Attached files
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EX-32.1 - EX-32.1 - BRAZIL FAST FOOD CORP | g26990exv32w1.htm |
EX-31.1 - EX-31.1 - BRAZIL FAST FOOD CORP | g26990exv31w1.htm |
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2011
Commission File Number: 000-23278
Brazil Fast Food Corp.
(Exact name of Registrant as specified in its charter)
Delaware | 13-3688737 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
Rua Voluntários da Pátria, 89-9° andar
Rio de Janeiro RJ, Brazil, CEP 22270-010
(Address of principal executive offices)
Rio de Janeiro RJ, Brazil, CEP 22270-010
(Address of principal executive offices)
Registrants telephone number: 011 55 21 2536-7500
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
As of April 29, 2011 there were 8,129,437 shares outstanding of the Registrants Common Stock, par
value $0.0001.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer or a smaller reporting company. See definition of larger accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
TABLE OF CONTENTS
Table of Contents
ITEM 1. FINANCIAL STATEMENTS.
BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
(in thousands of Brazilian Reais, except share amounts)
(in thousands of Brazilian Reais, except share amounts)
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
R$ | 21,939 | R$ | 16,742 | ||||
Inventories |
3,325 | 3,454 | ||||||
Accounts receivable |
||||||||
Clients |
7,883 | 8,285 | ||||||
Franchisees |
7,856 | 9,483 | ||||||
Allowance for doubtful accounts |
(1,514 | ) | (1,838 | ) | ||||
Prepaid expenses |
3,919 | 3,776 | ||||||
Receivables from properties sale (notes 3 and 4) |
3,633 | 3,633 | ||||||
Other current assets |
4,210 | 4,249 | ||||||
TOTAL CURRENT ASSETS |
51,251 | 47,784 | ||||||
Other receivables and other assets (note 3) |
15,828 | 16,258 | ||||||
Deferred tax asset, net |
11,983 | 11,992 | ||||||
Goodwill |
799 | 799 | ||||||
Property and equipment, net |
29,627 | 29,862 | ||||||
Deferred charges, net |
5,686 | 5,866 | ||||||
TOTAL ASSETS |
R$ | 115,174 | R$ | 112,561 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Notes payable |
R$ | 8,977 | R$ | 12,972 | ||||
Accounts payable and accrued expenses |
23,081 | 25,848 | ||||||
Payroll and related accruals |
7,178 | 6,571 | ||||||
Taxes |
3,835 | 4,936 | ||||||
Current portion of deferred income tax |
1,205 | 1,190 | ||||||
Current portion of deferred income (note 6) |
4,555 | 993 | ||||||
Current portion of contingencies and reassessed taxes |
1,470 | 1,580 | ||||||
Other current liabilities |
80 | 79 | ||||||
TOTAL CURRENT LIABILITIES |
50,381 | 54,169 | ||||||
Deferred income, less current portion (note 6) |
4,424 | 2,702 | ||||||
Deferred income tax |
960 | 1,262 | ||||||
NOTES PAYABLE, less current portion |
1,056 | 1,107 | ||||||
CONTINGENCIES AND REASSESSED TAXES, less
current portion (note 3) |
19,326 | 19,251 | ||||||
TOTAL LIABILITIES |
76,147 | 78,491 | ||||||
SHAREHOLDERS EQUITY: |
||||||||
Preferred stock, $.01 par value, 5,000 shares authorized; no
shares issued |
| | ||||||
Common stock, $.0001 par value, 12,500,000 shares authorized;
8,472,927 and 8,472,927 shares issued;
8,129,437 and 8,137,762 shares outstanding |
1 | 1 | ||||||
Additional paid-in capital |
61,148 | 61,148 | ||||||
Treasury Stock (343,490 and 335,165 shares) |
(2,065 | ) | (1,946 | ) | ||||
Accumulated Deficit |
(20,716 | ) | (24,946 | ) | ||||
Accumulated comprehensive loss |
(1,123 | ) | (1,091 | ) | ||||
TOTAL SHAREHOLDERS EQUITY |
37,245 | 33,166 | ||||||
Non-Controlling Interest |
1,782 | 904 | ||||||
TOTAL EQUITY |
39,027 | 34,070 | ||||||
TOTAL LIABILITIES AND EQUITY |
R$ | 115,174 | R$ | 112,561 | ||||
See Notes to Consolidated Financial Statements
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Table of Contents
BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(in thousands of Brazilian Reais, except share amounts)
(in thousands of Brazilian Reais, except share amounts)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
REVENUES |
||||||||
Net revenues from own-operated restaurants |
R$ | 40,146 | R$ | 38,277 | ||||
Net revenues from franchisees |
7,610 | 6,594 | ||||||
Revenues from supply agreements |
6,792 | 3,413 | ||||||
Other income |
397 | 1,806 | ||||||
TOTAL REVENUES |
54,945 | 50,090 | ||||||
Store Costs and Expenses |
(38,010 | ) | (37,125 | ) | ||||
Franchise Costs and Expenses |
(2,568 | ) | (2,378 | ) | ||||
Marketing Expenses |
(1,015 | ) | (1,100 | ) | ||||
Administrative Expenses |
(6,904 | ) | (6,156 | ) | ||||
Other Operating Expenses |
(1,573 | ) | (1,017 | ) | ||||
Net result of assets sold and impairment of assets |
(2 | ) | (27 | ) | ||||
TOTAL OPERATING COST AND EXPENSES |
(50,072 | ) | (47,803 | ) | ||||
OPERATING INCOME |
4,873 | 2,287 | ||||||
Interest Income (Expense) |
(44 | ) | (340 | ) | ||||
NET INCOME BEFORE INCOME TAX |
4,829 | 1,947 | ||||||
Income taxes |
(592 | ) | (212 | ) | ||||
NET INCOME BEFORE NON-CONTROLLING INTEREST |
4,237 | 1,735 | ||||||
Net loss attributable to non-controlling interest |
(7 | ) | 145 | |||||
NET INCOMEATTRIBUTABLE TO BRAZIL FAST FOOD CORP. |
R$ | 4,230 | R$ | 1,880 | ||||
NET INCOME PER COMMON SHARE
BASIC AND DILUTED |
R$ | 0.52 | R$ | 0.23 | ||||
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING: BASIC AND DILUTED |
8,134,586 | 8,137,762 |
See Notes to Consolidated Financial Statements
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Table of Contents
BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss (Unaudited)
(in thousands of Brazilian Reais)
Consolidated Statements of Comprehensive Loss (Unaudited)
(in thousands of Brazilian Reais)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
NET INCOME ATTRIBUTABLE TO BRAZIL FAST FOOD CORP. |
R$ | 4,230 | R$ | 1,880 | ||||
Other comprehensive income (loss): |
||||||||
Foreign currency translation adjustment |
(32 | ) | 13 | |||||
COMPREHENSIVE INCOME ATTRIBUTABLE TO BRAZIL FAST FOOD CORP. |
R$ | 4,198 | R$ | 1,893 | ||||
See Notes to Consolidated Financial Statements
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BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
Consolidated Statements of Changes In Shareholders Equity (Unaudited)
(in thousands of Brazilian Reais)
(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, 2010 |
8,137,762 | R$ | 1 | R$ | 61,148 | R$ | (1,946 | ) | R$ | (24,946 | ) | R$ | (1,091 | ) | R$ | 33,166 | R$ | 904 | R$ | 34,070 | ||||||||||||||||
Non-Controling Paid in Capital |
| 871 | 871 | |||||||||||||||||||||||||||||||||
Net Income |
| | | | 4,230 | | 4,230 | 7 | 4,237 | |||||||||||||||||||||||||||
Acquisition of Companys own
shares |
(8,325 | ) | | | (119 | ) | | | (119 | ) | 0 | (119 | ) | |||||||||||||||||||||||
Cummulative translation adjustment |
| | | | | (32 | ) | (32 | ) | | (32 | ) | ||||||||||||||||||||||||
Balance, March 31, 2011 |
8,129,437 | R$ | 1 | R$ | 61,148 | R$ | (2,065 | ) | R$ | (20,716 | ) | R$ | (1,123 | ) | R$ | 37,245 | R$ | 1,782 | R$ | 39,027 | ||||||||||||||||
See Notes to Consolidated Financial Statements
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BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(in thousands of Brazilian Reais)
(in thousands of Brazilian Reais)
Three Months Ended March, 31 | ||||||||
2011 | 2010 | |||||||
CASH FLOW FROM OPERATING ACTIVITIES: |
||||||||
NET INCOME (LOSS) BEFORE NON-CONTROLLING INTEREST |
R$ | 4.237 | R$ | 1.735 | ||||
Adjustments to reconcile net income to cash provided by
(used in) operating activities: |
||||||||
Depreciation and amortization |
1.779 | 1.615 | ||||||
(Gain) Loss on assets sold, net |
2 | 27 | ||||||
Deferred income tax |
(278 | ) | ||||||
Changes in assets and liabilities: |
||||||||
(Increase) decrease in: |
||||||||
Accounts receivable |
1.705 | (20 | ) | |||||
Inventories |
129 | 413 | ||||||
Prepaid expenses and other current assets |
(104 | ) | (454 | ) | ||||
Other assets |
(710 | ) | (1.017 | ) | ||||
(Decrease) increase in: |
||||||||
Accounts payable and accrued expenses |
(2.767 | ) | 3.649 | |||||
Payroll and related accruals |
607 | 1.397 | ||||||
Taxes other than income taxes |
(1.101 | ) | (1.191 | ) | ||||
Deferred income |
5.284 | (601 | ) | |||||
Contingencies and reassessed taxes |
(35 | ) | 520 | |||||
Other liabilities |
1 | 27 | ||||||
CASH FLOWS PROVIDED
BY OPERATING
ACTIVITIES |
8.749 | 6.100 | ||||||
CASH FLOW FROM INVESTING ACTIVITIES: |
||||||||
Additions to property and equipment |
(1.397 | ) | (2.237 | ) | ||||
Proceeds from sale of property, equipment and deferred charges |
1.164 | | ||||||
CASH FLOWS USED IN INVESTING ACTIVITIES |
(233 | ) | (2.237 | ) | ||||
CASH FLOW FROM FINANCING ACTIVITIES: |
||||||||
Acquisition of Companys own shares |
(119 | ) | | |||||
Non-Controling Paid in Capital |
878 | | ||||||
Net Borrowings (Repayments) under lines of credit |
(4.046 | ) | (3.323 | ) | ||||
CASH FLOWS USED IN FINANCING ACTIVITIES |
(3.287 | ) | (3.323 | ) | ||||
EFFECT OF FOREIGN EXCHANGE RATE |
(32 | ) | 13 | |||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
5.197 | 553 | ||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
16.742 | 13.250 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
R$ | 21.939 | R$ | 13.803 | ||||
See Notes to Consolidated Financial Statements
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BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in Brazilian Reais, unless otherwise stated)
Notes to Consolidated Financial Statements (Unaudited)
(in Brazilian Reais, unless otherwise stated)
NOTE 1 FINANCIAL STATEMENT PRESENTATION
The accompanying financial statements have been prepared by Brazil Fast Food Corp. (the
Company) without having been audited. In the opinion of the management, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation have been
included, and consistent with the finance statements prepared at December 31, 2010 in
accordance with USGAAP. The results for the quarter ended March 31, 2011 do not necessarily
indicate the results that may be expected for the full year. Unless otherwise specified, all
references in these financial statements to (i ) Reais or R$ are to the Brazilian Real
(singular), or to Brazilian Reais (plural), the legal currency of Brazil, and (ii ) U.S.
Dollars or $ are to United States dollars.
Certain information and footnote disclosures prepared in accordance with generally
accepted accounting principles and normally included in the financial statements have been
condensed consolidated or omitted. It is suggested that these financial statements be read
in conjunction with the consolidated financial statements and notes contained in the
Companys Annual Report on Form 10-K for the year ended December 31, 2010.
NOTE 2 BUSINESS AND OPERATIONS
Brazil Fast Food Corp. (the Company) was incorporated in the state of Delaware on
September 16, 1992.
On December 2006, the Company established a holding company in Brazil called BFFC do
Brasil Participações Ltda. (BFFC do Brasil, formerly 22N Participações Ltda.), to
consolidate all its business in the country and allow the Company to pursue its multi-brand
program, as discussed below:
BOBS TRADEMARK
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, and owns and operates, both directly and through franchisees, a chain of
hamburger fast food restaurants in Brazil.
KFC TRADEMARK
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, through its subsidiary CFK
Comércio de Alimentos Ltda. (CFK, formerly Clematis Indústria e Comércio de Alimentos e
Participações Ltda.), started to conduct the operations of four directly owned and operated
KFC restaurants in the city of Rio de Janeiro as a Yum! Brands franchisee, and took over the
management, development and expansion of the KFC chain in Brazil. CFK started its activities
on April 1, 2007, and accordingly, the results of its operations are included in this report
since that date.
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PIZZA HUT TRADEMARK
During 2008, the Company reached an agreement with Restaurants Connection International
Inc (RCI) to acquire, through its wholly-owned holding subsidiary, BFFC do Brasil, 60% of
Internacional Restaurantes do Brasil (IRB), which operates Pizza Hut restaurants in the
city of São Paulo as a Yum! Brands franchisee. The remaining 40% of IRB is held by another
Brazilian company of which IRBs current CEO is the main stockholder.
IRB also operates a coffee concept brand called In Bocca al Lupo Café, which has four
stores in the city of São Paulo.
The results of IRBs operations have being included in the consolidated financial
statements since December, 2008.
DOGGIS TRADEMARK
During October 2008, the Company reached an agreement with G.E.D. Sociedad Anonima
(GED), one of the fast food leaders in Chile, where it has 150 stores.
By this agreement, BFFC do Brasil would establish a Master Franchise to manage, develop
and expand the Doggis hot-dog chain in Brazil through own-operated restaurants and
franchisees and GED would establish a Master Franchise to manage, develop and expand the
Bobs hamburger chain in Chile through own-operated restaurants and franchisees.
The Master Franchise established in Brazil was named DGS Comercio de Alimento S.A.
(DGS) and the Master Franchise established in Chile was named BBS S.A. (BBS). BFFC do
Brasil has 20% of BBS and GED has 20% of DGS.
SUPRILOG
In the second half of 2008, the Company began the operation of Suprilog Logística
Ltda., which warehouses equipment and spare parts and provides maintenance services for the
Companys own-operated restaurants. It may also be used for some particular re-sale
activities of special products or raw materials used in the stores operations. Suprilogs
financial figures are fully consolidated in the accompanying financial statements.
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NOTE 3 OTHER RECEIVABLES AND OTHER ASSETS
Other receivables and other assets consist of the following:
R$000
Other receivables and other assets:
Other receivables and other assets:
March 31, | December 31, | |||||||
2011 (unaudited) | 2010 | |||||||
Receivables from franchisees assets sold (a) |
R$ | 581 | R$ | 660 | ||||
Judicial deposits (b) |
9,836 | 9,515 | ||||||
Properties for sale (c) |
1,150 | 1,361 | ||||||
Receivable from properties sale, less current portion (c) |
3,310 | 4,450 | ||||||
Investiment in BBS (Bobs Chile) (d) |
805 | 124 | ||||||
Other receivables |
146 | 148 | ||||||
R$ | 15,828 | R$ | 16,258 | |||||
(a) | The long-term portion of receivables derived from the sale of restaurants (fixed assets) to franchisees; | |
(b) | Deposits required by Brazilian courts in connection with legal disputes, also discussed in note 5; | |
(c) | Company sold its real estate properties, as discussed in note 4. As a portion of the sale had not been formalized by March 31, 2011, the Company recorded the related amount (cost of acquisition, net of accumulated depreciation) as property held for sale (R$1,150,000). The entry worth R$3,310,000 represents the long-term portion of receivables from the property sales which had been completed by March 31, 2011. The balance sheet also states the current portion of these receivables in the amount of R$3,633,000. | |
(d) | Refers to the Companys 20% capital interest in BBS, a non-controlling subsidiary (see note 2). During the first quarter of 2011 the Company paid in an additional R$681,000 in capital. The other stockholders also paid in extra capital for BBS, and as such, the Company kept its share at 20%. |
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NOTE 4 SALE OF ASSETS
During the third quarter of 2010 the Company sold all its eight properties to
Bigburger Ltda. and CCC Empreendimentos e Participações Ltda., entities controlled by José
Ricardo Bomeny and Rômulo B. Fonseca, respectively, two of the Companys major shareholders.
Three own-operated stores and five stores operated by franchisees, all under the Bobs brand,
had their business premises sold. The sale transaction only included the buildings and
improvements made to them and did not include either the operating assets or the operation of
the stores. Therefore, after the sale of the properties, the Company kept on operating its
stores as usual, as did the franchisees.
This transaction was conducted at the estimated fair value and will result in sale
proceeds of R$13.5 million from assets with a book value of R$6.4 million. Management prepared
the fair value estimates for these asset sales and in doing so considered valuations provided
by real estate consultants.
By December 31, 2010, much of the transaction had already been concluded (seven of the
eight properties sold), for which reason the company accounted for a net gain of R$5.4 million
(R$3.6 million, net of income tax) in the operating results for the twelve-month period ended
on that date. Some minor legal issues have held up the sale of the one remaining property,
though this is expected to be concluded in the second quarter of 2011, bringing expected
additional gains to be accounted for of approximately R$1.6 million (R$1.1 million, net of
income tax). The portion of assets which had not been sold by March 31, 2011 were reclassified
to the Properties for sale account (part of Other receivables and other assets see note
3) at their net cost value (R$1.2 million).
The terms of sale included a downpayment of approximately 20% of the total amount, with
the balance to be paid in 24 monthly installments. The buyers also accepted certain conditions
to protect the Companys long-term interests, including the maintenance of existing rental
agreements and loan guarantees. All payments due until March 31, 2011 (total amount received
was R$4.3 million wich includes R$1.1 received during the first quarter of 2011) were received
by the Company. The short-term portion of these receivables is stated as Receivables from
properties sale in the balance sheet and the long- term portion is stated as part of Other
receivables and other assets. The Company has evaluated the status of these receivables and
concluded that there are no issues with their collectability.
This transaction will enable the Company to reduce its debt and permit the management
to focus its attention on the core restaurant operations.
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NOTE 5 CONTINGENCIES AND REASSESSED TAXES
Liabilities related to tax amnesty programs and litigation consist of the following:
R$ 000 | March 31, 2011 (unaudited) | December 31, 2010 | ||||||||||||||||||||||
Long | Long | |||||||||||||||||||||||
Total | Current | Term | Total | Current | Term | |||||||||||||||||||
Liability | Liability | Liability | Liability | Liability | Liability | |||||||||||||||||||
Reassessed taxes |
||||||||||||||||||||||||
Federal taxes (PAES) |
11,244 | 1,470 | 9,774 | 11,639 | 1,580 | 10,059 | ||||||||||||||||||
Contingencies |
||||||||||||||||||||||||
ISS tax litigation |
7,002 | | 7,002 | 6,616 | | 6,616 | ||||||||||||||||||
Labor litigation |
1,902 | | 1,902 | 1,885 | | 1,885 | ||||||||||||||||||
Property leasing and other litigation |
648 | | 648 | 691 | 691 | |||||||||||||||||||
TOTAL |
20,796 | 1,470 | 19,326 | 20,831 | 1,580 | 19,251 | ||||||||||||||||||
Reassessed taxes
The Company successfully applied to join two subsequent amnesty programs offered by the
Brazilian federal government (REFIS in 1999 and PAES in 2003) to renegotiate Brazilian
federal taxes not paid by Venbo in 1999, 2001 and at the beginning of 2002 in arrears. The
second amnesty program (PAES) included the balance of the previous one (REFIS) and unpaid
2001 and 2002 federal taxes, as well as Social Security penalties.
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 in 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 March 31, 2011, total of R$11.2 million (R$11.6 million in December 31, 2010)
are sufficient, however, there is no assurance that the outcome of this situation will
derive further liability to the Company. As of March 31, 2011, the difference between such
debt at the statements provided by the Brazilian Federal Government and the statements
reported by the Companys was R$4.7 million (R$4.7 million in December 31, 2010).
In 2008, the Brazilian federal government detected miscalculation of the interest
accrued by most companies that had joined both amnesty programs. The Companys total debt
increased R$2.8 million accordingly.
In accordance to the amnesty programs the Company has been paying monthly installments
equivalent to 1.5% of Venbos gross sales, with interest accruing at rates set by the
Brazilian federal government, which are currently 6.0% per year (6.0% per year also in
December 31, 2010).
During the three-month period ended March 31, 2011, the Company paid approximately
R$0.4 million as part of the PAES program and no interest was charged on these payments.
During the same period of 2010 the Company paid approximately R$0.5 million, including R$0.1
in interest.
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During the third quarter of 2009, the Brazilian federal government launched a third
amnesty program to consolidate balances from previous programs and other fiscal debts. The
Company applied to join this program, but its rules, on debt consolidation and reduction in
consequence to number of monthly installments chosen, have not yet been fully formalized by
the Brazilian fiscal authorities. At the present moment, the Company cannot estimate if any
material adjustment to its debt will be necessary when consolidated by the Brazilian federal
government. The final consolidation of such amnesty program is expected to take place by the
end of the first semester of 2011.
Contingencies
ISS tax litigation
None of the Companys revenues were subject to municipal tax on services rendered (ISS)
until 2003. Notwithstanding, at the beginning of 2004, a new legislation stated that
royalties were to be considered liable for ISS tax payment. Although the Company is claiming
in court that royalties should not be understood as payment for services rendered and
therefore should not be taxed under ISS legislation, the Company is monthly depositing in
court the amount claimed.
As of March 31, 2011, the Company has totaled R$7.0 million (R$6.6 million in December
31, 2010) in deposits, which is considered by the Companys management, based on the opinion
of its legal advisors, sufficient to cover the Companys current ISS tax contingencies.
During the third quarter of 2009, the Companys claim was partially settled in court.
The decision was for Rio de Janeiro municipality to reimburse the Company approximately
R$0.5 million taxed before the ISS new legislation was enacted. The Company is studying how
probable tax credits to be received from the municipality could be offset against tax to be
paid to the municipality, since the Company is currently depositing the amount due in court.
Because of the uncertainty of realizing this tax credit, the Company did not recognize the
related amount as a gain in its Consolidated Income Statements.
The referred change in ISS tax legislation triggered much debate on whether marketing
fund contribution and initial fees paid by franchisees should be considered services
rendered and be liable for ISS tax payment. In response, the Company is working with its tax
advisors to adopt all necessary measures to avoid ISS taxation on marketing fund
contribution and initial fees.
Labor litigation
During 2005, the Company was ordered to pay to a former employee R$480,000. Although
unusually high, the Company cannot guarantee it will not receive other labor complaint of
similar magnitude.
As of March 31, 2011 the Company accounted for labor related liabilities the amount of
R$1.9 million (R$1.9 million in December 31, 2010), which is considered by the Companys management, based on the opinion of its legal advisors, sufficient to cover
the Companys current labor contingencies.
Other contingencies
The other contingencies that in accordance with our legal advisors require no provision
in the Companys balance sheet are the following:
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- The Company purchased Venbo Comércio de Alimentos Ltda. (Venbo) from VENDEX in
1996. The Acquisition Purchase Agreement states 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 has accordingly forwarded these 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 from the period prior to 1996. In order to have the
right to appeal it was obliged to pledge one of its properties as collateral. VENDEX took
over the defense of the case but did not offer another asset as collateral because of its
weak current financial condition.
The VENDEX attorneys are taking on the defense of all claims against Venbo. During the
third quarter of 2007, the single relevant claim was judged favorable to VENDEX. All the
other claims are immaterial; however, we cannot predict whether any other claim will be made
that might be material.
- A franchisee of the Companys became a permanent debtor of royalties and marketing
contributions, and the Company, after failing in its attempts to improve his business,
finally decided to terminate his franchise contract and close down his stores. After going
to 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 had offered him a store to
operate at a guaranteed profit, but that instead he had recorded operating losses. He put in
a claim for indemnity of R$5.5 million. The court judged the claim in favor of the
franchisee, but reduced the indemnity to R$1.2 million. The Companys legal advisors
understood his argument as contradicting franchise laws and the Companys usual business
practices and appealed against the ruling. In the appeal, the court again came down in favor
of the franchisee, but again reduced the compensation, this time to R$450,000. The Company
has again appealed against the ruling, but cannot predict the outcome.
- The owner of a property where the Company held a lease contract for operating one of
its stores (closed in 2002) claimed unpaid monetary restatement on rent for a period of two
and a half years, totaling R$1.0 million. The Company has reached an agreement to reduce the
claim and paid R$700 thousand during 2010. The Company is not safeguarded against receiving
other lease claims of similarly high amounts.
- Concerning inquires from the Brazilian Government General Attorneys Office, the
Company has the following issues:
a) obligation to hire handicapped personnel until they make up a minimum of 5% of the
total workforce. Although the Company has managed to hire and train some handicapped staff,
it is hard to attain the 5% level given the conditions in the stores and the limited labor
supply. The Company is trying to reach an agreement with the General Attorneys Office, but
there is no guarantee that it will be successful and avoid paying fines.
b) questions related to the total taxes paid by Venbo during the Pan American and Para
Pan American Games. Although the Company has proved that the taxes were collected according
to a special tax regime offered by Rio de Janeiro state, we cannot predict the final
outcome.
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- In February 2010, the Brazilian Federal Tax Authorities questioned the procedures
that the Company has used in recent years to recover the IPI (a tax on manufactured goods)
included in the cost of packaging products bought from different suppliers. The authorities
agree that the Company has the right to this tax credit but understand that it should claim
it back 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 in avoiding paying around R$1.2
million to the government and charging the suppliers for a reimbursement.
Based on an analysis of possible losses, taking into account the applicable litigation
and settlement strategies of its legal advisors, the Company has sufficient resources to
cover its current contingencies.
NOTE 6 DEFERRED INCOME
The Company settles agreements with beverage and food suppliers and for each product, the
Company negotiates a monthly performance bonus which will depend on the product sales volume to its
chains (including both own-operated and franchise operated). The performance bonus, or vendor
bonuses, can be paid monthly or in advance (estimated), depending on the agreement terms negotiated
with each supplier.
When a vendor bonus is received in advance in cash, it is recorded as an entry in the cCash
and cash equivalentes with a corresponding credit in deferred income and is recognized on a
straight line basis over the term of the related supply agreement on a monthly basis.
Performance bonuses may also include Exclusivity agreements, which are normally paid in
advance by suppliers.
The increase from 2010 to 2011 is also attributable to two performance bonus contracted during
2011, both of them with pre-existing suppliers and relate to two major products supplied to the
Bobs chain.
NOTE 7 STOCK OPTION PLAN ACTIVITY
The Companys Stock Option Plan terminated on September 17, 2002, ten years from the
date of its adoption by the Board of Directors.
During 2005, the Companys Board of Directors and a majority of its shareholders
decided that the Board would pay out compensation in cash and that no more stock options
would be granted.
During 2009, the last options of such plan were exercised and after this activity
the Company has no further exercisable options, under the Companys Stock Option Plan.
Accordingly, during 2010 and 2011 there was no option activity.
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NOTE 8 TREASURY STOCK
In the last quarter of 2004, the Companys Board of Directors approved a stock
repurchase plan involving the repurchase of as many as 200,000 shares of its own common
stock. The plans goal is to optimize the cash generated in the United States, and the
repurchase limit was increased by 200,000 shares on October 18, 2006.
During the first quarter of 2010, the Company did not repurchase any share under the
referred stock repurchase plan. During the first quarter of 2011, the Company repurchased
8,325 shares related to such plan.
Up to March 31, 2011, the Company repurchased a total amount of 343,490 shares and
the accumulated stock purchases totaled R$2.1 million. Those transactions are accounted
for as a reduction of Paid in Capital, in the Shareholders Equity section of the
accompanying balance sheets.
NOTE 9 SEGMENT INFORMATION
Through the Companys wholly-owned subsidiary, Venbo, which conducts business under the
trade name Bobs, the Company owns and operates, both directly and through franchisees,
Brazils second largest fast food hamburger restaurant chain. Currently, the Company
operates 40 points of sale under the Bobs brand.
Since April 2007, the Company has operated the KFC brand in Brazil through its
wholly-owned subsidiary, CFK. Presently, the Company operates 10 stores in Rio de Janeiro
under the trade name KFC.
Since December 1, 2008, the Company has operated the Pizza Hut brand in São Paulo,
Brazil, through its subsidiary IRB. It currently operates 17 stores under the Pizza Hut
brand.
Since September, 2008, the Company has operated the Doggis brand in Rio de Janeiro
through its subsidiary, DGS. At present, the Company operates 5 stores under the Doggis
trade name.
Currently, most of the Companys operations are concentrated in southeastern Brazil. As
of March 31, 2011, all point sales operated by the Company listed above were located at that
region which provided 100.0% of total Net Revenues from Own-operated Restaurants for the
year. In addition, from the total of 709 franchise-operated point of sales, 374 were located
at the same region, providing 56% of Net Revenues from Franchisees.
Outside Brazil, the Bobs brand is also present through franchise operations in Angola,
Africa (three stores) and, since the last quarter of 2009, in Chile, South America (four
stores). These operations are not material to our overall results.
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The Company manages and internally reports its operations in two segments: (1)
own-stores operations (2) franchise operations. The following tables present the Companys
revenues, costs/expenses and operating income per segment:
R$ 000 | Results from own-stores operations | |||||||
Three months ended March 31, | ||||||||
2011 | 2010 | |||||||
Net Restaurant Sales |
40,146 | 38,277 | ||||||
Store Costs and Expenses |
||||||||
Food, Beverage and Packaging |
(13,524 | ) | (13,217 | ) | ||||
Payroll & Related Benefits |
(8,632 | ) | (9,234 | ) | ||||
Restaurant Occupancy |
(4,755 | ) | (4,359 | ) | ||||
Contracted Services |
(4,905 | ) | (5,049 | ) | ||||
Depreciation and Amortization |
(1,625 | ) | (1,466 | ) | ||||
Royalties charged |
(1,384 | ) | (1,046 | ) | ||||
Other Store Costs and Expenses |
(3,185 | ) | (2,754 | ) | ||||
Total Store Costs and Expenses |
(38,010 | ) | (37,125 | ) | ||||
Operating margin |
2,136 | 1,152 | ||||||
R$ 000 | Results from franchise operations | |||||||
Three months ended March 31, | ||||||||
2011 | 2010 | |||||||
Net Franchise Revenues |
7,610 | 6,594 | ||||||
Payroll & Related Benefits |
(1,705 | ) | (1,621 | ) | ||||
Occupancy expenses |
(243 | ) | (228 | ) | ||||
Travel expenses |
(192 | ) | (187 | ) | ||||
Contracted Services |
(196 | ) | (61 | ) | ||||
Other franchise cost and
expenses |
(232 | ) | (281 | ) | ||||
Total Franchise Costs and
Expenses |
(2,568 | ) | (2,378 | ) | ||||
Operating margin |
5,042 | 4,216 | ||||||
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.
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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.
Own-stores operation conducted by the Company provided the following figures per brand:
Results from Bobs | Results from KFCs | Results from Pizza Huts | Results from Doggis | |||||||||||||||||||||||||||||
brand operations | brand operations | brand operations | brand operations | |||||||||||||||||||||||||||||
R$ 000 | ||||||||||||||||||||||||||||||||
Three months ended March 31, | Three months ended March 31, | Three months ended March 31, | Three months ended March 31, | |||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||
Revenues |
R$ | 18,285 | R$ | 19,490 | R$ | 6,214 | R$ | 5,103 | R$ | 14,936 | R$ | 13,135 | R$ | 711 | R$ | 549 | ||||||||||||||||
Food, Beverage and Packaging |
(6,816 | ) | (7,170 | ) | (2,338 | ) | (1,838 | ) | (3,992 | ) | (3,875 | ) | (378 | ) | (334 | ) | ||||||||||||||||
Payroll & Related Benefits |
(4,033 | ) | (4,910 | ) | (1,497 | ) | (1,326 | ) | (2,828 | ) | (2,789 | ) | (273 | ) | (209 | ) | ||||||||||||||||
Occupancy expenses |
(1,950 | ) | (2,110 | ) | (814 | ) | (716 | ) | (1,812 | ) | (1,450 | ) | (180 | ) | (83 | ) | ||||||||||||||||
Contracted Services |
(2,035 | ) | (2,546 | ) | (907 | ) | (767 | ) | (1,829 | ) | (1,653 | ) | (134 | ) | (83 | ) | ||||||||||||||||
Depreciation and Amortization |
(592 | ) | (648 | ) | (296 | ) | (272 | ) | (681 | ) | (489 | ) | (56 | ) | (57 | ) | ||||||||||||||||
Royalties charged |
| | (402 | ) | (167 | ) | (982 | ) | (879 | ) | | | ||||||||||||||||||||
Other Store Costs and Expenses |
(1,719 | ) | (1,844 | ) | (561 | ) | (165 | ) | (850 | ) | (709 | ) | (55 | ) | (36 | ) | ||||||||||||||||
Total Own-stores cost and
expenses |
(17,145 | ) | (19,228 | ) | (6,815 | ) | (5,251 | ) | (12,974 | ) | (11,844 | ) | (1,076 | ) | (802 | ) | ||||||||||||||||
Operating margin |
R$ | 1,140 | R$ | 262 | R$ | (601 | ) | R$ | (148 | ) | R$ | 1,962 | R$ | 1,291 | R$ | (365 | ) | R$ | (253 | ) | ||||||||||||
Below we provide the segment information and its reconciliation to the Companys income
statement:
R$ 000 | Three months ended March 31, | |||||||
2011 | 2010 | |||||||
Bobs Operating Income |
R$ | 1,140 | R$ | 262 | ||||
KFCs Operating Loss |
(601 | ) | (148 | ) | ||||
Pizza Huts Operating Income |
1,962 | 1,291 | ||||||
Doggis Operating Loss |
(365 | ) | (253 | ) | ||||
Total Operating Income |
2,136 | 1,152 | ||||||
Income from franchise operations |
5,042 | 4,216 | ||||||
Unallocated Marketing Expenses |
(1,015 | ) | (1,100 | ) | ||||
Unallocated Administrative Expenses |
(6,904 | ) | (6,156 | ) | ||||
Unallocated Other Operating Expenses |
(1,419 | ) | (868 | ) | ||||
Unallocated Net Revenues from Trade Partners |
6,792 | 3,413 | ||||||
Unallocated Other income |
397 | 1,806 | ||||||
Unallocated Depreciation and Amortization |
(154 | ) | (149 | ) | ||||
Unallocated Net result of assets sold and
impairment of assets |
(2 | ) | (27 | ) | ||||
Unallocated Interest Expenses |
(44 | ) | (340 | ) | ||||
Total Unallocated Expenses |
(2,349 | ) | (3,421 | ) | ||||
NET INCOME BEFORE INCOME TAX |
4,829 | 1,947 | ||||||
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following MD&A is intended to help readers understand the results of the Companys
operations, its financial condition and cash flows. The MD&A is provided as a supplement to, and
should be read in conjunction with, our financial statements and the accompanying notes to the
financial statements.
Special Note about Forward-Looking Statements
Certain statements in the Managements Discussion and Analysis (MD&A) other than purely
historical information, including estimates, projections, statements relating to our business
plans, objectives and expected operating results, and the assumptions upon which those statements
are based, are forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the Securities Act)
and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally
are identified by the words believe, project, expect, anticipate, estimate, intend,
strategy, plan, may, should, will, would, will be, will continue, will likely
result, and similar expressions. Forward-looking statements are based on current expectations and
assumptions that are subject to risks and uncertainties which may cause actual results to differ
materially from the forward-looking statements. A detailed discussion of risks and uncertainties
that could cause actual results and events to differ materially from such forward-looking
statements is included in the companys Annual Report on Form 10-K for the year ended December 31,
2010. We undertake no obligation to update or revise publicly any forward-looking statements,
whether as a result of new information, future events, or otherwise.
OUR BUSINESS
References to we, us or the Company are to Brazil Fast Food Corp.
During 1996, we 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, and
owns and operates, both directly and through franchisees, a chain of hamburger fast food
restaurants in Brazil.
In December 2006, we established a holding company in Brazil called BFFC do Brasil
Participações Ltda. (BFFC do Brasil, formerly 22N Participações Ltda.), to consolidate all our
business in the country and allow us to pursue its multi-brand program. Following the restructuring
strategy, we implemented segregate managements for our different divisions: fast food restaurants,
franchises and real estate. During the first quarter of 2007, we reached an agreement with Yum!
Brands, owner of the KFC brand. By this agreement, BFFC do Brasil, through its subsidiary CFK
Comércio de Alimentos Ltda. (CFK, formerly Clematis Indústria e Comércio de Alimentos e
Participações Ltda.), started to conduct the operations of four directly owned and operated KFC
restaurants in the city of Rio de Janeiro as a Yum! Brands franchisee, and took over the
management, development and expansion of the KFC chain in Brazil.
During 2008, we reached an agreement with Restaurants Connection International Inc (RCI) to
acquire, through its wholly-owned holding subsidiary, BFFC do Brasil, 60% of Internacional
Restaurantes do Brasil (IRB), which operates Pizza Hut restaurants in the city of São Paulo as a
Yum! Brands franchisee. The remaining 40% of IRB is held by another Brazilian company of which
IRBs current CEO is the main stockholder. IRB also operates a coffee concept brand called In
Bocca al Lupo Café, which is present as a corner operation, inside of four of Pizza Hut stores.
During October 2008, we reached an agreement with G.E.D. Sociedad Anonima (GED), one of the
fast food leaders in Chile, where it has 150 stores. By this agreement, BFFC do Brasil would
- 18 -
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establish a Master Franchise to manage, develop and expand the Doggis hot-dog chain in Brazil
through own-operated restaurants and franchisees and GED would establish a Master Franchise to
manage, develop and expand the Bobs hamburger chain in Chile through own-operated restaurants and
franchisees. The Master Franchise established in Brazil was named DGS Comercio de Alimento S.A.
(DGS) and the Master Franchise established in Chile was named BBS S.A. (BBS). BFFC do Brasil
has 20% of BBS and GED has 20% of DGS. BBS is qualified as noncontrolling subsidiary since we have
no ability to influence business decision in such investee. Accordingly, investment in BBS is
accounted for at cost of acquisition.
We also own Suprilog Logística Ltda., which warehouses equipment and spare parts and provides
maintenance services for our own-operated restaurants. It may also be used for some particular
re-sale activities of special products or raw materials used in the stores operations. 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 Chile, South America. These operations are not material to our overall results.
For the most part, revenues consist of sales by Companys own-operated restaurants, income
from agreements with trade partners and fees from restaurants operated by franchisees. These fees
consist primarily of initial franchise fees and royalties that are based on a percentage of sales.
We, through BFFC do Brasil, manage the second largest fast food chain in Brazil based on
number of system units.
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RESULTS OF OPERATIONS COMPARISON OF QUARTERS ENDED MARCH 31, 2011 AND 2010
(Amount in thousand of Brazilian Reais)
The following table sets forth the statement of operations for quarters ended March 31, 2011
and 2010. All the operating figures are stated as a percentage of total net revenues. However, the
details of store costs and expenses and franchise expenses also include these figures as a
percentage of net revenues from own-operated restaurants and net franchise revenues, respectively.
R$ 000 | 3 Months | 3 Months | ||||||||||||||
Ended | Ended | |||||||||||||||
31-Mar-11 | % | 31-Mar-10 | % | |||||||||||||
REVENUES |
||||||||||||||||
Net Revenues from Own-operated Restaurants |
R$ | 40,146 | 73.1 | % | R$ | 38,277 | 76.4 | % | ||||||||
Net Revenues from Franchisees |
7,610 | 13.9 | % | 6,594 | 13.2 | % | ||||||||||
Revenues from Special Agreements |
6,792 | 12.4 | % | 3,413 | 6.8 | % | ||||||||||
Other Income |
397 | 0.7 | % | 1,806 | 3.6 | % | ||||||||||
TOTAL REVENUES |
54,945 | 100.0 | % | 50,090 | 100.0 | % | ||||||||||
OPERATING COST AND EXPENSES |
||||||||||||||||
Store Costs and Expenses |
(38,010 | ) | -69.2 | % | (37,125 | ) | -74.1 | % | ||||||||
Franchise Costs and Expenses |
(2,568 | ) | -4.7 | % | (2,378 | ) | -4.7 | % | ||||||||
Marketing Expenses |
(1,015 | ) | -1.8 | % | (1,100 | ) | -2.2 | % | ||||||||
Administrative Expenses |
(6,904 | ) | -12.6 | % | (6,156 | ) | -12.3 | % | ||||||||
Other Operating Expenses |
(1,573 | ) | -2.9 | % | (1,017 | ) | -2.0 | % | ||||||||
Net result of assets sold and impairment of assets |
(2 | ) | 0.0 | % | (27 | ) | -0.1 | % | ||||||||
TOTAL OPERATING COST AND EXPENSES |
(50,072 | ) | -91.1 | % | (47,803 | ) | -95.4 | % | ||||||||
OPERATING INCOME |
4,873 | 8.9 | % | 2,287 | 4.6 | % | ||||||||||
Interest Income (Expense) |
(44 | ) | -0.1 | % | (340 | ) | -0.7 | % | ||||||||
NET INCOME BEFORE INCOME TAX |
4,829 | 8.8 | % | 1,947 | 3.9 | % | ||||||||||
Income taxes |
(592 | ) | -1.5 | % | (212 | ) | -0.6 | % | ||||||||
NET INCOME BEFORE NON-CONTROLLING INTEREST |
4,237 | 10.6 | % | 1,735 | 4.5 | % | ||||||||||
Net loss attributable to non-controlling interest |
(7 | ) | 0.0 | % | 145 | 0.4 | % | |||||||||
NET INCOMEATTRIBUTABLE TO BRAZIL FAST FOOD CORP. |
4,230 | 10.5 | % | 1,880 | 4.9 | % | ||||||||||
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Net Revenues from Own-Operated Restaurants
Net restaurant sales for the company-owned retail outlets increased by R$1.9 million, or
4.9%, to R$40.1 million for the quarter ended March 31, 2011, as compared to R$38.3 million for the
quarter ended March 31, 2010.
The breakdown of net revenues from the Companys own restaurants is as follows:
Net revenues from own-operated restaurants | ||||||||||||
3 Months | Increase | 3 Months | ||||||||||
March 31, | (Decrease) | March 31, | ||||||||||
Brand | 2011 | % | 2010 | |||||||||
Bobs |
R$ | 18,285 | -6.2 | % | R$ | 19,490 | ||||||
KFC |
6,214 | 21.8 | % | 5,103 | ||||||||
IRB Pizza Hut |
14,936 | 13.7 | % | 13,135 | ||||||||
DOGGIS |
711 | 29.5 | % | 549 | ||||||||
Consolidated Net Revenues |
R$ | 40,146 | 4.9 | % | R$ | 38,277 | ||||||
Based on the criterion of same store sales, which only includes stores that have been
open for more than one year, Bobs net restaurant sales in the three months ended March 31, 2011
were 6.6% higher than in the same three-month period in 2010. However, Bobs overall sales
decreased due to the reduction in the number of points of sale (from 59 in March 31, 2010 to 40 at
March 31, 2011).
The decrease in the number of Bobs point of sales reflects the companys strategy to limit
its direct operations to its most profitable outlets and to focus on growing its franchise network.
Under the criterion of same store sales, net restaurant sales saw an approximately 10.9%
increase for the KFC brand between the three months ended March 31, 2011 and the equivalent period
in 2010. KFCs overall sales increased due to (i) inclusion of lower price products, bringing in
new business during off-peak hours; (ii) increase in delivery business; and (iii) focus on speeding
up operations, especially at peak hours.
Under the criterion of same store sales, Pizza Huts net restaurant sales increased by
approximately 8.8% between the threemonth period ended March 31, 2011 and the equivalent period
of 2010. Pizza Huts sale increase is attributable to the inclusion of higher value items in its
menu board as well as an increase in the selling price of some products, representing an overall
price hike of around 3%. Pizza Huts revenues were also positively impacted by the increased number
of point of sales from 16 at March 31, 2010 to 17 at March 31, 2011).
The overall increase in Doggis sales is mainly attributable to the growth in the number of
points of sales from four on March 31, 2010 to five on March 31, 2011.
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Net Franchise Revenues
Net franchise revenues are comprised of initial fees (due upon the signing of a new franchise
contract) and royalty fees (a percentage on sales paid by stores operated by franchisees), as set
forth below:
R$000 | 3 months ended March, 31 | |||||||
2011 | 2010 | |||||||
Net Franchise Royalty Fees |
6,696 | 6,211 | ||||||
Initial Fee |
914 | 383 | ||||||
Net Franchise Revenues |
7,610 | 6,594 | ||||||
Net franchise revenues increased R$1.0 million, or 15.4%, to 7.6 million for the three months
ended March 31, 2011 as compared to R$6.5 million for the three months ended March 31, 2010.
This increase is attributable to the growth of the Companys franchise business from 646
retail outlets as of March 31, 2010 to 709 as of March 31, 2011.
Currently, the Bobs brand accounts for most of the franchise activity.
Alongside the royalty fees and initial fees, the Company receives marketing contributions from its
franchisees, which are designed to finance corporate marketing investments and are accounted for as
discussed in Marketing Expenses.
Revenue from Trade partners and Other Income
The Company has agreements with beverage and food suppliers, and for each product it
negotiates a monthly performance bonus which depends on the volume of sales of that product to its
chains (including both own-operated and franchise operated stores). The performance bonus, or
vendor bonus, can be paid monthly or in advance (estimated), depending on the agreement terms
negotiated with each supplier. Income from the performance bonus is only possible because the
number of restaurants that operate throughout Brazil under the prestigious brands franchised by the
Company, especially Bobs, represent an excellent channel for suppliers to increase their sales.
Each month, the Company assesses the volume of each product purchased by its chains and calculates
the performance bonus receivable from each contract. The performance bonus is normally received in
cash and rarely in products. Since 2008 the Company has not received any performance bonus in
products.
The income related to performance bonuses when received in cash recognized directly as a
credit in the Companys income statement under revenues from trade partners. Such revenue is
recorded when the cash is actually received from the vendors, since it is very hard to estimate how
much will be receivable and there are significant doubts about its collectibility until the vendor
agrees on the exact value of the bonus.
When a vendors bonus is received in advance in cash, it is recorded as an entry in the Cash
and cash equivalents with a corresponding credit in deferred income, and is recognized on a
straight line basis over the term of the related supply agreement on a monthly basis.
Performance bonuses may also include exclusivity agreements, which are normally paid in
advance by suppliers.
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Table of Contents
The rise in the number of Bobs brand franchisees, from 646 on March 31, 2010 to 709 on March
31, 2011, together with the expansion of the multi-brand concept, has given the Companys
administrators greater bargaining power with its suppliers.
In addition, the growth of the franchisee chain has boosted the volume of purchases made from
suppliers. According to the terms of its supply agreements, this means the Company has benefited
from volume-related performance bonuses from its suppliers.
Other income is mainly comprised of nonrecurring gains.
Store Costs and Expenses
Store costs and expenses represented (69.2%) and (74.1%) of total revenues for the quarters
ended March 31, 2011 and 2010, respectively.
Analyzed as a segment (own-store operations), the respective store costs and expenses for
own-operated restaurants as compared to net revenues can be seen below:
R$ 000 | 3 Months | 3 Months | ||||||||||||||
Ended | Ended | |||||||||||||||
31-Mar-11 | % | 31-Mar-10 | % | |||||||||||||
STORE RESULTS |
||||||||||||||||
Net Revenues from Own-operated Restaurants |
40,146 | 100.0 | % | 38,277 | 100.0 | % | ||||||||||
Store Costs and Expenses |
||||||||||||||||
Food, Beverage and Packaging |
(13,524 | ) | -33.7 | % | (13,217 | ) | -34.5 | % | ||||||||
Payroll & Related Benefits |
(8,632 | ) | -21.5 | % | (9,234 | ) | -24.1 | % | ||||||||
Restaurant Occupancy |
(4,755 | ) | -11.8 | % | (4,359 | ) | -11.4 | % | ||||||||
Contracted Services |
(4,905 | ) | -12.2 | % | (5,049 | ) | -13.2 | % | ||||||||
Depreciation and Amortization |
(1,625 | ) | -4.0 | % | (1,466 | ) | -3.8 | % | ||||||||
Royalties charged |
(1,384 | ) | -3.4 | % | (1,046 | ) | -2.7 | % | ||||||||
Other Store Costs and Expenses |
(3,185 | ) | -7.9 | % | (2,754 | ) | -7.2 | % | ||||||||
Total Store Costs and Expenses |
(38,010 | ) | -94.7 | % | (37,125 | ) | -97.0 | % | ||||||||
STORE OPERATING INCOME |
2,136 | 5.3 | % | 1,152 | 3.0 | % | ||||||||||
Food, Beverage and Packaging Costs
The table below sets forth the cost of food per brand:
3 Months ended | 3 Months ended | |||||||||||||||||||||||
R$000 | March 31, 2011 | March 31, 2010 | ||||||||||||||||||||||
Brand | Revenues | Cost of Food | % | Revenues | Cost of Food | % | ||||||||||||||||||
Bobs |
R$ | 18,285 | R$ | (6,816 | ) | -37.3 | % | R$ | 19,490 | R$ | (7,170 | ) | -36.8 | % | ||||||||||
KFC |
6,214 | (2,338 | ) | -37.6 | % | 5,103 | (1,838 | ) | -36.0 | % | ||||||||||||||
IRB Pizza Hut |
14,936 | (3,992 | ) | -26.7 | % | 13,135 | (3,875 | ) | -29.5 | % | ||||||||||||||
DOGGIS |
711 | (378 | ) | -53.2 | % | 549 | (334 | ) | -60.8 | % | ||||||||||||||
Consolidated |
R$ | 40,146 | R$ | (13,524 | ) | -33.7 | % | R$ | 38,277 | R$ | (13,217 | ) | -34.5 | % | ||||||||||
The overall decrease in the cost of food, beverages and packaging as a percentage of Net
Revenues from Own-Operated Restaurants from 2010 to 2011 was mainly due a reduction in the VAT
charged in Rio de Janeiro, as well as a significant drop in the purchase price of some Doggis
products (sausages and mayonnaise) and Doggiss freight costs. The cost of food also decreased due
to a
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reduction in the purchase price of other important products, like rice (KFC), ice-cream (Bobs,
KFC and Doggis), cheese, vegetables and soft drinks (Pizza Hut). This reduction was partially
offset by a higher purchase price of some raw materials used at Bobs and KFC: hamburgers, soft
drinks, chicken, French fries and packaging products.
Payroll & Related Benefits
The table below sets forth the payroll costs per brand:
Payroll & Related Benefits (Payroll) as a percentage of
Net revenues from own-operated restaurants (Revenues) per brand
Net revenues from own-operated restaurants (Revenues) per brand
3 Months ended | 3 Months ended | |||||||||||||||||||||||
R$000 | March 31, 2011 | March 31, 2010 | ||||||||||||||||||||||
Brand | Revenues | Payroll | % | Revenues | Payroll | % | ||||||||||||||||||
Bobs |
R$ | 18,285 | R$ | (4,033 | ) | -22.1 | % | R$ | 19,490 | R$ | (4,910 | ) | -25.2 | % | ||||||||||
KFC |
6,214 | (1,497 | ) | -24.1 | % | 5,103 | (1,326 | ) | -26.0 | % | ||||||||||||||
IRB Pizza Hut |
14,936 | (2,828 | ) | -18.9 | % | 13,135 | (2,789 | ) | -21.2 | % | ||||||||||||||
DOGGIS |
711 | (274 | ) | -38.5 | % | 549 | (209 | ) | -38.1 | % | ||||||||||||||
Consolidated |
R$ | 40,146 | R$ | (8,632 | ) | -21.5 | % | R$ | 38,277 | R$ | (9,234 | ) | -24.1 | % | ||||||||||
The reduction in Payroll & Related Benefits as a percentage of Net Revenues from
Own-Operated Restaurants is mainly due to the optimization of the workforce at all the brands
(increased revenues with no significant rise in employee ). In addition, the Bobs restaurants
reduced their overall headcount and hired more temporary staff, resulting in lower labor charges
and benefits payable.
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Restaurant Occupancy Costs and Other Expenses
The table below sets forth the occupancy costs per brand:
Restaurant Occupancy (Occupancy) as a percentage of
Net revenues from own-operated restaurants (Revenues) per brand
Net revenues from own-operated restaurants (Revenues) per brand
3 Months ended | 3 Months ended | |||||||||||||||||||||||
March 31, 2011 | March 31, 2010 | |||||||||||||||||||||||
R$000 | ||||||||||||||||||||||||
Brand | Revenues | Occupancy | % | Revenues | Occupancy | % | ||||||||||||||||||
Bobs |
R$ | 18,285 | R$ | (1,950 | ) | -10.7 | % | R$ | 19,490 | R$ | (2,110 | ) | -10.8 | % | ||||||||||
KFC |
6,214 | (814 | ) | -13.1 | % | 5,103 | (716 | ) | -14.0 | % | ||||||||||||||
IRB -
Pizza Hut |
14,936 | (1,812 | ) | -12.1 | % | 13,135 | (1,450 | ) | -11.0 | % | ||||||||||||||
DOGGIS |
711 | (179 | ) | -25.2 | % | 549 | (83 | ) | -15.1 | % | ||||||||||||||
Consolidated |
R$ | 40,146 | R$ | (4,755 | ) | -11.8 | % | R$ | 38,277 | R$ | (4,359 | ) | -11.4 | % | ||||||||||
The increase in restaurant occupancy costs and other expenses as a percentage of Net
Revenues from Own-Operated Restaurants is mainly due to higher store rents, as the rent
agreements were adjusted, as per their terms, by the IGP-M inflation index, which was 10.9%p.y. The
percentage increase in Doggiss occupancy costs was due to non-recurring rent discounts granted in
the first quarter of 2010.
Contracted Services
The table below sets forth the contracted service costs per brand:
Contracted Services (Services) as a percentage of
Net revenues from own-operated restaurants (Revenues) per brand
Net revenues from own-operated restaurants (Revenues) per brand
3 Months ended | 3 Months ended | |||||||||||||||||||||||
March 31, 2011 | March 31, 2010 | |||||||||||||||||||||||
R$000 | ||||||||||||||||||||||||
Brand | Revenues | Services | % | Revenues | Services | % | ||||||||||||||||||
Bobs |
R$ | 18,285 | R$ | (2,035 | ) | -11.1 | % | R$ | 19,490 | R$ | (2,546 | ) | -13.1 | % | ||||||||||
KFC |
6,214 | (907 | ) | -14.6 | % | 5,103 | (767 | ) | -15.0 | % | ||||||||||||||
IRB -
Pizza Hut |
14,936 | (1,829 | ) | -12.2 | % | 13,135 | (1,653 | ) | -12.6 | % | ||||||||||||||
DOGGIS |
711 | (134 | ) | -18.8 | % | 549 | (83 | ) | -15.1 | % | ||||||||||||||
Consolidated |
R$ | 40,146 | R$ | (4,905 | ) | -12.2 | % | R$ | 38,277 | R$ | (5,049 | ) | -13.2 | % | ||||||||||
The main reason for the reduction in expenses related to contracted services as a percentage
of net revenues from own-operated restaurants was a reduction in maintenance and utilities costs.
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Depreciation and Amortization (Stores and Headquarters)
The increase in Depreciation and amortization is attributable to store equipment modernization
and stores remodeling.
Other Store Cost and Expenses
Other store cost and expenses expressed as a percentage of Net revenues from own-operated
restaurants increased from the quarter ended March 31, 2010 to the same period ended March 31, 2011
mainly due to increase of selling expenses attributable to own-operated restaurants.
Franchise Costs and Expenses
As a percentage of Total Revenues, Franchise costs and expenses were (4.7%) and (4.7%) for the
quarters ended March 31, 2011 and 2010, respectively.
Analyzed as a segment (franchise operations), franchise costs and expenses had the following
behavior against net franchise revenues:
R$ 000 | Results from franchise operations | |||||||||||||||
Three months ended March 31, | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Net Franchise Revenues |
7,610 | 100.0 | % | 6,594 | 100.0 | % | ||||||||||
Payroll & Related Benefits |
(1,705 | ) | -22.4 | % | (1,621 | ) | -24.6 | % | ||||||||
Occupancy expenses |
(243 | ) | -3.2 | % | (228 | ) | -3.5 | % | ||||||||
Travel expenses |
(192 | ) | -2.5 | % | (187 | ) | -2.8 | % | ||||||||
Contracted Services |
(196 | ) | -2.6 | % | (61 | ) | -0.9 | % | ||||||||
Other franchise cost and expenses |
(232 | ) | -3.0 | % | (281 | ) | -4.3 | % | ||||||||
Total Franchise Costs and Expenses |
(2,568 | ) | -33.7 | % | (2,378 | ) | -36.1 | % | ||||||||
Operating margin |
5,042 | 66.3 | % | 4,216 | 63.9 | % | ||||||||||
Franchise costs and expenses expressed as a percentage of net franchise revenues were
approximately (33.7%) and (36.1%) for the three months ended March 31, 2011 and 2010, respectively.
The Company managed to increase its Franchise Revenues in 2011 keeping its franchise department
almost at the same size. Accordingly, despite the slight nominal increase in franchise expenses
during 2011, there was an optimization of them since franchise revenues had a greater growth in the
same period.
Marketing, General and Administrative Expenses
Marketing Expenses
Bobs Brand
According to our franchise agreements, the Bobs marketing fund dedicated to advertising and
promotion is comprised of financial contributions paid by the franchisees and contributions
by us. The fund is administrated by us and must be used in the common interest of the Bobs
chain, through the best efforts of the marketing department, to increase its restaurant
sales.
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Table of Contents
The marketing contributions from franchisees are recorded on an accrual basis as assets in
accounts receivables and in a cross entry as liabilities in the marketing fund. The
contributions due by Venbo are recorded on an accrual basis as marketing expenses and in a
cross entry as liabilities in the marketing fund.
In general, Bobs franchisees monthly contribute with 4.0% of their monthly gross sales to
the Bobs marketing fund. Since 2006, we have also committed 4.0% of its gross sales from
its own-operated restaurant monthly gross sales (sales derived from special events are not
subject to such contribution). These contributions can be deducted from our marketing
department expenses if previously agreed with the our franchisees. However, the total
marketing investments may be greater than 4.0% of combined sales if a supplier makes an
extra contribution (joint marketing programs) or if we use more of our own cash on
marketing, advertising and promotions.
We primarily invest the Bobs marketing fund resources in nationwide advertising programs
(commercials or sponsorship on TV, radio and outdoors). Our franchisees may also invest
directly in advertising and promotions for their own stores, upon previous consent from us,
which freely decides whether the cost of such single advertisement or promotion should 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 must be used in subsequent periods.
Periodically, we meet with the Bobs Franchisee Council to divulge the marketing fund
accounts in a report that is similar to a cash flow statement. This statement discloses the
marketing contributions received and the marketing expenses, both on a cash basis.
The balance of any resources from the marketing fund that are not spent is recorded as
accrued accounts payable in the balance sheet; this item totaled R$8.7 million as of March
31, 2011 (R$7.8 million as of December 31, 2010).
This balance represents contributions made by Venbo and franchisees that have not yet
been used in campaigns. These balances are, as agreed with the franchisees chain, a Venbo
obligation as of that date.
The marketing funds advertising and promotions expenses are recognized as incurred.
Total marketing investments financed by the marketing fund amounted to R$7.8 million and
R$3.8 million for the quarters ended March 31, 2011 and 2010, respectively.
KFC and Pizza Hut Brands
We contribute 0.5% of KFCs and Pizza Huts monthly net sales monthly into a marketing fund
managed by YUM! Brands Brazil. In addition, the Company is also committed to investing
5.0% of KFCs and Pizza Huts monthly net sales in local marketing and advertising.
The advertising and promotions expenses for KFC and Pizza Hut are recognized as incurred and
amounted to R$2.1 million and R$1.0 million for the three months ended March 31, 2011 and
2010, respectively.
Doggis Brand
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We are committed to invest at least 4% of the Doggis restaurant sales in local
marketing expenses. There is no contribution to a marketing fund.
Local marketing expenses on advertising and promotions for Doggis are recognized as incurred
and amounted R$0.2 million in 2011 and R$0.1 million for the three months ended March 31,
2011 and 2010, respectively.
As a percentage of total revenues, marketing expenses were approximately (1.8%) and (2.2%)
for the three months ended March 31, 2011 and 2010, respectively
General and Administrative Expenses
As a percentage of total revenues, general and administrative expenses were approximately
(14.3%) and (12.3%) for the three months ended March 31, 2011 and 2010, respectively.
This increase is attributable to non-recurring consulting expenses related to:
| improvement of the Companys information technology environment IT consultants were hired to analyze and map out the existing structure in order to enhance network security and business process automation; | ||
| human resource and headhunter fees for low management positions; | ||
| optimize its telecommunications infrastructure and reduce its related costs. |
Other Operating Expenses
Other operating expenses are mainly comprised of uncollectible receivables, depreciation,
preopening and non recurring expenses. Other operating expenses expressed as a percentage of Total
revenues were (2.9%), for the three months ended March 31, 2011 and (2.0%) for the three months
ended March 31, 2010.
The following table sets forth the breakdown of Other Operating Expenses:
Three months ended | ||||||||
March 31, | ||||||||
R$ 000 | 2011 | 2010 | ||||||
Uncollectable receivables |
R$ | 272 | R$ | (54) | ||||
Depreciation of Headquarters fixed assets |
(154 | ) | (149 | ) | ||||
Non-recurring logistics expenses |
(1,150 | ) | | |||||
Accruals for contingencies |
(301 | ) | (306 | ) | ||||
Preopening and other expenses |
(240 | ) | (508 | ) | ||||
R$ | (1,573 | ) | R$ | (1,017 | ) | |||
During the first quarter of 2011 the Company paid out one-time expenses to cover
momentary shortfalls in the distribution of raw materials to point of sales located at distant
areas in the north and mid-west of Brazil, which are complicated to organize and have high
logistics costs. In order to improve its logistics system, the Company changed its logistics
operator from Luft-FBD to Martin Brauwer, which will begin operations in the second quarter of
2011.
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Also during the first quarter of 2011, the Company received approximately R$300,000 of
receivables which were previously written-off and expensed as uncollectible. Therefore, as of March
31, 2011 this amount was computed as a gain, reversing the doubtful receivable expenses incurred in
the period, reducing the percentage discussed above.
Impairment of Assets and Net Result of Assets Sold
The Company 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 360.
During the quarters ended March 31, 2011 and 2010, Companys review in accordance with
FASB ASC 360, derived no charge to the income statement.
Interest Expense, net
Interest expense decrease as a percentage of Total Revenues is mainly due to lower
interest rates in 2011 and due to decrease of Companys indebtedness
Income Taxes
As a percentage of net restaurant sales, income taxes were approximately (1.5)% and
(0.6)% for the three months ended March 31, 2011 and 2010, respectively.
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Table of Contents
LIQUIDITY AND CAPITAL RESOURCES (Amounts in thousand of Brazilian reais)
A) Introduction
Since March 1996, we have funded our cumulative operating losses worth approximately R$22.2
million and made acquisitions of businesses and capital improvements (including the refurbishment
of some of the Companys stores), for which we used cash remaining at the closure of our
acquisition of Venbo, borrowed funds from various sources, and made private placements of our
securities. As of March 31, 2011, we had cash on hand of approximately R$21.9 million which
included a R$16.8 million investment in cash equivalent and a working capital of approximately
R$0.8.
In the past, debts denominated in any other currency than Brazilian Reais increased with the
major devaluation of the Brazilian Real at the beginning of 1999. A sequence of years with reduced
sales, mainly due to the weak economic environment in Brazil, worsened the situation and we were
not able to pay some of its obligations, including taxes. In the following years the payment of
taxes in arrears was renegotiated with levels of Brazilian government so they could be paid off
in monthly installments.
With the improvement of the Brazilian economy since 2002, our total revenues have increased
and, joined to a capital injection of R$9.0 million, we have started to reduce its debt position.
In 2003 we rescheduled much of its debt to the long term. The continued improvement of its sales
led us to (i) drastically reduce our debts with financial institutions in 2005; and (ii)
extinguish those debts and reverse its financial position to present time deposits with financial
institutions at the end of 2006. The improved collection rate from our franchisees, commencing in
2005, also strengthened our current assets. In 2007 and the first three quarters of 2008, we
maintained this positive scenario and was able to record positive working capital.
Since the last quarter of 2008, when we increased our bank debt position in order to fund the
acquisition of IRB, the expansion of the KFC stores and the startup of the Doggis brand, these
transactions brought the Companys working capital back into negative territory. After a sequence
of positive results (operating income in the years of 2009 and 2010, as well as in the first
quarter of 2011) the Company returned to achieve positive working capital. .
For the quarter ended March 31, 2011, we had net cash provided by operating activities of
R$9.0 million (R$6.1 million in 2009), net cash provided in investing activities of R$0.3 million
(R$2.2 million used in 2009) and net cash used in financing activities of R$4.0 million ( R$3.3
million in 2009). 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 used in financing activities was mainly the result
of repayments of borrowings from financial institutions to fund to IRB acquisition.
Since the beginning of the repurchase program, we have also invested approximately R$2.1
million in the financial market, re-purchasing 343,490 shares that had gained considerable value
in the over-the-counter market where they are negotiated. (During the quarter ended march 31,
2011, we invested approximately R$0.1 million in the financial market, re-purchasing 8,325
shares).
In 2008, we paid dividends to its shareholders by virtue of its successful reorganization. In
2009 there were no dividends paid to shareholders. In 2010, due to its increased operational
margins, we distributed extraordinary cash dividends based on accumulated profits since our last
distribution.
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Table of Contents
B) Debt Obligation financial institutions
As of March 31 2011, we had the following debt obligations with financial institutions:
R$ 000
March 31, | December 31, | |||||||
2011 (unaudited) | 2010 | |||||||
Revolving lines of credit (a) |
R$ | 9,091 | R$ | 12,386 | ||||
Leasing facilities (b) |
831 | 364 | ||||||
Other loan (c) |
111 | 1,329 | ||||||
| ||||||||
10,033 | 14,079 | |||||||
Less: current portion |
(8,977 | ) | (12,972 | ) | ||||
R$ | 1,056 | R$ | 1,107 | |||||
At March 31, 2011, future maturities of notes payable are as follows:
R$000
Remaining 2011 |
R$ | 8,722 | ||
2012 |
1,020 | |||
2013 |
| |||
R$ | 9,742 | |||
(a) Part of this debt (R$5.3 million) is due on demand from two Brazilian
financial institutions at interest of approximately 13.5%p.y. Another part (R$3.8
million) is comprised of two loans: one is payable in 9 installments of R$217,000
(ending on December, 2011), plus interest of 16.0%p.y and the other is payable in 22
installments of R$84,000 (ending on January, 2013), plus interest of 15.0%p.y . All
the debts of this category are collateralized against certain officers and
receivables.
(b) The debt is comprised of various lease facilities with private Brazilian
institutions for the funding of store equipment; payable in a range from 2 to 7
monthly payments at interest ranging from 17.8% p.y. to 23.4% p.y (ending on October,
2011). All the debts of this category are collateralized against the assets leased.
(c) Loan taken out with UBS Pactual relate to the acquisition of the Pizza Hut
business in Brazil. The repayment of this loan is due in 5 monthly installments
(ending on August, 2011), of R$166,000, plus interest of 13.2%p.y. The loan is
guaranteed by some of the Companys properties.
The carrying amount of notes payable approximates fair value at March 31, 2011 because they
are at market interest rates.
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Table of Contents
C) Debt Obligation taxes
The Company successfully applied to join two subsequent amnesty programs offered by the
Brazilian federal government (REFIS in 1999 and PAES in 2003) to renegotiate Brazilian
federal taxes not paid by Venbo in 1999, 2001 and at the beginning of 2002 in arrears. The
second amnesty program (PAES) included the balance of the previous one (REFIS) and unpaid
2001 and 2002 federal taxes, as well as Social Security penalties.
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 March 31, 2011, total of R$11.2 million (R$11.6 million in December 31, 2010) are
sufficient, however, there is no assurance that the outcome of this situation will derive
further liability to the Company. As of March 31, 2011, the difference between such debt at
the statements provided by the Brazilian Federal Government and the statements reported by
the Companys was R$4.7 million (R$4.7 million in December 31, 2010).
In 2008, the Brazilian federal government detected miscalculation of the interest
accrued by most companies that had joined both amnesty programs. The Companys total debt
increased R$2.8 million accordingly.
In accordance to the amnesty programs the Company has been paying monthly installments
equivalent to 1.5% of Venbos gross sales, with interest accruing at rates set by the
Brazilian federal government, which are currently 6.0% per year (6.0% per year also in
December 31, 2010).
During the three-month period ended March 31, 2011, the Company paid approximately R$0.4
million as part of the PAES program and no interest was charged on these payments. During the
same period of 2010 the Company paid approximately R$0.5 million, including R$0.1 in
interest.
During the third quarter of 2009, the Brazilian federal government launched a third
amnesty program to consolidate balances from previous programs and other fiscal debts. The
Company applied to join this program, but its rules, on debt consolidation and reduction in
consequence to number of monthly installments chosen, have not yet been fully formalized by
the Brazilian fiscal authorities. At the present moment, the Company cannot estimate if any
material adjustment to its debt will be necessary when consolidated by the Brazilian federal
government. The final consolidation of such amnesty program is expected to take place by the
end of the first semester of 2011.
D) Other Obligations
We also have long-term contractual obligations in the form of operating lease obligations
related to the Companys own-operated stores.
The future minimum lease payments under those obligations with initial or remaining
noncancelable lease terms in excess of one year at March 31, 2011 are as follows:
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R$ 000
Contratual | ||||
Fiscal Year | Leases | |||
Remaining 2011 |
R$ | 12.245 | ||
2012 |
11.934 | |||
2013 |
10.551 | |||
2014 |
9.099 | |||
2015 |
5.452 | |||
Thereafter |
1.388 | |||
R$ | 50.669 | |||
Rent expense was R$3.5 million for the quarter ended March 31, 2011 (R$4.2 million in
2010).
In the past, we generated cash and obtained financing sufficient to meet the our debt
obligations. We plan to fund our current debt obligations mainly through cash provided by our
operations, borrowings and capital injections.
The average cost of opening 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 the obtainment of permits.
We estimate that our capital expenditure for the fiscal year of 2011 to be used for
maintaining and upgrading our current restaurant network, making new investments in restaurant
equipment, and expanding the KFC, Pizza Hut and Doggis chains in Brazil through own-operated
stores, will come to approximately R$9.4 million. Additionally in 2011, we intend to
focus our efforts on expanding both the number of our franchisees and the number of our franchised
retail outlets, neither of which are expected to require significant capital expenditure. In
addition, the expansion will provide income derived from initial fees charged on new franchised
locations.
As discussed above, we have contractual obligations in different forms. The following table
summarizes our contractual obligations and financial commitments, as well as their aggregate
maturities.
R$ 000
Contratual | ||||||||||||||||
Fiscal Year | Leases | Fiscal Debt | Loans Payable | Total | ||||||||||||
Remaining 2011 |
R$ | 12,245 | R$ | 1,103 | R$ | 8,722 | R$ | 22,070 | ||||||||
2012 |
11,934 | 1,470 | 1,020 | 14,424 | ||||||||||||
2013 |
10,551 | 1,470 | | 12,021 | ||||||||||||
2014 |
9,099 | 1,470 | | 10,569 | ||||||||||||
2015 |
5,452 | 1,470 | | 6,922 | ||||||||||||
Thereafter |
1,388 | 4,262 | | 5,650 | ||||||||||||
R$ | 50,669 | R$ | 11,244 | R$ | 9,742 | R$ | 71,655 | |||||||||
Lease obligations are usually restated in accordance to Brazilian inflation currently at 11.0%
p.y. 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 March 31, 2011 on an
accrual basis.
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We plan to address our immediate and future cash flow needs to include focusing on a number of
areas including:
| the expansion of Companys franchisee base, which may be expected to generate additional cash flows from royalties and franchise initial fees without significant capital expenditures; | ||
| the improvement of food preparation methods in all stores to increase the operational margin of the chain, including acquiring new stores equipment and hiring a consultancy firm for stores personnel training program; | ||
| the continuing of motivational programs and menu expansions to meet consumer needs and wishes; | ||
| the improvement and upgrade of our IT system | ||
| the negotiation with suppliers in order to obtain significant agreements in long term supply contracts; and | ||
| the renegotiation of past due receivables with franchisees. |
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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
disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010 in pages
F-8 through F-45), the following involve a higher degree of judgment and/or complexity.
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. Revenues 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.
Currently we have approximately 230 franchisees that operates approximately 712 points of
sales. A few of them may undergo financial difficulties in the course of their business and may
therefore fail to pay their monthly royalty fees.
If a franchisee fails to pay its invoices for more than six months in a row, 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 .
In addition, we record a provision for doubtful receivables to allow for any amounts that may
be unrecoverable based upon an analysis of our 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.
When a franchisee has past due accounts derived from unpaid royalty fees, we may reassess such
debts with the franchisee and reschedule them in installments. We 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.
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Long-Lived Assets
We 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 either the carrying amount or the fair value less cost to sell, whichever is lower,
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 group 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
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 a percentage of the
franchisees gross sales are recognized in the month when they are earned.
The Company signs agreements with beverage and food suppliers and for each product, the
Company negotiates a monthly performance bonus which will depend on the product sales volume
to its chains (including both own-operated and franchise operated). The performance bonus, or
vendor bonuses, can be paid monthly or in advance (estimated), depending on the agreement
terms negotiated with each supplier. When received in cash, the performance bonus is
recognized as a credit in the Companys income statement ( under revenues from trade
partners). Such revenue is recorded when cash from vendors is received, since there is a
great difficulty in estimating the receivable amount and significant doubts about its
collectability exists until the vendor agrees with the exact bonus amounts.
When a vendor bonus is received in advance in cash, it is recorded as an entry in the Cash
and cash equivalents with a corresponding credit in deferred income and is recognized on a
straight line basis over the term of the related supply agreement on a monthly basis. When a
vendor bonus is received in products it is recognized as a reduction to store costs and
expenses.
Performance bonuses are normally received in cash and rarely in products. There were no
performance bonus received in products during the quarters ended March 31, 2011 and 2010.
Income obtained by lease of any of the Companys properties, by administration fees on
marketing fund and nonrecurring gains are recognized as other income when earned and deemed
realizable.
The relationship between the Company and each of its franchisees is legally bound by a formal
contract, where each 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 as per Staff Accounting
Bulletin No 104 (SAB 104), issued by the Security and Exchange Commission:
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| 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; |
The Company also address SAB104s fourth requirement for revenue recognition (Collectability
is reasonably assured) when recording its revenues. If a franchisee fails to pay its invoices
for more than six months in a row, the Company does not stop invoicing the contracted
amounts. However, in such cases the Company offsets any additional invoiced amounts with a
corresponding full allowance for doubtful accounts.
Marketing fund and expenses
Bobs Brand
According to our franchise agreements, the Bobs marketing fund to cover advertising and
promotion costs comprises the financial contributions paid by the franchisees and also the
contributions due by the Company. The funds resources are administrated by us and must be used in
the common interest of the Bobs chain to increase its restaurant sales through the best efforts of
the marketing department.
The marketing contribution from franchisees, are recorded on an accrual basis in assets as
accounts receivables with a cross entry in liabilities as the marketing fund. The contributions due
by Venbo are recorded on an accrual basis as marketing expenses and in a cross entry in liabilities
as the marketing fund.
In general, Bobs franchisees contribute 4.0% of their monthly gross sales to the Bobs
marketing fund, and since 2006 the Company has also contributed 4.0% of its own-operated
restaurants monthly gross sales (sales derived from special events are not subject to this
contribution). These contributions can be deducted from the our marketing department expenses, if
previously agreed with the franchisees. However, the total marketing investments may be greater
than 4.0% of combined sales if any supplier makes an additional contribution (joint marketing
programs) or if we use more of our own cash on marketing, advertising and promotions.
We invest the Bobs marketing fund primarily in nationwide advertising programs (commercials
or sponsorship on TV, radio and billboards). Our franchisees may also invest directly in
advertising and promotions for their own stores, upon previous consent from us, which freely
decides whether the cost of such advertisements or promotions can be deducted from the marketing
contribution owed.
The monies in the Bobs marketing fund do not have to be invested during the same month or
year they are received in, but they must be used in subsequent periods.
Periodically, we meet with the Bobs Franchisee Council to divulge the marketing fund accounts
through a report similar to a cash flow statement. This statement discloses the marketing
contributions received and the marketing expenses, both on a cash basis.
The balance of any resources from the marketing fund that are not invested is recorded as
accrued accounts payable in the balance sheet. This balance represents contributions made by Venbo
and franchisees that have not yet been used in campaigns. These balances are, as agreed with the
franchisees chain, a Venbo obligation as of that date.
Advertising and promotions expenses from the marketing fund are recognized as incurred.
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KFC and Pizza Hut Brands
We contributes each month with 0.5% of KFCs and Pizza Huts monthly net sales to a marketing
fund managed by YUM! Brands Brazil. In addition, we are also committed to invest 4.5% of KFCs
and Pizza Huts monthly net sales in local marketing and advertising.
The advertising and promotions expenses for KFC and Pizza Hut are recognized as incurred.
Doggis Brand
We invest at least 4% of Doggiss restaurant sales in local marketing. There is no
contribution to a marketing fund.
The advertising and promotions expenses for Doggis are recognized as incurred.
Income taxes
We account for income tax in accordance with guidance provided by the FASC ASC on Accounting
for Income Tax. Under the asset and liability method set out in this guidance, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to differences between
the carrying amounts of existing assets and liabilities on the financial statements and their
respective tax basis and operating loss carry-forwards. Deferred tax assets and liabilities are
measured using the enacted tax rates expected to apply to taxable income in the years in which the
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. Currently, the Company has no material uncertain income tax positions. 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.
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NEW ACCOUNTING STANDARDS
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. In line 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 in its financial statements, either through recognition or
disclosure. The adoption of this accounting standard in the second quarter of 2009 did not impact
on 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 had been evaluated. In addition, the
amendment modified the requirement to disclose the date on which subsequent events had been
evaluated in reissued financial statements to apply only to such statements that had 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-Q.
The FASB has issued Accounting Standards Update (ASU) No. 2010-09, Subsequent Events (Topic
855): Amendments to Certain Recognition and Disclosure Requirements. The amendments in the ASU
remove the requirement for an SEC filer to disclose a date through which subsequent events have
been evaluated in both issued and revised financial statements. Revised financial statements
include financial statements revised as a result of either correction of an error or retrospective
application of U.S. GAAP. The FASB also clarified that if the financial statements have been
revised, then an entity that is not an SEC filer should disclose both the date that the financial
statements were issued or available to be issued and the date the revised financial statements were
issued or available to be issued. The FASB believes these amendments remove potential conflicts
with the SECs literature. In addition, the amendments in the ASU requires an entity that is a
conduit bond obligor for conduit debt securities that are traded in a public market to evaluate
subsequent events through the date of issuance of its financial statements and must disclose such
date. All of the amendments in the ASU were effective upon issuance (February 24, 2010) except for
the use of the issued date for conduit debt obligors. That amendment is effective for interim or
annual periods ending after June 15, 2010. As a result of this amendment, we did not disclose the
date through which we evaluated subsequent events in this report on Form 10-Q.
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 the existing GAAP and does not therefore impact on our
consolidated financial position, results of operations or cash flows.
In June 2009, the FASB issued changes to the guidelines for the consolidation of variable
interest entities. These 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
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entity based upon the entitys purpose and design and the parent companys ability to direct
the entitys actions. The guidance was adopted during the 2010 fiscal year and did not impact our
consolidated financial position, results of operations or cash flows.
In January 2010, the FASB issued amendments to the existing fair value measurements and
disclosures guidance, which require new disclosures and clarify 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
was adopted during 2010 fiscal year and did not impact our consolidated financial position, results
of operations or cash flows.
The FASB has issued ASU 2010-29, Business Combinations (Topic 805): Disclosure of
Supplementary Pro Forma Information for Business Combinations. This ASU reflects the decision
reached in EITF Issue No. 10-G. The amendments in this ASU affect any public entity as defined by
Topic 805, Business Combinations, that enters into business combinations that are material on an
individual or aggregate basis. The amendments in this ASU specify that if a public entity presents
comparative financial statements, the entity should disclose revenue and earnings of the combined
entity as though the business combination(s)that occurred during the current year had occurred as
of the beginning of the comparable prior annual reporting period only. The amendments also expand
the supplemental pro forma disclosures to include a description of the nature and amount of
material, nonrecurring pro forma adjustments directly attributable to the business combination
included in the reported pro forma revenue and earnings.
The amendments are effective prospectively for business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2010. Early adoption is permitted. The guidance was adopted during 2010 fiscal year
and did not impact our consolidated financial position, results of operations or cash flows.
The FASB has issued ASU No. 2010-28, Intangibles Goodwill and Other (Topic 350): When to
Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying
Amounts. This ASU reflects the decision reached in EITF Issue No. 10-A. The amendments in this ASU
modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying
amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill
impairment test if it is more likely than not that a goodwill impairment exists. In determining
whether it is more likely than not that a goodwill impairment exists, an entity should consider
whether there are any adverse qualitative factors indicating that an impairment may exist. The
qualitative factors are consistent with the existing guidance and examples, which require that
goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of a reporting unit
below its carrying amount. For public entities, the amendments in this ASU are effective for fiscal
years, and interim periods within those years, beginning after December 15, 2010. Early adoption is
not permitted. The guidance was adopted during 2011 fiscal year and did not impact our consolidated
financial position, results of operations or cash flows.
The FASB has issued FASB Accounting Standards Update (ASU) No. 2010-22, Accounting for Various
Topics. ASU 2010-22 amends various SEC paragraphs in the FASB Accounting StandardsCodificationTM
(Codification) based on external comments received and the issuance of Staff Accounting Bulletin
(SAB) No. 112 , which amends or rescinds portions of certain SAB topics. Specifically, SAB 112 was
issued to bring existing SEC guidance into conformity with:
| Codification Topic 805, Business Combinations (originally issued as FASB Statement No. 141 (Revised December 2007), Business Combinations); and | ||
| Codification Topic 810, Consolidation (originally issued as FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements). |
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Such Update was adopted during 2010 fiscal year and did not impact our consolidated
financial position, results of operations or cash flows.
The FASB has issued Accounting Standard Update (ASU) No. 2010-01, Equity (Topic 505):
Accounting for Distributions to Shareholders with Components of Stock and Cash. The
amendments to the Codification in this ASU clarify that the stock portion of a distribution
to shareholders that allows them to elect to receive cash or stock with a potential
limitation on the total amount of cash that all shareholders can elect to receive in the
aggregate is considered a share issuance that is reflected in earnings per share
prospectively and is not a stock dividend. This ASU codifies the consensus reached in EITF
Issue No. 09-E, Accounting for Stock Dividends, Including Distributions to Shareholders
with Components of Stock and Cash. ASU 2010-01 is effective for interim and annual periods
ending on or after December 15, 2009, and should be applied on a retrospective basis. Such
Update was adopted during 2010 fiscal year and did not impact our consolidated financial
position, results of operations or cash flows.
The FASB issued Accounting Standards Update (ASU) No. 2010-11, Derivatives and Hedging(Topic
815): Scope Exception Related to Embedded Credit Derivatives. The FASB believes this ASU
clarifies the type of embedded credit derivative that is exempt from embedded derivative
bifurcation requirements. Specifically, only one form of embedded credit derivative
qualifies for the exemption one that is related only to the subordination of one
financial instrument to another. As a result, entities that have contracts containing an
embedded credit derivative feature in a form other than such subordination may need to
separately account for the embedded credit derivative feature.
The amendments in the ASU are effective for each reporting entity at the beginning of its
first fiscal quarter beginning after June 15, 2010. The adoption of this accounting standard
did not impact our consolidated financial position, results of operations or cash flows.
The FASB has issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic
820): Improving Disclosures about Fair Value Measurements. This ASU requires some new
disclosures and clarifies some existing disclosure requirements about fair value measurement
as set forth in Codification Subtopic 820-10. The FASBs objective is to improve these
disclosures and, thus, increase the transparency in financial reporting. Specifically, ASU
2010-06 amends Codification Subtopic 820-10 to now require:
| A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and | ||
| In the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements. |
In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures:
| For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and | ||
| A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. |
ASU 2010-06 is effective for interim and annual reporting periods beginning after December
15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in
the roll forward of activity in Level 3 fair value measurements. Those disclosures are
effective for fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years. Early application is permitted. The guidance was adopted during 2011
fiscal year and did not impact our consolidated financial position, results of operations or
cash flows.
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OFF-BALANCE SHEET ARRANGEMENTS
We are not involved in any off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 extinguished all of our debt denominated in US$ in
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 using bank credit facilities.
These debt obligations expose us to market risks, including changing CDI-based interest rate risk.
The CDI is a daily variable interest rate used by Brazilian banks. It is linked to the Brazilian
equivalent of the Federal Reserve fund rates and its fluctuations are much like those observed in
the international financial market.
We had R$9.6 million of variable rate (CDI-based interest) debt outstanding at March 31, 2011,
and R$13.7 million outstanding at December 31, 2010. Based on the amounts outstanding, a 100 basis
point change in interest rates would result in an approximate change to interest expense of $0.2
million at March 31, 2011 as well as $0.2 million at December 31, 2010. We attempt, when possible,
to protect our revenues from foreign currency exchange risks by periodically adjusting our selling
prices in Reais.
We are not engage in trading market risk-sensitive instruments or purchasing hedging
instruments or other than trading instruments that are likely to expose us to market risk,
whether interest rate, foreign currency exchange, commodity price or equity price risk. Our primary
market risk exposures are those relating to interest rate fluctuations and possible devaluations of
the Brazilian currency. In particular, a change in Brazilian interest rates would affect the rates
at which we could borrow funds under our several credit facilities with Brazilian banks and
financial institutions.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As of March 31, 2011, the end of the period covered by this Quarterly Report on Form 10-Q, 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 March 31, 2011, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures were effective and
operating as of March 31, 2011, 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,
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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.
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 March 31, 2011 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 quarterly 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 quarterly report.
Changes in Internal Control over Financial Reporting
During the quarter ended March 31, 2011, 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.
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PART IIOTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not currently subject to any material legal proceedings, nor, to our knowledge, is any
material legal proceeding threatened against us. From time to time, we may be a party to certain
legal proceedings incidental to the normal course of our business. While the outcome of these
legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will
have a material effect upon our financial condition or results of operations.
ITEM 1A. RISK FACTORS.
An investment in our securities involves a high degree of risk. There have been no material
changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year
ended December 31, 2010 that was filed with the Securities and Exchange Commission on February 15,
2011.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ended March 31, 2011, the Company repurchased 8,325 shares of its
common stock for US$73 thousand, equivalent to R$119 thousand.
Issuer Purchase of Equity Securities during the three months ended March 31, 2011.
(c) Total Number of Shares Purchased |
(d) Maximum Number | |||||||||||||||
As | of | |||||||||||||||
(a) Total Number | (b) Average | Part of Publicly | Shares that May Yet | |||||||||||||
of Shares | Price Paid | Announced Plans | Be Purchased Under the | |||||||||||||
Period | Purchased | Per Share | or Programs | Plan or Programs | ||||||||||||
January 1 to January 31, 2011
|
| | | 64.835 | ||||||||||||
February 1 to February 28, 2011
|
6.545 | 8,704 | 6.545 | 58.290 | ||||||||||||
March 1 to March 31, 2011
|
1.780 | 8,831 | 1.780 | 56.510 | ||||||||||||
Total Q1 2011
|
8.325 | 8,731 | ||||||||||||||
Total Year 2011
|
8.325 | 8,731 | 56.510 |
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ITEM 6. EXHIBITS.
Exhibits
Number | Title | |
31.1
|
Certification by Ricardo Figueiredo Bomeny, Chief Executive Officer and acting Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification by Ricardo Figueiredo Bomeny, Chief Executive Officer and acting Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Date:
May 11, 2011
BRAZIL FAST FOOD CORP. |
||||
By: | /s/ Ricardo Figueiredo Bomeny | |||
Ricardo Figueiredo Bomeny | ||||
Chief Executive Officer and acting Chief Financial Officer |
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