<PAGE>
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1998
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number: 0-23278
Brazil Fast Food Corp.
(Exact name of registrant as specified in its charter)
Delaware 13-3688737
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Av. Brasil, 6431, CEP 21040-360, Rio de Janeiro, Brazil
(Address of principal executive offices)
011-55-21-564-6452
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
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. /X/ Yes / / No
Applicable Only to Issuers Involved in Bankruptcy
Proceeding During the Preceding Five Years:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act 1934 subsequent to the distribution of securities under a plan
confirmed by a court. / / Yes / / No
Applicable Only to Corporate Issuers:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
12, 933,638 shares of Common Stock at November 11, 1998
<PAGE>
Part l - Financial Information
Item 1. Financial Statements
The condensed financial statements included herein have been prepared by
Brazil Fast Food Corp. (the "Company"), without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. While certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, the Company believes that the disclosures made herein are
adequate to make the information presented not misleading.
<PAGE>
BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
================================================================================
ASSETS
------
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
-------------------- -----------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents R$ 444 R$ 1,522
Accounts receivable, net 4,982 3,197
Inventories 539 775
Prepaid and other current assets 843 594
---------- ----------
TOTAL CURRENT ASSETS 6,808 6,088
PROPERTY AND EQUIPMENT, NET 21,454 23,613
DEFERRED CHARGES, NET 12,702 14,073
GOODWILL, NET 5,153 5,386
OTHER ASSETS 165 194
---------- ----------
TOTAL ASSETS R$ 46,282 R$ 49,354
========== ==========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable R$ 3,936 R$ 4,295
Accounts payable and accrued expenses 3,121 4,571
Payroll and related accruals 2,254 1,868
Taxes, other than income taxes 1,096 672
Deferred income 906 910
Other 164 513
---------- ---------
TOTAL CURRENT LIABILITIES 11,477 12,829
NOTES PAYABLE, less current portion 4,435 694
DEFERRED INCOME, less current portion 2,266 2,930
---------- ---------
TOTAL LIABILITIES 18,178 16,453
---------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value,
5,000 shares authorized;
no shares issued - -
Common stock, $.0001 par value,
20,000,000 shares authorized;
12,933,638 and 12,304,484
shares issued and outstanding
at September 30, 1998 and
December 31, 1997, respectively 1 1
Additional paid-in capital 46,226 44,698
Deficit (17,819) (11,553)
Cumulative translation adjustment (304) (245)
---------- ---------
TOTAL SHAREHOLDERS' EQUITY 28,104 32,901
---------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY R$ 46,282 R$ 49,354
========== =========
See Selected Notes to Financial Statements
<PAGE>
BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
================================================================================
For the Nine
Months Ended
September 30,
--------------------------
1998 1997
---------- -----------
NET OPERATING REVENUES:
Restaurant sales R$ 48,183 R$ 53,343
1,418 1,033
Franchise income 1,595 1,214
Other income ---------- -----------
TOTAL NET OPERATING REVENUES 51,196 55,590
---------- -----------
COSTS AND EXPENSES:
Cost of restaurant sales 17,670 18,839
Restaurant payroll and other
employee benefits 11,881 13,170
Restaurant occupancy and
other expenses 5,536 5,430
Depreciation and amortization 2,909 3,142
Other operating expenses 7,733 8,201
Selling expenses 2,942 3,473
General and administrative
expenses 6,884 8,484
---------- -----------
TOTAL COSTS AND EXPENSES 55,555 60,739
---------- -----------
(LOSS) FROM OPERATIONS (4,359) (5,149)
INTEREST (EXPENSE) (1,753) (1,242)
FOREIGN EXCHANGE LOSS (154) (12)
---------- -----------
NET (LOSS) (6,266) (6,403)
OTHER COMPREHENSIVE INCOME (LOSS)
FOREIGN CURRENCY TRANSLATION
ADJUSTMENT (59) (203)
---------- -----------
COMPREHENSIVE LOSS R$ (6,325) R$ (6,606)
=========== ===========
BASIC NET (LOSS) PER COMMON
SHARE R$ (.50) R$ (.59)
=========== ===========
WEIGHTED AVERAGE BASIC
COMMON SHARES OUTSTANDING 12,591,800 10,781,151
=========== ===========
See Selected Notes to Financial Statements
<PAGE>
BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
================================================================================
For the Three
Months Ended
September 30,
-------------------------
1998 1997
--------- ---------
NET OPERATING REVENUES:
Restaurant sales R$ 14,493 R$ 17,707
Franchise income 512 320
Other income 509 386
--------- ---------
TOTAL NET OPERATING REVENUES 15,514 18,413
--------- ---------
COSTS AND EXPENSES:
Cost of restaurant sales 5,402 6,268
Restaurant payroll and other employee
benefits 3,586 4,338
Restaurant occupancy and other expenses 1,680 1,893
Depreciation and amortization 773 1,104
Other operating expenses 2,304 2,548
Selling expenses 930 1,288
General and administrative expenses 2,226 2,691
--------- ---------
TOTAL COSTS AND EXPENSES 16,901 20,130
--------- ---------
(LOSS) FROM OPERATIONS (1,387) (1,717)
INTEREST (EXPENSE) (640) (325)
FOREIGN EXCHANGE LOSS (109) (23)
--------- ---------
NET (LOSS) (2,136) (2,065)
OTHER COMPREHENSIVE INCOME (LOSS):
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (9) (86)
--------- ---------
COMPREHENSIVE LOSS
R$ (2,145) R$ (2,151)
========== ==========
BASIC NET (LOSS) PER COMMON SHARE
R$ (.16) R$ (.19)
========== ==========
WEIGHTED AVERAGE BASIC COMMON SHARES
OUTSTANDING 12,933,638 11,071,151
========== ==========
See Selected Notes to Financial Statements
<PAGE>
BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Common Stock Additional Cumulative
----------------------------- Paid-In Translation
Shares Par Value Capital Deficit Adjustment Total
---------- ---------- -------------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 12,304,484 R$ 1 R$ 44,698 R$ (11,553) R$ (245) R$ 32,901
Insurance of shares upon
exercise of options 6,154 - 23 - - 23
Issuance of shares in
private placements 623,000 - 1,505 - - 1,505
Net loss for the period - - - (6,266) - (6,266)
Cumulative translation
adjustment - - - - (59) (59)
---------- ---------- -------------- -------------- ----------- ---------
Balance, September 30, 1998 12,933,638 R$ 1 R$ 46,226 R$ (17,819) R$ (304) R$ 28,104
========== ========== ============= ============== =========== =========
</TABLE>
See Selected Notes to Financial Statements
<PAGE>
BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30,
------------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) R$ (6,266) R$ (6,403)
Adjustments to reconcile net (loss) to net cash provided by
(used in) operating activities:
Net (loss) on sale of assets 61 -
Depreciation and amortization 2,909 3,142
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 616 (1,300)
Inventories 236 318
Other current assets (249) 274
Other assets 29 (59)
Increase (decrease) in:
Accounts payable and accrued expenses (1,450) (1,218)
Payroll and related accruals 386 281
Taxes, other than income taxes 424 (275)
Deferred income (664) 485
Other current liabilities (353) 355
-------------- --------------
NET CASH (USED IN) OPERATING ACTIVITIES (4,321) (4,400)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES :
Capital expenditures (1,933) (605)
Proceeds from sale of assets 323 -
-------------- --------------
NET CASH (USED IN) INVESTING ACTIVITIES (1,610) (605)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in borrowings 3,383 (986)
Proceeds from private placement 1,505 6,168
Proceeds from exercise of options 23 -
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,911 5,182
-------------- --------------
EFFECT OF FOREIGN EXCHANGE RATES (58) (203)
-------------- --------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (1,078) (26)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,522 1,556
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD R$ 444 R$ 1,530
============== ==============
</TABLE>
See Selected Notes to Financial Statements
<PAGE>
BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
================================================================================
NOTE 1 - FINANCIAL STATEMENT PRESENTATION
- -----------------------------------------
The accompanying financial statements have been prepared by Brazil Fast Food
Corp. (the "Company"), without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows
at September 30, 1998 and for all periods presented have been made. The
results of operations for the period ended September 30, 1998 are not
necessarily indicative of the operating results for a full year. Unless
otherwise specified all reference in these financial statements to (i)
"Reais", the "Real" or "R$" are to the Brazilian Real (singular), or to
Brazilian Reais (plural), the legal currency of Brazil, and the (ii) "U.S.
Dollars" or "$" are to United States Dollars.
Certain information and footnote disclosures prepared in accordance with
general accepted accounting principles and normally included in the
financial statements have been condensed or omitted. It is suggested that
these financial statements be read in conjunction with the financial
statements and notes included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
Through June 30, 1997 the consolidated financial statements have been
indexed and expressed in currency of constant purchasing power by using a
monthly index derived from the Indice Geral de Precos-Mercado ("IGP-M").
Since the implementation of the Real Plan in June 1994, the Brazilian
economy has experienced a declining rate of inflation with a cumulative
inflation rate for the three-year period from July 1994 to June 1997, as
measured by the IGP-M of 54%. Based on the foregoing, management determined
that Brazil ceased to be considered a hyperinflationary economy, as defined
in Statement of Financial Accounting Standards ("SFAS") No. 52, and from
July 1, 1997 no longer indexed its financial statements for constant
currency purchasing power.
<PAGE>
BRAZIL FAST FOOD CORP. AND SUBSIDIARIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
================================================================================
NOTE 2 - SHAREHOLDERS' EQUITY
- -----------------------------
In the first quarter of 1998, the Company issued 6,154 shares of common
stock upon the exercise of options, receiving net proceeds of R$23.
In the second quarter of 1998, the Company issued 623,000 shares of common
stock in a private placement, receiving net proceeds of R$1,505.
NOTE 3 - COMPREHENSIVE INCOME
- -----------------------------
In 1998, the Company adopted SFAS No.130, "Reporting Comprehensive Income",
which requires the Company to display comprehensive income and its
components in the financial statements. In the Company's case,
comprehensive income includes net loss and the change in the Company's
cumulative translation adjustment.
NOTE 4 - RECONCILIATION TO BRAZILIAN GAAP
- -----------------------------------------
The following reconciliation is provided to facilitate an understanding of
the differences in financial reporting between generally accepted
accounting principles ("GAAP") used in the United States as compared with
those used in Brazil.
<TABLE>
<CAPTION>
Income Stockholders'
Statement Equity
----------- -----------
<S> <C> <C>
Balances, September 30, 1998 using U.S. GAAP R$ (6,266) R$ 28,104
Adjustments for constant currency purchasing
power and foreign translation adjustments 48 (4,912)
Adjustments under purchase accounting
from Acquisitions (1,120) (4,862)
Accounting for pre-operating expenses 45 1,093
Accounting for deferred income 414 655
Present value adjustments (20) (101)
Accounting for capitalized leases (6) 8
----------- -----------
Balances, September 30, 1998 using Brazilian GAAP R$ (6,905) R$ 19,985
=========== ===========
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND LIQUIDITY
AND CAPITAL RESOURCES
RESULTS OF OPERATIONS
The following comparative unaudited financial data of the Company for the
nine months ended September 30, 1997 and September 30,1998, respectively, are
herein included and commented upon an effort to facilitate a meaningful
presentation of the evolution of the Company's operating results.
Since the implementation of the Real Plan in June 1994, the Brazilian
economy has experienced declining levels of inflation rates, with a cumulative
inflation rate for the three-year period from July 1994 to June 1997, as
measured by the IGP-M (a Brazilian General Price Index), of 54%. The inflation
rate since June 30, 1997 and through September 30, 1998, as measured by the IGP-
M, was approximately 3.5% per annum. Considering the above, Management has made
the determination that Brazil should no longer be considered a highly
inflationary economy from July 1, 1997 onward, pursuant to FASB 52.
Accordingly, operating results for the periods ended June 30, 1997
presented in the accompanying financial statements have been indexed and
expressed in currency of constant purchasing power of June 30, 1997 by using a
monthly index derived from the IGP-M index. The Company believes that the IGP-M
index is an appropriate general price inflation indicator to be used under US
GAAP.
<TABLE>
<CAPTION>
Nine Months Nine months
Ended Ended
September 30, 1997 % September 30, 1998 %
---------------------- ----- ------------------------ -----
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
NET OPERATING REVENUES:
- - Restaurant sales R$53,343 R$ 48,183
- - Franchise income 1,033 1,418
- - Other income 1,214 1,595
-------- ---------
TOTAL NET OPERATING REVENUES 55,590 100.0 51,196 100.0
-------- ----- --------- -----
COSTS AND EXPENSES:
- - Cost of restaurant sales 18,839 33.9 17,670 34.5
- - Restaurant payroll and other employee benefits 13,170 23.7 11,881 23.2
- - Restaurant occupancy costs and other expenses 5,430 9.8 5,535 10.8
- - Depreciation and amortization 3,142 5.7 2,908 5.7
- - Other operating expenses 8,201 14.8 7,733 15.1
- - Selling expenses 3,473 6.2 2,942 5.7
- - General and administrative expenses 8,484 15.3 6,885 13.4
-------- ----- --------- -----
TOTAL COSTS AND EXPENSES 60,739 109.3 55,554 108.5
-------- ----- --------- -----
LOSS FROM OPERATIONS (5,149) (9.3) (4,358) (8.5)
- - Interest expense (1,254) (2.3) (1,908) (3.7)
------- ---- -------- -----
NET LOSS R$ (6,403) (11.5) R$ (6,266) (12.2)
========= ===== ========= =====
</TABLE>
Restaurant Sales
Systemwide gross sales increased from R$ 77,275,000 for the nine months
ended September 30, 1997 to R$ 86,850,000 for the same period of 1998, primarily
due to an increased number of franchised retail fast food outlets.
Net restaurant sales from Company-owned stores were R$ 53,343,000 and R$
48,183,000 for the nine months ended September 30, 1997 and 1998, respectively,
a decrease from period to period of approximately 9.7%. During the period from
October 1, 1997 to September 30, 1998, the Company opened 8 new outlets, closed
3 unprofitable outlets and sold 12 outlets to franchisees, resulting in 75
Company-owned retail fast food outlets at September 30, 1998 as compared with 82
such outlets at September 30, 1997.
Same store sales declined by 6.6% for the nine months ended September 30,
1998 when compared to the nine months ended June 30, 1997. This decline is
primarily attributable to an economic recession, initially stemming from the so-
called "Asian Crisis" and exacerbated thereafter by the worsening Russian
economy, which resulted in a significant outflow of foreign investment. Measures
taken by the Brazilian Central Bank to stem such outflow included two interest
rate increases in September 1998, which substantially increased the cost of
consumer indebtedness, with a corresponding reduction in discretionary consumer
spending. Consumer spending was also adversely affected by
<PAGE>
economic concerns engendered by the then uncertain outcome of scheduled
Brazilian national elections. This decline was also impacted by across-the-
board product price reductions of approximately 5%, as well as temporary
discounts, both implemented by the Company in an effort to improve store
traffic.
Franchise Income
Franchise income was R$ 1,033,000 and R$ 1,418,000 for the nine months
ended September 30, 1997 and 1998, respectively. The increase of 37.1% is
primarily attributable to the growth in franchised locations, from an average of
50 units for the nine months ended September 30, 1997 to an average of 79 in the
comparable 1998 period. The increased number of franchisees also resulted in the
Company's receipt of increased royalty fees. Franchise income was partially
reduced by the opening of new stores with lower sales levels than those
previously in operation. A number of these stores are located in smaller cities
or were opened in kiosks in locations having close proximity to other BOB's
restaurants.
Through the period from October 1, 1997 to September 30, 1998, the Company,
as noted above, sold 12 of its restaurants to franchisees. These stores, which
either had low profitability or, in some cases, operating losses, were located
at a distance from both Rio de Janeiro and Sao Paulo, the primary focus of the
Company's operations. The Company's historical experience has shown that
franchisee administration can enhance the profitability of such stores,
primarily as a result of (i) lower taxation (tax incentives from Federal and
state governments to small companies); (ii) better knowledge of specific markets
and their local customs; and lower operating expenses. In certain situations,
the Company has provided incentives in the form of reduced royalties to
franchisees for a period of time.
Other Income
Other income was R$ 1,214,000 and R$ 1,595,00 for the nine months ended
September 30, 1997 and 1998, respectively, and is comprised of income derived
from suppliers pursuant to exclusivity agreements, from marketing fees charged
to franchisees, and from initial fees paid by new franchisees. The increase of
31.4% from period to period is primarily attributable to the increase in the
number of franchised outlets, noted above.
Cost of Restaurant Sales
Cost of restaurant sales expressed as a percentage of net operating
revenues were 33.9% and 34.5% for the nine months ended September 30, 1997 and
1998, respectively. The increase is due to an approximately 2% increase in the
cost of certain items such as bread and soft drinks, caused mainly by increased
taxation, and was partially offset by concessions negotiated with some suppliers
of such items during the first nine months of 1998.
Restaurant Payroll and Other Employee Benefits
Restaurant payroll and other employee benefits expressed as a percentage of
net operating revenues decreased from 23.7% for the nine months ended September
30, 1997 to 23.2% for the nine months ended September 30, 1998, mainly due to an
ongoing personnel reduction program first initiated in 1997, which resulted in a
reduction in the total number of assistant store managers, as well as in the
<PAGE>
average number of store employees from 25 in September 1997 to 23 by September
1998. Further contributing factors to this decline include reductions in
employee medical costs, night shift differentials and transportation benefits.
This decrease was partially negated by salary increase mandated by union-driven
agreements (4% increases for Rio de Janeiro employees since October 1997).
Restaurant Occupancy Costs and Other Expenses
Restaurant occupancy costs and other expenses expressed as a percentage of
net operating revenues were approximately 9.8% and 10.8% for the nine months
ended September 30, 1997 and 1998, respectively. The increase is mainly due to
minimum rents, which have to be restated every year to reflect the effect of
inflation (currently at approximately 3.5% per annum). In addition, the sale of
12 Company-owned stores to franchisees, noted above, included 2 stores which
prior to their sale were located in Company-owned properties, which changed the
correlation between restaurant operating costs and net operating revenues since
the newly opened stores were relocated to leased properties.
Depreciation and Amortization
Depreciation and amortization expressed as a percentage of net operating
revenues was essentially a constant at approximately 5.7% for each of the nine
month periods ended September 30, 1997 and 1998, respectively.
Other Operating Expenses
Other operating expenses expressed as a percentage of net operating
revenues were approximately 14.8% and 15.1% for the nine months ended September
30, 1997 and 1998, respectively. The increase reflects the effect of annual
inflationary adjustments of service contracts (primarily accounting and
maintenance), partially offset by negotiated reductions and non-renewals of
certain of such contracts.
Selling Expenses
Selling expenses decreased from 6.2% during the nine month ended September
30, 1997 to 5.7% for the comparable l998 period. The decrease is primarily
attributable to internal cost efficiencies implemented by the Company during the
1998 period.
General and Administrative Expenses
General and administrative expenses expressed as a percentage of net
operating revenues were approximately 15.3% and 13.4% for the nine months ended
September 30, 1997 and 1998, respectively. General and administrative expenses
for the nine months ended September 30, l997 included approximately R$ 600,000
of non-recurrent charges arising primarily from: (i) higher professional fees
attributable to financing activities and regulatory filings; (ii) a write-off of
obsolete equipment; and (iii) a partial write-off of certain deferred charges.
By way of contrast, general and administrative expenses for the nine months
ended September 30, 1998 include non-recurring credits of approximately R$
330,000 attributable to a reversal of excess labor contingencies that had been
previously established by the Company based upon its historical experience and
gains derived from the final settlement of amounts owed to the Company's prior
owner. In order to reduce its monthly general and administrative expenses in
1998, the Company spent approximately R$ 220,000 on fixed assets and
improvements and approximately R$ 200,000 on employee termination charges, which
are non recurring items and which will result in a reduction of monthly cash
expenditures of at least R$ 250,000. Without giving effect to such non-recurring
charges and
<PAGE>
credits, as applicable, general and administrative expenses as a percentage of
total net operating revenues for the nine months ended September 30, 1997 and
1998 were approximately 14.2% or R$ 7,884,000 and 14.1% or R$ 7,215,000,
respectively. The reduction is mainly due to: (i) reductions in the number of
administrative personnel, implemented during the latter half of 1997 and
throughout the nine month period ended September 30, 1998; (ii) increased office
automation; (iii) relocation of the Company's executive and principal
administrative offices to a Company-owned facility; (iv) termination of a
stategic consulting agreement with Hardee's, which had cost the Company R$
290,000 during the first nine months of l997; and (v) a number of other smaller
cost reductions.
Interest Expense
Interest expense expressed as a percentage of net operating revenues was
approximately 2.3% and 3.7% for the nine months ended September 30, l997 and
1998, respectively.
Interest expense reflects an increase in the Company's total indebtedness
stemming from borrowings to satisfy the final payment to the Company's prior
owner in March l998 of approximately R$ 3,000,000 which was funded on a short
term basis by the Company's existing credit facilities. Such indebtedness was
converted into long term debt owed to a Brazilian financial institution at a
lower interest rate during the Summer of 1998 .
Seasonality
The Company's revenues are subject to seasonality as over 20% of its sales
are generated during the Brazilian summer months of December and January due to
local customs and traditions such as Christmas shopping and school vacation.
Liquidity and Capital Resources
Since March 19, 1996, the Company has funded its operating losses of
R$17,819,000 and made acquisitions of business and capital improvements,
including store remodeling, by using cash remaining after the closing of the
Venbo acquisition, by borrowings, and proceeds from private placements of its
securities. At September 30, 1998, the Company had R$444,000 in cash on hand
and a deficiency in working capital of R$720,000.
The Company's capital requirements are primarily for the expansion of its
retail operations. For the nine months ended September 30, 1998, the Company's
EBITDA was negative R$1,450,000. The Company believes it is able to fund its
continuing operations through reliance, if required, upon its existing credit
facilities. During 1998, the Company intends to continue to focus its efforts
on expanding both the number of its franchisees and its franchised outlets,
neither of which are expected to involve significant capital expenditures by the
Company.
The Company has obtained long term credit facilities from a Brazilian
banking institution amounting to approximately R$3,000,000 (equivalent to
$2,650,000) which bears interest in US dollars at the rate of 13% per annum. In
addition, the Company has obtained short-term credit facilities from several
banks in Brazil, which the Company believes are sufficient to sustain its
working capital needs through the low seasons of the year.
<PAGE>
The Company's continued operations is dependent in part, upon its ability
to increase sales volume through enhancements of its stores, including but not
limited to new computerized systems and refurbishment of interior designs, and
expansion of its franchise network. These activities will require additional
cash expenditures. The Company believes that cash flow from operations,
combined with bank borrowings, discussed above, as well as continued growth in
franchising and equity sales, will enable the Company to continue in business.
Year 2000
The Company has performed a review of its Year 2000 preparedness
relative to its products and systems, its accounting software and its computer
hardware. The Company believes that it will not incur material costs in
connection with becoming Year 2000 compliant. In addition, the Company has
received communications from its significant third party vendors and service
providers stating that they are generally on target to become Year 2000
compliant in 1999 if they have not already done so. There can be no assurance
that these third party vendors and service provides will complete their own Year
2000 compliant projects in a timely manner and that failure to do so would not
have an adverse impact on the Company's business.
Quantitative and Qualitative Information About Market Risk
The Company does not engage in trading market risk sensitive
instruments and does not purchase hedging instruments or "other than trading"
instruments that are likely to expose the Company to market risk, whether
interest rate, foreign currency exchange, commodity price or equity price risk.
The Company has issued no debt instruments, entered into no forward or future
contracts, purchased no options and entered into no swaps. The Company's primary
market risk exposure is that of interest rate risk. A change in Brazilian
interest rates would affect the rate at which the Company could borrow funds
under its several credit facilities with Brazilian banks and financial
instruments.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) None
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report, as amended, to be signed on its behalf
by the undersigned thereunto duly authorized.
Brazil Fast Food Corp.
(registrant)
By: /s/Peter van Voorst Vader
----------------------------------------
Peter van Voorst Vader
Chief Executive Officer
(Principal Executive Officer)
By: /s/Carlos Henrique da Silva Rego
----------------------------------------
Carlos Henrique da Silva Rego
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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