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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number: 0-23278
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BRAZIL FAST FOOD CORP.
(Exact name of registrant as specified in its charter)
Delaware 13-3688737
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Av. Brasil
6431--Bonsucesso
CEP 21040-360
Rio de Janeiro, Brazil N/A
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: 55 21 564-4219
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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-- --
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Class A Redeemable Common Stock Purchase Warrants,
Class B Redeemable Common Stock Purchase Warrants
(Title of Class)
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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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
The number of shares outstanding of the Registrant's common stock is
3,541,540 (as of March 29, 2001).
The aggregate market value of the voting stock held by non-affiliates of
the Registrant is
$2,115,402 (as of March 29, 2001).
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Proxy Statement for its Annual Meeting of Stockholders to be
convened in May 2001.
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Unless otherwise specified, all references in this Report to (i) "reais,"
the "real" or "R$" are to the Brazilian real (singular), or to the Brazilian
reais (plural), the legal currency of Brazil, and (ii) "U.S. dollars" or "$"
are to United States dollars. Unless otherwise specified, all financial
statements and other financial information presented herein are in accordance
with generally accepted accounting principles in the United States ("U.S.
GAAP").
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PART I
ITEM 1. BUSINESS
(a) General Development of Business
Brazil Fast Food Corp., through its wholly-owned subsidiary, Venbo Comercio
de Alimentos Ltda., a Brazilian limited liability company which conducts
business under the trade name "Bob's," owns and, directly and through
franchisees, operates the second largest chain of hamburger fast food
restaurants in Brazil.
Recent Developments
The world financial market disruptions that were initiated by the Asian
financial crisis in late 1997 and exacerbated by the near-collapse of the
Russian economy in mid-1998 ultimately spread to Brazil in late 1998. Bank
interest rates surged upward beyond 35% per annum, while interest rates on
consumer credit transactions rose to in excess of 8% per month. Unemployment
rose substantially, particularly in cities such as Rio de Janeiro and Sao
Paulo, as businesses attempted to cope with curtailed credit facilities and
reduced economic growth. In January 1999, the Brazilian government devalued the
Real in an effort to combat the onset of an economic recession. All of these
events led to a slowdown in Brazilian retail traffic, generally, and to a
significant reduction in our sales for the first quarter of 1999.
By the end of the second quarter of 1999, the Brazilian economy began to
show signs of a recovery. The January 1999 currency devaluation had increased
the attractiveness of Brazilian products in world markets. Further, the
Brazilian Central Bank initiated a series of interest rate reductions which
lowered interest rates from approximately 42.0% per annum at the end of March
1999 to approximately 15.75% per annum by the end of December 2000. As
agricultural and industrial production significantly increased with the
expansion of available credit facilities, employment and retail sales levels
began to rise by the end of the second quarter of 1999 after several months of
stagnation or decline.
As the Brazilian economy improved during the remainder of 1999 and
throughout 2000, our sales also increased. However, we remain burdened with a
significantly higher level of indebtedness and interest expense than we had
experienced prior to the commencement of the economic recession in late 1998.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operation."
(b) Financial Information About Industry Segments
Not applicable
(c) Narrative Description of Business
Restaurant Operations
Each of our restaurants serves a generally uniform menu featuring
hamburgers, french fries, soft drinks and juices, cold sandwiches, desserts and
milkshakes. Selected restaurants also serve coffee and/or beer. We are
particularly known for our milkshakes and the special spicing of our
hamburgers.
Historically, our restaurants were distinguishable from other "fast food"
operations by their unique service design whereby customers would place and pay
for their order on one line and pick up their order on another line. Cooks
would prepare orders as read to them by the counter service representative who
took the order. We have changed this two line system into a single line system,
which has improved both the quality and speed of service, while retaining our
cooked-to-order philosophy. This change has been made possible by deployment of
proprietary software, which facilitates communication between counter personnel
and the
1
kitchen staff. Under this new system, as each order is input by a service
representative into a countertop terminal, it also appears on a computer screen
in the kitchen, thereby assuring that each customer will receive his food
rapidly while permitting us to retain cooked-to-order offerings.
Our restaurants generally open at 10:00 A.M. for lunch and remain open for
dinner. Closing hours vary according to location. In some locations with
proximity to late night entertainment, the outlets remain open for the "after
hours" crowd. Our restaurants are not generally open for breakfast, as results
from test-marketing that we conducted at various times during 1999 and 2000
have indicated that offering fast food breakfasts are not economically viable
at the present time.
Our prices are consistently positioned at the same levels as those for
comparable products offered by our major competitors. We attempt to maintain
the overall cost of our meals at levels competitive with lunch prices offered
by popular street snack bars known as "lanchonetes".
Originally, our restaurants were built as counter service facilities to
accommodate our initial primary clientele of teenagers. In keeping with our
current efforts to attract family oriented customers, all of our restaurants
built since 1980 have included seating facilities. In addition, all of our 19
pre-1980 restaurants have now been renovated to update the decor, expand the
seating facilities and provide air conditioning. Our restaurants have an
identifiable style highlighted by their distinctive red and white color theme,
which is used on all signage as well as upon our paper goods. This style is
carried through in the uniforms worn by our personnel, which are occasionally
modified to feature hats and shirts used in promotions.
For the past several years, we have been the exclusive provider of
hamburgers and related items at three of Brazil's largest special events--
Carnivale, the one week festive period which precedes the advent of Lent, the
Formula One Automobile Racing Championships and the Motorcycle Grand Prix. In
addition, our food products are sold at other special events throughout Brazil,
including boat fairs, automobile fairs and State rodeos. Using custom
constructed trailers and moveable kiosks, we are able to offer most of our
products at temporary locations for the duration of each special event. In
addition to providing an additional revenue source, our visibility is enhanced
by signage that can be picked up via television coverage of the special event
and by reaching a consumer market where we may not have a permanent outlet.
The following table presents information concerning openings and closings of
both our owned and operated and our franchised restaurants for the years ended
December 31, 2000, 1999 and 1998(a):
Year Ended
December 31,
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2000 1999 1998
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Owned and operated restaurants:
Opened during period............................... 7 -- 1
Closed during period............................... -- 1 3
Sold to franchisees................................ 1 4 15
Bought from franchisees............................ 2 -- --
Open at end of period.............................. 63 55 60
Franchised restaurants:
Opened during period............................... 29(b) 29(c) 26(d)
Closed during period............................... 2 1 2
Sold to us by franchisees.......................... 2 -- --
Open at end of period.............................. 133 108 80
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(a) Does not include trailers and kiosks used for temporary locations.
(b) Includes 1 of our owned and operated restaurants that was sold to a
franchisee during the year ended December 31, 2000.
(c) Includes 4 of our owned and operate restaurants that were sold to
franchisees during the year ended December 31, 1999.
(d) Includes 15 of our owned and operated restaurants sold to franchisees
during the year ended December 31, 1998.
2
The average guest check per customer for our owned restaurants for the years
ended December 31, 2000, 1999 and 1998 were R$5.22, R$4.80 and R$4.65,
respectively.
We strive to maintain quality and uniformity throughout both our owned and
operated and our franchised restaurants by publishing detailed specifications
for food products, food preparation, and service, by continuous in-service
training of employees, and by field visits from our supervisors. Quality
control at each restaurant is undertaken by the store manager, who visually
inspects the products as they are being prepared for cooking. The manager also
keeps a record of the expiration date of the products in inventory. In the case
of our franchisees, a marketing manager in each of our six primary geographic
regions periodically reviews their operations and make recommendations to
assist in compliance with our specifications.
Our quality control inspectors are also sent to each restaurant, whether
owned by us or by one of our franchisees, periodically to conduct a review of
the food stock. These inspectors also take samples of the water used at each
restaurant in the preparation of food and drinks as well as random samples of
one food item which are taken to a contract laboratory for a microbiological
analysis.
Growth Strategy
Brazil's population of 166 million is the sixth largest in the world. Sao
Paulo, Brazil's largest city, has 10.4 million residents and a contiguous area
population of 37.0 million persons. Rio de Janeiro, Brazil's second largest
city, has 5.9 million residents and a contiguous area population of 14.4
million persons. Ten metropolitan areas, including those of Rio de Janeiro and
Sao Paulo, have populations in excess of one million. According to Media Data
"98, a non-affiliated consulting concern, the average annual income for the
population of nine major markets in Brazil, including Sao Paulo and Rio de
Janeiro, was as follows: R$70,728 for 1% of such population, R$44,916 for 4% of
such population, R$29,328 for 7% of such population, R$19,368 for 12% of such
population, R$10,128 for 31% of such population, R$5,220 for 33% of such
population and R$2,748 for 12% of such population. The study, which took into
account income and spending habits of the targeted population, concluded that
the fast food market is one of Brazil's fastest growing business segments and
that Brazil's fast food market could exceed 60,000,000 customers. Based upon
the foregoing, we believe there is significant room for expansion in the
Brazilian fast food market.
We are currently focusing our growth efforts upon the development of new
franchises, especially in northern Brazil, where competition is not as intense
as in other urban areas. We also intend to enter into territory agreements with
franchisees which will require the franchisee to commit to the development of
several Bob's restaurants in a particular region. We also anticipate taking
advantage of the continuing construction and development of shopping malls in
Brazil, where food fast can be a significant profit center.
In addition, we expect to continue to capitalize on our 49 year history in
Brazil. As our operations are based wholly in Brazil, we believe we have the
capacity to understand and respond to consumer taste preferences in developing
additional local markets and test marketing new products and concepts.
We also intend to utilize our customized trailers and moveable kiosks to
maximize our ability to cater to special events and temporary markets, and also
to test certain markets on a temporary basis.
In 1999, we entered into substantially similar agreements with each of
Petrobras and Ipiranga, the two largest Brazilian gasoline retailers with
approximately 7,000 and 4,000 outlets, respectively, which provide that we and,
respectively, Petrobras and Ipiranga will jointly select sites for development,
each to include both a Bob's restaurant and a retail gas station. We
contemplate that substantially all of these new sites will be built, owned and
operated by present and future franchisees. We will share royalties received
from each franchisee with these gasoline retailers. Our first such joint site,
with Petrobras, was opened in 2000. We subsequently concluded similar
agreements with Brazilian subsidiaries of each of Shell and Texaco, with
approximately 3,700 and 3,000 retail gasoline outlets, respectively. By
December 31, 2000, we had opened 10 joint restaurant/retail gasoline outlets.
3
In 1999, we initiated a computer-based delivery system for telephonic food
and beverage orders. As of December 31, 2000, our telephonic order delivery
system had been installed in approximately 80% of our owned and operated
restaurants.
We are continuing to explore alternate distribution channels for our
products to maximize consumer exposure in an economically efficient manner. We
expect to utilize a "store-within-a-store" concept where we will either rent
space from a larger non-competitive retail consumer operation or will rent
space in our own outlet to other non-competitive fast food providers, thereby
maximizing consumer traffic while minimizing costs of operation. We currently
rent space in two of our Sao Paulo stores to Dunkin' Donuts, which does not
compete directly with us, but offers complementary products.
Franchise Program
Our franchise agreements generally require the franchisee of a traditional
Bob's restaurant to pay us an initial fee of $30,000 and to pay us additional
fees equal to 4% of the franchisee's gross sales in its first two years of
operation and 5% of monthly gross sales thereafter. In addition, franchisees
pay 4% of monthly gross sales for cooperative advertising. Our typical
franchise agreement also provides that the franchisee must use our approved
supplies and suppliers and must build each franchised outlet in accordance with
our specifications at our approved locations. The term of the majority of our
franchise agreements is 10 years, with a few agreements having 5 year terms.
At present, approximately 9 months elapse between our initial contact with a
prospective franchisee and the opening of a franchised outlet. After the
initial meeting, and if the potential franchisee meets certain basic
conditions, such as significant business experience, financial resources and
knowledge of the market in the area where the franchise will be located, a
preliminary franchise agreement is signed, which, among other matters, requires
the prospective franchisee to pay us a non-refundable sum equal to 50% of the
initial franchising fee to partially compensate us for the cost of a three-
month training program to familiarize the prospective franchisee with our
operations. Following mutual agreement as to the site of a new restaurant, a
definitive franchise agreement is signed, outlining the obligations and
responsibilities of each party, including the franchising fees and promotion
commissions to be paid to us. The franchisee then begins a three-month training
program. Construction of the restaurant typically begins at the beginning of
the training program and is generally completed within three to six months. The
franchising fee is sufficient to cover all training expenses incurred by us.
In some instances, the franchise agreements that we have negotiated with
existing franchisees accommodate specific requirements and characteristics of
the franchisee. We have entered into territory agreements with franchisees
located in areas where we have determined that it is in our best interest to
establish two or more stores within a geographic region. The territory
agreements incorporate the same terms and conditions of our franchise
agreements, but also provide for the franchisee to commit to opening an agreed-
upon number and type of store within a specified time-frame. In a limited
number of instances, we may grant franchisees exclusive territorial rights if
we believe such grants would further the development of new market
opportunities.
Under Brazilian law, we cannot dictate the price at which our franchisees
sell their products, although in general, franchisee prices mirror the prices
at our owned and operated stores.
We receive 45 to 60 inquiries monthly from potential franchisees. A steering
committee formed by our top management receives formal franchising proposals
and reviews them to determine which should be accepted.
In addition to the 81 franchisees who, collectively, operated 153 outlets,
including 17 kiosks and 3 trailers, at December 31, 2000, we have signed final
franchising contracts with 20 new franchisees to open and operate a like number
of additional outlets, to be located in the States of Rio de Janeiro, Sao
Paulo, Mato Grosso do Sul, Brasilia, Alagoas, Pernambuco, Santa Catarina,
Maranhao and in the Federal District of Brasilia. The majority of these
additional outlets are scheduled to begin operations prior to the end of the
first half of 2001.
4
In our first effort to expand our "Bob's" brand beyond Brazil, we entered
into a master franchisee agreement for Portugal during 2000. This agreement
requires the master franchisee to open 30 "Bob's" retail restaurants over a 10-
year period, including no less than 5 to be operated by the master franchisee,
provides that the master franchisee assume financial responsibility for
marketing the "Bob's" brand in Portugal and calls for our sharing in all
royalties payable by subfranchisees to the master franchisee.
We have received numerous awards from the Brazilian Franchise Association,
an independent trade organization, including
. quality seal in 2000 and for each of four prior years, and
. best Brazilian franchise operation in 1997 out of approximately 1,000
candidates.
We generally retain a right of first refusal in connection with any proposed
sale of a franchisee's interest.
Advertising and Promotions
We utilize television, radio, and a variety of promotional campaigns to
advertise our products. Our primary promotional campaign in 2000 was to
encourage purchases of our larger than standard portion "mega" sandwiches and
combination meals.
We introduced colorful cardboard boxes imprinted with the "Bob's" symbol for
our premium sandwich offerings in 1997, replacing paper bags, thereby enhancing
our quality image.
We are constantly seeking to expand the breadth and quality of our product
offerings:
. In 1997, we launched a new line of chicken products in an effort to
capitalize upon customers' requests for "health-oriented" food offerings;
one of these products, a chicken steak sandwich, has become one of our
best selling offerings.
. In 1998, we launched the "Bob's Dog," an extra-large hot dog with two
different sauces.
. In 1999, we introduced a chocolate mousse pie dessert; bacon was also
added as an option to all of our sandwich offerings.
. In 2000, we introduced a cheese, ham and egg sandwich and a hot fudge
topped ice cream sundae; we also introduced our "MEGA" sized sandwiches
and combination meals.
We and our advertising agency annually develop a multi-media marketing
program to advertise our restaurant network in its primary markets. We
periodically develop 15 and 30 second television commercials which, typically,
are aired one to six times a day for a 15-day period. Temporary product
discounts are offered in Rio de Janeiro and Sao Paulo through radio and
television advertising several times a year. Other successful promotional
programs have included offering products tied into popular movies with certain
value meals, and selling specially produced hats at a discount with certain
value meals. We also offer a "kids meal," which includes three food items and a
small packaged toy. Certain of our outlets offer special services for
children's birthday parties and also feature appearances by "Bobi", our mascot.
All these programs are reinforced by visual tools, such as banners, posters and
place mats.
We keep franchisees informed of current advertising techniques and effective
promotions and make our advertising materials available to our franchisees. Our
franchisees are required, generally, to spend 4% of their monthly gross
receipts for advertising and promotions. Individual stores also develop
promotional programs to attract additional clientele or to assist in the
implementation of expanded business hours. These promotions are paid for by
each outlet. We commit approximately 4% of our system-wide gross sales to
marketing activities.
We are a participant in a joint retail marketing effort initiated in 1998 in
Rio de Janeiro, together with Shell, Lojas Americanas (one of the biggest
department store chains in Brazil) and Sendas (one of the biggest
5
supermarket chains in Brazil), of memberships in "Smart Club," which offers
special premiums to repeat customers. This program, which was expanded during
1999 to encompass other areas of Brazil, continued throughout 2000 and is
ongoing.
We intend to increase our marketing efforts in Sao Paulo in an effort to
capitalize upon the current strength of the local economy.
Sources of Supply
We and our franchisees have not experienced any material shortages of food,
equipment, fixtures, or other products which are necessary to restaurant
operations. We anticipate no such shortages of products and, in any event,
believe that alternate suppliers are available.
We purchase food products and packaging from numerous independent suppliers.
In selecting and periodically adjusting the mix of our suppliers, we assess and
continuously monitor the efficiency of their regional and national distribution
capabilities. To take advantage of volume discounts, we have entered into
centralized purchasing agreements. Food products are ordered by, and delivered
directly to each restaurant. Billing and payment for our owned restaurants are
handled through the centralized office, while franchisees handle their own
invoices directly. Packaging and durable goods are delivered to a centralized
warehouse operated by a non-affiliated person, which delivers supplies to each
of our own restaurants. This centralized purchasing helps assure availability
of products and provides quantity discounts, quality control and efficient
distribution.
We participate in joint promotion and marketing programs with Coca-Cola for
its soft drink products and with Novartis Nutricion for its Ovomaltine
chocolate, as well as with Mate Leao for a popular Brazilian brand of iced tea.
Trademarks
We believe that our trademarks and service marks, all of which are owned by
us, are important to our business.
Our trademarks and service marks have been registered in the Brazilian
trademark office. These trademarks and service marks expire at various times
from 2001 to 2010. Renewals of these trademarks and service marks generally
have been obtained prior to their expiration.
Competition
In terms of the number of retail outlets, we are the second largest food
service organization in Brazil. Each of our restaurants is in competition with
other food service operations within the same geographical area. We compete
with other organizations primarily through the quality, variety, and value
perception of food products offered. The number and location of units, quality
and speed of service, attractiveness of facilities, and effectiveness of
marketing are also important factors. The price charged for each menu item may
vary from market to market depending on competitive pricing and the local cost
structure.
Based on several articles which have appeared in independent Brazilian
newspapers and periodicals, we believe that we and McDonald's are the market
leaders in the hamburger fast food business in Rio de Janeiro and Sao Paulo.
Statistical data drawn from these articles indicate that our share of the fast
food hamburger chain market approximated 10.1%, 12.0% and 11.0% during the
years ended December 31, 2000, 1999 and 1998, respectively. McDonald's, which
ended 2000 with approximately 1,095 outlets including 551 kiosks, accounted for
substantially all of the balance of this market. At the end of 1999, McDonald's
Brazilian outlets and kiosks approximated 870. According to reports published
in the Brazilian media, McDonald's estimates it will invest R$200.0 million
into its Brazilian operations during 2001, including the establishment of an
additional 80 points of sale.
6
Pizza Hut ended 2000 with 62 fast food pizza outlets in Brazil, as
contrasted with 70 at the end of 1999 and 133 at the end of 1998. Domino's
Pizza opened their first 8 stores in 1999 and ended 2000 with approximately 13
outlets. Arby's closed all outlets during 1999. Habib's, a Middle Eastern fast
food chain, ended 2000 with approximately 157 outlets, compared to 124 at the
end of 1999, and according to reports published in the Brazilian media intends
to open an additional 35 outlets in 2001.
Our competitive position is enhanced by our use of fresh ground beef and
special flavorings, made-to-order operations, comparatively diverse menu, use
of promotional products, wide choice of condiments, atmosphere and decor of our
restaurants and our relatively long history in Brazil. We believe that the use
of moveable trailers and kiosks, which are not utilized by our competitors,
affords us a competitive advantage over our competitors. We also believe that,
as a Brazilian-based company, we have the advantage over our non-Brazilian
competitors of being able to readily understand and respond to local consumer
preferences.
Personnel
As of December 31, 2000, we, including our franchisees, employed 4,779
persons, of whom 2,026 were employed in our owned and operated restaurants. The
total number of full-time employees at that date was 2,101, of which 716 were
temporary personnel. Since 1999, we have reduced the number of hours in each
worker's shift, from 8 hours to 6 hours, in order to increase productivity.
Our employee relations historically have been satisfactory. We are not a
party to any collective bargaining agreements. However, we have agreed to be
bound by the terms, as they may be applicable to our employees, of agreements
negotiated on a city-by-city basis by trade associations of hotel, restaurant
and fast food owners and operators, of which we are a member.
Government Regulation
We and our franchisees are subject to regulatory provisions relating to the
wholesomeness of food, sanitation, health, safety, fire, land use and
environmental standards and where applicable, liquor licensing as it relates to
serving beer in selected restaurants. Suspension of certain licenses or
approvals due to failure to comply with applicable regulations or otherwise
could interrupt the operations of the affected restaurant. We and our
franchisees are also subject to Brazilian federal labor codes establishing
minimum wages and regulating overtime and working conditions.
Franchising regulations at the federal level were enacted in Brazil at the
end of 1994 and we believe we are in material compliance with such regulations.
Should any further laws applicable to franchise relationships and operations be
enacted, we are unable to predict their effect, if any, on our operations. We
believe that we are in material compliance with all other regulatory provisions
relating to our operations.
We are not currently subject to any governmental price regulation.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
Not applicable.
7
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this report, including without limitation,
statements relating to our plans, strategies, objectives, expectations,
intentions and adequacy of resources, are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Investors
are cautioned that such forward-looking statements involve risks and
uncertainties including without limitation the following:
Risks Relating to Operations
Operating Losses; Accumulated Deficit; Need for Additional Financing;
Qualified Report of Independent Auditors
For the year ended December 31, 2000, we incurred a net loss of R$3,351,000.
Our accumulated deficit at December 31, 2000 was R$40,154,000 and our working
capital deficit at such date was R$14,807,000. Our plans to expand our retail
operations may be significantly curtailed unless we obtain additional
financing. There can be no assurance as to the availability or, if available,
the terms of any such additional financing.
Independent Auditors' Report
The independent auditors' report upon our consolidated financial statements
comprising a portion of this annual report includes an explanatory paragraph
stating that such financial statements have been prepared assuming our
continuity as a going concern and also stating that we have suffered recurring
losses from operations and have a net capital deficiency from operations, which
raises substantial doubt about our ability to continue as a going concern.
Competition
The restaurant industry, and particularly the fast food segment, is highly
competitive with respect to price, service, food quality (including taste,
freshness, healthfulness and nutritional value) and location. Both we and our
franchisees face competition from a broad range of other restaurants and food
service establishments. These competitors include international, national and
local fast food chains. Our most significant competitor is McDonald's, whose
restaurants offer food products similar to those offered by Bob's restaurants,
at comparable prices. Several other international competitors are present in
the Brazilian fast food market, including Domino's Pizza, Dunkin' Donuts and
Pizza Hut. McDonald's, in particular, has vastly greater over-all financial and
other resources than we do.
The fast food industry is characterized by the frequent introduction of new
products, accompanied by substantial promotional campaigns. In recent years,
numerous companies in the fast food industry have introduced products
positioned to capitalize on growing consumer preference for food products that
are, or are perceived to be, healthful, nutritious, low in calories and low in
fat content. We are subject to increasing competition from companies whose
products or marketing strategies address these consumer preferences. There can
be no assurance that consumers will continue to regard our products as
sufficiently distinguishable from competitive products, that substantially
equivalent products will not be introduced by our other competitors or that we
will be able to compete successfully.
Certain Factors Affecting the Fast Food Restaurant Industry
In order to remain competitive, we are required to respond to changing
consumer preferences, tastes and eating habits, increases in food and labor
costs and national, regional and local economic conditions. Many companies
internationally have adopted "value pricing" strategies. Such strategies could
have the effect of drawing customers away from companies that do not engage in
discount pricing and could also negatively impact the operating margins of
competitors that do attempt to match competitors' price reductions. We could be
adversely affected by continuing or sustained price discounting in the fast
food industry.
8
Risks Attendant to Franchise Expansion
Our growth strategy is substantially dependent upon our ability to attract,
retain and contract with qualified franchisees and the ability of these
franchisees to open and operate their restaurants successfully. In addition,
our continued growth will depend in part on the ability of our existing and
future franchisees to obtain sufficient financing or investment capital to meet
their market development obligations. If we experience difficulty in
contracting with qualified franchisees, if franchisees are unable to meet their
development obligations or if franchisees are unable to operate their
restaurants profitably, our future operating results could be adversely
affected.
Government Regulation
Both we and our franchisees are subject to regulatory provisions relating to
the wholesomeness of food, sanitation, health, safety, fire, land use and
environmental standards. Suspension of certain licenses or approvals due to
failure to comply with applicable regulations or otherwise, could interrupt the
operations of the affected restaurant. Both we and our franchisees are also
subject to Brazilian federal labor codes establishing minimum wages and
regulating overtime and working conditions. Changes in such codes could result
in increased labor costs that could adversely impact future operating results.
A Brazilian federal franchising law, enacted in December 1994, requires a
franchisor to furnish a written offering statement to each perspective
franchisee prior to consummation of the sale of a franchise, containing the
franchisor's background, the duties and responsibilities of each of the
franchisor and franchisee, all fees payable by the franchisee to the franchisor
and information with respect to the operations and profitability of prior
franchisees of the franchisor. This offering statement is not required to be
reviewed by, or filed with any governmental agency. The franchise law also
delineates the respective legal rights and rights of action of the franchisor
and franchisee. Should any further laws applicable to franchise relationships
and operations be enacted, we are unable to predict their effect, if any, on
our operations.
Dependence on Key Personnel
We believe that our future success will depend in significant part upon the
continued service of certain key personnel, principally Peter van Voorst Vader,
our chief executive officer, and upon our ability to attract and retain highly
qualified managerial personnel. Competition for such personnel is intense, and
there can be no assurance that we can retain our existing key managerial
personnel or that we can attract and retain such employees in the future. Our
loss of key personnel or our inability to hire or retain qualified personnel
could have a material adverse effect upon our results of operations.
Risks Relating to Brazil
Change of Economic Environment
In March 1994 the Brazilian government initiated an economic stabilization
plan, known as the "Real Plan". Pursuant to the Real Plan, the government
. implemented a tax and public spending reform program designed to reduce
public expenditures and to improve the collection of tax revenues,
. announced the continuation of a privatization program, and
. introduced a new currency, known as the real, in July 1994 to replace the
cruzeiro real.
The Real Plan has resulted in substantial reduction in Brazil's rate of
inflation, which has declined from 2,489.11% per annum in 1993 to 9.95% per
annum in 2000.
Despite the success to date of the Real Plan in reducing inflation in
Brazil, the fiscal adjustment program necessary to reduce government
expenditures is not complete after the seventh year of the Real Plan. There can
9
be no assurance that this economic program will be any more successful than
previous programs in reducing inflation over the long term, especially in light
of
. the Brazilian congress' delay in approving certain reductions in
government expenditures and reform of Brazil's social security and
taxation systems, and
. the negative effects of the Asian, Russian and Latin American crises on
Brazil, which has caused a flight of foreign investment, the devaluation
of the real and new inflationary pressures on the Brazilian economy.
Accordingly, periods of substantial inflation may once again have
significant adverse effects on the Brazilian economy, on the value of the real
and on our financial condition, results of operations and prospects.
Currency Fluctuations
Fluctuations in the exchange rates between the Brazilian currency and the
U.S. Dollar will affect our operations. Brazil has historically experienced
generally unpredictable currency devaluation for many years. Although the
exchange rate between the real and the U.S. dollar had been relatively stable
from mid-July 1994 through late 1998, the spread of the Asian and Russian
economic difficulties to South America culminated in the devaluation of the
real in mid-January 1999. By the end of January 1999, the real dropped against
the dollar by approximately 64% compared to the end of December 1998. As of
December 31, 2000, the exchange rate was R$1.9554 to $1.00. Although some
recent economic measures has been taken by the Brazilian Federal Government in
an effort to stabilize the real, the potential for future devaluation or
volatility continues to persist.
Political and Constitutional Uncertainty
The Brazilian political scene has been marked by high levels of uncertainty
since the country returned to civilian rule in 1985 after 20 years of military
government. The death of a President-elect and the impeachment of another
President, as well as frequent turnovers at and immediately below the cabinet
level, particularly in the economic area, have contributed to the absence of a
coherent and consistent policy to confront Brazil's economic problems. While
the free market and liberalization measures of recent years have enjoyed broad
political and public support, some important political factions remain opposed
to significant elements of the reform program, including, in particular, the
Workers' Party, headed by Mr. Luiz Inacio Lula da Silva, the runner-up in each
of the 1998, 1994 and 1989 Presidential elections. Mr. Fernando Henrique
Cardoso, who was re-elected to a second four-year term as President in October
1998, is expected to continue to pursue the adoption of free market and
economic liberalization measures similar to those undertaken in recent years.
There can be no assurance that such measures will be adopted or, if adopted,
that they will be successful. Failure to adopt economic reform measures could
adversely impact Brazil's economy which in turn could adversely affect our
revenues and results of operations.
Controls on Foreign Investments
Brazil generally requires governmental approval for the repatriation of
capital and income by foreign investors. Although such approvals are usually
given, there can be no assurance that such approvals will be forthcoming in the
future. In addition, the government may impose temporary restrictions on
foreign capital remittances abroad, if there is a deterioration in the balance
of payments or for other reasons. We could be adversely affected by delays in,
or a refusal to grant, any required governmental approval for repatriation of
capital from Venbo. There can be no assurance that additional or different
restrictions or adverse policies applicable to Venbo will not be imposed in the
future, or as to the duration or impact of any such restrictions or policies.
10
ITEM 2. PROPERTIES
All of our restaurants currently in operation, excluding kiosks and movable
trailers, have been built to our specifications as to exterior style and
interior decor, are either in a strip of stores on a neighborhood street or in
mall food court outlets, with some free-standing, one-story buildings, and are
substantially uniform in design and appearance. They are constructed on sites
ranging from approximately 1,100 to 7,500 square feet, free-standing
restaurants. Most are located in downtown areas or shopping malls, are of a
store-front type and vary according to available locations but generally retain
standard signage and interior decor.
We own the land and building for 9 restaurants, 5 of which are presently
leased to franchisees. In addition, we have leases covering land and building
for 4 restaurants, and we also have leases for 55 restaurants. Our land and
building leases are generally written for terms of five years with one or more
five-year renewal options. In certain instances, we have the option to purchase
the underlying real estate. Certain leases require the payment of additional
rent equal to the greater of a percentage (ranging from 1% to 10%) of monthly
sales or specified amounts.
Our corporate headquarters are located in premises at Avenida Brasil, 6431-
Bonsucesso, CEP 21040-360, Rio de Janeiro, Brazil, which Venbo acquired in
1995.
ITEM 3. LEGAL PROCEEDINGS
We refer you to Note 11 of our consolidated financial statements for
information relating to certain litigation we have instituted against the
Brazilian Federal and certain state governments as well as to a tax amnesty
program that we applied to join during 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our security holders during the
fourth quarter of the year ended December 31, 2000.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) Our Common Stock and Class A Redeemable Common Stock Purchase Warrants
are each quoted on the Nasdaq SmallCap Market under the respective symbols
"BOBS" and "BOBSW." Our Class B Redeemable Common Stock Purchase Warrants are
quoted on Nasdaq's Electronic Bulletin Board under the symbol "BOBSZ." Prior to
February 4, 2000, these warrants were also quoted on the Nasdaq SmallCap
Market. The following table sets forth the range of the high and low bid
quotations on the Nasdaq SmallCap Market for the periods indicated:
Common Stock Class A Warrants Class B Warrants
--------------- ----------------- ----------------
Three Months Ended High Low High Low High Low
- ------------------ ------- ------- -------- -------- -------- -------
March 31, 2000............... $2 9/16 $ 1 3/8 $ 3/32 $ 1/32 $ 1/32 $ 1/32
June 30, 2000................ $2 3/16 $ 1 5/8 $ 1/32 $ 1/32 $ 1/32 $ 1/32
September 30, 2000........... $3 $ 1 1/2 $ 1/32 $ 1/32 $ 1/64 $ 1/64
December 31, 2000............ $2 1/16 $ 1 5/8 $ 1/64 $ 1/64 $ N/Q $ N/Q
March 31, 1999............... $ 3 1/2 $ 2 1/4 $ 1/32 $ 1/32 $ 1/16 $ 1/32
June 30, 1999................ $ 4 3/4 $ 2 1/4 $ 1/32 $ 1/32 $ 1/8 $ 1/32
September 30, 1999........... $ 3 1/2 $ 1 7/8 $ 1/8 $ 1/32 $ 3/16 $ 1/32
December 31, 1999............ $ 2 3/8 $1 7/16 $ 1/8 $ 1/32 $ 17/32 $ 1/32
The above quotations represent prices between dealers and do not include
retail markup, markdown or commission. They do not necessarily represent actual
transactions.
(b) As of March 29, 2001, there were 72, 22 and 22 recordholders of our
Common Stock, Class A Warrants and Class B Warrants, respectively.
(c) We have not declared any cash dividends on our Common Stock and we have
no intention to pay cash dividends in the foreseeable future.
12
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from our audited
consolidated financial statements subsequent to our acquisition of Venbo. All
amounts are stated in constant R$ in accordance with U.S. GAAP, unless
otherwise noted.
The following data should be read in conjunction with our consolidated
financial statements and related notes, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and the other financial
information included elsewhere in this annual report.
Statement of Operations Data:
(in thousands)
BFFC Venbo
BFFC March 19, 1996 January 1, 1996
Year Ended December 31, to to
-------------------------------------------------- December 31, March 18, 1996
2000 1999 1998 1997 1996 (Predecessor)
----------- ----------- ----------- ----------- -------------- ---------------
NET OPERATING REVENUES:
Restaurant Sales R$ 63,775 R$ 56,370 R$ 63,666 R$ 73,008 R$ 56,381 R$15,001
Franchise Income........ 3,134 2,343 1,427 1,475 651 161
Other Income............ 4,884 3,667 2,699 1,705 1,253 113
----------- ----------- ----------- ----------- ----------- --------
TOTAL NET OPERATING
REVENUES............... 71,793 62,380 67,792 76,188 58,285 15,275
----------- ----------- ----------- ----------- ----------- --------
COST AND EXPENSES:
Cost of Restaurant
Sales................ 24,560 21,715 23,453 25,861 20,479 6,430
Restaurant Payroll and
other employees
benefits............. 12,329 12,660 15,389 17,490 13,412 3,231
Restaurant Occupancy
and Other Expenses... 6,963 6,755 7,316 7,532 4,645 1,085
Depreciation and
Amortization......... 3,610 3,489 3,738 4,139 2,650 675
Other Operating
Expenses............. 11,951 8,534 9,978 10,751 8,632 3,111
Selling Expenses...... 5,759 5,127 3,700 4,719 3,599 880
General and Admin.
Expenses............. 6,131 6,518 10,161 10,745 10,128 3,609
Impairment of
Goodwill............. -- 5,076 -- -- --
----------- ----------- ----------- ----------- ----------- --------
Total Cost and
Expenses........... 71,303 64,798 78,811 81,237 63,545 19,021
----------- ----------- ----------- ----------- ----------- --------
Income (Loss) From
Operations............. 490 (2,418) (11,019) (5,049) (5,260) (3,746)
Interest Income......... 1 16 109 45 111 2,196
Interest Expenses....... (3,418) (5,046) (3,151) (1,488) (139) (989)
Foreign Exchange
(loss)gain............. (424) (3,453) (288) (23) 4 273
----------- ----------- ----------- ----------- ----------- --------
(Loss) before benefit
from income taxes...... (3,351) (10,901) (14,349) (6,515) (5,284) (2,266)
Benefit from income
taxes.................. -- -- -- -- 46 --
----------- ----------- ----------- ----------- ----------- --------
Net (Loss) R$ (3,351) R$ (10,901) R$ (14,349) R$ (6,515) R$ (5,238) R$(2,266)
----------- ----------- ----------- ----------- ----------- --------
Basic Net (Loss) per
common share R$ (1.04) R$ (3.37) R$ (4.53) R$ (2.30) R$ (2.72)
----------- ----------- ----------- ----------- ----------- --------
Weighted Average Common
Share Outstanding
(basic)................ 3,235,290 3,235,290 3,169,748 2,831,607 1,924,026
=========== =========== =========== =========== =========== ========
At December 31,
-------------------------------
2000 1999 1998
--------- --------- ---------
Balance Sheet Data:
Working capital (deficit)..................... R$(14,807) R$(11,560) R$(10,189)
Total Assets.................................. R$ 41,694 R$ 39,410 R$ 41,632
Retained earnings (deficit)................... R$(40,154) R$(36,803) R$(25,902)
Total Shareholders' equity.................... R$ 5,538 R$ 8,963 R$ 19,997
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is based on and should be read together with our
consolidated financial statements and notes thereto appearing elsewhere in this
report. All amounts referred to herein that refer directly to our financial
statement balances or are otherwise drawn directly from our consolidated
financial statements or notes thereto are stated in constant R$ in accordance
with U.S. GAAP.
Background
Brazilian Political Environment
The Brazilian political environment has been marked by high levels of
uncertainty since the country returned to civilian rule in 1985 after 20 years
of military government. The death of a president in 1985 and the resignation of
another president in the midst of impeachment proceedings in 1992, as well as
rapid turnover at and immediately below the cabinet level, have adversely
affected the implementation of consistent economic and monetary policies,
including consistent policies in the areas of government-owned enterprises and
telecommunications.
Measures by the government intended to influence the course of Brazil's
economy (e.g. actions to control inflation, interest rates or consumption) have
been frequent and occasionally drastic. Changes in policy, social instability
or other political or economic developments, and the government's responses to
such developments, may have a material adverse effect on our financial
condition and results of operations.
Mr. Fernando Henrique Cardoso was elected President of Brazil in October
1994 and took office in January 1995 for a single four-year term. He has
generally sought to continue the economic stabilization and liberalization
policies he developed as Finance Minister from May 1993 through April 1994
under President Itamar Franco. President Cardoso is the leader of a coalition
of political parties that represents a majority of the Federal Congress.
Brazil's constitution was amended in 1998 to permit President Cardoso to stand
for re-election to a second four-year term. Although President Cardoso's
policies appear to have broad political support and he was re-elected in
October 1998 for another four year term, his policies have suffered major
setbacks, including the failure of Brazil's congress to pass social security
reform and various austerity measures on government spending. There can be no
assurance that President Cardoso's policies will not be revised in whole or in
part at some future date. Furthermore, some important groups remain opposed to
significant elements of his program, and the implementation of any policies of
economic stabilization or liberalization is subject to significant compromises
and accommodations.
Economic Environment
Our financial condition and results of operations are dependent on general
economic conditions in Brazil, and in particular on
. economic growth and its impact on demand for fast food services, and
. exchange rates between Brazilian and foreign currencies.
. Historically, the Brazilian economy has been extremely volatile, and the
Government has implemented a succession of programs intended to stabilize
the economy and provide a basis for sustainable, non-inflationary growth.
We have been affected by such programs in a variety of ways, particularly
when such programs have resulted in contractions in demand or very high
real interest rates.
Beginning in December 1993, the Government introduced the Real Plan, an
economic stabilization program intended to reduce the rate of inflation by
reducing certain public expenditures, collecting liabilities owed to the
Government, increasing tax revenues, continuing to privatize government-owned
entities and introducing a new currency. The real was introduced as Brazil's
currency in July 1994, based on a monetary correction index, the URV,
introduced earlier in the year. Since taking office in January 1995, President
Cardoso has continued to implement the Real Plan. Under the Real Plan, the rate
of inflation has decreased
14
significantly, and the rate of growth of real gross domestic product has
increased substantially. Since mid 1997, Brazil has faced continuing deficits
in its payment balance and, simultaneously, the market began to doubt the
government's capability to reduce public spending. Based on these and other
reasons, including massive outflows of foreign capital in the first two weeks
of January 1999, Brazil devalued its currency. Brazil and the IMF have recently
reached an agreement whereby Brazil would receive, under certain conditions
(such as minimum level of country reserves and reversal of public spending
deficit), a $40 billion bail-out package. The long-term effects upon Brazil in
general and upon us in particular of the Real Plan and the devaluation and
success of the bail-out package, are uncertain.
Effects of Inflation and Devaluation
Brazil has experienced extremely high and generally unpredictable rates of
inflation and of devaluation of Brazilian currency for many years.
Since the introduction of the Real Plan in July 1994, the rate of inflation
has decreased considerably. The annual rate of inflation during 2000 was 9.95%
as compared to 20.1% and 1.8% in 1999 and 1998, respectively. Inflation in 2001
is expected to be high with experts predicting an annual rate of inflation of
between 5% and 7% due to the lingering effects of Brazil's 1998-1999 economic
recession, the size of the public deficit and the difficulty to sustain
external reserves and the international increase in the price of oil.
The following table sets forth Brazilian inflation, as measured by the
Indice Geral de Precos-Mercado, and the devaluation of the Brazilian currency
against the U.S. dollar for the periods shown.
Year Ended December
31,(1)
----------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Inflation......................................... 9.9% 20.1% 1.8% 7.7% 9.2%
Devaluation....................................... 9.3% 48.0% 8.3% 6.7% 6.9%
- --------
(1) Annualized rates
15
Results of Operations
Twelve Twelve Twelve
Months Ended % Months Ended % Months Ended %
December 31, Restaurant December 31, Restaurant December 31, Restaurant
2000 Sales 1999 Sales 1998 Sales
------------ ---------- ------------ ---------- ------------ ----------
(in thousands)
Net Operating Revenue
--Restaurant Sales.... R$63,775 100.0 R$ 56,370 100.0 R$ 63,666 100.0
--Franchise Income.... 3,134 4.9 2,343 4.2 1,427 2.2
--Other Income........ 4,884 7.7 3,667 6.5 2,699 4.2
-------- -------- --------- -------- --------- --------
Total Net Operating
Revenues........... 71,793 112.6 62,380 110.7 67,792 106.5
-------- -------- --------- -------- --------- --------
Costs and Expenses:
--Cost of Restaurant
Sales............... 24,560 38.5 21,715 38.5 23,453 36.8
--Restaurant Payroll
and Other Employees
Benefits............ 12,329 19.3 12,660 22.5 15,389 24.2
--Restaurant Occupancy
and Other Expenses.. 6,963 10.9 6,755 12.0 7,316 11.5
--Depreciation and
Amortization........ 3,610 5.7 3,489 6.2 3,738 5.9
--Other Operating
Expenses............ 11,951 18.7 8,534 15.1 9,978 15.7
--Selling Expenses.... 5,759 9.0 5,127 9.1 3,700 5.8
--General and
Administrative
Expenses............ 6,131 9.6 6,518 11.6 10,161 16.0
--Impairment of
Goodwill............ -- -- -- 5,076 8.0
-------- -------- --------- -------- --------- --------
Total Cost and
Expenses........... 71,303 111.8 64,798 115.0 78,811 123.8
-------- -------- --------- -------- --------- --------
Income (Loss) From
Operations............. 490 0.8 (2,418) (4.3) (11,019) (17.3)
--Interest Expense-Net (3,417) (5.4) (5,030) (8.9) (3,042) (4.8)
--Foreign Exchange Loss (424) (0.6) (3,453) (6.1) (288) (0.4)
-------- -------- --------- -------- --------- --------
(Loss) Before Benefit
from Income Taxes...... (3,351) (5.3) (10,901) (19.3) (14,349) (22.5)
Benefit from Income
Taxes.................. -- -- --
-------- -------- --------- -------- --------- --------
Net (Loss).............. R$(3,351) (5.3) R$(10,901) (19.3) R$(14,349) (22.5)
======== ======== ========= ======== ========= ========
Restaurant Sales
Net restaurant sales for our owned stores were R$63,775,000, R$56,370,000
and R$63,666,000 for the years ended December 31, 2000, 1999 and 1998,
respectively. Same store sales on an annualized basis for 2000 increased 9%
when compared to 1999.
In addition to the macroeconomic factors described elsewhere in this report,
the approximately 13.1% increase in 2000 revenues is attributable to
. our constant sales initiatives,
. expansion of our product offerings,
. a 10% increase in our sales prices,
. our introduction of a telephonic order delivery program, and
. the continued expansion of our owned and operated points of sale.
16
The decrease in 1999 sales was attributable to the decrease in the number of
owned and operated retail outlets from 68 at December 31, 1998 to 62 at
December 31, 1999, reflecting implementation of our strategy to limit our
direct operations to highly profitable outlets, and to focus our future growth
on developing and expanding our franchise network. Such decrease was partially
offset by an overall 7.9% increase in selling prices, introduction of new lines
of bacon and chicken products, an improved incentive program for store
personnel and the improvement, particularly in the fourth quarter of 1999, of
the Brazilian economy.
Franchise Income
Franchise income was R$3,134,000, R$2,343,000 and R$1,427,000 for the years
ended December 31, 2000, 1999 and 1998, respectively. The increases of 33.8%,
64.2% and 31.5% in 2000, 1999 and 1998, respectively, are primarily due to the
expansion of franchised locations. At December 31, 2000, 1999 and 1998, we had
153, 124 and 92 franchised points of sale, respectively. The increase in the
number of franchisees resulted in increases in initial fees charged to new
franchisees and royalty fees.
Through the period from January 1, 1998 to December 31 2000, we sold 20 of
our restaurants to franchisees (1 in 2000, 4 in 1999 and 15 in 1998). These
stores had either low profitability or, in some cases, operating losses. Our
historical experience has shown that franchisee administration can enhance the
profitability of such stores, primarily as a result of
. lower taxation (tax incentives from Federal and state governments to
small companies),
. better knowledge of specific markets and their local customs, and
. lower operating expenses.
In some situations, we have provided incentives in the form of reduced
royalties to franchisees for a period of time.
Other Income
Other income was R$4,884,000, R$3,667,000 and R$2,699,000 for the years
ended December 31, 2000, 1999 and 1998, respectively, and is comprised of
income derived from suppliers pursuant to license as well as exclusivity
agreements, from marketing fees and initial fees paid by new franchisees. The
increase throughout these years is primarily attributable to the increase in
the number of franchised outlets, discussed above, which was partially offset
by termination of a joint publicity agreement in April 1999.
Cost of Restaurant Sales
Cost of restaurant sales expressed as a percentage of restaurant sales were
38.5%, 38.5% and 36.8% for the years ended December 31, 2000, 1999 and 1998,
respectively. The impact on our gross margins of increases during 2000 of our
cost of meat and chicken products was offset by sales price increases and
reductions in the cost of some food and packaging products.
The 1999 increase is primarily attributable to an approximately 58% increase
in the cost of imported food products and paper goods following the January
1999 Brazilian currency devaluation and from a 1% sales tax increase.
Restaurant Payroll and Other Employee Benefits
Restaurant payroll and other employee benefits expressed as a percentage of
restaurant sales were 19.3%, 22.5% and 24.2% for the years ended December 31,
2000, 1999 and 1998, respectively.
The decrease in 2000 in primarily attributable to changes in the status of
our retail store personnel who, prior to the second quarter of 1999, were hired
at employee rather than trainee rates. Since the second quarter
17
of 1999, all new hires of store personnel have been at trainee rates, resulting
in lower employment charges and fringe benefit costs, while also attracting
younger and more motivated personnel.
The decrease in 1999 is mainly due to implementation of lower night shift
wages, changes in the scope of medical care and transportation benefits for new
employees and reduced daily hours of employment for store personnel.
Increases in salaries mandated by union-driven agreements (3% in each of
2000 and 1999 and 4% in 1998 for Rio de Janeiro employees and 3% in each of
2000, 1999 and 1998 for Sao Paulo employees) partially offset these percentage
decreases.
Restaurant Occupancy Costs and Other Expenses
Restaurant occupancy costs and other expenses expressed as a percentage of
restaurant sales were approximately 10.9%, 12.0% and 11.5% for the years ended
December 31, 2000, 1999 and 1998. The 2000 decrease is mainly due to our
negotiation of temporary lease cost reductions, as well as our initiation of
legal action with respect to a specific lease, which resulted in a significant
and permanent reduction in its cost. The reduction was partially offset by
increases in the portion of minimum rent which is linked to the Brazilian
inflation rate (9.95%, 20.1% and 1.78% per annum in 2000, 1999 and 1998,
respectively).
Depreciation and Amortization
Depreciation and Amortization expense expressed as a percentage of
restaurant sales was approximately 5.7%, 6.2% and 5.9% for the years ended
December 31, 2000, 1999 and 1998, respectively. Depreciation and amortization
has remained relatively constant from year to year.
Other Operating Expenses
Other operating expenses expressed as a percentage of restaurant sales were
approximately 18.7%, 15.1% and 15.7% for the years ended December 31, 2000,
1999 and 1998. The increase from 2000 to 1999 was mainly attributable to
R$590,000 of professional fees incurred in connection with tax litigation and,
to a much lesser extent, lease cost reduction efforts, R$491,000 in increased
fees for electricity, R$1,199,000 in additional personnel costs attributable to
our initiation of a partially outsourced telephonic order delivery system,
R$944,000 in additional contractual costs attendant to our outsourcing of head
office administrative personnel, and R$222,000 of upward inflationary
adjustments to contracts governing our outsourced repair and maintenance
services.
Selling Expenses
Selling expenses expressed as a percentage of restaurant sales were 9.0%,
9.1% and 5.8% for the years ended December 31, 2000, 1999 and 1998,
respectively. The 1999 increase is due to the growth in the number of
franchised stores.
General and Administrative Expenses
General and administrative expenses expressed as a percentage of restaurant
sales were 9.6%, 11.6% and 16.0% for the years ended December 31, 2000, 1999
and 1998, respectively. The year to year decreases are mainly attributable to
. headcount reductions
. restructuring of middle management, including the outsourcing of some
departments in order to reduce administrative charges and
. the optimization of some functions and positions
18
Impairment of Goodwill
In the fourth quarter of 1998, we determined, based upon our evaluation of
the undiscounted cash flows that an impairment of our goodwill existed and took
a charge of R$5,076,000.
Interest Income Expense and Foreign Exchange Loss
Interest income and expense expressed as a percentage of restaurant sales
was approximately (6.0%), (15.0%) and (5.2%) for the years ended December 31,
2000, 1999 and 1998, respectively. The 1999 increase is primarily due to the
approximately 48% Brazilian currency devaluation and to an increase in our
indebtedness level.
Liquidity And Capital Resources
Since March 19, 1996, we have funded our operating losses of R$40,154,000
and made acquisitions of businesses and capital improvements (including store
remodeling) by using cash remaining at the closing of our acquisition of Venbo,
by borrowing funds from various sources and private placements of securities.
As of December 31, 2000, we had cash on hand of R$1,857,000 and a working
capital deficiency of R$14,807,000.
Our capital requirements are primarily for expansion of our retail
operations. Currently, 4 of our stores are in owned facilities and all the
others are in leased facilities. For the year ended December 31, 2000, our
earnings before interest, taxes, depreciation and amortization (EBITDA) was
R$4,100,000. During the same period, our average cost to open a store
approximated R$300,000 to R$500,000, including leasehold improvements,
equipment and beginning inventory, as well as expenses for store design, site
selection, lease negotiation, construction supervision and obtaining permits.
We currently estimate that our capital expenditures for fiscal 2000, which will
be used to maintain our restaurant network, will approximate R$1,500,000. We
anticipate that our primary use of our cash resources during 2001 will be to
service our debt obligations. During 2001, we intend to focus our efforts on
expanding both the number of our franchisees and our franchised outlets,
neither of which are expected to involve significant capital expenditures by
us.
In the year ended December 31, 2000, we had net cash provided by operating
activities of R$4,495,000 and had net cash used in investing activities of
R$4,062,000. The primary use of cash for investing activities was for capital
expenditures related to our retail store expansion.
We plan to address our immediate and future cash flow needs to include
focusing on a number of areas including:
. the sale of certain of our owned and operated stores,
. reduction of expenses, including headcount reductions,
. the expansion of our franchisee base, which may be expected to generate
additional cash flows from royalties and franchise fees without
significant capital expenditure, and
. the introduction of new programs and menu expansions to meet consumer
wishes
In order to act on these plans and sustain current operations, we are
dependent upon the continued forbearance of our creditors, as well as upon
additional financing.
There can be no assurance that our plans will be realized, or that
additional financing will be available to us when needed, or at terms that are
desirable. Furthermore, there can be no assurance that we will locate suitable
new franchisees, or desirable locations for new franchisees to open stores. Our
ability to further reduce expenses and head count is directly impacted by our
need to maintain an infrastructure to support our current and future changing
of locations. Our ability to re-market our owned stores to franchisees, and to
generate cash flows from such activities, is impacted by the ability to locate
suitable buyers with the interest and capital to complete such transactions,
and the time to complete such sales. Additionally, our ability to achieve our
plans
19
is further impacted by the instability of the economic environment in Brazil,
which has a direct impact on the desire and ability of consumers to visit fast
food outlets. We are also dependent upon the continued employment of key
personnel. These factors, among others, raise substantial doubt about our
ability to continue as a going concern.
Quantitative and Qualitative Information about Market Risk
We do not engage in trading market risk sensitive instruments and do not
purchase hedging instruments or "other than trading" instruments that are
likely to expose us to market risk, whether interest rate, foreign currency
exchange, commodity price or equity price risk. We have issued no debt
instruments, entered into no forward or future contracts, purchased no options
and entered into no swaps. Our primary market risk exposures are those of
interest rate fluctuations and possible devaluations of the Brazilian currency.
A change in Brazilian interest rates would affect the rate at which we could
borrow funds under our several credit facilities with Brazilian banks and
financial institutions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to pp. F-1 through F-19 comprising a portion of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 10 is hereby incorporated by reference from our definitive Proxy
Statement to be filed within 120 days of December 31, 2000.
ITEM 11. EXECUTIVE COMPENSATION
Item 11 is hereby incorporated by reference from our definitive Proxy
Statement to be filed within 120 days of December 31, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 12 is hereby incorporated by reference from our definitive Proxy
Statement to be filed within 120 days of December 31, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13 is hereby incorporated by reference from our definitive Proxy
Statement to be filed within 120 days of December 31, 2000.
21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules:
(i) Financial Statements
Reports of Independent Public Accountants
Consolidated Balance Sheets--December 31, 2000 and December 31, 1999
Consolidated Statements of Operations for the years ended December
31, 2000, 1999 and 1998.
Consolidated Statements of Comprehensive Loss for the years ended
December 31, 2000, 1999 and 1998.
Consolidated Statement of Changes in Shareholders' Equity for the
years ended December 31, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows for the year ended December 31,
2000, 1999 and 1998.
Notes to Consolidated Financial Statements
(ii) Financial Statement Schedules
All financial statement schedules are omitted because the conditions
requiring their filing do not exist or the information required thereby
is included in the financial statements filed, including the notes
thereto.
(b) Reports on Form 8-K
None.
(c) Exhibits
3.1 Certificate of Incorporation of the Registrant, as amended(1)
3.2 By-laws of the Registrant(2)
*10.1 Amended and Restated 1992 Stock Option Plan(2)
21.1 Subsidiaries of Registrant(3)
- --------
* Denotes a compensatory plan.
(1) Denotes document filed as an exhibit to Registrant's Registration
Statement on Form S-1 (File No. 333-3754) and incorporated herein by
reference.
(2) Denotes document filed as an exhibit to Registrant's Registration
Statement on Form S-1 (File No. 33-71368) and incorporated herein by
reference.
(3) Denotes document filed as an exhibit to Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Rio
de Janeiro, Country of Brazil, on the 29th day of March, 2001.
Brazil Fast Food Corp.
/s/ Peter van Voorst Vader
By: _________________________________
Peter van Voorst Vader
President and Chief Executive
Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Peter van Voorst Vader President and Chief March 29, 2001
______________________________________ Executive Officer
Peter van Voorst Vader (Principal Executive
Officer
/s/ Carlos Henrique Rego Vice President--Finance March 29, 2001
______________________________________ (Principal Financial
Carlos Henrique Rego Officer and Accounting
Officer)
/s/ Omar Carneiro da Cunha Chairman of the Board March 29, 2001
______________________________________
Omar Carneiro da Cunha
/s/ Lawrence Burstein Director March 29, 2001
______________________________________
Lawrence Burstein
/s/ Jose Ricardo Bosquet Bomeny Director March 29, 2001
______________________________________
Jose Ricardo Bosquet Bomeny
23
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Page
-------------
Report of Independent Public Accountants.......................... F-2
Financial Statements:
Consolidated Balance Sheets..................................... F-3
Consolidated Statements of Operations........................... F-4
Consolidated Statements of Comprehensive Loss................... F-5
Consolidated Statements of Changes in Shareholders' Equity...... F-6
Consolidated Statements of Cash Flows........................... F-7
Notes to Consolidated Financial Statements...................... F-8 thru F-19
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Brazil Fast Food Corp. and Subsidiary:
We have audited the accompanying consolidated balance sheets of Brazil Fast
Food Corp. and subsidiary (a Delaware corporation) as of December 31, 2000 and
1999, and the related consolidated statements of operations, comprehensive
loss, changes in shareholders' equity and cash flows for the years ended
December 31, 2000, 1999 and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Brazil Fast Food Corp. and
subsidiary as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for the years ended December 31, 2000, 1999 and
1998, in conformity with accounting principles generally accepted in the United
States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, to the
financial statements, the Company has suffered recurring losses from operations
and has a negative working capital that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Arthur Andersen S/C
Rio de Janeiro, Brazil
March 15, 2001
F-2
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands of Brazilian Reais, except share amounts)
December 31,
------------------
2000 1999
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.. R$ 1,857 R$ 1,154
Accounts receivable, net
allowance for doubtful
accounts of R$988
and R$873, respectively... 3,785 2,515
Inventories................ 1,340 728
Prepaid expenses and other
current assets............ 816 639
-------- --------
TOTAL CURRENT ASSETS..... 7,798 5,036
-------- --------
PROPERTY AND EQUIPMENT, NET.. 21,722 20,879
DEFERRED CHARGES, NET........ 10,301 11,083
OTHER RECEIVABLES AND OTHER
ASSETS...................... 1,873 2,412
-------- --------
TOTAL ASSETS............. R$41,694 R$39,410
======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES:
Notes payable.............. R$ 9,090 R$ 7,376
Accounts payable........... 3,406 2,298
Accrued expenses........... 2,472 1,836
Payroll and related
accruals ................. 2,473 1,760
Taxes, other than income
taxes..................... 4,224 1,829
Deferred income............ 370 821
Other current liabilities.. 570 676
-------- --------
TOTAL CURRENT
LIABILITIES............. 22,605 16,596
NOTES PAYABLE, less current
portion..................... 1,376 2,746
DEFERRED INCOME, less current
portion..................... 2,468 1,721
TAXES IN LITIGATION.......... 9,306 9,169
OTHER LIABILITIES............ 401 215
-------- --------
TOTAL LIABILITIES........ 36,156 30,447
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par
value, 5,000 shares
authorized; no shares
issued.................... -- --
Common stock, $.0001 par
value, 40,000,000 shares
authorized; 3,235,290
shares issued and
outstanding............... 1 1
Additional paid-in
capital................... 46,226 46,226
Deficit.................... (40,154) (36,803)
Accumulated comprehensive
loss...................... (535) (461)
-------- --------
TOTAL SHAREHOLDERS'
EQUITY.................. 5,538 8,963
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.... R$41,694 R$39,410
======== ========
The accompanying notes are integral part of the consolidated financial
statements.
F-3
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of Brazilian Reais, except share amounts)
Year Ended December 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
NET OPERATING REVENUES:
Restaurant sales................... R$ 63,775 R$ 56,370 R$ 63,666
Franchise income................... 3,134 2,343 1,427
Other income....................... 4,884 3,667 2,699
------------ ------------ ------------
TOTAL NET OPERATING REVENUES..... 71,793 62,380 67,792
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of restaurant sales........... 24,560 21,715 23,453
Restaurant payroll and other
employee benefits................. 12,329 12,660 15,389
Restaurant occupancy and other
expenses.......................... 6,963 6,755 7,316
Depreciation and amortization...... 3,610 3,489 3,738
Other operating expenses........... 11,951 8,534 9,978
Selling expenses................... 5,759 5,127 3,700
General and administrative
expenses.......................... 6,131 6,518 10,161
Impairment of goodwill............. -- -- 5,076
------------ ------------ ------------
TOTAL COSTS AND EXPENSES......... 71,303 64,798 78,811
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS........ 490 (2,418) (11,019)
INTEREST INCOME...................... 1 16 109
INTEREST (EXPENSE)................... (3,418) (5,046) (3,151)
FOREIGN EXCHANGE (LOSS).............. (424) (3,453) (288)
------------ ------------ ------------
NET (LOSS)........................... R$ (3,351) R$ (10,901) R$ (14,349)
============ ============ ============
NET (LOSS) PER COMMON SHARE
BASIC AND DILUTED.................. R$ (1.04) R$ (3.37) R$ (4.53)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
BASIC AND DILUTED.................. 3,235,290 3,235,290 3,169,748
============ ============ ============
The accompanying notes are integral part of the consolidated financial
statements.
F-4
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands of Brazilian Reais)
Year Ended December 31,
---------------------------------
2000 1999 1998
--------- ---------- ----------
Net Loss...................................... R$ (3,351) R$ (10,901) R$ (14,349)
Other comprehensive (loss):...................
Foreign currency translation adjustment..... (74) (133) (83)
--------- ---------- ----------
Comprehensive Loss............................ R$ (3,425) R$ (11,034) R$ (14,432)
========= ========== ==========
The accompanying notes are an integral part of the consollidated financial
statements.
F-5
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of Brazilian Reais)
Common Stock Additional Accumulated
------------------- Paid-In Comprehensive
Shares Par Value Capital (Deficit) Loss Total
--------- --------- ---------- ---------- ------------- ---------
Balance, January 1,
1998................... 3,076,121 R$ 1 R$ 44,699 R$ (11,553) R$ (245) R$ 32,902
Issuance of shares for
private placement...... 157,631 -- 1,506 -- -- 1,506
Exercise of options..... 1,538 -- 21 -- -- 21
Net loss................ -- -- -- (14,349) -- (14,349)
Cumulative translation
adjustment............. -- -- -- -- (83) (83)
--------- ---- --------- ---------- ------- ---------
Balance, December 31,
1998................... 3,235,290 1 46,226 (25,902) (328) 19,997
Net loss................ -- -- -- (10,901) -- (10,901)
Cumulative translation
adjustment............. -- -- -- -- (133) (133)
--------- ---- --------- ---------- ------- ---------
Balance, December 31,
1999................... 3,235,290 1 46,226 (36,803) (461) 8,963
Net loss................ -- -- -- (3,351) -- (3,351)
Cumulative translation
adjustment............. -- -- -- -- (74) (74)
--------- ---- --------- ---------- ------- ---------
Balance, December 31,
2000................... 3,235,290 R$ 1 R$ 46,226 R$ (40,154) R$ (535) R$ 5,538
========= ==== ========= ========== ======= =========
The accompanying notes are integral part of the consolidated financial
statements.
F-6
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of Brazilian Reais)
Year Ended December 31,
---------------------------------
2000 1999 1998
--------- ---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss)................................. R$ (3,351) R$ (10,901) R$ (14,349)
Adjustments to reconcile net (loss) to cash
provided by (used in) operating
activities:...............................
Loss from impairment of goodwill......... -- -- 5,076
Depreciation and amortization............ 3,610 3,489 3,738
Loss on disposals........................ 391 805 653
Increase (decrease) in other
liabilities............................. (106) 946 --
Changes in assets and liabilities:
(Increase) decrease in:...................
Accounts receivable...................... (1,270) (369) 1,051
Inventories.............................. (612) (68) 115
Prepaid expenses and other
assets.................................. 362 (94) 243
Other receivables........................ -- 303 (2,715)
(Decrease) increase in:
Accounts payable and accrued expenses.... 1,744 339 (634)
Payroll and related accruals............. 713 (637) 529
Taxes other than income taxes............ 2,395 (526) 1,363
Other liabilities........................ 186 654 --
Deferred income.......................... 296 (408) (846)
Tax litigations.......................... 137 8,081 --
--------- ---------- ----------
CASH FLOWS PROVIDED BY (USED IN)
OPERATING ACTIVITIES.................. 4,495 1,614 (5,776)
--------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to property and equipment........ (4,062) (1,540) (3,905)
Additions to deferred charges.............. -- -- (161)
Proceeds from sale of property and
equipment................................. -- 33 790
Proceeds from sale of other assets......... -- -- 2,131
--------- ---------- ----------
CASH FLOWS (USED IN) INVESTING
ACTIVITIES............................ (4,062) (1,507) (1,145)
--------- ---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of shares of common
stock..................................... -- -- 1,528
Proceeds from issuance of notes payable.... 344 -- 9,694
Net (repayments) advance of notes payable.. -- 363 (4,923)
--------- ---------- ----------
CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES............................ 344 363 6,299
--------- ---------- ----------
EFFECT OF FOREIGN EXCHANGE RATE............ (74) (133) (83)
--------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... 703 337 (705)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR...................................... 1,154 817 1,522
--------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR... R$ 1,857 R$ 1,154 R$ 817
========= ========== ==========
The accompanying notes are integral part of the consolidated financial
statements.
F-7
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share amounts)
1. BUSINESS AND OPERATIONS
Brazil Fast Food Corp. (the "Company") was incorporated in the State of
Delaware on September 16, 1992, to serve as a vehicle to effect a merger,
exchange of capital stock, asset acquisition or other similar business
combination with an operating business.
On March 19, 1996 (the "Closing"), the Company acquired all of the
outstanding quotas (shares of capital stock) of Venbo from Bob's Industria e
Comercio Ltda. ("BIEC") and Arnaldo Bisoni ("Bisoni" and with BIEC,
collectively, the "Sellers") for $19,200 (the "Purchase Price") plus related
acquisition costs, of which $16,700 was paid in cash at the Closing, with the
balance of $2,500 payable with interest at the rate of 1% per annum over LIBOR
due 720 days from the Closing. In addition, the Company acquired all of the
trademarks relating to Venbo's business from Vendex International N.V., an
affiliate of the Sellers, for $1,800 payable to BIEC with interest at the rate
of 6 7/8% per annum in monthly installments equal to 4% of Venbo's net sales
for each immediately preceding month. The Company's acquisition of the quotas
and trademarks is hereinafter referred to as the "Acquisition".
The Acquisition was treated for accounting purposes as a purchase and the
consideration paid in excess of the net assets acquired was allocated to those
net assets based on their fair market value. The unallocated amount was
classified as goodwill (R$3,762) and amortized over a 20 year period (See Note
4).
In order to raise sufficient cash to complete the Acquisition and to fund
the Company's subsequent expansion strategy, the Company sold 3,115,701 shares
of its common stock to new investors in a private transaction (the "Private
Placement") at $3.20 per share, resulting in net proceeds to the Company of
approximately $10,000.
Funding of the cash portion of the Purchase Price was derived from the
following sources; (i) approximately $9,900 from the Company's own funds; (ii)
$4,000 from a Brazilian subsidiary of Coca-Cola, which was paid to the Company
concurrently with the consummation of the Acquisition, in consideration for
Coca-Cola products being designated the exclusive soft drink products for all
of the Company's restaurants for a ten-year term and for the Company's
agreement to participate at its own expense in joint promotions and marketing
programs with Coca-Cola during such term; and (iii) the balance of $2,800 from
the proceeds of a Private placement.
At the Closing, the Company issued 1,046,422 shares of its common stock to
Shampi Investments A.E.C. ("Shampi") in exchange for the assignment by Shampi
to the Company of Shampi's right to acquire the outstanding quotas of Venbo.
As a result of the Acquisition and the Private Placement: (i) Venbo became a
wholly-owned subsidiary of the Company, (ii) Shampi and the investors in the
Private Placement, collectively, acquired approximately 58.4% of the
outstanding common stock of the Company, (iii) designees of Shampi, being
respectively, Peter VanVoorst Vader, Omar Carneiro da Cunha and Arnaldo Bisoni,
became three members of the Company's Board of Directors, and (iv) the
Company's name was changed to "Brazil Fast Food Corp".
2. MANAGEMENT PLANS REGARDING GOING CONCERN
Since the acquisition of Venbo by the Company in 1996, the Company has
sustained net losses totaling approximately R$40,154. To date, the Company has
been dependent upon its initial capital, additional equity and debt financing
to fund its operating losses and capital needed for expansion.
F-8
BRAZIL FAST FOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Currently, the Company has no significant unused credit line.
In 1999, the Company commenced court actions to defer payments of its past
due taxes against different branches of Brazilian Government. These actions are
intended to extend payments on past due taxes and reduce financing interest
charges. During the second quarter of 2000, the Company obtained a favorable
outcome in the state lawsuits. In the same period, the Company withdrew its
lawsuit regarding federal taxes and applied to join a tax amnesty program
offered by the Brazilian Federal government (see Note 11).
During 2000, the agreement with the Brazilian subsidiary of Coca-Cola
referred to in Note 1 was amended in order to enhance and extend the original
exclusivity for an additional two years. As part of such agreement, the Coca
Cola Brazilian subsidiary agreed to pay the Company an additional R$1,000 in
connection with the extension of exclusivity.
Management plans to address its immediate and future cash flow needs by
focusing on a number of areas including: the continued sale of non-profitable
company-owned stores; reduction of expenses including headcount optimization;
the continued expansion of its franchisee base, which will generate additional
cash flows from royalties and franchise fees without significant capital
expenditure; the introduction of new programs, such as a delivery call center,
an internet delivery service and menu expansion to meet customer demand. In
order to act on these plans and sustain current operations, the Company is
dependent upon the continued forbearance of its creditors, as well as
additional financing.
There can be no assurance that management's plans will be realized, or that
additional financing will be available to the Company when needed, or at terms
that are desirable. Furthermore, there can be no assurance that the Company
will continue to receive the forbearance of its creditors, or that it will
locate suitable new franchisees, or desirable locations for new franchisees to
open stores. The Company's ability to further reduce expenses and head count is
directly impacted by its need to maintain an infrastructure to support its
current and future chain of locations. The Company's ability to remarket
Company-owned stores to franchisees, and to generate cash flows from such
activities, is impacted by the ability to locate suitable buyers with the
interest and capital to complete such transactions, and the time to complete
such sales. Additionally, the Company's ability to achieve its plans is further
impacted by the instability of the economic environment in Brazil, which has a
direct impact on the desire and ability of consumers to visit fast food
outlets. The Company is also dependent upon the continued employment of key
personnel. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Generally Accepted Accounting Principles ("GAAP")
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States ("U.S. GAAP"). Such
accounting principles may differ in certain respects from accounting principles
generally accepted in Brazil ("Brazilian GAAP"), which is applied by the
Company for its annual financial statement preparation. Unless otherwise
specified, all references in this financial statement to (i) "reais," the
"real" or "R$" are to the Brazilian real (singular), or to the Brazilian reais
(plural), the legal currency of Brazil, and (ii) "U.S. dollars" or "$" are to
United States dollars.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
F-9
BRAZIL FAST FOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Geographic Area of Operations
The Company primarily operates in Rio de Janeiro and Sao Paulo, Brazil,
making it susceptible to changes in the economic, political, and social
conditions in Brazil. Brazil has experienced political, economic and social
uncertainty in recent years, including an economic crisis characterized by
exchange rate instability and real devaluation, increased inflation, high
domestic interest rates, negative economic growth, reduced consumer purchasing
power and high unemployment. Under its current leadership, the Brazilian
government has been pursuing economic stabilization policies, including the
encouragement of foreign trade and investment and an exchange rate policy of
free market flotation. Despite the current improvement of Brazilian economic
environment, no assurance can be given that the Brazilian government will
continue to pursue these policies, that these policies will be successful if
pursued or that these policies will not be significantly altered. A decline in
the Brazilian economy, political or social problems or a reversal of Brazil's
foreign investment policy is likely to have an adverse effect on the Company's
results of operations and financial condition. Additionally, inflation in
Brazil may lead to higher wages and salaries for employees and increase the
cost of raw materials, which would adversely affect the Company's
profitability.
Risks inherent in foreign operations include nationalization, war, terrorism
and other political risks and risks of increases in foreign taxes or U.S. tax
treatment of foreign taxes paid and the imposition of foreign government
royalties and fees.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All material intercompany accounts and
transactions have been eliminated in consolidation.
Constant Currency Restatement
Through June 30, 1997 the Brazilian economy was hyperinflationary as defined
in Statement of Financial Accounting Standards ("SFAS") No. 52. The financial
statements prior to that time were comprehensively restated for the effects of
inflation. After that date, inflation restatement was not applied; however, the
non-monetary assets reflect the effects of inflation through that date.
Foreign Currency
Transactions in foreign currency are recorded at the prevailing exchange
rate at the time of the related transactions. Assets and liabilities
denominated in foreign currencies are translated into Brazilian Reais at
exchange rates reported by the Central Bank of Brazil at the balance sheet
date. The related transaction gains and losses are recognized in the statement
of operations as they occur.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
F-10
BRAZIL FAST FOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounts receivable
Long term receivables denominated in Brazilian Reais not indexed higher than
the general price level inflation indicator are discounted to their present
value.
Inventories
Inventories, primarily consisting of food, beverages and supplies, are
stated at the lower of cost or replacement value. Cost of inventories is
determined principally on the average cost method.
Property and Equipment
Property and equipment are stated at price-level adjusted cost, less price-
level adjusted accumulated depreciation through June 30, 1997. Depreciation on
property and equipment is provided using the straight-line method over the
following estimated useful lives of the related assets:
Years
-------
Buildings and building improvements.. 50
Leasehold improvements............... 4 - 5
Machinery and equipment.............. 10 - 15
Furniture and fixtures............... 10 - 15
Vehicles............................. 5 - 13
Deferred Charges
Deferred charges, which relate to leasehold premiums paid in advance for
rented outlet premises are stated at price-level adjusted cost, less price-
level adjusted accumulated amortization until June 30, 1997. Leasehold premiums
related to unprofitable stores were written off.
The amortization periods, which range from 5 to 20 years, are the terms of
management's estimate of the related rental contracts including renewal
options, which are solely at the discretion of the Company.
Preopening Costs
Labor costs and the costs of hiring and training personnel and certain other
costs relating to the opening of new restaurants are expensed as incurred.
Revenue Recognition
Initial franchise fee revenue is recognized when all material services and
conditions relating to the franchise have been substantially performed or
satisfied which normally occurs when the restaurant is opened. Annual franchise
fees based on a percentage of the revenues of the franchisee are recognized
when earned.
Amounts received and to be received from the Coca-Cola exclusivity
agreements (see notes 1 and 2) as well as amounts received from other suppliers
linked to exclusivity agreements are recorded as deferred income and are being
recognized on a straight line basis over the term of such agreements or the
related supply agreement. The Company accounts for other supplier exclusivity
fees on a straight-line basis over the related supply agreement.
F-11
BRAZIL FAST FOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Advertising Expense
The Company expenses advertising costs as incurred. Advertising expense was
R$4,126, R$3,055 and R$2,923 for the years ended December 31, 2000, 1999 and
1998, respectively.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under the asset and liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis and operating loss carry-forwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under SFAS No. 109, the effect of a change in tax rates or deferred
tax assets and liabilities is recognized in income in the period that includes
the enactment date.
Long-Lived Assets
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," effective January 1,
1996. SFAS No. 121 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. SFAS No. 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company periodically
reviews the recovery of long-lived assets in accordance with SFAS No. 121 based
primarily upon expected future operating cash flows. See note 4 for the
discussion of an impairment of goodwill identified by the Company in the fourth
quarter of 1998.
Net (Loss) Per Common Share
In 1997, the FASB issued SFAS No. 128, "Earnings Per Share" effective for
financial statements issued for periods ending after December 15, 1997. This
statement establishes standards for computing and presenting earnings per share
("EPS"), replacing the presentation of required primary EPS with a presentation
of Basic EPS and Diluted EPS on the face of the statement of operations. Under
this standard, Basic EPS is computed based on weighted average shares
outstanding and excludes any potential dilution; Diluted EPS reflects potential
dilution from the exercise or conversion of securities into common stock or
from other contracts to issue common stock. There were no common share
equivalents outstanding as of December 31, 2000, 1999 and 1998 that would have
had a dilutive effect on earnings for those respective years.
Recently Issued Accounting Standard
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivatives and Hedging Activities ("SFAS No. 133").
SFAS No. 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Company does not expect the adoption
of this standard to have a material effect on the Company's results of
operations, financial position or cash flows.
Reclassifications
The Financial Statements for the years ended December 31, 1999 and 1998 have
been restated to conform with the current year presentation.
F-12
BRAZIL FAST FOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. IMPAIRMENT OF ASSETS
In connection with the acquisition of Venbo described in Note 1, and other
subsequent acquisitions, the Company recorded approximately R$5,900 of
goodwill.
In accordance with SFAS No. 121, the Company periodically evaluated the
realizability of such amounts based primarily on undiscounted cash flows. In
the fourth quarter of 1998, the Company determined, based on its evaluation of
the undiscounted cash flows resulting from the business acquired in the
acquisitions referred to above, negative cash flows from operations and
operating losses incurred, among other factors, that an impairment in
realizability of the goodwill existed. Accordingly, an impairment of goodwill
of R$5,076 was recorded in the accompanying consolidated statements of
operations for the year ended December 31, 1998.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
------------------
2000 1999
-------- --------
Land..................................................... R$ 2,828 R$ 2,828
Buildings and building improvements...................... 4,543 4,504
Leasehold improvements................................... 6,624 6,024
Machinery and equipment.................................. 11,311 9,410
Furniture and fixtures................................... 2,818 2,986
Assets under capitalized leases.......................... 4,131 3,795
Vehicles................................................. 199 100
Other.................................................... 680 --
-------- --------
33,134 29,647
Less: Accumulated depreciation and amortization (11,412) (8,768)
-------- --------
R$21,722 R$20,879
======== ========
6. DEFERRED CHARGES
Deferred charges consists of the following:
December 31,
------------------
2000 1999
-------- --------
Leasehold premiums....................................... R$13,541 R$13,541
Less: Accumulated amortization........................... (3,240) (2,458)
-------- --------
R$10,301 R$11,083
======== ========
F-13
BRAZIL FAST FOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. NOTES PAYABLE
Notes payable consists of the following:
December 31,
------------------
2000 1999
-------- --------
Revolving lines of credit(a)............................. R$ 2,514 R$ 644
Mortgages payable(b)..................................... 4,445 4,868
Equipment leasing facility(c)............................ 3,507 4,566
Other.................................................... -- 44
-------- --------
10,466 10,122
Less: current portion.................................... (9,090) (7,376)
-------- --------
R$ 1,376 R$ 2,746
======== ========
At December 31, 2000, future maturities of notes payable are as follows:
December 31,
------------
2001............................... R$ 9,090
2002............................... R$ 1,345
2003............................... R$ 31
--------
R$10,466
========
- --------
(a) Provides for maximum borrowings of R$2,800; due on demand from various
financial institutions; interest rates ranging from 21.6% to 42.6% per
annum; collaterized by accounts receivables and guaranteed by certain
officers.
(b) Due in full June 2001; interest payments due semi-annually; interest
charged at 15% per annum; secured by certain property with a carrying value
of R$ 6,153 at December 31, 2000; principal and interest indexed to the
U.S. dollar, thus susceptible to exchange rate variations due to the
devaluation of the Real.
(c) Provides for maximum borrowings of R$ 734 for the funding of information
technology funding, R$ 1,980 for funding of restaurant equipment and R$ 793
for refinancing of past due Notes Payable on both information technology
and restaurant equipment ; payable in monthly installments together with
interest with a final payment due November 2002; interest charged at rates
ranging between 15% and 18% per annum; secured by equipment under lease;
principal and interest indexed to the U.S. dollar, thus susceptible to
exchange rates variations due to the devaluation of the Real.
The carrying amount of notes payable approximates fair value at December 31,
2000 and 1999 because they are indexed to the U.S. dollar or are at market
interest rates.
F-14
BRAZIL FAST FOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. ACCRUED EXPENSES
Accrued expenses consists of the following:
December 31,
---------------
2000 1999
------- -------
Rent payable................................................ R$ 875 R$ 608
Accrued utilities........................................... 202 457
Accrued freight............................................. 65 37
Accrued maintenance......................................... 116 30
Accrued advertising......................................... 296 77
Contingencies............................................... 139 245
Outsourcing fees............................................ 419 231
Audit services.............................................. 145 151
Other accrued liabilities................................... 215 --
------- -------
R$2,472 R$1,836
======= =======
9. CASH FLOW INFORMATION
Supplemental Disclosure of Cash Flow Information:
Year ended December 31,
-----------------------
2000 1999 1998
------- ------- -------
Interest paid........................................ R$1,533 R$2,150 R$1,877
Income taxes paid.................................... R$ -- R$ -- R$ --
10. TAXATION
Tax losses through December 31, 2000 relating to income tax was R$39,641 and
to social contribution tax was R$42,080. Social contribution tax is a Brazilian
tax levied on taxable income and is by its nature comparable to corporate
income tax. At the date of Acquisition, Venbo had R$5,512 of tax loss
carryforwards. The utilization of these pre-acquisition losses recognized
subsequent to the Acquisition, first reduces to zero any goodwill related to
the Acquisition, second reduces other non-current intangible assets to zero,
and third reduces income tax expense. There is no goodwill reflected as of
December 31, 1998.
The accumulated tax loss position can be offset against future taxable
income. Brazilian tax legislation restricts the offset of accumulated tax
losses to 30% of taxable profits on an annual basis. These losses can be used
indefinitely and are not impacted by a change in ownership of the Company.
The following is a reconciliation of the amount of reported income tax
benefit and the amount computed by applying the combined statutory tax rate of
34% (33% in 1998) to the loss before income taxes:
December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Tax benefit at the combined statutory rate... R$(1,139) R$(3,706) R$(4,735)
Combined statutory rate applied to
differences between.........................
taxable results Brazil and reported results.. 255 1,571 1,885
-------- -------- --------
Tax benefit for the year..................... (884) (2,135) (2,850)
Valuation allowances recorded against net
deferred tax assets......................... 884 2,135 2,850
-------- -------- --------
Income tax benefit as reported in the
accompanying consolidated statement of
operations.................................. R$ -- R$ -- R$ --
======== ======== ========
F-15
BRAZIL FAST FOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Differences between taxable results in Brazil and reported results are
comprised, mainly, by the differences between Brazilian GAAP and U.S. GAAP.
The following summarizes the composition of deferred tax assets and
liabilities and the related valuation allowance at December 31, 2000 and 1999,
based on temporary differences and tax loss carryforwards determined by
applying rates of 9% for social contribution tax and 25% for income tax.
December 31,
------------------
2000 1999
-------- --------
Deferred tax assets:
Tax loss carry forward................................. R$13,696 R$12,813
Provision for contingencies............................ 417 274
Legal deposits......................................... -- 129
Deferred income........................................ -- 70
Present value adjustment............................... 190 316
-------- --------
Total deferred tax assets............................ 14,303 13,602
-------- --------
Deferred tax liabilities:
Deferred income........................................ 3 --
Property and equipment................................. 1,105 1,497
Deferred charges....................................... 2,972 3,066
-------- --------
Total deferred tax liabilities....................... 4,080 4,563
-------- --------
Net deferred tax asset................................... 10,223 9,039
Valuation allowance...................................... (10,223) (9,039)
-------- --------
R$ -- R$ --
======== ========
The valuation allowance reflects the Company's assessment of the likelihood
of realizing the net deferred tax assets in view of current operations and the
Company's recurring losses.
11. COMMITMENTS AND LITIGATION
Operating Leases
The future minimum lease payments under operating leases with an initial or
remaining non cancelable lease term in excess of one year at December 31, 2000
are as follows:
December 31,
------------
2001................................ R$4,452
2002................................ R$3,477
2003................................ R$2,867
2004................................ R$2,090
2005................................ R$1,594
Thereafter.......................... R$3,157
Rent expense was R$4,772, R$4,493, and R$4,925 for the years ended December
31, 2000, 1999, and 1998, respectively.
Other Commitments
The Company has long term contracts (5 to 10 years) with all of its
franchisees. Under these contracts the franchisee has the right to use the
Bob's name and formulas in a specific location or area. The Company has no
specific financial obligations in respect of these contracts.
F-16
BRAZIL FAST FOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Litigation and Tax Amnesty Program
During 1999, certain Brazilian taxes levied on the Company were not paid.
Using current proceedings from enacted Brazilian laws, the Company's legal
advisors filed lawsuits asking that those taxes be paid in several installments
(60--240 months) based on the usual terms for rescheduling of taxes in arrears.
The Company is also claiming that neither fines nor interest higher than 12%
per annum should be included in the above mentioned installments. However, the
interest rates required by Brazilian Laws, which are higher than those claimed
by the Company, have been recorded in the financial statements in that as of
December 31, 1999.
During the second quarter 2000, the Company obtained a favorable outcome in
the state lawsuits. In the same period, the Company withdrew its lawsuit
regarding federal taxes and applied to join a tax amnesty program offered by
the Brazilian Federal government (REFIS). Through this program, all past due
federal taxes will be paid in monthly installments equivalent to 1.2% of the
Company's gross sales, with interest accruing at rates set by the Brazilian
Federal government, currently 9.25% per year.
Litigation consists of the following:
2000 1999
-------------------------------- --------------------------------
Total Current Long Term Total Current Long Term
Liability Liability Liability Liability Liability Liability
--------- --------- --------- --------- --------- ---------
Social security tax R$ 1,290 R$1,290(a) R$ -- R$ 3,875 R$ 706(a) R$3,169
Value-added tax 4,110 1,600(b) 2,510 3,023 974(b) 2,049
Social tax charged on
revenues............... 1,127 1,127(b) -- 3,458 595(b) 2,863
Other litigations 1,088(c) -- 1,088(c) 1,088(c) -- 1,088
REFIS................... 6,684 976 5,708 -- -- --
------ ----- ----- ------ ----- -----
TOTAL................. R$14,299 R$4,993 R$9,306 R$11,444 R$2,275 R$9,169
====== ===== ===== ====== ===== =====
- --------
(a) Classified as "Payroll and related accruals"
(b) Classified as "Taxes, other than income taxes"
(c) Labor, civil and other litigation
12. SHAREHOLDERS' EQUITY
Preferred Stock
The Board of Directors of the Company is empowered, without stockholder
approval, to issue up to 5,000 shares of "blank check" preferred stock (the
"Preferred Stock") with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or other rights of the
holders of the Company's common stock. As of December 31, 2000, no Preferred
Stock had been issued.
Common Stock
In 1998, the Company issued 1,538 shares of common stock upon the exercise
of stock options, receiving net proceeds of R$21.
In 1998, the Company issued 157,631 shares of common stock in a private
placement, receiving net proceeds of R$1,506.
F-17
BRAZIL FAST FOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In May 1999, the Company effected a one for four reverse stock split of its
outstanding shares of common stock. Accordingly, all data shown in the
accompanying financial statements and notes have been retroactively adjusted
to reflect this stock split.
Stock Option Plan
On September 18, 1992, the Company's Board of Directors and a majority of
the shareholders of the Company approved the 1992 Stock Option Plan (the
"Plan").
The Plan, as amended and restated, authorizes the granting of awards, the
exercise of which would allow up to an aggregate of 1,000,000 shares of the
Company's common stock to be acquired by the holders of said awards. The
awards can take the form of Incentive Stock Options ("ISOs") or Non-qualified
Stock Options ("NQSOs"). Options may be granted to employees, directors and
consultants. ISOs and NQSOs are granted in terms not to exceed ten years and
become exercisable as set forth when the award is granted. Options may be
exercised in whole or in part. The exercise price of the ISOs must be at least
equal to the fair market price of the Company's common stock on the date of
grant or in the case of a plan participant who is granted an option price of
at least 110% of the fair market value on the date of grant, the option must
be exercised within five years from the date of grant. The exercise price of
all NQSOs granted under the Plan shall be determined by the Board of Directors
of the Company at the time of grant. No options may be granted under the Plan
after September 17, 2002.
The Company accounts for awards granted to employees and directors under
Accounting Principles Board ("APB") opinion No. 25, "Accounting for Stock
Issued to Employees", under which no compensation cost has been recognized for
stock options granted. Had compensation costs of these stock options been
determined consistent with SFAS No. 123 "Accounting for Stock Based
Compensation", the Company's net loss and loss per share would have been the
following pro forma amounts:
2000 1999 1998
-------- --------- ---------
Net (loss) as reported...................... R$(3,351) R$(10,901) R$(14,349)
Net (loss) pro forma........................ R$(3,689) R$(11,836) R$(15,253)
Net (loss) per share, as reported........... R$ (1.04) R$ (3.37) R$ (4.53)
Net (loss) per share, pro forma............. R$ (1.14) R$ (3.66) R$ (4.80)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
All transactions with individuals other than those considered employees, as
set forth within the scope of APB No. 25, must be accounted for under the
provisions of SFAS No. 123. During 2000, 1999 and 1998, no options were
granted to outside consultants.
F-18
BRAZIL FAST FOOD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Vesting terms of the options range from immediately vesting of all options
to a ratable vesting period of 5 years. Option activity for the years ended
December 31, 2000, 1999 and 1998 is summarized as follows:
2000 1999 1998
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- ------- -------- ------- --------
Options outstanding at
beginning of year...... 224,387 $11.04 140,862 $12.56 127,400 $13.00
Granted............... 241,500 2.18 98,625 2.86 27,500 10.48
Exercised............. -- -- -- -- (1,538) 14.52
Canceled.............. (19,475) -- (15,100) -- (12,500) 13.00
-------- ------ ------- ------ ------- ------
Options outstanding at
end of year............ 446,912 $ 4.95 224,387 $ 7.87 140,862 $12.56
Options exercisable at
end of year............ 400,162 $ 5.35 176,587 $ 8.80 133,462 $12.48
During 1998, the Board of Directors approved an increase in options
available for grant under the Plan from 500,000 to 1,000,000.
The weighted average fair values of options granted during 2000, 1999, and
1998 were $.96, $2.45 and $5.20, respectively.
The fair value of each option grant is estimated on the date of grant using
the Black Scholes option pricing model with the following weighted average
assumptions used for grants in 2000, 1999, and 1998: (1) risk-free interest
rate of 5.71%, 4.65% and 5.07% (2) no expected dividend yield, (3) expected
lives of 5 years; and (4) expected stock price volatility of 98%, 138% and 50%,
respectively.
The options outstanding at December 31, 2000, range in price from $2.00 per
share to $13.00 per share and have a weighted average remaining contractual
life of 2 1/3 years.
F-19