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EX-31.1 - EX-31.1 - BRAZIL FAST FOOD CORPg21233exv31w1.htm
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 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)
Registrant’s 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 Registrant’s 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

ITEM 1. FINANCIAL STATEMENTS.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II—OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
ITEM 1A RISK FACTORS
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 6 EXHIBITS
SIGNATURES
EX-31.1
EX-32.1


Table of Contents

ITEM 1.   FINANCIAL STATEMENTS.
BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(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

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BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(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

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BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(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

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BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss) — (Unaudited)
(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

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BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
Consolidated Statements of Changes In Shareholders’ Equity (Unaudited)
(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 Company’s 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

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BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(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 Company’s 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)
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 Company’s 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 “Bob’s”, 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 Bob’s 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 Company’s 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 Company’s 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 Company’s multi-brand program, discussed below:

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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 KFC’s 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 KFC’s 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 IRB’s 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 Company’s officers, supported by the Board, decided to undertake a bank loan in order to fund such acquisition. Therefore, the Company’s 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 Company’s 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 IRB’s 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 IRB’s 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 IRB’s 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 Bob’s 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 Venbo’s 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 Company’s 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.

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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 Company’s total debt would be greater than the figures in the Company’s 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 Company’s 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 Company’s 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 court’s 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 Company’s Management, based on the opinion of its legal advisors, believes is sufficient to face Company’s 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 Company’s accounted for liabilities in the amount of R$2.0 million (R$2.0 million in December 31, 2008), which the Company’s Management, based on the opinion of its legal advisors, believes is sufficient to face Company’s current labor contingencies.

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Other contingencies
      Other contingencies that in accordance with our legal advisors required no provision in the Company’s balance sheet are the following:
 
      • The Company purchased Venbo Comércio de Alimentos Ltda. (“Venbo”) from VENDEX in 1996. The Acquisition’s Purchase Agreement stated that Venbo’s former owner (“VENDEX”) would be responsible for off-balance liabilities derived from Venbo’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 VENBO’s state tax (VAT) and fined the Company’s 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 Company’s 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 Company’s 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 Company’s Stock Option Plan.
     There were no options canceled or expired during the nine months ended September 30, 2009, under the Company’s 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 Company’s 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 Company’s total disbursement for these stock purchases totaled R$317.3 thousand. The Company’s 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 “Bob’s”, 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 KFC’s brand in Brazil. Since December 2008, we operate, through our subsidiary IRB, the Pizza Hut’s brand in Brazil and since July 2009, we operate, through our subsidiary DGS, the Doggis’ brand in Brazil.
     Currently the majority of Company’s 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 Bob’s brand is also present, through franchisees, in Angola, Africa. These operations are not material to our overall results.
     The following tables present the Company’s 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 Bob’s     Results from KFC’s     Pizza Hut’s  
    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 Hut’s 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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ITEM 2.   MANAGEMENT’S 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 Management’s 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 company’s 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 “Bob’s”.
     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 Company’s 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 KFC’s agent in that country, with the commitment of locally develop and expand KFC brand, as well as assume the supervision and control of KFC’s 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. IRB’s 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 Bob’s 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 Bob’s 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 Company’s 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 Company’s 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 KFC’s 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 Bob’s stores and “Banquete Crocante” at KFC stores, joined to new incentives to store personnel, impacted positively restaurant sales.

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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 Company’s 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.

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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 Company’s 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 Bob’s 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 KFC’s 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 Hut’s restaurants as compared to other Company’s 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 Bob’s 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 Company’s marketing department expenses, if previously agreed with the Company’s 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 Company’s 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 Company’s 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, Company’s 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, Company’s 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 Company’s 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, Company’s 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 Company’s indebtedness, mainly related to Company’s 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 Company’s cumulative operating losses of approximately R$36.3 million and made acquisitions of businesses and capital improvements (including remodeling of Company’s stores) by using cash remaining at the closing of Company’s acquisition of Venbo, by borrowing funds from various sources and from private placements of Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s investment in property and equipment to improve Company’s 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 Company’s 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 Venbo’s 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 Company’s 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 Company’s total debt would be greater than the figures in the Company’s 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 Company’s 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 Company’s 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 Company’s debt obligations. We plan to fund Company’s current debt obligations mainly through cash provided by Company’s 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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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 Company’s 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 store’s 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
     Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as related disclosures. On an ongoing basis, we evaluate our estimates and judgments based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
     We annually review our financial reporting and disclosure practices and accounting policies to ensure that they provide accurate and transparent information relative to the current economic and business environment. We believe that of our significant accounting policies (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 Company’s 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 Bob’s 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 Company’s marketing department expenses, if previously agreed with the Company’s 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 Company’s 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 Company’s 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 Company’s 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 employee’s 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 Company’s 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 Company’s 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 Company’s 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 statement’s 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 Company’s 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 company’s 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 II—OTHER 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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