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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 September 30, 2002
Commission File Number: 0-23278
----------------------
Brazil Fast Food Corp.
(Exact name of Registrant as specified in its charter)
----------------------
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 September 30, 2002 there were issued and outstanding 7,422,790 shares
of the Registrant's Common Stock, par value $0.0001.
=======================================================================
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS OF BRAZILIAN REAIS, EXCEPT SHARE AMOUNTS)
ASSETS
September 30, December 31,
------------- -------------
2002 2001
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents R$ 1,301 R$ 2,267
Accounts receivable, net of allowance for doubtful accounts 4,632 3,834
Inventories 1,074 924
Stock subscription receivable -
Prepaid expenses and other current assets 1,188 710
------------- -------------
TOTAL CURRENT ASSETS 8,195 7,735
------------- -------------
PROPERTY AND EQUIPMENT, NET 17,665 19,891
DEFERRED CHARGES, NET 10,323 9,690
OTHER RECEIVABLES AND OTHER ASSETS 3,105 2,461
------------- -------------
TOTAL ASSETS R$ 39,288 R$ 39,777
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable R$ 10,160 R$ 11,103
Accounts payable and accrued expenses 5,698 7,246
Payroll and related accruals 2,817 1,686
Taxes, other than income taxes 6,025 3,466
Restructured past due taxes 2,041 1,829
Deferred income 637 637
Other current liabilities 526 485
-------------- -------------
TOTAL CURRENT LIABILITIES 27,904 26,452
NOTES PAYABLE, less current portion 176 -
DEFERRED INCOME, less current portion 1,920 2,398
RESTRUCTURED PAST DUE TAXES, less current portion 8,067 9,573
OTHER LIABILITIES 372 137
-------------- -------------
TOTAL LIABILITIES 38,439 38,560
-------------- -------------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000 shares authorized; no
shares issued - -
Common stock, $.0001 par value, 12,500,000 shares authorized;
7,502,790 and 3,722,790 shares issued and outstanding 1 1
Additional paid-in capital 59,170 50,341
Deficit (56,921) (48,404)
Accumulated comprehensive loss (1,401) (721)
-------------- -------------
TOTAL SHAREHOLDERS' EQUITY 849 1,217
-------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY R$ 39,288 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)
Nine Months Ended September 30,
-------------------------------
2002 2001
NET OPERATING REVENUES: ------------ ------------
Restaurant sales R$ 46,689 R$ 50,843
Franchise income 3,496 2,906
Other income 5,227 4,255
------------ ------------
TOTAL NET OPERATING REVENUES 55,412 58,004
------------ ------------
COSTS AND EXPENSES:
Cost of restaurant sales 18,569 20,184
Restaurant payroll and other employee benefits 9,469 9,767
Restaurant occupancy and other expenses 6,081 6,072
Depreciation and amortization 2,847 2,996
Other operating expenses 10,241 10,696
Selling expenses 3,553 4,360
General and administrative expenses 6,243 5,491
------------ ------------
TOTAL COSTS AND EXPENSES 57,003 59,566
------------ ------------
INCOME (LOSS) FROM OPERATIONS (1,591) (1,562)
INTEREST INCOME (EXPENSE) (3,958) (3,519)
FOREIGN EXCHANGE (LOSS) (2,968) (2,505)
------------ ------------
NET (LOSS) R$ (8,517) R$ (7,586)
============ ============
NET (LOSS) PER COMMON SHARE R$ (1.67) R$ (2.11)
BASIC AND DILUTED ============ ============
WEIGHTED AVERAGE COMMON 5,106,123 3,590,984
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 September 30,
-------------------------------
NET OPERATING REVENUES: 2002 2001
------------ ------------
Restaurant sales R$ 14,839 R$ 15,495
Franchise income 1,206 1,019
Other income 1,644 1,416
------------ ------------
TOTAL NET OPERATING REVENUES 17,689 17,930
------------ ------------
COSTS AND EXPENSES:
Cost of restaurant sales 5,814 6,243
Restaurant payroll and other employee benefits 2,995 3,048
Restaurant occupancy and other expenses 2,047 2,125
Depreciation and amortization 966 1,054
Other operating expenses 3,264 3,402
Selling expenses 1,060 1,484
General and administrative expenses 2,509 1,266
------------ ------------
TOTAL COSTS AND EXPENSES 18,655 18,622
------------ ------------
INCOME (LOSS) FROM OPERATIONS (966) (692)
INTEREST INCOME (EXPENSE) (877) (1,078)
FOREIGN EXCHANGE (LOSS) (1,948) (1,262)
------------ -------------
NET (LOSS) R$ (3,791) R$ (3,032)
============ =============
NET (LOSS) PER COMMON SHARE R$ (0.57) R$ (0.81)
BASIC AND DILUTED ============ =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
BASIC AND DILUTED 6,622,790 3,722,790
------------ -------------
See Notes to Consolidated Financial Statements
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,
------------------------------ --------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net Loss R$ (8,517) R$ (7,586) R$ (3,791) R$ (3,032)
Other comprehensive (loss):
Foreign currency translation (680) (176) (610) 28
adjustment
------------- ------------- ------------- -------------
Comprehensive Loss R$ (9,197) R$ (7,762) R$ (4,401) R$ (3,004)
------------- ------------- ------------- -------------
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 2nd quarter 2,500,000 - 5,000 - - 5,000
Private placement 3rd quarter 1,200,000 3,829 3,829
Net loss - - - (8,517) - (8,517)
Cumulative translation
adjustment - - - - (680) (680)
---------- ---------- ----------- ---------- ----------- -----------
Balance, September 30,2002 7,422,790 R$ 1 R$ 59,170 R$(56,921) R$ (1,401) R$ 849
---------- ---------- ----------- ----------- ----------- -----------
See Notes to Consolidated Financial Statements
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS OF BRAZILIAN REAIS)
Nine Months Ended September 30,
-------------------------------
2002 2001
----------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) R$(8,517) R$(7,586)
Adjustments to reconcile net (loss) to cash provided by
(used in) operating activities:
Depreciation and amortization 2,847 2,996
Loss on disposals 2,746 -
Expense paid through issuance of equity - 158
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (798) 847
Inventories (150) 647
Prepaid expenses and other current assets (478) (648)
Other assets (644) -
(Decrease) increase in:
Accounts payable and accrued expenses (1,548) (942)
Payroll and related accruals 1,131 841
Taxes other than income taxes 1,265 405
Other liabilities 276 (1,356)
Deferred income (478) 548
--------- ---------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES (4,348) (2,206)
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (951) (1,208)
Additions to deferred charges - -
Proceeds from sale of property and equipment - -
Proceeds from sale of other assets - -
--------- ---------
CASH FLOWS (USED IN) INVESTING ACTIVITIES (951) (1,208)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under lines of credit (3,816) 207
Proceeds from issuance of shares of common stock 8,829 3,043
--------- ---------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 5,013 3,250
--------- ---------
EFFECT OF FOREIGN EXCHANGE RATE (680) (176)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (966) (340)
CASH AND CASH EQUIVALENTS AT JANUARY 31, 2002 2,267 1,857
--------- ---------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30, 2002 R$ 1,301 R$ 1,517
--------- ---------
Supplemental disclosure of cash flow information: (i) 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. (ii) 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. (iii)
During the nine month period ended September 30, 2002 the Company purchased
three stores (including fixed assets and deferred charges) using credit
facilities of R$3,470. As of September 30, 2002 the Company had paid R$461
relating such debt.
See Notes to Consolidated Financial Statements
BRAZIL FAST FOOD CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
(in thousands of Brazilian Reais)
NOTE 1 - FINANCIAL STATEMENT PRESENTATION
The accompanying financial statements have been prepared by Brazil
Fast Food Corp. (the "Company"), without audit. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position,
results of operations and cash flows at September 30, 2002 and for all
periods presented have been made. The results of operations for the
periods ended September 30, 2002 and 2001 are not necessarily
indicative of the operating results for a full year. Unless otherwise
specified all references in these financial statements to (i ) "Reais"
or "R$" 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$56,921
and at September 30, 2002, consolidated current liabilities exceed
consolidated current assets by R$19,709.
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 unused credit
line in the amount of approximately R$326.
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 reached an agreement with
the state government to parcel unpaid taxes in sixty months and,
subsequently, withdrew its lawsuit. In the same period, the Company
withdrew its lawsuit regarding federal taxes and applied to join a tax
amnesty program offered by the Brazilian Federal government (REFIS).
Through this program, all past due federal taxes will be paid in
monthly installments equivalent to 1.2% of the Company's gross sales,
with interest accruing at rates set by the Brazilian Federal
government, currently 10.0% per year. During fiscal year 2002, the
Company paid approximately R$ 696 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 four accredited private investors
(collectively, the New Investors), as a part of a new shareholders
agreement (the Agreement). As of September 30, 2002 the Company had
received the total amount of such private placement.
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$3,829
pursuant to such private placement.
NOTE 5 - CONTRACTED SERVICES PAYABLE IN 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.
NOTE 6 - STOCK OPTION PLAN ACTIVITY
During the nine months ended September 30, 2002, under the Company's
Stock Option Plan, the Compensation Committee granted options to
purchase 175,250 shares with an average exercise price of $.94, vest
over a period of 3 years, and valued at average fair value of $80,115
using the Black Scholes option pricing model.
Under the Company's Stock Option Plan, options to purchase a total of
109,750 shares were canceled and options to purchase a total of 25,938
shares have expired during the nine months ended September 30, 2002
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OUR BUSINESS
Through our wholly-owned subsidiary, Venbo Comercio de Alimentos Ltda., a
Brazilian limited liability company which conducts business under the trade name
"Bob's," we own and, directly and through franchisees, operate the second
largest chain of hamburger fast food restaurants in Brazil
RESULTS OF OPERATIONS
During the first nine months of 2002, several events negatively impacted
the Brazilian economy as well as our restaurant sales and results of our
operations.
In the first half of 2002, the Brazilian economy was still suffering the
effects derived from the terrorist attacks in the United States of America and
the Brazilian energy crisis. This period was also affected by the worsening of
the crisis of the Argentina economy.
During the third quarter of 2002 the political uncertainty attendant to the
outcome of the Brazilian presidential election in October 2002 also has reduced
and/or postponed most business projects and money supply.
Brazilian currency has devaluated approximately 47.7% against the US dollar
during the first nine months of 2002 and, as a consequence, Brazilian inflation
rates reached the highest level since the inception of Brazil's stabilization
plan in mid 1994. In response to these events, the Brazilian Central Bank in
October 2002 increased overnight interest rates from 18% to 21% per year.
All these factors together increased unemployment rates in major
metropolitan areas (Rio de Janeiro and Sao Paulo), and decreases in average
take-home income.
Restaurant Sales
Net restaurant sales for our company-owned retail outlets decreased R$
4,154,000 or 8.2 %, to R$46,689,000 for the nine months ended September 30, 2002
as compared to R$50,843,000 for the nine months ended September 30, 2001. Same
store sales decreased approximately 5.8% for the nine months ended September 30,
2002 as compared to the nine months ended September 30, 2001.
Net restaurant sales for our company-owned retail outlets decreased R$
656,000 or 4.2 % to R$14,839,000 for the three months ended September 30, 2002
as compared to R$15,495,000 for the three months ended September 30, 2001. Same
store sales decreased approximately 2.2% for the three months ended September
30, 2002 as compared to the three months ended September 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 72 as of September 30, 2001 to 64 as of September 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 an average increase of 5% in the sales prices of our products during
the nine months of 2002; 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$665 in the nine months ended September 30, 2002 and approximately
R$328 in the three months ended September 30, 2002.
Franchise Income
Franchise income increased R$590,000 or 20.3%, to R$3,496,000 for the nine
months ended September 30, 2002 as compared to R$2,906,000 for the nine months
ended September 30, 2001; franchise income increased R$187,000 or 18.4%, to
R$1,206,000 for the three months ended September 30, 2002 as compared to
R$1,019,000 for the three months ended September 30, 2001. These increases are
mainly attributable to the growth of our franchise business from 177 retail
outlets as of September 30, 2001 to 222 as of September 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$972,000 or 22.8%, to R$5,227,000 for the nine
months ended September 30, 2002 as compared to R$4,255,000 for the nine months
ended September 30, 2001; other income increased R$228,000 or 16.1%, to
R$1,644,000 for the three months ended September 30, 2002 as compared to
R$1,416,000 for the three months ended September 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 39.8%
and 39.7% for the nine months ended September 30, 2002 and 2001, respectively,
and 39.2% and 40.3% for the three months ended September 30, 2002 and 2001,
respectively.
The decrease of cost of restaurant sales in the third quarter of 2002 is
primarily attributable to decreases in our cost of ice cream, meat and chicken
products in July of 2002, resulting from our negotiations with suppliers. The
devaluation of the Brazilian Real against the US dollar may reverse this trend
in the last quarter of 2002.
Restaurant Payroll and Other Employee Benefits
As a percentage of restaurant sales, restaurant payroll and other employee
benefits increased from 20.3% to 19.2% for the nine months ended September 30,
2002 and 2001, respectively, and from 20.2% to 19.7% for the three months ended
September 30, 2002 and 2001, 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 13.0% and 11.9% for the nine months
ended September 30, 2002 and 2001, respectively, and 13.8% and 13.7% for the
three months ended September 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 13.3% per annum, as well as to the
effect of our decreased restaurant sales, noted above. During the third quarter
of 2002 these increases were partially offset by temporary reduction of the
occupancy cost of some of our stores.
Depreciation and Amortization
As a percentage of restaurant sales, depreciation and amortization were
approximately 6.1% and 5.9% for the nine months ended September 30, 2002 and
2001, respectively, and approximately 6.5% and 6.8% for the three months ended
September 30, 2002 and 2001, respectively.
Depreciation and amortization expenses, generally, remained at constant
levels for the three months and nine months ended September 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 21.0% for the nine months ended September 30, 2002 and
2001, respectively, and approximately 22.0% and 22.0% for the three months ended
September 30, 2002 and 2001, respectively.
The percentage increases in the comparable nine month periods are mainly
attributable to the effect of our decreased restaurant sales as well as
increased fees for security services, increased utility expenses (primarily
natural gas), and severance payments made during the second quarter of 2002
pursuant to the terms of certain maintenance and other outsourced agreements.
These increases were partially offset during the comparable three month
periods by reductions in delivery costs and the nonrenewal of certain outsourced
services.
Selling Expenses
As a percentage of restaurant sales, selling expenses were approximately
7.6% and 8.6% for the nine months ended September 30, 2002 and 2001,
respectively, and approximately 7.1% and 9.6% for the three months ended
September 30, 2002 and 2001, respectively.
These percentage decreases, especially those attributable to the third
quarter of 2002, arose from an optimization of marketing investments and cost
reduction measures.
General and Administrative Expenses
As a percentage of restaurant sales, general and administrative expenses
were approximately 13.4% and 10.8% for the nine months ended September 30, 2002
and 2001, respectively, and approximately 16.9% and 8.2% for the three months
ended September 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 in the second quarter of 2002 and a review
regarding the impairment of fixed assets in accordance to FAS 121 required us to
take a write-off of approximately R$1,800,000 and R$2,200,000 during the three
and nine months ended September 30, 2002, respectively.
Excluding the effect of this charge and write-off, respectively, general
and administrative expenses remained at constant levels for the three and nine
month periods ended September 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 (14.8)% and (11.8)% for the nine
months ended September 30, 2002 and 2001, respectively. As a percentage of
restaurant sales, net interest expense and foreign exchange gains and/or losses
were approximately (19.0)% and (15.1)% for the three months ended September 30,
2002 and 2001, respectively.
The percentage increase for the three and nine months ended September 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, which is partially denominated in U.S. Dollars, and the interest that we
must pay thereon. The increase in interest expenses is also due to the increase
of the level of our indebtedness.
LIQUIDITY AND CAPITAL RESOURCES
Since March 1996, we have funded our operating losses of R$56,921,000 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, 2002, we had cash on hand of R$1,301,000 and a
working capital deficiency of R$19,709,000.
Our capital requirements are primarily for the upgrade 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 nine months ended September 30, 2002 and
the three months ended September 30, 2002, our earnings before interest, taxes,
depreciation and amortization (EBITDA) were R$1,256,000 and R$1,000,
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 have estimated that our capital expenditures for fiscal 2002, which will
be used to maintain and upgrade our current restaurant network, will be
approximately R$1,600,000. We anticipate that the primary use of our cash
resources during 2002 will be to service our debt obligations. During the
remainder of 2002, we intend to focus our efforts on expanding both the number
of our franchisees and the number of our franchised retail outlets, neither of
which are expected to require significant capital expenditures.
As of September 30, 2002, we had net cash used in operating activities of
R$(4,348,000), net cash from investing activities of R$(951,000) and net cash
provided by financing activities of R$8,829,000. Net cash used in investing
activities was primarily the result of our investment in property and equipment
to improve our retail operations. Net cash provided by financing activities was
a result of our private placement of equity shares in May 2002. The proceeds
from the private placement were used to reduce our debt, including debt with
private individuals, debt with financial institutions in Brazil, and past due
accounts payable with suppliers and others.
Our debt obligations as of September 30, 2002 were as follows:
Amount
Type of Debt Obligation Outstanding
- ----------------------- -----------
Revolving lines of credit(a) R$ 174,000
Mortgages payable(b) 3,966,000
Equipment leasing facility(c) 2,829,000
Notes payable linked to fixed asset
acquisitions(d) 3,367,000
- ------------------------------------ --------------
Total R$10,336,000
--------------
- -----------
(a) Provides for maximum borrowings of R$500,000; due on demand from a Brazilian
financial institution with interest rates of 35.3% per annum, and guaranteed by
certain officers. Currently, we have no significant unused credit line and no
other external sources of liquidity.
(b) Amount due in quarterly installments, starting December, 2002. Interest on
this amount accrues at a rate of 25% per annum and is payable quarterly,
starting December, 2002. Payment is secured by certain property with a carrying
value of R$4,742,000 at September 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. This facility is subject to a legal challenge by us as described
in note 3 of the financial statements.
(d) This credit facility was used to purchase three stores. Repayment of
principal with respect to one of these stores is due in 20 monthly installments
of R$22,000, plus an intermediate payment due January, 2003 in the amount of
R$130,072. 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$2,768,000. 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$4,638,000 and federal taxes of approximately R$6,225,000.
Pursuant to a settlement reached with Brazilian state taxing authorities in
2000, 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 2000, we applied to, and were accepted by, the Brazilian
federal government to join a tax amnesty program, which restructured our
outstanding 1999 federal tax obligations into monthly payments equal to 1.2% of
our gross sales, with interest accruing at a rate set from time-to-time by the
Brazilian federal government (TJLP), which was 10.0% a.a. as of September 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;
o the extinguishments of our obligations denominated in US dollar which
will reduce our exposure to the effects of the Brazilian Real
devaluation; and
o negotiation with suppliers in order to obtain significant rebates in
long term supply contracts.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not engage in trading market risk-sensitive instruments or purchasing
hedging instruments or "other than trading" instruments that are likely to
expose us to market risk, whether interest rate, foreign currency exchange,
commodity price or equity price risk. We have not issued debt instruments,
entered into forward or futures contracts, purchased options or entered into
swaps. Our primary market risk exposures are those relating to interest rate
fluctuations and possible devaluations of the Brazilian currency. In particular,
a change in Brazilian interest rates would affect the rates at which we could
borrow funds under our several credit facilities with Brazilian banks and
financial institutions.
ITEM 4. CONTROLS AND PROCEDURES.
Within the 90 days prior to the date of this report, under the supervision
and with the participation of management, including Peter van Voorst Vader
(serving as the Company's Chief Executive Officer and Acting Chief Financial
Officer), the Company has evaluated the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, Mr. Vader 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.
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 four accredited investors at a price
of R$2.00 per share. An additional 1,200,000 shares were sold to two accredited
investors at a price of $1.00 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
On August 16, 2002, the Company submitted to the SEC a current report on
Form 8-K, dated August 15, 2002, which reported Item 9-Regulation FD Disclosure.
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 18, 2002
Brazil Fast Food Corp.
(Registrant)
By: /s/ Peter van Voorst Vader
------------------------------------
Peter van Voorst Vader
Chief Executive Officer
And Acting Chief Financial Officer
Certification
I, Peter van Voorst Vader, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Brazil Fast Food Corp.
(the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 18, 2002
/s/ Peter van Voorst Vader
------------------------------
Peter van Voorst Vader
Chief Executive Officer and
Acting Chief Financial Officer