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EX-31.1 - EX-31.1 - BRAZIL FAST FOOD CORP | g25977exv31w1.htm |
EX-32.1 - EX-32.1 - BRAZIL FAST FOOD CORP | g25977exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment
No. 1
to
to
FORM
10-K/A
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 0000-23278
BRAZIL FAST FOOD CORP.
(Exact name of Registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
13-3688737 (I.R.S. Employer Identification No.) |
Rua Voluntários da Pátria 89, 9º andar
Botafogo, CEP 22.270-010, Rio de Janeiro, Brazil
(Address of principal executive offices)
(Address of principal executive offices)
Registrants telephone number, including area code: 55 21 2536-7500
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.0001 per share (Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. YES o NO þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act. YES o NO þ
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. YES þ NO o
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 o (Do not check if a smaller reporting company) | Smaller reporting company þ |
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
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o NO o
As of
February 9, 2011, the aggregate market value of the registrants common stock held by
non-affiliates of the registrant was
$27,718,116, computed by reference to the average bid and
asked price of such common stock.
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
Class | Outstanding at February 9, 2010 | |
Common Stock, $0.0001 par value per share |
8,472,927 shares |
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A amends the Registrants Annual Report on Form 10-K for the year
ended December 31, 2009, which the Registrant previously filed with the Securities and Exchange
Commission (SEC) on March 31, 2010. The Registrant is filing this amendment for the purpose of
responding to SEC comments.
Documents Incorporated By Reference
Portions of the Registrants definitive proxy statement for its 2010 annual meeting of
Shareholders, which proxy statement must be filed no later than 120 days after the close of the
Registrants fiscal year ended December 31, 2009, are hereby incorporated by reference in Part III
of this Annual Report on Form 10-K.
Table of Contents
TABLE OF CONTENTS
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
CONSOLIDATED BALANCE SHEETS |
CONSOLIDATED STATEMENTS OF OPERATIONS |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (DEFICIT) |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Sec. 302 Certification of CEO & CFO |
Sec. 906 Certification of CEO & CFO |
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Unless otherwise specified, all references in this report to Reais, the Real or R$ are
to the Brazilian Real (singular), or to the Brazilian Reais (plural), the legal currency of Brazil,
and U.S. Dollars or $ are to United States Dollars. Unless otherwise specified, all financial
statements and other financial information presented herein are stated in R$ and are in accordance
with generally accepted accounting principles in the United States (U.S. GAAP).
PART I
ITEM 1. BUSINESS
(a) GENERAL
We, through our holding company in Brazil, BFFC do Brasil Participações Ltda. (BFFC do
Brasil, former 22N Participações Ltda.), and its subsidiaries, Venbo Comércio de
Alimentos Ltda. (Venbo), a Brazilian limited liability company that conducts business under the
trade name Bobs, CFK Comércio de Alimentos Ltda. (CFK, former Clematis Indústria e Comércio de
Alimentos e Participações Ltda.), a Brazilian limited liability company that conducts business
under the trade name KFC, Internacional Restaurantes do Brasil S.A. (IRB) a Brazilian Corporation
that conducts business under the trade name Pizza Hut, DGS Comércio de Alimentos S.A. (DGS) a
Brazilian Corporation that conducts business under the trade name Doggis and Suprilog Logística
Ltda., a Brazilian limited liability company devoted to logistic services, constitute a group that
is the second largest fast food chain in Brazil as per the number of points of sales in all
Brazilian territory.
We were incorporated in Delaware in 1992. Our executive offices are located at Rua Voluntários
da Pátria, 89 9º andar, Botafogo, CEP 22.270-010, Rio de Janeiro RJ, Brazil. Our telephone
number is +5521 2536-7500.
Recent Developments
In December 2006, we set up a holding company in Brazil, called BFFC do Brasil Participações
Ltda. (BFFC do Brasil, former 22N Participações Ltda.), via the capital contribution of the
equity interest we held in Venbo Comércio de Alimentos Ltda. (Venbo). Following this
restructuring, all of our businesses in Brazil were consolidated through this new holding, and
Venbo centralized the managing services of the group. At the beginning there were three primary
divisions: fast food restaurants, franchises and real estate.
Along the last three years, with the incorporation of new concepts, new brands and new
activities, the Company developed a new organization that have been improving BFFCs management
decisions, enhancing its operations, increasing its efficiency and facilitating its access to bank
loans and other financial instruments. Since October 2008, the President (CEO) of the group has
under his authority two Departments and four Divisions, including the Human Resources Department
and the Quality and Product Development Department, and the Administrative & Finance Division, the
Development Division, the Brands Division and the Own Stores Division. In the Administrative &
Finance Division we include the Accountants, the Financials, the IT Department, the Legal
Department, the Supply Department and the Administrative Services Department. The Development
division has an Expansion Department and a Project & Design Department. The Brands Division manages
all franchise chains, up to December 2009 limited to Bobs brand. The Own Stores Division manages
all brands points of sale: Bobs, KFC, Doggis and Pizza Hut brands. Pizza Hut was incorporated in
2008 and Doggis in 2009.
During the first quarter of 2007, we reached an agreement with Yum! Brands, owner of the KFC
brand, to conduct the operations of KFCs four directly owned and operated restaurants in Rio de
Janeiro as a Yum! Brands franchisee. In order to operate the KFC brand in Brazil,
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we, through BFFC do Brasil, established a new subsidiary, named CFK Comércio de Alimentos
Ltda. (CFK, former Clematis Indústria e Comércio de Alimentos e Participações Ltda.), which is
responsible for managing, developing and expanding KFCs chain in Brazil. CFK initiated its
activities on April 1, 2007. During the year 2008 we opened three new own stores in Rio de Janeiro
and Macaé (State of RJ) and in December 2009 there were 12 stores operating, one of them in São
Paulo city. The Yum! Brands franchise agreement were complemented by two other agreements, one of
them turning BFFC responsible for the management of the KFC chain in Brazil and the other one
giving us the responsibility for the expansion of this chain in accordance with a special program
agreed by both parties.
The Pizza Hut concept was adopted by BFFC through the acquisition of Internacional
Restaurantes do Brasil (IRB), a franchise operator of 14 stores in the great São Paulo city. We
entered into an agreement with Mascalli, a Brazilian society having as a controller partner Mr.
Jorge Aguirre, CEO of IRB for the last ten years. Mascalli entered with 40% and BFFC with 60% of
IRBs capital. This operation, for local fiscal reasons, was done through another society called
POGO Participações, constituted by Mascalli (40%) and BFFC do Brasil (60%)). POGO, in fact,
acquired IRB and in January 2009 was incorporated by IRB. Further in this report we give other
details of this transaction. In 2009, a new store was started in the great São Paulo. With the
acquisition of IRB, BFFC inherited a new brand: In Bocca al Lupo Café (IBAL), a coffee concept of
coffee stations. Four stations are operating today within Pizza Hut stores. For the moment on,
these operations are inserted in Pizza Hut activities and are not material in terms of the
financial figures of the group.
In addition, in 2008 we signed an agreement with a Chilean company to develop Bobs brand in
Chile and Doggis in Brazil. Doggis is a Chilean brand specializing in hot dogs. This added a new
concept to our multi-brand program, with products that are a natural complement to our activities
in the fast-food market. Diversification is one of our strategic programs supported by the
multi-brand concept. The agreement was built on a Master Franchise basis creating two societies
with crossed participations 80/20% in Chile and Brazil. These two societies started operating in
2009 and the first three Bobs stores in Chile and three Doggis stores in Brazil were started in
the second half of 2009.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Not applicable.
(c) NARRATIVE DESCRIPTION OF BUSINESS
Restaurant Operations (Bobs, KFC, Pizza Hut, Doggis and IBAL)
As of December 31, 2009, we had 681 points of sale, including 291 kiosks and trailers, of
which 59 are owned and operated by us and the remaining 622 by our franchisees, all under the
Bobs trade-name. Note that approximately 49.0% of these points of sale are located in the
States of Rio de Janeiro and São Paulo, with the remainder widely spread throughout major cities in
all other States of Brazil, except for three franchised restaurants in Angola. The largest number
of franchise operations outside Rio de Janeiro and São Paulo are in the States of Santa Catarina
and Paraná, both in the south of Brazil, and Minas Gerais.
In the last few years we have been expanding our points of sale in country towns with at least
250,000 inhabitants, a large territory with none or very little presence of our bigger competitors.
As of December 31, 2009, we had 12 own-operated stores with the brand KFC, including 11 in Rio de
Janeiro State and one in São Paulo State (there were no KFC stores operated by franchisees in
December but one of the stores in Rio de Janeiro was transferred to a franchisee at the beginning
of 2010) and three own-operated stores with the brand Doggis in Rio de Janeiro. Pizza Hut operated
at the end of 2009, 15 own stores in São Paulo. Within these stores we operated four coffee corners
with In Bocca al Lupo Café brand.
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Our chains serve a large menu of hamburgers, cheeseburgers, chicken burgers, sandwiches, hot
dogs, pizza, pastas, French fries, soft drinks, juices, desserts, ice creams and milkshakes.
Selected points of sale also serve coffee and/or beer. They are generally open all year round,
seven days a week. Our points of sale generally open at 10:00 a.m. Closing hours vary according to
location. In some locations with proximity to late night entertainment, the points of sale remain
open for the after hours crowd.
Our fast-food service is based in a single line system distinguished from other competitors by
its variety and flexibility, which allow customers to add items to or exclude items from the
several meals they have to choose. We maintain a cooked-to-order philosophy: cooks would prepare
orders as read to them by the counter service representative who took the order or as exposed on a
screen in the kitchen as transmitted by an automatic system from the cashier. Depending on the
concept our stores are casual restaurants, fast food points, kiosks, or Express Points of Sales and
we also have delivery services.
For the past fourteen years, Bobs has been the exclusive provider of hamburgers and related
items at one of Brazils largest special events the Rio de Janeiro Carnival, the one-week
festive period that precedes the advent of Lent. Likewise, our food products are sold at other
special events throughout Brazil, mainly intent on young crowds. In 2007, we also participated in
the São Paulo Carnival. In addition, we participated in the Panamerican and Para Panamerican Games
(North, Central and South America Olympics), held in the city of Rio de Janeiro between July and
August 2007. We also participate in events through our franchisees in the north and northeast of
Brazil. Using custom constructed trailers and moveable kiosks, we are able to offer most of our
products at temporary locations for the duration of each special event. Besides providing an
additional revenue source, our visibility is enhanced by signage that can be picked up via
television coverage of the special event and by reaching a consumer market where we may not have a
permanent outlet.
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The following tables present the openings and closings of both our owned and operated
restaurants and our franchised restaurants for the years ended December 31, 2009, 2008 and 2007:
Bobs | ||||||||||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||
Stores | Kiosks | Stores | Kiosks | Stores | Kiosks | |||||||||||||||||||
Owned and operated restaurants: |
||||||||||||||||||||||||
Opened during period |
1 | 1 | 2 | 4 | 1 | 3 | ||||||||||||||||||
Closed during period |
0 | 0 | 1 | 0 | 1 | 2 | ||||||||||||||||||
Sold to franchisees |
4 | 1 | 1 | 0 | 3 | 2 | ||||||||||||||||||
Bought from franchisees |
0 | 0 | 0 | 0 | 1 | 0 | ||||||||||||||||||
Open at end of period |
39 | 20 | 42 | 20 | 42 | 16 | ||||||||||||||||||
Franchised restaurants |
||||||||||||||||||||||||
Opened during period |
29 | 17 | 28 | 49 | 30 | 56 | ||||||||||||||||||
Closed during period |
5 | 4 | 13 | 7 | 17 | 7 | ||||||||||||||||||
Sold to us by our franchisees |
0 | 0 | 0 | 0 | 1 | 0 | ||||||||||||||||||
Bought from us by our franchisees |
4 | 1 | 1 | 0 | 3 | 2 | ||||||||||||||||||
Open at end of period |
351 | 271 | 323 | 257 | 307 | 215 | ||||||||||||||||||
Total stores & kiosks at end of
period: |
390 | 291 | 365 | 277 | 349 | 231 | ||||||||||||||||||
KFC | ||||||||||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||
Stores | Kiosks | Stores | Kiosks | Stores | Kiosks | |||||||||||||||||||
Owned and operated restaurants: |
||||||||||||||||||||||||
Opened during period |
4 | 1 | 3 | 0 | 4 | 0 | ||||||||||||||||||
Closed during period |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Sold to franchisees |
1 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Bought from franchisees |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Open at end of period |
10 | 1 | 7 | 0 | 4 | 0 | ||||||||||||||||||
Franchised restaurants: |
||||||||||||||||||||||||
Opened during period |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Closed during period |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Sold to us by our franchisees |
0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Bought from us by our franchisees |
1 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Open at end of period |
1 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Total stores & kiosks at end of
period: |
11 | 1 | 7 | 0 | 4 | 0 | ||||||||||||||||||
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PH | ||||||||||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||
Stores | Kiosks | Stores | Kiosks | Stores | Kiosks | |||||||||||||||||||
Owned and operated restaurants: |
||||||||||||||||||||||||
Opened during period |
1 | 0 | 14 | 0 | | | ||||||||||||||||||
Closed during period |
0 | 0 | 0 | 0 | | | ||||||||||||||||||
Sold to franchisees |
0 | 0 | 0 | 0 | | | ||||||||||||||||||
Bought from franchisees |
0 | 0 | 0 | 0 | | | ||||||||||||||||||
Open at end of period |
15 | 0 | 14 | 0 | | | ||||||||||||||||||
Franchised restaurants: |
||||||||||||||||||||||||
Opened during period |
0 | 0 | 0 | 0 | | | ||||||||||||||||||
Closed during period |
0 | 0 | 0 | 0 | | | ||||||||||||||||||
Sold to us by our franchisees |
0 | 0 | 0 | 0 | | | ||||||||||||||||||
Bought from us by our franchisees |
0 | 0 | 0 | 0 | | | ||||||||||||||||||
Open at end of period |
0 | 0 | 0 | 0 | | | ||||||||||||||||||
Total stores & kiosks at end of
period: |
15 | 0 | 14 | 0 | | | ||||||||||||||||||
DOGGIS | ||||||||||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||
Stores | Kiosks | Stores | Kiosks | Stores | Kiosks | |||||||||||||||||||
Owned and operated restaurants: |
||||||||||||||||||||||||
Opened during period |
3 | 0 | | | | | ||||||||||||||||||
Closed during period |
0 | 0 | | | | | ||||||||||||||||||
Sold to franchisees |
0 | 0 | | | | | ||||||||||||||||||
Bought from franchisees |
0 | 0 | | | | | ||||||||||||||||||
Open at end of period |
3 | 0 | | | | | ||||||||||||||||||
Franchised restaurants: |
||||||||||||||||||||||||
Opened during period |
0 | 0 | | | | | ||||||||||||||||||
Closed during period |
0 | 0 | | | | | ||||||||||||||||||
Sold to us by our franchisees |
0 | 0 | | | | | ||||||||||||||||||
Bought from us by our franchisees |
0 | 0 | | | | | ||||||||||||||||||
Open at end of period |
0 | 0 | | | | | ||||||||||||||||||
Total stores & kiosks at end of
period: |
3 | 0 | | | | | ||||||||||||||||||
The average guest check per customer for both our owned and operated points of sale and
our franchised points of sale for the years ended December 31, 2009, 2008, 2007 was R$10.24, R$9.07
and R$8.62, respectively for Bobs stores. In 2009, the average check for KFC stores was R$13.47,
for Pizza Hut stores R$31.35 and for Doggis stores R$8.22. Values for these three brands in 2008
were not significant due to the short time we operated them or with no operation at all in the case
o Doggis.
We strive to maintain quality and uniformity throughout our chains, all brands, by publishing
detailed specifications for food products, food preparation and service, by continuous in-service
training of employees and by field visits from our supervisors and outsourced to specialized
organizations. The store manager, who visually inspects the products as they are being prepared for
cooking, undertakes quality control at each point of sale. The store manager also keeps a record of
the expiration date of the products in inventory. In addition, we have a
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third party company hired to review all own-operated and franchised stores operation as well as
recommend actions to be taken by the store manager to comply with our quality and uniformity
specifications. The quality control inspectors hired by the specialized company, are sent
periodically to each restaurant, whether owned by us or by one of our franchisees, to conduct a
review of the stores activity. Other specialized inspectors also take samples of the water used at
each restaurant in the preparation of food and drinks as well as random samples of some food items,
which are taken to a contract laboratory for a microbiological analysis. In 2008, We hired the
outsourced services of a third party company to perform these activities so that our field
supervisors and consultants may focus their work on the business and its markets.
Since we operate KFC, Pizza Hut and Doggis we have adapted our methods and operations to the
franchisors norms of these brands. We invest a lot of energy and financial funding to keep all
brands operations in the highest possible level of quality and health standards.
Growth Strategy
Our primary goal is to continue to increase our network of points of sale in Brazil, where we
believe fast food is a developing market, and to gain market share by entering markets in cities
where we are under-represented. Bobs, KFC and Doggis will essentially be developed in the
franchise concept. Owned stores will be developed only in particular cases and as opportunity
strategies. While we are only franchisees for Pizza Hut, we will continue to develop owned stores.
Bobs is the second largest fast food hamburger restaurant chain in Brazil and we are focusing
our growth efforts upon the development of new franchises, in the proportion of 40% stores to 60%
kiosks. Other concepts are being developed as Bobs Shakes stations and Express stores called
BEXPRESS by Bobs. Our target is to achieve 816 operating points of sale in 2010 (421 traditional
stores and 395 kiosks, BEXPRESS and Bobs Shakes), occupying growth potential locations to avoid
the entrance of competitors and increasing the number of outlets in major cities of Brazil, like
São Paulo (SP), Salvador (BA), Porto Alegre (RS) and Brasília (Brazils Federal District), as well
as in country cities with around 250,000 inhabitants or , depending on the average income, in
cities with between even less inhabitants. As part of our growth strategy, we have begun to
participate in regional business presentations and organize road shows in order to captivate new
franchisees candidates in targeted cities in Brazil.
We are forecasting 16 KFC stores at the end of 2010, 9 Doggis points of sale, 17 Pizza Hut
restaurants and 4 PHD stores (the Pizza Hut Delivery stations). We also intend starting 6 Coffee
stations out of Pizza Hut stores.
We are also focusing our growth efforts on the increase in profitability of existing points of
sales. We are looking out for Bobs stores and we aim to increment sales per square meter through
layout enhancement, production process study, service improvement, as well as motivational programs
and personnel training. Motivating plans are continually implemented to boost sales, supported by
marketing campaigns, and monitoring systems are widely used disclosing targets and success figures
to stimulate revenues and results. The new Own Stores Division under the command of a largely
experienced professional proved along 2009 that we can improve a lot our P&L for all brands when
focus on profitability is largely applied in the operation of our restaurants and points of sale.
We are committed to a multi-brand concept that will let us work with different trademarks. We
are permanently studying investments under this concept, not only in Brazil but also abroad,
inclusive in other countries of Latin America. The agreements signed concerning KFC, Pizza Hut and
Doggis are to-day a reality that is completely matched to this strategy.
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Franchise Program
In 2009, for the twelfth year in a row, Bobs received the Quality Seal of the Brazilian
Franchise Association (ABF). This quality seal is granted after a consultation with the franchisees
of pre-qualified franchisors about marketing performance, business support and training offered by
the franchisor. Franchisors only pre-qualify when fulfilling all necessary requirements of the
franchising industry.
Bobs franchise agreements generally require the franchisee of a traditional Bobs restaurant
to pay us an initial fee of R$60,000, which is lower for kiosks and small stores, and additional
monthly royalties fees equal to 5.0% of the franchisees gross sales. Franchisees pay also 4.0% of
monthly gross sales in marketing contribution. Our typical franchise agreement also provides that
the franchisee has the right to use the Bobs trademark and formulas in a specific location or
area, must use our approved supplies and suppliers and must build each franchised outlet in
accordance with our specifications at approved locations. Today, the term of our franchise
agreements is 5 years, with antecedent agreements having 10-year terms. Historically, upon
expiration a franchise agreement is renewed without the interruption of the franchisees business.
We generally have no financing obligations with respect to these franchise agreements but the
franchisee pays new initial fees (currently 50% of the first initial fees) and is suggested or
obliged to invest in refurbishment of the store or in buying new equipment. The KFC and Doggis
franchise agreements have been and are being adapted both to the brands owners and to the
particular rules and uses of the Brazilian market. The Franchisees that we are going to hire for
these brands will pay their royalty charges to the franchisor (Yum! Brands or Doggis) and we will
receive a portion of these amounts. Such portion is not defined yet.
At present, approximately 9 months elapse between our initial contact with a prospective
franchisee and the opening of a franchised store. After individuals wishing to own and operate a
Bobs franchise are submitted to a psycho test, a one day training at a store and an interview with
the franchise development team, they have an initial meeting with a committee formed by our top
management, which reviews all individuals applications and determines which should be accepted. We
determine if the potential franchisee meets certain basic conditions, such as significant business
experience, financial resources and knowledge of the market in the area where the franchise will be
located. When accepted, the potential franchisee who agreed with our offering circular signs (a)
the candidacy agreement, which is immediately in force and suspends the franchise in case a Bobs
store is not open, (b) the franchise agreement, which will be in force when the restaurant is
inaugurated, and pays a non-refundable sum equal to 50.0% of the initial franchising fee. Following
mutual agreement as to the site of a new restaurant, he pays the remaining 50.0% of the initial
franchising fee, begins a four-month training program and handles all documents contained in the
Master check list. Construction of the restaurant typically begins at the beginning of the training
program and is generally completed within three to six months. The initial fee is sufficient to
cover all training expenses we incur.
Other concepts such as Express or Bobs Shakes Stations have shorter periods for construction
and training. The other brands resemble Bobs restaurants. In the case of Doggis the training
period is also shorter.
We generally retain a right of first refusal in connection with any proposed sale of a
franchisees interest.
We, in order to intensify our intercommunication with franchisees, respond to specific
difficulties in different regions of Brazil, and enhance our chains performance, have been
organizing quarterly meetings with the Bobs Franchisee Committee, which members are elected by our
franchisees every two years, and half-yearly regional meetings with all
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franchisees. We also have been organizing working groups with our franchisees to study changes
in equipment, appliances, products, suppliers, hardware and software.
We encourage mature and profitable franchisees to increase the number of stores they operate.
As a consequence of this strategy, the number of points of sale per group of Bobs franchisees
(which includes franchised restaurants in the name of partners and family relatives) increased from
1.77 in 1999 to 4.2 in 2009. At December 31, 2009, we had 148 franchisees that collectively
operated 622 points of sale. From this total, 27 operated more than 5 points of sale, and 15, more
than 10 points of sale.
We have successfully focused on developing special agreements with gasoline retailers to house
Bobs points of sales in retail gasoline stations. The restaurant/gas stations, or joint sites,
although housed at gas stations, are built, owned and operated by our franchisees rather than by
the gasoline retailer. We then share a portion of the royalties attributable to those joint sites
with the respective gasoline retailer. We are currently operating 47 joint sites with gasoline
retailers, including Shell, Forza, and Petrobras, the latter being the largest one in Brazil. Our
agreements with each of these gasoline retailers do not establish a number of joint sites to be
opened. These agreements, like our standard franchise agreements, only set forth conditions to
establish a joint site and do not limit the number of joint sites that may be opened under the
agreement. To date, there are nine joint sites operating in Petrobras gas stations. Shell has ten
joint sites in operation. Forza has twenty-two Bobs sites in operation. Besides, other six joint
sites operate in Repsol, Ale, Esso and Texaco.
In November 2005, we opened our first Bobs franchise point of sale in Luanda, capital of
Angola, one of the largest countries in Africa with approximately 16 million people. As of today,
we have three Bobs points of sale operating in Angola. And in 2009 we started our first Bobs
restaurants in Santiago, Chile. At December 31 we had three points of sales operating in Chile.
KFC franchise will operate under Yum! Brands model, which is not different from Bobs model.
We transferred to a franchisee in 2010 one of our own stores, the first KFC franchise operation.
Doggis franchise operations will start in 2010.
Advertising and Promotions
In Bobs chain, we aim to increase fidelity among our target-market, formed by young consumers
from 13 to 25 years old, and attract consumers not familiarized with our products. For this reason,
we intend to identify our fast-food hamburger restaurant chain with a place to go with the family
and to meet friends. This concept is common to KFC and Pizza Hut brands.
We, through our advertising agency, develop a multi-media marketing program to advertise our
restaurant networks in its primary markets. We usually employ television, radio, outdoors, and a
variety of promotional campaigns to advertise our products; and we develop 15 and 30-second
television commercials, which, typically, are aired one to six times a day for a 15-day period.
In 2009 we issued 21 campaigns with Bobs brand. Six of them, for the launching of new
products or directed to sustain leading products with special TV marketing programs: new size of
hamburgers, new crisp milkshakes and combos. Three campaigns in the Points of Sale promoted new
combos with milkshakes, new flavors for ice-creams and new chocolate milkshakes that were very
successful. Six special promotions and six campaigns directed to children completed an extended
program of marketing in different Medias. Carnival events
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were, once again, an excellent opportunity to give a strong visibility to the brand. All 21
campaigns covered the twelve months of the year.
Certain of our points of sale offer special services for childrens birthday parties. Visual
tools, such as banners, posters and place mats, reinforce all these programs. We keep franchisees
informed of current advertising techniques and effective promotions and make our advertising
materials available to our franchisees. Our franchisees contribute generally with 4.0% of their
monthly gross receipts to a marketing fund dedicated to advertising and promotions that we
administrate. Franchisees can discuss with us marketing programs in the meetings of the Franchisees
Council, 4 per year. The Marketing Fund is audited yearly with an external independent audit chosen
with the franchisees vote. Individual stores also develop promotional programs to attract
additional clientele or to assist in the implementation of expanded business hours. Each outlet
pays for these promotions.
Our KFC chain is still small but even so it has a small marketing fund which has been used in
2009 especially in outdoors and store exposition and diffusion of promotions. We developed 13
campaigns along 2009. Twister, Bog Box Meal, Sandwich Zinger, Mega Meal, Variety Bucket, Mini
Dessert, Snacker Snack Box and Khrushers were the principal products enlightened focusing young
adults, families and teens. Some campaigns were launched as brand builders or addressed to value
seekers. KFC marketing is in part locally built and in part receives guide and direction from
Yum!s marketing unit for the CARIBLA region. We contribute to a Latin American fund managed by
Yum! International and addressed to the diffusion of the brand.
Pizza Hut developed 20 campaigns highlighting pizzas, salads and wraps, pastas, new combo
meals, appetizers, and new dessert lines. The program was specially designed to face the eventual
effects on clients of the financial world crises burst in the last quarter of 2008. In general we
consider that the marketing actions in 2009 contributed to a growth of 22% of the number of
transactions. Special campaigns focusing delivery enlarged 35% the base of home customers with an
increase also in margins due to a change in products mix.
Marketing for Doggis was developed only in points of sale and their surroundings. Pamphlets,
banners, special packaging and naps were largely used to bring customers to the stores and push
them to consume our products crating an image for the brand that just started late last year in
Brazil.
Sources of Supply
We purchase food products, packaging, equipment and other goods from numerous independent
suppliers. In selecting and periodically adjusting the mix of our suppliers, we assess and
continuously monitor the efficiency of their regional and national distribution capabilities and
facilities, as well as the quality of their products. We also encourage our suppliers innovation,
best practices and continuous improvement. To take advantage of volume discounts, we have entered
into centralized purchasing agreements. Food products are ordered by, and delivered directly to
each point of sale. Billing and payment for our company owned and operated points of sale are
handled through the centralized office, while franchisees handle their own invoices directly.
Packaging, uniforms, cleaning materials and appliances are delivered by suppliers to Fast Food
Distributor Ltda. (FBD), a centralized warehouse operated by a non-affiliated company. This
centralized purchasing helps assure availability of products and provides quantity discounts,
quality control and efficient distribution.
In June 2005, we renegotiated our contract with Fast Food Distributor Ltda. (FBD) to include
transportation and delivery of supplies to each point of sale, and extended it, which otherwise
would expire in March 2006, for five more years. The new terms represented substantial cost
reductions and impacted positively on the operational margins of our fast food
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restaurant chain. Due to that, Suprilog, a limited liability company established by Venbo
Comércio de Alimentos Ltda. with the objective to carry out the transportation service for a
limited period of time, ceased its operations, which were absorbed by FBD, in November 2005.
Suprilog was then converted into the present unit with a logistic and maintenance profile. It
renders services to the companies of the group as warehouse for informatics, store equipment,
marketing and refurbish materials and spare parts for store equipment. It is also a support to
maintenance of store activities and since 2008 it is operating a buy & sale business of the basic
ingredient of crisp milkshakes.
We participate in long-term exclusivity agreements with Coca-Cola, for its soft-drink
products, Pepsi Cola (for KFC and Piozza Hut brands), Ambev, the biggest Brazilian brewery company,
Farm Frites, the Argentinean producer of French fries, and Sadia, one of the biggest meat
processors in Brazil, as well as with Novartis Nutricion for its Ovomaltine chocolate. These
agreements are extensive from four to five years. We are currently renegotiating the agreements
that come to an end, always in better conditions since the scale of our supplies enlarges with the
development of the chains.
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 Company strives to maintain quality and uniformity throughout its chains by only permitting
own-operated and franchised restaurants the purchase of approved supplies from approved
suppliers. To approve both supplies and suppliers, the Company assesses and continuously
monitors, through a specific team and third party contracted services, the efficiency and
capabilities of their facilities, as well as the quality of their products.
Regularly the Company negotiates commercial agreements with leading suppliers to benefit all
restaurants chains under its management. The Company negotiates, through a specialized third
part company, with suppliers of equipment, appliances, packaging, cleaning material and
uniforms targeting the constant modernization of its chains, including development of new
equipments and appliances, their regulatory and visual identification adequacy and reduced
costs.
Trademarks
We believe that our trademarks and service marks, all of which are owned by us, are important
to our business.
Our trademarks and service marks have been registered in the Brazilian trademark office. These
trademarks and service marks expire at various times, when they are routinely renewed. The
following table sets forth our significant trademarks and service marks that are registered in the
Brazilian trademark office:
Trademark or Service Mark | Expiration Date | |
BFFC
|
03/25/2017 | |
BFFC- BRAZIL FAST FOOD CORP
|
03/25/2017 | |
BIG BOB
|
01/05/2012 | |
BOBS
|
06/05/2012; | |
BOBS EXPRESS
|
Patents Pending | |
BOBS GRILL
|
05/01/2017; | |
CAPUCCINE
|
11/13/2017; | |
FRANFILE
|
03/24/2013; | |
SALADÍSSIMAS BOBS
|
11/29/2013; | |
BOBS DOUBLE CHEESEBURGER
|
10/23/2010; | |
BOBS BURGÃO
|
12/16/2015; | |
FRANLITOS
|
12/04/2016. |
We have registered our trademark Bobs in Paraguay, Uruguay and Argentina, the three
countries members of the Mercosur South America Commercial Agreement, in which Brazil takes part.
We have also registered Bobs Burgers trademark and logo in Paraguay, Uruguay, and Argentina. We
have also registered our trademark Bobs in Portugal, Germany, France, Italy, Chile and Benelux
(an economic union of Belgium, the Netherlands, and Luxembourg), as well as in Angola, where we
opened a franchise store at the end of 2005. As of today, we are initiating the process of
registering our trademarks in the United Sates of America and Mexico.
The other brands we operate (KFC, Pizza Hut, Doggis) belong to foreign franchisors and we have
a right to use them in Brazil as stated by written in special agreements.
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Competition
In terms of number of points of sale, Bobs is the second largest fast food hamburger
restaurant chain in Brazil. Each of our restaurants is in competition with other food service
operations within the same geographical area. We compete with other organizations primarily through
the quality, variety, and value perception of food products offered. The number and location of
units, quality and speed of service, attractiveness of facilities, and effectiveness of marketing
are also important factors. The price charged for each menu item may vary from market to market
depending on competitive pricing and the local cost structure.
Additionally, each of our restaurants is in competition with informal food service. Fast-food
restaurants have to focus on a limited number of options, sometimes even on just one type of
product, in order to achieve the efficiency required in the competitive food service industry.
Brazil is a vast country with an extensive regional cuisine, where a typical meal from one region
can be found exotic in another, making more challenging the act of convincing the general public of
a cross-country homogeneous menu. Because of that, made to order improvisations, prepared at the
street by informal and moveable vendors nearby bus stations and subways, can be more appealing to
the general public, since it mirrors people preferences with very low cost and normally tax
reductions or exemptions.
Moreover, each of our restaurants is in competition for consumers pocket with other services
and consumer goods, such as: mobiles, cable TV, broad band Internet and retail stores financing.
Bobs competitive position is enhanced by our use of fresh ground meat and special flavorings,
made-to-order operations, comparatively diverse menu, use of promotional products, wide choice of
condiments, atmosphere and decor of our points of sale and our 58 years history in Brazil. This is
also a characteristic of KFC, Pizza Hut and Doggis stores where the power of the international
brands is a particular booster for their products. In the case of Bobs, we believe that the use of
kiosks and the new Express concepts spreading the brand in the country side of the major States may
afford us an advantage over our competitors. We also believe that, as a Brazilian-based company, we
have the advantage over our non-Brazilian competitors of being able to readily understand and
respond to local consumer preferences. Nevertheless we are constantly accessing the market through
opinion polls, practicing benchmark and developing strategic programs to increase our market share.
The KFC stores and the Pizza Hut stores explore the concepts developed by Yum! Brands which
have many characteristics in common with Bobs operation. KFC is specialized in fried chicken and
its stores have the lay-out, identification and colors proper of the brand. Most of Pizza Hut
stores re casual dining restaurants. But the focus in quality, quick service and excellent clients
acquaintance are the same in all brands operated by the BFFC group. As a consequence we can say
that competitors are the same for all of them. The recently incorporated brand Doggis, exploring
the hot-dog concept, faces the same condition of strong competitors; in this case no international
or local brands are among them but the popular informal offers at low prices are a permanent
challenge. Quality, hygiene and health care of our products are our ways of fighting these
competitors with a different target constituted of classes B and C of consumers.
Personnel
As of December 31, 2009, VENBO (Bobs brand), including its franchisees, employed around
10,800 persons, of whom 1,459 were employed in own operated restaurants. The total number of
full-time employees as of December 31, 2009 was 1,589, which includes our administrative staff
(130). CFK (KFC brand) employed as of December 31, 2009, 516 persons in the stores and 526
including 10 administrative staff. DGS (Doggis) had 79 employees (02
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administrative staff) and IRB (Pizza Hut) 710 employees, 694 in stores and 16 administrative
staff.
Our employee relations historically have been satisfactory. We are not a party to any
collective bargaining agreements. However, we have agreed to be bound by the terms, as they may be
applicable to our employees, of agreements negotiated on a city-by-city basis by trade associations
of hotel, restaurant and fast food owners and operators, of which we are a member.
(d) | FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES |
Not applicable.
Note: we have three franchise points of sale in Luanda, capital of Angola; although we have
been receiving royalties attributable to this operation, the total amount received is not relevant
to our operations. These royalties are registered as BFFC revenues in the USA. Three Bobs stores
are operating in Chile since the second half of 2009 managed by BBS, a company where we have a 20%
participation in capital. The figures are also non material in our consolidated financial
statements but they are disclosed in special notes in the financial chapters of this 10-K.
Availability of Reports and Other Information
We make available, free of charge, copies of our Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K, Proxy Statement on Schedule 14A and amendments to those
materials filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act
of 1934 after we file electronically such material with, or furnish it to, the United States
Securities and Exchange Commission (the Commission). Persons wanting copies of such reports may
send us their requests at Rua Voluntários da Pátria 89, 9º andar Botafogo CEP 22.270-010, Rio de
Janeiro, Brazil, in attention to Brazil Fast Food Corp. Secretary. In addition, such reports are
available, free of charge, on the Commissions website located at www.sec.gov, and may also be read
and copied at the Commissions public reference room at 100 F Street, NE, Washington, D.C. 20549,
or by calling the SEC at (800) SEC-0330.
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ITEM 1A. RISK FACTORS
FORWARD LOOKING STATEMENTS
This Annual Report contains forward-looking statements including statements regarding, among
other items, business strategy, growth strategy and anticipated trends in our business, which are
made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The words believe, expect and anticipate and similar expressions identify
forward-looking statements, which speak only as of the date the statement is made. These
forward-looking statements are based largely on our expectations and are subject to a number of
risks and uncertainties, some of which cannot be predicted or quantified and are beyond our
control. Future events and actual results could differ materially from those set forth in,
contemplated by, or underlying the forward-looking statements. Statements in this report, including
those set forth in Risk Factors, describe factors, among others, that could contribute to or
cause such differences. In light of these risks and uncertainties, there can be no assurance that
the forward-looking information contained in this Annual Report will in fact transpire or prove to
be accurate. Investors are cautioned that such forward-looking statements involve risks and
uncertainties including without limitation the following:
Risks Relating to Operations
Our success depends on our ability to efficiently compete in the food service industry.
The success of our business is dependent upon our ability to compete with formal and informal
players in the eating out segment, respond promptly to changing consumer preferences, improve and
promote our products and services, recruit and motivate qualified restaurant personnel and boost
consumer perceptions of our food quality and restaurants facilities, while maintaining the prices
we charge our customers and our operational margins. The demand for low fat and less caloric food
has increased significantly in the last few years and the Brazilian Government is glowingly
imposing new disclosure rules on the nutrition content of food products on sale as well as
restrictions on advertising and promotions. To respond in accordance, we may be required to spend
significant funds on research and development of new products, product line extensions, new food
preparation methods and new appliances, training, as well as preparing and printing disclosure
materials to be exposed in stores and on food packages. We may not have the resources necessary to
compete effectively, which may cause consumers to prefer the products of our competitors, and our
marketing campaigns may have a diminished effect. As a result, we could experience a decrease in
revenues, which would have an adverse impact on our business and operations.
Our future success is dependent upon the success and expansion of our franchise program.
A portion of our revenues is attributable to the fees we collect from our franchisees. To
improve our revenues in the future, we have developed a growth strategy that includes increasing
our number of franchised points of sale. This growth strategy is substantially dependent upon our
ability to attract, retain and contract with qualified franchisees and the ability of these
franchisees to open and operate their points of sale successfully. In addition, our continued
growth will depend in part on the ability of our existing and future franchisees to obtain
sufficient financing or investment capital to meet their market development obligations and this
may be also influenced by the Brazilian economy and market development. If we experience difficulty
in contracting with qualified franchisees, if franchisees are unable to meet their development
obligations or if franchisees are unable to operate their points of sale profitably, the amount of
franchise fees paid to us by our franchisees would decrease and our future operating results could
be adversely affected. This concept becomes more material in the next future due to the launching
of our expansion program with franchised operations of the new brands, KFC and Doggis, which has
been started in the first quarter of 2010.
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We are subject to extensive regulatory requirements applicable to the food service industry.
Both our franchisees and we are subject to regulatory provisions relating to the wholesomeness
of food, sanitation, health, safety, fire, land use and environmental standards. Suspension of
certain licenses or approvals due to our or our franchisees failure to comply with applicable
regulations could interrupt the operations of the affected restaurant and inhibit our or their
ability to sell products. Both our franchisees and we are also subject to Brazilian federal labor
codes, which establish minimum wages and regulate overtime and working conditions. Changes in such
codes could result in increased labor costs that could cause a reduction in our operating income.
We are also subject to Brazilian federal franchising laws applicable to franchise relationships and
operations. Changes in these or any other regulations may contain requirements that impose
increased burdens on our business, which may adversely affect our results of operations. We cannot
assure that we will be able to deal successfully with any potential new or amended regulations.
Risks Relating to Brazil
Our business are subject to changes in Brazils economy.
Our business is very sensitive to the economic activity, and is highly affected by consumers
confidence, population average income and employment. In Brazil, these three factors have improved
significantly. Nevertheless, the Brazilian economic growth has averaged 4.2% p.a. in the last three
years, what is substandard in comparison to other developing countries.
Brazils tax burden accounts for an estimated 35.0% of GDP, and real interest rate, at around
4.5% p.a., is among the highest in the world. Tax burden and interest rates pressure our business
by depressing our margins and increasing our cost of capital. Also, inflation pressure our business
because, although inflation is often reflected on food products and packing material we purchase,
as well as on utility service and occupancy expenses we incur, to pass on higher costs is not
always possible due to Brazilian low consumers purchase power. Besides, higher inflation can
pressure labor costs and increase unemployment, which has an adverse effect on our business, since
it spurs informal business, such as moveable food vendors at the street.
The world financial crisis that started in September 2008 affected the Brazilian economy in
2009, mainly the industrial sector. Government measures, supported by a strong structure of
financial institutions, avoided a collapse of the countrys economy. Commercial transactions in the
retail market were almost normalized in the second half of the year. We could manage to keep our
activity and even grow revenues over 2008. The forecasts for 2010 and the next years are optimistic
with the recovering of the industrial production. Yet we have seen that international crises affect
seriously Brazilian economy and we cannot say that a second wave of financial crises in the world
will be successfully managed in Brazil. Together with internal and historical factors, that have
been for a long time limiting GDP growth, we must be very careful about our strategic plans and
permanently consider measures to protect the group in case of new crises. Sales and margins
reduction and less income could be natural consequences of a new wave of challenges in
macroeconomic environment. We cannot either assure that we will be able to implement quick
emergency measures to mitigate these eventual risks.
Our business may be affected by political and constitutional uncertainty in Brazil.
High levels of uncertainty have marked the Brazilian political environment since the country
returned to civilian rule in 1985 after 20 years of military government. Brazils democracy
structure has gone through outstanding improvements in the last 25 years but it still
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lacks of solid political institutions, committed political parties and mature judicial system.
The country suffers from constant institutional changes that turn very difficult the continuity of
long range development plans. This can also affect our long range strategies.
Controls on foreign investments may limit our ability to receive capital from our Brazilian
operating subsidiary
Brazil generally requires the registration of foreign capital invested in Brazilian markets or
businesses. Thereafter, any repatriation of the foreign capital, or income earned on the foreign
capital investment, must be approved by the Brazilian government. Although approvals on
repatriation are usually granted and we know of no current restrictions on foreign capital
remittances, there can be no assurance that in the future approvals on repatriation will be granted
or restrictions or adverse policies will not be imposed.
Risks related to Our Common Stock
Our common stock has been delisted from The Nasdaq SmallCap Market.
Our common stock was delisted from the Nasdaq SmallCap Market on March 11, 2002. As a result,
our common stock is now quoted on the OTC Bulletin Board, which may reduce the already thin trading
market of our common stock. In addition, the delisting from the Nasdaq SmallCap Market may
significantly impair our ability to raise additional funds to operate our business.
Risks related to past due fiscal obligations of VENDEX
We have past due fiscal obligations of VENDEX.
VENDEX was the owner of Venbo Comércio de Alimentos Ltda. before we purchased it in 1996. At
that moment, a due diligence was conducted to evaluate its debt, other liabilities and assets. The
agreement signed by both VENDEX and Brazil Fast Food Corp. determined that VENDEX would be
responsible for any hidden liability or future liability concerning the acts of the company prior
to the date of the purchase, limited to certain conditions.
In the past years we have acknowledge the situation of Venbos fiscal debts prior to 1996
through the communications we received from the Brazilian fiscal authorities. These communications
were, as immediately as received, forwarded to VENDEX lawyers in Brazil.
In 2005, Venbo was summoned by the fiscal authority of the State of Rio de Janeiro to pay a
debt 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 substitute the
seizure of the asset, because of its weak current financial condition. This matter was finally
decided in favor of VENDEX in the São Paulo Court but the pledge of our property is still in force
waiting for the Rio de Janeiro Court to validate São Paulos decision.
We believe VENDEX attorneys are defending all demands. During the third quarter of 2007, the
only relevant claim was judged favorable to VENDEX. All other claims we know are immaterial;
however, we cannot predict the receipt of additional claims that might be material.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
All of our points of sale currently in operation have been built to our specifications as to
exterior style and interior decor, are either in a strip of stores on a neighborhood street or in
mall food court points of sale, with some free-standing, one-story buildings, and are substantially
uniform in design and appearance.
Our restaurants are constructed on sites ranging from approximately 270 to 7,500 square feet
and our kiosks on sites that average 70 square feet. Most of our points of sale are located in
downtown areas or shopping malls, are of a store-front type and vary according to available
locations but generally retain standard signage and interior decor.
We own the land and buildings for eight points of sale, five of which are presently leased to
franchisees and three of which houses three of our own-operated stores. We also lease the property
for 39 of our own-operated stores and 16 of our own-operated kiosks. Our land and building leases
are generally written for terms of five years with one or more five-year renewal options. Certain
leases require the payment of additional rent equal to the greater of a percentage (ranging from
1.0% to 10.0%) of monthly sales or specified amounts.
Our corporate headquarters were located until June 2004 in premises at Avenida Brasil, 6431
Bonsucesso, CEP 21.040-360, Rio de Janeiro, RJ, Brazil, which Venbo acquired in 1995. Today, our
headquarters are located at Rua Voluntários da Pátria, 89 9th floor Botafogo, CEP 22.270-010,
Rio de Janeiro, RJ, Brazil. These are leased offices that enable us to reduce expenses due to the
fact that we occupy a smaller area with less expenditure of electricity and air conditioning. The
four Divisions that integrate our headquarters and the administration of our stores are now all
located in the same building.
Our franchise activities, KFC and Doggis management are supported by personnel located at this
address. Pizza Hut headquarters are located in São Paulo, in Av. Brigadeiro Faria Lima, 1572
12nd floor. All support services for our São Paulo activities are located since October 2009 in the
same address.
We believe that our current facilities are adequate for our needs in the foreseeable future.
All KFC stores, Doggis stores and Pizza Hut restaurants are operated in leased locations. The
average areas for KFC and Pizza Hut brands are currently 20 to 40% bigger than for Bobs stores.
Doggis stores are currently 20 to 30% smaller than Bobs restaurants.
ITEM 3. LEGAL PROCEEDINGS
We have pending a number of lawsuits that have been filed from time to time in various
jurisdictions. The following is a brief description of the more significant of these lawsuits. In
addition, we are subject to diverse federal, state and local regulations that impact several
aspects of our business. In case we experience unfavorable decisions, our net income could be
adversely impacted for the period in which the ruling occurs or for future periods. Material values
that could impact income and that imply in risks of losing the lawsuits have been duly registered
as liabilities in our financial statements.
In January 2009, the State of Rio de Janeiro fined VENBO because of pretended error in tax
paying. The fine amounted to R$5.0 million. Our lawyers have appealed because it seems evident that
the authorities committed a basic mistake having ignored court decisions in our favor. We are sure
we have correctly paid all our VA Taxes but we cannot guarantee that this will be the opinion of
the authorities and maybe we will be obliged to go to the courts to defend our rights.
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Concerning the ISS, a tax charged by Brazilian cities on services rendered by companies in
Brazil, none of the Companys revenues were subject to such tax until 2003, but in the beginning of
2004 a new ISS legislation has been implemented and according to it all fees received from
franchisees should be included on the basis of ISS calculation. 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, and at the same time, is monthly depositing with the court the amount
referred to ISS while awaits its determination. Additionally, the referred change in the ISS tax
regulations motivated deep debates whether marketing funds and initial fees paid by franchisees
could be considered 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 contribution and initial fees, but cannot guarantee they will be successful.
IPTU is a Brazilian municipal tax charged on real estate. Fiscal Authorities are claiming to
pay IPTU twice (in amount of R$400 thousand) on one of Venbos store, because its building is
considered as facing two streets. Although our lawyers understand that this claim has no legal
basis we cannot predict the result of its appeal.
During February, 2010, the Brazilian Federal Tax Authorities questioned the procedures that
the Company has been applying in past years in order to recover IPI (a tax on industrial
production), included in packaging products, bought from different suppliers. The Authorities agree
that we have the right to such tax credit but understand that we would have claimed it from the
suppliers and not from the Government. The Company has already filed its defense but there is no
guarantee that it will be successful to avoid to pay around R$1.2 million to the Government and
claim the suppliers for reimbursement. This could affect cash flow during the time necessary for
solving the claim.
As stated in our past filings, we are currently paying a debt included in subsequent amnesty
programs offered by the Brazilian Federal Government called REFIS since 1999 and PAES since 2003.
In 2009 the Government offered a new amnesty program we recognize as REFIS 4. We subscribed to this
program and we are waiting for the Tax Authorities to fix the real value of the debt. This debt is
constituted of the Social Security debt, already fixed and having caused a liabilitys adjustment
in 2008, and the Income Tax and Taxes on Revenues debt that was not reviewed by the authority at
the closure of our 2009 financial statements. This could have positive or negative impacts in our
income statements but we cannot estimate them at the present moment. The matter is further
discussed in Note 12 to Consolidated Financial Statements in this report.
Concerning lawsuits initiated by franchisees against the Company, the most relevant is
one related to one franchisee that blames the Company for his unsuccessful franchise operation and
states that the franchiser should be considered responsible for having offered the operation of a
store with guaranteed profitability. This franchisee became a permanent debtor of royalty and
marketing contributions, and the Company, after failing a great exertion to improve his business,
finally decided to interrupt the franchise contract and closed the stores explored by him. In 2007,
the Company was condemned to pay a compensation of R$1.2 million to this former franchisee. The
Company appealed based on its legal advisors that believe his argument contradicts franchise laws
and the usual business practices of the Company. The compensation was reduced by the court to
R$0.45 million but we appealed to the Superior Court with good chances of impairing this amount,
but we cannot guarantee a successful result. One other franchisee is suing the company with no
legal arguments but we are still discussing with him an agreement and we cannot estimate the risk
and its amount. We are suing two franchisees for breach of contract. In this case normally the
point of sale
is transferred to a new franchisee and the sum due is recovered by us through this
transaction.
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Concerning lawsuits initiated by individuals against the Company, the owner of the property
where the Company held a lease contract for operation of one of the Companys store (closed in
2002) claimed unpaid monetary restatement on rent for a period of two and a half years in the
amount of R$1.0 million. The Company has reached an agreement and reduced the claimed amount to R$
700 thousand. The Company is not guarded from receiving other lease claims in such high amount.
Concerning labor contingencies, we finally arrived to an agreement with a Companys former
employee with whom we were discussing in court a fine of R $700,000. We agreed to pay this amount
in monthly installments and we must finish paying in 2010 affecting this years income in R$
170,000. Despite the infrequency of this amount in labor processes, the Company is not guarded from
receiving other labor claims in such high amount. During 2006 and 2007, the Company received other
labor claims from former employees that together with the number of lawsuits in due course obliged
us to increase our labor contingencies. Yet, in 2008 and 2009 many of the claims in due course were
negotiated and we could fix the provision labor contingencies in our balance sheet in R$1.53
million as of December 31, 2009 in VENBO (Bobs), R $6.5 thousand in CFK (KFC) and R $0.6 million
in IRB (Pizza Hut). DGS employs only two people and there is no provision for labor contingencies.
Concerning inquires from the Brazilian Government General Attorney Office the Company has the
following issues:
(a) | We have committed ourselves to hire handicap personnel up to a minimum of 5% of our total employees. And so, we have done our best in hiring and training handicap personnel, but found it very difficult given the normal conditions of our stores and the limitation of labor supply. We want to reach an agreement with the General Attorney Office, but we cannot guarantee we will be successful and avoid fines. | ||
(b) | Questioning related to the total amount of taxes paid by Venbo during the Pan American and Para Pan American Games. Although the Company has proved that the referred taxes were collected according to a special tax regime of Rio de Janeiro Estate, we cannot predict judge final outcome. | ||
(c) | Questioning related to marketing campaigns for children. We believe our campaigns were not misleading and we gathered evidence to use against such claim. During 2008 and 2009 we were exempted from fines concerning these campaigns and we signed an engagement to respect in the future some methods and procedures used to address marketing campaigns for kids. |
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
Removed and reserved. |
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PART II
ITEM 5. | MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Our common stock is quoted on OTC Bulletin Board under the symbol BOBS.OB. There is a
limited public trading market for our common stock. The following table sets forth the range of the
high and low bid quotations for our common stock for the periods indicated:
Three Months Ended | Common Stock | |||||||
High | Low | |||||||
March 31, 2009 |
3.25 | 3.25 | ||||||
June 30, 2009 |
3.49 | 3.20 | ||||||
September 30, 2009 |
3.59 | 3.31 | ||||||
December 31, 2009 |
4.93 | 4.90 | ||||||
March 31, 2008 |
7.30 | 4.10 | ||||||
June 30, 2008 |
7.10 | 4.00 | ||||||
September 30, 2008 |
6.95 | 3.90 | ||||||
December 31, 2008 |
6.00 | 5.75 |
The above quotations represent prices between dealers, without retail markup, markdown or
commission. They do not necessarily represent actual transactions.
Brazil generally requires the registration of foreign capital invested in Brazilian markets or
businesses. Thereafter, the Brazilian government must approve any repatriation of the foreign
capital, or income earned on the foreign capital investment. In addition, the Brazilian government
may also impose temporary restrictions on foreign capital remittances abroad if Brazils foreign
currency reserves decline significantly. Although approvals on repatriation are usually granted and
we know of no current restrictions on foreign capital remittances, our payment of dividends would
be subject to these limits if the Brazilian government delays, imposes these restrictions on, or
does not approve, the transfer by our Brazilian subsidiary, BFFC do Brasil Participações Ltda., of
funds out of Brazil for the payment of dividends to our non-Brazilian shareholders. See Risk
Factors Risks Relating to Brazil.
Holders
The number of record holders of our common stock as of December 31, 2009 was 55.
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Dividends
The Company has had a policy of retaining future earnings for the development of its business. In
2006, the Company followed a restructuring strategy and consolidated all its businesses in Brazil
through a holding company subsidiary. In subsequent years, the Company invested in new concepts,
new brands and new activities and became a multi-brand organization, highly recognized in Brazil.
In 2008, by virtue of the Company successful reorganization, its Board of Directors decided to
distribute cash dividends to its shareholders. In 2009 there were no dividends paid to
shareholders.
The Companys dividend policy is subject to the discretion of the Board of Directors and depend
upon a number of factors, including future earnings, financial condition, cash requirements, and
general business conditions. Each year, the Board of Directors discusses the Companys profits
distribution while considering its investment programs.
Equity Compensation Plans
The Company Stock Option Plan terminated on September 17, 2002, ten years after from the date
of its adoption by the Board of Directors.
As of December, 31, 2009 there were no further common stock that might be issued upon the
exercise of options or warrants.
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ITEM 6. | SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA |
The following selected consolidated financial data has been derived from our audited financial
statements and should be read in conjunction with our consolidated financial statements, including
the accompanying notes, and Managements Discussion and Analysis of Financial Condition and Results
of Operations, appearing elsewhere in this report.
Year Ended December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
REVENUES |
||||||||||||||||||||
Net Revenues from Own-operated Restaurants |
R$ | 146,875 | R$ | 90,122 | R$ | 85,904 | R$ | 80,931 | R$ | 75,559 | ||||||||||
Net Revenues from Franchisees |
24,647 | 22,427 | 18,811 | 16,385 | 11,963 | |||||||||||||||
Revenues from Supply Agreements |
10,270 | 8,317 | 6,673 | 6,059 | 3,655 | |||||||||||||||
Other Income |
3,098 | 2,499 | 3,056 | 2,953 | 1,283 | |||||||||||||||
TOTAL REVENUES |
184,890 | 123,365 | 114,444 | 106,328 | 92,460 | |||||||||||||||
OPERATING COST AND EXPENSES |
||||||||||||||||||||
Store Costs and Expenses |
(135,715 | ) | (89,729 | ) | (83,349 | ) | (74,689 | ) | (68,384 | ) | ||||||||||
Franchise Costs and Expenses |
(8,619 | ) | (6,207 | ) | (3,623 | ) | (3,176 | ) | (2,144 | ) | ||||||||||
Marketing Expenses |
(4,092 | ) | (1,053 | ) | (2,082 | ) | (4,018 | ) | (2,453 | ) | ||||||||||
Administrative Expenses |
(21,298 | ) | (17,442 | ) | (13,430 | ) | (11,333 | ) | (9,192 | ) | ||||||||||
Other Operating Expenses |
(4,397 | ) | (2,876 | ) | (2,945 | ) | (4,213 | ) | (3,848 | ) | ||||||||||
Net result of assets sold |
1,225 | (205 | ) | 842 | 145 | (52 | ) | |||||||||||||
Impairment of assets |
| | | (180 | ) | (148 | ) | |||||||||||||
TOTAL OPERATING COST AND EXPENSES |
(172,896 | ) | (117,512 | ) | (104,587 | ) | (97,464 | ) | (86,221 | ) | ||||||||||
OPERATING INCOME |
11,994 | 5,853 | 9,857 | 8,864 | 6,239 | |||||||||||||||
Interest Expense, net |
(4,882 | ) | (9,677 | ) | (697 | ) | (623 | ) | 537 | |||||||||||
Foreign Exchage and Monetary Restatement Loss |
| | | (42 | ) | (84 | ) | |||||||||||||
NET INCOME (LOSS) BEFORE INCOME TAX |
7,112 | (3,824 | ) | 9,160 | 8,199 | 6,692 | ||||||||||||||
Income taxes deferred |
| 311 | 4,343 | 4,543 | | |||||||||||||||
Income taxes current |
(36 | ) | (746 | ) | (46 | ) | (2,808 | ) | (2,248 | ) | ||||||||||
NET INCOME (LOSS) BEFORE NON-CONTROLLING INTEREST |
7,076 | (4,259 | ) | 13,457 | 9,934 | 4,444 | ||||||||||||||
Net (income) loss attributable to non-controlling interest |
(180 | ) | 317 | | | | ||||||||||||||
NET INCOME (LOSS) ATTRIBUTABLE TO BRAZIL FAST FOOD CORP. |
R$ | 6,896 | R$ | (3,942 | ) | R$ | 13,457 | R$ | 9,934 | R$ | 4,444 | |||||||||
NET INCOME PER COMMON SHARE
BASIC AND DILUTED |
R$ | 0.85 | R$ | (0.48 | ) | R$ | 1.65 | R$ | 1.22 | R$ | 0.55 | |||||||||
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING: |
||||||||||||||||||||
BASIC AND DILUTED |
8,152,505 | 8,163,949 | 8,169,766 | 8,137,291 | 8,061,317 | |||||||||||||||
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ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion should be read in conjunction with ITEM 6 Selected Consolidation
Historical Financial Data, ITEM 1A Forward Looking Statements, and with our consolidated
financial statements and related notes appearing elsewhere in this report.
Background
Over the last years, we have endeavored to reduce our operating costs, increase our product
offerings, improve our image to our customers, continuously develop and implement promotional
campaigns and steadily increase our restaurant network and franchise base. Although we have
experienced increases in operating revenues and positive net income in recent years, factors
related to the Brazilian political and economic environment have contributed to our history of
significant net losses. Our franchise activity is largely performing granting good incomes for the
group. But in fact, we experience a certain difficulty in increasing our store Bobs and KFC
returns. As we have found some managerial fragilities in their operation, we invested in a new
organization under the command of an experienced officer we hired on November 2008. He is Mr Jorge
Aguirre and was for many years the CEO of IRB, the São Paulo franchisee of 14 Pizza Hut stores. He
worked many years ago in Bobs and then in our principal competitor. A great effort in own operated
stores was done in 2009 under his command and a significant improvement was obtained in the P & L
of Bobs and KFC points of sales as discussed later in this report. Nevertheless, we must also
high light environmental factors that have a great influence in our problems. These factors include
the following:
Brazilian Political Environment
Brazil, which is located in the central and northeastern part of South America, is the largest
Latin American country and the worlds fourth-largest democracy.
According to Latinobarómetro, a Chilean organization that carried out surveys in 18 countries
each year since the mid-1990s, published exclusively by The Economist, democracy has increased its
resilience in Latin America. After decades of military ruling, the region has shown enthusiasm for
democracy and free-market reform, but its disappointing growth rate in recent years and recurring
recession periods (severe in some places) has brought up questions about which economic and
monetary policies is more adequate to respond to poverty and inequality. Latin America, and Brazil
is no exception, carries a legacy of past undemocratic practices, and although a large number of
its citizens believe that a market economy is essential for their country development, only a few
express faith in political parties, in the Congress and in the courts.
High levels of uncertainty have marked the Brazilian political environment since the country
returned to civilian rule in 1985 after 20 years of military government. Even though the election
of Luiz Inácio Lula da Silva in 2002 and 2006 has shown democracy increasing matureness in the
country, the
corruption scandal involving his Workers Party (PT), the largest left-wing force in Latin
America, and the government mismanagement and paralysis, disappointed many enthusiasts.
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Brazilian Economic Environment
In March 1994, the Brazilian government introduced an economic stabilization program, known as
the Real Plan, intended to reduce the rate of inflation by reducing certain public expenditures,
collecting liabilities owed to the Brazilian government, increasing tax revenues, continuing to
privatize government-owned entities and introducing the Real, a new currency based on a monetary
correction index and fixed against the U.S. Dollar. From 1994 to 2000, the Real Plan resulted in a
substantial reduction in Brazils rate of inflation.
During this period, many structural reforms, such as government monopolies break down,
privatization and deregulation of some sectors, were approved by the Brazilian Congress and Senate,
but the country fiscal deficit were still looming. After two major international crisis, Asia in
1997 and Russia in 1998, investors fled to minimize their lost while Brazils international
reserves plunged. In January 1999, the Central Bank of Brazil determined the free fluctuation of
the Real against other currencies and adopted an inflation target methodology, where the National
Monetary Counsel establishes an inflation target, with maximum and minimum variation permitted, to
be met by the Central Bank through its monetary policy. The Central Bank of Brazil implemented a tight monetary policy in order to keep inflation under
control. Nevertheless, the possibility of a left-wing president victory in 2002, scared out
investors, triggering Brazils currency devaluation, which in only six months dropped 80.0% against
the U.S. Dollar. Inflation, already in two digits, spike higher.
The currency devaluation in 2002 boosted the country exports and helped an economic recovery
in the fourth quarter of 2003. In 2004, Brazil capitalized on international growth, depreciated
Brazilian currency and higher commodities prices, to grow 5.7%, according to the IBGE Brazilian
Institute of Geography and Statistics (a governmental institution), helping income and employment
to recover from its worst figures in years. In 2005, a corruption scandal followed by a major
political crises halted economic growth, and Brazil GDP increased 3.2%, below all expectations. In
2006, albeit massive government spending, decreasing nominal interest rates and controlled
inflation, amounting taxes and social contributions, as well as deep-rooted bureaucracy, diminished
Brazils GDP, which increased 3.8%.
In 2007, internal market consumption growth and investments in gross fixed capital formation
expanded Brazils GDP to 5.4%.
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Year Ended December 31 | ||||||||||||||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||||||||
% | % | % | % | % | % | % | % | |||||||||||||||||||||||||
GDP 1 |
-0.2 | 4.5 | 5.4 | 3.8 | 3.2 | 5.7 | 1.1 | 2.7 | ||||||||||||||||||||||||
Inflation 2 |
4.1 | 6.5 | 4.5 | 3.1 | 5.7 | 7.6 | 9.3 | 12.5 | ||||||||||||||||||||||||
Interest Rates 3 |
8.75 | 12.75 | 11.2 | 13.2 | 18.1 | 17.8 | 16.3 | 24.9 | ||||||||||||||||||||||||
Exchange Rates(4) |
-25.5 | 31.9 | 17.2 | 8.7 | 11.8 | 8.1 | 18.2 | -52.3 |
(1) | IBGE | |
(2) | IPCA | |
(3) | SELIC | |
(4) | (Devaluation)/Revaluation of the Brazilian currency along the year (31/12 vs. 01/01) against US $. |
The September 2008 crisis had a rather strong impact in Brazilian economy in 2009, mainly
concerning the industrial production and exports of industrial goods. However, the effect of such
economic crisis was largely mitigated by the high level of Central Banks reserves, the good health
of Brazilian banking system and international clients in the food market that avoided a deep crisis
in export transactions. The Brazilian fast food and restaurant industries were affected in
metropolitan areas as São Paulo in the first half of the year and it started a sustained recovery
in the second half of 2009. The slower activity in the first half of 2009 motivated some measures
as reduction of expenses and slower expansion programs and they resulted in successful figures
towards the end of the year, achieving the 10th biggest fast food group in Latin America as
highlighted by a public inquiry developed in Mexico.
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OUR BUSINESS
We, through our holding company in Brazil, BFFC do Brasil (formerly 22N Participações Ltda.),
are the second largest fast food chain in Brazil.
During 1996, the Company acquired 100.0% of the capital of Venbo Comercio de Alimentos Ltda.
(Venbo), a Brazilian limited liability company which operates, directly and through franchisees,
a chain of hamburger fast food restaurants in Brazil under the trade name Bobs.
In December, 2006, the Company started an expansion of its activities by developing a
multi-brand program of its fast-food chain and set up BFFC do Brasil (formerly 22N Participações
Ltda), via the capital contribution of the equity interest it held in Venbo. BFFC do Brasil has
been established with the purpose to be the Companys holding enterprise in Brazil.
In 2007, the Company, through BFFC do Brasil, signed agreements with Yum!, through which BFFC
acquired CFK (formerly Clematis Indústria e Comércio de Alimentos e Participações Ltda.), a
Brazilian limited liability company that conducts business under the trade name KFC (four stores
at that time) in Brazil. Also through such agreement, the Company became KFCs master franchisee in
this country, with the commitment of locally develop and expand KFC brand. At the end of 2009, the
Company was operating 11 stores in Rio de Janeiro State and one in São Paulo State.
In August 2008, the Company, also through its holding company in Brazil, signed another
agreement with Yum! and acquired 60% of Internacional Restaurantes do Brasil (IRB), a Brazilian
company which operates 14 Pizza Hut restaurants and 4 In Bocca al Lupo Café (a Coffee concept
brand) in the city of São Paulo. IRBs restaurants started operating as part of BFFC in the
beginning of December, 2008. Revenues and operating results of the café concept are still
integrated in IRBs financial statements of Pizza Hut operation. At the end of 2009, the Company
was operating 15 Pizza Hut stores in São Paulo State.
In October 2008, the Company signed an agreement with G.E.D. Sociedad Anonima, one of the
fast-food leaders in Chile, operating hot dog chain under the trade mark Doggis, with 150 stores in
that country. As per this agreement, the Company will develop own and franchised-operated hotdog
stores in Brazil and the shareholders of Doggis will develop Bobs stores in Chile. A master
franchise company was set up in each country (DGS Comércio de Alimentos S.A. (DGS in Brazil and
BBS S.A. (BBS) in Chile), 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
another two were open during the fourth quarter of 2009. During the fourth quarter of 2009 BBS
opened its first three stores in Chile.
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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 Company is also present, through Bobs franchisees, in
Angola, Africa, and in Chile, South America. 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 percent of sales.
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RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(Amounts in Brazilian Reais, unless otherwise stated)
COMPARISON OF YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(Amounts in Brazilian Reais, unless otherwise stated)
The following table sets forth statement of operations for the periods of twelve months ended
December 31, 2009, 2008 and 2007. 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 the Net revenues from own-operated
restaurants and Net Franchise Revenues, respectively.
12 Months | 12 Months | 12 Months | ||||||||||||||||||||||
Ended | Ended | Ended | ||||||||||||||||||||||
R$000 | 31-Dec-09 | % | 31-Dec-08 | % | 31-Dec-07 | % | ||||||||||||||||||
REVENUES |
||||||||||||||||||||||||
Net Revenues from Own-operated Restaurants |
R$ | 146,875 | 79.4 | % | R$ | 90,122 | 73.1 | % | R$ | 85,904 | 75.1 | % | ||||||||||||
Net Revenues from Franchisees |
24,647 | 13.3 | % | 22,427 | 18.2 | % | 18,811 | 16.4 | % | |||||||||||||||
Revenues from Supply Agreements |
10,270 | 5.6 | % | 8,317 | 6.7 | % | 6,673 | 5.8 | % | |||||||||||||||
Other Income |
3,098 | 1.7 | % | 2,499 | 2.0 | % | 3,056 | 2.7 | % | |||||||||||||||
TOTAL REVENUES |
184,890 | 100.0 | % | 123,365 | 100.0 | % | 114,444 | 100.0 | % | |||||||||||||||
OPERATING COST AND EXPENSES |
||||||||||||||||||||||||
Store Costs and Expenses |
(135,715 | ) | -73.4 | % | (89,729 | ) | -72.7 | % | (83,349 | ) | -72.8 | % | ||||||||||||
Franchise Costs and Expenses |
(8,619 | ) | -4.7 | % | (6,207 | ) | -5.0 | % | (3,623 | ) | -3.2 | % | ||||||||||||
Marketing Expenses |
(4,092 | ) | -2.2 | % | (1,053 | ) | -0.9 | % | (2,082 | ) | -1.8 | % | ||||||||||||
Administrative Expenses |
(21,298 | ) | -11.5 | % | (17,442 | ) | -14.1 | % | (13,430 | ) | -11.7 | % | ||||||||||||
Other Operating Expenses |
(4,397 | ) | -2.4 | % | (2,876 | ) | -2.3 | % | (2,945 | ) | -2.6 | % | ||||||||||||
Net result of assets sold |
1,225 | 0.7 | % | (205 | ) | -0.2 | % | 842 | 0.7 | % | ||||||||||||||
TOTAL OPERATING COST AND EXPENSES |
(172,896 | ) | -93.5 | % | (117,512 | ) | -95.3 | % | (104,587 | ) | -91.4 | % | ||||||||||||
OPERATING INCOME |
11,994 | 6.5 | % | 5,853 | 4.7 | % | 9,857 | 8.6 | % | |||||||||||||||
Interest Expense, net |
(4,882 | ) | -2.6 | % | (9,677 | ) | -7.8 | % | (697 | ) | -0.6 | % | ||||||||||||
NET INCOME (LOSS) BEFORE INCOME TAX |
7,112 | 3.8 | % | (3,824 | ) | -3.1 | % | 9,160 | 8.0 | % | ||||||||||||||
Income taxes deferred |
| 0.0 | % | 311 | 0.3 | % | 4,343 | 3.8 | % | |||||||||||||||
Income taxes current |
(36 | ) | 0.0 | % | (746 | ) | -0.6 | % | (46 | ) | 0.0 | % | ||||||||||||
NET INCOME (LOSS) BEFORE NON-CONTROLLING INTEREST |
7,076 | (4,259 | ) | 13,457 | 0.0 | % | ||||||||||||||||||
Net (income) loss attributable to non-controlling interest |
(180 | ) | -0.1 | % | 317 | | 0.0 | % | ||||||||||||||||
NET INCOME (LOSS) ATTRIBUTABLE TO BRAZIL FAST FOOD CORP. |
6,896 | 4.7 | % | (3,942 | ) | -4.4 | % | 13,457 | 15.7 | % | ||||||||||||||
The Companys results of operations include the accounts of CFK subsequent to April 1,
2007, the accounts of IRB subsequent to December 1, 2008 and the accounts of DGS subsequent to
September 1, 2009.
Introduction
The world economic crisis during the last quarter of 2008 derived a negatively impact at the
economical environment in Brazil at the first semester of 2009. Although its consequences in Brazil
were minor as contrasted to other countries, the local retail market was impacted and investors
reduced their appetite at franchise ventures during this period.
In the second semester of 2009 the local markets faced a constant improvement, the purchase
power increased and, as a consequence, revenues raised and returned to 2008 levels.
30
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Bobs and Pizza Hut managed to increase same-store sales during 2009 and KFC, although
decreased such figures, had improvements on the operating margins.
A great effort was performed in the own-operated with slight progress of the main store
indicators such as gross margin and personnel turnover.
The number of Bobs franchised stores increased in a lower grade in comparison of previous
years. However, the brand expansion in the countryside is providing the Company valuable spaces
and blocking competitors.
The expansion of the own-stores continued with the opening of a relevant Pizza Hut store in
São Paulo, Brazil, three KFC stores and three first stores under the brand Doggis.
Net Revenues from Own-Operated Restaurants
Net restaurant sales for our company-owned retail outlets increased R$56.7 million or 63% to
R$146.8 million for the year ended December 31, 2009 as compared to R$90.1 million and R$85.9
million for the years ended December 31, 2008 and 2007, respectively.
Under the criteria of same store sales, which only includes stores that have been opened for
more than one year, net restaurant sales increased approximately 4.7% (Bobs brand) and 0.9% (KFC
brand) for the twelve months ended December 31, 2009 as compared to the twelve months ended
December 30, 2008.
Overall restaurant sales increased due to the economic issues discussed above and to the Pizza
Hut operation which brought 15 new points of sales, with additional restaurant revenues of
approximately R$48.7 million. In addition, there was an increase of point of sales from 69 (62
Bobs brand and 7 KFCs brand) at December 31, 2008 to 71 (59 Bobs brand and 12 KFC brand) at
December 31, 2009. The increase of KFC stores also brought a greater average ticket to restaurant
revenues.
Also, intensive marketing campaigns including some of products with greater added value both
at Bobs and KFC, joined to new incentives to store personnel, impacted positively 2009 restaurant
sales.
The increase of Revenues from 2007 to 2008 is attributable to (i) increases of KFC brand sales
due to a better operation at the stores; (ii) the growth of Bobs and KFCs point of sales; and
(iii) the consolidation of one month (December, 2008) of IRB revenues (Pizza Hut sales of R$4.3
million).
Net Franchise Revenues
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:
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12 months ended December, 31 | ||||||||||||
R$000 | 2009 | 2008 | 2007 | |||||||||
Net Franchise Royalty Fees |
22,714 | 19,803 | 16,205 | |||||||||
Initial Fee |
1,933 | 2,624 | 2,606 | |||||||||
Net Franchise Revenues |
24,647 | 22.427 | 18,811 | |||||||||
Net franchise revenues increased R$2.2 million or 9.9% to R$24.6 million for the year ended
December 31, 2009, as compared to R$22.4 million and R$18.8 million for the years ended December
31, 2008 and 2007, respectively. These increases are mainly attributable to the growth of our
Bobs brands franchise operations from 522 points of sale as of December 31, 2007 to 580 as of
December 31, 2008 to 622 as of December 31, 2009.
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 note 2 of the financial statements.
Revenue from Supply Agreements and Other Income
The Company negotiates with beverage and food suppliers, and for each
product negotiates a monthly performance bonus which will depend on the product sales
volume to its chains. The performance bonus, or vendor bonuses, can be paid monthly or in advance (estimated),
depending on the Companys financial decision. Income from performance bonus is only possible
because the number of restaurants that operate throughout Brazil under the prestigious brands,
especially Bobs, franchised by the Company represents an excellent channel for suppliers to
increase their sales. Monthly, the Company assesses each product purchase volume by its chains
and calculates the performance bonus to receive from each contract. Performance bonus is
normally received in cash and rarely in products.
The income related to performance bonus when received in cash is straight recognized as a
credit in the Companys income statement under other income (in the past when not relevant),
revenue from supply agreements and the revenues from trade partners.
The income related to performance bonus when received in products is recognized as cost
reduction. However, because not material they do not demand a value entry in the general
ledger. Instead, they are recorded as an entry in the auxiliary inventory ledger, reducing the
average cost of the inventory. The impact on the income statement occurs only when these
products are sold in the stores.
The main reason for the difference in accounting is that pursuant to GAAP, performance bonus received in products
represents a tangible gain that can only be earned if sold in the Company stores, while that
performance bonus received in cash can fund any transactions of the Company (e.g. capital
expenditure, administrative expenses, franchise expenses, etc).
When received in advance, the Company records an entry in the Banks account with counterpart
in deferred income (in the liabilities section of the Balance Sheet). Monthly, the proportional
amount is transferred to the income statement, e.g., when one year bonus is advanced, the total
amount received is divided by 12, and monthly 1/12 is credited in the income statement.
Exclusivity agreements also include performance bonuses, which are normally paid in advance by
suppliers.
Other
income is mainly comprised of lease of Companys properties and nonrecurring gains.
Store Costs and Expenses
As a percentage of Total revenues, Store costs and expenses were (73.4%), (72.7%) and (72.8%)
for the years ended December 31, 2009, 2008 and 2007, respectively.
Analyzing as a segment (own-stores operations), Store cost and expenses had the following
evolution towards Net revenues from own-operated restaurants:
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12 Months | 12 Months | 12 Months | ||||||||||||||||||||||
Ended | Ended | Ended | ||||||||||||||||||||||
R$000 | 31-Dec-09 | % | 31-Dec-08 | % | 31-Dec-07 | |||||||||||||||||||
STORE RESULTS |
||||||||||||||||||||||||
Net Revenues from Own-operated Restaurants |
146,875 | 100.0 | % | 90,122 | 100.0 | % | 85,904 | 100.0 | % | |||||||||||||||
Store Costs and Expenses
|
||||||||||||||||||||||||
Food, Beverage and Packaging |
(51,720 | ) | -35.2 | % | (34,578 | ) | -38.4 | % | (31,334 | ) | -36.5 | % | ||||||||||||
Payroll & Related Benefits |
(33,787 | ) | -23.0 | % | (24,939 | ) | -27.7 | % | (22,807 | ) | -26.5 | % | ||||||||||||
Restaurant Occupancy |
(15,446 | ) | -10.5 | % | (10,236 | ) | -11.4 | % | (10,107 | ) | -11.8 | % | ||||||||||||
Contracted Services |
(16,768 | ) | -11.4 | % | (10,036 | ) | -11.1 | % | (11,681 | ) | -13.6 | % | ||||||||||||
Depreciation and Amortization |
(5,138 | ) | -3.5 | % | (2,819 | ) | -3.1 | % | (2,416 | ) | -2.8 | % | ||||||||||||
Royalties Charged |
(3,537 | ) | -2.4 | % | (271 | ) | -0.3 | % | | 0.0 | % | |||||||||||||
Other Store Costs and Expenses |
(9,319 | ) | -6.3 | % | (6,850 | ) | -7.6 | % | (5,004 | ) | -5.8 | % | ||||||||||||
Total Store Costs and Expenses |
(135,715 | ) | -92.4 | % | (89,729 | ) | -99.6 | % | (83,349 | ) | -97.0 | % | ||||||||||||
STORE OPERATING INCOME |
11,160 | 7.6 | % | 393 | 0.4 | % | 2,555 | 3.0 | % | |||||||||||||||
Food, Beverage and Packaging Costs
The overall decrease of percentage is mainly due to better gross margin operated by Pizza Hut
restaurants. In addition, Bobs and KFC gross margins were also positively impacted by promotion
campaigns that focused products with the greatest value from the brands menu.
Concerning Bobs brand, the cost of food, beverage and packaging was impacted by increases of
the purchase price of products such as soft drinks, ice cream and packaging, and by decreases of
purchase price of products such as meat and chicken hamburger.
Regarding KFCs brand the cost of food, beverage and packaging was also impacted by increases
of the purchase price of most of its raw materials: packaging, chicken, French fries and soft
drinks.
The percentage increase of cost of food, beverage and packaging during 2008 was due to
increases of the purchase price of all main products: bread, meat and chicken hamburger, French
fries, ice cream and soft drinks. The reduction of costs related to logistics and distribution of
our main raw materials partially offset the cost increases.
Payroll & Related Benefits
Payroll & Related Benefits decreases as a percentage of Net Revenues from Own-Operated
Restaurants are mainly due to reduction of the work force at Bobs outlets and to turn over
reduction both at KFC and Bobs brands, as well as the implementation of manage control techniques
such as line bar and floor plan. The Company is still seeking HR policies and motivational
campaigns in order to even reduce turnover indicators. Such decrease was partially offset by
increase in salaries at KFC and Bobs outlets and due to higher salaries paid at Pizza Huts
restaurants as compared to other Companys brand.
Payroll & Related Benefits increase during 2008 is mainly attributable to raises of Companys
store personnel salaries of approximately 5.85% provided by union-driven agreements (which also
derived higher social charges that are computed based on employees salaries). Such increase was
partially offset by the reduction of temporary workforce and reduction on personnel transportation
costs.
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Restaurant Occupancy Costs
Restaurant occupancy costs decrease as a percentage of Net Revenues from Own-Operated
Restaurants is mainly due to reduction of rent costs on renewals as well as lower cost
negotiated on recently open KFC outlets. In addition, there was reduction on store rents derived
from contracted annual restatements according to Brazilian inflation measured by the IGP-M index,
which was negative during 2009 (annual deflation of 1.72%).
Contracted Services
The increase observed during the year of 2009 is mainly attributable to increases of security
costs, as well as maintenance costs. In addition, the increase is also attributable to consulting
services related to assessing and improving store procedures, client treatment, store cleaning etc.
This increase was partially offset by the reduction of utilities costs.
The decrease from 2007 to 2008 is mainly attributable to reduction in the costs of utilities
and reductions of contracted services as maintenance, security, money collection and call center.
On the other hand, increases of water and gas consumption costs and cleaning material partially
offset the overall decrease.
Depreciation and Amortization
The increases in Depreciation and amortization during 2009 and 2008 are attributable to the
constant store equipment modernization and to stores remodeling.
Other Store Costs and Expenses
Other store cost and expenses as a percentage of Net Revenues from Own-Operated Restaurants
decrease during 2009 is attributable to reductions on transportation and on consumption material
costs.
The increase during 2008 is mainly attributable to the increase of costs related to cleaning,
office and consumption material.
Franchise Costs and Expenses
As a percentage of Total Revenues, Franchise costs and expenses were (4.7%), (5.0%) and (3.2%)
for the years ended December 31, 2009, 2008 and 2007, respectively.
Analyzing as a segment (franchise operations), Franchise costs and expenses had the following
evolution towards Net Franchise revenues:
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12 Months | 12 Months | 12 Months | ||||||||||||||||||||||
Ended | Ended | Ended | ||||||||||||||||||||||
R$000 | 31-Dec-09 | % | 31-Dec-08 | % | 31-Dec-07 | % | ||||||||||||||||||
FRANCHISE RESULTS |
||||||||||||||||||||||||
Net Revenues from Franchisees |
24,647 | 100.0 | % | 22,427 | 100.0 | % | 18,811 | 100.0 | % | |||||||||||||||
Franchise Costs and Expenses |
(8,619 | ) | -35.0 | % | (6,207 | ) | -27.7 | % | (3,623 | ) | -19.3 | % | ||||||||||||
FRANCHISE OPERATING INCOME |
16,028 | 65.0 | % | 16,220 | 72.3 | % | 15,188 | 80.7 | % | |||||||||||||||
Cost and expenses increases are attributable to the constant 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.
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Marketing, General and Administrative and Other Expenses
Marketing expenses
Bobs Brand
According to our franchise agreements, Bobs marketing fund we have dedicated to
advertising and promotion is comprised of financial contributions paid by the franchisees
and also by the contributions due by the Company. The fund resources are administrated by
the Company and must be used in the common interest of Bobs chain, through the best
marketing department efforts, to increase its restaurant sales.
Therefore, the marketing contribution from franchisees, are recorded on accrual basis, in
the assets as accounts receivables and cross entry in the liabilities as marketing fund.
The contributions due by Venbo are recorded on accrual basis, as marketing expenses and
cross entry in liabilities as marketing fund.
In general, Bobs franchisees monthly contribute with 4.0% of their monthly gross sales to
Bobs marketing fund, and since 2006, the Company is also committed to contribute with 4.0%
of its own-operated restaurant monthly gross sales (sales derived from special events are
not subject to such contribution). These contributions can be deducted by the Companys
marketing department expenses, if previously agreed with the Companys franchisees.
However, the total of marketing investments may be greater than 4.0% of combined sales, if
there is any supplier additional contribution (joint marketing programs) or if the Company
use additional own cash on marketing advertising and promotion.
The Company primarily invests Bobs marketing fund resources on nationwide advertising
programs (commercials or sponsorship on TV, radio and outdoors). The Companys franchisees
may also directly invest in advertising and promotions for their own stores, upon previous
consent from the Company, which freely decides whether the cost of such single
advertisement or promotion could be deducted from the marketing contribution owed.
The Bobs marketing fund resources are not required to be invested during the same month or
year that they were received, but they must be used in subsequent periods.
Periodically, the Company meets Bobs Franchisee Council to demonstrate the marketing fund
accounts, through a report similar to a statement of cash flows. This statement discloses
the marketing contributions received and the marketing expenses, both in cash basis. To
provide absolute transparency and comply with the Companys franchisees request, all
accounts included in the Marketing Fund are revised by independent auditors.
The balance of eventual non-invested marketing fund is recorded as accounts payable accrued
expenses at the balance sheet. This balance represents contributions made by Venbo and by the
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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 marketing fund expenses on advertising and promotions are recognized as incurred. Total
marketing investments financed by the marketing fund amounted R$19.3 million,
R$20.3 million and R$19.4 million for the years ended December 31, 2009, 2008 and 2007,
respectively.
KFC and Pizza Hut Brands
The Company monthly contributes with 0.5% of KFC and Pizza Hut monthly net sales to a
marketing fund managed 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 and amounted R$3.6 million and R$3.4 million for the years ended December 31, 2009
and 2008, respectively.
Doggis
The Company is committed to invest at least 4% of Doggis restaurant sales in local
marketing expenses. There is no contribution to a marketing fund.
Local marketing expenses on Doggis advertising and promotions are recognized as
incurred and amounted R$0.2 million for its four month period of operations during 2009.
As a percentage of total revenues, marketing department expenses were approximately (2.2%),
(0.9%) and (1.8%) for the twelve months ended December 31, 2009, 2008 and 2007, respectively.
Administrative Expenses
This decrease during 2009 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.
The increase during 2008 is attributable to increase in salaries of the administrative
personnel and information technology improvements, mainly due to the expansion of KFC`s chain), as
well as new programs launched to motivate a differentiated service in Bobs chain stores, through
several new operational processes.
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Other Operating Expenses
Other operating expenses are mainly comprised of uncollectible receivables, depreciation,
preopening and non recurring expenses. The following table sets forth the breakdown of Other
Operating Expenses:
December 31, | ||||||||||||
R$000 | 2009 | 2008 | 2007 | |||||||||
Uncollectable receivables |
(502 | ) | (851 | ) | (1,288 | ) | ||||||
Reassessed tax and other tax adjustments |
187 | | 424 | |||||||||
Accruals for contingencies |
(443 | ) | | 215 | ||||||||
Depreciation of Headquarters fixed assets |
(805 | ) | (682 | ) | (833 | ) | ||||||
Professional fees for tax consulting |
| | (1,793 | ) | ||||||||
Preoperating and other (expenses) income |
(2,834 | ) | (1,343 | ) | 330 | |||||||
R$ | (4,397 | ) | R$ | (2,876 | ) | R$ | (2,945 | ) | ||||
The Company experienced higher preopening expenditures related to the expansion of KFC
point of sales during 2008 and 2009, and to the expansion of Pizza Hut during 2009, resulting in
increases of such expenses.
Impairment of Assets and Net Result of Assets Sold
The Company usually reviews its fixed assets in accordance with guidance on the impairment or
disposal of long-lived assets in the Property Plant and Equipment Topic of the FASB ASC, which
requires that long-lived assets being disposed of be measured at the lower of carrying amount or
fair value less cost to sell, whether reported in continuing operations or in discontinued
operations.
During the years ended December 31, 2007, 2008 and 2009, Companys review in accordance with
such guidance, derived no charge to the income statement.
INTEREST EXPENSES AND INCOME TAX
Interest Expenses, net
The increasing from 2007 to 2008 is due to burden by the loans agreement renegotiation within
UBS Pactual, (see note 8 of the consolidated financial statements), as well as, by the monetary
restatement and interest recalculation of Federal Taxes and Social Security penalities PAES (see
note 8 of the consolidated financial statements), in the amounts of R$6.7 million and R$2.8
million, respectively, and to higher interest rates in 2008.
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The
reduction of interest expenses from 2008 to 2009 is derived from
lower interest rates (average of 19.8% in 2008 contrasted with an
average of 16.7% in 2009) and
to renegotiation of loans.
INCOME TAXES
Venbo has substantial tax loss carryforward derived from its past negative operating results.
Usually, tax losses represent deferred tax assets. However, before the year 2006, the
Company used to record a valuation allowance that offset its total deferred tax assets, due
the uncertainty of Venbos future positive results and, as a consequence, doubtful taxable income.
As of December 31, 2006, Venbos business forecasts indicated taxable income for the subsequent 10
years.
Subsequently, at the end of years 2007 and 2008, Venbos business projections (performed
by independent consultants) also indicated positive results for the next 10 years. Therefore, the
Company gradually reduced its valuation allowance and increased the caption Deferred Income Tax
Assets in the balance sheet. Such adjustments derived positive and tax free impacts of R$0.3
million and R$4.3 million on the income statement of the years of 2008 and 2007, respectively.
During the year of 2009, although, the Companys forecasts still indicate that future
operating results will provide taxable income at Venbo and IRB, the review of its deferred income
taxes derived no adjustment to its operating results.
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LIQUIDITY AND CAPITAL RESOURCES
(Amounts in Brazilian Reais, unless otherwise stated)
(Amounts in Brazilian Reais, unless otherwise stated)
A) Introduction
Since March 1996, we have funded Companys cumulative operating losses of approximately R$39.9
million and made acquisitions of businesses and capital improvements (including remodeling of
Companys stores) by using cash remaining at the closing of Companys acquisition of Venbo, by
borrowing funds from various sources and from private placements of Companys securities. As of
December 31, 2009, we had cash on hand of R$13.3 million (which include investments funds of R$9.2
million) and a working capital deficit of R$9.4 million (working capital deficit of R$6.3 million
in 2008).
In the past, debts denominated in other currency than Brazilian Reais have increased with a
maxi devaluation of the Brazilian Real in the beginning of 1999. A sequence of years with reduced
sales, mainly due to a weak economic environment in Brazil, has worsened the situation and the
Company was not able to pay some of its obligations, including taxes. In the following years those
past due taxes were renegotiated with different levels of Brazilian Government and were parceled.
With the improvement of Brazilian economy since 2002, the Companys total revenues increased
and, joined to a capital injection of R$9.0 million, the Company started to reduce its liabilities
position. In 2003 the Company, reschedule a great portion of its debts to long term. Continued
improvement of sales conducted the Company to (i) drastically reduce its debts with financial
institutions during 2005; and (ii) extinguish those debts and reverse its financial position to
present time deposits with financial institutions at the end of 2006. The enhancement of
collection rate from Companys franchisees commencing in 2005 also strengthened Company current
assets. During 2007 and until the third quarter of 2008, the Company maintained this positive
scenario and 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,
these transactions brought the Company back into a state of negative working capital. The Company
believes that this is a temporary situation which involves no high risks since it would not be
difficult to obtain further revolving lines of credit in Brazil. Also, the current positive result
and future positive projections performed by the independent consultants above mentioned may invert
the situation in the next years.
For the year ended December 31, 2009, we had net cash provided by operating activities of
R$11.1 million (R$5.6 million in 2008), net cash used in investing activities of R$8.8 million
(R$18.1 million in 2008) and net cash provided by financing activities of R$0.5 million
(provided R$15.5 million in 2008). Net cash used in investing activities was primarily the result
of Companys investment in property and equipment to improve Companys retail operations, mainly
setting up new own-operated KFC and Pizza Hut stores. Net cash provided by financing activities was
mainly the result of borrowings from financial institutions to fund to IRB acquisition.
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The Company has also invested in the financial market approximately R$1.9 million,
re-purchasing 335,165 shares that, up to the end of the year of 2009, had considerably increased
their value according to the over the counter market where they are negotiated.
On February 28, 2008, the Companys Board of Directors met and discussed the intention to
payback to the Companys shareholders the amount of $0.05 per share as a one-time dividend.
Accordingly, the company paid dividend in the amount of R$0.7 million.
B) Debt Obligation financial institutions
As of December 31 2009, the Companys debt obligations with financial institutions were as
follows:
December 31, | ||||||||
R$000 | 2009 | 2008 | ||||||
Revolving lines of credit (a) |
R$ | 11,422 | R$ | 4,641 | ||||
Leasing facilities (b) |
1,373 | 3,257 | ||||||
Other loan (c) |
9,638 | 13,737 | ||||||
22,433 | 21,635 | |||||||
Less: current portion |
(13,829 | ) | (10,536 | ) | ||||
R$ | 8,604 | R$ | 11,099 | |||||
At December 31, 2009, future maturities of notes payable are as follows:
R$000 | ||||
2010 |
R$ | 13,829 | ||
2011 |
6,300 | |||
2012 |
2,304 | |||
R$ | 22,433 | |||
a) A portion of such debt obligation (R$6.0 million) is due on demand from two
Brazilian financial institutions with interest rates of approximately 20.0%p.y.
Another portion (R$5.4 million) is payable in different terms to two Brazilian
financial institutions. The first of them is payable in 24 installments of R$211,000
(ending on December, 2011), plus interests of 14.0%p.y. The second one is payable in
ten installments of R$30,000 (ending on October, 2010), plus interests of 16.7%p.y.
All debts of this category are collateralized by certain officers and receivables.
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(b) Comprised of various lease facilities with Brazilian private institutions
for the funding of store equipment; payable in a range from 4 to 22 monthly payments,
together with interests range from 14.3% p.y. to 23.4% p.y (ending on October, 2011).
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 12 to 36 monthly
installments (ending on December, 2012), averaging R$117,000, plus average interest
of 16.7%p.y. Loan is guaranteed by Companys financial funds.
C) Debt Obligation taxes
Since September 2002, the Company and its subsidiaries have been paying all its current
taxes on a timely basis. However, during 1999, 2001 and in the beginning of 2002, certain
Brazilian Federal taxes levied on Venbo were not paid.
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) in
order to renegotiate those debts.
The second amnesty program (PAES) included the balance of the previous federal tax
amnesty program (REFIS) and unpaid 2001 and 2002 federal tax, as well as the Social Security
penalties. The total debt included in such program is being paid in monthly installments, on
a timely basis, equivalent to 1.5% of the Companys gross sales, with interest accruing at
rates set by the Brazilian federal government, which currently are 6.0% per year (6.25% per
year in 2008).
During the period of twelve months ended December 31, 2009, the Company paid
approximately R$2.1 million (2.0 million in the same period of 2008) related to such
Brazilian federal tax amnesty program, including R$0.3 million (R$0.4 million in 2008) of
interests.
During 2008, the Brazilian Federal Government reviewed their records and detected that the
computation of PAES was incorrect for most of the companies which have adhered to such
program. At most cases, there was miscalculation of interest beard on debts of Brazilian
Social Security (INSS). During the last quarter of 2008, the Company adjusted its
liabilities in additional R$2.8 million in order to comply with such fiscal review.
In February 2005, the Company compared its remaining debt regarding PAES with statements
provided by the Brazilian Federal Government. Those statements reported that Companys total
debt would be greater than the figures in the Companys balance sheet, in the amount of
approximately R$3.2 million.
During March, 2005, the Company filed a formal request with the Brazilian Federal
Authorities, claiming to have its total debt reviewed. Such request, reconciled the amounts
the Company had accrued at its accounting books to the amounts reported in the official
statement at the same period.
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The Company believes that the amounts accrued at the balance sheet as of December 31, 2009,
total of R$13.0 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 December 31, 2009, the difference between such debt at the statements
provided by the Brazilian Federal Government and the statements reported by the Companys
was R$4.8 million (R$4.8 million in December 31, 2008).
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 receive different reduction of their fiscal debt.
The program rules are not already fully formalized by the Brazilian Fiscal Authorities.
However the Company has applied to it and expect to have its fiscal debt consolidated by the
end of the first semester of 2010.
Considering the current status of fiscal debts, we are required to pay restructured
past-due Brazilian federal taxes of approximately R$13.0 million (R$13.7 million in 2008),
of which, R$1.7 million we expect to pay during 2010.
D) Other Obligations
We have long-term contractual obligations in the form of operating lease obligations related
to our owned and operated outlets.
The future minimum lease payments under those obligations with an initial or remaining
non-cancelable lease terms in excess of one year at December 31, 2009 are as follows:
R$000
Contractual | ||||
Fiscal Year | Leases | |||
2010 |
6,914 | |||
2011 |
5,948 | |||
2012 |
2,660 | |||
2013 |
1,830 | |||
2014 |
1,469 | |||
Thereafter |
1,630 | |||
Total |
20,451 | |||
Rent expense was R$15.1 million for the year ended December 31, 2009 (R$14.5 million in
2008).
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Our capital expenditures for fiscal 2009 were approximately R$12.6 million (R$22.6 million
in 2008). We require capital primarily for the improvement of our owned and operated points
of sale. Currently, four of our owned and operated retail outlets are located in facilities
that we own and all of our other owned and operated retail outlets are located in leased
facilities.
In the past, we have generated cash and obtained financing sufficient to meet Companys debt
obligations. We plan to fund Companys current debt obligations mainly through cash provided
by Companys operations, borrowings and capital raising.
Our average cost to open a retail outlet is approximately R$200,000 to R$2,000,000 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 2010, which will
be used to maintain and upgrade our current restaurant network, provide new investments on
restaurant equipment, as well as expand KFC, Pizza Hut and Doggis chain in Brazil through
own-operated stores, will be of approximately R$12.8 million. During 2010, 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.
R$000
Contractual | ||||||||||||||||
Fiscal Year | Leases | Financial Debt | Fiscal Debt | Total | ||||||||||||
2010 |
6,914 | 13,829 | 1,676 | 22,419 | ||||||||||||
2011 |
5,948 | 6,300 | 1,134 | 13,382 | ||||||||||||
2012 |
2,660 | 2,304 | 1,134 | 6,098 | ||||||||||||
2013 |
1,830 | | 1,134 | 2,964 | ||||||||||||
2014 |
1,469 | | 1,134 | 2,603 | ||||||||||||
Thereafter |
1,630 | | 6,800 | 8,430 | ||||||||||||
Total |
20,451 | 22,433 | 13,012 | 55,896 | ||||||||||||
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 December 31, 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:
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- | the expansion of Companys franchisee base, which may be expected to generate additional cash flows from royalties and franchise initial fees without significant capital expenditures; | ||
- | the improvement of food preparation methods in all stores to increase the operational margin of the chain, including acquiring new stores equipment and hiring a consultancy firm for stores personnel training program; | ||
- | the continuing of motivational programs and menu expansions to meet consumer needs and wishes; | ||
- | the improvement and upgrade of our IT system | ||
- | the negotiation with suppliers in order to obtain significant agreements in long term supply contracts; and | ||
- | the renegotiation of past due receivables with franchisees. |
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Managements discussion and analysis of financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the U.S. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses as well as related disclosures. On an ongoing basis, we
evaluate our estimates and judgments based on historical experience and various other factors that
are believed to be reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
We annually review our financial reporting and disclosure practices and accounting policies to
ensure that they provide accurate and transparent information relative to the current economic and
business environment. We believe that of our significant accounting policies (See the Notes to
Consolidated Financial Statements or summary of significant accounting policies more fully
described in pages F-8 through F-37), 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 by guidance of FASB
ASC related to Foreign Currency Translation. 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.
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
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which may be unrecoverable and is based upon an analysis of the Companys prior collection
experience, customer credit worthiness, and current economic trends. After all attempts to collect
a receivable have failed, the receivable is written off against the allowance.
Long-Lived Assets
The Company adopted guidance on the impairment or disposal of long-lived assets in the
Property Plant and Equipment Topic of the FASB ASC, which requires that long-lived assets being
disposed of be measured at the lower of carrying amount or fair value less cost to sell, whether
reported in continuing operations or in discontinued operations.
If an indicator of impairment (e.g., negative operating cash flows for the most recent
trailing twelve-month period) exists for any grouping of assets, an estimate of undiscounted future
cash flows produced by each restaurant within the asset grouping is compared to its carrying value.
If any asset is determined to be impaired, the loss is measured by the excess of the carrying
amount of the asset over its fair value as determined by an estimate of discounted future cash
flows.
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 related to exclusivity agreements received from suppliers linked to exclusivity
agreements (see note 12b) are recorded as deferred income and are being recognized on a straight
line basis over the term of such agreements or the related supply agreement.
The income received from suppliers, related to performance bonus, is recognized when the
suppliers agree that the contracted performance has been reached. In case the performance bonus is
received in cash, it is recognized on income statement; in case they are received in products, it
is recognized as a cost reduction.
Marketing fund and expenses
Bobs Brand
According to our franchise agreements, Bobs marketing fund we have dedicated to advertising
and promotion is comprised of financial contributions paid by the franchisees and also by the
contributions due by the Company. The fund resources are administrated by the Company and must be
used in the common interest of Bobs chain, through the best marketing department efforts, to
increase its restaurant sales.
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Therefore, the marketing contribution from franchisees, are recorded on accrual basis, in the
assets as accounts receivables and cross entry in the liabilities as marketing fund. The
contributions due by Venbo are recorded on accrual basis, as marketing expenses and cross entry in
liabilities as marketing fund.
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 at least 4.0% of
its own-operated restaurant monthly gross sales (sales derived from special events are not subject
to such contribution). These contributions can be deducted by the Companys marketing department
expenses, if previously agreed with the Companys franchisees. However, the total of marketing
investments may be greater than 4.0% of combined sales, if there is any supplier additional
contribution (joint marketing programs) or if the Company use additional own cash on marketing
advertising and promotion. Currently, the company reached around of 10% of gross sales.
The Company primarily invests Bobs marketing fund resources on nationwide advertising programs
(commercials or sponsorship on TV, radio and outdoors). The Companys franchisees may also directly
invest in advertising and promotions for their own stores, upon previous consent from the Company,
which freely decides whether the cost of such single advertisement or promotion could be deducted
from the marketing contribution owed.
The Bobs marketing fund resources are not required to be invested during the same month or
year that they were received, but they must be used in subsequent periods.
Periodically, the Company meets Bobs Franchisee Council to demonstrate the marketing fund
accounts, through a report similar to a statement of cash flows. This statement discloses the
marketing contributions received and the marketing expenses, both in cash basis. To provide
absolute transparency and comply with the Companys franchisees request, all accounts included in
the Marketing Fund are revised by independent auditors.
The balance of eventual non-invested marketing fund is recorded as accounts payable accrued
expenses at the balance sheet. This balance represents contributions made by Venbo and by the
franchisees, but not used in campaigns yet, thus, these balances are, as agreed with the
franchisees chain, an obligation of Venbo on that date.
The marketing fund expenses on advertising and promotions are recognized as incurred.
KFC and Pizza Hut Brands
KFC and Pizza Hut brands have no Marketing Fund since they have no franchisees up to the end
of 2009.
However, the Company monthly contributes with 0.5% of KFC and Pizza Hut monthly net sales to
a marketing fund managed 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.
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The marketing expenses on KFC and Pizza Hut advertising and promotions are recognized as
incurred and amounted R$3.6 million and R$3.4 million for the years ended December 31, 2009 and
2008, respectively.
Doggis
The Company is committed to invest at least 4% of Doggis restaurant sales in local marketing
expenses. There is no contribution to a marketing fund.
Local marketing expenses on Doggis advertising and promotions are recognized as incurred and
amounted R$0.2 million for its four month period of operations during 2009.
Income taxes
The Company accounts for income taxes in accordance with guidance provided by the FASC ASC on
Accounting for Income Taxes. Under the asset and liability method of such guidance, 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.
Under the above referred guidance, the effect of a change in tax rates or deferred tax assets
and liabilities is recognized in income in the period that includes the enactment date.
Stock options
Since January, 2006, the Company adopted the guidance of FASB ASC on Share-Based Payment,
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 guidance on Share-Based Payment 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 most recent guidance. Results for prior periods have not been
restated.
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NEW ACCOUNTING STANDARDS
In 2006, the FASB issued guidance on accounting for uncertainty in income taxes, codified
primarily in the Income Taxes Topic of the FASB ASC . This guidance 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. This guidance also provides
guidance on derecognition, measurement, classification, interest and penalties, accounting in
interim periods, disclosure and transition. The provisions of this guidance establish the
cumulative effect of the change in accounting principle to be recorded as an adjustment to retained
earnings. The Company adopted guidance on accounting for uncertainty in income taxes effective
January 1, 2007, as required, however, its adoption did not derived material effects on the
Companys consolidated financial statements.
In April 2009, the FASB provided additional guidance for estimating fair value in accordance
with FASB ASC Fair Value Measurements and Disclosures when there is no active market or where the
price inputs being used represent distressed sales. This guidance reaffirms the objective of fair
value measurement, which is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction (that is, not a forced liquidation or distressed sale). It
also reaffirms the need to use judgment to determine if a formerly active market has become
inactive, as well as to determine fair values when markets have become inactive. This update to
FASB ASC Fair Value Measurements and Disclosures was effective prospectively for reporting
periods ending after June 15, 2009. The adoption of this update in the second quarter of 2009 did
not impact our consolidated financial position, results of operations, or cash flows.
Derivatives and Hedging We adopted the amendment to FASB ASC Derivatives and Hedging on
January 1, 2009. This amendment expands the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and related hedged items are
accounted for under FASB ASC Derivatives and Hedging, and (c) how derivative instruments and
related hedged items affect an entitys financial position, financial performance, and cash flows.
The adoption of this accounting standard on January 1, 2009 did not impact our consolidated
financial position, results of operations, or cash flows.
Interim Disclosures Fair Value of Financial Instruments We adopted the amendment to FASB
ASC Interim Disclosures about Fair Value of Financial Instruments in the second quarter of 2009.
This amendment requires the existing disclosure requirements related to the fair value of financial
instruments be extended to interim periods that were previously only required in annual financial
statements. The adoption of this accounting standard in the second quarter of 2009 did not impact
our consolidated financial position, results of operations, or cash flows.
Subsequent Events We adopted FASB ASC Subsequent Events in the second quarter of 2009.
This accounting standard establishes the accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are available to be issued.
It requires the disclosure of the date through which an entity has evaluated subsequent events and
the basis for that date; that is, whether that date represents the date the financial statements
were issued or were available to be
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issued. Consistent with the requirements of this accounting standard for public entities, we evaluate subsequent
events through the date the financial statements are issued. FASB ASC Subsequent Events should
not result in significant changes in the subsequent events that an entity reports, either through
recognition or disclosure, in its financial statements. The adoption of this accounting standard
in the second quarter of 2009 did not impact our consolidated financial position, results of
operations, or cash flows. The FASB amended this accounting guidance in March 2010, effective
immediately, to exclude public entities from the requirement to disclose the date on which
subsequent events have been evaluated. In addition, the amendment modified the requirement to
disclose the date on which subsequent events have been evaluated in reissued financial statements
to apply only to such statements that have been restated to correct an error or to apply U.S. GAAP
retrospectively. As a result of this amendment, we did not disclose the date through which we
evaluated subsequent events in this report on Form 10-K.
FASB Accounting Standards Codification In June 2009, the FASB issued FASB ASC The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.
The FASB Accounting Standards Codification has become the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in accordance with GAAP. All existing accounting standard documents are
superseded by the FASB ASC and any accounting literature not included in the FASB ASC will not be
authoritative. However, rules and interpretive releases of the SEC issued under the authority of
federal securities laws will continue to be sources of authoritative GAAP for SEC registrants.
This accounting standard is effective for interim and annual reporting periods ending after
September 15, 2009. Therefore, beginning with our third quarter 2009 report on Form 10-Q, all
references made to GAAP in our consolidated financial statements now reference the new FASB ASC.
This accounting standard does not change or alter existing GAAP and, therefore, did not impact our
consolidated financial position, results of operations, or cash flows.
In June 2009, the FASB issued changes on guidelines of consolidation of variable interest
entities. Such new guidelines determine when an entity that is insufficiently capitalized or not
controlled through voting interests should be consolidated. According to this recent accounting
pronouncement, the company has to determine whether it should provide consolidated reporting of an
entity based upon the entitys purpose and design and the parent companys ability to direct the
entitys actions. The guidance is to be adopted during 2010 fiscal year. The Company does not
expect adoption of this guidance to have a material impact on its consolidated financial
statements.
In January 2010, the FASB issued amendments to the existing fair value measurements and
disclosures guidance which requires new disclosures and clarifies existing disclosure requirements.
The purpose of these amendments is to provide a greater level of disaggregated information as well
as more disclosure around valuation techniques and inputs to fair value measurements. The guidance
is to be adopted during 2010 fiscal year. The Company does not expect adoption of this guidance to
have a material impact on its consolidated financial statements.
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OFF-BALANCE SHEET ARRANGEMENTS
We are not involved in any off-balance sheet arrangements.
ITEM7A. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
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
foreign exchange 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.
We had R$14.7 million of variable rate (CDI-based interest) debt outstanding at December 31,
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 December 31, 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index to Financial Statements that appears on page F-1 of this Annual
Report on Form 10-K. The Report of Independent Registered Public Accounting Firm, the Financial
Statements and the Notes of Financial Statements, listed in the Index to Financial Statements,
which appear beginning on page F-2 of this Annual Report on Form 10-K, are incorporated by
referenced into this Item 8.
On October 13, 2009, the Securities Exchange Commission SEC released, through Section 7606,
a temporary exemption for non-accelerated filers or small cap companies from including an
attestation report of their independent auditor on internal controls over financial reporting for
fiscal years ending before June 15, 2010. Such attestation report was previously required
pursuant to Section 404 of Sarbanes Oxley Act of 2002.
The Security Exchange Commission defines non-accelerated filer as the U.S. and foreign
companies that have public float (Market Capital) less than $75 million. Considering the market
value on June 30, 2009, December 31 2009 and January 31, 2010, BFFC is a Small Cap corporation, in
strict conformity with the average market price of shares and the number of shares outstanding on
those dates, as follows:
June 30, 2009: $29,570,515.23
December 31, 2009: $41,517,342.30
January 31, 2010: $40,670,049.60
Nevertheless, giving the expansion of our group and the growing complexity of our activities
in the multi-brand concept, the management decided to discuss below some actions and plans which
are in course aiming the improvement of internal controls.
1. | Our activities are essentially focused on the operation of our restaurants and on the revenues provided by our franchisees (in 2009 only Bobs chain). Concerning the restaurants (both own operated and operated by franchisees) the main controls of the food service for our clients are performed by the trained employees that operate the stores and by a computer software (Snack Control) that registers all transactions, food, currency and tax records. Along 2009, we decided to upgrade our information system used at our stores and we started the migration of Snack Control to another computer software (Degust), a modern software adapted to the present demands of the industry. The migration will be completed in 2010. Degust system is showing a much better performance and allows us to extend our up-grade of controls to our computerized Enterprise Resource Planning (ERP) used for our accounting books. This will be a rather long process that can go through 2010. Franchisees are also satisfied with Degust and this gives us other chances of automate their operation control, targeting a better process of royalties and marketing contribution collection. |
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2. | Our ERP system (Protheus), a software permanently up-dated by the supplier (TOTVS Informatics) was not fully used in its large possibilities, in part due to the weak performance of Snack Control. With the migration to Degust and new hardware, (gradually acquired for our stores along 2009 to support such new store computer system) the management decided to invest in a whole revision of the administrative, financial and fiscal processes. The new structures of the group and the new management organization designed and fixed at the beginning of 2009, forced new and quicker methods for reliably processing our operations. The management considers that the present processes and control methods are accurate enough to assure an efficient administration of our operation and the emission of trusty financial statements. Nonetheless, the company must be prepared for expansion, so the management contracted an independent consulting firm which is specialized in the study and projections of process techniques. The consultants developed in the last quarter of 2009 the first part of the project that is being finished in the first quarter of 2010. It will boost an important and gradual change in our administrative organization and methods, which will be in operation along the second semester. Up-grades of Protheus and the fitting of special tools to work with it are included in this program. | ||
3. | During the last quarter of 2009 we also prepared the company to outsource its accounting department. We contracted Mazars services, an international firm operating in Brazil and perfectly mastering local accounting and tax legislation, as well as US-GAAP. They started our accounting services in January 2010 but we devoted a whole quarter to assure the migration. Only IRB, our Pizza Hut subsidiary, has its accounting books prepared by ADDCONT, a Brazilian accounting firm that was in charge of these services at IRB for several years before our acquisition. | ||
4. | We prepared and strengthened our expansion services that will have an important role in the development of the franchise operation of KFC and Doggis chains. We improved our methods for selecting franchisees and for the selection of new points of sales. These procedures are the basis of our growing revenues in the next years and at the same time they have a great influence in the control of the franchise operation, with impacts in the brands image and in the income we will be able to get from this activity. | ||
5. | No processes can be performing without a tough training of the people that will use and manage them. Thats why we started in the second half of 2009 a study that will be completed in the first semester of 2010, which will allow us to start up this year new methods and plans for training. We will improve and expand our Human Resources Department that will be in charge of this program. |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of December 31, 2009, the end of the period covered by this Annual Report on Form 10-K, an
evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules
13(a)-15(e) and 15(d)-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) was performed under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer. Our disclosure controls and
procedures are designed to ensure that information required to be disclosed by us in the reports
that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commissions rules and forms, and
(ii) accumulated and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Based upon the foregoing evaluation as of December 31, 2009, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures were effective and
operating as of December 31, 2009, to provide reasonable assurance that information required to be
disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the rules and forms of the SEC, and
to provide reasonable assurance that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13(a)-15(f). Under the
supervision and with the participation of our management, including our Chief Executive Officer and
Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
Our internal control over financial reporting includes policies and procedures that (1)
pertain to maintenance of records that, in reasonable detail, accurately and fairly reflect
transactions and dispositions of assets; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures are being made only in
accordance with authorizations of our management and board of directors; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of assets that could have a material effect on the financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements and, even when determined to be effective, can only
provide reasonable, not absolute, assurance with respect to financial statement preparation and
presentation. Projections of any evaluation of effectiveness to future periods are subject to risk
that controls may become inadequate as a result of changes in conditions or deterioration in the
degree of compliance.
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Management understands that the set of internal controls applicable to restaurant operations
provides us reasonable trust on their performance, aligned with the best practices observed in the
Brazilian food service market. Central support to stores is improving along the years adapting
the best systems and methods that local suppliers offer for these activities in Brazil. At the same
time our management has concluded that our internal control over financial reporting was effective
as of December 31, 2009 and provides reasonable assurance regarding the reliability of financial
reporting and for the preparation of financial statements for external reporting purposes in
accordance with generally accepted accounting principles. The results of managements assessments
were reviewed with the Audit Committee of our Board of directors. Management believes that the
improvements we are pursuing through the implementation of the business process redesign project
will comply with Sarbanes Oxley 404 rule, in order to be able to report according to this
regulation when the market cap threshold will be achieved.
This annual report does not include an attestation report of our registered public accounting
firm regarding our internal control over financial reporting. Managements report on internal
control over financial reporting was not subject to attestation by our registered public accounting
firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company
to provide only managements report in this annual report.
Changes in Internal Control over Financial Reporting
During the year ended December 31, 2009, there were no changes in our internal
control over financial reporting that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting, except for the matters mentioned above.
ITEM 9B. OTHER INFORMATION
Unregistered Sales of Equity Securities and Use of Proceeds
(c) During the twelve months ended December 2009, the Company purchased a total of 45,955
shares of its common stock at a total cost of R$0.3 million.
Quarterly increments of such purchase are as follows:
2009 | ||||||||
#of shares | US$000 | |||||||
1st quarter |
15,445 | 52 | ||||||
2nd quarter |
23,470 | 73 | ||||||
3rd quarter |
4,540 | 16 | ||||||
4th quarter |
2,500 | 14 | ||||||
45,955 | 155 | |||||||
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The items required by Part III, Item 10 are incorporated herein by reference from the
Registrants Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed on or before
April 30, 2010.
ITEM 11. EXECUTIVE COMPENSATION
The items required by Part III, Item 10 are incorporated herein by reference from the
Registrants Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed on or before
April 30, 2010.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The items required by Part III, Item 10 are incorporated herein by reference from the
Registrants Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed on or before
April 30, 2010.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The items required by Part III, Item 10 are incorporated herein by reference from the
Registrants Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed on or before
April 30, 2010.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The items required by Part III, Item 10 are incorporated herein by reference from the
Registrants Proxy Statement for its 2010 Annual Meeting of Shareholders to be filed on or before
April 30, 2010.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Financial Statement Schedules:
(i) Financial Statements filed as a part of this Annual Report are listed on the Index to
Financial Statements at page F-1 herein.
(ii) Financial Statement Schedules
(b) Reports on Form 8-K
None.
(c) Exhibits
The following exhibits are required to be filed with this Report on Form 10-K by Item 601 of
Regulation S-K.
Exhibit No. | Description | |||
3.1 | Certificate of Incorporation of the Registrant, as amended (1) |
|||
3.2 | By-laws of the Registrant (2) |
|||
10.1 | Amended and Restated 1992 Stock Option Plan (2)) |
|||
21.1 | Subsidiaries of Registrant (3) |
|||
24.1 | Power of Attorney (comprises a portion of the signature page of this
report) |
|||
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 Section 906 of the Sarbanes-Oxley
Act of 2002 |
|||
* | Filed herewith. | |
(1) | Filed as an exhibit to Registrants Registration Statement on Form S-1 (File No. 333-3754). | |
(2) | Filed as an exhibit to Registrants Registration Statement on Form S-1 (File No. 33-71368). | |
(3) | Filed as an exhibit to Registrants Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 0-23278). |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment No. 1 to the Annual Report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Rio de Janeiro, Federative
Republic of Brazil, on the 11th
day of February, 2011.
BRAZIL FAST FOOD CORP. |
||||
By: | /s/ Ricardo Figueiredo Bomeny | |||
Ricardo Figueiredo Bomeny | ||||
President and Chief Executive Officer | ||||
By: | /s/ Ricardo Figueiredo Bomeny | |||
Ricardo Figueiredo Bomeny | ||||
Acting Chief Financial Officer | ||||
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints and hereby authorizes Ricardo Figueiredo Bomeny, severally, such persons true and lawful
attorneys-in-fact, with full power of substitution or resubstitution, for such person and in such
persons name, place and stead, in any and all capacities, to sign on such persons behalf,
individually and in each capacity stated below, any and all amendments, to this Annual Report, and
to file the same, with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact, full power and authority
to do and perform each and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact, or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Registration Statement
has been signed by the following persons in the capacities and on the dates indicated:
/s/ Ricardo Figueiredo Bomeny
|
Date: February 11, 2011 | |
Chief Executive Officer and Acting Chief Financial Officer |
||
/s/ Guillermo Hector Pisano
|
Date: February 11, 2011 | |
Chairman of the Board |
||
/s/ Gustavo Alberto Villela Filho
|
Date: February 11, 2011 | |
Director |
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/s/Alexandre Nunes
|
Date: February 11, 2011 | |
Director |
||
/s/ Marcos Rocha
|
Date: February 11, 2011 | |
Director |
||
/s/ Marcos Gouvêa
|
Date: February 11, 2011 | |
Director |
||
/s/ Lúcio Montanini
|
Date: February 11, 2011 | |
Director |
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BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Brazil Fast Food Corp.
Brazil Fast Food Corp.
Rio de Janeiro, RJ
We have audited the accompanying consolidated balance sheets of Brazil Fast Food Corp. as of
December 31, 2009 and 2008 and the related consolidated statements of income, stockholders equity,
and cash flows for each of the three years in the period ended December 31, 2009, 2008 and 2007.
These financial statements are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Brazil Fast Food Corp. at December 31, 2009 and 2008,
and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2009, 2008 and 2007, in conformity with accounting principles generally accepted
in the United States of America.
Rio de Janeiro, Brazil
March 31, 2010
March 31, 2010
/s/ BDO Auditores Independentes
F - 2
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BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of Brazilian Reais, except share amounts)
(In thousands of Brazilian Reais, except share amounts)
December 31, | ||||||||
2009 | 2008 | |||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents (note 3) |
R$ | 13,250 | R$ | 10,424 | ||||
Inventories |
3,762 | 2,970 | ||||||
Accounts receivable (note 4) |
10,342 | 10,741 | ||||||
Prepaid expenses |
3,132 | 2,419 | ||||||
Other current assets (note 5) |
3,323 | 2,642 | ||||||
TOTAL CURRENT ASSETS |
33,809 | 29,196 | ||||||
Property and equipment, net (note 6) |
35,003 | 31,104 | ||||||
Deferred charges, net (note 7) |
6,799 | 4,544 | ||||||
Deferred tax asset, net (note 11) |
13,597 | 13,688 | ||||||
Goodwill (note 2) |
799 | 2,895 | ||||||
Other receivables and other assets (note 5) |
10,948 | 7,716 | ||||||
TOTAL ASSETS |
R$ | 100,955 | R$ | 89,143 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Notes payable (note 8) |
R$ | 13,829 | R$ | 10,536 | ||||
Accounts payable and accrued expenses (note 9) |
16,275 | 14,383 | ||||||
Payroll and related accruals |
4,668 | 4,565 | ||||||
Income taxes accruals |
68 | 627 | ||||||
Taxes, other than income taxes |
3,575 | 1,765 | ||||||
Current portion of deferred income (note 12b) |
2,837 | 1,878 | ||||||
Current portion of contingencies and reassessed taxes (note 12c) |
1,676 | 1,677 | ||||||
Other current liabilities |
260 | 81 | ||||||
TOTAL CURRENT LIABILITIES |
43,188 | 35,512 | ||||||
Deferred income, less current portion (note 12b) |
4,076 | 4,836 | ||||||
Notes payable, less current portion (note 8) |
8,604 | 11,099 | ||||||
Contingencies and reassessed taxes, less |
||||||||
current portion (note 12c) |
18,803 | 18,210 | ||||||
TOTAL LIABILITIES |
74,671 | 69,657 | ||||||
EQUITY |
||||||||
SHAREHOLDERS EQUITY: |
||||||||
Preferred stock, $.01 par value, 5,000 shares authorized; no
shares issued |
| | ||||||
Common stock, $.0001 par value, 12,500,000 shares authorized; |
||||||||
8,472,927 and 8,437,927 shares issued; |
1 | 1 | ||||||
8,137,762 and 8,148,717 shares outstanding |
||||||||
Additional paid-in capital |
61,148 | 61,062 | ||||||
Treasury Stock (335,165 and 289,210 shares) |
(1,946 | ) | (1,601 | ) | ||||
Accumulated Deficit |
(33,021 | ) | (39,917 | ) | ||||
Accumulated comprehensive loss |
(1,077 | ) | (1,040 | ) | ||||
TOTAL SHAREHOLDERS EQUITY |
25,105 | 18,505 | ||||||
Non-Controlling Interest |
1,179 | 981 | ||||||
TOTAL EQUITY |
26,284 | 19,486 | ||||||
TOTAL LIABILITIES AND EQUITY |
R$ | 100,955 | R$ | 89,143 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(in thousands of Brazilian Reais, except share amounts)
(in thousands of Brazilian Reais, except share amounts)
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
REVENUES |
||||||||||||
Net Revenues from Own-operated Restaurants |
R$ | 146,875 | R$ | 90,122 | R$ | 85,904 | ||||||
Net Revenues from Franchisees |
24,647 | 22,427 | 18,811 | |||||||||
Revenues from Supply Agreements |
10,270 | 8,317 | 6,673 | |||||||||
Other Income |
3,098 | 2,499 | 3,056 | |||||||||
TOTAL REVENUES |
184,890 | 123,365 | 114,444 | |||||||||
OPERATING COST AND EXPENSES |
||||||||||||
Store Costs and Expenses (note 19) |
(135,715 | ) | (89,729 | ) | (83,349 | ) | ||||||
Franchise Costs and Expenses (note 19) |
(8,619 | ) | (6,207 | ) | (3,623 | ) | ||||||
Marketing Expenses |
(4,092 | ) | (1,053 | ) | (2,082 | ) | ||||||
Administrative Expenses (note 14) |
(21,298 | ) | (17,442 | ) | (13,430 | ) | ||||||
Other Operating Expenses (note 15) |
(4,397 | ) | (2,876 | ) | (2,945 | ) | ||||||
Net result of assets sold |
1,225 | (205 | ) | 842 | ||||||||
TOTAL OPERATING COST AND EXPENSES |
(172,896 | ) | (117,512 | ) | (104,587 | ) | ||||||
OPERATING INCOME |
11,994 | 5,853 | 9,857 | |||||||||
Interest Expense, net (note 16) |
(4,882 | ) | (9,677 | ) | (697 | ) | ||||||
NET INCOME (LOSS) BEFORE INCOME TAX |
7,112 | (3,824 | ) | 9,160 | ||||||||
Income taxes deferred (note 11) |
| 311 | 4,343 | |||||||||
Income taxes current (note 11) |
(36 | ) | (746 | ) | (46 | ) | ||||||
NET INCOME (LOSS) BEFORE NON-CONTROLLING INTEREST |
7,076 | (4,259 | ) | 13,457 | ||||||||
Net (income) loss attributable to non-controlling interest |
(180 | ) | 317 | | ||||||||
NET INCOME (LOSS) ATTRIBUTABLE TO BRAZIL FAST FOOD CORP. |
R$ | 6,896 | R$ | (3,942 | ) | R$ | 13,457 | |||||
NET INCOME LOSS PER COMMON SHARE BASIC AND DILUTED |
R$ | 0.85 | R$ | (0.48 | ) | R$ | 1.65 | |||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |
||||||||||||
BASIC AND DILUTED |
8,152,505 | 8,163,949 | 8,169,766 | |||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (AUDITED)
(In thousands of Brazilian Reais)
(In thousands of Brazilian Reais)
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Net Income (Loss) |
R$ | 6,896 | R$ | (3,942 | ) | R$ | 13,457 | |||||
Other comprehensive income (loss): |
||||||||||||
Foreign currency translation
adjustment |
(37 | ) | 74 | (134 | ) | |||||||
Comprehensive Income (loss) |
R$ | 6,859 | R$ | (3,868 | ) | R$ | 13,323 | |||||
The accompanying notes are an integral part of the consolidated financial statements.
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BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(In thousands of Brazilian Reais)
(In thousands of Brazilian Reais)
Additional | Accumulated | Total | Non- | |||||||||||||||||||||||||||||||||
Common Stock | Paid-In | Treasury | Accumulated | Comprehensive | Shareholders | Controlling | Total | |||||||||||||||||||||||||||||
Shares | Par Value | Capital | Stock | Deficit | Loss | Equity | Interest | Equity | ||||||||||||||||||||||||||||
Balance, December 31, 2006 |
8,182,242 | R$ | 1 | R$ | 60,818 | R$(808) | R$(48,753 | ) | R$(980) | R$ | 10,278 | R$ | | R$10,278 | ||||||||||||||||||||||
Exercise of options |
10,000 | | 35 | | | | 35 | | 35 | |||||||||||||||||||||||||||
Shares granted |
10,000 | | 135 | | | | 135 | | 135 | |||||||||||||||||||||||||||
Net Income |
| | | | 13,457 | | 13,457 | | 13,457 | |||||||||||||||||||||||||||
Acquisition of Companys own shares |
(24,555 | ) | | | (252 | ) | | | (252 | ) | | (252 | ) | |||||||||||||||||||||||
Cumulative translation adjustment |
| | | | | (134 | ) | (134 | ) | | (134 | ) | ||||||||||||||||||||||||
Balance, December 31, 2007 |
8,177,687 | R$ | 1 | R$ | 60,988 | R$(1,060 | ) | R$(35,296 | ) | R$(1,114 | ) | R$ | 23,519 | R$ | | R$ | 23,519 | |||||||||||||||||||
Exercise of options |
33,750 | | 74 | | | | 74 | | 74 | |||||||||||||||||||||||||||
Net Loss |
| | | | (3,942 | ) | | (3,942 | ) | (317 | ) | (4,259 | ) | |||||||||||||||||||||||
Acquisition of Companys own shares |
(62,720 | ) | | | (541 | ) | | | (541 | ) | | (541 | ) | |||||||||||||||||||||||
Non-Controling interest on IRB
Acquisition |
| | | | | | | 1,298 | 1,298 | |||||||||||||||||||||||||||
Paid dividend |
| | | | (679 | ) | | (679 | ) | | (679 | ) | ||||||||||||||||||||||||
Cumulative translation adjustment |
| | | | | 74 | 74 | | 74 | |||||||||||||||||||||||||||
Balance, December 31, 2008 |
8,148,717 | R$ | 1 | R$ | 61,062 | R$(1,601 | ) | R$(39,917 | ) | R$(1,040 | ) | R$ | 18,505 | R$ | 981 | R$ | 19,486 | |||||||||||||||||||
Exercise of options |
35,000 | | 86 | | | | 86 | 86 | ||||||||||||||||||||||||||||
Net income |
| | | | 6,896 | | 6,896 | 180 | 7,076 | |||||||||||||||||||||||||||
Acquisition of Companys own shares |
(45,955 | ) | | | (345 | ) | | | (345 | ) | (345 | ) | ||||||||||||||||||||||||
Non-Controling interest on Doggis |
| | | | | | | 18 | 18 | |||||||||||||||||||||||||||
Cumulative translation adjustment |
| | | | | (37 | ) | (37 | ) | (37 | ) | |||||||||||||||||||||||||
Balance, December 31, 2009 |
8,137,762 | R$ | 1 | R$ | 61,148 | R$(1,946 | ) | R$(33,021 | ) | R$(1,077 | ) | R$ | 25,105 | R$ | 1,179 | R$ | 26,284 | |||||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of Brazilian Reais)
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
CASH FLOW FROM OPERATING ACTIVITIES: |
||||||||||||
NET INCOME (LOSS) ATTRIBUTABLE TO BRAZIL FAST FOOD CORP. |
R$ | 6,896 | R$ | (3,942 | ) | R$ | 13,457 | |||||
Adjustments to reconcile net income to cash provided by
operating activities: |
||||||||||||
Depreciation and amortization |
5,943 | 3,501 | 3,249 | |||||||||
(Gain) Loss on assets sold and impairment of assets |
(1,225 | ) | 205 | (842 | ) | |||||||
Deferred income tax asset |
| (4,802 | ) | (4,343 | ) | |||||||
Non-controlling interest |
198 | 981 | | |||||||||
Changes in assets and liabilities: |
||||||||||||
(Increase) decrease in: |
||||||||||||
Accounts receivable |
399 | (2,124 | ) | (1,305 | ) | |||||||
Inventories |
(792 | ) | 308 | (1,091 | ) | |||||||
Prepaid expenses and other current assets |
(1,394 | ) | (1,393 | ) | (1,164 | ) | ||||||
Other assets |
(3,232 | ) | (1,871 | ) | (1,366 | ) | ||||||
(Decrease) increase in: |
||||||||||||
Accounts payable and accrued expenses |
1,892 | 7,777 | (4,108 | ) | ||||||||
Payroll and related accruals |
103 | 1,641 | 98 | |||||||||
Taxes |
1,342 | 1,323 | (242 | ) | ||||||||
Other liabilities |
771 | 2,897 | (2,593 | ) | ||||||||
Deferred income |
199 | 1,132 | 3,532 | |||||||||
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES |
11,100 | 5,633 | 3,282 | |||||||||
CASH FLOW FROM INVESTING ACTIVITIES: |
||||||||||||
Additions to property and equipment |
(12,605 | ) | (12,495 | ) | (6,039 | ) | ||||||
Investiment in subsidiaries acquired |
| (4,283 | ) | | ||||||||
Goodwill on acquisition |
| (2,895 | ) | | ||||||||
Goodwill remeasurement |
2,096 | | | |||||||||
Proceeds from sale of property, equipment and deferred charges |
1,733 | 1,527 | 1,537 | |||||||||
CASH FLOWS (USED IN) INVESTING ACTIVITIES |
(8,776 | ) | (18,146 | ) | (4,502 | ) | ||||||
CASH FLOW FROM FINANCING ACTIVITIES: |
||||||||||||
Net Borrowings (Repayments) under lines of credit |
798 | 2,927 | 4,971 | |||||||||
Loan contracted for acquisition of assets |
| 13,737 | | |||||||||
Acquisition of Companys own shares |
(345 | ) | (541 | ) | (252 | ) | ||||||
Dividend paid |
| (679 | ) | | ||||||||
Proceeds from exercise of stock options |
86 | 74 | 170 | |||||||||
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES |
539 | 15,518 | 4,889 | |||||||||
EFFECT OF FOREIGN EXCHANGE RATE |
(37 | ) | 74 | (134 | ) | |||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
2,826 | 3,079 | 3,535 | |||||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
10,424 | 7,345 | 3,810 | |||||||||
CASH AND CASH EQUIVALENTS AT END OF YEAR |
R$ | 13,250 | R$ | 10,424 | R$ | 7,345 | ||||||
See note 10 for supplementary cash flow information.
The accompanying notes are an integral part of the consolidated financial statements.
F - 7
Table of Contents
BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in Brazilian Reais, unless otherwise stated)
(in Brazilian Reais, unless otherwise stated)
1 | 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 100.0% of the capital of Venbo Comercio de Alimentos Ltda. (Venbo), a Brazilian limited liability company which conducts business under the trade name Bobs, owns and, directly and through franchisees, operates a chain of hamburger fast food restaurants in Brazil. | ||
On December 2006, the Company established a holding company, called BFFC do Brasil Participações Ltda. (BFFC do Brasil, formerly 22N Participações Ltda.), via the capital contribution of the equity interest it held in Venbo. After this restructuring, completed on December 31, 2006, all of the Companys businesses in Brazil are being consolidated through BFFC do Brasil, and Venbo started to be prepared to conduct its business through three primary divisions: fast food restaurants, franchises and real estate. The creation of BFFC do Brasil also marked the beginning of the Companys multi-brand program, discussed below: |
KFC |
During the first quarter of 2007, the Company reached an agreement with Yum! Brands, owner of the KFC brand. By this agreement, BFFC do Brasil started to conduct the operations of KFCs four directly owned and operated restaurants in Rio de Janeiro as a Yum! Brands franchisee. In order to operate the KFC brand in Brazil, the Company, through BFFC do Brasil, set up a new subsidiary, named CFK Comércio de Alimentos Ltda. (CFK, formerly Clematis Indústria e Comércio de Alimentos e Participações Ltda.), which is responsible for managing, developing and expanding KFCs chain in Brazil. CFK initiated 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). On that date, IRB operated 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. | |||
After such acquisition BFFC do Brasil begun to control and manage IRB. | |||
The remaining 40% of IRB is hold by another Brazilian company of which the current IRBs CEO is the main stockholder. Such IRB Officer has been operating the stores for the last years and has been responsible for raising the company that had gone through a long period of operating losses. | |||
The Company has undertaken a bank loan in order to fund such acquisition through the Companys subsidiary BFFC do Brasil within UBS Pactual (a Brazilian financial institution) in the total amount of R$9 million. |
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According to the purchase and sale agreement dated as of August 5, 2008, POGO Participações S.A. (POGO) is the buyer of IRBs capital stock. However, BFFC do Brasil paid the costs of acquisition (US$5.5 million) to RCI -Restaurants Connection International Inc (RCI) in behalf of POGO. At the moment of this payment, BFFC do Brasil accounted for a loan receivable (a portion as other current assets and another portion as other receivables and other assets) with POGO. BFFC intended to subsequently convert a portion of such loan into POGO capital stock. However, due to pending legal issues, only during the fourth quarter of 2008, BFFC do Brasil managed to convert US$2.0 million of such loan into 60% of IRBs capital stock. The other portion of the loan will be repaid considering the same terms as the loan between BFFC do Brasil and UBS Pactual, including the interest rates (see discussion on MD&A, at Liquidity and Capital Resources, B) Debt Obligation financial institutions). The legal closing date for the purchase occurred in December, 2008 when the acquirer obtained the control of the acquiree. | |||
Effective December 1, 2008, the Company paid for R$9 million for a 60% ownership interest in IRBs capital stock. The results of the operations have been included in the consolidated financial statements beginning at the acquisition date. | |||
During the first quarter of 2009, POGO, which owns 100% of IRBs Capital, was merged into IRB. | |||
During 2009, one new restaurant was open and, for 2010, two new restaurants will be open and a complete reform is foreseen to happen in one restaurant, also with adoption of a new brand image. |
Doggis |
During October 2008, the Company reached an agreement with G.E.D. Sociedad Anonima, one of the fast-food leaders in Chile, operating hot dog chain under the trade mark Doggis, with 150 stores in that country. As per such agreement, BFFC do Brasil will develop own and franchised hot-dog stores in Brazil and Doggis will develop Bobs brand stores in Chile. This business will be operated in a Master Franchise concept, with a company created in Brazil, DGS Comercio de Alimento S.A. (DGS), and another company in Chile, BBS S.A. (BBS). 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$4.0 million. The Company opened the first Doggis store in third quarter of 2009 and another two were open during the fourth quarter of 2009. During the fourth quarter of 2009 BBS opened its first three stores in Chile. The present Consolidated Financial Statement also includes DGS accounts. BBS 2009 results were recorded through the equity method, representing BFFCs share on such results. |
SUPRILOG |
During the second half of 2008 the Company started to operate a new Subsidiary, Suprilog Transportadora Ltda, which business is to support all the Companys subsidiaries with maintenance for restaurant and its equipments, including warehouses for spare parts, engineering and marketing materials. It may also be used for some particular re-sale activities of special products or raw-materials used in the stores operation. Although its financial figures are currently not material, they are being entirely consolidated on the present Financial Staments. |
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2 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
Generally Accepted Accounting Principles (GAAP) | ||
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). Such accounting principles differ in certain respects from accounting principles generally accepted in Brazil (Brazilian GAAP), which is applied by the Company for its annual consolidated financial statement preparation. Unless otherwise specified, all references in these financial statements to (i) reais, the real or R$ are to the Brazilian real (singular), or to the Brazilian reais (plural), the legal currency of Brazil, and (ii) U.S. dollars or $ are to United States dollars. | ||
Use of estimates | ||
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. | ||
Geographic area of operations | ||
The Company primarily operates, directly and through franchisees, point of sales in all Brazilian states (primarily in Rio de Janeiro and São Paulo). Besides the Brazilian operations, the Company is also present, through Bobs franchisees, in Angola, Africa, and in Chile, South America. These operations are not material to our overall results. The operation in Brazil is susceptible to changes in Brazilian economic, political, and social conditions. Brazil has experienced political, economic and social uncertainty in recent years, including an economic crisis characterized by exchange rate instability and Real devaluation, increased inflation, high domestic interest rates, negative economic growth, reduced consumer purchasing power and high unemployment. Under its current leadership, the Brazilian government has been pursuing economic stabilization policies, including the encouragement of foreign trade and investment and an exchange rate policy of free market flotation. Despite the current improvement of Brazilian economic environment, no assurance can be given that the Brazilian government will continue to pursue these policies, that these policies will be successful if pursued or that these policies will not be significantly altered. | ||
A decline in the Brazilian economy, political or social problems or a reversal of Brazils foreign investment policy is likely to have an adverse effect on the Companys results of operations and financial condition. Additionally, inflation in Brazil may lead to higher wages and salaries for employees and increase the cost of raw materials, which would adversely affect the Companys profitability. |
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Risks inherent in foreign operations include nationalization, war, terrorism and other political risks and risks of increases in foreign taxes or U.S. tax treatment of foreign taxes paid and the imposition of foreign government royalties and fees. | ||
Principles of consolidation | ||
The consolidated financial statements include the accounts of the Company and its (directly and indirectly) subsidiaries. | ||
The wholly-owned subsidiaries of the Company as of December 31, 2009 are BFFC do Brasil, Venbo, CFK and Suprilog. As discussed at note 1, the Company also own a 60% capital interest of IRB, 80% of DGS and 20% of BBS. | ||
IRBs and DGS accounts are entirely added to the present Consolidated Financial Statements and figures related to its non-controlling interests are stated both in the Companys equity (in the Consolidated Balance Sheets) and in the Consolidated Income Statements. | ||
The investment in BBS was accounted for as per the equity method. | ||
The Companys consolidated financial statements include the accounts of CFK and IRB subsequent to each acquisition, respectively April 1, 2007 and December 1, 2008, as well as DGS since the beginning of its operation (third quarter of 2009). | ||
All material intercompany accounts and transactions have been eliminated in consolidation. | ||
Goodwill | ||
Goodwill represents the excess of cost over the net tangible assets and identifiable intangible assets of acquired businesses. The Companys goodwill results from the acquisition of 60% of IRB. | ||
For the acquisition of a 60% of IRB to be recorded in the accounting books, the Companys management requested assistance from a consultant in obtaining the fair value assessment of IRBs fixed assets. The assistance included making a financial assessment using discounted cash flows prepared on the basis of assumptions defined in conjunction with the Companys management. The main purpose of such assessment was whether on that date there were any signs of impairment, based on the FASB ASC Recognition and Measurement of an Impairment Loss The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. The guidance in paragraphs 2325 were used to determine the fair value of a reporting unit. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, thus the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any. | ||
The excess of the fair value of the unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill, at the amount of R$2.9 million registered in December, 2008 as non-current assets. | ||
The findings of these assessments were analyzed by the Companys management team and by IRBs independent auditors. Their conclusion was that the amount allocated as goodwill on December 31, 2008, was adequate. | ||
During 2009, the Company reviewed the fair value of IRBs fixed assets. Such review reduced the goodwill to R$799 thousand and increased the fixed assets in R$2.1 million. | ||
These assessments were undertaken to comply with the U.S. GAAP. | ||
Constant currency restatement | ||
Through June 30, 1997 the Brazilian economy was hyperinflationary as defined by guidance of FASB ASC related to Foreign Currency Translation. 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. |
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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 income statement as they occur. | ||
Cash and cash equivalents | ||
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. | ||
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 writing-off those receivables on the accounting books, the finance department keeps these records to conduct the commercial negotiations. | ||
In addition, the Company records a provision for doubtful receivables to allow for any amounts which may be unrecoverable and is based upon an analysis of the Companys prior collection experience, customer credit worthiness, and current economic trends. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. | ||
Inventories | ||
Inventories, primarily consisting of food, beverages and supplies, are stated at the lower of cost or replacement value. Cost of inventories is determined principally on the average cost method. | ||
Property and equipment | ||
Property and equipment are stated at cost, less accumulated depreciation. Depreciation on property and equipment is provided using the straight-line method over the following estimated useful lives of the related assets: |
Years | ||||
Buildings and building improvements |
50 | |||
Leasehold improvements |
4-5 | |||
Machinery and equipment |
10-15 | |||
Furniture and fixtures |
10-15 | |||
Software |
35 | |||
Vehicles |
5 |
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Deferred charges | ||
Deferred charges, which relate to leasehold premiums paid in advance for rented outlet premises are stated at cost, less accumulated amortization. Leasehold premiums related to unprofitable stores written off. | ||
The amortization periods, which range from 5 to 20 years, are the terms of managements estimate of the related rental contracts including renewal options, which are solely at the discretion of the Company. | ||
Preopening costs | ||
Labor costs and the costs of hiring and training personnel and certain other costs relating to the opening of new restaurants are expensed as incurred. | ||
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 royalty fees equivalent to on a percentage of the franchisees gross sales are recognized when earned. | ||
Revenue from trade partners, when received in cash is straight recognized as a credit in the Companys income statement, when received in advance, is recorded as an entry in the Banks account with counterpart in deferred income (in the liabilities section of the Balance Sheet) and monthly is proportionally transferred to the income statement (when one year bonus is advanced, the total amount received is divided by 12, and monthly 1/12 is credited in the income statement), and when received in products is recognized as cost reduction. | ||
Revenues obtained by lease of Companys properties, by administration fees on marketing fund and nonrecurring gains are recognized as other income when incurred. | ||
The Companys subsidiaries record their revenues gross of taxes on sales, since in Brazil these taxes are included both in sales prices and in royalty fees. In addition, because of specific tax rules in Brazil, local companies are required to account for sales, even when they are canceled, recording a separate caption in the general ledger to offset the original sales amount recorded. | ||
However, for reporting purposes, the company states its revenues net of taxes and net of canceled sales. | ||
The following tables set forth gross sales, sales deductions and reported revenues: |
Nine | ||||||||||||||||
Months | ||||||||||||||||
Twelve Months ended 31 December, | ended September 30, | |||||||||||||||
2007 | 2008 | 2009 | 2010 | |||||||||||||
Gross Revenues Own Operated Restaurants |
90,990 | 99,748 | 164,402 | 125,665 | ||||||||||||
(-) Tax on revenues |
(5,598 | ) | (9,279 | ) | (17,248 | ) | (13,022 | ) | ||||||||
(-) Canceled Sales |
(262 | ) | (347 | ) | (279 | ) | (255 | ) | ||||||||
Net Revenues Own Operated Restaurant |
85,130 | 90,122 | 146,875 | 12,388 | ||||||||||||
Nine | ||||||||||||||||
Months | ||||||||||||||||
Twelves Months ended 31 December, | ended September 30, | |||||||||||||||
2007 | 2008 | 2009 | 2010 | |||||||||||||
Gross Revenues from Franchises |
21,789 | 25,982 | 28,632 | 22,860 | ||||||||||||
(-) Tax on revenues |
(2,978 | ) | (3,555 | ) | (3,985 | ) | (3,112 | ) | ||||||||
Net Revenues from Franchises |
18,811 | 22,427 | 24,647 | 19,748 | ||||||||||||
Nine | ||||||||||||||||
Months | ||||||||||||||||
Twelves Months ended 31 December, | ended September 30, | |||||||||||||||
2007 | 2008 | 2009 | 2010 | |||||||||||||
Gross Revenues from Trade Partners |
7,351 | 9,117 | 11,062 | 15,811 | ||||||||||||
(-) Tax on revenues |
(678 | ) | (800 | ) | (792 | ) | (1,276 | ) | ||||||||
Net Revenues from Trade Partners |
6,673 | 8,317 | 10,270 | 14,535 | ||||||||||||
The relationship between the Company and each of its franchisees is legally bound by a formal contract, where the franchisee agrees to pay monthly royalty fees equivalent to a percentage of its gross sales. The formal contract and the franchisees sales (as a consequence of their business) address three of four requirements for revenue recognition: |
| Persuasive evidence that an arrangement exists the contract is signed by the franchisee; | ||
| Delivery has occurred or services have been rendered franchisee sales are the basis of royalty revenues; | ||
| The sellers price to the buyer is fixed or determinable the contract states that royalties are a percentage of the franchisees gross sales; |
Regarding the fourth requirement for revenue recognition, that collectability is reasonably assured, we do cover the issue of collectability when we record the Companys royalty revenues. First, we record all invoices in the accounts receivable system, so that we can control when the invoice is due or how long it has been outstanding. These records are all uploaded to the general ledger. If a franchisee fails to pay its invoices for more than six months, one of the following procedures is adopted: either (i) the franchisees accounts receivable are written off if the individual invoices are below R$5,000; or (ii) the Company records a provision for doubtful accounts if the individual invoices are over R$5,000 . |
The Company records a provision for doubtful receivables to allow for any amounts that may be unrecoverable based upon an analysis of the Companys prior collection experience, customer creditworthiness and current economic trends. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. |
Despite writing-off those receivables on the accounting books or recording a provision for doubtful accounts, the finance department keeps these records to conduct the commercial negotiations. |
The Company does not stop invoicing a franchisee if he fails to pay six invoices in a row. However, it does offset any additional revenues from the debtor franchisee by reversing the entry uploaded from the accounts receivable system to the general ledger. |
Renegotiated Past Due Accounts |
Currently the Company has approximately 200 franchisees. A few of them may undergo financial difficulties in the course of their business and may therefore fail to pay their monthly royalty fees. When a franchisee has past due accounts derived from unpaid royalty fees, the Company may reassess such debts with the franchisee and reschedule them in installments. The Company may also intermediate the sale of the franchise business to another franchisee (new or owner of another franchised store) and reschedule such debts as a portion of the purchase price. When either kind of agreement is reached, the Company accounts for these amounts as renegotiated past due accounts. The Company records a provision for doubtful receivables to allow for any amounts that may be unrecoverable based upon an analysis of the Companys prior collection experience, customer creditworthiness and current economic trends. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. When revenues incurred from franchisees that already have past due accounts are reversed in the Companys general ledger. |
Marketing expense, Marketing fund and advertising expenses | ||
Bobs Brand | ||
According to our franchise agreements, Bobs marketing fund we have dedicated to advertising and promotion is comprised of financial contributions paid by the franchisees and also by the contributions due by the Company. The fund resources are administrated by the Company and must be used in the common interest of Bobs chain, through the best marketing department efforts, to increase its restaurant sales. | ||
Therefore, the marketing contribution from franchisees, are recorded on accrual basis, in the assets as accounts receivables and cross entry in the liabilities as marketing fund. The contributions due by Venbo are recorded on accrual basis, as marketing expenses and cross entry in liabilities as marketing fund. |
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In general, Bobs franchisees monthly contribute with 4.0% of their monthly gross sales to Bobs marketing fund, and since 2006, the Company is also committed to contribute at least 4.0% of its own-operated restaurant monthly gross sales (sales derived from special events are not subject to such contribution). These contributions can be deducted by the Companys marketing department expenses, if previously agreed with the Companys franchisees. However, the total of marketing investments may be greater than 4.0% of combined sales, if there is any supplier additional contribution (joint marketing programs) or if the Company use additional own cash on marketing advertising and promotion. Currently, the company reached around of 10% of gross sales. | ||
The Company primarily invests Bobs marketing fund resources on nationwide advertising programs (commercials or sponsorship on TV, radio and outdoors). The Companys franchisees may also directly invest in advertising and promotions for their own stores, upon previous consent from the Company, which freely decides whether the cost of such single advertisement or promotion could be deducted from the marketing contribution owed. | ||
The Bobs marketing fund resources are not required to be invested during the same month or year that they were received, but they must be used in subsequent periods. | ||
Periodically, the Company meets Bobs Franchisee Council to demonstrate the marketing fund accounts, through a report similar to a statement of cash flows. This statement discloses the marketing contributions received and the marketing expenses, both in cash basis. To provide absolute transparency and comply with the Companys franchisees request, all accounts included in the Marketing Fund are revised by independent auditors. | ||
The balance of eventual non-invested marketing fund is recorded as accounts payable accrued expenses at the balance sheet. This balance represents contributions made by Venbo and by the franchisees, but not used in campaigns yet, thus, these balances are, as agreed with the franchisees chain, an obligation of Venbo on that date. | ||
The marketing fund expenses on advertising and promotions are recognized as incurred. Total marketing investments financed by the marketing fund amounted R$19.3 million, R$20.3 million and R$19.4million for the years ended December 31, 2009, 2008 and 2007, respectively. |
KFC and Pizza Hut Brands |
KFC and Pizza Hut brands have no Marketing Fund since they have no franchisees up to the end of 2009. | ||
However, the Company monthly contributes with 0.5% of KFC and Pizza Hut monthly net sales to a marketing fund managed 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 and amounted R$3.6 million and R$3.4 million for the years ended December 31, 2009 and 2008, respectively. |
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Doggis |
The Company is committed to invest at least 4% of Doggis restaurant sales in local marketing expenses. There is no contribution to a marketing fund. | ||
Local marketing expenses on Doggis advertising and promotions are recognized as incurred and amounted R$0.2 million for its four month period of operations during 2009. | ||
Stock options | ||
Since January, 2006, the Company adopted the guidance of FASB ASC on Share-Based Payment, 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 guidance on Share-Based Payment 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 most recent guidance. Results for prior periods have not been restated. | ||
During 2005, the Companys Board of Directors and a majority of the shareholders of the Company decided that Board compensation would be paid in cash and that no more stock options would be granted. Accordingly, during 2009, 2008 and 2007, no options were granted. | ||
Compensation expense related to share-based awards is generally amortized on a straight-line basis over the vesting period other income (expenses) in the consolidated statement of results. In the beginning of 2009 the last 35,000 outstanding options were exercised and no share-based compensation was charged to Companys results. In 2008, results included share-based compensation expense of R$5 thousand both in 2008 and in 2007. | ||
Income taxes | ||
The Company accounts for income taxes in accordance with guidance provided by the FASC ASC on Accounting for Income Taxes. Under the asset and liability method of such guidance, 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. Under the above referred guidance, the effect of a change in tax rates or deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. | ||
The effect of income tax positions are recorded only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Although we do not currently have any material charges related to interest and penalties, such costs, if incurred, are reported within the provision for income taxes. | ||
Long-lived and intangibles assets | ||
The Company adopted guidance on the impairment or disposal of long-lived assets in the Property Plant and Equipment Topic of the FASB ASC, which requires that long-lived assets being disposed of be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. |
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If an indicator of impairment (e.g., negative operating cash flows for the most recent trailing twelve-month period) exists for any grouping of assets, an estimate of undiscounted future cash flows produced by each restaurant within the asset grouping is compared to its carrying value. If any asset is determined to be impaired, the loss is measured by the excess of the carrying amount of the asset over its fair value as determined by an estimate of discounted future cash flows. | ||
The Company applied annually impairment tests, mainly at its goodwill, property, equipment and deferred charges. For the year ended December 31, 2009 no adjustments were required according to those tests. | ||
Net income (loss) per common share | ||
The Company applies adopted guidance on Earnings per Share Topic of the FASB ASC, in the calculation of earnings per share. Under this standard, Basic EPS is computed based on weighted average shares outstanding and excludes any potential dilution; Diluted EPS reflects potential dilution from the exercise or conversion of securities into common stock or from other contracts to issue common stock. There were no common share equivalents outstanding as of December 31, 2009, 2008 and 2007 that would have had a dilutive effect on earnings for those respective years. | ||
Recently issued accounting standards | ||
In 2006, the FASB issued guidance on accounting for uncertainty in income taxes, codified primarily in the Income Taxes Topic of the FASB ASC . This guidance 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. This guidance also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The provisions of this guidance establish the cumulative effect of the change in accounting principle to be recorded as an adjustment to retained earnings. The Company adopted guidance on accounting for uncertainty in income taxes effective January 1, 2007, as required, however, its adoption did not derived material effects on the Companys consolidated financial statements. | ||
In April 2009, the FASB provided additional guidance for estimating fair value in accordance with FASB ASC Fair Value Measurements and Disclosures when there is no active market or where the price inputs being used represent distressed sales. This guidance reaffirms the objective of fair value measurement, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale). It also reaffirms the need to use judgment to determine if a formerly active market has become inactive, as well as to determine fair values when markets have become inactive. This update to FASB ASC Fair Value Measurements and Disclosures was effective prospectively for reporting periods ending after June 15, 2009. The adoption of this update in the second quarter of 2009 did not impact our consolidated financial position, results of operations, or cash flows. | ||
Derivatives and Hedging We adopted the amendment to FASB ASC Derivatives and Hedging on January 1, 2009. This amendment expands the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB ASC Derivatives and Hedging, and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. The adoption of this accounting standard on January 1, 2009 did not impact our consolidated financial position, results of operations, or cash flows. |
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Non-controlling Interest During 2009 the Company adopted certain provisions of FASB ASC 805-20 Business Combinations Identifiable Assets and Liabilities, and Any Noncontrolling Interest. These establish accounting and reporting standards for the non-controlling interest (formerly known as minority interest) in a subsidiary (which may include variable interest entities) and for the deconsolidation of a subsidiary. Significant changes include: balance sheet and income statement presentation and expanded disclosures; accounting for changes in a parent ownership interest in a subsidiary that do not result in deconsolidation; and recognition and measurement of a gain or loss when a subsidiary is deconsolidated. For balance sheet presentation, non-controlling interests are now recorded within equity and so-called mezzanine display is not permitted. In income statements, the amount of income attributable to the non-controlling interest is now a deduction that impacts net income. The statement requires prospective application except for the presentation and disclosure requirements, which must be applied retrospectively for all periods presented. Prior periods were reclassified to conform to the current period presentation. | ||
Interim Disclosures Fair Value of Financial Instruments We adopted the amendment to FASB ASC Interim Disclosures about Fair Value of Financial Instruments in the second quarter of 2009. This amendment requires the existing disclosure requirements related to the fair value of financial instruments be extended to interim periods that were previously only required in annual financial statements. The adoption of this accounting standard in the second quarter of 2009 did not impact our consolidated financial position, results of operations, or cash flows. | ||
Subsequent Events We adopted FASB ASC Subsequent Events in the second quarter of 2009. This accounting standard establishes the accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date; that is, whether that date represents the date the financial statements were issued or were available to be issued. Consistent with the requirements of this accounting standard for public entities, we evaluate subsequent events through the date the financial statements are issued. FASB ASC Subsequent Events should not result in significant changes in the subsequent events that an entity reports, either through recognition or disclosure, in its financial statements. The adoption of this accounting standard in the second quarter of 2009 did not impact our consolidated financial position, results of operations, or cash flows. The FASB amended this accounting guidance in March 2010, effective immediately, to exclude public entities from the requirement to disclose the date on which subsequent events have been evaluated. In addition, the amendment modified the requirement to disclose the date on which subsequent events have been evaluated in reissued financial statements to apply only to such statements that have been restated to correct an error or to apply U.S. GAAP retrospectively. As a result of this amendment, we did not disclose the date through which we evaluated subsequent events in this report on Form 10-K. | ||
FASB Accounting Standards Codification In June 2009, the FASB issued FASB ASC The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. The FASB Accounting Standards Codification has become the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with GAAP. All existing accounting standard documents are superseded by the FASB ASC and any accounting literature not included in the FASB ASC will not be authoritative. However, rules and interpretive releases of the SEC issued under the authority of federal securities laws will continue to be sources of authoritative GAAP for SEC registrants. This accounting standard is effective for interim and annual reporting periods ending after September 15, 2009. Therefore, beginning with our third quarter 2009 report on Form 10-Q, all references made to GAAP in our consolidated financial statements now reference the new FASB |
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ASC. This accounting standard does not change or alter existing GAAP and, therefore, did not impact our consolidated financial position, results of operations, or cash flows. | ||
In June 2009, the FASB issued changes on guidelines of consolidation of variable interest entities. Such new guidelines determine when an entity that is insufficiently capitalized or not controlled through voting interests should be consolidated. According to this recent accounting pronouncement, the company has to determine whether it should provide consolidated reporting of an entity based upon the entitys purpose and design and the parent companys ability to direct the entitys actions. The guidance is to be adopted during 2010 fiscal year. The Company does not expect adoption of this guidance to have a material impact on its consolidated financial statements. | ||
In January 2010, the FASB issued amendments to the existing fair value measurements and disclosures guidance which requires new disclosures and clarifies existing disclosure requirements. The purpose of these amendments is to provide a greater level of disaggregated information as well as more disclosure around valuation techniques and inputs to fair value measurements. The guidance is to be adopted during 2010 fiscal year. The Company does not expect adoption of this guidance to have a material impact on its consolidated financial statements. |
3 | CASH AND CASH EQUIVALENTS | |
Cash and cash equivalent consists of the following: |
December 31, | ||||||||
R$000 | 2009 | 2008 | ||||||
Cash at point of sales |
R$ | 1,435 | R$ | 1,354 | ||||
Cash with money collectors |
561 | 288 | ||||||
Bank accounts |
2,028 | 281 | ||||||
Investments funds |
9,226 | 8,501 | ||||||
R$ | 13,250 | R$ | 10,424 | |||||
Bank account figures are comprised of the amount of R$298,000 (R$54,000 in 2008) which is deposited in a financial institution located in the U.S.A. and the remaining balance in financial institutions located in Brazil. | ||
The Company invests its temporary overflow of cash in financial funds linked, in their majority, to fixed-income securities. In 2009, a portion of those investments were pledged to UBS Pactual loan (note 8.c), related to the acquisition of Pizza Hut business in Brazil. |
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4 | ACCOUNTS RECEIVABLE | |
Accounts Receivables consists of the following: |
December 31, | ||||||||
R$000 | 2009 | 2008 | ||||||
Clients food sales |
R$ | 6,199 | R$ | 3,952 | ||||
Clients other |
102 | | ||||||
Franchisees current accounts |
4,385 | 5,684 | ||||||
Franchisees renegotiated past due accounts |
1,498 | 1,726 | ||||||
Franchisees receivable from
sales of assets |
419 | 593 | ||||||
Allowance for doubtful accounts |
(2,261 | ) | (1,214 | ) | ||||
R$ | 10,342 | R$ | 10,741 | |||||
5 | OTHER CURRENT ASSETS, OTHER RECEIVABLES AND OTHER ASSETS | |
Other assets consist of the following: | ||
R$000 | ||
Other current assets: |
December 31, | ||||||||
2009 | 2008 | |||||||
Witholding taxes |
R$ | 600 | R$ | 772 | ||||
Receivables from franchisees and from FBD (a) |
2.689 | 897 | ||||||
Other current receivables |
34 | 973 | ||||||
R$ | 3.323 | R$ | 2.642 | |||||
R$000 | ||
Other receivables and other assets: |
December 31, | ||||||||
2009 | 2008 | |||||||
Receivables from franchisees assets sold (b) |
R$ | 700 | 267 | |||||
Judicial deposits (c) |
10.134 | 7.419 | ||||||
Other receivables |
114 | 30 | ||||||
R$ | 10.948 | R$ | 7.716 | |||||
(a) | Short term receivables from franchisees developed from rights other than royalties and sale of assets and receivables derived from transaction discussed at note 1; | |
(b) | Long term portion of receivables derived from selling of restaurants to franchisees; and | |
(c) | Deposits required by Brazilian court in connection to some legal disputes, also discussed at note 12.c; |
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6 PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
December 31, | ||||||||
R$000 | 2009 | 2008 | ||||||
Land |
R$ | 2,322 | R$ | 2,322 | ||||
Buildings and building improvements |
4,831 | 5,077 | ||||||
Leasehold improvements |
18,785 | 16,525 | ||||||
Machinery, equipment and software |
29,177 | 27,691 | ||||||
Furniture and fixtures |
6,147 | 6,569 | ||||||
Assets under capitalized leases |
1,949 | 3,218 | ||||||
Vehicles |
409 | 348 | ||||||
Work in progress |
674 | 64 | ||||||
64,294 | 61,814 | |||||||
Less: Accumulated depreciation and
amortization |
(29,291 | ) | (30,710 | ) | ||||
R$ | 35,003 | R$ | 31,104 | |||||
7 DEFERRED CHARGES, NET
Deferred charges consist of the following:
December 31, | ||||||||
R$000 | 2009 | 2008 | ||||||
Leasehold premiums |
R$ | 13,120 | R$ | 10,374 | ||||
Franchise Charges |
1,218 | | ||||||
Less: Accumulated amortization |
(7,539 | ) | (5,830 | ) | ||||
R$ | 6,799 | R$ | 4,544 | |||||
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8 NOTES PAYABLE
Notes payable consists of the following:
December 31, | ||||||||
R$000 | 2009 | 2008 | ||||||
Revolving lines of credit (a) |
R$ | 11,422 | R$ | 4,641 | ||||
Leasing facilities (b) |
1,373 | 3,257 | ||||||
Other loan (c) |
9,638 | 13,737 | ||||||
22,433 | 21,635 | |||||||
Less: current portion |
(13,829 | ) | (10,536 | ) | ||||
R$ | 8,604 | R$ | 11,099 | |||||
At December 31, 2009, future maturities of notes payable are as follows:
R$000 | ||||
2010 |
R$ | 13,829 | ||
2011 |
6,300 | |||
2012 |
2,304 | |||
R$ | 22,433 | |||
a) A portion of such debt obligation (R$6.0 million) is due on demand from two
Brazilian financial institutions with interest rates of approximately 20.0%p.y.
Another portion (R$5.4 million) is payable in different terms to two Brazilian
financial institutions. The first of them is payable in 24 installments of R$211,000
(ending on December, 2011), plus interests of 14.0%p.y. The second one is payable in
ten installments of R$30,000 (ending on October, 2010), plus interests of 16.7%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 4 to 22 monthly payments,
together with interests range from 14.3% p.y. to 23.4% p.y (ending on October,
2011). 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 12 to 36 monthly
installments (ending on December, 2012), averaging R $117,000, plus average interest
of 16.7%p.y. Loan is guaranteed by Companys financial funds.
The carrying amount of notes payable approximates fair value at December 31, 2009 because
they are at market interest rates.
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9 ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
December 31, | ||||||||
R$000 | 2009 | 2008 | ||||||
Suppliers |
R$ | 10,751 | R$ | 9,804 | ||||
Rent payable |
1,657 | 1,191 | ||||||
Consulting fees |
596 | 260 | ||||||
Accrued utilities |
805 | 367 | ||||||
Accrued maintenance |
267 | 447 | ||||||
Accrued advertising |
158 | 778 | ||||||
Marketing fund |
1,010 | 184 | ||||||
Royalty payable |
444 | 264 | ||||||
Other accrued liabilities |
587 | 1,088 | ||||||
R$ | 16,275 | R$ | 14,383 | |||||
As mentioned at note 2, the balances presented in the caption Marketing Fund represent
contributions made by Venbo and by the Bobs brand franchisees, but not used in campaigns
yet.
10 CASH FLOW INFORMATION
Supplemental Disclosure of Cash Flow Information:
December 31, | ||||||||||||
R$000 | 2008 | 2008 | 2007 | |||||||||
Interest paid |
R$ | 4,836 | R$ | 1,644 | R$ | 465 | ||||||
Income taxes paid |
R$ | 103 | R$ | 270 | R$ | 69 | ||||||
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11 INCOME TAXES
Tax loss carryforwards through December 31, 2009 relating to income tax were
R$60.8 million and to social contribution tax were R$61.6 million, comprised mainly of
fiscal results at Venbo, CFK, IRB and DGS. Social contribution tax is a Brazilian tax levied
on taxable income and is by its nature comparable to corporate income tax.
The accumulated tax loss position can be offset against future taxable income. Brazilian
tax legislation restricts the offset of accumulated tax losses to 30.0% of taxable profits
on an annual basis. These losses can be used indefinitely and are not impacted by a change
in ownership of the Company.
The following is a reconciliation of the amount of reported income tax benefit and the
amount computed by applying the combined statutory tax rate of 34.0% to the loss before
income taxes:
December 31, | ||||||||||||
R$000 | 2009 | 2008 | 2007 | |||||||||
Tax (expense) income at the combined statutory rate |
R$ | (2,418 | ) | R$ | 1,300 | R$ | (3,114 | ) | ||||
Current income tax offset by
accumulated tax loss credits |
| | 1,114 | |||||||||
Combined statutory rate applied to differences between
taxable results in Brazil and reported results |
2,382 | (2,046 | ) | 1,954 | ||||||||
Income tax (expense) as reported in the accompanying
consolidated statement of operations |
R$ | (36 | ) | R$ | (746 | ) | R$ | (46 | ) | |||
Differences between taxable results in Brazil and reported results are primarily due to
accrued expenses that are only deductible when paid, such as contingencies. Differences
between Brazilian GAAP and U.S. GAAP also result on reconcile of reported income tax.
F - 23
Table of Contents
The following summarizes the composition of deferred tax assets and liabilities and the
related valuation allowance at December 31, 2009 and 2008, based on temporary differences
and tax loss carry forwards determined by applying rates of 9.0% for social contribution tax
and 25.0% for income tax.
December 31, | ||||||||
R$000 | 2009 | 2008 | ||||||
Deferred tax assets: |
||||||||
Tax loss carry forward |
R$ | 20,738 | R$ | 21,790 | ||||
Provision for contingencies |
2,539 | 2,100 | ||||||
Deferred charges |
2,126 | (28 | ) | |||||
Total deferred tax assets |
25,403 | 23,862 | ||||||
Deferred tax liabilities: |
||||||||
Property and equipment |
3,881 | 3,448 | ||||||
Total deferred tax liabilities |
3,881 | 3,448 | ||||||
Net deferred tax asset |
21,522 | 20,414 | ||||||
Valuation allowance |
(7,925 | ) | (6,726 | ) | ||||
R$ | 13,597 | R$ | 13,688 | |||||
Companys forecasts indicate that future operating results will provide taxable income
at Venbo and IRB, therefore the company expects to realize a great portion of its deferred
tax assets. The valuation allowance reflects the Companys assessment of the likelihood
of realizing the net deferred tax assets in view of current operations and is mostly
comprised of tax loss carryfowards held by the Company through CFK and DGS, as well as
portion of Venbos tax loss which are greater than the projected taxable income.
12 COMMITMENTS AND LITIGATION
a) Operating leases
The future minimum lease payments under those obligations with an initial or remaining
non-cancelable lease terms in excess of one year at December 31, 2009 are as follows:
R$000 | ||||
Fiscal Year | Contractual Leases | |||
2010 |
6,914 | |||
2011 |
5,948 | |||
2012 |
2,660 | |||
2013 |
1,830 | |||
2014 |
1,469 | |||
Thereafter |
1,630 | |||
Total |
20,451 | |||
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Rent expense was R$15.1 million, R$14.5 million, and R$7.2 million for the years ended
December 31, 2009, 2008, and 2007, respectively.
b) Other commitments
The Company has long term contracts (5 to 10 years) with all of its franchisees. Under
these contracts the franchisee has the right to use the Bobs name and formulas in a
specific location or area. The Company has no specific financial obligations in respect of
these contracts.
The Company has exclusivity supply agreements with some of its food and beverage providers.
Under these agreements the Company receives cash in order to exclusively trade the
suppliers products, for a period of time. Amounts received upon such 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.
As of December 31, 2009 the company had the amount of R$6.9 million (R$6.7 million in 2008)
recorded as Deferred Income in its balance sheet, related to such commitments.
F - 25
Table of Contents
c) Reassessed taxes and Contingencies
Liabilities related to tax amnesty programs and litigation consist of the following:
December 31, | ||||||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||||||
Long | Long | |||||||||||||||||||||||
Total | Current | Term | Total | Current | Term | |||||||||||||||||||
R$000 | Liability | Liability | Liability | Liability | Liability | Liability | ||||||||||||||||||
Reassessed taxes |
||||||||||||||||||||||||
Federal taxes |
13,011 | 1,676 | 11,335 | 13,712 | 1,677 | 12,035 | ||||||||||||||||||
Contingencies |
||||||||||||||||||||||||
ISS tax litigation |
5,123 | | 5,123 | 3,828 | | 3,828 | ||||||||||||||||||
Labor litigation |
2,137 | | 2,137 | 2,065 | | 2,065 | ||||||||||||||||||
Property leasing litigation
and other litigation |
208 | | 208 | 282 | | 282 | ||||||||||||||||||
TOTAL |
20,479 | 1,676 | 18,803 | 19,887 | 1,677 | 18,210 | ||||||||||||||||||
Reassessed taxes
Since September 2002, the Company and its subsidiaries have been paying all its current
taxes on a timely basis. However, during 1999, 2001 and in the beginning of 2002, certain
Brazilian Federal taxes levied on Venbo were not paid.
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) in
order to renegotiate those debts.
The second amnesty program (PAES) included the balance of the previous federal tax
amnesty program (REFIS) and unpaid 2001 and 2002 federal tax, as well as the Social Security
penalties. The total debt included in such program is being paid in monthly installments, on
a timely basis, equivalent to 1.5% of the Companys gross sales, with interest accruing at
rates set by the Brazilian federal government, which currently are 6.0% per year (6.25% per
year in 2008).
During the period of twelve months ended December 31, 2009, the Company paid
approximately R$2.1 million (2.0 million in the same period of 2008) related to such
Brazilian federal tax amnesty program, including R$0.3 million (R$0.4 million in 2008) of
interest.
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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Table of Contents
In February 2005, the Company compared its remaining debt regarding PAES with statements
provided by the Brazilian Federal Government. Those statements reported that Companys total
debt would be greater than the figures in the Companys balance sheet, in the amount of
approximately R$3.2 million.
During March, 2005, the Company filed a formal request with the Brazilian Federal
Authorities, claiming to have its total debt reviewed. Such request, reconciled the amounts
the Company had accrued at its accounting books to the amounts reported in the official
statement at the same period. The Company believes that the amounts accrued at the balance
sheet as of December 31, 2009, total of R$13.0 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 December 31, 2009, the difference between such debt
at the statements provided by the Brazilian Federal Government and the statements reported
by the Companys was R$4.8 million (R$4.8 million in December 31, 2008).
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 receive different reduction of their fiscal debt.
The program rules are not already fully formalized by the Brazilian Fiscal Authorities,
including how the government will compute the debt consolidation. The Company has applied to
it and expects to have its fiscal debt consolidated by the end of the first semester of
2010. The Company cannot estimate at the present moment if any material adjustment to its
accrued amounts will be necessary when Brazilian Government provide the Companys
consolidated fiscal debt.
Contingencies
| ISS litigation |
ISS is a tax charged by Brazilian cities on services rendered by Brazilian companies.
None of the Companys revenues were subject to such tax until 2003, but in the
beginning of 2004 a new ISS legislation has been implemented and according to it,
royalty fees had to be included on the basis of ISS calculation.
Although the Company is claiming in court that royalty fees should not be considered
payment for services rendered and therefore should not be subject to ISS taxation,
the Company is depositing monthly with the court the amount claimed by ISS, while
awaiting the courts determination. In addition, the Company has accrued the claimed
amounts as of December 31, 2009, total of R$5.1 million (R$3.8 million in December
31, 2008), which the Companys Management, based on the opinion of its legal
advisors, believes is sufficient to face Companys current tax contingencies.
During the third quarter of 2009 this claiming was partially settled and the court
decided that the Rio de Janeiro City Government has to reimburse the Company the
amounts of ISS tax which were paid before the change of the tax legislation, in a
total of approximately R$0.5 million. Legal disputes in Brazil have historically
demonstrated that positive outcomes of Companies against the Government are rarely
received in cash. Instead, they are generally received in tax credits. Currently,
the Company is studying how these tax credits could be compensated, since this compensation has to be against taxes ruled by Rio de janeiro City Governent and
the main tax is, as discussed above, being deposited by the Company. Because of the
uncertainty of realizing
F - 27
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this tax credit, the Company did not recognize the related amount as a gain in its
Consolidated Income Statements.
The referred change in the ISS tax regulations motivated deep debates whether
marketing funds and initial fees paid by franchisees could be considered as payment
for service rendered by the ISS tax authorities. Because of that, the Company,
together with its tax advisors, is adopting measures in order to avoid the charge of
ISS against the marketing funds and initial fees.
| Labor litigations |
During 2005, the Company was ordered to pay a fine of approximately R$480,000 to a
former employee. Despite the infrequency of this amount in labor processes, the
Company is not guarded from receiving other labor claims in such high amount. During
2008 and 2007 the Company received other labor claims from former employees. As of
September 30, 2009 the Companys accounted for liabilities in the amount of R$2.1
million (R$2.0 million in December 31, 2008), which the Companys Management, based
on the opinion of its legal advisors, believes is sufficient to face Companys
current labor contingencies.
Other contingencies
Other contingencies that in accordance with our legal advisors required no provision
in the Companys balance sheet are the following:
- The Company purchased Venbo Comércio de Alimentos Ltda. (Venbo) from VENDEX in
1996. The Acquisitions Purchase Agreement stated that Venbos former owner
(VENDEX) would be responsible for off-balance liabilities derived from Venbos
transactions prior to the Acquisition, limited to certain conditions. From 1997 to
date, the Company has received several communications from the Brazilian fiscal
authorities related to the period prior to the Acquisition and, accordingly, has
forwarded those to VENDEX and its attorneys.
In 2005, Venbo was summoned by the fiscal authority of the State of Rio de Janeiro to
pay a debt of approximately R$97,000 referred to the period prior to 1996. In order
to have the right to appeal it was obliged to put in a pledge one of its properties.
VENDEX assumed the defense but did not substituted the seizure of the asset, because
of its weak current financial condition.
VENDEX attorneys are defending all demands. During the third quarter of 2007, the
single relevant claim was judged favorable to VENDEX. All other claims are
immaterial; however, we cannot predict the receipt of additional claims that might be
material.
- A Companys franchisee has became a permanent debtor of royalties and marketing
contributions, and the Company, after failing a great exertion to improve his
business, finally decided to interrupt his franchise contract and closed the stores
explored by him. After claiming in court, the Company managed to receive the past due
amounts from the franchisee and to terminate the original franchise agreement.
This same franchisee alleged in court that the Company was responsible for having
offered the operation of a store with guaranteed profitability, but, instead he had
operating losses. He claimed to receive a legal indemnity in the amount of R$5.5
million. As per the first instance, the court judged the claim favorable to the
franchisee, but reduced the indemnity to R$1.2 million. The Companys legal advisors understood that his argument contradicts franchise laws and
the usual business practices of the Company and appealed. As per the second
instance, the court gave
F - 28
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another positive outcome to the franchisee, but, again, reducing the compensation;
this time to R$450,000. Although still appealing the franchise claim, the Company
cannot predict the result of its appeal.
- The owner of the property where the Company held a lease contract for operation of
one of the Companys store (closed in 2002) claimed unpaid monetary restatement on
rent for a period of two and a half years in the amount of R$1.0 million. The Company
has reached an agreement and reduced the claimed amount to R $700 thousand.
The Company is not guarded from receiving other lease claims in such high
amount.
- In January 2009, fiscal authorities from the State of Rio de Janeiro
understood that there was a miscalculation at VENBOs state tax (VAT) and fined the
Companys subsidiary in the amount of R$5.0 million. Our tax lawyers have appealed
because it seems evident that the fiscal authorities committed a basic mistake having
ignored previous court decisions in our favor. We have the opinion that we have
correctly paid all our VA Taxes, however we cannot predict the result of its appeal.
- Concerning inquires from the Brazilian Government General Attorney Office
the Company has the following issues:
a) obligation to hire handicap personnel up to a minimum of 5% of
our total employees. Although the Company is managing to hire and train some
handicap personnel, there are difficulties to reach such percentage given the
conditions of our stores and the limitation of labor supply. The Company is
trying to reach an agreement with the General Attorney Office, but we cannot
guarantee we will be successful and avoid fines.
b) questioning related to the total amount of taxes paid by Venbo during
the Pan American and Para Pan American Games. Although the Company has proved
that the referred taxes were collected according to a special tax regime of
Rio de Janeiro Estate, we cannot predict judge final outcome.
- IPTU is a Brazilian municipal tax charged on real estate. Fiscal
Authorities are claiming to pay IPTU twice (in amount of R$400 thousand) on one
of Venbos store, because its building is considered as facing two streets.
Although our lawyers understand that this claim has no legal basis we cannot
predict the result of its appeal.
- During February, 2010, the Brazilian Federal Tax Authorities questioned the
procedures that the Company has been applying in past years in order to recover IPI
(a tax on industrial production), included in packaging products, bought from
different suppliers. The Authorities agree that we have the right to such tax credit
but understand that we would have claimed it from the suppliers and not from the
Government. The Company has already filed its defense but there is no guarantee that
it will be successful to avoid to pay around R$1.2 million to the Government and
claim the suppliers for reimbursement.
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.
F - 29
Table of Contents
13 SHAREHOLDERS EQUITY
Preferred stock
The Board of Directors of the Company is empowered, without shareholder approval, to issue
up to 5,000 shares of blank check preferred stock (the Preferred Stock) with dividend,
liquidation, conversion, voting or other rights which could adversely affect the voting
power or other rights of the holders of the Companys common stock. To date no Preferred
Stock had been issued.
Common Stock
The table below states issued, treasury and outstanding shares of common stock:
December 31, | ||||||||
2009 | 2008 | |||||||
Issued shares |
8,472,927 | 8,437,927 | ||||||
Less: Treasury stock |
(335,165 | ) | (289,210 | ) | ||||
Outstanding shares |
8,137,762 | 8,148,717 | ||||||
Stock repurchase plan
During the last quarter of 2004, the Companys Board of Directors approved a stock
repurchase plan covering the repurchase of as many as 200,000 shares of its own common
stock. The plan goal was 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 2009, the Company repurchased a total amount of 45,955 shares (62,720 in 2008 and
24,555 in 2007), under the referred stock repurchase plan. The Companys total disbursement
for these transactions totaled R$1.9 million and is accounted for as a deduction of Paid in
Capital, in the Shareholders Equity section of the accompanying consolidated balance
sheets.
F - 30
Table of Contents
Severance agreement
In December, 2007 we granted 10,000 shares to Mr. Bruce Bennet as a severance payment for
leaving Venbos management. Exemption from registration under the Securities Act of 1933, as
amended, was claimed for this issuance in reliance upon the exemption afforded by Section
4(2) of the Securities Act as a transaction by an issuer not involving any public offering.
During 2007 the Company charged R$135,000 to operating results related to those severance
agreement. Such amount is a result of number of shares granted, multiplied by their fair
value.
Stock option plan
The Companys Stock Option Plan terminated on September 17, 2002, ten years from the date of
its adoption by the Board of Directors.
The stock options of Brazil Fast Food Corp. pursuant to the 1992 Stock Option Plan, as
amended, and the grant of stock options outside of plan by Brazil Fast Food Corp.s Board of
Directors, were included in a Registration Statement on Form S-8 filed by the Company with
the U.S. Securities and Exchange Commission. The Registration Statement, which was assigned
File No. 333-133981, was declared effective by the SEC on May 10, 2006.
During 2005, the Companys Board of Directors and a majority of the shareholders of the
Company decided that Board compensation would be paid in cash and that no more stock options
would be granted. The provisions set by the Plan are still valid for all vesting options
until the last option grant (November, 2004).
During 2009, options to purchase an aggregate of 35,000 (33,750 in 2008) shares of common
stock were exercised, having an aggregate purchase price of $37,100 ($25,175 in 2008)
equivalent to R$85,000 (R$74,000 in December 30, 2008).
There were no options canceled or expired during the twelve months ended December 31, 2009,
under the Companys Stock Option Plan.
Intrinsic value for stock options is defined as the difference between the current market
value and the exercise price. The total intrinsic value of stock options exercised during
the period of 2009 was approximately $94,150 (approximately $150,075 in 2008). The total
intrinsic value of options exercisable at December 31, 2008 was approximately US$104,650.
After those options which were exercised during 2009, the Company has no further exercisable
options, under the Companys Stock Option Plan.
F - 31
Table of Contents
All options are immediately vesting. Option activity for the years ended December 31,
2009, 2008 and 2007 is summarized as follows:
2009 | 2008 | 2007 | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
Average | Average | Average | ||||||||||||||||||||||
Exercise | Exercise | Exercise | ||||||||||||||||||||||
Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
Options outstanding
at beginning of year |
35,000 | $ | 1.06 | 68,750 | $ | 1.22 | 78,750 | $ | 1.35 | |||||||||||||||
Granted |
| | | | | | ||||||||||||||||||
Exercised |
(35,000 | ) | 1.06 | (33,750 | ) | 1.39 | (10,000 | ) | 2.19 | |||||||||||||||
Expired |
| | | | ||||||||||||||||||||
Canceled |
| | | | | | ||||||||||||||||||
Options outstanding
at December 31, |
| $ | | 35,000 | $ | 1.06 | 68,750 | $ | 1.22 | |||||||||||||||
Options exercisable
at December 31, |
| $ | | 35,000 | $ | 1.06 | 68,750 | $ | 1.22 |
14 ADMINISTRATIVE EXPENSES
Administrative Expenses consist of the following:
Year Ended December 31, | ||||||||||||
R$000 | 2009 | 2008 | 2007 | |||||||||
Payroll & Related Benefits |
9,575 | 7,628 | 6,522 | |||||||||
Occupancy expenses |
2,182 | 1,940 | 1,445 | |||||||||
Legal, accounting and
consulting |
4,714 | 3,310 | 1,821 | |||||||||
Maintenance Expenses |
337 | 629 | 401 | |||||||||
IT Expenses |
705 | 777 | 613 | |||||||||
Travel and transport expenses |
1,021 | 550 | 525 | |||||||||
Bank Charges |
410 | 227 | 179 | |||||||||
Other Administrative Expenses |
2,354 | 2,381 | 1,924 | |||||||||
21,298 | 17,442 | 13,430 | ||||||||||
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Table of Contents
15 OTHER OPERATING EXPENSES
Other expenses consist of the following:
December 31, | ||||||||||||
R$000 | 2009 | 2008 | 2007 | |||||||||
Uncollectable receivables |
(502 | ) | (851 | ) | (1,288 | ) | ||||||
Reassessed tax and other tax adjustments |
187 | | 424 | |||||||||
Accruals for contingencies |
(443 | ) | | 215 | ||||||||
Depreciation of Headquarters fixed assets |
(805 | ) | (682 | ) | (833 | ) | ||||||
Professional fees for tax consulting |
| | (1,793 | ) | ||||||||
Preoperating and other (expenses) income |
(2,834 | ) | (1,343 | ) | 330 | |||||||
R$ | (4,397 | ) | R$ | (2,876 | ) | R$ | (2,945 | ) | ||||
16 INTEREST EXPENSE, NET
Interest Expenses, net consist of the following:
December 31, | ||||||||||||
R$000 | 2009 | 2008 | 2007 | |||||||||
Interest income |
1,424 | 1,896 | 579 | |||||||||
Interest expenses |
(6,306 | ) | (11,573 | ) | (1,276 | ) | ||||||
R$ | (4,882 | ) | R$ | (9,677 | ) | R$ | (697 | ) | ||||
During 2008, the account Interest Expenses, net was significantly burden by the loans
agreement renegotiation within UBS Pactual, (see note 8), as well as, by the monetary restatement
and interest recalculation of Federal Taxes and Social Security penalities PAES (see note 12), in
the amounts of R$6.7 million and R$2.8 million, respectively.
17 TRANSACTIONS WITH RELATED PARTIES
Among all 622 franchised Bobs point of sales (POS), 25 stores (25 stores in 2008) are franchised
with Mr Romulo Fonseca (or relative) and 33 stores (28 stores in 2008) are franchised with Mr. Jose
Ricardo Bomeny (or relative) Both individuals are Companys shareholders. All franchise
transactions with those related parties are made at usual market value and at December 31, 2009 the
Company account receivables included R$700,247 (R$527,253 in 2008) related to them.
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Table of Contents
18 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousand of Brazilian Reais, except share amounts)
(In thousand of Brazilian Reais, except share amounts)
2009 | ||||||||||||||||
First | Second | Third | Fourth | |||||||||||||
R$000 | Quarter | Quarter | Quarter | Quarter | ||||||||||||
Net Restaurant Sales |
34,974 | 33,356 | 36,986 | 41,559 | ||||||||||||
Net Franchise Revenues |
6,092 | 4,936 | 6,120 | 7,499 | ||||||||||||
Operating income (loss) |
1,832 | 1,670 | 3,299 | 5,193 | ||||||||||||
Net income (loss) |
1,123 | 350 | 2,151 | 3,272 | ||||||||||||
Basic and diluted income per share |
0.14 | 0.04 | 0.26 | 0.41 | ||||||||||||
Weighted average common shares
outstanding |
8,172,166 | 8,157,902 | 8,142,061 | 8,138,321 |
R$000 | 2008 | |||||||||||||||
Net Restaurant Sales |
20,628 | 18,539 | 21,670 | 29,285 | ||||||||||||
Net Franchise Revenues |
4,965 | 5,151 | 5,699 | 6,612 | ||||||||||||
Operating income |
2,278 | (10 | ) | 1,878 | 1,707 | |||||||||||
Net income (loss) |
2,029 | 39 | 1,935 | (7,945 | ) | |||||||||||
Basic and diluted
income per
share |
0.25 | 0.00 | 0.24 | (0.97 | ) | |||||||||||
Weighted average
common shares
outstanding |
8,192,720 | 8,166,961 | 8,149,919 | 8,146,612 |
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Table of Contents
19 SEGMENT INFORMATION
Through our wholly-owned subsidiary Venbo, which conducts business under the trade name Bobs, we
own and, directly and through franchisees, operate the second largest fast food hamburger
restaurant chain in Brazil.
Since April 2007, we operate, through our wholly-owned subsidiary CFK, the KFCs brand in Brazil,
with 10 stores in Rio de Janeiro.
Since December 1, 2008, we operate through our subsidiary IRB, the Pizza Hut`s brand in Sao Paulo,
Brazil, with 15 stores.
Since September, 2008, we operate through our subsidiary DGS, the Doggis brand in Rio de Janeiro,
Brazil, with 3 stores.
Currently the majority of Companys operations are concentrated at the southeast region of Brazil.
Regarding Bobs brand, as of December 31, 2009, from the total of 59 own-operated point of sales, 1
were located at the southeast region which provided 98.4% of total Net Revenues from Own-operated
Restaurants. In addition, from the total of 622 franchise-operated point of sales, 373 were located
at the same region, which provided 55.2% Net Revenues from Franchisees.
Besides the Brazilian operations, the Bobs brand is also present, through franchisees, in Angola,
Africa and since the last quarter of 2009 in Chile, South America. These operations are not
material to our overall results.
The following table presents the Companys revenues, costs/expenses and operating income by
segment.
Results from own-stores operations | ||||||||||||
Year Ended December 31, | ||||||||||||
R$000 | 2009 | 2008 | 2007 | |||||||||
Revenues |
R$ | 146,875 | R$ | 90,122 | R$ | 85,904 | ||||||
Food, Beverage and Packaging |
(51,720 | ) | (34,578 | ) | (31,334 | ) | ||||||
Payroll & Related Benefits |
(33,787 | ) | (24,939 | ) | (22,807 | ) | ||||||
Restaurant Occupancy |
(15,446 | ) | (10,236 | ) | (10,107 | ) | ||||||
Contracted Services |
(16,768 | ) | (10,036 | ) | (11,681 | ) | ||||||
Depreciation and Amortization |
(5,138 | ) | (2,819 | ) | (2,416 | ) | ||||||
Royalties charged |
(3,537 | ) | (271 | ) | | |||||||
Other Store Costs and Expenses |
(9,319 | ) | (6,850 | ) | (5,004 | ) | ||||||
Total Own-stores cost and expenses |
(135,715 | ) | (89,729 | ) | (83,349 | ) | ||||||
Operating margin |
R$ | 11,160 | R$ | 393 | R$ | 2,555 | ||||||
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Table of Contents
Results from franchise operations | ||||||||||||
Year Ended December 31, | ||||||||||||
R$000 | 2009 | 2008 | 2007 | |||||||||
Revenues |
R$ | 24,647 | R$ | 22,427 | R$ | 18,811 | ||||||
Payroll & Related Benefits |
(5,393 | ) | (3,110 | ) | (2,600 | ) | ||||||
Occupancy expenses |
(709 | ) | (671 | ) | (283 | ) | ||||||
Travel expenses |
(784 | ) | (758 | ) | (334 | ) | ||||||
Contracted Services |
(715 | ) | (665 | ) | (68 | ) | ||||||
Other franchise cost and expenses |
(1,018 | ) | (1,003 | ) | (338 | ) | ||||||
Total franchise cost and expenses |
(8,619 | ) | (6,207 | ) | (3,623 | ) | ||||||
Operating margin |
R$ | 16,028 | R$ | 16,220 | R$ | 15,188 | ||||||
Cost and expenses that are exclusively related to own-operated stores even the ones incurred at
the headquarters are considered in the item Results from own-store operations.
Cost and expenses that are exclusively related to franchisee operated stores even the ones
incurred at the headquarters are considered in the item Results from franchise operations.
There are items that support both activities, such as (i) administrative expenses (finance
department collects the receivables from franchise but also reviews daily own store sales); (ii)
selling expenses (our marketing campaigns enhance the sales of our stores as well as the sales of
our franchisees); (iii) interest expense (income); (iv) income tax (benefits); (v) exclusivity and
other agreements with suppliers; and (vi) extraordinary items. Such items were not included in none
of the segment results disclosed in the table above because (a) their segregation would require a
high level of complexity and (b) the chief operating decision maker relies primarily on operating
margins to assess the segment performance.
Currently, besides the accounts receivables from franchisees (derived from franchise fees,
royalties, and marketing fund), the Company does not have assets exclusively used at the franchise
business. Accordingly, except for those receivables, assets presented in the Consolidated Balance
Sheets are used at the restaurant operating business.
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Table of Contents
Own-stores operation conducted by the Company provided the following figures per brand:
Results from Bobs brand operations | Results from KFCs brand operations | |||||||||||||||||||||||
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
R$000 | 2009 | 2008 | 2007 | 2009 | 2008 | 2007 * | ||||||||||||||||||
Revenues |
R$ | 78,686 | R$ | 75,133 | R$ | 80,111 | R$ | 18,868 | R$ | 10,640 | R$ | 5,793 | ||||||||||||
Food, Beverage and Packaging |
(29,272 | ) | (29,255 | ) | (29,502 | ) | (7,293 | ) | (4,082 | ) | (1,832 | ) | ||||||||||||
Payroll & Related Benefits |
(18,523 | ) | (20,127 | ) | (21,096 | ) | (4,617 | ) | (3,156 | ) | (1,711 | ) | ||||||||||||
Occupancy expenses |
(8,560 | ) | (8,359 | ) | (9,209 | ) | (2,417 | ) | (1,437 | ) | (898 | ) | ||||||||||||
Contracted Services |
(9,124 | ) | (8,383 | ) | (10,913 | ) | (2,393 | ) | (1,653 | ) | (768 | ) | ||||||||||||
Depreciation and Amortization |
(2,569 | ) | (2,611 | ) | (2,410 | ) | (879 | ) | (95 | ) | (6 | ) | ||||||||||||
Royalties charged |
| | | (555 | ) | (189 | ) | | ||||||||||||||||
Other Store Costs and Expenses |
(5,800 | ) | (6,356 | ) | (4,872 | ) | (676 | ) | (305 | ) | (132 | ) | ||||||||||||
Total Own-stores cost and expenses |
(73,848 | ) | (75,091 | ) | (78,002 | ) | (18,830 | ) | (10,917 | ) | (5,347 | ) | ||||||||||||
Operating margin |
R$ | 4,838 | R$ | 42 | R$ | 2,109 | R$ | 38 | R$ | (277 | ) | R$ | 446 | |||||||||||
Results from | ||||||||||||
Doggis brand | ||||||||||||
operations | ||||||||||||
Results from Pizza Huts brand operations | Year Ended | |||||||||||
Year Ended December 31, | December 31, | |||||||||||
R$000 | 2009 | 2008 ** | 2009 *** | |||||||||
Revenues |
R$ | 48,764 | R$ | 4,349 | R$ | 557 | ||||||
Food, Beverage and Packaging |
(14,808 | ) | (1,241 | ) | (347 | ) | ||||||
Payroll & Related Benefits |
(10,442 | ) | (1,656 | ) | (205 | ) | ||||||
Occupancy expenses |
(4,377 | ) | (440 | ) | (92 | ) | ||||||
Contracted Services |
(5,191 | ) | | (60 | ) | |||||||
Depreciation and Amortization |
(1,658 | ) | (113 | ) | (32 | ) | ||||||
Royalties charged |
(2,982 | ) | | |||||||||
Other Store Costs and Expenses |
(2,798 | ) | (271 | ) | (45 | ) | ||||||
Total Own-stores cost and expenses |
(42,256 | ) | (3,721 | ) | (781 | ) | ||||||
Operating margin |
R$ | 6,508 | R$ | 628 | R$ | (224 | ) | |||||
* | KFCs 2007 figures are comprised of nine months, since its operations started on April 1, 2007. | |
** | Pizza Huts 2008 figures are comprised of one month, since its operations started on December 1, 2008. | |
*** | Doggis 2009 figures are comprised of four months, since its operations started on September 1, 2009. |
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Table of Contents
EXHIBIT INDEX
Exhibit No. | Description | |
3.1
|
Certificate of Incorporation of the Registrant, as amended (1) | |
3.2
|
By-laws of the Registrant (2) | |
10.1
|
Amended and Restated 1992 Stock Option Plan (2)) | |
21.1
|
Subsidiaries of Registrant (3) | |
24.1
|
Power of Attorney (comprises a portion of the signature page of this report) | |
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 Section 906 of the Sarbanes-Oxley Act of 2002 | |
99.1
|
Certifying Statement of the Chief Executive Officer and Acting Chief Financial Officer pursuant to Section 1350 of the Title 18 of the United States Code. |
* | Filed herewith. | |
(1) | Filed as an exhibit to Registrants Registration Statement on Form S-1 (File No. 333-3754). | |
(2) | Filed as an exhibit to Registrants Registration Statement on Form S-1 (File No. 33-71368). | |
(3) | Filed as an exhibit to Registrants Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 0-23278). |
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