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 JUNE 30, 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 August 8, 2000, 1,710,000 shares of the issuer's Common Stock, $.01
par value, were outstanding.
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<TABLE>
<CAPTION>
SFORZA ENTERPRISES INC.
INDEX
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Condensed Balance Sheet--June 30, 2000 3
Consolidated Condensed Statements of Income for the six
months and three months ended June 30, 2000 and 1999 4
Consolidated Condensed Statements of Cash Flows for the six
months ended June 30, 2000 and 1999 5
Notes to Interim Consolidated Condensed Financial Statements 6 - 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation 8 - 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
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2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
SFORZA ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEET
(Unaudited)
June 30, 2000
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 717,521
Inventories 157,431
Other current assets 282,978
-----------
Total current assets 1,157,930
Property and equipment, net 2,185,509
Other assets, net 870,096
-----------
Total assets $ 4,213,535
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 481,454
Accrued expenses 467,955
Current portion of obligations under capital leases 16,446
-----------
Total current liabilities 965,855
Obligations under capital leases, net of current portion 160,441
-----------
Total liabilities 1,126,296
-----------
Shareholders' equity:
Common stock, $.01 par value 17,100
Additional paid in capital 5,097,064
Retained earnings (deficit) (2,026,925)
-----------
Total shareholders' equity 3,087,239
-----------
Total liabilities and shareholders' equity $ 4,213,535
===========
</TABLE>
3
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<TABLE>
<CAPTION>
SFORZA ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
For the Six Months and Three Months Ended June 30, 2000 and 1999
2000 1999
--------------------------------- ----------------------------------
Six Months Three Months Six Months Three Months
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Net sales $ 6,801,056 $ 3,052,580 $ 2,241,521 $ 982,749
----------- ----------- ----------- -----------
Cost and expenses:
Cost of sales 3,329,691 1,528,244 1,102,070 480,234
Operating expenses 3,126,936 1,517,114 1,152,694 612,290
Depreciation and
amortization 295,930 152,504 90,196 47,634
Interest expense 20,740 10,019 3,294 1,524
----------- ----------- ----------- -----------
Total cost and
expenses 6,773,297 3,207,881 2,348,254 1,141,682
----------- ----------- ----------- -----------
Operating income (loss) 27,759 (155,301) (106,733) (158,933)
Other income (expense):
Other income (expense) 49,613 (7,082) 25,601 22,114
Loss on sale of assets (50,211) (20,211) - -
Equity in earnings
(losses) of unconsol-
idated affiliates - - 7,097 (20,866)
----------- ----------- ----------- -----------
Income (loss) before
provision for income
taxes 27,161 (182,594) (74,035) (157,685)
Income tax expense
(benefit) - - - -
----------- ----------- ----------- -----------
Net income (loss) $ 27,161 $ (182,594) (74,035) $ (157,685)
=========== =========== =========== ===========
Basic net income (loss)
per common share $ .02 $ (.11) $ (.04) $ (.09)
=========== =========== =========== =========
Diluted net income per
common share $ .02 $ (.11) $ (.04) $ (.09)
=========== =========== =========== ==========
Weighted average common shares outstanding:
Basic 1,710,000 1,710,000 1,710,000 1,710,000
=========== =========== =========== ===========
Diluted 1,711,875 1,711,875 1,710,000 1,710,000
=========== =========== =========== ===========
</TABLE>
4
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<TABLE>
<CAPTION>
SFORZA ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2000 and 1999
(Unaudited)
2000 1999
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 27,161 $ (74,035)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Equity in earnings of unconsolidated
affiliates - (7,097)
Depreciation and amortization 295,930 90,196
Loss on sale of assets 50,211 -
Decrease in inventories 46,263 9,145
(Increase) decrease in other current
assets (39,922) 62,876
Decrease in accounts payable (266,685) (189,686)
Increase (decrease) in accrued expenses (111,658) 10,762
---------- ----------
Net cash provided by (used in) operating
activities 1,300 (97,839)
---------- ----------
Cash flows from investing activities:
Proceeds from sale of assets 226,735 -
Purchases of property and equipment (85,812) (34,006)
(Increase) decrease in other assets 5,945 (37,412)
Return of investment in limited partnership - 622,714
---------- ----------
Net cash provided by investing activities 146,868 551,296
---------- ----------
Cash flows from financing activities:
Principal payments on long-term debt (69,754) (1,816)
Principal payments on obligations under
capital leases (48,279) (12,260)
---------- ----------
Net cash used in financing activities (118,033) (14,076)
---------- ----------
Net increase in cash and cash equivalents 30,135 439,381
Cash and cash equivalents, beginning of period 687,386 439,476
---------- ----------
Cash and cash equivalents, end of period $ 717,521 $ 878,857
========== ==========
</TABLE>
5
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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 June 30, 2000 and for the six months ended June
30, 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 for the interim periods ended June 30, 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 June 30, 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 (loss) per common share is computed in accordance with Financial
Accounting Standards Board Statement 128. Basic earnings per common share
excludes dilution and is computed by dividing income (loss) 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
6
<PAGE>
this calculation are anti-dilutive for the six and three months ended June 30,
2000 and 1999, since the exercise prices exceed the average market price.
Subsequent Sale of Restaurant
-----------------------------
On May 1, 2000, the Company recorded a loss of $50,211 from the sale of the
business and assets of its sushi restaurant, Sushi Rok. Total proceeds from the
sale of the sushi restaurant, which opened in January 2000, approximated
$220,000. The related sushi restaurant lease was assigned to the purchaser;
however, the Company will remain contingently liable for payments due under the
lease.
7
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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; technological
difficulties associated with the Company's management information systems; 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, and My Martini Grille, a full-service up-scale grill which opened in
February 1997. The Company also owned Sushi Rock, a sushi restaurant, which
opened in January 2000. (See discussion of sale below.) Both Sforza Ristorante
and My Martini 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 June 30, 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
Max's Beach Place
Restaurant Ft. Lauderdale Beach, Florida April 1997
Max's Grille Las
Olas Riverfront Downtown Ft. Lauderdale,
Restaurant Florida June 1998
Max's Grille Weston (West Broward County),
Restaurant Florida October 1998
</TABLE>
8
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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" above).
Results of Operations
The following table presents, for the periods indicated, the consolidated
statements of operations for the Company expressed as percentages of total
revenue. The results of operations for the six and three months ended June 30,
9
<PAGE>
2000 are not necessarily indicative of the results to be expected for the year
ending December 31, 2000:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Cost and expenses:
Cost of sales 50.1 48.8 48.9 49.2
Operating expenses 49.7 62.3 46.0 51.4
Depreciation and
amortization 5.0 4.8 4.4 4.0
Interest expense .3 .2 .3 .1
----- ----- ----- -----
Total cost and
expenses 105.1 116.1 99.6 104.7
----- ----- ----- -----
Operating income (loss) (5.1) (16.1) .4 (4.7)
Other income, net (.2) .3 .7 1.1
Loss on sale of assets (.7) -- (.7) --
Equity in income (loss)
of unconsolidated
affiliates -- (.2) -- .3
----- ----- ----- -----
Income (loss) before
income tax expense (6.0) (16.0) .4 (3.3)
Income tax expense (benefit) -- -- -- --
----- ----- ----- -----
Net income (loss) (6.0)% (16.0)% .4% (3.3)%
===== ===== ===== =====
</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 Sushi Rok in January 2000, and took over full
operations of the three Max's Grille Restaurants on August 6, 1999. Net sales
increased from $2,241,521 for the six months ended June 30, 1999 to $6,081,056
for the six months ended June 30, 2000, representing an increase of 203.41%. 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 Sushi Rok during the six months ended June 30,
2000. The combined net sales for Sforza Ristorante and My Martini Grille
decreased by $523,984 for the six months ended June 30, 2000 from the comparable
period in 1999. Management believes that the decrease in net sales of Sforza
Ristorante and My Martini Grille is primarily attributable to the increase in
competition in the downtown West Palm Beach market. Net sales attributable to
the three Max's Grille Restaurants included in the Company's net sales for the
six months ended June 30, 2000 were $4,819,875, while net sales from Sushi Rok
were $263,644 for the same period.
10
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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
$1,102,070 for the six months ended June 30, 1999 to $3,329,691 for the six
months ended June 30, 2000, a 202.13% increase. This principally results from
consolidating the three Max's Grille Restaurants and the additional costs of
sales at Sushi Rok during the six months ended June 30, 2000.
Cost of sales, as a percentage of net sales, was 48.96% for the six months ended
June 30, 2000 and 49.17% for the six months ended June 30, 1999. The cost of
sales percentage for the three Max's Grille Restaurants was 48.95% for the six
months ended June 30, 2000. The combined cost of sales percentage for the West
Palm Beach restaurants for the six months ended June 30, 2000 was 48.99%.
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 $1,974,242 from
$1,152,694 for the six months ended June 30, 1999 to $3,126,936 for the six
months ended June 30, 2000, an increase of 171.27%. 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 Sushi Rok. Operating
expenses totaled 45.98% and 51.42% of net sales for the six months ended June
30, 2000 and 1999, respectively.
Depreciation and Amortization
Depreciation and amortization totaled $295,930 for the six months ended June 30,
2000 and $90,196 for the six months ended June 30, 1999. Amortization of
goodwill associated with the purchase of the Max's Grille Restaurants totaled
$53,244 for the six months ended June 30, 2000.
Equity in Earnings of Unconsolidated Affiliates
On December 30, 1997, the Company acquired 51% equity interests in each of four
limited partnerships, which operated 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).
11
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Other Income
Other income for the six months ended June 30, 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 June 30, 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 June 30, 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 (loss) attributable to common
shareholders was $27,161 and $(74,035) for the six months ended June 30, 2000
and 1999, respectively.
Sale of Sushi Rok
On May 1, 2000, the Company recorded a loss of $50,211 from the sale of the
business and assets of its sushi restaurant. Total proceeds from the sale of
Sushi Rok, which opened in January 2000, approximated $220,000. The related
sushi restaurant lease was assigned to the purchaser; however, the Company will
remain contingently liable for payments due under the lease.
Liquidity and Capital Resources
As of June 30, 2000, two of the Company's operating restaurants 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) were 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.
12
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The Company's principal financing for the construction and opening of the five
restaurants that it owns and operates as of June 30, 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 adequate and 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.
13
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Currently there are no legal proceedings the Company is aware, and to which the
Company is a party.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. Exhibit 21 - Subsidiaries of the Registrant
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: August 9, 2000
By: /s/ Gerald J. Visconti, Jr.
---------------------------
Gerald J. Visconti, President
By: /s/ Vincent Holland
-------------------
Vincent Holland, Chief Financial and Accounting Officer
