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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2003
Commission File Number: 0-23278
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Brazil Fast Food Corp.
(Exact name of Registrant as specified in its charter)
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Delaware 13-3688737
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Av. Brasil, 6431 - Bonsucesso, CEP 21040
360, Rio de Janeiro, Brazil
(Address of principal executive offices)
Registrant's telephone number: 011 55 21 2564-6452
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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 [ ] No [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
As of March 31, 2003 there were issued and outstanding 7,569,718 shares
of the Registrant's Common Stock, par value $0.0001.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
Consolidated Balance Sheets (Unaudited)
(in thousands of Brazilian Reais, except share amounts)
ASSETS
March, 31 December 31,
----------- ------------
2003 2002
----------- ------------
CURRENT ASSETS:
Cash and cash equivalents R$ 858 R$ 1,461
Inventories 1,603 1,536
Accounts receivable
Clients 622 714
Franchisees 5,322 5333
Allowance for doubtful accounts (1,893) (1,893)
Prepaid expenses 553 637
Other current assets 261 231
----------- ------------
TOTAL CURRENT ASSETS 7,326 8,019
----------- ------------
PROPERTY AND EQUIPMENT, NET 16,859 17,081
DEFERRED CHARGES, NET 8,520 9,035
OTHER RECEIVABLES AND OTHER ASSETS 2,860 2,849
----------- ------------
TOTAL ASSETS R$ 35,565 R$ 36,984
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Notes payable R$ 4,016 R$ 6,317
Accounts payable and accrued expenses 4,366 5,295
Payroll and related accruals 1,655 2,645
Taxes, other than income taxes 776 1,155
Deferred income 637 637
Contingencies and taxes in litigation (note 4) 5,488 5,901
Other current liabilities 231 307
----------- ------------
TOTAL CURRENT LIABILITIES 17,169 22,257
NOTES PAYABLE, less current portion 2,060 --
DEFERRED INCOME, less current portion 1,601 1,761
CONTINGENCIES AND TAXES IN LITIGATION, less
current portion (note 4) 18,075 14,173
OTHER LIABILITIES 211 303
----------- ------------
TOTAL LIABILITIES 39,116 38,494
----------- ------------
SHAREHOLDERS' EQUITY (DEFICIENCY):
Preferred stock, $.01 par value, 5,000 shares authorized; no
shares issued -- --
Common stock, $.0001 par value, 40,000,000 shares authorized;
7,542,790 shares issued and outstanding 1 1
Additional paid-in capital 59,297 59,297
Deficit (61,704) (59,614)
Accumulated comprehensive loss (1,145) (1,194)
----------- ------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY) (3,551) (1,510)
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) R$ 35,565 R$ 36,984
=========== ============
See Notes to Consolidated Financial Statements 2
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
Consolidated Statements of Operations (Unaudited)
(in thousands of Brazilian Reais, except share amounts)
Three Months Ended March 31,
--------------------------------
2003 2002
------------ ------------
STORE RESULTS
Net Restaurant Sales R$ 15,447 R$ 17,115
Store Costs and Expenses
Food, Beverage and Packaging (6,131) (6,828)
Payroll & Related Benefits (3,464) (3,537)
Restaurant Occupancy (1,795) (2,142)
Contracted Services (2,109) (2,110)
Other Store Costs and Expenses (677) (751)
Total Store Costs and Expenses (14,176) (15,368)
------------ ------------
STORE OPERATING INCOME 1,271 1,747
------------ ------------
FRANCHISE RESULTS
Net Franchise Royalty Fees R$ 1,617 R$ 1,169
Franchise Costs and Expenses (450) (323)
------------ ------------
FRANCHISE OPERATING INCOME 1,167 846
------------ ------------
MARKETING, GENERAL AND
ADMINISTRATIVE (EXPENSES) INCOME
Marketing (Expenses) Income 323 (349)
Administrative Expenses (1,514) (2,188)
Other Operating Income (Expenses) (1,285) 538
Depreciation and Amortization (883) (982)
Total Marketing, G & A (Expenses) Income (3,359) (2,981)
------------ ------------
OPERATING INCOME (LOSS) (921) (388)
------------ ------------
Interest Income (Expense) (818) (1,245)
Foreign Exchange and Monetary Restatement Gain (Loss) (351) 113
------------ ------------
NET INCOME (LOSS) R$ (2,090) R$ (1,520)
============ ============
NET (LOSS) PER COMMON SHARE
BASIC AND DILUTED R$ (0.28) R$ (0.41)
============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
BASIC AND DILUTED 7,542,790 3,722,790
============ ============
See Notes to Consolidated Financial Statements 3
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
(IN THOUSANDS OF BRAZILIAN REAIS)
Three Months Ended March 31,
----------------------------
2003 2002
---------- ----------
Net Loss R$ (2,090) R$ (1,520)
Other comprehensive income (loss):
Foreign currency translation adjustment 49 1
---------- ----------
Comprehensive Loss R$ (2,041) R$ (1,519)
========== ==========
See Notes to Consolidated Financial Statements 4
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(IN THOUSANDS OF BRAZILIAN REAIS)
Common Stock Additional Accumulated
----------------------- Paid-In Comprehensive
Shares Par Value Capital (Deficit) Loss Total
--------- --------- ---------- ---------- ------------- ---------
Balance, December 31, 2002 7,542,790 R$ 1 R$ 59,297 R$ (59,614) R$ (1,194) R$ (1,510)
Net loss -- -- -- (2,090) -- (2,090)
Cumulative translation adjustment -- -- -- -- 49 49
--------- --------- --------- ---------- --------- ---------
Balance, March 31, 2003 7,542,790 R$ 1 R$ 59,297 R$ (61,704) R$ (1,145) R$ (3,551)
========= ========= ========= ========== ========= =========
See Notes to Consolidated Financial Statements 5
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS OF BRAZILIAN REAIS)
Three Months Ended March 31,
-----------------------------
2003 2002
---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) R$ (2,090) R$ (1,520)
Adjustments to reconcile net (loss) to cash provided by
(used in) operating activities:
Depreciation and amortization 883 982
(Gain) Loss on assets sold 53 (13)
Contingences accrued 2,045 --
Services provided in exchange for shares 77 --
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 285 (183)
Inventories (67) (317)
Prepaid expenses and other current assets 54 (431)
Other assets (11) --
(Decrease) increase in:
Accounts payable and accrued expenses (1,006) (731)
Payroll and related accruals (990) 612
Taxes other than income taxes 264 962
Other liabilities (168) 378
Contingencies and taxes in litigation 801 (315)
Deferred income (160) (159)
---------- ----------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES (30) (735)
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to property and equipment (629) (218)
Proceeds from sale of property, equipment and deferred charges 248 193
CASH FLOWS (USED IN) INVESTING ACTIVITIES (381) (25)
---------- ----------
Borrowings under lines of credit 0 534
Repayments under lines of credit (241) (60)
Proceeds from issuance of shares of common stock - -
---------- ----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES (241) 474
---------- ----------
EFFECT OF FOREIGN EXCHANGE RATE 49 1
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (603) (285)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,461 2,267
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD R$ 858 R$ 1,982
========== ==========
See Notes to Consolidated Financial Statements 6
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS OF BRAZILIAN REAIS)
NOTE 1 - FINANCIAL STATEMENT PRESENTATION
The accompanying financial statements have been prepared by
Brazil Fast Food Corp. (the "Company"), without audit. In the
opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at
March 31, 2003 and for all periods presented have been made.
The results of operations for the periods ended March 31, 2003
and 2002 are not necessarily indicative of the operating
results for a full year. Unless otherwise specified all
references in these financial statements to (i ) "Reais" or
"R$" are to the Brazilian Real (singular), or to Brazilian
Reais (plural), the legal currency of Brazil, and (ii ) "U.S.
Dollars" or "$" are to United States' dollars.
Certain information and footnote disclosures prepared in
accordance with generally accepted accounting principles and
normally included in the financial statements have been
condensed or omitted. It is suggested that these financial
statements be read in conjunction with the consolidated
financial statements and notes included in the Company's
Annual Report on Form 10-K for the year ended December 31,
2002.
NOTE 2 - MANAGEMENT PLANS REGARDING GOING CONCERN
Since the acquisition of Venbo Comercio de Alimentos Ltda. in
1996, the Company has sustained net losses totaling
approximately R$61,704 and at March 31, 2003, consolidated
current liabilities exceed consolidated current assets by
R$9,843.
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. Currently,
the Company has no significant unused CREDIT LINE.
During 2002, the Company received net proceeds in amount of
R$8,829 which were used to reduce our debt, including debt
with private individuals, debt with financial institutions in
Brazil, and past due accounts payable with suppliers and
others.
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.
See Notes to Consolidated Financial Statements 7
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 by 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.
NOTE 3 - RECLASSIFICATION
The consolidated Balance Sheet as of December 31, 2002, as
well as the consolidated statement of operation for the three
month period ended March 31, 2002, have been restated to
conform with the current quarter presentation.
NOTE 4 - OTHER LIABILITIES AND LITIGATION
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 consolidated
financial statements as of December 31, 1999.
During the second quarter of 2000, the Company reached an
agreement with the state government to parcel unpaid taxes in
sixty months, interest free, in amounts indexed to Brazil's
UNIDADE FISCAL DE REFERENCIA, which is currently 12% per year.
Subsequent to this agreement, the Company withdrew its
lawsuit. 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 11.5% per year.
Additionally, during December 2002, the Company applied to
join another tax amnesty program offered by the Rio de Janeiro
state government, through which the Company will parcel unpaid
state taxes in one hundred and twenty months.
See Notes to Consolidated Financial Statements 8
During three months ended March 31, 2003, the Company paid
approximately R$ 223 related to such Brazilian Federal tax
amnesty program and approximately R$561 related to Rio de
Janeiro state government AGREEMENTS.
THE COMPANY HAS OTHER PAST DUE FEDERAL TAXES WHICH WERE NOT
PAID IN THE BEGINNING OF 2002, AS WELL AS PENALTIES APPLIED
AGAINST THE COMPANY BY THE BRAZILIAN SOCIAL SECURITIES
AUTHORITIES, IN THE AMOUNT OF R$9,487, which are not covered
by any of the above mentioned tax agreements. However, the
Brazilian Government is implementing another tax amnesty
program during 2003, through which the Company intends to
include those tax debts.
Since June 2002, the Company has paid all its current taxes on
a timely basis.
During 2001, the Company claimed in Brazilian court that their
lease financing contracts with IBM Leasing should not have
their principal amounts indexed to the US dollar, but instead
stated in Brazilian Reais bearing interest of 12% per annum.
While awaiting the court's determination, we have deposited
all installment payments due under our lease financing
agreements with the court in reais, inclusive of 12% per annum
interest, until November, 2002, the end of the contract term.
However, the Company accrued contracted amounts at March 31,
2003. Such lawsuit is in its initial phase.
Liabilities related to tax amnesty programs and litigation
consist of the following:
March 31, December 31,
2003 2002
---------------------------------- ----------------------------------
Long Long
Total Current Term Total Current Term
Liability Liability Liability Liability Liability Liability
--------- --------- --------- --------- --------- ---------
Social security tax
debts - restated R$ 5.861 -- R$ 5.861 R$ 1.365 -- R$ 1.365
Reassessed value-
added tax 5.345 969 4.376 5.987 1.125 4.862
Social tax charged
on revenues 3.626 3.626 3.816 3.816 --
IBM Leasing litigation 3.143 3.143 3.187 3.187
Other litigation 627 627 637 -- 637
REFIS 4.961 893 4.068 5.082 960 4.122
--------- -------- --------- --------- -------- ---------
TOTAL R$ 23.563 R$ 5.488 R$ 18.075 R$ 20.074 R$ 5.901 R$ 14.173
========= ======== ========= ========= ======== =========
See Notes to Consolidated Financial Statements 9
NOTE 5 - PRIVATE PLACEMENT
In May, 2002, the Company privately sold 2,500,000 shares of
its common stock for R$5,000 to four accredited private
investors (collectively, the New Investors), as a part of a
new shareholders agreement (the Agreement).
During the third quarter of 2002, the Company privately sold
an additional 1,200,000 shares of our common stock at a price
in Brazilian reais, computed at the times of exercise,
equivalent to US$1.00 per share.
The Company has received proceeds of R$8,829 pursuant to such
private placements during the second and the third quarters of
2002.
NOTE 6 - SERVICES PROVIDED IN EXCHANGE OF COMMON SHARES
In May, 2002 the Company entered into an agreement requiring
the Company to retain the services of either Ricardo Bomeny,
or an entity of which he is a principal, to manage the
Company's subsidiary day-to-day operations for a term of two
years. For such services the consultant will receive 20,000
shares of the Company`s common stock for each of the first
twelve months of such two-year term, a sum in cash for the
second twelve months of such term in a amount to be mutually
agreed upon at a future date, and an additional 260,000 shares
at the end of the two-year term conditioned upon the
attainment of specified targets. During the first quarter of
2003 the Company charged R$77 to operating results related to
those services. Such amount is a result of number of shares
owed on accrual basis during the first quarter 2003,
multiplied by their average fair value.
NOTE 7 - STOCK OPTION PLAN ACTIVITY
During the three months ended March 31, 2003, there were no
options granted, canceled or EXPIRED under the Company's Stock
Option Plan.
See Notes to Consolidated Financial Statements 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OUR BUSINESS
Through our wholly-owned subsidiary, Venbo Comercio de Alimentos Ltda.,
a Brazilian limited liability company which conducts business under the trade
name "Bob's," we own and, directly and through franchisees, operate the second
largest chain of hamburger fast food restaurants in Brazil
RESULTS OF OPERATIONS - COMPARISON OF QUARTERS ENDED MARCH 31, 2003 AND 2002
For the current quarter onward, the Company has reformatted its consolidated
statement of OPERATIONS in order to improve the quality of analysis. Basically,
the current statement differ from the previous one when segregated the earnings
provided by COMPANY'S operated stores business from the earnings provided by
franchise business. However, all the operating figures were stated as a
percentage of THE NET RESTAURANT SALES because the Company believes that, in
general, either kind of business (restaurant operations or franchise net earns)
move towards Net Restaurant Sales evolution, and, accordingly, cost and expenses
should be analyzed in conjunction with such evolution.
The consolidated statement of operation for the three month period ended March
31, 2002, has been restated to conform with the current quarter presentation.
11
The following table sets forth certain operating data for the quarters ended
March 31, 2003 and 2002.
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2003 % MARCH 31, 2002 %
-------------- --------------
STORE RESULTS
Net Restaurant Sales R$ 15,447,000 100.0% R$ 17,115,000 100.0%
Store Costs and Expenses
Food, Beverage and Packaging (6,131,000) -39.7% (6,828,000) -39.9%
Payroll & Related Benefits (3,464,000) -22.4% (3,537,000) -20.7%
Restaurant Occupancy (1,795,000) -11.6% (2,142,000) -12.5%
Contracted Services (2,109,000) -13.7% (2,110,000) -12.3%
Other Store Costs and Expenses (677,000) -4.4% (751,000) -4.4%
Total Store Costs and Expenses (14,176,000) -91.8% (15,368,000) -89.8%
STORE OPERATING INCOME 1,271,000 8.2% 1,747,000 10.2%
--------------
FRANCHISE RESULTS
Net Franchise Royalty Fees R$ 1,617,000 10.5% R$ 1,169,000 6.8%
Franchise Costs and Expenses (450,000) -2.9% (323,000) -1.9%
FRANCHISE OPERATING INCOME 1,167,000 7.6% 846,000 4.9%
-------------- --------------
MARKETING, GENERAL AND
ADMINISTRATIVE (EXPENSES) INCOME
Marketing Income (Expenses) 323,000 2.1% (349,000) -2.0%
Administrative Expenses (1,514,000) -9.8% (2,188,000) -12.8%
Other Operating Income (Expenses) (1,285,000) -8.3% 538,000 3.1%
Depreciation and Amortization (883,000) -5.7% (982,000) -5.7%
Total Marketing, G & A (Expenses) Income (3,359,000) -21.7% (2,981,000) -17.4%
-------------- --------------
OPERATING INCOME (LOSS) (921,000) (388,000)
-------------- --------------
Interest Income (Expense) (818,000) -5.3% (1,245,000) -7.3%
Foreign Exchange and Monetary Restatement Gain (Loss) (351,000) -2.3% 113,000 0.7%
-------------- --------------
NET INCOME (LOSS) R$ (2,090,000) -13.5% R$ (1,520,000) -8.9%
============== ==============
12
Introduction
During the second half of fiscal 2002, DUE TO the political uncertainty
attendant to the outcome of the Brazilian presidential election in October 2002
and the subsequent victory of Labor Party, investors doubted about the future
economic trends in Brazil AND reduced and/or postponed most business projects
and money supply.
Brazilian currency DEVALUATED approximately 52.3% against the US dollar during
the year of 2002 and, as a consequence, Brazilian inflation rates reached the
highest level since the inception of Brazil's stabilization plan in mid 1994. In
response to these events, the Brazilian Central Bank in October 2002 and
subsequently in December increased overnight interest rates from 18% to 25% per
year.
The new Brazilian President took office in January 2003 starting to take acts -
which includes the discussion of implementing structural reforms- in order to
reverse the previous year end scenario. In response to such acts, the Brazilian
inflation started to decline and the Brazilian Real valuated against the US
Dollar during the 2003. However, fiscal and monetary policies from the Brazilian
Central Bank have remained austere and the return of economic growth, despite of
being expected, was postponed.
THESE policies increased unemployment rates in major metropolitan areas (Rio de
Janeiro and Sao Paulo), and decreases in average take-home income, negatively
impacting our restaurant sales and results of our operations for the first
quarter of 2003.
Store Results
Net Restaurant Sales
Net restaurant sales for our company-owned retail outlets decreased R$
1,668,000 or 9.7 %, to R$15,447,000 for the three months ended March 31, 2003 as
compared to R$17,115,000 for the three months ended March 30, 2002. The
year-to-year decrease is mainly attributable to the reduction of our
company-owned retail outlets from 67 as of March 31, 2002 to 61 as of March 31,
2003. The company closed 2 owned-operated outlets during the period between the
quarter ended March 31, 2002 and the quarter ended March 31, 2003, sold 5
outlets to franchisees and opened 1 new outlet. This reflects the company's
strategy to limit company direct operations to highly profitable outlets, and to
focus on the growth of franchises, which management anticipates will
significantly reduce the level of the Company's future capital expenditures.
Same store sales decreased approximately 0.5% for the three months
ended March 31, 2003 the three months ended March 31, 2002. Same store sales
decrease is mainly attributable to the reduction of general public expending
provoked by macroeconomic factors described above.
These decreases were partially offset by (i) our promotional campaigns;
(ii) introduction of new products (ii) an average increase of 12% in the sales
prices of our products SINCE MARCH 31, 2002.
13
Food, Beverage and Packaging Costs
As a percentage of net restaurant sales, food, beverage and packaging
costs were (39.7%) and (39.9%) for the three months ended March 31, 2003 and
2002, respectively.
Food, beverage and packaging costs remained almost flat from period to
period, though the pressure from suppliers to increase their prices has become
very frequent. The Company's long term agreements with some suppliers and recent
rebates negotiations have helped to keep general cost of products stable. In
addition, those products, which prices increased due to devaluation of Brazilian
Real against the US Dollar in mid 2002, returned to their original cost due to
the partial reversed exchange situation during the first quarter of 2003.
Payroll & Related Benefits
As a percentage of net restaurant sales, store payroll and related
benefits increased from (20.7%) for the three months ended March 31, 2002 to
(22.4%) for the same period ended March 31, 2003.
These increases are mainly attributable to increases in employee
transportation cost, TO increases in salaries mandated by union-driven
agreements and, as a consequence, social charges that are computed based on
employees salaries. In addition, the increase in the number of store
supervisors, in order to improve the quality of our restaurant operations, also
impacted our 2003 payroll costs.
Restaurant Occupancy Costs and Other Expenses
Restaurant occupancy costs and other expenses expressed as a percentage
of net restaurant sales were approximately (11.6%) and (12.5%) for the three
months ended March 31, 2003 and 2002, respectively. This decrease is mainly
attributable to temporary and permanent reduction of the occupancy cost of some
of our stores, as well as to the closing of one unprofitable store which had
extremely high lease costs. On the other hand, increases in our minimum rent
obligations, which are indexed to Brazilian inflation, currently at 32.5% per
annum, partially offset such decrease.
Contracted Services
Expenses related to contracted services expressed as a percentage of
net restaurant sales were approximately (13.7%) and (12.3%) for the three months
ended March 31, 2003 and 2002, respectively. This increase is mainly
attributable to increases in utility costs, mainly electricity rate increases of
19%, as well as higher delivery costs. The effect of those increases were
partially offset by reduction obtained on maintenance service and money
collection contracts.
14
Other Store Cost and Expenses
Other store cost and expenses expressed as a percentage of net
restaurant sales were approximately (4.4%) and (4.4%) for the three months ended
March 31, 2003 and 2002, respectively. Other store cost and expenses remained at
constant level from period to period.
Franchise Results
Net Franchise Royalty Fees
Net franchise royalty fees increased R$448,000 or 38.3%, to R$1,617,000
for the three months ended March 31, 2003 as compared to R$1,169,000 for the
three months ended March 31, 2002.
This increase is mainly attributable to the growth of our franchise
business from 206 retail outlets as of March 31, 2002 to 250 as of March 31,
2003.
From the period of April 1, 2002 to March 31, 2003, the Company sold 5
of its restaurants to franchisees. These stores had either low profitability or,
in some cases, operating losses. The Company's 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
- lower operating expenses.
Franchise Costs and Expenses
Franchise cost and expenses expressed as a percentage of net restaurant
sales were approximately (2.9%) and (1.9%) for the three months ended March 31,
2003 and 2002, respectively.
Such increase is, in general, attributable to the growth of franchise network
and to an improvement on the Company's policy of following the operation of its
franchisees: our supervisors responsible for franchised stores had increased the
number of visits all around the Brazilian territory which, in turn, increased
traveling expenses.
In addition, the Company's franchise department had its payroll costs increased,
basically for the same reasons described above in the topic Store Results -
Payroll and related benefits.
15
Marketing, General and Administrative (Expenses) Income
MARKETING INCOME (EXPENSES)
As a percentage of net restaurant sales, marketing (expenses) income
were approximately 2.1% and (2.0%) for the three months ended March 31, 2003 and
2002, respectively.
The reversal from net marketing expense for the three months ended
March 31, 2002 to net MARKETING income for the three months ended March 31, 2003
is mainly attributable to (i) an optimization of marketing investments; (ii)cost
reduction measures and (iii) growth of the franchise network which increased
such franchisees' contributions to our marketing efforts.
General and Administrative Expenses
As a percentage of restaurant sales, general and administrative
expenses were approximately (9.8%) and (12.8%) for the three months ended March
31, 2003 and 2002, respectively.
This decrease is mainly attributable to reductions or non renewal of
certain outsourced administrative services, SUCH AS LEGAL, ACCOUNTING AND
AUDITING SERVICES.
Other Operating Income (Expenses)
Other operating income (expenses) are mainly comprised of the initial
fees paid by our franchisees, as well as income derived from suppliers pursuant
to terms of certain exclusivity agreements, net result of assets and non
recurring income or expenses
Other operating income (expense) expressed as a percentage of net
restaurant sales reversed from 3.1%, for the three months ended March 31, 2002
to (8.3%) for the three months ended March 31, 2003.
DURING THE FIRST QUARTER OF 2003 THE COMPANY RECORDED NON-RECURRING
EXPENSES IN AMOUNT OF R$2,690,000 RELATED TO A PROVISION FOR FINES THAT MAY BE
APPLIED AGAINST THE COMPANY (IN ADDITION TO THOSE RECOGNIZED AT THE END OF
FISCAL 2002) BY THE BRAZILIAN SOCIAL SECURITY AUTHORITIES, WHICH CHARGED CERTAIN
OPERATING TRANSACTIONS NOT COVERED BY THE COMPANY'S PREVIOUS CALCULATION OF
SOCIAL SECURITY CONTRIBUTIONS AND RESTATED SUCH UNPAID DEBT.
On the other hand, also during the first quarter of 2003, the Company recorded a
non-recurring gain of R$643,000 related to a reversal of accrued Delaware
Franchise Taxes derived from a review on such tax computation.
16
Depreciation and Amortization
As a percentage of net restaurant sales, depreciation and amortization
were approximately 5.7% and 5.7% for the three months ended March 31, 2003 and
2002, respectively.
DEPRECIATION AND AMORTIZATION EXPENSES, GENERALLY, REMAINED AT CONSTANT
LEVELS FOR THE THREE MONTHS AND THREE MONTHS ENDED MARCH 31, 2003 WHEN
CONTRASTED WITH THE COMPARABLE PERIOD IN 2002.
Interest Income (Expenses) and Foreign Exchange Gain (loss)
Interest Income and Expenses
As a percentage of net restaurant sales, net interest expense were
approximately (5.3)% and (7.3)% for the three months ended March 31, 2003 and
2002, respectively.
The percentage decrease for the three and three months ended March 31,
2003 as compared to the same period in 2002 is primarily attributable to
reduction of the level of our bank indebtedness.
Foreign Exchange and Monetary Restatement Gain (Loss)
As a percentage of net restaurant sales, net foreign exchange gain
and/or losses were approximately (2.3)% and 0.7% for the three months ended
March 31, 2003 and 2002, respectively.
The reverse from a net gain during the three months ended March 31,
2002 to a net loss during the three months ended March 31, 2003 is primarily
attributable to a recognition during the first quarter of 2003 of monetary
restatement derived from notes payable contracted on the second quarter of 2002,
which are indexed by Brazilian inflation meaSURED BY THE IGP-M INDEX, WHICH WAS
32.5% FOR THE PERIOD OF TWELVE MONTHS ENDED MARCH 31, 2003.
In respect of the exchange rate, either periods presented valuation of the
Brazilian Real against the US Dollar, resulting in foreign exchange gains, since
our DEBT IS PARTIALLY denominated in U.S. Dollars.
17
LIQUIDITY AND CAPITAL RESOURCES
Since March 1996, we have funded our cumulative operating losses of R$61,704,000
and made acquisitions of businesses and capital improvements (including
remodeling of our retail outlets) by using cash remaining at the closing of our
acquisition of Venbo, by borrowing funds from various sources and from private
placements of securities. As of March 31, 2003, we had cash on hand of R$858,000
and a working capital deficiency of R$9,843,000.
For the quarter ended March 31, 2003, we had net cash used in operating
activities of R$30,000, net cash used in investing activities of R$381,000 and
net cash used in financing activities of R$241,000. Net cash used in investing
activities was primarily the result of our investment in property and equipment
to improve our retail operations, mainly on remodeling TWO GREAT COMPANY'S
operated stores. Net cash used in financing activities was a result of repayment
of our financing debts.
Our earnings before interest, taxes, depreciation and amortization (EBITDA) were
approximately negative R$38,000 for the quarter ended March 31, 2003 and
approximately positive R$600,000 for the quarter ended March 31, 2002. EBITDA is
not intended to be a performance measure that should be regarded as an
alternative to, or more meaningful than, either loss from operations or net loss
as an indicator of operating performance or cash flows as a measure of
liquidity, as determined in accordance with accounting principles generally
accepted in the United States.
Our cash resources are currently used primarily to pay for the servicing costs
on our debt obligations, which costs have increased significantly due to
increased interest rates in Brazil charged on short-term debt and the
devaluation of the Real against the U.S. Dollar during the fiscal 2002. Our debt
obligations as of MARCH 31, 2003 WERE AS FOLLOWS:
MARCH 31,
-------------
2003
------------
Revolving lines of credit(a) R$ 801,000
Mortgages payable(b) 1,840,000
Notes payable linked to
fixed assets acquisitions(c) 3,391,000
Other notes payable 44,000
------------
6,076,000
Less: current portion (4,016,000)
------------
R$ 2,060,000
============
At March 31, 2003, future maturities of notes payable are as follows:
REMAINING 2003 R$ 3,841,000
2004 R$ 940,000
2005 R$ 940,000
2006 R$ 715,000
------------
6,076,000
============
18
- -----------
(a) Due on demand from a Brazilian financial institution with
interest rates of 26.5% per annum, and guaranteed by certain
officers. Currently, we have no significant unused credit
line.
(b) Amount due in quarterly installments, starting June, 2003,
ending September, 2003. Interest on this amount accrues at a
rate of 25% per annum and is payable quarterly. Payment is
secured by certain property with a carrying value of
R$5,049,000 at March 31, 2002. Principal and interest are
indexed to the U.S. Dollar, and are therefore susceptible to
exchange rate variations between the U.S. Dollar and the
Brazilian Real.
(c) This credit facility was used to purchase three stores.
Repayment of principal with respect to one of these stores is
due in 15 monthly installments of R$19,000. Repayment of
principal with respect to the other two stores is due in 40
monthly installments of R$45,000 in addition of 3 annual
installments of R$400,000, starting January, 2004, ending
January 2006. There is no interest charged on these
borrowings. Principal is indexed to Brazilian inflation
measured by IGP-M. This facility is secured by the fixed
assets purchased.
In addition to the foregoing debt obligations, we are required to make certain
payments on restructured past-due Brazilian state taxes of approximately
R$5,345,000 and federal taxes of approximately R$4,961,000. Pursuant to a
settlement reached with Brazilian state taxing authorities in 2000 and 2002, we
are required to make repayments over a ten-year period, interest free, in
amounts indexed to Brazil's UNIDADE FISCAL DE REFERENCIA, which is currently
12.0% per annum. In addition, in 2000, we applied to, and were accepted by, the
Brazilian federal government to join a tax amnesty program, which restructured
our outstanding 1999 federal tax obligations into monthly payments equal to 1.2%
of our gross sales, with interest accruing at a rate set from time-to-time by
the Brazilian federal government (TJLP), which was 11.5% a.a. as of March 31,
2003. During 2003, we expect to pay approximately R$1,125,000 pursuant to the
state tax settlement and approximately R$960,000 pursuant to the federal tax
amnesty program.
The Company has other past due Federal Taxes which were not paid in the
beginning of 2002, as well as fines applied against the Company by the Brazilian
Social Securities Authorities, in the amount of R$9,487,000, which are not
covered by any of the above mentioned tax agreements. However, the Brazilian
Government is implementing another tax amnesty program during 2003, through
which the Company intends to include those tax debts.
Since June 2002, the Company has paid all its current taxes on a timely basis.
The Company has also long-term contractual obligations in the form of operating
lease obligations related to Company-operated outlets.
19
The future minimum lease payments under those obligations with an initial or
remaining noncancelable lease terms in excess of one year at March 31, 2003 are
as follows:
Fiscal Year Amount
2003 R$3,825,000
2004 1,966,000
2005 1,560,000
2006 1,033,000
2007 284,000
Thereafter 153,000
Rent expense was R$1,251,000 for the quarter ended March 31, 2003.
In the past, we have generated cash and obtained financing sufficient to meet
our debt obligations. We plan to fund our current debt obligations mainly
through cash provided by our operations, INCLUDING ASSETS SALES, FRANCHISE
INITIAL FEES AND REBATES FROM SUPPLIERS.
Currently, four of our company-owned retail outlets are located in facilities
that we own and all of our other company-owned retail outlets are located in
leased facilities.
Our average cost to open a retail outlet was approximately 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 have estimated that our capital expenditures for fiscal 2003, which will be
used to maintain and upgrade our current restaurant network, will be
approximately R$2,100,000. We anticipate that the primary use of our cash
resources during 2003 will be to service our debt obligations. During 2003, we
intend to focus our efforts on expanding both the number of our franchisees and
the number of our franchised retail outlets, neither of which are expected to
require significant capital expenditures.
As discussed above, the Company has contractual obligations in different forms.
The following table summarizes the Company's contractual obligations and
financial commitments, as well as their aggregate maturities.
Fiscal Year Contractual Leases Fiscal Debt * Loans Payable Total
----------- ------------------ ------------- ------------- -----
Remaining 2003 5,076,000 1.322,000 3,481,000 9.879.000
2004 1,966,000 2.085,000 940,000 4.991.000
2005 1,560,000 2.085,000 940,000 4.585.000
2006 1,033,000 2.085,000 715,000 3.833.000
2007 284,000 2.085,000 -- 2.369.000
Thereafter 153,000 644,000 -- 797.000
* Does not include fiscal debt, which were not reschedule yet, in the amount of
9,487,000.
Cash provided by operations along with our borrowing capacity and other sources
of cash will be used to satisfy the obligations and our estimates for capital
improvements (including remodeling of our retail outlets).
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 company-owned retail
outlets; the reduction of expenses,
20
including reducing our per-store headcount expense by continuing to expand our
operations while maintaining our current headcount; the expansion of our
franchisee base, which may be expected to generate additional cash flows from
royalties and franchise fees without significant capital expenditures; and the
introduction of new programs and menu expansions to meet consumer needs and
wishes; the extinguishments of our obligations denominated in US dollar which
will reduce our exposure to the effects of the Brazilian Real devaluation;
negotiation with suppliers in order to obtain significant rebates in long term
supply contracts; AND NEGOTIATION IN ORDER TO REDUCE AREA OF SOME STORES LOCATED
IN SHOPPING CENTERS, DECREASING LEASING COSTS AND IMPROVING STORE PROFITABILITY.
In order to sustain our operations, we have, in the past, been dependent upon
the continued forbearance of our creditors. While we are currently in full
compliance with agreements with our creditors, there can be no assurance that
we will not be forced to seek the forbearance of our creditors in the future.
In addition, there can be no assurance that our plans will be realized, or
that additional financing will be available to us when needed, or on terms
that are desirable. Furthermore, there can be no assurance that we will locate
suitable new franchisees, or desirable locations for new and existing
franchisees to open retail outlets. Our ability to further reduce expenses and
optimize our headcount is directly impacted by our need to maintain an
infrastructure to support changing the locations, if required, of both our
current and future retail outlets and operations. Our ability to re-market our
company-owned retail outlets to franchisees, and to generate cash flows from
such activities, is impacted by our 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 is further impacted
by the instability of both the political and 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the U.S.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses as well as related disclosures. On an ongoing basis, we evaluate our
estimates and judgments based on historical experience and various other factors
that are believed to be reasonable under the circumstances. Actual results may
differ from these estimates under different assumptions or conditions.
We annually review our financial reporting and disclosure practices and
accounting policies to ensure that they provide accurate and transparent
information relative to the current economic and business environment. We
believe that of our significant accounting policies involve a higher degree of
judgment and/or complexity. (See summary of significant accounting policies more
fully described on pages F-10 through F-15 of our 10-k report as of December 31,
2002).
We follow SFAS No. 144 with regard to impairment of long lived assets and
intangibles. If there is an indicator of impairment (i.e. negative operating
cash flows) an estimate of undisclosed future cash flows produced by each
restaurant within the asset grouping is compared to its carrying value.
21
IF ANY ASSET IS DETERMINED TO BE IMPAIRED, THE LOSS IS MEASURED BY THE EXCESS OF
THE ASSET CARRYING VALUE OVER ITS FAIR VALUE.
NEW ACCOUNTING STANDARDS
Asset retirement obligations
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
Accounting for Asset Retirement Obligations, effective January 1, 2003. The
Statement requires legal obligations associated with the retirement of
long-lived assets to be recognized at their fair value at the time that the
obligations are incurred. Upon initial recognition of a liability, the cost
will be capitalized as part of the related long-lived asset and allocated to
expense over the useful life of the asset. The adoption of the new rules is
not expected to have a material effect on the Company's ongoing results of
operations or financial position.
Variable interest entities
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 (FIN No. 46), Consolidation of Variable Interest Entities,
which requires an enterprise to consolidate or make certain, disclosures about
variable interest entities that meet certain criteria, effective July 1, 2003.
The Company is currently performing an analysis to determine the applicability
of FIN No. 46 to it.
Impairment of long-lived assets and intangible assets
The company follows the SFAS No. 144 and 141 with regard to the impairment of
long lived assets and intangibles. If there is an indicator of impairment (i.e.
negative operating cash flows) an estimate of undiscounted future cash flows
produced by each restaurant within the asset grouping is compared to its
carrying value. If any asset is determined to be impaired, the loss is measured
by the excess of the carrying amount of the asset over its fair value."
22
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this report, including statements
relating, among other things, to our business plans, business and growth
strategies, objectives, expectations, trends, intentions and adequacy of
resources, are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The words "believe," "expect,"
"anticipate" and similar expressions identify forward-looking statements, which
speak only as of the date the statement is made. Future events and actual
results could differ materially from those set forth in, contemplated by, or
underlying the forward-looking statements. Investors are cautioned that such
forward-looking statements involve risks and uncertainties, some or all of which
cannot be predicted or quantified and are beyond our control, including, without
limitation, those risks and uncertainties described in the risk factors set
forth in certain of our periodic filings with the Securities and Exchange
Commission, including the risk factors set forth in our Annual Report on Form
10-K for the year ended December 31, 2002, as filed with the Securities and
Exchange Commission on April 2, 2002. Investors are urged to read such periodic
filings and the risk factors contained in those filings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not engage in trading market risk-sensitive instruments or
purchasing 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 not issued debt
instruments, entered into forward or futures contracts, purchased options or
entered into swaps. Our primary market risk exposures are those relating to
interest rate fluctuations and possible devaluations of the Brazilian currency.
In particular, a change in Brazilian interest rates would affect the rates at
which we could borrow funds under our several credit facilities with Brazilian
banks and financial institutions.
ITEM 4. CONTROLS AND PROCEDURES.
Within the 90 days prior to the date of this report, under the
supervision and with the participation of management, including Ricardo
Figueiredo Bomeny (serving as the Company's Chief Executive Officer and Acting
Chief Financial Officer), the Company has evaluated the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, Mr. BOMENY has
concluded that the Company's disclosure controls and procedures are effective in
timely alerting him to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's periodic
SEC filings.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of their evaluation.
23
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
99.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: May 15, 2003
Brazil Fast Food Corp.
(Registrant)
By: /s/ Ricardo Figueiredo Bomeny
--------------------------------
Ricardo Figueiredo Bomeny
Chief Executive Officer
And Acting Chief Financial Officer
25
CERTIFICATION
I, RICARDO FIGUEIREDO BOMENY, CERTIFY THAT:
1. I have reviewed this quarterly report on Form 10-Q of Brazil Fast Food
Corp. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
DATE:MAY 15, 2003
/S/ RICARDO FIGUEIREDO BOMENY
--------------------------------
RICARDO FIGUEIREDO BOMENY
Chief Executive Officer and
Acting Chief Financial Officer
26