Attached files
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EX-31.1 - EX-31.1 - BRAZIL FAST FOOD CORP | g21233exv31w1.htm |
EX-32.1 - EX-32.1 - BRAZIL FAST FOOD CORP | g21233exv32w1.htm |
Table of Contents
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
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2009
Commission File Number: 000-23278
Brazil Fast Food Corp.
(Exact name of Registrant as specified in its charter)
Delaware | 13-3688737 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
Rua Voluntários da Pátria, 89-9° andar
Rio de Janeiro RJ, Brazil, CEP 22270-010
(Address of principal executive offices)
Rio de Janeiro RJ, Brazil, CEP 22270-010
(Address of principal executive offices)
Registrants telephone number: 011 55 21 2536-7500
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 þ No o
As of November 13, 2009 there were issued 8,472,927 shares of the Registrants Common Stock, par
value $0.0001.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer or a smaller reporting company. See definition of larger accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
TABLE OF CONTENTS
Table of Contents
ITEM 1. | FINANCIAL STATEMENTS. |
BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands of Brazilian Reais, except share amounts)
(in thousands of Brazilian Reais, except share amounts)
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
R$ | 10,708 | R$ | 10,424 | ||||
Inventories |
2,844 | 2,970 | ||||||
Accounts receivable |
||||||||
Clients |
4,723 | 3,952 | ||||||
Franchisees |
6,521 | 8,003 | ||||||
Allowance for doubtful accounts |
(1,214 | ) | (1,214 | ) | ||||
Prepaid expenses |
2,767 | 2,419 | ||||||
Other current assets |
5,147 | 2,642 | ||||||
TOTAL CURRENT ASSETS |
31,496 | 29,196 | ||||||
OTHER RECEIVABLES AND OTHER ASSETS |
9,373 | 7,716 | ||||||
DEFERRED TAX ASSET |
13,688 | 13,688 | ||||||
GOODWILL |
2,895 | 2,895 | ||||||
PROPERTY AND EQUIPMENT, NET |
34,396 | 31,104 | ||||||
DEFERRED CHARGES, NET |
6,239 | 4,544 | ||||||
TOTAL ASSETS |
R$ | 98,087 | R$ | 89,143 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Notes payable |
R$ | 11,652 | R$ | 10,536 | ||||
Accounts payable and accrued expenses |
14,287 | 14,383 | ||||||
Payroll and related accruals |
6,125 | 4,565 | ||||||
Taxes |
2,637 | 2,392 | ||||||
Current portion of deferred income |
4,341 | 1,878 | ||||||
Current portion of contingencies and reassessed taxes |
1,677 | 1,677 | ||||||
Other current liabilities |
31 | 81 | ||||||
TOTAL CURRENT LIABILITIES |
40,750 | 35,512 | ||||||
DEFERRED INCOME, less current portion |
4,454 | 4,836 | ||||||
NOTES PAYABLE, less current portion |
11,291 | 11,099 | ||||||
CONTINGENCIES AND REASSESSED TAXES, less
current portion (note 3) |
18,396 | 18,210 | ||||||
TOTAL LIABILITIES |
74,891 | 69,657 | ||||||
NONCONTROLLIING INTEREST |
1,329 | 981 | ||||||
SHAREHOLDERS EQUITY: |
||||||||
Preferred stock, $.01 par value, 5,000 shares authorized; no
shares issued |
| | ||||||
Common stock, $.0001 par
value, 12,500,000 shares
authorized; 8,472,297 and 8,437,927
shares issued 8,140,262 and 8,148,718 shares outstanding |
1 | 1 | ||||||
Additional paid-in capital |
61,148 | 61,062 | ||||||
Treasury Stock (332,665 and 289,210 shares) |
(1,918 | ) | (1,601 | ) | ||||
Accumulated Deficit |
(36,293 | ) | (39,917 | ) | ||||
Accumulated comprehensive loss |
(1,071 | ) | (1,040 | ) | ||||
TOTAL SHAREHOLDERS EQUITY |
21,867 | 18,505 | ||||||
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY |
R$ | 98,087 | R$ | 89,143 | ||||
See Notes to Consolidated Financial Statements
-2-
Table of Contents
BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(in thousands of Brazilian Reais, except share amounts)
(in thousands of Brazilian Reais, except share amounts)
Nine Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
REVENUES |
||||||||
Net Revenues from Own-operated Restaurants |
R$ | 105,316 | R$ | 60,837 | ||||
Net Revenues from Franchisees |
17,148 | 15,815 | ||||||
Revenues from Special Agreements |
6,887 | 6,150 | ||||||
Other Income |
3,357 | 1,983 | ||||||
TOTAL REVENUES |
132,708 | 84,785 | ||||||
OPERATING COST AND EXPENSES |
||||||||
Store Costs and Expenses |
(98,855 | ) | (62,134 | ) | ||||
Franchise Costs and Expenses |
(6,405 | ) | (4,531 | ) | ||||
Marketing Expenses |
(2,965 | ) | (481 | ) | ||||
Administrative Expenses |
(15,434 | ) | (11,824 | ) | ||||
Other Operating Expenses |
(2,370 | ) | (1,488 | ) | ||||
Net result of assets sold and impairment of assets |
122 | (181 | ) | |||||
TOTAL OPERATING COST AND EXPENSES |
(125,907 | ) | (80,639 | ) | ||||
OPERATING INCOME |
6,801 | 4,146 | ||||||
Interest Expense, net |
(3,184 | ) | 17 | |||||
NET INCOME BEFORE INCOME TAX |
3,617 | 4,163 | ||||||
Income taxes |
337 | (160 | ) | |||||
NET INCOME BEFORE MINORITY INTEREST |
3,954 | 4,003 | ||||||
NONCONTROLING INTEREST |
(330 | ) | | |||||
NET INCOME |
R$ | 3,624 | R$ | 4,003 | ||||
NET INCOME PER COMMON SHARE
BASIC AND DILUTED |
R$ | 0.44 | R$ | 0.49 | ||||
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING: BASIC AND DILUTED |
8,157,272 | 8,169,757 |
See Notes to Consolidated Financial Statements
- 3 -
Table of Contents
BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(in thousands of Brazilian Reais, except share amounts)
(in thousands of Brazilian Reais, except share amounts)
Three Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
REVENUES |
||||||||
Net Revenues from Own-operated Restaurants |
R$ | 36,986 | R$ | 21,670 | ||||
Net Revenues from Franchisees |
6,120 | 5,699 | ||||||
Revenues from Special Agreements |
2,411 | 2,024 | ||||||
Other Income |
1,050 | 410 | ||||||
TOTAL REVENUES |
46,567 | 29,803 | ||||||
OPERATING COST AND EXPENSES |
||||||||
Store Costs and Expenses |
(33,594 | ) | (21,159 | ) | ||||
Franchise Costs and Expenses |
(2,195 | ) | (1,677 | ) | ||||
Marketing Expenses |
(1,037 | ) | (261 | ) | ||||
Administrative Expenses |
(5,621 | ) | (4,294 | ) | ||||
Other Operating Expenses |
(1,071 | ) | (377 | ) | ||||
Net result of assets sold and impairment of assets |
250 | (157 | ) | |||||
TOTAL OPERATING COST AND EXPENSES |
(43,268 | ) | (27,925 | ) | ||||
OPERATING INCOME |
3,299 | 1,878 | ||||||
Interest Expenses, net |
(1,077 | ) | 64 | |||||
NET INCOME BEFORE INCOME TAX |
2,222 | 1,942 | ||||||
Income taxes |
1 | (7 | ) | |||||
NET INCOME BEFORE INCOME TAX |
2,223 | 1,935 | ||||||
Income taxes |
| | ||||||
NET INCOME BEFORE MINORITY INTEREST |
2,223 | 1,935 | ||||||
NONCONTROLING INTEREST |
(72 | ) | | |||||
NET INCOME |
R$ | 2,151 | R$ | 1,935 | ||||
NET INCOME PER COMMON SHARE
BASIC AND DILUTED |
R$ | 0.26 | R$ | 0.24 | ||||
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING: BASIC AND DILUTED |
8,142,061 | 8,149,919 |
See Notes to Consolidated Financial Statements
- 4 -
Table of Contents
BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(in thousands of Brazilian Reais)
(in thousands of Brazilian Reais)
Nine Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
NET INCOME |
R$ | 3,624 | R$ | 4,003 | R$ | 2,151 | R$ | 1,935 | ||||||||
Other comprehensive income (loss): |
||||||||||||||||
Foreign currency translation adjustment |
(31 | ) | (3 | ) | 6 | 35 | ||||||||||
COMPREHENSIVE INCOME |
R$ | 3,593 | R$ | 4,000 | R$ | 2,157 | R$ | 1,970 | ||||||||
See Notes to Consolidated Financial Statements
- 5 -
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BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
Consolidated Statements of Changes In Shareholders Equity (Unaudited)
(in thousands of Brazilian Reais)
(in thousands of Brazilian Reais)
Additional | Accumulated | |||||||||||||||||||||||||||
Common Stock | Paid-In | Treasury | Accumulated | Comprehensive | ||||||||||||||||||||||||
Shares | Par Value | Capital | Stock | (Deficit) | Loss | Total | ||||||||||||||||||||||
Balance, December 31, 2008 |
8,148,717 | R$ | 1 | R$ | 61,062 | R$ | (1,601 | ) | R$ | (39,917 | ) | R$ | (1,040 | ) | R$ | 18,505 | ||||||||||||
Net Income |
3,624 | 3,624 | ||||||||||||||||||||||||||
Exercise of options |
35,000 | 86 | 86 | |||||||||||||||||||||||||
Cummulative translation adjustment |
(31 | ) | (31 | ) | ||||||||||||||||||||||||
Acquisition of Companys own shares |
(43,455 | ) | (317 | ) | (317 | ) | ||||||||||||||||||||||
Balance, September 30, 2009 |
8,140,262 | R$ | 1 | R$ | 61,148 | R$ | (1,918 | ) | R$ | (36,293 | ) | R$ | (1,071 | ) | R$ | 21,867 | ||||||||||||
See Notes to Consolidated Financial Statements
- 6 -
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BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(in thousands of Brazilian Reais)
(in thousands of Brazilian Reais)
Nine Months Ended September, 30 | ||||||||
2009 | 2008 | |||||||
CASH FLOW FROM OPERATING ACTIVITIES: |
||||||||
NET INCOME |
R$ | 3,624 | R$ | 4,003 | ||||
Adjustments to reconcile net income to cash provided by
(used in) operating activities: |
||||||||
Depreciation and amortization |
3,664 | 2,466 | ||||||
(Gain) Loss on assets sold, net |
(122 | ) | 181 | |||||
Noncontroling interest |
330 | | ||||||
Changes in assets and liabilities: |
||||||||
(Increase) decrease in: |
||||||||
Accounts receivable |
711 | 1,633 | ||||||
Inventories |
126 | 1,545 | ||||||
Prepaid expenses and other current assets |
(2,853 | ) | (5,092 | ) | ||||
Other assets |
(1,657 | ) | (6,517 | ) | ||||
(Decrease) increase in: |
||||||||
Accounts payable and accrued expenses |
(96 | ) | 1,105 | |||||
Payroll and related accruals |
1,560 | 1,431 | ||||||
Taxes other than income taxes |
245 | 108 | ||||||
Deferred income |
2,081 | 1,421 | ||||||
Contingencies and reassessed taxes |
186 | (334 | ) | |||||
Other liabilities |
(50 | ) | (65 | ) | ||||
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES |
7,749 | 1,885 | ||||||
CASH FLOW FROM INVESTING ACTIVITIES: |
||||||||
Additions to property and equipment |
(8,511 | ) | (6,578 | ) | ||||
Acquisition of Companys own shares |
(317 | ) | (443 | ) | ||||
CASH FLOWS USED IN INVESTING ACTIVITIES |
(8,828 | ) | (7,021 | ) | ||||
CASH FLOW FROM FINANCING ACTIVITIES: |
||||||||
Proceeds from issuance of shares of common stock |
86 | 44 | ||||||
Paid dividend |
| (678 | ) | |||||
Net Borrowings (Repayments) under lines of credit |
1,308 | 8,622 | ||||||
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES |
1,394 | 7,988 | ||||||
EFFECT OF FOREIGN EXCHANGE RATE |
(31 | ) | (3 | ) | ||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
284 | 2,849 | ||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
10,424 | 7,345 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
R$ | 10,708 | R$ | 10,194 | ||||
See Notes to Consolidated Financial Statements
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BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in thousands of Brazilian Reais, unless where stated)
(in thousands of Brazilian Reais, unless where stated)
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 (consisting of normal
recurring accruals) necessary for a fair presentation have been included. The results for the
quarter ended September 30, 2009 do not necessarily indicate the results that may be expected for
the 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 contained in the Companys Annual Report on Form 10-K
for the year ended December 31, 2008.
NOTE 2 BUSINESS AND OPERATIONS
Brazil Fast Food Corp. (the Company) was incorporated in the State of Delaware on September
16, 1992. During 1996, the Company acquired (the Acquisition) 100.0% of the capital of Venbo
Comercio de Alimentos Ltda. (Venbo), a Brazilian limited liability company which conducts
business under the trade name Bobs, owns and, directly and through franchisees, operates a chain
of hamburger fast food restaurants in Brazil.
During the second half of 2004, Venbo established, in an association with a Brazilian
individual (Associate), a new company, Suprilog Transportadora Ltda. (Suprilog), to render
transportation services at usual market value to Venbo, to Bobs franchisees and to other Brazilian
companies. During the first quarter of 2005, the Associate left the joint venture and Venbo became
wholly-owner of Suprilog. By the end of 2005, Venbo renegotiated the contract with one of the main
suppliers, Fast Food Distributor Ltda. (FBD a non-affiliate company), considering different basis
from the previous one, including logistics and transportation services. Because of such renewal,
Venbo sold the main operating assets and liabilities of Suprilog to FBD, which is now providing the
transportation. Suprilog operated the transportation business until the end of November 2005.
Suprilog was kept as a non-operating company until the second quarter of 2008. Currently it is
starting its new operations as supporting all the Companys subsidiaries with maintenance for
restaurant and its equipments, including warehouses for spare parts, engineering and marketing
materials. It may also be used for some particular re-sale activities of special products or
raw-materials used in the stores operation. Although its financial figures are currently not
material, they are being entirely consolidated on the present Financial Statements.
On December 2006, the Company set up a new holding company, called BFFC do Brasil
Participações Ltda. (BFFC do Brasil, formerly 22N Participações Ltda.), via the capital
contribution of the equity interest it held in Venbo. After this restructuring, completed on
December 31, 2006, all of the Companys businesses in Brazil are being consolidated through BFFC do
Brasil, and Venbo is being prepared to conduct its business through three primary divisions: fast
food restaurants, franchises and real estate. The creation of BFFC do Brasil also marked the
beginning of the Companys multi-brand program, discussed below:
- 8 -
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KFC
During the first quarter of 2007, the Company reached an agreement with Yum! Brands, owner of
the KFC brand. By this agreement, BFFC do Brasil started to conduct the operations of KFCs four
directly owned and operated restaurants in Rio de Janeiro as a Yum! Brands franchisee. In order to
operate the KFC brand in Brazil, the Company, through BFFC do Brasil, established a new subsidiary,
named CFK Comércio de Alimentos Ltda. (CFK, formerly Clematis Indústria e Comércio de Alimentos e
Participações Ltda.), which is responsible for managing, developing and expanding KFCs chain in
Brazil. CFK started its activities on April 1, 2007, and accordingly, the result of its operation
is included in this report since that date.
Pizza Hut
On August 5, 2008 the Company, through its wholly-owned holding subsidiary, BFFC do Brasil,
signed an agreement with a North-American company, RCI -Restaurants Connection International Inc
(RCI), for the acquisition of 60% of its Brazilian subsidiary, IRB Internacional Restaurantes
do Brasil (IRB). IRB operates 14 restaurants in the city of São Paulo Brazil, as a franchisee
of Pizza Hut (another Yum!s brand), with annual revenues of around R$50.0 million. IRB also
operates a coffee concept brand called In Bocca al Lupo Café with 4 stores in São Paulo.
The remaining 40% of IRB is hold by another Brazilian company of which the current IRBs CEO
is the main stockholder. Such IRB Officer has been operating the stores for the last years and has
been responsible for raising the company that had gone through a long period of operating losses.
BFFC do Brasil controls and manages IRB.
The Company had the necessary cash for funding the transaction, however the Companys
officers, supported by the Board, decided to undertake a bank loan in order to fund such
acquisition. Therefore, the Companys current cash will be reserved for working capital as well as
for other projects, including the expansion of the KFC chain. The bank loan has been contracted by
the Companys subsidiary BFFC do Brasil within UBS Pactual (a Brazilian financial institution) in
the total amount of R$9 million.
According to the purchase and sale agreement dated as of August 5, 2008, POGO Participações
S.A. (POGO) is the buyer of IRBs capital stock. However, BFFC do Brasil paid the costs of
acquisition (US$5.5 million) to RCI -Restaurants Connection International Inc (RCI) in behalf of
POGO. At the moment of this payment, BFFC do Brasil accounted for a loan receivable (a portion as
other current assets and another portion as other receivables and other assets) with POGO. BFFC
intended to subsequently convert a portion of such loan into POGO capital stock. However, due to
pending legal issues, only during the fourth quarter, BFFC do Brasil managed to convert US$2.0
million of such loan into 60% of IRBs capital stock. The other portion of the loan will be repaid
considering the same terms as the loan between BFFC do Brasil and UBS Pactual, including the
interest rates (see discussion on MD&A, at Liquidity and Capital Resources, B) Debt Obligation -
financial institutions). The legal closing date for the purchase occurred in December when the
acquirer obtained the control of the acquiree.
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Effective December 1, 2008, the Company paid R$9 million for a 60% ownership interest in IRBs
capital stock. The results of the operations have been included in the consolidated financial
statements beginning at the acquisition date. The aggregate value ascribed to the assets acquired
including minority interest of approximately R$1.0 million at the purchase date is as follows:
R$ 000 | ||||
Total current assets |
3,575 | |||
Deferred tax assets |
4,491 | |||
Property & Equipment, net |
3,667 | |||
Deferred charges |
503 | |||
Goodwill |
2,895 | |||
Other receivables and other assets LT |
619 | |||
Total |
15,750 | |||
BFFC plans to maintain the historical growth of IRB assuring the steady increase of sales and
result of operations within the 14 opened restaurants so far. It also drifted for 2009 the opening
of a new restaurant in São Paulo, now in final phase of construction. Additionally, a complete
reform is foreseen in two restaurant units in São Paulo city, with adoption of a new brand image.
For the next 2 years 3 new restaurants are foreseen to open and a complete reform is foreseen to
happen in one restaurant each year, also with adoption of a new brand image.
During the first quarter of 2009, IRB incorporated POGO.
Doggis
During October 2008, the Company reached an agreement with Doggis, one of the fast-food
leaders in Chile, operating hot dog chain with 150 stores in that country. As per such agreement,
BFFC do Brasil will develop own and franchised hot-dog stores in Brazil and Doggis will develop
Bobs brand stores in Chile. This business will be operated in a Master Franchise concept, with a
company created in Brazil (DGS) and another company in Chile. 80% of capital shares will belong
to the local controller of the brand and 20% to the corresponding partner. The transaction involves
an investment of US$0.4 million to capitalize the master franchise companies along the first year
of the agreement. The companies expect to open a maximum of 4 own stores in each country, an
investment of around US$4.0 million. The Company opened the first Doggis store in third quarter
of 2009 and intends to open another one during the fourth quarter of 2009. The present
Consolidated Financial Statement also includes DGS accounts.
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NOTE 3 CONTINGENCIES AND REASSESSED TAXES
Liabilities related to tax amnesty programs and litigation consist of the following:
September 30, 2009 (unaudited) | December 31, 2008 | |||||||||||||||||||||||
Long | Long | |||||||||||||||||||||||
Total | Current | Term | Total | Current | Term | |||||||||||||||||||
R$ 000 | Liability | Liability | Liability | Liability | Liability | Liability | ||||||||||||||||||
Reassessed taxes |
||||||||||||||||||||||||
Federal taxes (PAES) |
13,140 | 1,677 | 11,463 | 13,712 | 1,677 | 12,035 | ||||||||||||||||||
Contingencies |
||||||||||||||||||||||||
ISS tax litigation |
4,730 | | 4,730 | 3,828 | | 3,828 | ||||||||||||||||||
Labor litigation |
1,973 | | 1,973 | 2,065 | | 2,065 | ||||||||||||||||||
Property leasing and other litigation |
230 | | 230 | 282 | | 282 | ||||||||||||||||||
TOTAL |
20,073 | 1,677 | 18,396 | 19,887 | 1,677 | 18,210 | ||||||||||||||||||
Reassessed taxes
During 1999, 2001 and in the beginning of 2002, certain Brazilian taxes levied on Venbo were
not paid. In addition during 2002, Brazilian Social Security Authorities applied penalties against
Venbo, by charging certain operating transactions not covered by Venbos previous calculation of
Social Security contributions. Those debts were renegotiated in different moments and with
different levels of Brazilian Government.
Since September 2002, the Company and its subsidiaries have been paying all its current taxes
on a timely basis.
The tax debt evolution and its current status are summarized as follows:
| Federal taxes PAES |
Concerning the unpaid federal taxes and the Social Security penalties, the Company
applied to join and was accepted into two subsequent amnesty programs offered by the
Brazilian federal government (REFIS during 1999 and PAES during 2003).
The second amnesty program (PAES) included the balance of the previous federal tax
amnesty program (REFIS) and unpaid 2001 and 2002 federal tax, as well as the Social Security
penalties. The total debt included in such program is being paid in monthly installments, on
a timely basis, equivalent to 1.5% of the Companys gross sales, with interest accruing at
rates set by the Brazilian federal government, which currently are 6.0% per year (6.25% per
year in 2008).
During the period of nine months ended September 30, 2009, the Company paid
approximately R$1.4 million (1,5 million in the same period of 2008) related to such
Brazilian federal tax amnesty program, including R$0.3 million (R$0.3 million in 2008) of
interests.
In addition, during 2008 the Brazilian Federal Government reviewed their records and
detected that the computation of PAES was incorrect for most of the companies which have
adhered to such program. At most cases, there was miscalculation of interest beard on debts
of Brazilian Social Security (INSS). During the last quarter of 2008, the Company adjusted
its liabilities in additional R$2.8 million in order to comply with such fiscal review.
- 11 -
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In February 2005, the Company compared its remaining debt regarding PAES with statements
provided by the Brazilian Federal Government. Those statements reported that Companys total
debt would be greater than the figures in the Companys balance sheet, in the amount of
approximately R$3.2 million. During March, 2005, the Company filed a formal request with the
Brazilian Federal Authorities, claiming to have its total debt reviewed. Such request,
reconciled the amounts the Company had accrued at its accounting books to the amounts
reported in the official statement at the same period. The Company believes that the amounts
accrued at the balance sheet as of September 30, 2009, total of R$13.1 million (R$13.7
million in December 31, 2008) are correct, however, there is no assurance that the outcome of
this situation will derive further liability to the Company. As of September 30, 2009, the
difference between such debt at the statements provided by the Brazilian Federal Government
and the statements reported by the Companys was R$7.9 million (R$4.8 million in September
30, 2008).
For the remaining period of 2009, we expect to pay approximately R$0.3 million pursuant
to the federal tax amnesty program.
During the third quarter of 2009, the Brazilian Government issued another amnesty
program. The Companies which apply to such new program will consolidate the balances of
previous programs and other fiscal debts. Depending on the number of monthly installments the
Companies choose, they will got different reduction of its fiscal debt.
The program rules are not already formalized by the Brazilian Fiscal Authorities.
However the Company has applied to it and expect to have its fiscal debt consolidated by the
beginning of 2010.
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Contingencies
| ISS litigation |
ISS is a tax charged by Brazilian cities on services rendered by Brazilian companies. | |||
None of the Companys revenues were subject to such tax until 2003, but in the beginning of 2004 a new ISS legislation has been implemented and according to it, royalty fees had to be included on the basis of ISS calculation. | |||
Although the Company is claiming in court that royalty fees should not be considered payment for services rendered and therefore should not be subject to ISS taxation, the Company is depositing monthly with the court the amount claimed by ISS, while awaiting the courts determination. In addition, the Company has accrued the claimed amounts as of September 30, 2009, total of R$5.4 million (R$3.8 million in December 31, 2008), which the Companys Management, based on the opinion of its legal advisors, believes is sufficient to face Companys current tax contingencies. | |||
During the third quarter of 2009 this claiming was partially settled and the court decided that the Rio de Janeiro City Government has to reimburse the Company the amounts of ISS tax which were paid before the change of the tax legislation, in a total of approximately R$0.5 million. Legal disputes in Brazil have historically demonstrated that positive outcomes of Companies against the Government are rarely received in cash. Instead, they are generally received in tax credits. Currently, the Company is studying how these tax credits could be compensated, since this compensation has to be against taxes ruled by Rio de janeiro City Governent and the main tax is, as discussed above, being deposited by the Company. Because of the uncertainty of realizing this tax credit, the Company did not recognize the related amount as a gain in its Consolidated Income Statements. | |||
The referred change in the ISS tax regulations motivated deep debates whether marketing funds and initial fees paid by franchisees could be considered as payment for service rendered by the ISS tax authorities. Because of that, the Company, together with its tax advisors, is adopting measures in order to avoid the charge of ISS against the marketing funds and initial fees. |
| Labor litigations | ||
During 2005, the Company was ordered to pay a fine of approximately R$480,000 to a former employee. Despite the infrequency of this amount in labor processes, the Company is not guarded from receiving other labor claims in such high amount. During 2008 and 2007 the Company received other labor claims from former employees. As of September 30, 2009 the Companys accounted for liabilities in the amount of R$2.0 million (R$2.0 million in December 31, 2008), which the Companys Management, based on the opinion of its legal advisors, believes is sufficient to face Companys current labor contingencies. |
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Other contingencies
Other contingencies that in accordance with our legal advisors required no provision in the Companys balance sheet are the following: | |||
The Company purchased Venbo Comércio de Alimentos Ltda. (Venbo) from VENDEX in 1996. The Acquisitions Purchase Agreement stated that Venbos former owner (VENDEX) would be responsible for off-balance liabilities derived from Venbos transactions prior to the Acquisition, limited to certain conditions. From 1997 to date, the Company has received several communications from the Brazilian fiscal authorities related to the period prior to the Acquisition and, accordingly, has forwarded those to VENDEX and its attorneys. | |||
In 2005, Venbo was summoned by the fiscal authority of the State of Rio de Janeiro to pay a debt of approximately R$97,000 referred to the period prior to 1996. In order to have the right to appeal it was obliged to put in a pledge one of its properties. VENDEX assumed the defense but did not substituted the seizure of the asset, because of its weak current financial condition. | |||
VENDEX attorneys are defending all demands. During the third quarter of 2007, the single relevant claim was judged favorable to VENDEX. All other claims are immaterial; however, we cannot predict the receipt of additional claims that might be material. | |||
A Companys franchisee has became a permanent debtor of royalties and marketing contributions, and the Company, after failing a great exertion to improve his business, finally decided to interrupt his franchise contract and closed the stores explored by him. After claiming in court, the Company managed to receive the past due amounts from the franchisee and to terminate the original franchise agreement. | |||
This same franchisee alleged in court that the Company was responsible for having offered the operation of a store with guaranteed profitability, but, instead he had operating losses. He claimed to receive a legal indemnity in the amount of R$5.5 million. As per the first instance, the court judged the claim favorable to the franchisee, but reduced the indemnity to R$1.2 million. The Companys legal advisors understood that his argument contradicts franchise laws and the usual business practices of the Company and appealed. As per the second instance, the court gave another positive outcome to the franchisee, but, again, reducing the compensation; this time to R$450,000. Although still appealing the franchise claim, the Company cannot predict the result of its appeal. | |||
The owner of the property where the Company held a lease contract for operation of one of the Companys store (closed in 2002) claimed unpaid monetary restatement on rent for a period of two and a half years in the amount of R$1.0 million. The Companys lawyers appealed based on a letter dated March, 2002, signed by the owner, clearly stating the debt relief, and on the fact that, the legal time for claiming such kind of right has expired based on Brazilian laws. However, we cannot guarantee a successful result. |
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In January 2009, fiscal authorities from the State of Rio de Janeiro understood that there was a miscalculation at VENBOs state tax (VAT) and fined the Companys subsidiary in the amount of R$5.0 million. Our tax lawyers have appealed because it seems evident that the fiscal authorities committed a basic mistake having ignored previous court decisions in our favor. We have the opinion that we have correctly paid all our VA Taxes, however we cannot predict the result of its appeal. |
Based on an analysis of possible losses, taking into account the applicable litigation and
settlement strategies of its legal advisors, the Company believes to have sufficient resource to
face current contingencies.
NOTE 4 STOCK OPTION PLAN ACTIVITY
The Companys Stock Option Plan terminated on September 17, 2002, ten years from the date
of its adoption by the Board of Directors.
The stock options of Brazil Fast Food Corp. pursuant to the 1992 Stock Option Plan, as
amended, and the grant of stock options outside of plan by Brazil Fast Food Corp.s Board of
Directors, were included in a Registration Statement on Form S-8 filed by the Company with the U.S.
Securities and Exchange Commission. The Registration Statement, which was assigned File No.
333-133981, was declared effective by the SEC on May 10, 2006.
During 2005, the Companys Board of Directors and a majority of the shareholders of the
Company decided that Board compensation would be paid in cash and that no more stock options would
be granted. The provisions set by the Plan are still valid for all vesting options until the last
option grant (November, 2004).
During the period of nine months ended September 30, 2009, options to purchase an aggregate of
35,000 (23,750 in September 30, 2008) shares of common stock were exercised, having an aggregate
purchase price of $37,100 ($25,175 in September 30, 2008) equivalent to R$85,495 (R$44,033 in
September 30, 2008). After those options which were exercised during 2009, the Company has no
further exercisable options, under the Companys Stock Option Plan.
There were no options canceled or expired during the nine months ended September 30, 2009,
under the Companys Stock Option Plan.
Intrinsic value for stock options is defined as the difference between the current market
value and the exercise price. The total intrinsic value of stock options exercised during the
period of nine months ended September 30, 2009 was approximately $94,150 (approximately $166,500 in
September 30, 2008).
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NOTE 5 TREASURY STOCK
During the last quarter of 2004, the Companys Board of Directors approved a stock
repurchase plan covering the repurchase of as many as 200,000 shares of its own common stock. The
plan goal is to optimize the cash generated in the United States and its repurchase limit has been
increased by 200,000 shares on October 18, 2006.
During the nine months ended September 30, 2009, the Company repurchased a total
amount of 43,455 shares under the referred stock repurchase plan. During the nine months
ended September 30, 2008, the Company repurchased 52,620 shares related to such plan.
During the nine months ended September 30, 2009, the Companys total disbursement for
these stock purchases totaled R$317.3 thousand. The Companys accumulated disbursement for these
transactions is R$1,9 million and is accounted for as a deduction of Paid in Capital, in the
Shareholders Equity section of the accompanying balance sheets.
NOTE 6 SEGMENT INFORMATION
Through our wholly-owned subsidiary Venbo, which conducts business under the trade name
Bobs, we own and, directly and through franchisees, operate the second largest fast food
hamburger restaurant chain in Brazil. Since April 2007, we operate, through our wholly-owned
subsidiary CFK, the KFCs brand in Brazil. Since December 2008, we operate, through our subsidiary
IRB, the Pizza Huts brand in Brazil and since July 2009, we operate, through our subsidiary DGS,
the Doggis brand in Brazil.
Currently the majority of Companys operations are concentrated at the southeast region of
Brazil. All 14 Pizza Hut point of sales operated by the Company, as well as all 12 point of sales
under KFC brand, are located at this region. The single store under the trade mark Doggis is also
at Southeast region of Brazil. Regarding Bobs brand, as of September 30, 2009, from the total of 61
Company own-operated point of sales, 60 were located at the southeast region which provided 98.5%
of total Net Revenues from Own-operated Restaurants. In addition, from the total of 597
franchise-operated point of sales,308 were located at the same region, which provided 61.3% Net
Revenues from Franchisees.
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Besides the Brazilian operations, the Bobs brand is also present, through franchisees, in
Angola, Africa. These operations are not material to our overall results.
The following tables present the Companys revenues, costs/expenses and operating income per
segment:
Results from own-stores operations | ||||||||||||||||
Nine months ended September 30, | Three months ended September 30, | |||||||||||||||
R$ 000 | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Revenues |
105,316 | 60,837 | 36,986 | 21,670 | ||||||||||||
Cost and expenses |
(98,855 | ) | (62,134 | ) | (33,594 | ) | (21,159 | ) | ||||||||
Operating margin |
6,461 | (1,297 | ) | 3,392 | 511 | |||||||||||
Results from franchise operations | ||||||||||||||||
Nine months ended September 30, | Three months ended September 30, | |||||||||||||||
R$ 000 | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Revenues |
17,148 | 15,815 | 6,120 | 5,699 | ||||||||||||
Cost and expenses |
(6,405 | ) | (4,531 | ) | (2,195 | ) | (1,677 | ) | ||||||||
Operating margin |
10,743 | 11,284 | 3,925 | 4,022 | ||||||||||||
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Own-stores operation conducted by the Company provided the following figures per brand:
Results from | ||||||||||||||||||||
Results from Bobs | Results from KFCs | Pizza Huts | ||||||||||||||||||
brand operations | brand operations | brand operations | ||||||||||||||||||
Nine months ended | ||||||||||||||||||||
Nine months ended September 30, | Nine months ended September 30, | September 30, | ||||||||||||||||||
R$ 000 | 2009 | 2008 | 2009 | 2008 | 2009 | |||||||||||||||
Revenues |
R$ | 57,259 | R$ | 53,346 | R$ | 12,785 | R$ | 7,491 | R$ | 35,120 | ||||||||||
Food, Beverage and
Packaging |
(21,376 | ) | (20,889 | ) | (5,064 | ) | (2,905 | ) | (10,858 | ) | ||||||||||
Payroll & Related Benefits |
(13,610 | ) | (14,870 | ) | (3,294 | ) | (1,935 | ) | (7,904 | ) | ||||||||||
Occupancy expenses |
(6,450 | ) | (6,041 | ) | (1,775 | ) | (1,051 | ) | (3,210 | ) | ||||||||||
Contracted Services |
(6,977 | ) | (6,210 | ) | (2,009 | ) | (1,085 | ) | (3,911 | ) | ||||||||||
Depreciation and Amortization |
(2,068 | ) | (1,935 | ) | (611 | ) | (21 | ) | (495 | ) | ||||||||||
Royalties charged |
| | | | (2,145 | ) | ||||||||||||||
Other Store Costs and
Expenses |
(4,266 | ) | (4,921 | ) | (466 | ) | (245 | ) | (2,098 | ) | ||||||||||
Total Own-stores cost and
expenses |
(54,747 | ) | (54,866 | ) | (13,219 | ) | (7,242 | ) | (30,621 | ) | ||||||||||
Operating margin |
R$ | 2,512 | R$ | (1,520 | ) | R$ | (434 | ) | R$ | 249 | R$ | 4,499 | ||||||||
There are no Pizza Huts figures for the period of nine months ended September 30,
2008, since its operations started on December 01, 2008.
Doggis operations conducted by the Company since July, 2009, provided revenues of R$152
thousand and a negative operating margin of R$116.
Cost and expenses that are exclusively related to own-operated stores even the ones
incurred at the headquarters are considered in the item Results from own-store operations.
Cost and expenses that are exclusively related to franchisee operated stores even the ones
incurred at the headquarters are considered in the item Results from franchise operations.
There are items that support both activities, such as (i) administrative expenses (finance
department collects the receivables from franchise but also reviews daily own store sales); (ii)
selling expenses (our marketing campaigns enhance the sales of our stores as well as the sales of
our franchisees); (iii) interest expense (income); (iv) income tax (benefits); (v) exclusivity and
other agreements with suppliers; and (vi) extraordinary items. Such items were not included in none
of the segment results disclosed in the table above because (a) their segregation would require a
high level of complexity and (b) the chief operating decision maker relies primarily on operating
margins to assess the segment performance.
Currently, besides the accounts receivables from franchisees (derived from franchise fees,
royalties, and marketing fund), the Company does not have assets exclusively used at the franchise
business. Accordingly, except for those receivables, assets presented in the Consolidated Balance
Sheets are used at the restaurant operating business.
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Table of Contents
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion is intended to help the reader understand the results of
operations, financial condition, and cash flows of the Company. This discussion is provided as a
supplement to, and should be read in conjunction with, our financial statements and the
accompanying notes to the financial statements.
Special Note About Forward-Looking Statements
Certain statements in Managements Discussion and Analysis (MD&A), other than purely
historical information, including estimates, projections, statements relating to our business
plans, objectives and expected operating results, and the assumptions upon which those statements
are based, are forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the Securities Act)
and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally
are identified by the words believe, project, expect, anticipate, estimate, intend,
strategy, plan, may, should, will, would, will be, will continue, will likely
result, and similar expressions. Forward-looking statements are based on current expectations and
assumptions that are subject to risks and uncertainties which may cause actual results to differ
materially from the forward-looking statements. A detailed discussion of risks and uncertainties
that could cause actual results and events to differ materially from such forward-looking
statements is included in the companys Annual Report on Form 10-K for the year ended December 31,
2008. We undertake no obligation to update or revise publicly any forward-looking statements,
whether as a result of new information, future events, or otherwise.
OUR BUSINESS
References to we, us or the Company are to Brazil Fast Food Corp.
We, through our holding company in Brazil, BFFC do Brasil (formerly 22N Participações Ltda.),
are the second largest fast food chain in Brazil.
During 1996, the Company acquired 100.0% of the capital of Venbo Comercio de Alimentos Ltda.
(Venbo), a Brazilian limited liability company which operates, directly and through franchisees,
a chain of hamburger fast food restaurants in Brazil under the trade name Bobs.
In December, 2006, the Company started an expansion of its activities by developing a
multi-brand program of its fast-food chain and set up BFFC do Brasil (formerly 22N Participações
Ltda), via the capital contribution of the equity interest it held in Venbo. BFFC do Brasil has
been established with the purpose to be the Companys holding enterprise in Brazil.
In 2007, the Company, through BFFC do Brasil, signed agreements with Yum!, through which BFFC
acquired CFK (formerly Clematis Indústria e Comércio de Alimentos e Participações Ltda.), a
Brazilian limited liability company that conducts business under the trade name KFC (four stores
at that time) in Brazil. Also through such agreement, the Company became KFCs agent in that
country, with the commitment of locally develop and expand KFC brand, as well as assume the
supervision and control of KFCs local franchise chain.
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In August 2008, the Company, also through its holding company in Brazil, signed another
agreement with Yum! and acquired 60% of Internacional Restaurantes do Brasil (IRB), a Brazilian
company which operates 14 Pizza Hut restaurants and 4 In Bocca al Lupo Café (a Coffee concept
brand)in the city of São Paulo. IRBs restaurants started operating as part of BFFC in the
beginning of December, 2008.
In October 2008, the Company signed an agreement with Doggis, a Chilean brand covering a
hot-dog fast-food concept. Doggis has 150 stores in Chile, where it is one of the fast-food market
leaders. As per this agreement, the Company will develop own and franchised-operated hot-dog stores
in Brazil and the shareholders of Doggis will develop Bobs stores in Chile. A master franchise
company was set up in each country, 80% belonging to the local controller of the brand, 20% to the
corresponding partner. The Company opened the first Doggis store in third quarter of 2009 and
intends to open another one during the fourth quarter of 2009.
The Company also owns a logistic company which serves all the other subsidiaries with repair
and maintenance services and the warehouse for spare parts and other materials. These operations
are not material to our overall results.
Besides the Brazilian operations, the Bobs brand is also present, through franchisees, in
Angola, Africa. These operations are not material to our overall results.
In their majority, Revenues consist of sales by Company-operated restaurants and fees from
restaurants operated by franchisees. These fees primarily include initial fees and royalties that
are based on a percentage of sales.
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RESULTS OF OPERATIONS COMPARISON OF THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Amount in thousand of Brazilian Reais)
The
following table sets forth statement of operations for the three and
nine months ended
September 30, 2009 and 2008. All the operating figures were stated as a percentage of total
revenues. However the specific discussions of store cost and expenses and franchise expenses also
include the evolution of such figures stated as a percentage of Net revenues from own-operated
restaurants and Net Franchise Revenues, respectively.
9 Months | 9 Months | 3 Months | 3 Months | |||||||||||||||||||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||||||||||||||||||
R$ 000 | 30-Sep-09 | % | 30-Sep-08 | % | 30-Sep-09 | % | 30-Sep-08 | % | ||||||||||||||||||||||||
REVENUES |
||||||||||||||||||||||||||||||||
Net Revenues from Own-operated Restaurants |
R$105,316 | 79.4 | % | R$60,837 | 71.8 | % | R$36,986 | 79.4 | % | R$21,670 | 72.7 | % | ||||||||||||||||||||
Net Revenues from Franchisees |
17,148 | 12.9 | % | 15,815 | 18.7 | % | 6,120 | 13.1 | % | 5,699 | 19.1 | % | ||||||||||||||||||||
Revenues from Special Agreements |
6,887 | 5.2 | % | 6,150 | 7.3 | % | 2,411 | 5.2 | % | 2,024 | 6.8 | % | ||||||||||||||||||||
Other Income |
3,357 | 2.5 | % | 1,983 | 2.3 | % | 1,050 | 2.3 | % | 410 | 1.4 | % | ||||||||||||||||||||
TOTAL REVENUES |
132,708 | 100.0 | % | 84,785 | 100.0 | % | 46,567 | 100.0 | % | 29,803 | 100.0 | % | ||||||||||||||||||||
OPERATING COST AND EXPENSES |
||||||||||||||||||||||||||||||||
Store Costs and Expenses |
(98,855 | ) | -74.5 | % | (62,134 | ) | -73.3 | % | (33,594 | ) | -72.1 | % | (21,159 | ) | -71.0 | % | ||||||||||||||||
Franchise Costs and Expenses |
(6,405 | ) | -4.8 | % | (4,531 | ) | -5.3 | % | (2,195 | ) | -4.7 | % | (1,677 | ) | -5.6 | % | ||||||||||||||||
Marketing Expenses |
(2,965 | ) | -2.2 | % | (481 | ) | -0.6 | % | (1,037 | ) | -2.2 | % | (261 | ) | -0.9 | % | ||||||||||||||||
Administrative Expenses |
(15,434 | ) | -11.6 | % | (11,824 | ) | -13.9 | % | (5,621 | ) | -12.1 | % | (4,294 | ) | -14.4 | % | ||||||||||||||||
Other Operating Expenses |
(2,370 | ) | -1.8 | % | (1,488 | ) | -1.8 | % | (1,071 | ) | -2.3 | % | (377 | ) | -1.3 | % | ||||||||||||||||
Net result of assets sold and impairment of assets |
122 | 0.1 | % | (181 | ) | -0.2 | % | 250 | 0.5 | % | (157 | ) | -0.5 | % | ||||||||||||||||||
TOTAL OPERATING COST AND EXPENSES |
(125,907 | ) | -94.9 | % | (80,639 | ) | -95.1 | % | (43,268 | ) | -92.9 | % | (27,925 | ) | -93.7 | % | ||||||||||||||||
OPERATING INCOME |
6,801 | 5.1 | % | 4,146 | 4.9 | % | 3,299 | 7.1 | % | 1,878 | 6.3 | % | ||||||||||||||||||||
Interest Income (Expense) |
(3,184 | ) | -2.4 | % | 17 | 0.0 | % | (1,077 | ) | -2.3 | % | 64 | 0.2 | % | ||||||||||||||||||
NET INCOME BEFORE INCOME TAX |
3,617 | 2.7 | % | 4,163 | 4.9 | % | 2,222 | 4.8 | % | 1,942 | 6.5 | % | ||||||||||||||||||||
Income taxes |
337 | 0.3 | % | (160 | ) | -0.3 | % | 1 | 0.0 | % | (7 | ) | 0.0 | % | ||||||||||||||||||
NET INCOME BEFORE MINORITY INTEREST |
3,954 | 3.8 | % | 4,003 | 6.6 | % | 2,223 | 6.0 | % | 1,935 | 8.9 | % | ||||||||||||||||||||
NONCONTROLING INTEREST |
(330 | ) | -0.3 | % | | 0.0 | % | (72 | ) | -0.2 | % | | 0.0 | % | ||||||||||||||||||
NET INCOME |
3,624 | 3.4 | % | 4,003 | 6.6 | % | 2,151 | 5.8 | % | 1,935 | 8.9 | % | ||||||||||||||||||||
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Introduction
Following the first semester of 2009, the quarter ended September 30, 2009, the Companys
operations had overall increase of retail. The Company believes that, in Brazil, the financial
crisis affected industries (durable and semi-durable goods) more intensely than the retail market.
Credit facilities to consumers had been reduced until the end of the period of nine months ended
September 30,of 2009 and during this period consumer spending was driven to the retail market. Such
economic environment affected positively the Companys operations during the nine months of 2009.
Net Revenues from Own-Operated Restaurants
Net restaurant sales for our company-owned retail outlets increased R$44.5 million or
73.1%, to R$105.3 million for the nine months ended September 30, 2009 as compared to R$60.8
million for the nine months ended September 30, 2008.
Net restaurant sales for our company-owned retail outlets increased R$15.3 million or 70.7%,
to R$37.0 million for the three months ended September 30, 2009 as compared to R$21.7 million for
the three months ended September 30, 2008.
Under the criteria of same store sales, which only includes stores that have been open for
more than one year, net restaurant sales increased approximately 4.5% (Bobs brand) and 1.9% (KFC
brand) for the nine months ended September 30, 2009 as compared to the nine months ended September
30, 2008.
Same store sales decreased approximately 2.9% (Bobs brand) and approximately 0.5% (KFC brand)
for the three months ended September 30, 2009 as compared to the three months ended September 30,
2008.
Overall restaurant sales increased due to (i) the economic issues discussed above; (ii) due to
the increase in number of point of sales from 64 (59 Bobs brand and 5 KFC brand) at September30,
2008 to 73 (61 Bobs brand and 12 KFCs brand) at September 30, 2009; and the beginning of Pizza
Hut brand operation on December, 2008, which brought 14 new points of sales with additional
restaurant revenues of approximately R$35.1 million.
In addition, intensive marketing campaigns including some of the most important products such
as Ovomaltine milkshake and Big Bob hamburger at Bobs stores and Banquete Crocante at
KFC stores, joined to new incentives to store personnel, impacted positively restaurant sales.
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Table of Contents
Net Franchise Revenues
Net Franchise revenues are comprised of initial fees (amount due at the signing of a new
franchise contract) and royalty fees (derived from a percentage on the sales of the stores operated
by franchisees), as set forth below:
Nine months ended September, 30 | ||||||||
R$000 | 2009 | 2008 | ||||||
Net Franchise Royalty Fees |
15,852 | 13,886 | ||||||
Initial Fee |
1,296 | 1,929 | ||||||
Net Franchise Revenues |
17,148 | 15,815 | ||||||
Net franchise revenues increased R$1.3 million or 8.4%, to R$17.1 million for the nine months
ended September 30, 2009 from R$15,8 million for the nine months ended September 30, 2008.
Net franchise revenues increased R$0.4 million or 7.4%, to R$6.1 million for the three months
ended September 30, 2009 from R$5,7 million for the three months ended September 30, 2008.
These increases are attributable to the growth of Companys franchise business from 558 retail
outlets as of September 30, 2008 to 597 as of September 30, 2009.
Up to current date, the franchise activity is only operated by Bobs brand.
In addition of royalty fees and initial fees, the Company receives from franchisees marketing
contributions which represent franchise contributions to finance corporate marketing investments
and are accounted for as discussed at Marketing (Expenses) Income.
- 23 -
Table of Contents
Revenue from Special Agreements and Other Income
The Company may obtain income from its suppliers when agreements are settled to exclusively
use certain products from a supplier or when agreements are settled with performance bonus to be
reached.
The income received from suppliers, related to performance bonus, is recognized when the
suppliers agree that the contracted performance has been reached. In case the performance bonus is
received in cash, it is recognized as Revenues from Special Agreements; in case they are received
in products, it is recognized as a cost reduction.
Other income is mainly comprised of lease of Companys properties, administration fees on
marketing fund and nonrecurring gains.
Store Costs and Expenses
As a percentage of Total revenues, Store costs and expenses were (72.1%) and (71.0%) for the
quarters ended September 30, 2009 and 2008, respectively.
As a percentage of Total revenues, Store costs and expenses were (74.5%) and (73.3%) for the
periods of nine ended September 30, 2009 and 2008, respectively.
Analyzing as a segment (own-stores operations), Store cost and expenses had the following
evolution towards Net revenues from own-operated restaurants:
9 Months | 9 Months | 3 Months | 3 Months | |||||||||||||||||||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||||||||||||||||||
R$ 000 | 30-Sep-09 | % | 30-Sep-08 | % | 30-Sep-09 | % | 30-Sep-08 | % | ||||||||||||||||||||||||
STORE RESULTS |
||||||||||||||||||||||||||||||||
Net Revenues from Own-operated Restaurants |
105,316 | 100.0 | % | 60,837 | 100.0 | % | 36,986 | 100.0 | % | 21,670 | 100.0 | % | ||||||||||||||||||||
Store Costs and Expenses |
| | ||||||||||||||||||||||||||||||
Food, Beverage and Packaging |
(37,388 | ) | -35.5 | % | (23,820 | ) | -39.2 | % | (12,813 | ) | -34.6 | % | (8,538 | ) | -39.4 | % | ||||||||||||||||
Payroll & Related Benefits |
(24,874 | ) | -23.6 | % | (16,805 | ) | -27.6 | % | (8,562 | ) | -23.1 | % | (5,710 | ) | -26.3 | % | ||||||||||||||||
Restaurant Occupancy |
(11,470 | ) | -10.9 | % | (7,092 | ) | -11.7 | % | (3,867 | ) | -10.5 | % | (2,308 | ) | -10.7 | % | ||||||||||||||||
Contracted Services |
(12,567 | ) | -11.9 | % | (7,295 | ) | -12.0 | % | (4,048 | ) | -10.9 | % | (2,303 | ) | -10.6 | % | ||||||||||||||||
Depreciation and Amortization |
(3,188 | ) | -3.0 | % | (1,956 | ) | -3.2 | % | (984 | ) | -2.7 | % | (662 | ) | -3.1 | % | ||||||||||||||||
Royalties charged |
(2,515 | ) | -2.4 | % | | 0.0 | % | (1,150 | ) | -3.1 | % | | 0.0 | % | ||||||||||||||||||
Other Store Costs and Expenses |
(6,853 | ) | -6.5 | % | (5,166 | ) | -8.5 | % | (2,170 | ) | -5.9 | % | (1,638 | ) | -7.6 | % | ||||||||||||||||
Total Store Costs and Expenses |
(98,855 | ) | -93.9 | % | (62,134 | ) | -102.1 | % | (33,594 | ) | -90.8 | % | (21,159 | ) | -97.6 | % | ||||||||||||||||
STORE OPERATING INCOME |
6,461 | 6.1 | % | (1,297 | ) | -2.1 | % | 3,392 | 9.2 | % | 511 | 2.4 | % | |||||||||||||||||||
Food, Beverage and Packaging Costs
As a percentage of Net revenues from own-operated restaurants, food, beverage and packaging
costs were (34.6 %) and (39.4%) for quarters ended September 30, 2009 and 2008, respectively.
As a percentage of Net revenues from own-operated restaurants, food, beverage and packaging
costs were (35.5 %) and (39.2%) for the nine months ended September 30, 2009 and 2008,
respectively.
Concerning Bobs brand the cost of food, beverage and packaging was impacted by increases of
the purchase price of almost all main products: meat and chicken hamburger and soft drinks and by
decreases in packaging products.
Regarding KFCs brand the cost of food, beverage and packaging was also impacted by increases
of the purchase price of some products: packaging, chicken, French fries and soft drinks.
The decrease of percentage is mainly due to better gross margin operated by Pizza Hut
restaurants.
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Payroll & Related Benefits
As a percentage of Net revenues from own-operated restaurants, store payroll and related
benefits decreased from (26.3%) for the three months ended September 30, 2008 to (23.1%) for the
same period ended September 30, 2009.
As a percentage of Net revenues from own-operated restaurants, store payroll and related
benefits decreased from (27.6%) for the nine months ended September 30, 2008 to (23.6%) for the
same period ended September 30, 2009.
Payroll & Related Benefits decreases are mainly due to reduction of the work force at Bobs
outlets and to turn over reduction both at KFC and Bobs brands. Such decrease was partially offset
by increase in salaries at KFC and Bobs outlets and due to higher salaries paid at Pizza Huts
restaurants as compared to other Companys brand.
Restaurant Occupancy Costs and Other Expenses
Restaurant occupancy costs and other expenses expressed as a percentage of Net revenues from
own-operated restaurants were approximately (10.5%) and (10.7%) for the three months ended
September 30, 2009 and 2008, respectively.
Restaurant occupancy costs and other expenses expressed as a percentage of Net revenues from
own-operated restaurants were approximately (10.9%) and (11.7%) for the nine months ended September
30, 2009 and 2008, respectively.
Restaurant occupancy costs decrease is mainly due to reduction of rent costs on renewals as
well as lower cost negotiated on recently open KFC outlets.
Contracted Services
Expenses related to contracted services expressed as a percentage of Net revenues from
own-operated restaurants were approximately (10.9%) and (10.6%) for quarters ended September 30,
2009 and 2008, respectively.
Expenses related to contracted services expressed as a percentage of Net revenues from
own-operated restaurants were approximately (10.9%) and (12.0%) for the nine months ended September
30, 2009 and 2008, respectively.
The increase of three months is mainly attributable to increases of security costs, as well as
maintenance costs.
This increase was partially offset by the reduction of utilities costs.
Depreciation and Amortization
As a percentage of Net revenues from own-operated restaurants, depreciation and amortization
were approximately (2.7%) and (3.1%) for the three months ended September 30, 2009 and 2008,
respectively.
As a percentage of Net revenues from own-operated restaurants, depreciation and amortization
were approximately (3.0%) and (3.2%) for the nine months ended September 30, 2009 and 2008,
respectively.
Depreciation and amortization costs kept almost at the same level from 2008 to 2009.
Other Store Cost and Expenses
Other store cost and expenses expressed as a percentage of Net revenues from own-operated restaurants were
approximately (5.9%) and (7.6%) for the three months ended September
30, 2009 and 2008, respectively.
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Other store cost and expenses expressed as a percentage of Net revenues from own-operated
restaurants were approximately (6.5%) and (8.5%) for the nine months ended September 30, 2009 and
2008, respectively.
Other store cost and expenses kept decreases are attributable to reduction of transportation
and consumption material costs.
Franchise Costs and Expenses
As a percentage of Total Revenues, Franchise costs and expenses were (4.7%) and (5.6%) for the
quarters ended September 30, 2009 and 2008, respectively.
As a percentage of Total Revenues, Franchise costs and expenses were (4.8%) and (5.3%) for the
nine months ended September 30, 2009 and 2008, respectively.
Analyzing as a segment (franchise operations), Franchise costs and expenses had the following
evolution towards Net Franchise revenues:
9 Months | 9 Months | 3 Months | 3 Months | |||||||||||||||||||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||||||||||||||||||
R$ 000 | 30-Sep-09 | % | 30-Sep-08 | % | 30-Sep-09 | % | 30-Sep-08 | % | ||||||||||||||||||||||||
FRANCHISE RESULTS |
||||||||||||||||||||||||||||||||
Net Revenues from Franchisees |
17,148 | 100.0 | % | 15,815 | 100.0 | % | 6,120 | 100.0 | % | 5,699 | 100.0 | % | ||||||||||||||||||||
Franchise Costs and Expenses |
(6,405 | ) | -37.4 | % | (4,531 | ) | -28.7 | % | (2,195 | ) | -35.9 | % | (1,677 | ) | -29.4 | % | ||||||||||||||||
FRANCHISE OPERATING INCOME |
10,743 | 62.6 | % | 11,284 | 71.3 | % | 3,925 | 64.1 | % | 4,022 | 70.6 | % |
Franchise cost and expenses expressed as a percentage net franchise revenues were
approximately (35.9%) and (29.4%) for the periods of three months ended September 30, 2009 and
2008, respectively.
Franchise cost and expenses expressed as a percentage net franchise revenues were
approximately (37.4%) and (28.7%) for the periods of nine months ended September 30, 2009 and 2008,
respectively.
This increase is attributable to the growth of franchise business and the related necessity to
spread its infra-structure. Accordingly, there were increases of franchise department personnel and
their compensation, as well as increase on occupancy costs, consulting services and traveling
expenses in 2009.
Marketing, General and Administrative Expense
Marketing Expenses
Bobs Brand
According to our franchise agreements, Bobs marketing fund we have dedicated to advertising
and promotion is comprised of financial contributions paid by the franchisees and also by the
contributions due by the Company. The fund resources are administrated by the Company and must be
used in the common interest of Bobs chain, through the best marketing department efforts, to
increase its restaurant sales.
Therefore, the marketing contribution from franchisees, are recorded on accrual basis, in the
assets as accounts receivables and cross entry in the liabilities as marketing fund. The
contributions due by Venbo are recorded on accrual basis, as marketing expenses and cross entry in liabilities
as marketing fund.
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In general, Bobs franchisees monthly contribute with 4.0% of their monthly gross sales to Bobs
marketing fund, and since 2006, the Company is also committed to contribute with 4.0% of its
own-operated restaurant monthly gross sales (sales derived from special events are not subject to
such contribution). These contributions can be deducted by the Companys marketing department
expenses, if previously agreed with the Companys franchisees. However, the total of marketing
investments may be greater than 4.0% of combined sales, if there is any supplier additional
contribution (joint marketing programs) or if the Company use additional own cash on marketing
advertising and promotion.
The Company primarily invests Bobs marketing fund resources on nationwide advertising programs
(commercials or sponsorship on TV, radio and outdoors). The Companys franchisees may also directly
invest in advertising and promotions for their own stores, upon previous consent from the Company,
which freely decides whether the cost of such single advertisement or promotion could be deducted
from the marketing contribution owed.
The Bobs marketing fund resources are not required to be invested during the same month or
year that they were received, but they must be used in subsequent periods.
Periodically, the Company meets Bobs Franchisee Council to demonstrate the marketing fund
accounts, through a report similar to a statement of cash flows. This statement discloses the
marketing contributions received and the marketing expenses, both in cash basis. To provide
absolute transparency and comply with the Companys franchisees request, all accounts included in
the Marketing Fund are revised by independent auditors.
The balance of non-invested marketing fund as of September 30, 2009 amounts R$2.3 million and
is recorded as accounts payable accrued expenses at the balance sheet. This balance represents
contributions made by Venbo and by the franchisees, but not used in campaigns yet, thus, these
balances are, as agreed with the franchisees chain, an obligation of Venbo on that date.
The Bobs marketing fund invstments on advertising and promotions related to such brand
amounted R$17.4 million and R$12.6 million for the nine months ended September 30, 2009 and 2008,
respectively.
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KFC and Pizza Hut Brands
The Company monthly contributes with 0.5% of KFC and Pizza Hut monthly net sales to a
marketing fund manage by YUM! Brands Brazil. In addition, the Company is also committed to invest
5.0% of KFC and Pizza Hut monthly net sales on local marketing and advertising activities.
The marketing expenses on KFC and Pizza Hut advertising and promotions are recognized as
incurred.
Summary
As a percentage of total revenues, Companys consolidated marketing expenses were
approximately (2.1%) and (0.9)% for the three months ended September 30, 2009 and 2008,
respectively.
As a percentage of total revenues, Companys consolidated marketing expenses were
approximately (2.2%) and (0.6%) for the nine months ended September 30, 2009 and 2008,
respectively.
The following table details Companys consolidated marketing expenses:
Nine months ended September 30, 2009 | ||||||||||||||||||||
R$ 000 | Bobs | KFC | Pizza Hut | Doggis | Total | |||||||||||||||
Marketing Expenses |
(165 | ) | (927 | ) | (1,790 | ) | (83 | ) | (2,965 | ) |
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General and Administrative Expenses
As a percentage of total revenues, general and administrative expenses were approximately
(12.1%) and (14.4%) for the nine months ended September 30, 2009 and 2008, respectively.
As a percentage of total revenues, general and administrative expenses were approximately
(11.6%) and (13.9%) for the three months ended September 30, 2009 and 2008, respectively.
This decrease is attributable to the optimization of administrative structure of personnel in
the three brands conducted Pizza Hut, Bobs and KFC, the first effort done to obtain the synergy
from the three brand joint administration.
Other Operating Expenses
Other operating expenses are mainly comprised of uncollectible receivables, depreciation,
preopening and non recurring expenses.
Other operating expenses expressed as a percentage of Total revenues were (1.8%), for the nine
months ended September 30, 2009 and (1.8%) for the nine months ended September 30, 2008.
Other operating expenses expressed as a percentage of Total revenues were (2.3%), for the
three months ended September 30, 2009 and (1.3%) for the three months ended September 30, 2008.
The following table sets forth the breakdown of Other Operating Expenses:
Nine months ended | |||||||||
September 30, | |||||||||
R$ 000 | 2009 | 2008 | |||||||
Uncollectable receivables |
R$ | (366 | ) | R$ | (430 | ) | |||
Depreciation of Headquarters fixed assets |
(476 | ) | (510 | ) | |||||
Preopening and other expenses |
(1,528 | ) | (548 | ) | |||||
R$ | (2,370 | ) | R$ | (1,488 | ) | ||||
Increase of 2009 figures are related to the opening of a premium Pizza Hut restaurant in São
Paulo, which the Company intends to take place during the fourth quarter of 2009.
Impairment of Assets and Net Result of Assets Sold
The Company usually reviews its fixed assets in accordance with SFAS 144, which requires that
long-lived assets being disposed of be measured at the lower of carrying amount or fair value less
cost to sell.
During the nine months ended September 30, 2008, Companys review in accordance with SFAS 144,
derived charge to the income statement of R$181.
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Interest Expense
As a percentage of net restaurant sales, net interest expenses were approximately (2.3%) and
0.2% for the three months ended September 30, 2009 and 2008, respectively.
As a percentage of net restaurant sales, net interest expenses were approximately (2.4%) and
0.0% for the nine months ended September 30, 2009 and 2008, respectively.
The increase during 2009 is due to increase of Companys indebtedness, mainly related to
Companys expansion .
Income Taxes
As a percentage of net restaurant sales, income taxes were approximately 0.3% and (0.3%) for
the nine months ended September 30, 2009 and 2008, respectively.
As a percentage of net restaurant sales, income taxes were approximately 0.0% and 0.0% for the
three months ended September 30, 2009 and 2008, respectively.
During the 2009, the Company revised its computation of provision for taxes on IRB income and
such review derived a positive adjustment of approximately R$0.4 million.
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LIQUIDITY AND CAPITAL RESOURCES (Amounts in thousand of Brazilian reais)
A) Introduction
Since March 1996, we have funded Companys cumulative operating losses of approximately
R$36.3 million and made acquisitions of businesses and capital improvements (including remodeling
of Companys stores) by using cash remaining at the closing of Companys acquisition of Venbo, by
borrowing funds from various sources and from private placements of Companys securities. As of
September 30, 2009, we had cash on hand of approximately R$10.8 million which includes
investments funds of R$9.1 million and a working capital deficit of approximately R$11.0 million.
Negative working capital has been shown in Companys financial statements for several years.
In the past, debts denominated in currency other than Brazilian Reais have increased with maxi
devaluation of the Brazilian Real in the beginning of 1999. A sequence of years with reduced sales,
mainly due to a weak economic environment in Brazil, has worsened the situation and the Company was
not able to pay some of its obligations, including taxes. In the following years those past due
taxes were renegotiated with different levels of Brazilian Government and were parceled.
With the improvement of Brazilian economy since 2002, the Companys total revenues increased
and, joined to a capital injection of R$9.0 million, the Company started to reduce its liabilities
position. In 2003 the Company, reschedule a great portion of its debts to long term. Continued
improvement of sales conducted the Company to (i) drastically reduce its debts with financial
institutions during 2005; and (ii) extinguish those debts and reverse its financial position to
present time deposits with financial institutions at the end of 2006. The enhancement of
collection rate from Companys franchisees commencing in 2005 also strengthened Company current
assets. During 2007 and until the third quarter of 2008, the Company maintained this positive
scenario and together with resources provided by the renewal of a relevant supplier exclusivity
agreement during 2008, was able to compute a positive working capital. Since the last quarter of
2008, when the Company increased its bank debt position in order to fund IRB acquisition,as well as
the expansion of KFC stores and the startup of Doggis brand, it worsened its working capital into a
negative situation.
For the quarter ended September 30, 2009, we had net cash provided by operating activities of
R$7.7 million (R$1.9 million in 2008), net cash used in investing activities of R$8.8 million
(R$7.0 million in 2008) and net cash provided by financing activities of R$1.4 million (R$8.0
million in 2008). Net cash used in investing activities was primarily the result of Companys
investment in property and equipment to improve Companys retail operations, mainly setting up new
own-operated KFC stores. Net cash used in financing activities was mainly the result of repayments
to financial institutions which funded IRB acquisition.
The Company has also invested in the financial market approximately R$1.9 million,
re-purchasing 332,665 shares that have considerably increased their value according to the over the
counter market where they are negotiated.
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B) Debt Obligation financial institutions
As of September 30 2009, the Company had debt obligation with financial institutions as
follows:
September 30, | December 31, | |||||||
R$ 000 | 2009 | 2008 | ||||||
Revolving lines of credit (a) |
R$ | 10,429 | R$ | 4,641 | ||||
Leasing facilities (b) |
2,047 | 3,257 | ||||||
Other loan (c) |
10,466 | 13,737 | ||||||
22,942 | 21,635 | |||||||
Less: current portion |
(11,652 | ) | (10,536 | ) | ||||
R$ | 11,290 | R$ | 11,099 | |||||
At September 30, 2009, future maturities of notes payable are as follows:
R$ 000 | ||||||
Remaining |
2009 | R$ | 7,085 | |||
2010 | 7,270 | |||||
2011 | 5,620 | |||||
2012 | 2,968 | |||||
R$ | 22,943 | |||||
a) A portion of such debt obligation (R$5,0 million) is due on demand from two
Brazilian financial institutions with interest rates of approximately 19.1%p.y.
Another portion (R$5.4 million) is payable in different terms to three Brazilian
financial institutions. The first of them is payable in one installment of
R$115,000, plus interests of 17.7%p.y. The second one is payable in six installments
of R$125,000, plus interests of 18.1%p.y. Other three loans have repayment ranging
from 31 to 33 monthly installments, averaging R$55,000, plus average interest of
15%p.y. All debts of this category are collateralized by certain officers and
receivables.
(b) Comprised of various lease facilities with Brazilian private institutions
for the funding of store equipment; payable in a range from 1 to 25 monthly
payments, together with interests range from 14.3% p.y. to 23.4% p.y. All debts of
this category are collateralized by assets leased.
(c) 4 loans contracted within UBS Pactual related to the acquisition of Pizza
Hut business in Brazil (note 1). Repayment of those loans range from 15 to 39
monthly installments, averaging R$286,000, plus average interest of 20%p.y. Loan is
guaranteed by Companys financial funds.
The carrying amount of notes payable approximates fair value at September 30, 2009 because
they are at market interest rates.
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C) Debt Obligation taxes
During 1999, 2001 and in the beginning of 2002, certain Brazilian taxes levied on Venbo were
not paid. In addition during 2002, Brazilian Social Security Authorities applied penalties against
Venbo, by charging certain operating transactions not covered by Venbos previous calculation of
Social Security contributions. Those debts were renegotiated in different moments and with
different levels of Brazilian Government.
Since September 2002, the Company and its subsidiaries have been paying all its current taxes
on a timely basis.
The tax debt evolution and its current status are summarized as follows:
| Federal taxes PAES |
Concerning the unpaid federal taxes and the Social Security penalties, the Company
applied to join and was accepted into two subsequent amnesty programs offered by the
Brazilian federal government (REFIS during 1999 and PAES during 2003).
The second amnesty program (PAES) included the balance of the previous federal tax
amnesty program (REFIS) and unpaid 2001 and 2002 federal tax, as well as the Social Security
penalties. The total debt included in such program is being paid in monthly installments, on
a timely basis, equivalent to 1.5% of the Companys gross sales, with interest accruing at
rates set by the Brazilian federal government, which currently are 6.0% per year (6.25% per
year in 2008).
During the period of nine months ended September 30, 2009, the Company paid
approximately R$1.4 million (1,5 million in the same period of 2008) related to such
Brazilian federal tax amnesty program, including R$0.3 million (R$0.3 million in 2008) of
interests.
In addition, during 2008 the Brazilian Federal Government reviewed their records and
detected that the computation of PAES was incorrect for most of the companies which have
adhered to such program. At most cases, there was miscalculation of interest beard on debts
of Brazilian Social Security (INSS). During the last quarter of 2008, the Company adjusted
its liabilities in additional R$2.8 million in order to comply with such fiscal review.
In February 2005, the Company compared its remaining debt regarding PAES with statements
provided by the Brazilian Federal Government. Those statements reported that Companys total
debt would be greater than the figures in the Companys balance sheet, in the amount of
approximately R$3.2 million. During March, 2005, the Company filed a formal request with the
Brazilian Federal Authorities, claiming to have its total debt reviewed. Such request,
reconciled the amounts the Company had accrued at its accounting books to the amounts
reported in the official statement at the same period. The Company believes that the amounts
accrued at the balance sheet as of September 30, 2009, total of R$13.1 million (R$13.7
million in December 31, 2008) are correct, however, there is no assurance that the outcome of
this situation will derive further liability to the Company. As of September 30, 2009, the
difference between such debt at the statements provided by the Brazilian Federal Government
and the statements reported by the Companys was R$7.9 million (R$4.8 million in September
30, 2008).
For the remaining period of 2009, we expect to pay approximately R$0.3 million pursuant
to the federal tax amnesty program.
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During the third quarter of 2009, the Brazilian Government issued another amnesty
program. The Companies which apply to such new program will consolidate the balances of
previous programs and other fiscal debts. Depending on the number of monthly installments the
Companies choose, they will got different reduction its fiscal debt.
The program rules are not already formalized by the Brazilian Fiscal Authorities,
however the Company has applied to it and expect to have its fiscal debt consolidated by the
beginning of 2010.
D) Other Obligations
We also have long-term contractual obligations in the form of operating lease obligations
related to Companys owned and operated stores.
The future minimum lease payments under those obligations with an initial or remaining
noncancelable lease terms in excess of one year at September 30, 2009 are as follows:
R$ 000 | ||||
Contratual | ||||
Fiscal Year | Leases | |||
Remaining 2009 |
R$ | 1,521 | ||
2010 |
3,345 | |||
2011 |
2,885 | |||
2012 |
1,273 | |||
2013 |
864 | |||
Thereafter |
1,346 | |||
R$ | 11,234 | |||
In the past, we have generated cash and obtained financing sufficient to meet Companys
debt obligations. We plan to fund Companys current debt obligations mainly through cash provided
by Companys operations, borrowings and capital raising.
Our average cost to open a retail outlet is approximately R$400,000 to R$1,500,000
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 the fiscal year of 2009, which will be
used to maintain and upgrade our current restaurant network, provide new investments on restaurant
equipment, as well as expand KFC and Doggis chains in Brazil through own-operated stores, will be
of approximately R$4.3 million. During 2009, we intend to focus our efforts on expanding both the
number of our franchisees and the number of our franchised retail outlets, neither of which are
expected to require significant capital expenditures. In addition, such expansion will provide
income derived from initial fees charged to new franchised locations.
As discussed above, we have contractual obligations in different forms. The following table
summarizes our contractual obligations and financial commitments, as well as their aggregate
maturities.
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Table of Contents
R$ 000
Contratual | ||||||||||||||||
Fiscal Year | Leases | Fiscal Debt | Loans Payable | Total | ||||||||||||
Remaining 2009 |
R$ | 1,521 | R$ | 839 | R$ | 7,085 | R$ | 9,445 | ||||||||
2010 |
3,345 | 1,677 | 7,270 | 12,292 | ||||||||||||
2011 |
2,885 | 1,677 | 5,620 | 10,182 | ||||||||||||
2012 |
1,273 | 1,677 | 2,968 | 5,918 | ||||||||||||
2013 |
864 | 1,677 | | 2,541 | ||||||||||||
Thereafter |
1,346 | 5,594 | | 6,940 | ||||||||||||
R$ | 11,234 | R$ | 13,140 | R$ | 22,943 | R$ | 47,317 | |||||||||
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Lease obligations are usually restated in accordance to Brazilian inflation (see disclose the
latest recent annual rates at Background, ITEM 7 of this report). Fiscal debts are due with
interests, which rates are discussed on letter C above. All the amounts disclosed on the previous
tables include interest incurred up to September 30, 2009 on an accrual basis.
We plan to address our immediate and future cash flow needs to include focusing on a number of
areas including:
| the expansion of Companys franchisee base, which may be expected to generate additional cash flows from royalties and franchise initial fees without significant capital expenditures; | |
| the improvement of food preparation methods in all stores to increase the operational margin of the chain, including acquiring new stores equipment and hiring a consultancy firm for stores personnel training program; | |
| the continuing of motivational programs and menu expansions to meet consumer needs and wishes; | |
| the improvement and upgrade of our IT system | |
| the negotiation with suppliers in order to obtain significant agreements in long term supply contracts; and | |
| the renegotiation of past due receivables with franchisees. |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Managements 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 (See the Notes to
Consolidated Financial Statements or summary of significant accounting policies more fully
described in pages F-8 through F-36) , the following involve a higher degree of judgment and/or
complexity
Constant currency restatement
Through June 30, 1997 the Brazilian economy was hyperinflationary as defined in Statement of
Financial Accounting Standards (SFAS) No. 52. The financial statements prior to that time were
comprehensively restated for the effects of inflation. After that date, inflation restatement was
not applied, however the non-monetary assets reflect the effects of inflation through that date.
Foreign currency
Assets and liabilities recorded in functional currencies other than Brazilian Reais are
translated into Brazilian Reais at the prevailing exchange rate as reported by the Central Bank of
Brazil as of the balance sheet date. Revenue and expenses are translated at the weighted-average
exchange rates for the year. The resulting translation adjustments are charged or credited to other
comprehensive income. Gains or losses from foreign currency transactions, such as those resulting
from the settlement of receivables or payables denominated in foreign currency, are recognized in
the consolidated statement of operations as they occur.
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Accounts receivable
Accounts receivable consist primarily of receivables from food sales, franchise royalties and
assets sold to franchisees.
As a rule, all invoices past due over 6 months and below the amount of R$5,000 are
written-off. This criterion is recommended by the Brazilian tax authorities to determine deductible
expenses regarding the accounting judgment applied to the realization of account receivables. We
believe that this fiscal rule is conservative and perfectly applicable to our business. Despite of
writing-off those receivables on the accounting books, the finance department keeps these records
to conduct the commercial negotiations.
In addition, the Company records a provision for doubtful receivables to allow for any amounts
which may be unrecoverable and is based upon an analysis of the Companys prior collection
experience, customer credit worthiness, and current economic trends. After all attempts to collect
a receivable have failed, the receivable is written off against the allowance.
Long-Lived Assets
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 carrying value.
Revenue recognition
Restaurant sales revenue is recognized when purchase in the store is effected.
Initial franchise fee revenue is recognized when all material services and conditions relating
to the franchise have been substantially performed or satisfied which normally occurs when the
restaurant is opened. Monthly franchise fees based on a percentage of the revenues of the
franchisee are recognized when earned.
Amounts received from suppliers linked to exclusivity agreements are recorded as deferred
income and are being recognized on a straight line basis over the term of such agreements or the
related supply agreement.
The income received from suppliers, related to performance bonus, is recognized when the
suppliers agree that the contracted performance has been reached. In case the performance bonus is
received in cash, it is recognized on income statement; in case they are received in products, it
is recognized as a cost reduction.
Marketing fund and expenses
Bobs Brand
According to our franchise agreements, Bobs marketing fund we have dedicated to advertising
and promotion is comprised of financial contributions paid by the franchisees and also by the
contributions due by the Company. The fund resources are administrated by the Company and must be
used in the common interest of Bobs chain, through the best marketing department efforts, to
increase its restaurant sales.
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Therefore, the marketing contribution from franchisees, are recorded on accrual basis, in the
assets as accounts receivables and cross entry in the liabilities as marketing fund. The
contributions due by Venbo are recorded on accrual basis, as marketing expenses and cross entry in
liabilities as marketing fund.
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In general, Bobs franchisees monthly contribute with 4.0% of their monthly gross sales to Bobs
marketing fund, and since 2006, the Company is also committed to contribute with 4.0% of its
own-operated restaurant monthly gross sales (sales derived from special events are not subject to
such contribution). These contributions can be deducted by the Companys marketing department
expenses, if previously agreed with the Companys franchisees. However, the total of marketing
investments may be greater than 4.0% of combined sales, if there is any supplier additional
contribution (joint marketing programs) or if the Company use additional own cash on marketing
advertising and promotion.
The Company primarily invests Bobs marketing fund resources on nationwide advertising programs
(commercials or sponsorship on TV, radio and outdoors). The Companys franchisees may also directly
invest in advertising and promotions for their own stores, upon previous consent from the Company,
which freely decides whether the cost of such single advertisement or promotion could be deducted
from the marketing contribution owed.
The Bobs marketing fund resources are not required to be invested during the same month or
year that they were received, but they must be used in subsequent periods.
Periodically, the Company meets Bobs Franchisee Council to demonstrate the marketing fund
accounts, through a report similar to a statement of cash flows. This statement discloses the
marketing contributions received and the marketing expenses, both in cash basis. To provide
absolute transparency and comply with the Companys franchisees request, all accounts included in
the Marketing Fund are revised by independent auditors.
The balance of eventual non-invested marketing fund is recorded as accounts payable accrued
expenses at the balance sheet. This balance represents contributions made by Venbo and by the
franchisees, but not used in campaigns yet, thus, these balances are, as agreed with the
franchisees chain, an obligation of Venbo on that date.
KFC and Pizza Hut Brands
The Company monthly contributes with 0.5% of KFC and Pizza Hut monthly net sales to a
marketing fund manage by YUM! Brands Brazil. In addition, the Company is also committed to invest
5.0% of KFC and Pizza Hut monthly net sales on local marketing and advertising activities.
The marketing expenses on KFC and Pizza Hut advertising and promotions are recognized as
incurred.
Income taxes
The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income
Taxes. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax basis and
operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled.
Also as per SFAS Nº 109, the Company has to estimate its valuation allowance, which reflects
the Companys assessment of the likelihood of realizing the net deferred tax assets in view of
current operations.
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Stock options
Prior to January 1, 2006, the Company accounts for awards granted to employees and directors
under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, under which no compensation cost was recognized for stock options granted. In addition,
as permitted by Statement of Financial Accounting Standards No. 123, the company included its stock
option compensations as a pro forma disclosure in notes of its financial statements.
Accordingly, from January 1, 2004 to December 31, 2005 the Company was not required to record
stock-based compensation charges if the employees stock option exercise price is equal to or
exceeds the fair value of the stock at the date of grant.
NEW ACCOUNTING STANDARDS
Effective January 1, 2006, the Company adopted the provisions of the Statement of
Financial Accounting Standards No. 123(R), Share-Based Payment (SFAS No. 123(R)), using the
modified-prospective transition method. Under this transition method, compensation cost
beginning in 2006 includes the portion vesting in the period for (1) all share-based
payments granted prior to, but not vested as of January 1, 2006, based on the grant date
fair value estimated in accordance with the original provisions of SFAS No. 123 and (2) all
share-based payments granted subsequent to January 1, 2006, based on the grant date fair
value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior
periods have not been restated.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48), which is an interpretation of FASB Statement No. 109, Accounting for
Income Taxes. FIN 48 clarifies the accounting for income taxes by prescribing the minimum
recognition threshold a tax position is required to meet before being recognized in the
financial statements. FIN 48 also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods, disclosure and
transition. The provisions of FIN 48 establish the cumulative effect of the change in
accounting principle to be recorded as an adjustment to retained earnings. The Company
adopted FIN 48 effective January 1, 2007, as required, however, its adoption did not derived
material effects on the Companys consolidated financial statements.
In September 2006 the FASB issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements, which establishes a framework for measuring fair value and expands
disclosures about fair value measurements. This statement is effective for fiscal years
beginning after November 15, 2007 except for nonfinancial assets and nonfinancial
liabilities, for which the effective date is fiscal years beginning after November 15, 2008.
During the 2008 third quarter, FSP FAS 157-3 was issued. Such FSP amended SFAS 157 by giving
further guidance in determining fair value of a financial asset when there is no active
market for such assets at the measurement date. This new guidance illustrates the fact that
approaches other than the Market Value Approach to determining fair value may be appropriate
for instruments such as those for which the market is no longer active. In utilizing these
other approaches, however, the guidance reiterates certain of the measurement principles
described in SFAS 157.The adoption of SFAS No. 157 and FSP FAS 157-3 did not have a
material impact on the Companys consolidated financial statements.
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In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132(R) (SFAS No. 158). SFAS No. 158
requires the Company to recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in the Consolidated balance sheet and to
recognize changes in that funded status in the year changes occur through other
comprehensive income. The provisions of SFAS 158 did not affect the Companys consolidated
financial statements since the Company has no pension plans for its employees.
In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of SFAS No. 115. This statement
allows entities to measure certain assets and liabilities at fair value, with changes in the
fair value recognized in earnings. The statements objective is to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently, without
applying complex hedge accounting provisions. This statement is effective for fiscal years
beginning after November 15, 2007. The adoption of SFAS No. 159 derived no material effects
on the Companys consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. This
Statement requires an acquirer to recognize the assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree at the acquisition date, measured at their
fair values as of that date. This Statement changes the accounting for acquisition-related
costs and restructuring costs, now requiring those costs to be recognized separately from
the acquisition. This Statement also makes various other amendments to the authoritative
literature intended to provide additional guidance or to conform the guidance in that
literature to that provided in this Statement. SFAS No. 141(R) shall be applied
prospectively to business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008 and
early adoption is prohibited. The adoption of SFAS No. 141(R) derived no significant impact
on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51. This Statement establishes
accounting and reporting standards for the noncontrolling interest in a subsidiary
(previously referred to as minority interest) and for the deconsolidation of a subsidiary.
This Statement shall be applied prospectively as of the beginning of the fiscal year in
which this Statement is initially applied, except for the presentation and disclosure
requirements, which shall be applied retrospectively for all periods presented. This
Statement is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008, with early adoption prohibited. The adoption of
SFAS No. 160 derived no significant impact on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments
and Hedging Activities (SFAS 161). SFAS 161 requires companies with derivative
instruments to disclose information that should enable financial-statement users to
understand how and why a company uses derivative instruments, how derivative instruments and
related hedged items are accounted for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133) and how these items affect a companys
financial position, results of operations and cash flows. SFAS 161 affects only these
disclosures and does not change the accounting for derivatives. SFAS 161 is to be applied
prospectively beginning with the first quarter of our 2009 fiscal year. The adoption of
SFAS 161 did not have material impact in its consolidated financial statements.
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In April 2009, the FASB issued FASB Staff Position No. FAS 107-1, Interim Disclosures
about Fair Value of Financial Instruments (FSP FAS 107-1). FSP FAS 107-1 requires
expanded fair value disclosures for all financial instruments within the scope of FASB
Statement No. 107, Disclosures about Fair Value of Financial Instruments. These
disclosures will now be required for interim periods for publicly traded entities. In
addition, entities will be required to disclose the methods and significant assumptions used
to estimate the fair value of financial instruments in financial statements on an interim
basis. The adoption of FSP FAS 107-1 did not have material impact in its consolidated
financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
We are not involved in any off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We finance a portion of our operations by issuing debt and entering into bank credit
facilities. These debt obligations expose us to market risks, including foreign currency exchange
risk and changing CDI-based interest rate risk. CDI is a daily variable interest rate used by
Brazilian Banks. CDI rate is linked to Brazilian equivalent Federal Reserve fund rates and its
fluctuation is similar to those observed in international financial market.
A portion of our purchase commitments are denominated in U.S. Dollars, while our operating
revenues are denominated in Brazilian Reais. We have extinguished all of our debt denominated in
US$ during 2003. Fluctuations in exchange rates between the Real and the U.S. Dollar expose us to
significant foreign exchange risk.
We had R$20.8 million of variable rate debt outstanding at September 30, 2009, and R$18.4
million outstanding at December 31, 2008. Based on the amounts outstanding, a 100 basis point
change in interest rates would result in an approximate change to interest expense of $0.25 million
at September 30, 2009, and $0.4 million at December 31, 2008. We attempt, when possible, to protect
our revenues from foreign currency exchange risks by periodically adjusting our selling prices in
Reais.
We are 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. 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.
Under the supervision and with the participation of management, we have evaluated the
effectiveness of the design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15(e) and 15d-15(e) as of the end of the period covered by this report. Based
on that evaluation, our Chief Executive Officer, Ricardo Bomeny, who is also our acting Principal
Financial Officer has concluded that, as of September 30, 2009, these disclosure controls and
procedures were effective in timely alerting him to material information relating to our company
required to be included in our periodic SEC reports. During our last fiscal quarter, there were no
changes in our internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial reporting.
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Limitations on the Effectiveness of Controls
A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been detected. Our
disclosure controls and procedures are designed to provide reasonable assurance of achieving its
objectives. Our principal executive officer and principal financial officer concluded that our
disclosure controls and procedures are effective at that reasonable assurance level.
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PART IIOTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Neither we nor our subsidiaries are currently subject to any material legal proceedings, nor,
to our knowledge, is any material legal proceeding threatened against us or our subsidiaries. From
time to time, we or our subsidiaries may be a party to certain legal proceedings incidental to the
normal course of our business. While the outcome of these legal proceedings cannot be predicted
with certainty, we do not expect that these proceedings will have a material effect upon our
financial condition or results of operations.
ITEM 1A. RISK FACTORS.
There have been no material changes to the risk factors previously disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2008 that was filed with the Securities and
Exchange Commission on April 9, 2009.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the nine months ended September 30, 2009, the Company repurchased a total of 43,455
shares of common stock for US$141 thousand, equivalent to R$317 thousand.
Issuer Purchase of Equity Securities during the nine months ended September 30, 2009.
(c) Total Number of | ||||||||||||||||
(a) Total | Shares Purchased As | (d) Maximum Number of | ||||||||||||||
Number | (b) Average | Part of Publicly | Shares that May Yet Be | |||||||||||||
of Shares | Price Paid | Announced Plans | Purchased Under the | |||||||||||||
Period | Purchased | Per Share | or Programs | Plan or Programs | ||||||||||||
January 1 to January 31, 2009 |
| | | 110,790 | ||||||||||||
February 1 to February 28,
2009 |
4,145 | 3.443 | 4,145 | 106,645 | ||||||||||||
March 1 to March 31, 2009 |
11,300 | 3.378 | 11,300 | 95,345 | ||||||||||||
Total Q1 2009 |
15,445 | 3.410 | ||||||||||||||
April 1 to April 30, 2009 |
6,075 | 3.006 | 6,075 | 89,270 | ||||||||||||
May 1 to May 31, 2009 |
9,575 | 3.031 | 9,575 | 79,695 | ||||||||||||
June 1 to June 30, 2009 |
7,820 | 3.284 | 7,820 | 71,875 | ||||||||||||
Total Q2 2009 |
23,470 | 3.107 | ||||||||||||||
Total 1st semester 2009 |
38,915 | 3.259 | ||||||||||||||
July 1 to July 30, 2009 |
2,075 | 3.488 | 2,075 | 69,800 | ||||||||||||
August 1 to August 31, 2009 |
0 | | | 69,800 | ||||||||||||
September 1 to September 30,
2009 |
2,465 | 3.580 | 2,465 | 67,335 | ||||||||||||
Total Q3 2009 |
4,540 | 3.534 | ||||||||||||||
Total Year 2009 |
43,455 | 3.350 | 67,335 |
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ITEM 6. EXHIBITS.
Exhibits | ||
Number | Title | |
31.1
|
Certification by Ricardo Figueiredo Bomeny, Chief Executive Officer and acting Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification by Ricardo Figueiredo Bomeny, Chief Executive Officer and acting Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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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 13, 2009
BRAZIL FAST FOOD CORP. |
||||
By: | /s/ Ricardo Figueiredo Bomeny | |||
Ricardo Figueiredo Bomeny | ||||
Chief Executive Officer and acting Chief Financial Officer |
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