SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission File Number: 000-23278

Brazil Fast Food Corp.

(Exact name of Registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		13-3688737 (IRS Employer Identification No.)

Rua Voluntários da Pátria, 89-9° andar
Rio de Janeiro RJ, Brazil, CEP 22270-010
(Address of principal executive offices)

Registrant’s telephone number: 011 55 21 2536-7500

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ            No o

As of July 29, 2011 there were 8,129,437 shares outstanding of the Registrant’s Common Stock, par value $0.0001.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “larger accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o            No þ

 

 

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			48
Item 4. Controls and Procedures			48
PART II. OTHER INFORMATION			50
Item 1. Legal Proceedings			50
Item 1A. Risk Factors			50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			51
Item 3. Defaults Upon Senior Securities			51
Item 4. Removed and Reserved			51
Item 5. Other Information			51
Item 6. Exhibits			52
EX-31.1
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

BRAZIL FAST FOOD CORP. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)
(in thousands of Brazilian Reais, except share amounts)

		June 31,				December 31,
		2011				2010
		(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (note 3)		R$	20.927			R$	16.742
Inventories			3.781				3.454
Accounts receivable
Clients			7.804				8.285
Franchisees			8.672				9.483
Allowance for doubtful accounts			(899	)			(1.838	)
Prepaid expenses			2.221				1.350
Advances to suppliers			2.779				2.426
Receivables from properties sale (notes 4 and 5)			3.633				3.633
Other current assets			5.031				4.249
TOTAL CURRENT ASSETS			53.949				47.784
Other receivables and other assets (note 4)			14.617				16.258
Deferred tax asset, net			11.842				11.992
Goodwill			799				799
Property and equipment, net			29.263				29.862
Deferred charges, net			5.424				5.866
TOTAL ASSETS		R$	115.894			R$	112.561
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Notes payable		R$	9.463			R$	12.972
Accounts payable and accrued expenses			21.002				25.848
Payroll and related accruals			8.059				6.571
Taxes			3.210				4.936
Current portion of deferred income tax			1.105				1.190
Current portion of deferred income (note 7)			2.201				993
Current portion of contingencies and reassessed taxes			1.530				1.580
Other current liabilities			76				79
TOTAL CURRENT LIABILITIES			46.646				54.169
Deferred income, less current portion (note 7)			5.698				2.702
Deferred income tax			763				1.262
NOTES PAYABLE, less current portion			879				1.107
CONTINGENCIES AND REASSESSED TAXES, less current portion (note 6)			19.262				19.251
TOTAL LIABILITIES			73.248				78.491
SHAREHOLDERS’ EQUITY:
Preferred stock, $.01 par value, 5,000 shares authorized; no shares issued			—				—
Common stock, $.0001 par value, 12,500,000 shares authorized; 8,472,927 and 8,472,927 shares issued; 8,129,437 and 8,137,762 shares outstanding			1				1
Additional paid-in capital			61.148				61.148
Treasury Stock (343,490 and 335,165 shares)			(2.065	)			(1.946	)
Accumulated Deficit			(17.420	)			(24.946	)
Accumulated comprehensive loss			(1.130	)			(1.091	)
TOTAL SHAREHOLDERS’ EQUITY			40.534				33.166
Non-Controlling Interest			2.112				904
TOTAL EQUITY			42.646				34.070
TOTAL LIABILITIES AND EQUITY		R$	115.894			R$	112.561

See Notes to Consolidated Financial Statements

BRAZIL FAST FOOD CORP. AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)
(in thousands of Brazilian Reais, except share amounts)

		Six Months Ended June 30,
		2011				2010
REVENUES
Net Revenues from Own-operated Restaurants		R$	78.468			R$	73.450
Net Revenues from Franchisees			15.434				12.648
Revenues from Supply Agreements			10.567				8.592
Other Income			1.462				2.806
TOTAL REVENUES			105.931				97.496
OPERATING COST AND EXPENSES
Store Costs and Expenses			(73.371	)			(71.135	)
Franchise Costs and Expenses			(5.478	)			(5.650	)
Marketing Expenses			(1.391	)			(2.169	)
Administrative Expenses			(13.814	)			(11.947	)
Other Operating Expenses			(2.936	)			(2.907	)
Net result of assets sold			(28	)			(18	)
TOTAL OPERATING COST AND EXPENSES			(97.018	)			(93.826	)
OPERATING INCOME			8.913				3.670
Interest Income (expense), net			142				(1.000	)
NET INCOME BEFORE INCOME TAX			9.055				2.670
Income taxes			(1.192	)			(663	)
NET INCOME BEFORE NON-CONTROLLING INTEREST			7.863				2.007
Net (income) loss attributable to non-controlling interest			(337	)			127
NET INCOME ATTRIBUTABLE TO BRAZIL FAST FOOD CORP.		R$	7.526			R$	2.134
NET INCOME PER COMMON SHARE BASIC AND DILUTED		R$	0,93			R$	0,26
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: BASIC AND DILUTED			8.132.012				8.137.762

See Notes to Consolidated Financial Statements

BRAZIL FAST FOOD CORP. AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)
(in thousands of Brazilian Reais, except share amounts)

		Three Months Ended June 30,
		2011				2010
REVENUES
Net Revenues from Own-operated Restaurants		R$	38.322			R$	35.173
Net Revenues from Franchisees			7.824				6.054
Revenues from Supply Agreements			3.775				5.179
Other Income			1.065				1.000
TOTAL REVENUES			50.986				47.406
OPERATING COST AND EXPENSES
Store Costs and Expenses			(35.361	)			(34.010	)
Franchise Costs and Expenses			(2.910	)			(3.272	)
Marketing Expenses			(376	)			(1.069	)
Administrative Expenses			(6.910	)			(5.791	)
Other Operating Expenses			(1.363	)			(1.890	)
Net result of assets sold			(26	)			9
TOTAL OPERATING COST AND EXPENSES			(46.946	)			(46.023	)
OPERATING INCOME			4.040				1.383
Interest Income (expenses), net			186				(660	)
NET INCOME BEFORE INCOME TAX			4.226				723
Income taxes			(600	)			(451	)
NET INCOME BEFORE NON-CONTROLLING INTEREST			3.626				272
Net income attributable to non-controlling interest			(330	)			(18	)
NET INCOME ATTRIBUTABLE TO BRAZIL FAST FOOD CORP.		R$	3.296			R$	254
NET INCOME PER COMMON SHARE BASIC AND DILUTED		R$	0,41			R$	0,03
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: BASIC AND DILUTED			8.129.437				8.157.902

See Notes to Consolidated Financial Statements

BRAZIL FAST FOOD CORP. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Loss (Unaudited)
(in thousands of Brazilian Reais)

		Six Months Ended June 30,								Three Months Ended June 30,
		2011				2010				2011				2010
NET INCOME		R$	7.526			R$	2.134			R$	3.296			R$	254
Other comprehensive income (loss):
Foreign currency translation adjustment			(39	)			18				(7	)			5
COMPREHENSIVE INCOME		R$	7.487			R$	2.152			R$	3.289			R$	259

See Notes to Consolidated Financial Statements

BRAZIL FAST FOOD CORP. AND SUBSIDIARIES

Consolidated Statements of Changes In Shareholders’ Equity (Unaudited)
(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			—				—				—				—				7.526				—				7.526				337				7.863
Acquisition of Company’s own shares			(8.325	)			—				—				(119	)			—				—				(119	)			0				(119	)
Cummulative translation adjustment			—				—				—				—				—				(39	)			(39	)			—				(39	)
Balance, June 30, 2011			8.129.437			R$	1			R$	61.148			R$	(2.065	)		R$	(17.420	)		R$	(1.130	)		R$	40.534			R$	2.112			R$	42.646

See Notes to Consolidated Financial Statements

BRAZIL FAST FOOD CORP. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
(in thousands of Brazilian Reais)

		Six Months Ended June, 30
		2011				2010
CASH FLOW FROM OPERATING ACTIVITIES:
NET INCOME ATTRIBUTABLE TO BRAZIL FAST FOOD CORP.		R$	7.863			R$	2.007
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization			3.445				3.084
Loss on assets sold, net			28				18
Deferred tax			(434	)			—
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable			353				316
Inventories			(327	)			1.520
Prepaid expenses, advances to suppliers and other current assets			(1.224	)			(2.600	)
Other assets			859				(1.206	)
(Decrease) increase in:
Accounts payable and accrued expenses			(4.846	)			2.349
Payroll and related accruals			1.488				2.545
Taxes other than income taxes			(1.726	)			293
Deferred income			4.204				(979	)
Contingencies and reassessed taxes			(39	)			635
Other liabilities			(3	)			(70	)
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES			9.641				7.912
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to property and equipment			(2.556	)			(4.139	)
Proceeds from sale of property, equipment and deferred charges			2.104				—
CASH FLOWS USED IN INVESTING ACTIVITIES			(452	)			(4.139	)
CASH FLOW FROM FINANCING ACTIVITIES:
Acquisition of Company’s own shares			(119	)			—
Net Repayments under lines of credit			(4.846	)			(1.648	)
CASH FLOWS USED IN FINANCING ACTIVITIES			(4.965	)			(1.648	)
EFFECT OF FOREIGN EXCHANGE RATE			(39	)			18
NET INCREASE IN CASH AND CASH EQUIVALENTS			4.185				2.143
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			16.742				13.250
CASH AND CASH EQUIVALENTS AT END OF PERIOD		R$	20.927			R$	15.393

See Notes to Consolidated Financial Statements

BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(in Brazilian Reais, unless otherwise stated)

NOTE 1 — FINANCIAL STATEMENT PRESENTATION

     The accompanying unaudited consolidated financial statements of Brazil Fast Food Corp. and its subsidiaries (together referred as “the Company”) have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial statements. Accordingly they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These unaudited consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements and notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. 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.

     The balance sheet at December 31, 2010 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

     The consolidated financial statements as of June 30, 2011 and for the three and six-month periods ended June 30, 2011 and 2010, included in this report, are unaudited. However, in management’s opinion, such consolidated financial statements reflect all normal recurring adjustments that are necessary for a fair presentation. The results for the interim periods are not necessarily indicative of trends or of results expected for the full year ending December 31, 2011.

     The preparation of these financial statements requires the use of estimates and assumptions that reflect the assets, liabilities, revenues and expenses reported in the financial statements, as well as amounts included in the notes thereto. Management reviews its estimates periodically, including those related to depreciation, contingencies, income taxes and allowance for doubtful accounts. While the Company uses its best estimates and judgments, actual results could differ from those estimates as further confirming events occur.

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:

BOB’S 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 “Bob’s”, 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.

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 IRB’s 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 IRB’s 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 approximately 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 Bob’s 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.

FCK (former SUPRILOG)

     During the second quarter of 2011, the Company set up a new company, called FCK — Franquias e Participações Ltda., via the capital contribution of the equity interest it held in SUPRILOG. FCK will operate the franchise system of KFC in Brazil.

     The previous operation of Suprilog Logística Ltda. (warehousing of equipment and spare parts as well as maintenance services for the Company’s own-operated restaurants) is now being conducted by Venbo.

     As of June 30, 2011, FCK had not initiated its new operation.

NOTE 3 — CASH AND CASH EQUIVALENT

     Cash and cash equivalent consists of the following:

		June 30,				December 31,
R$’000		2011				2010
		R$				R$
Cash at point of sales			785				890
Cash with money collectors			158				359
Bank accounts			1,775				2,907
Investments funds (a)			18,209				12,586
		R$	20,927			R$	16,742

     Bank account figures are comprised of the amount of R$58,000 (R$298,000 in 2009) which is deposited in a financial institution located in the U.S.A. and the remaining balance in financial institutions located in Brazil.

     (a) The Company invests its temporary overflow of cash in financial funds linked, in their majority, to fixed-income securities, with original maturities of less than three months.

NOTE 4 — OTHER RECEIVABLES AND OTHER ASSETS

     Other receivables and other assets consist of the following:

		June 30,				December 31,
R$’000		2011 (unaudited)				2010
Other receivables and other assets:
Receivables from franchisees — assets sold (a)		R$	501			R$	660
Judicial deposits (b)			9.340				9.515
Properties held for sale (c)			1.143				1.361
Receivable from properties sale, less current portion (c)			2.170				4.450
Investment in BBS (Bobs — Chile) (d)			805				124
Other receivables			658				148
		R$	14.617			R$	16.258

NOTE 5 — SALE OF ASSETS

     During the third quarter of 2010 the Company entered into an agreement to sell 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 Company’s major shareholders. Three own-operated stores and five stores operated by franchisees, all under the Bob’s 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 will continue to operate its stores as usual, as will 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 legal issues have held up the sale of the one remaining property, though this is expected to be concluded in the second semester 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 June 30, 2011 were reclassified to the Properties held for sale account (part of “Other receivables and other assets” — see note 4) at their net cost value (R$1.1 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 Company’s long-term interests, including the maintenance of existing rental agreements and loan guarantees. All payments due until June 30, 2011 (total amount received was R$5.5 million which includes R$2.2 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.

NOTE 6 — CONTINGENCIES AND REASSESSED TAXES

     Liabilities related to tax amnesty programs and litigation consist of the following:

		June 30, 2011 (unaudited)												December 31, 2010
										Long												Long
		Total				Current				Term				Total				Current				Term
R$000’		Liability				Liability				Liability				Liability				Liability				Liability
Reassessed taxes
Federal taxes (PAES)			11,009				1,530				9,479				11,639				1,580				10,059
Contingencies
ISS tax litigation			7,450				—				7,450				6,616				—				6,616
Labor litigation			1,649				—				1,649				1,885				—				1,885
Property leasing and other litigation			684				—				684				691				—				691
TOTAL			20,792				1,530				19,262				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 Company’s total tax liability would be greater than the figures in the Company’s balance sheet, in the amount of approximately R$3.2 million.

     During March, 2005, the Company filed a formal request with the Brazilian Federal Authorities, claiming to have its total tax liability 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 June 30, 2011, of R$11.0 million (R$11.6 million in December 31, 2010) are sufficient, however, there is no assurance that the outcome of this situation will not derive further liability to the Company. As of June 30, 2011, the difference between such tax liability at the statements provided by the Brazilian Federal Government and the statements reported by the Company’s 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 Company’s total tax liability increased R$2.8 million accordingly.

     In accordance to the amnesty programs the Company has been paying monthly installments equivalent to 1.5% of Venbo ´s 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 second quarter ended June 30, 2011, the Company paid approximately R$0.7 million (R$0.7 million in the same period of 2010) as part of the PAES program and no interest was charged on these payments.

     During the third quarter of 2009, the Brazilian federal government launched a third amnesty program to consolidate balances from previous programs and other tax debts. The Company applied to join such program. However, the rules for the amnesty program, on tax liability 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 when the Government will consolidate the total tax liability of such amnesty program and also cannot estimate if any material adjustment will be necessary.

Contingencies

•

ISS tax litigation

     None of the Company’s 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 June 30, 2011, the Company has totaled R$7.4 million (R$6.6 million in December 31, 2010) in deposits, which is considered by the Company’s management, based on the opinion of its legal advisors, sufficient to cover the Company’s current ISS tax contingencies.

     During the third quarter of 2009, the Company’s 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. The Company and its tax advisors understand that those figures are not covered by the ISS legislation and, accordingly, they are not subject to such taxation. The Company and its legal advisors are working to adopt all necessary measures to avoid an inadequate interpretation of ISS taxation that could lead 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 June 30, 2011 the Company accounted for labor related liabilities the amount of R$1.6 million (R$1.9 million in December 31, 2010), which is considered by the Company’s management, based on the opinion of its legal advisors, sufficient to cover the Company’s current labor contingencies.

     Other contingencies

     The Company has experienced other contingencies related to the former owner of Venbo, to franchisees or ex-franchisees, to owners of properties where the Company held lease contracts and others. The Company cannot predict the receipt of additional claims that might be material or that might need Company ´s disbursements.

     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 7 — 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 “Cash and cash equivalent’s” 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 8 — STOCK OPTION PLAN ACTIVITY

     The Company’s Stock Option Plan terminated on September 17, 2002, ten years from the date of its adoption by the Board of Directors.

     During 2005, the Company’s 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 Company’s Stock Option Plan. Accordingly, during 2010 and 2011 there was no option activity.

NOTE 9 — TREASURY STOCK

     In the last quarter of 2004, the Company’s Board of Directors approved a stock repurchase plan involving the repurchase of as many as 200,000 shares of its own common stock. The plan’s 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 2011, the Company repurchased 8,325 shares related to such plan. During the first semester of 2010, the Company did not repurchase any share under the referred stock repurchase plan.

     Up to June 30, 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 and an increase in treasury stocks, in the Shareholders’ Equity section of the accompanying balance sheets.

NOTE 10 — SEGMENT INFORMATION

     Through the Company’s wholly-owned subsidiary, Venbo, which conducts business under the trade name “Bob’s”, the Company owns and operates, both directly and through franchisees, Brazil’s second largest fast food hamburger restaurant chain. Currently, the Company operates 39 points of sale under the Bob’s brand.

     Since April 2007, the Company has operated the KFC brand in Brazil through its wholly-owned subsidiary, CFK. Presently, the Company operates 8 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 Company’s operations are concentrated in southeastern Brazil. As of June 30, 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 736 franchise-operated point of sales, 383 were located at the same region, providing 56% of Net Revenues from Franchisees.

     Outside Brazil, the Bob’s 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.

     The Company manages and internally reports its operations in two segments: (1) own-stores operations (2) franchise operations. The following tables present the Company’s revenues, costs/expenses and operating income per segment:

R$000’						Results from own-stores operations
		Six months ended June 30,								Three months ended June 30,
		2011				2010				2011				2010
Net Restaurant Sales			78.468				73.450				38.322				35.173
Store Costs and Expenses			—				—				—				—
Food, Beverage and Packaging			(25.876	)			(25.090	)			(12.352	)			(11.873	)
Payroll & Related Benefits			(16.790	)			(17.938	)			(8.158	)			(8.704	)
Restaurant Occupancy			(9.379	)			(8.681	)			(4.624	)			(4.322	)
Contracted Services			(9.723	)			(9.634	)			(4.818	)			(4.585	)
Depreciation and Amortization			(3.130	)			(2.786	)			(1.505	)			(1.320	)
Royalties charged			(2.853	)			(2.178	)			(1.469	)			(1.132	)
Other Store Costs and Expenses			(5.620	)			(4.828	)			(2.435	)			(2.074	)
Total Store Costs and Expenses			(73.371	)			(71.135	)			(35.361	)			(34.010	)
Operating margin			5.097				2.315				2.961				1.163

R$000’						Results from franchise operations
		Six months ended June 30,								Three months ended June 30,
		2011				2010				2011				2010
Net Franchise Revenues			15.434				12.648				7.824				6.054
Payroll & Related Benefits			(3.280	)			(3.471	)			(1.575	)			(1.850	)
Occupancy expenses			(426	)			(697	)			(183	)			(470	)
Travel expenses			(677	)			(590	)			(485	)			(404	)
Contracted Services			(463	)			(185	)			(267	)			(123	)
Other franchise cost and expenses			(632	)			(707	)			(400	)			(425	)
Total Franchise Costs and Expenses			(5.478	)			(5.650	)			(2.910	)			(3.272	)
Operating margin			9.956				6.998				4.914				2.782

     Cost and expenses that are exclusively related to own-operated stores — even the ones incurred at the headquarters — are considered in the item “Results from own-store operations”.

     Cost and expenses that are exclusively related to franchisee operated stores — even the ones incurred at the headquarters — are considered in the item “Results from franchise operations”.

     There are items that support both activities, such as (i) administrative expenses (finance department collects the receivables from franchise but also reviews daily own store sales); (ii) selling expenses (our marketing campaigns enhance the sales of our stores as well as the sales of our franchisees); (iii) interest expense (income); (iv) income tax (benefits); (v) exclusivity and other agreements with suppliers; and (vi) extraordinary items. Such items were not included in none of the segment results disclosed in the table above because (a) their segregation would require a high level of complexity and (b) the chief operating decision maker relies primarily on operating margins to assess the segment performance.

     Currently, besides the accounts receivables from franchisees (derived from franchise fees, royalties, and marketing fund), the Company does not have assets exclusively used at the franchise business. Accordingly, except for those receivables, assets presented in the Consolidated Balance Sheets are used at the restaurant operating business.

     Own-stores operation conducted by the Company provided the following figures per brand:

		Results from Bob’s								Results from KFC’s								Results from Pizza Hut’s								Results from Doggi’s
		brand operations								brand operations								brand operations								brand operations
R$000’
		Six months ended June 30,								Six months ended June 30,								Six months ended June 30,								Six months ended June 30,
		2011				2010				2011				2010				2011				2010				2011				2010
Revenues			R$33.759				R$35.367				R$12.346				R$9.979				R$31.209				R$27.071				R$1,154			R$	1.033
Food, Beverage and Packaging			(12.408	)			(12.817	)			(4.642	)			(3.629	)			(8.237	)			(8.045	)			(589	)			(599	)
Payroll & Related Benefits			(7.467	)			(9.172	)			(3.126	)			(2.821	)			(5.663	)			(5.522	)			(534	)			(423	)
Occupancy expenses			(3.731	)			(3.822	)			(1.659	)			(1.486	)			(3.639	)			(3.145	)			(350	)			(228	)
Contracted Services			(3.763	)			(4.479	)			(1.720	)			(1.676	)			(4.016	)			(3.302	)			(224	)			(177	)
Depreciation and Amortization			(1.095	)			(1.305	)			(614	)			(547	)			(117	)			(844	)			(1.304	)			(90	)
Royalties charged			—				—				(793	)			(368	)			(2.042	)			(1.810	)			(18	)			—
Other Store Costs and Expenses			(3.025	)			(3.028	)			(1.158	)			(353	)			(1.342	)			(1.376	)			(95	)			(71	)
Total Own-stores cost and expenses			(31.489	)			(34.623	)			(13.712	)			(10.880	)			(25.056	)			(24.044	)			(3.114	)			(1.588	)
Operating margin			R $2.270				R$744				R$(1.366	)			R$(901	)			R$ 6.153				R $3.027				R$(1.960	)			R$ (555)

		Results from Bob’s								Results from KFC’s								Results from Pizza Hut’s								Results from Doggi's
		brand operations								brand operations								brand operations								brand operations
R$000’		Three months ended June 30,								Three months ended June 30,								Three months ended June 30,								Three months ended June 30,
		2011				2010				2011				2010				2011				2010				2011				2010
Revenues			R$15.474				R$15.877				R$6.132				R$4.876				R$16.273				R$13.936				R $443				R $484
Food, Beverage and Packaging			(5.592	)			(5.647	)			(2.304	)			(1.791	)			(4.245	)			(4.170	)			(211	)			(265	)
Payroll & Related Benefits			(3.434	)			(4.262	)			(1.629	)			(1.495	)			(2.835	)			(2.733	)			(261	)			(214	)
Occupancy expenses			(1.781	)			(1.712	)			(845	)			(770	)			(1.827	)			(1.695	)			(170	)			(145	)
Contracted Services			(1.728	)			(1.933	)			(813	)			(909	)			(2.187	)			(1.649	)			(90	)			(94	)
Depreciation and Amortization			(503	)			(657	)			(318	)			(275	)			564				(355	)			(1.248	)			(33	)
Royalties charged			—				—				(391	)			(201	)			(1.060	)			(931	)			(18	)			—
Other Store Costs and Expenses			(1.306	)			(1.184	)			(597	)			(188	)			(492	)			(667	)			(40	)			(35	)
Total Own-stores cost and expenses			(14.344	)			(15.395	)			(6.897	)			(5.629	)			(12.082	)			(12.200	)			(2.038	)			(786	)
Operating margin			R$ 1.130				R$482				R$(765)				R$ (753	)			R$4.191				R$1.736				R$(1.595	)			R$ (302	)

     Below we provide the segment information and its reconciliation to the Company ´s income statement:

R$000’		Six Months Ended June 30,								Three Months Ended June 30,
		2011				2010				2011				2010
Bob ´s Operating Income			R$2.270				R$744				R$1.130				R$482
KFC ´s Operating Loss			(1.366	)			(901	)			(765	)			(753	)
Pizza Hut ´s Operating Income			6.153				3.027				4.191				1.736
Doggi ´s Operating Loss			(1.960	)			(555	)			(1.595	)			(302	)
Total Operating Income			5.097				2.315				2.961				1.163
Income from franchise operations			9.956				6.998				4.914				2.782
Unallocated Marketing Expenses			(1.391	)			(2.169	)			(376	)			(1.069	)
Unallocated Administrative Expenses			(13.814	)			(11.947	)			(6.910	)			(5.791	)
Unallocated Other Operating Expenses			(2.936	)			(2.907	)			(1.363	)			(1.890	)
Unallocated Net Revenues from Trade Partners			10.567				8.592				3.775				5.179
Unallocated Other income			1.462				2.806				1.065				1.000
Unallocated Net result of assets sold and impairment of assets			(28	)			(18	)			(26	)			9
Unallocated Interest Income (Expenses)			142				(1.000	)			186				(660	)
Total Unallocated Expenses			(5.998	)			(6.643	)			(3.649	)			(3.222	)
NET INCOME BEFORE INCOME TAX			9.055				2.670				4.226				723

     The following MD&A is intended to help readers understand the results of the Company’s 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 Management’s Discussion and Analysis (“MD&A”) other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the company’s Annual Report on Form 10-K for the year ended December 31, 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 “Bob’s”, and owns and operates, both directly and through franchisees, a chain of hamburger fast food restaurants in Brazil. At the end of the second quarter of 2011, the Company was operating 39 stores in Rio de Janeiro State.

     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 separate 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. At the end of the second quarter of 2011, the Company was operating 8 stores in Rio de Janeiro State.

     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 IRB’s 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. At the end of the second quarter of 2011, the Company was operating 17 Pizza Hut stores in São Paulo State.

     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 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 Bob’s 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. The Company opened the first Doggis’ store in third quarter of 2009 and at the end of the first semester of 2011 the Company was operating 5 stores in Rio de Janeiro State.

     We also own FCK — Franquias e Participações Ltda., via the capital contribution of the equity interest it held in SUPRILOG. FCK will operate the franchise system of KFC in Brazil .As of June 30, 2011, FCK had not initiated its new operation. FCK figures are not material to our overall results.

     Besides the Brazilian operations, the Company is also present, through Bob’s 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 Company’s 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.

     RESULTS OF OPERATIONS — COMPARISON OF QUARTERS ENDED JUNE 30, 2011 AND 2010

(Amount in thousand of Brazilian Reais)

     The following table sets forth the statement of operations for the three and six months ended June 30, 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’		Three Months								Three Months								Six Months								Six Months
		Ended								Ended								Ended								Ended
		30-Jun-11					%			30-Jun-10					%			30-Jun-11					%			30-Jun-10					%
REVENUES
Net Revenues from Own-operated Restaurants			R$38.322				75,2	%			R$35.173				74,2	%			R$78.468				74,1	%			R$73.450				75,3	%
Net Revenues from Franchisees			7.824				15,3	%			6.054				12,8	%			15.434				14,6	%			12.648				13,0	%
Revenues from Special Agreements			3.775				7,4	%			5.179				10,9%	%			10.567				10,0	%			8.592				8,8	%
Other Income			1.065				2,1	%			1.000				2,1	%			1.462				1,4	%			2.806				2,9	%
TOTAL REVENUES			50.986				100,0	%			47.406				100,0	%			105.931				100,0	%			97.496				100,0	%
OPERATING COST AND EXPENSES
Store Costs and Expenses			(35.361	)			-69,4	%			(34.010	)			-71,7	%			(73.371	)			-69,3	%			(71.135	)			-73,0	%
Franchise Costs and Expenses			(2.910	)			-5,7	%			(3.272	)			-6,9	%			(5.478	)			-5,2	%			(5.650	)			-5,8	%
Marketing Expenses			(376	)			-0,7	%			(1.069	)			-2,3	%			(1.391	)			-1,3	%			(2.169	)			-2,2	%
Administrative Expenses			(6.910	)			-13,6	%			(5.791	)			-12,2	%			(13.814	)			-13,0	%			(11.947	)			-12,3	%
Other Operating Expenses			(1.363	)			-2,7	%			(1.890	)			-4,0	%			(2.936	)			-2,8	%			(2.907	)			-3,0	%
Net result of assets sold			(26	)			-0,1	%			9				0,0	%			(28	)			0,0	%			(18	)			0,0	%
TOTAL OPERATING COST AND EXPENSES			(46.946	)			-92,1	%			(46.023	)			-97,1	%			(97.018	)			-91,6	%			(93.826	)			-96,2	%
OPERATING INCOME			4.040				7,9	%			1.383				2,9	%			8.913				8,4	%			3.670				3,8	%
Interest Income (Expense)			186				0,4	%			(660	)			-1,4	%			142				0,1	%			(1.000	)			-1,0	%
NET INCOME BEFORE INCOME TAX			4.226				8,3	%			723				1,5	%			9.055				8,5	%			2.670				2,7	%
Income taxes			(600	)			-1,6	%			(451	)			-1,3	%			(1.192	)			-1,5	%			(663	)			-0,9	%
NET INCOME BEFORE NON-CONTROLLING INTEREST			3.626				9,5	%			272				0,8	%			7.863				10,0	%			2.007				2,7	%
Net loss attributable to non-controlling interest			(330	)			-0,9	%			(18	)			-0,1	%			(337	)			-0,4	%			127				0,2	%
NET INCOMEATTRIBUTABLE TO BRAZIL FAST FOOD CORP.			3.296				8,6	%			254				0,7	%			7.526				9,6	%			2.134				2,9	%