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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 June 30, 2002
Commission File Number: 0-23278
----------------------
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]
As of June 30, 2002 there were issued and outstanding 6,222,790 shares of
the Registrant's Common Stock, par value $0.0001.
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BRAZIL FAST FOOD CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS OF BRAZILIAN REAIS, EXCEPT SHARE AMOUNTS)
ASSETS
June 30, December 31,
------------- -------------
2002 2001
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents R$ 1,164 R$ 2,267
Accounts receivable, net of allowance for doubtful accounts 4,068 3,834
Inventories 954 924
Stock subscription receivable 828 -
Prepaid expenses and other current assets 662 710
------------- -------------
TOTAL CURRENT ASSETS 7,676 7,735
------------- -------------
PROPERTY AND EQUIPMENT, NET 21,950 19,891
DEFERRED CHARGES, NET 9,166 9,690
OTHER RECEIVABLES AND OTHER ASSETS 2,839 2,461
------------- -------------
TOTAL ASSETS R$ 41,631 R$ 39,777
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable R$ 12,280 R$ 11,103
Accounts payable and accrued expenses 5,435 7,246
Payroll and related accruals 2,331 1,686
Taxes, other than income taxes 7,523 5,295
Deferred income 637 637
Other current liabilities 762 485
-------------- -------------
TOTAL CURRENT LIABILITIES 28,968 26,452
NOTES PAYABLE, less current portion - -
DEFERRED INCOME, less current portion 2,080 2,398
TAXES IN LITIGATION 8,787 9,573
OTHER LIABILITIES 376 137
-------------- -------------
TOTAL LIABILITIES 40,211 38,560
-------------- -------------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000 shares authorized; no - -
shares issued
Common stock, $.0001 par value, 12,500,000 shares authorized;
6,222,790 and 3,722,790 shares issued and outstanding 1 1
Additional paid-in capital 55,341 50,341
Deficit (53,131) (48,404)
Accumulated comprehensive loss (791) (721)
-------------- -------------
TOTAL SHAREHOLDERS' EQUITY 1,420 1,217
-------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY R$ 41,631 R$ 39,777
-------------- -------------
See Notes to Consolidated Financial Statements
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS OF BRAZILIAN REAIS, EXCEPT SHARE AMOUNTS)
Six Months Ended June 30,
-----------------------------
2002 2001
NET OPERATING REVENUES: ------------ ------------
Restaurant sales R$ 31,850 R$ 35,348
Franchise income 2,290 1,887
Other income 3,583 2,839
------------ ------------
TOTAL NET OPERATING REVENUES 37,723 40,074
------------ ------------
COSTS AND EXPENSES:
Cost of restaurant sales 12,755 13,941
Restaurant payroll and other employee benefits 6,474 6,719
Restaurant occupancy and other expenses 4,034 3,947
Depreciation and amortization 1,881 1,942
Other operating expenses 6,977 7,294
Selling expenses 2,493 2,876
General and administrative expenses 3,735 4,225
------------ ------------
TOTAL COSTS AND EXPENSES 38,349 40,944
------------ ------------
INCOME (LOSS) FROM OPERATIONS (626) (870)
INTEREST INCOME (EXPENSE) (3,081) (2,441)
FOREIGN EXCHANGE (LOSS) (1,020) (1,243)
------------ ------------
NET (LOSS) R$ (4,727) R$ (4,554)
============ ============
NET (LOSS) PER COMMON SHARE R$ (1.09) R$ (1.29)
BASIC AND DILUTED ============ ============
WEIGHTED AVERAGE COMMON 4,347,790 3,525,082
SHARES OUTSTANDING: ------------ ------------
BASIC AND DILUTED
See Notes to Consolidated Financial Statements
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS OF BRAZILIAN REAIS, EXCEPT SHARE AMOUNTS)
Three Months Ended June 30,
---------------------------
NET OPERATING REVENUES: 2002 2001
------------ ------------
Restaurant sales R$ 14,677 R$ 16,232
Franchise income 1,076 921
Other income 1,766 1,448
------------ ------------
TOTAL NET OPERATING REVENUES 17,519 18,601
------------ ------------
COSTS AND EXPENSES:
Cost of restaurant sales 5,927 6,496
Restaurant payroll and other employee benefits 3,125 3,330
Restaurant occupancy and other expenses 1,971 1,962
Depreciation and amortization 899 976
Other operating expenses 3,348 3,530
Selling expenses 1,060 1,501
General and administrative expenses 1,593 1,370
------------ ------------
TOTAL COSTS AND EXPENSES 17,923 19,165
------------ ------------
INCOME (LOSS) FROM OPERATIONS (404) (564)
INTEREST INCOME (EXPENSE) (1,668) (3,846)
FOREIGN EXCHANGE (LOSS) (1,133) (578)
------------ -------------
NET (LOSS) R$ (3,205) R$ (4,988)
============ =============
NET (LOSS) PER COMMON SHARE R$ (0.64) R$ (1.34)
BASIC AND DILUTED ============ =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
BASIC AND DILUTED 4,972,790 3,722,790
------------ -------------
See Notes to Consolidated Financial Statements
PAGE>
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
(IN THOUSANDS OF BRAZILIAN REAIS)
Six Months Ended June 30, Three Months Ended June 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net Loss R$ (4,727) R$ (4,554) R$ (3,205) R$ (4,988)
Other comprehensive (loss):
Foreign currency translation (70) (204) (71) (82)
adjustment
------------- ------------- ------------- -------------
Comprehensive Loss R$ (4,797) R$ (4,758) R$ (3,276) R$ (5,070)
------------- ------------- ------------- -------------
See Notes to Consolidated Financial Statements
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, January 1, 2001 3,722,790 1 50,341 (48,404) (721) 1,217
Private placement 2,500,000 - 5,000 - - 5,000
Net loss - - - (4,727) - (4,727)
Cumulative translation - - - - (70) (70)
adjustment ---------- ----------- ------------ ------------ ------------- -----------
Balance, June 30,2002 6,222,790 R$ 1 R$ 55,341 R$(53,131) R$ (791) R$ 1,420
---------- ----------- ------------ ------------ ------------- -----------
See Notes to Consolidated Financial Statements
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS OF BRAZILIAN REAIS)
Six Months Ended June 30,
-------------------------
2002 2001
---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) R$(4,727) R$(4,554)
Adjustments to reconcile net (loss) to cash provided by
(used in) operating activities:
Depreciation and amortization 1,881 1,942
Loss on disposals 466 -
Expense paid through issuance of equity - 158
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (234) 644
Inventories (30) 572
Prepaid expenses and other current assets 48 (413)
Other assets (378) -
(Decrease) increase in:
Accounts payable and accrued expenses (1,811) (244)
Payroll and related accruals 645 555
Taxes other than income taxes 1,442 (20)
Other liabilities 516 (715)
Deferred income (318) 739
---------- ----------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES (2,500) (1,336)
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (773) (937)
Additions to deferred charges - -
Proceeds from sale of property and equipment - -
Proceeds from sale of other assets - -
---------- ----------
CASH FLOWS (USED IN) INVESTING ACTIVITIES (773) (937)
---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under lines of credit (1,932) (1,060)
Proceeds from issuance of shares of common stock 4,172 3,043
---------- ----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 2,240 1,983
---------- ----------
EFFECT OF FOREIGN EXCHANGE RATE (70) (204)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,103) (494)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,267 1,857
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR R$ 1,164 R$ 1,363
---------- ----------
Supplemental disclosure of cash flow information: In the period ended March 31,
2001, the Company issued common stock to satisfy certain vendor credit and
future services in the amount of R$915. In the quarter ended March 31, 2001, the
Company paid certain expenses related to the amendment to the Stockholders'
Agreement through the issuance of equity valued at R$157.
See Notes to Consolidated Financial Statements
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS OF BRAZILIAN REAIS)
NOTE 1 - FINANCIAL STATEMENT PRESENTATION
The accompanying financial statements have been prepared by Brazil
Fast Food Corp. (the "Company"), without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position,
results of operations and cash flows at June 30, 2002 and for all
periods presented have been made. The results of operations for the
periods ended June 30, 2002 and 2001 are not necessarily indicative of
the operating results for a full year. Unless otherwise specified all
references in these financial statements to (i ) "Reais" or "R$" 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,
2001.
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$53,131
and at June 30, 2002, consolidated current liabilities exceed
consolidated current assets by R$21,292.
To date, the Company has been dependent upon its initial capital and
additional equity and debt financing to fund its operating losses and
capital needed for expansion. Currently, the Company has no
significant unused credit line.
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 form royalties and
franchise fees without significant capital expenditures; the
introduction of new programs, such as a delivery call center, an
internet delivery service and menu expansion to meet customer demand.
In order to act on these plans and sustain current operations, the
Company is dependent upon the continued forbearance of its creditors,
as well as additional financing.
There can be no assurance that management's plans will be realized, or
that additional financing will be available to the Company when
needed, or at terms that are desirable. Furthermore, there can be no
assurance that the Company will continue to receive the forbearance of
its creditors, or that it will locate suitable new franchisees, or
desirable locations for new franchisees to open stores.
The Company's ability to further reduce expenses and headcount is
directly impacted by its need to maintain an infrastructure to support
its current and future chain of locations.
The Company's ability to remarket Company-owned stores to franchisees,
and to generate cash flows from such activities, is impacted by the
ability to locate suitable buyers with the interest and capital to
complete such transactions, and the time to complete such sales.
Additionally, the Company's ability to achieve its plans is further
impacted by the instability of the economic environment in Brazil,
which has a direct impact on the desire and ability of consumers to
visit fast food outlets. The Company is also dependent upon the
continued employment of key personnel. These factors, among others,
raise substantial doubts about the Company's ability to continue as
going concern.
NOTE 3 - 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 had also
claimed 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 2000, the Company obtained a favorable
outcome in the state lawsuits. In the same period, the Company
withdrew its lawsuit regarding federal taxes and applied to join a tax
amnesty program offered by the Brazilian Federal government (REFIS).
Through this program, all past due federal taxes will be paid in
monthly installments equivalent to 1.2% of the Company's gross sales,
with interest accruing at rates set by the Brazilian Federal
government, currently 10.0% per year. During fiscal year 2001, the
Company paid approximately R$ 484 related to such tax amnesty program.
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. Currently the installments
are being legally deposited in the amounts claimed by the Company.
Such lawsuit is in its initial phase.
NOTE 4 - PRIVATE PLACEMENT
In May, 2002, the Company privately sold 2,500,000 shares of its
common stock for R$5,000 to Gustavo Figueiredo Bomeny and CCC
Empreendimentos e Participacoes Ltd (collectively, the New Investors),
as a part of a new shareholders agreement (the Agreement). As of June
30, 2002 the Company had received proceeds of R$ 4,172 pursuant to
such private placement. The balance of R$ 828, which is accounted for
as of June 30, 2002 as Stock Subscription Receivable, was received in
July, 2002.
In addition, the Agreement gives the right to the New Investors,
exercisable on their discretion within thirty days after the Company
received the aforementioned R$5,000, to purchase up to an additional
850,000 shares of our common stock at a price in Brazilian reais,
computed at the time or times of exercise, equivalent to US$1.00 per
share.
NOTE 5 - STOCK OPTION PLAN ACTIVITY
During the six months ended June 30, 2002, under the Company's Stock
Option Plan, the Compensation Committee granted options to purchase
151,500 shares with an exercise price of $1.06, vest over a period of
3 years, and valued at a fair value of $77,926 using the Black Scholes
option pricing model.
Under the Company's Stock Option Plan, options to purchase a total of
97,500 shares were canceled and options to purchase a total of 25,938
shares have expired during the six months ended June 30, 2002
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
During 2001, certain factors such as terrorist attacks in New York City and
Washington, D.C., the Brazilian energy crisis, and the crisis in Argentina's
economy, all of which adversely impacted the Brazilian economy as a whole, also
negatively impacted our restaurant sales and the results of our operations
during the latter part of that year. In the first half of 2002, these factors
still continue to negatively affect the Brazilian economy, as reflected in
increased unemployment rates in major metropolitan areas (Rio de Janeiro and Sao
Paulo), and decreases in average take-home income.
Political uncertainty attendant to the outcome of the forthcoming Brazilian
presidential election in October 2002 also has negatively affected both the
economic environment and consumer spending. In particular, consumer spending in
the food sector has decreased in the first half of 2002 between 8% and 10% when
compared to the same period in 2001.
Restaurant Sales
Net restaurant sales for our company-owned retail outlets decreased
R$3,498,000 or 9.9%, to R$31,850,000 for the six months ended June 30, 2002 as
compared to R$35,348,000 for the six months ended June 30, 2001. Same store
sales decreased approximately 7.4% for the six months ended June 30, 2002 as
compared to the six months ended June 30, 2001.
Net restaurant sales for our company-owned retail outlets decreased
R$1,555,000 or 9.6% to R$14,677,000 for the three months ended June 30, 2002 as
compared to R$16,232,000 for the three months ended June 30, 2001. Same store
sales decreased approximately 7.5% for the three months ended June 30, 2002 as
compared to the three months ended June 30, 2001.
The year to year decreases are attributable to the macroeconomic factors
described above as well as to the reduction of our company-owned retail outlets
from 73 as of June 30, 2001 to 66 as of June 30, 2002.
These decreases were partially offset by:
o our constant sales initiatives and promotional campaigns;
o our continuous introduction of new products and the expansion of our
product offerings;
o a 1% increase in the sales prices of our products during the first
quarter of 2002 and a further 5% increase during the second quarter;
and
o a change in the manner of calculating tax upon our sales in the State
of Sao Paulo, which resulted in higher net sales of approximately
R$337 in the six months ended June 30, 2002 and approximately R$147 in
the three months ended June 30, 2002
Franchise Income
Franchise income increased R$403,000 or 21.4%, to R$2,290,000 for the six
months ended June 30, 2002 as compared to R$1,887,000 for the six months ended
June 30, 2001; franchise income increased R$155,000 or 16.8%, to R$1,076,000 for
the three months ended June 30, 2002 as compared to R$921,000 for the three
months ended June 30, 2001. These increases are mainly attributable to the
growth of our franchise business from 166 retail outlets as of June 30, 2001 to
209 as of June 30, 2002.
Other Income
Other income is comprised of the initial fees paid by our franchisees and
such franchisees' contributions to our marketing efforts, as well as income
derived from suppliers pursuant to terms of certain exclusivity agreements.
Other income increased R$744,000 or 26.2%, to R$3,583,000 for the six
months ended June 30, 2002 as compared to R$2,839,000 for the six months ended
June 30, 2001; other income increased R$318,000 or 22.0%, to R$1,766,000 for the
three months ended June 30, 2002 as compared to R$1,448,000 for the three months
ended June 30, 2001.
These increases are mainly attributable to the year to year growth of our
franchise business, noted above.
Cost of Restaurant Sales
As a percentage of restaurant sales, cost of restaurant sales were 40.0%
and 39.4% for the six months ended June 30, 2002 and 2001, respectively, and
40.4% and 40.0% for the three months ended June 30, 2001 and 2001, respectively.
The increase is primarily attributable to increases in our cost of ice
cream, meat and chicken products, partially offset by reduced taxation in the
State of Sao Paulo.
Restaurant Payroll and Other Employee Benefits
As a percentage of restaurant sales, restaurant payroll and other employee
benefits increased from 19.0% to 20.3% for the six months ended June 30, 2001
and 2002, respectively, and from 20.5% to 21.3% for the three months ended June
30, 2001 and 2002, respectively.
These increases are mainly attributable to the effect of our decreased
restaurant sales, noted above, resulting in percentage increases for these 2002
fiscal periods as compared to the like 2001 periods. In addition, increases in
salaries mandated by union-driven agreements and in employee charges (FGTS) also
adversely impacted our 2002 payroll costs.
Restaurant Occupancy Costs and Other Expenses
Restaurant occupancy costs and other expenses expressed as a percentage of
net restaurant sales were approximately 12.7% and 11.2% for the six months ended
June 30, 2002 and 2001, respectively, and 13.4% and 12.1% for the three months
ended June 30, 2002 and 2001, respectively These increases are mainly
attributable to increases in our minimum rent obligations, which are indexed to
Brazilian inflation, currently at 9.5% per annum, as well as to the effect of
our decreased restaurant sales, noted above.
Depreciation and Amortization
As a percentage of restaurant sales, depreciation and amortization were
approximately 5.9% and 5.5% for the six months ended June 30, 2002 and 2001,
respectively, and approximately 6.1% and 6.0% for the three months ended June
30, 2002 and 2001, respectively.
Depreciation and amortization expenses, generally, remained at constant
levels for the three months and six months ended June 30, 2002 when contrasted
with the comparable periods in 2001.
Other Operating Expenses
As a percentage of restaurant sales, other operating expenses were
approximately 21.9% and 20.6% for the six months ended June 30, 2002 and 2001,
respectively, and approximately 22.8% and 21.7% for the three months ended June
30, 2002 and 2001, respectively.
These percentage increases are mainly attributable to the effect of our
decreased restaurant sales. The 2002 increases are also due to increased fees
for security services and utilities, in the latter instance primarily for
natural gas, as well as to severance payments made during the second quarter of
2002 pursuant to the terms of certain maintenance agreements. In addition,
charges attributable to the termination of certain outsourced services increased
2002 expenses by approximately R$109,000. Partially offsetting these increases
were reductions in delivery costs and the nonrenewal of certain outsourced
services.
Selling expenses
As a percentage of restaurant sales, selling expenses were approximately
7.8% and 8.1% for the six months ended June 30, 2002 and 2001, respectively, and
approximately 7.2% and 9.2% for the three months ended June 30, 2002 and 2001.
These percentage decreases, especially those attributable to the second
quarter of 2002, arose by reason of an optimization of marketing investments.
General and Administrative Expenses
As a percentage of restaurant sales, general and administrative expenses
were approximately 11.7% and 12.0% for the six months ended June 30, 2002 and
2001, respectively, and approximately 10.9% and 8.4% for the three months ended
June 30, 2002 and 2001, respectively.
We were required to recognize a charge of approximately R$900,000 during
the first quarter of 2001 related to renegotiations of, and amendment to, our
stockholders' agreement with AIG Latin America Equity Partners Ltd.
A fixed assets inventory required us to take a write-off of approximately
R$400,000 during the second quarter ended June, 2002.
Excluding the effect of this charge and write-off, respectively, general
and administrative expenses remained at constant levels for the three and six
month periods ended June 30, 2002 as compared to the same periods in 2001.
Interest Income and Expenses
As a percentage of restaurant sales, net interest expense and foreign
exchange gains and/or losses were approximately (12.9)% and (10.4)% for the six
months ended June 30, 2002 and 2001, respectively.
The percentage increase for the six months ended June 30, 2002 as compared
to the same period in 2001 is primarily attributable to an increase in Brazilian
interest rates and an increase in the exchange rate between the Real and the
U.S. Dollar. Increases in the exchange rate have had an immediate and direct
impact on our debt that is denominated in U.S. Dollars and the interest that we
must pay thereon.
As a percentage of restaurant sales, net interest expense and foreign
exchange gains and/or losses were approximately (19.1)% and (27.3)% for the
three months ended June 30, 2002 and 2001, respectively.
In the second quarter of 2001, we reversed previously recorded interest
income of R$2,431,000 in order to comply with Brazilian tax regulations.
Excluding the effect of this reversal, net interest expense expressed as a
percentage of restaurant sales would have been (19.1)% and (12.3)% for the three
months ended June 30, 2002 and 2001, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since March 1996, we have funded our operating losses of R$53,131,000 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 June 30, 2002, we had cash on hand of R$1,164,000 and a
working capital deficiency of R$21,292,000.
Our capital requirements are primarily for expansion of our retail
operations. 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. For the six months ended June 30, 2002 and the
three months ended June 30, 2002, our earnings before interest, taxes,
depreciation and amortization (EBITDA) were R$1,255,000 and R$1,072,000,
respectively. 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 to in the United States.
During the same periods, 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 currently estimate that our capital expenditures for fiscal 2002, which
will be used to maintain our restaurant network, will be approximately
R$1,600,000. We anticipate that the primary use of our cash resources during
2002 will be to service our debt obligations. During the remainder of 2002, we
intend to focus our efforts on expanding both the number of our franchisees and
the number of our franchised retail outlets, neither of which are expected to
require significant capital expenditures.
As of June 30, 2002, we had net cash used in operating activities of
R$(2,500,000), net cash from investing activities of R$(773,000) and net cash
provided by financing activities of R$2,240,000. Net cash used in investing
activities was primarily the result of our investment in property and equipment
to improve our retail operations. Net cash provided by financing activities was
a result of our private placement of equity shares in May 2002.
AMOUNT
TYPE OF DEBT OBLIGATION OUTSTANDING
- ----------------------- -----------
Revolving lines of credit(a) R$ 1,830,000
Mortgages payable(b) 4,958,000
Equipment leasing facility(c) 2,455,000
Notes payable linked to fixed asset
acquisitions(d) 3,037,000
- ------------------------------------ ------------
Total R$12,280,000
------------
- -----------
(a) Amount due on demand from various financial institutions as well as private
individuals with interest rates ranging from 24.2% to 41.8% per annum, and
collateralized by accounts receivables and guaranteed by certain officers.
Currently, we have no significant unused credit line and no other external
sources of liquidity.
(b) Amount due in full September 2002. Interest on this amount accrues at a rate
of 15% per annum and is payable semi-annually. Payment is secured by certain
property with a carrying value of R$4,759,000 at June 30, 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 facility provides no significant unused credit. Repayment of principal
is due in monthly installments, together with interest, with a final payment due
November 2002. Interest is charged on these borrowings at rates ranging between
15% and 18% per annum. This facility is secured by our leased equipment.
Principal and interest are indexed to the U.S. Dollar, and are therefore also
susceptible to exchange rate variations between the U.S. Dollar and the
Brazilian Real.
(d) This credit facility was used to purchase three stores. Repayment of
principal with respect to one of these stores is due in 21 monthly installments
of R$20,000, plus an intermediate payment due January, 2003 in the amount of
R$118,571. Repayment of principal with respect to the other two stores is due
November 2002, with a possible extension to November 2003, in the amount of
R$2,500,000. There is no interest charged on these borrowings. Principal is
indexed to Brazilian inflation measured by IGP. 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 1999 Brazilian state taxes of
approximately R$5,144,150 and federal taxes of approximately R$6,310,000.
Pursuant to a settlement reached with Brazilian state taxing authorities in
2001, we are required to make repayments over a five-year period, interest free,
in amounts indexed to Brazil's UNIDADE FISCAL DE REFERENCIA, which is currently
9.4% per annum. Also in 2001, 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 over a five-year
period equal to 1.2% of our gross sales, with interest accruing at a rate set
from time-to-time by the Brazilian federal government, which was 10.0% as of
June 30, 2002. During 2002, we expect to pay approximately R$1,527,000 pursuant
to the state tax settlement and approximately R$945,000 pursuant to the federal
tax amnesty program.
We plan to address our immediate and future cash flow needs to include
focusing on a number of areas including:
o the sale of certain of our company-owned retail outlets;
o the reduction of expenses, including reducing our per-store headcount
expense by continuing to expand our operations while maintaining our
current headcount;
o 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
o the introduction of new programs and menu expansions to meet consumer
needs and wishes.
In order to act on these plans and to sustain current operations, we are
dependent upon the continued forbearance of our creditors, as well as upon
additional financing. There can be no assurance that our plans will be realized,
or that additional financing will be available to us when needed, or 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.
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,
2001, 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.
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.
PART II--OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 15, 2002, we completed a private placement of our common stock. An
aggregate of 2,500,000 shares were sold to two accredited investors at a price
of R$2.00 per share. The issuance of securities was not registered under the
Securities Act of 1993 because such securities were offered and sold in a
transaction not involving a public offering, exempt from registration under the
Securities Act pursuant to Section 4(2) thereof. We intend to use the proceeds
for general corporate purposes, including working capital.
ITEM 6. Exhibits and Reports on Form 8-K.
a) Exhibits
None
(b) Reports on Form 8-K
None
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: August 15, 2002
Brazil Fast Food Corp.
(Registrant)
By: /s/ Peter van Voorst Vader
----------------------------
Peter van Voorst Vader
Chief Executive Officer