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 September 30, 2003
Commission File Number: 0-23278
Brazil Fast Food Corp.
| Delaware (State or other jurisdiction of incorporation or organization) |
13-3688737 (IRS Employer 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
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 o
As of September 30, 2003 there were issued and outstanding 7,566,540 shares of the Registrant’s Common Stock, par value $0.0001.
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
Consolidated Balance Sheets (Unaudited) (in thousands of Brazilian Reais, except share amounts)
| September, 30 | December 31, | |||||||||||
| 2003 | 2002 | |||||||||||
ASSETS |
||||||||||||
CURRENT ASSETS: |
||||||||||||
Cash and cash equivalents |
R$664 | R$1,461 | ||||||||||
Inventories |
1,659 | 1,536 | ||||||||||
Accounts receivable |
||||||||||||
Clients |
451 | 714 | ||||||||||
Franchisees |
6,200 | 5,333 | ||||||||||
Allowance for doubtful accounts |
(1,680 | ) | (1,893 | ) | ||||||||
Prepaid expenses |
1,142 | 637 | ||||||||||
Other current assets |
139 | 231 | ||||||||||
TOTAL CURRENT ASSETS |
8,575 | 8,019 | ||||||||||
PROPERTY AND EQUIPMENT, NET |
16,462 | 17,081 | ||||||||||
DEFERRED CHARGES, NET |
8,161 | 9,035 | ||||||||||
OTHER RECEIVABLES AND OTHER ASSETS |
2,636 | 2,849 | ||||||||||
TOTAL ASSETS |
R$35,834 | R$36,984 | ||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIENCY) |
||||||||||||
CURRENT LIABILITIES: |
||||||||||||
Notes payable |
R$4,557 | R$6,317 | ||||||||||
Accounts payable and accrued expenses |
4,631 | 5,295 | ||||||||||
Payroll and related accruals |
2,028 | 2,645 | ||||||||||
Taxes, other than income taxes |
734 | 1,155 | ||||||||||
Deferred income |
567 | 637 | ||||||||||
Commitments and litigation (note 4) |
1,607 | 5,901 | ||||||||||
Other current liabilities |
829 | 307 | ||||||||||
TOTAL CURRENT LIABILITIES |
14,953 | 22,257 | ||||||||||
NOTES PAYABLE, less current portion |
1,854 | — | ||||||||||
DEFERRED INCOME, less current portion |
1,952 | 1,761 | ||||||||||
COMMITMENTS AND LITIGATION, less
current portion (note 4) |
21,410 | 14,173 | ||||||||||
OTHER LIABILITIES |
220 | 303 | ||||||||||
TOTAL LIABILITIES |
40,389 | 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;
7,566,540 shares issued and outstanding |
1 | 1 | ||||||||||
Additional paid-in capital |
59,311 | 59,297 | ||||||||||
Deficit |
(62,902 | ) | (59,614 | ) | ||||||||
Accumulated comprehensive loss |
(965 | ) | (1,194 | ) | ||||||||
TOTAL SHAREHOLDERS’ EQUITY (DEFICIENCY) |
(4,555 | ) | (1,510 | ) | ||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIENCY) |
R$35,834 | 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)
| Nine Months Ended September 30, | ||||||||||||
| 2003 | 2002 | |||||||||||
STORE RESULTS |
||||||||||||
Net Restaurant Sales |
R$43,742 | R$46,612 | ||||||||||
Store Costs and Expenses |
||||||||||||
Food, Beverage and Packaging |
(17,441 | ) | (18,569 | ) | ||||||||
Payroll & Related Benefits |
(10,102 | ) | (10,143 | ) | ||||||||
Restaurant Occupancy |
(5,483 | ) | (6,368 | ) | ||||||||
Contracted Services |
(5,892 | ) | (5,891 | ) | ||||||||
Other Store Costs and Expenses |
(1,301 | ) | (1,455 | ) | ||||||||
TOTAL STORE COSTS AND EXPENSES |
(40,219 | ) | (42,426 | ) | ||||||||
STORE OPERATING INCOME |
3,523 | 4,186 | ||||||||||
FRANCHISE RESULTS |
||||||||||||
Net Franchise Royalty Fees |
R$4,663 | R$3,367 | ||||||||||
Franchise Costs and Expenses |
(1,537 | ) | (872 | ) | ||||||||
FRANCHISE OPERATING INCOME |
3,126 | 2,495 | ||||||||||
MARKETING, GENERAL AND
ADMINISTRATIVE (EXPENSES) INCOME |
||||||||||||
Marketing (Expenses) Income |
(567 | ) | (407 | ) | ||||||||
Administrative Expenses |
(4,655 | ) | (5,459 | ) | ||||||||
Other Operating Income (Expenses) |
176 | (52 | ) | |||||||||
Depreciation and Amortization |
(2,570 | ) | (2,847 | ) | ||||||||
TOTAL MARKETING, G & A (EXPENSES) INCOME |
(7,616 | ) | (8,765 | ) | ||||||||
OPERATING INCOME (LOSS) |
(967 | ) | (2,084 | ) | ||||||||
Interest Income (Expense) |
(2,282 | ) | (3,465 | ) | ||||||||
Foreign Exchange and Monetary Restatement Gain (Loss) |
(39 | ) | (2,968 | ) | ||||||||
NET INCOME (LOSS) |
R$ (3,288 | ) | R$ (8,517 | ) | ||||||||
NET (LOSS) PER COMMON SHARE
BASIC AND DILUTED |
R$ (0.44 | ) | R$ (1.67 | ) | ||||||||
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING: |
||||||||||||
BASIC AND DILUTED |
7,546,748 | 5,106,123 | ||||||||||
See Notes to Consolidated Financial Statements
3
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
Consolidated Statements of Operations (Unaudited) (In Thousands of Brazilian Reais, Except Share Amounts)
| Three Months Ended September 30, | ||||||||||||
| 2003 | 2002 | |||||||||||
STORE RESULTS |
||||||||||||
Net Restaurant Sales |
R$14,393 | R$14,781 | ||||||||||
Store Costs and Expenses |
||||||||||||
Food, Beverage and Packaging |
(5,549 | ) | (5,814 | ) | ||||||||
Payroll & Related Benefits |
(3,282 | ) | (3,218 | ) | ||||||||
Restaurant Occupancy |
(1,855 | ) | (2,154 | ) | ||||||||
Contracted Services |
(1,869 | ) | (1,828 | ) | ||||||||
Other Store Costs and Expenses |
(319 | ) | (338 | ) | ||||||||
TOTAL STORE COSTS AND EXPENSES |
(12,874 | ) | (13,352 | ) | ||||||||
STORE OPERATING INCOME |
1,519 | 1,429 | ||||||||||
FRANCHISE RESULTS |
||||||||||||
Net Franchise Royalty Fees |
R$1,560 | R$1,162 | ||||||||||
Franchise Costs and Expenses |
(494 | ) | (243 | ) | ||||||||
FRANCHISE OPERATING INCOME |
1,066 | 919 | ||||||||||
MARKETING, GENERAL AND
ADMINISTRATIVE (EXPENSES) INCOME |
||||||||||||
Marketing (Expenses) Income |
(674 | ) | 24 | |||||||||
Administrative Expenses |
(1,517 | ) | (1,501 | ) | ||||||||
Other Operating Income (Expenses) |
580 | (1,039 | ) | |||||||||
Depreciation and Amortization |
(828 | ) | (966 | ) | ||||||||
TOTAL MARKETING, G & A (EXPENSES) INCOME |
(2,439 | ) | (3,482 | ) | ||||||||
OPERATING INCOME (LOSS) |
146 | (1,134 | ) | |||||||||
Interest Income (Expense) |
(680 | ) | (709 | ) | ||||||||
Foreign Exchange and Monetary Restatement Gain (Loss) |
(68 | ) | (1,948 | ) | ||||||||
NET INCOME (LOSS) |
R$(602 | ) | R$(3,791 | ) | ||||||||
NET (LOSS) PER COMMON SHARE |
||||||||||||
BASIC AND DILUTED |
R$(0.08 | ) | R$(0.57 | ) | ||||||||
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING: |
||||||||||||
BASIC AND DILUTED |
7,554,665 | 6,622,790 | ||||||||||
See Notes to Consolidated Financial Statements
4
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
Consolidated Statements of Comprehensive Loss (Unaudited) (In Thousands of Brazilian Reais)
| Nine Months Ended September 30, | Three Months Ended September 30, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net Loss |
R$(3,288 | ) | R$(8,517 | ) | R$(602 | ) | R$(3,791 | ) | |||||||||
Other comprehensive income (loss): |
|||||||||||||||||
Foreign currency translation adjustment |
229 | (680 | ) | 3 | (610 | ) | |||||||||||
Comprehensive Loss |
R$(3,059 | ) | R$(9,197 | ) | R$(599 | ) | R$(4,401 | ) | |||||||||
See Notes to Consolidated Financial Statements
5
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 |
— | — | — | (3,288 | ) | — | (3,288 | ) | ||||||||||||||||
Exercise of options |
23,750 | 14 | 14 | |||||||||||||||||||||
Cumulative translation adjustment |
— | — | — | — | 229 | 229 | ||||||||||||||||||
Balance, September 30, 2003 |
7,566,540 | R$1 | R$59,311 | R$(62,902 | ) | R$(965 | ) | R$(4,555 | ) | |||||||||||||||
See Notes to Consolidated Financial Statements
6
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited) (In Thousands of Brazilian Reais)
| Nine Months Ended September 30, | ||||||||||||
| 2003 | 2002 | |||||||||||
CASH FLOW FROM OPERATING ACTIVITIES: |
||||||||||||
Net (loss) |
R$(3,288 | ) | R$(8,517 | ) | ||||||||
Adjustments to reconcile net (loss) to cash provided by
(used in) operating activities: |
||||||||||||
Depreciation and amortization |
2,570 | 2,847 | ||||||||||
(Gain) Loss on assets sold |
147 | 2,746 | ||||||||||
Contingences accrued |
2,045 | — | ||||||||||
Services provided in exchange for shares |
120 | — | ||||||||||
Changes in assets and liabilities: |
||||||||||||
(Increase) decrease in: |
||||||||||||
Accounts receivable |
(1,257 | ) | (798 | ) | ||||||||
Inventories |
(123 | ) | (150 | ) | ||||||||
Prepaid expenses and other current assets |
(413 | ) | (478 | ) | ||||||||
Other assets |
213 | (644 | ) | |||||||||
(Decrease) increase in: |
||||||||||||
Accounts payable and accrued expenses |
(784 | ) | (1,548 | ) | ||||||||
Payroll and related accruals |
(617 | ) | 1,131 | |||||||||
Taxes other than income taxes |
222 | 1,265 | ||||||||||
Other liabilities |
439 | 276 | ||||||||||
Contingencies and taxes in litigation |
255 | — | ||||||||||
Deferred income |
121 | (478 | ) | |||||||||
CASH
FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES |
(350 | ) | (4,348 | ) | ||||||||
CASH FLOW FROM INVESTING ACTIVITIES: |
||||||||||||
Additions to property and equipment |
(1,654 | ) | (951 | ) | ||||||||
Proceeds from sale of property, equipment and deferred charges |
870 | |||||||||||
CASH FLOWS (USED IN) INVESTING ACTIVITIES |
(784 | ) | (951 | ) | ||||||||
CASH FLOW FROM FINANCING ACTIVITIES: |
||||||||||||
Net Borrowings (Repayments) under lines of credit |
94 | (3,816 | ) | |||||||||
Proceeds from issuance of shares of common stock |
— | 8,829 | ||||||||||
Exercise of options |
14 | 8,829 | ||||||||||
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES |
108 | 13,842 | ||||||||||
EFFECT OF FOREIGN EXCHANGE RATE |
229 | (680 | ) | |||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
(797 | ) | 7,863 | |||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
1,461 | 2,267 | ||||||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
R$664 | R$10,130 | ||||||||||
See Notes to Consolidated Financial Statements
7
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited) (In Thousands of Brazilian Reais)
| NOTE 1 — FINANCIAL STATEMENT PRESENTATION | |||
| The accompanying financial statements have been prepared by Brazil Fast Food Corp. (the “Company”), without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at September 30, 2003 and for all periods presented have been made. The results of operations for the periods ended September 30, 2003 and 2002 are not necessarily indicative of the operating results for a full year. Unless otherwise specified all references in these financial statements to (i ) “Reais” or “R$” 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$62,902 and at September 30, 2003, consolidated current liabilities exceed consolidated current assets by R$6,378. | |||
| 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 approximately R$500 of unused credit line. | |||
| During 2002, the Company received net proceeds in amount of R$8,829 which were used to reduce its 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, menu expansion to meet customer demand and rebate from suppliers. In order to act on these plans and sustain current operations, the Company has, in the past, been 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, while the Company is currently in full compliance with agreements with the creditors, there can be no assurance that the Company will not be forced to seek the forbearance of its creditors in the future, 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 and nine month periods ended September 30, 2002, have been restated to conform with the current quarter presentation. |
8
| NOTE 4 — COMMITMENTS AND LITIGATION | |||
| During 1999, certain Brazilian taxes levied on the Company were not paid. In 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. In the same period, the Company applied to join a tax amnesty program and was accepted by the Brazilian Federal government (REFIS). Through this program, 1999 past due federal taxes are being 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. | |||
| In the end of 2001 and beginning 2002 the Company did not pay some other state and Federal taxes. In addition, Brazilian Social Securities Authorities applied penalties against the Company, by charging certain operating transactions not covered by the Company’s previous calculation of Social Security contributions. | |||
| During December 2002, the Company applied to join and was accepted to another tax amnesty program offered by the Rio de Janeiro state government, through which the Company will parcel unpaid 2001 and 2002 state taxes, in one hundred and twenty months, interest free, in amounts indexed to Brazil’s UNIDADE FISCAL DE REFERENCIA, which is currently 12% per year. | |||
| During June 2003 the Brazilian Government had implemented another tax amnesty (PAES), to which the Company applied and is waiting for Government acceptance. Through this program the balance of the previous Federal tax amnesty program (REFIS) and unpaid 2002 federal tax, as well as the Social Security penalties, will be paid in monthly installments equivalent to 1.5% of the Company’s gross sales, with interest accruing at rates set by the Brazilian Federal government, currently 11.5% per year. | |||
| All installments related to those agreements have been paid on a timely basis. During nine months ended September 30, 2003, the Company paid approximately R$ 801 related to such Brazilian Federal tax amnesty programs and approximately R$1,532 related to Rio de Janeiro state government agreements. | |||
| 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, the Company has deposited all installment payments due under our lease financing agreements with the court in reais, inclusive of 12% per annum interest. The installment payments ceased on November, 2002, the end of the contract term. Despite of been claiming to pay lower amounts, the Company has accrued the full contracted amounts as of September 30, 2003. | |||
| Liabilities related to tax amnesty programs and litigation consist of the following: |
| September 30, 2003 |
December 31, 2002 |
||||||||||||||||||||||||||||
| Long | Long | ||||||||||||||||||||||||||||
| Total | Current | Term | Total | Current | Term | ||||||||||||||||||||||||
| Liability | Liability | Liability | Liability | Liability | Liability | ||||||||||||||||||||||||
Social security tax
debts — restated |
R$0 | — | — | R$1,365 | — | R$1,365 | |||||||||||||||||||||||
Social tax charged
on revenues |
— | — | — | 3,816 | 3,816 | — | |||||||||||||||||||||||
Reassessed value-
added tax |
4,581 | 892 | 3,689 | 5,987 | 1,125 | 4,862 | |||||||||||||||||||||||
REFIS |
4,457 | 358 | 4,099 | 5,082 | 960 | 4,122 | |||||||||||||||||||||||
PAES |
10,239 | 358 | 9,881 | — | — | — | |||||||||||||||||||||||
IBM Leasing litigation |
3,144 | — | 3,144 | 3,187 | — | 3,187 | |||||||||||||||||||||||
Other litigation |
597 | — | 597 | 637 | — | 637 | |||||||||||||||||||||||
TOTAL |
R$23,017 | R$1,607 | R$21,410 | R$20,074 | R$5,901 | R$14,173 | |||||||||||||||||||||||
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. | |||
| On August 15, 2003 options to purchase an aggregate of 23,750 shares of common stock were exercised, having an aggregate purchase price of $4,512.50 equivalent to R$14. | |||
| 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 nine months ended September 30, 2003 the Company charged R$120 to operating results related to those services. Such amount is a result of number of shares owed on accrual basis during the nine months of 2003, multiplied by their average fair value. | |||
| NOTE 7 — STOCK OPTION PLAN ACTIVITY | |||
| On August 15, 2003, under the Company’s Stock Option Plan, the Compensation Committee granted options to purchase 32,500 shares with an average exercise price of $.32, immediate vesting, and valued at average fair value of $10,075.00 using the Black Scholes option pricing model. | |||
| Also on August 15, 2003, options to purchase an aggregate of 23,750 shares of common stock were exercised, having an aggregate purchase price of $4,512.50 equivalent to R$14. | |||
| There were no options canceled during the nine months ended September 30, 2003, under the Company’s Stock Option Plan. | |||
| Under the Company’s Stock Option Plan, options to purchase a total of 28,125 shares have expired during the nine months ended September 30, 2003. |
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 THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
For the first quarter onward, the Company has reformatted its consolidated statement of operations in order to improve the quality of analysis. Basically, the reformatted statement differs 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 and nine month period ended September 30, 2002, has been restated to conform with the current presentation.
11
The following table sets forth certain operating data for the periods of three and nine months ended September 30, 2003 and 2002. (Amount in Brazilian Reais)
| Nine Months | Nine Months | |||||||||||||||||||
| Ended | Ended | |||||||||||||||||||
| September 30, 2003 | % | September 30, 2002 | % | |||||||||||||||||
STORE RESULTS |
||||||||||||||||||||
Net Restaurant Sales |
R$43,742,000 | 100.0 | % | R$46,612,000 | 100.0 | % | ||||||||||||||
Store Costs and Expenses |
||||||||||||||||||||
Food, Beverage and Packaging |
(17,441,000 | ) | -39.9 | % | (18,569,000 | ) | -39.8 | % | ||||||||||||
Payroll & Related Benefits |
(10,102,000 | ) | -23.1 | % | (10,143,000 | ) | -21.8 | % | ||||||||||||
Restaurant Occupancy |
(5,483,000 | ) | -12.5 | % | (6,368,000 | ) | -13.7 | % | ||||||||||||
Contracted Services |
(5,892,000 | ) | -13.5 | % | (5,891,000 | ) | -12.6 | % | ||||||||||||
Other Store Costs and Expenses |
(1,301,000 | ) | -3.0 | % | (1,455,000 | ) | -3.1 | % | ||||||||||||
Total Store Costs and Expenses |
(40,219,000 | ) | -91.9 | % | (42,426,000 | ) | -91.0 | % | ||||||||||||
STORE OPERATING INCOME |
3,523,000 | 8.1 | % | 4,186,000 | 9.0 | % | ||||||||||||||
FRANCHISE RESULTS |
||||||||||||||||||||
Net Franchise Royalty Fees |
R$4,663,000 | 10.7 | % | R$3,367,000 | 7.2 | % | ||||||||||||||
Franchise Costs and Expenses |
(1,537,000 | ) | -3.5 | % | (872,000 | ) | -1.9 | % | ||||||||||||
FRANCHISE OPERATING INCOME |
3,126,000 | 7.1 | % | 2,495,000 | 5.4 | % | ||||||||||||||
MARKETING, GENERAL AND
ADMINISTRATIVE (EXPENSES) INCOME |
||||||||||||||||||||
Marketing (Expenses) Income |
(567,000 | ) | -1.3 | % | (407,000 | ) | -0.9 | % | ||||||||||||
Administrative Expenses |
(4,655,000 | ) | -10.6 | % | (5,459,000 | ) | -11.7 | % | ||||||||||||
Other Operating Income (Expenses) |
176,000 | 0.4 | % | (52,000 | ) | -0.1 | % | |||||||||||||
Depreciation and Amortization |
(2,570,000 | ) | -5.9 | % | (2,847,000 | ) | -6.1 | % | ||||||||||||
Total Marketing, G & A (Expenses) Income |
(7,616,000 | ) | -17.4 | % | (8,765,000 | ) | -18.8 | % | ||||||||||||
OPERATING INCOME (LOSS) |
(967,000 | ) | (2,084,000 | ) | ||||||||||||||||
Interest Income (Expense) |
(2,282,000 | ) | -5.2 | % | (3,465,000 | ) | -7.4 | % | ||||||||||||
Foreign Exchange and Monetary Restatement
Gain (Loss) |
(39,000 | ) | -0.1 | % | (2,968,000 | ) | -6.4 | % | ||||||||||||
NET INCOME (LOSS) |
R$(3,288,000 | ) | -7.5 | % | R$(8,517,000 | ) | -18.3 | % | ||||||||||||
| Three Months | Three Months | |||||||||||||||||||
| Ended | Ended | |||||||||||||||||||
| September 30, 2003 | % | September 30, 2002 | % | |||||||||||||||||
STORE RESULTS |
||||||||||||||||||||
Net Restaurant Sales |
R$14,393,000 | 100.0 | % | R$14,781,000 | 100.0 | % | ||||||||||||||
Store Costs and Expenses |
||||||||||||||||||||
Food, Beverage and Packaging |
(5,549,000 | ) | -38.6 | % | (5,814,000 | ) | -39.3 | % | ||||||||||||
Payroll & Related Benefits |
(3,282,000 | ) | -22.8 | % | (3,218,000 | ) | -21.8 | % | ||||||||||||
Restaurant Occupancy |
(1,855,000 | ) | -12.9 | % | (2,154,000 | ) | -14.6 | % | ||||||||||||
Contracted Services |
(1,869,000 | ) | -13.0 | % | (1,828,000 | ) | -12.4 | % | ||||||||||||
Other Store Costs and Expenses |
(319,000 | ) | -2.2 | % | (338,000 | ) | -2.3 | % | ||||||||||||
Total Store Costs and Expenses |
(12,874,000 | ) | -89.4 | % | (13,352,000 | ) | -90.3 | % | ||||||||||||
STORE OPERATING INCOME |
1,519,000 | 10.6 | % | 1,429,000 | 9.7 | % | ||||||||||||||
FRANCHISE RESULTS |
||||||||||||||||||||
Net Franchise Royalty Fees |
R$1,560,000 | 10.8 | % | R$1,162,000 | 7.9 | % | ||||||||||||||
Franchise Costs and Expenses |
(494,000 | ) | -3.4 | % | (243,000 | ) | -1.6 | % | ||||||||||||
FRANCHISE OPERATING INCOME |
1,066,000 | 7.4 | % | 919,000 | 6.2 | % | ||||||||||||||
MARKETING, GENERAL AND
ADMINISTRATIVE (EXPENSES) INCOME |
||||||||||||||||||||
Marketing (Expenses) Income |
(674,000 | ) | -4.7 | % | 24,000 | 0.2 | % | |||||||||||||
Administrative Expenses |
(1,517,000 | ) | -10.5 | % | (1,501,000 | ) | -10.2 | % | ||||||||||||
Other Operating Income (Expenses) |
580,000 | 4.0 | % | (1,039,000 | ) | -7.0 | % | |||||||||||||
Depreciation and Amortization |
(828,000 | ) | -5.8 | % | (966,000 | ) | -6.5 | % | ||||||||||||
Total Marketing, G & A (Expenses) Income |
(2,439,000 | ) | -16.9 | % | (3,482,000 | ) | -23.6 | % | ||||||||||||
OPERATING INCOME (LOSS) |
146,000 | (1,134,000 | ) | |||||||||||||||||
Interest Income (Expense) |
(680,000 | ) | -4.7 | % | (709,000 | ) | -4.8 | % | ||||||||||||
Foreign Exchange and Monetary Restatement
Gain (Loss) |
(68,000 | ) | -0.5 | % | (1,948,000 | ) | -13.2 | % | ||||||||||||
NET INCOME (LOSS) |
R$(602,000 | ) | -4.2 | % | R$(3,791,000 | ) | -25.6 | % | ||||||||||||
12
Introduction
During the second half of fiscal 2002, due to the political uncertainty attendant to the outcome of the Brazilian presidential election in October 2002 and the subsequent victory of Labor Party, investors doubted about the future economic trends in Brazil and reduced and/or postponed most business projects and money supply.
Brazilian currency devaluated approximately 52.3% against the US dollar during the year of 2002 and, as a consequence, Brazilian inflation rates reached the highest level since the inception of Brazil’s stabilization plan in mid 1994. In response to these events, the Brazilian Central Bank in October 2002 and subsequently in December increased overnight interest rates from 18% to 25% per year.
The new Brazilian President took office in January 2003 starting to take acts - which includes the discussion of implementing structural reforms- in order to reverse the previous year-end scenario. In response to such acts, the Brazilian inflation started to decline and the Brazilian Real valuated against the US Dollar during the 2003.
During the quarter ended September 30, 2003 the economic environment shows inflation under control. Brazilan Central Bank reduced the overnight interest rates twice and indicated other lower reductions in the future. However, those reductions were not transferred to consumers or to the industry yet.
Actually, the unemployment rates in major metropolitan areas (Rio de Janeiro and Sao Paulo), remain stable, but they are still high. Accordingly, the average take-home income keeps in low levels, and is still negatively impacting our restaurant sales and results of our operations for the nine months of 2003.
STORE RESULTS
Net Restaurant Sales
Net restaurant sales for our company-owned retail outlets decreased R$ 2,870,000 or 6.2%, to R$43,742,000 for the nine months ended September 30, 2003 as compared to R$46,612,000 for the nine months ended September 30, 2002. Same store sales decreased approximately 0.30% for the nine months ended September 30, 2003 as compared to the same period of 2002.
Net restaurant sales for our company-owned retail outlets decreased R$ 388,000 or 2.6 %, to R$14,393,000 for the three months ended September 30, 2003 as compared to R$14,781,000 for the three months ended September 30, 2002. Same store sales decreased approximately 1.46% for the three months ended September 30, 2003 as compared to the same period of 2002.
Same store sales decreases are mainly attributable to lower consumer spending due to macro economic factors described above, as well as a stronger competition in metropolitan areas such as Rio de Janeiro and Sao Paulo. Such decreases were partially offset by an average increase of 14% in the sales prices of our products since September 30, 2003.
The year-to-year decreases on total Net Restaurant Sales are also attributable to the reduction of our company-owned retail outlets from 64 as of September 30, 2002 to 58 as of September 30, 2003.
The company closed 1 owned-operated outlet during the period between September 30, 2002 and September 30, 2003 and sold 5 outlets to franchisees. 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.
In addition, the Company is working on marketing campaigns and on personnel motivation in order to improve restaurant sales.
13
Food, Beverage and Packaging Costs
As a percentage of net restaurant sales, food, beverage and packaging costs were (39.9%) and (39.8%) for the nine months ended September 30, 2003 and 2002, respectively.
As a percentage of net restaurant sales, food, beverage and packaging costs were (38.6%) and (39.3%) for the three months ended September 30, 2003 and 2002, respectively.
Food, beverage and packaging nominal costs increased from period to period, due to on purchase prices of soft drinks, meat, ice cream and French fries. Those increases were partially offset by long term agreements celebrated with some suppliers. The percentage decrease observed on comparing the third quarters periods were attributable to the effect of increasing our sales prices and successful negations with suppliers.
Payroll & Related Benefits
As a percentage of net restaurant sales, store payroll and related benefits increased from (21.8%) for the nine months ended September 30, 2002 to (23.1%) for the same period ended September 30, 2003.
As a percentage of net restaurant sales, store payroll and related benefits increased from (21.8%) for the three months ended September 30, 2002 to (22.8%) for the same period ended September 30, 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 (12.5%) and (13.7%) for the nine months ended September 30, 2003 and 2002, respectively.
Restaurant occupancy costs and other expenses expressed as a percentage of net restaurant sales were approximately (12.9%) and (14.6%) for the three months ended September 30, 2003 and 2002, respectively.
These decreases are 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 21.4% per annum, partially offset such decreases.
Contracted Services
Expenses related to contracted services expressed as a percentage of net restaurant sales were approximately (13.5%) and (12.6%) for the nine months ended September 30, 2003 and 2002, respectively.
Expenses related to contracted services expressed as a percentage of net restaurant sales were approximately (13.0%) and (12.4%) for the three months ended September 30, 2003 and 2002, respectively.
These increases are mainly attributable to increases in utility costs, mainly electricity which rate has increased approximately 19%, as well as higher delivery costs. The effect of those increases was partially offset by reduction obtained on maintenance service contracts.
14
Other Store Cost and Expenses
Other store cost and expenses expressed as a percentage of net restaurant sales were approximately (3.0%) and (3.1%) for the nine months ended September 30, 2003 and 2002, respectively.
Other store cost and expenses expressed as a percentage of net restaurant sales were approximately (2.2%) and (2.3%) for the three months ended September 30, 2003 and 2002, respectively.
Other store cost and expenses remained almost constant from period to period.
FRANCHISE RESULTS
Net Franchise Royalty Fees
Net franchise royalty fees increased R$1,296,000 or 38.5%, to R$4,663,000 for the nine months ended September 30, 2003 as compared to R$3,367,000 for the nine months ended September 30, 2002 and increased R$398,000 or 34.3%, to R$1,560,000 for the three months ended September 30, 2003 as compared to R$1,162,000 for the three months ended September 30, 2002.
This increase is mainly attributable to the growth of our franchise business from 222 retail outlets as of September 30, 2002 to 261 as of September 30, 2003.
From the period of September 1, 2002 to September 30, 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 (3.5%) and (1.9%) for the nine months ended September 30, 2003 and 2002, respectively, and (3.4%) and (1.6%) for the three months ended September 30, 2003 and 2002, respectively.
The increases are, 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 were approximately (1.3)% and (0.9%) for the nine months ended September 30, 2003 and 2002, respectively.
As a percentage of net restaurant sales, marketing (expenses) income were approximately (4.7%) and 0.2% for the three months ended September 30, 2003 and 2002, respectively.
Those increases are due to higher expenses derived by more intensive promoting campaigns of new products on the Company’s menu.
General and Administrative Expenses
As a percentage of restaurant sales, general and administrative expenses were approximately (10.6%) and (11.7%) for the nine months ended September 30, 2003 and 2002, respectively and approximately (10.5%) and (10.2%) for the three months ended September 30, 2003 and 2002, respectively.
The decrease observed on comparing the nine month periods is mainly attributable to reductions or non-renewal of a great number of outsourced administrative services, such as payroll processing, legal, accounting and auditing services.
The increase observed on comparing the three month periods is mainly attributable to increase in salaries mandated by union-driven agreements and, as a consequence, social charges that are computed based on employees salaries. The percentage increase in the comparable three month periods is also attributable to the effect of our decreased restaurant sales.
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 sold and non recurring income or expenses
Other operating income (expenses) expressed as a percentage of net restaurant sales were (0.1%), for the nine months ended September 30, 2002 and 0.4% for the nine months ended September 30, 2003.
Other operating income (expense) expressed as a percentage of net restaurant sales were (7.0)%, for the three months ended September 30, 2002 and 4.0% for the three months ended September 30, 2003.
The reversal from net expense to net income comparing the three and nine month periods of 2002 and 2003 was mainly provoked by a great number of rebate agreements with suppliers during 2003.
Depreciation and Amortization
As a percentage of net restaurant sales, depreciation and amortization were approximately (5.9)% and (6.1)% for the nine months ended September 30, 2003 and 2002, respectively.
As a percentage of net restaurant sales, depreciation and amortization were approximately (5.8)% and (6.5)% for the three months ended September 30, 2003 and 2002, respectively.
The 2003 decreases is attributable to the completion of depreciation upon some assets (mainly computers and leasehold improvements) and to the reduction of depreciation arose by the sale of fixed assets located at stores transferred to franchised operation.
16
INTEREST INCOME (EXPENSES) AND FOREIGN EXCHANGE GAIN (LOSS)
Interest Income and Expenses
As a percentage of net restaurant sales, net interest expense were approximately (5.2)% and (7.4)% for the nine months ended September 30, 2003 and 2002, respectively.
As a percentage of net restaurant sales, net interest expense were approximately (4.7)% and (4.8)% for the three months ended September 30, 2003 and 2002, respectively.
The percentage decreases for the nine and three months ended September 30, 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 and monetary restatement gain and/or losses were approximately (0.1)% and (6.4)% for the nine months ended September 30, 2003 and 2002, respectively.
As a percentage of net restaurant sales, net foreign exchange gain and/or losses were approximately (0.5)% and (13.2)% for the three months ended September 30, 2003 and 2002, respectively.
The decreases of net losses during the periods of 2002 and 2003 are primarily attributable to valuation of the Brazilian Real against the US Dollar during the periods of three and nine month ended September 30, 2003 contrasted to a devaluation of the Brazilian Real against the US Dollar in the same periods of 2002. Those effects of foreign exchange gain or losses are derived from the restatements of our obligations denominated in U.S. Dollars. The decreases of net losses during those periods are also attributable to the reduction of debts denominated in U.S. Dollars.
LIQUIDITY AND CAPITAL RESOURCES
Since March 1996, we have funded our cumulative operating losses of R$62,902,000 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 September 30, 2003, we had cash on hand of R$664,000 and a working capital deficiency of R$6,378,000.
For the nine months ended September 30, 2003, we had net cash used in operating activities of R$350,000, net cash used in investing activities of R$784,000 and net cash provided by financing activities of R$108,000. 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 provided by financing activities was a result of rescheduling our financing debts.
17
Our earnings before interest, taxes, depreciation and amortization (EBITDA) were approximately R$1,603,000 for the period of nine months ended September 30, 2003 and approximately positive R$763,000 for the same period ended September 30, 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 September 30, 2003 were as follows:
| September 30, | ||||
| 2003 | ||||
Revolving lines of credit (a) |
R$2,587,000 | |||
Mortgages payable |
— | |||
Notes payable linked to
fixed assets acquisitions (b) |
3,065,000 | |||
Other notes payable |
38,000 | |||
| 5,690,000 | ||||
Less: current portion |
(3,836,000 | ) | ||
| R$1,854,000 | ||||
At September 30, 2003, future maturities of notes payable are as follows:
| Fiscal | |||||
| Year | |||||
Remaining 2003 |
R$2,752,000 | ||||
2004 |
R$1,218,000 | ||||
2005 |
R$957,000 | ||||
2006 |
R$763,000 | ||||
| 5,690,000 | |||||
| (a) | Due on demand from various Brazilian financial institutions as well as private individuals with interest rates raging from 29.0% to 32.9% per annum, and guaranteed by certain officers and receivables. Currently, the Company has approximately R$500,000 of unused credit line. | |
| (b) | This credit facility was used to purchase three stores. Repayment of principal with respect to one of these stores is due in 12 monthly installments of R$25,000. Repayment of principal with respect to the other two stores is due in 37 monthly installments of R$46,000 in addition of 3 annual installments of R$408,000, 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. |
18
Pursuant to settlements 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 (REFIS), 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 September 30, 2003.
The Company has other past due Federal Taxes which were not paid in the beginning of 2002, in the approximated amount of R$839,000,as well as fines applied against the Company by the Brazilian Social Securities Authorities, in the approximated amount of R$9,400,000, which are not covered by any of the above mentioned tax agreements. However, during June 2003 the Brazilian Government implemented another tax amnesty (PAES), to which the Company applied and is waiting for Government acceptance. Through this program the balance of the previous Federal tax amnesty program (REFIS) and unpaid 2002 federal tax, as well as the Social Security penalties, will be paid in monthly installments equivalent to 1.5% of the Company’s gross sales, with interest accruing at rates set by the Brazilian Federal government, currently 11.5% per year.
Considering all the above mentioned fiscal debts, we are required to pay restructured past-due Brazilian state taxes of approximately R$4,581,000 and federal taxes of approximately R$14,696,000.
For the remaining fiscal 2003, we expect to pay approximately R$446,000 pursuant to the state tax settlements and approximately R$267,000 pursuant to the federal tax amnesty program.
Since June 2002, the Company has paid all its current taxes on a timely basis.
19
The Company has also long-term contractual obligations in the form of operating lease obligations related to Company-operated outlets.
The future minimum lease payments under those obligations with an initial or remaining noncancelable lease terms in excess of one year at September 30, 2003 are as follows:
| Fiscal Year | Amount | ||||
2003 |
1,159,000 | ||||
2004 |
1,966,000 | ||||
2005 |
1,560,000 | ||||
2006 |
1,033,000 | ||||
2007 |
284,000 | ||||
Thereafter |
153,000 | ||||
Rent expense was R$3,917,000 for the nine month period ended September 30, 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 the remaining 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 | |||||||||||||
remanining 2003 |
1,159,000 | 713,000 | 2,752,000 | 4,313,000 | |||||||||||||
2004 |
1,966,000 | 4,181,400 | 1,218,000 | 8,941,400 | |||||||||||||
2005 |
1,560,000 | 2,722,400 | 957,000 | 3,974,400 | |||||||||||||
2006 |
1,033,000 | 1,457,400 | 763,000 | 3,253,400 | |||||||||||||
2007 |
284,000 | 1,457,400 | — | 1,741,400 | |||||||||||||
Thereafter |
153,000 | 8,744,400 | — | 8,897,400 | |||||||||||||
20
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, 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 we reached during the quarter ended September 30, 2003, reducing 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.
GOING CONCERN ISSUE
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.
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
21
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 ADOPTION OF THE NEW RULES IS NOT EXPECTED TO HAVE A MATERIAL EFFECT ON THE COMPANY’S ONGOING RESULTS OF OPERATIONS OR FINANCIAL POSITION.
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.”
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 15, 2003. 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 future 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. Recently, the Company extinguished its debt denominated in US$ reducing the exposure to exchange rate fluctuations.
ITEM 4. CONTROLS AND PROCEDURES.
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, as of September 30, 2003. 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.
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PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
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
Exhibit 31.1 — Certification of Ricardo Figueiredo Bomeny Pursuant to Section 302
Exhibit 32.1 — Certification of Ricardo Figueiredo Bomeny Pursuant to Section 906
(b) Reports on Form 8-K
None
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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: November 14, 2003 | ||
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Brazil Fast Food Corp. (Registrant) |
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| By: /s/ Ricardo Figueiredo Bomeny | ||
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Ricardo Figueiredo Bomeny Chief Executive Officer And Acting Chief Financial Officer |
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