCI) through separate
management agreements with URCI executed by each of the limited partnerships.
During June 1999, the Company elected to forego the development of the fourth
restaurant and the related limited partnership was liquidated. The Company
received $614,000 in cash representing a return of its investment upon the
liquidation of such limited partnership. The Company accounted for the
investments in the limited partnerships using the equity method through August
5, 1999.
On August 5, 1999, the Company purchased from an affiliate of URCI the remaining
49% interests in each of the three remaining limited partnerships for an
aggregate purchase price of $160,000. In addition, the URCI affiliate was
granted options to purchase up to 20,000 shares of the Company's common stock at
$2.50 per share. The agreement also terminated the management agreements with
URCI and requires the limited partnerships to pay certain license fees to URCI
during the twelve-month period following the acquisition. The licensing
agreement generally may be terminated after twelve months.
The Company consolidates the three remaining limited partnerships in its
financial statements for periods subsequent to August 5, 1999. The excess of the
Company's aggregate investment in the three limited partnerships plus the
incremental purchase price for the 49% interests, including transaction costs,
over the book value of the net assets acquired was recorded as goodwill and is
being amortized over eight years.
Equity Method of Accounting
The Company owned 51% limited partnership interests in each of three limited
partnerships which operate Max's Grille Restaurants at separate locations prior
to acquiring the remaining 49% ownership interests on August 5, 1999. Because
the Company did not exercise control over the limited partnerships, the
Company's investments were accounted for using the equity method of accounting
through August 5, 1999. As a result, the revenue and expenses of these
restaurants were not incorporated into the Company's consolidated revenue and
expenses for periods prior to August 6, 1999. Instead, 51% of the profit or
losses from the limited partnerships is recognized in results of operations as
"equity in losses of unconsolidated affiliates".
The Company purchased the remaining 49% interests in the limited partnerships on
August 5, 1999 and therefore consolidates the three limited partnerships in its
financial statements in periods subsequent to August 5, 1999 (see "General
Comments").
6
<PAGE>
Results of Operations
The following table presents, for the periods indicated, the consolidated
statements of operations for the Company expressed as percentage of total
revenue. The results of operations for the three months ended March 31, 2000 are
not necessiarily indicative of the results to be expected for the year ending
December 31, 2000:
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
---- ----
<S> <C> <C>
Net sales 100.0% 100.0%
------- -------
Cost and expenses:
Cost of sales 48.0 49.4
Operating expenses 43.0 42.9
Depreciation, amortization, and impairment loss 4.6 3.4
Interest expense .3 .1
------- -------
Total cost and
expenses 95.9 95.8
------- -------
Operating income 4.1 4.2
Other income, net .7 .3
Equity in income of
unconsolidated affiliates .- 2.2
------- -------
Income before income
tax expense 4.8 6.7
Income tax expense .- .-
------- -------
Net income 4.8% 6.7%
======= =======
</TABLE>
Net Sales
The Company's net sales consist of the food and beverage sales realized by the
restaurants it owns and operates. The Company operated two West Palm Beach,
Florida restaurants, Sforza Ristorante and My Martini Grille, during both years
presented above, began operating the sushi restaurant in January 2000, and began
operating the three Max's Grille Restaurants on August 6, 1999. Net sales
increased from $1,258,772 for the three months ended March 31, 1999 to
$3,748,476 for the three months ended March 31, 2000, representing an increase
of 197.8%. The increase in net sales from 1999 to 2000 was principally due to
the consolidation of the three Max's Grille Restaurants (see "General Comments")
and the additional sales generated by the sushi restaurant during the three
months ended March 31, 2000. The combined net sales for Sforza Ristorante and My
Martini Grille decreased by $239,613 for the three months ended March 31, 2000
from the comparable period in 1999. Net sales attributable to the three Max's
Grille Restaurants included in the Company's net sales for the three months
ended March 31, 2000 were $2,550,234, while net sales from the sushi restaurant
were $179,083 for the same period.
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
$621,836 for the three months ended March 31, 1999 to $1,801,477 for the three
months ended March 31, 2000, an 189.7% increase. This principally results from
consolidating the three Max's Grille Restaurants and the additional costs of
sales at the sushi restaurant during the three months ended March 31, 2000.
Cost of sales, as a percentage of net sales, was 48.0% for the three months
ended March 31, 2000 and 49.4% for the three months ended March 31, 1999. The
cost of sales percentage for the three Max's Grille Restaurants was 47.4% for
the three months ended March 31, 2000. The combined cost of sales percentage for
the West Palm Beach restaurants for the three months ended March 31, 2000 was
44.9%. Management is continuing its evaluation of the menu offerings and pricing
structure for all of its restaurants in order to maximize their sales and
profits.
Operating Expenses
Operating expenses include other salaries and wages, rent and other occupancy
expenses, advertising, repairs and maintenance, general supplies, and
administrative expenses. Operating expenses increased by $1,069,418 from
$540,404 for the three months ended March 31, 1999 to $1,609,822 for the three
months ended March 31, 2000, an 197.9% increase. This increase is primarily due
to the consolidation of the operating expenses for the three Max's Grille
Restaurants and the additional expenses incurred to operate the sushi
restaurant. Operating expenses totaled 43.0% and 42.9% of net sales for the
three months ended March 31, 2000 and 1999, respectively.
Depreciation, Amortization, and Impairment Loss
Depreciation and amortization totaled $143,426 for the three months ended March
31, 2000 and $42,562 for the three months ended March 31, 1999. Amortization of
goodwill associated with the purchase of the Max's Grille Restaurants totaled
$26,622 for the three months ended March 31, 2000. In addition, an impairment
loss of $30,000 was recorded in the three months ended March 31, 2000 relating
to the subsequent sale of the sushi restaurant (see "Sale of Sushi Restaurant"
below).
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 planned to operate Max's Grille
Restaurants. Three of the restaurants were operating as of December 31, 1998.
During June 1999, the Company received $614,000 in cash in lieu of developing
the fourth restaurant upon liquidation of the related limited partnership. On
August 5, 1999, the Company acquired the remaining 49% interests in the
remaining three limited partnerships in a purchase transaction. The Company's
investments were accounted for using the equity method through August 5, 1999
(see "Equity Method of Accounting" above).
8
<PAGE>
Other Income
Other income for the three months ended March 31, 2000 and 1999 principally
consists of interest earned.
Income Taxes
The Company reported a net loss for federal income tax purposes for the year
ended December 31, 1999 and, at March 31, 2000, has available net operating loss
carryforwards approximating $1,200,000 which may be used to reduce future
taxable income. The tax benefits from the operating loss carryforwards were
offset by valuation allowances at March 31, 2000 and, accordingly, no net
deferred tax assets are recognized in the accompanying consolidated condensed
balance sheet. The benefit of the loss carryforwards will be recognized in the
Company's financial statements when management determines that it is more likely
than not that such losses will be realized.
Interest Expense
Interest incurred principally relates to capital leases and loans for equipment.
Net Income
As a result of the above, the Company's net income attributable to common
shareholders was $179,755 and $83,650 for the three months ended March 31, 2000
and 1999, respectively.
Sale of Sushi Restaurant
As of March 31, 2000, the Company recorded an impairment of loss of $30,000 due
to the sale of the business and assets of its sushi restaurant on May 1, 2000.
Total proceeds from the sale of the sushi restaurant, which opened in January
2000, approximated $220,000. The net assets sold are included in other current
assets at their net realizable value in the accompanying consolidated condensed
balance sheet. The restaurant lease was assigned to the purchaser; however, the
Company will remain contingently liable for payments due under the lease.
Liquidity and Capital Resources
Three of the Company's operating restaurants at March 31, 2000 are located in
West Palm Beach, Florida and the three Max's Grille Restaurants are located in
Broward County, Florida. All of the restaurants are 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 slower during the off-season. Proceeds from the sale of the sushi
restaurant on May 1, 2000 (see "Sale of Sushi Restaurant" above) will be used to
pay related liabilities. The Company expects to use cash reserves or working
capital generated during its busy season to fund its operations during the
off-season.
9
<PAGE>
The Company's principal financing for the construction and opening of the six
restaurants that it owns and operates as of March 31, 2000 was principally
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 its remaining cash reserves will
be sufficient to meet the Company's working capital requirements and anticipated
capital expenditures through 2000.
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 sales and profitability.
10
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Currently there are no legal proceedings of which the Company that the Company
is aware, and to which the Company is a party.
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: May 5, 2000
By: /s/ Jay Visconti
--------------------
Jay Visconti, President
By: /s/ Vincent Holland
-----------------------
Vincent Holland, Chief Financial and Accounting Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the Company's unaudited consolidated financial statements
for the quarter ended March 31, 2000 and is qualified in its
entirety by reference to such financial statements and related
notes
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> JAN-1-2000
<PERIOD-END> MAR-31-2000
<CASH> 665684
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 177125
<CURRENT-ASSETS> 1323803
<PP&E> 3108247
<DEPRECIATION> 776849
<TOTAL-ASSETS> 4559805
<CURRENT-LIABILITIES> 1147715
<BONDS> 268086
0
0
<COMMON> 17100
<OTHER-SE> 3222733
<TOTAL-LIABILITY-AND-EQUITY> 4559805
<SALES> 3748476
<TOTAL-REVENUES> 3748476
<CGS> 1801447
<TOTAL-COSTS> 1801447
<OTHER-EXPENSES> 1793969
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10721
<INCOME-PRETAX> 179755
<INCOME-TAX> 0
<INCOME-CONTINUING> 179755
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 179755
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.11
</TABLE>
