SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-27494
FIRST SOUTH AFRICA CORP., LTD.
------------------------------
(Exact name of Registrant as Specified in Its Charter)
Bermuda Not Applicable
------- --------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
Clarendon House, Church Street, Hamilton HM CX, Bermuda
-------------------------------------------------------
(Address of Principal Executive Offices with Zip Code)
Registrant's Telephone Number, Including Area Code: 441-295-1422
--------------------------------------------------------------
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. Yes [X] No [_]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [_] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of common stock outstanding as of May 12, 1998 was
7,097,892.
First South Africa Corp., Ltd.
Item 1. Unaudited Consolidated Balance Sheets at
March 31, 1998 and June 30, 1997 3 - 4
Unaudited Consolidated Statements of Income
for the three months and for the nine months
ended March 31, 1998 and 1997 5 - 6
Unaudited Consolidated Statements of Cash
Flows for the nine months ended March 31,
1998 and 1997 7
Unaudited Consolidated Statement of Changes
in Stockholders' Investment for the period
June 30, 1997 to March 31, 1998 8
Notes to the unaudited Consolidated
Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
operations 18
2
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31, JUNE 30,
1998 1997
$ $
------------ ------------
CURRENT ASSETS
Cash on hand 20,994,491 19,889,111
Trade accounts receivable 20,303,100 12,000,224
Less: Allowances for bad debts (878,107) (696,279)
------------ ------------
19,424,993 11,303,945
Inventories (net) 13,952,413 7,219,960
Prepaid expenses and other current assets 1,363,328 934,263
------------ ------------
TOTAL CURRENT ASSETS 55,735,225 39,347,279
Property, plant and equipment 36,171,324 16,197,605
Less: Accumulated depreciation (13,395,967) (4,849,396)
------------ ------------
22,775,456 11,348,209
Intangible assets (net) 21,715,882 12,620,822
Deferred charges (net) 1,616,980 838,439
Other assets 114,642 42,730
------------ ------------
101,958,185 64,197,479
============ ============
3
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' INVESTMENT
March 31, June 30,
1998 1997
$ $
------------ ------------
CURRENT LIABILITIES
Bank overdraft payable 4,823,514 --
Current portion of long term debt 1,779,766 1,673,712
Trade accounts payable 11,787,405 6,755,823
Other provisions and accruals 4,173,741 3,184,428
Other taxes payable 564,705 654,653
Income tax payable 1,748,173 1,721,079
------------ ------------
Total current liabilities 24,877,304 13,989,695
Long term debt 32,653,136 13,341,758
Deferred income taxes 367,147 358,446
------------ ------------
57,897,587 27,689,899
Minority shareholders' investment 18,509,639 13,287,566
STOCKHOLDERS' INVESTMENT
Capital stock:
A class common stock, $0.01 par
value - authorized 23,000,000 shares,
issued and outstanding 5,274,749 shares 52,747 35,361
B class common stock, $0.01 par
value - authorized 2,000,000 shares,
issued and outstanding 1,822,500 shares 18,725 18,691
Preferred stock, $0.01 par value,
- authorized 5,000,000 shares, issued
and outstanding nil shares -- --
Capital in excess of par 26,713,755 22,891,093
Retained earnings 6,253,788 2,803,065
Foreign currency translation adjustments (7,488,056) (2,528,196)
------------ ------------
101,958,185 64,197,479
============ ============
4
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FOR
THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
1998 1997
$ $
----------- -----------
Revenues 28,218,692 18,729,799
=========== ===========
Operating expenses
Cost of sales 16,536,884 10,491,146
Selling, general and administrative costs 9,732,843 6,809,021
----------- -----------
26,269,727 17,300,167
Operating income 1,948,965 1,429,632
Other income 370,949 88,920
Interest income/( expense) (163,901) (195,879)
Income from consolidated companies before income taxes 2,156,013 1,322,673
Provision for taxes on income (688,855) (176,575)
----------- -----------
1,467,158 1,146,098
Minority interest in consolidated subsidiary companies 549,443 --
----------- -----------
Net income 917,715 1,146,098
=========== ===========
Basic earnings per share 0.13 0.22
Fully diluted earnings per share 0.13 0.22
5
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FOR
THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
1998 1997
$ $
----------- -----------
Revenues 85,770,957 44,536,940
Operating expenses
Cost of sales 52,308,927 24,543,952
Selling, general and administrative costs 27,475,571 16,050,703
----------- -----------
79,784,498 40,594,655
Operating income 5,986,459 3,942,285
Other income 1,005,860 599,521
Interest income/( expense) 93,756 (770,087)
Income from consolidated companies before
income taxes 7,086,075 3,771,719
Provision for taxes on income (1,926,674) (799,130)
----------- -----------
5,159,401 2,972,589
Minority interest in consolidated
subsidiary companies (1,708,678) --
----------- -----------
Net income 3,450,723 2,972,589
=========== ===========
Basic earnings per share 0.55 0.61
Fully diluted earnings per share 0.48 0.60
6
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
1998 1997
$ $
----------- -----------
Cash flows from operating activities:
Net income 3,450,723 2,972,589
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,632,627 1,398,324
Deferred income taxes (7,003) 240,635
Net loss/(gain) on sale of assets 76,810 (18,012)
Effect of changes in current assets and
current liabilities 386,100 1,586,881
Minority interest in consolidated subsidiary companies 1,708,678 --
----------- -----------
Net cash provided by operating activities 8,247,935 6,180,417
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (3,444,009) (2,526,740)
Proceeds on disposal of property, plant and equipment 72,421 --
Proceeds on disposal of investment in First SA Lifestyle
Holdings Limited 3,507,424 --
Proceeds on dilution in First SA Food Holdings Limited 5,970 --
Additional purchase price payments (3,015,118) --
Other assets acquired (204,553) 287,069
Acquisitions of subsidiaries (net of cash of $563,898) (23,489,585) (7,935,813)
Increase in loans to related companies -- 2,891
----------- -----------
Net cash used in investing activities (26,567,450) (10,172,593)
Cash flows from financing activities:
Net borrowings in bank overdrafts 2,496,419 1,867,474
Borrowings of long term debt 15,368,342 720,806
Reduction in deferred debt issue costs (958,543) --
Borrowings/(repayments) in short term debt 219,679 (1,099,443)
Proceeds on stock issues 3,840,077 --
----------- -----------
Net cash provided in financing activities 20,965,974 1,488,837
----------- -----------
Effect of exchange rate changes on cash (1,541,079) 66,626
----------- -----------
Cash utilised by operations 1,105,380 (2,436,713)
Cash on hand at beginning of period 19,889,111 4,682,035
----------- -----------
Cash on hand at end of period 20,994,491 2,245,322
=========== ===========
7
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' INVESTMENT
First South
First South Africa Corp., Foreign
Africa Corp., Ltd. Capital in currency
Ltd. Class B excess of Retained translation
common stock common stock par earnings adjustments Total
$ $ $ $ $ $
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1997 35,361 18,691 22,891,093 2,803,065 (2,528,196) 23,220,014
Issuance of stock to FSAC escrow agent 847 -- -- -- -- 847
Issuance of stock to acquire subsidiaries -- 20 699,414 -- -- 699,434
Proceeds on warrants exercised 1,595 -- 1,068,259 -- -- 1,069,854
Net income -- -- -- 988,626 -- 988,626
Translation adjustment -- -- -- -- (1,106,252) (1,106,252)
----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 1997 37,803 18,711 24,658,766 3,791,691 (3,634,448) 24,872,523
Issuance of stock to FSAC escrow agent 683 -- -- -- -- 683
Issuance of stock to acquire subsidiaries 1,429 14 1,480,071 -- -- 1,481,514
Warrant swap out at par value 11,738 -- (11,738) -- -- --
Proceeds on warrants exercised 744 -- 449,506 -- -- 450,250
Proceeds on options exercised 100 -- 43,650 -- -- 43,750
Net income -- -- -- 1,544,382 -- 1,544,382
Translation adjustment -- -- -- -- (1,721,456) (1,721,456)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 52,497 18,725 26,620,255 5,336,073 (5,355,904) 26,671,646
Proceeds on options exercised 250 -- 93,500 -- -- 93,750
Net income -- -- -- 917,715 -- 917,715
Translation adjustment -- -- -- -- (2,132,152) (2,132,152)
----------- ----------- ----------- ----------- ----------- -----------
52,747 18,725 26,713,755 6,253,788 (7,488,056) 25,550,959
=========== =========== =========== =========== =========== ===========
8
FIRST SOUTH AFRICA CORP., LTD.
1. ORGANISATION AND PRINCIPLE ACTIVITIES OF THE GROUP
First South Africa Corp., Ltd. (the "Company") was founded on September 6,
1995. The purpose of the Company is to acquire and operate South African
companies.
The principle activities of the group include the following:
ENGINEERING INTERESTS
The business of manufacturing, servicing and selling packaging machines,
receiving commission income, receiving rental income, manufacture of
washers for use in the fastener industry, manufacture and supply of
air-conditioning products.
FOOD INTERESTS
The manufacture, sale and distribution of both ready to eat and ready for
bake off pastry related food products, the manufacture, sale and
distribution of high margin speciality breads and staple breads, the
manufacture and sale of a wide range of prepared food products and the
manufacture, sale and distribution of a wide range of processed meat
products.
LIFESTYLE INTERESTS
The manufacture, sale and distribution of plastic, wooden and steel outdoor
products aimed at the leisure market.
9
FIRST SOUTH AFRICA CORP., LTD.
2. ACQUISITIONS
On July 1, 1997 the Company acquired 100% of the common stock of Fifers
Bakery (Pty) Ltd for an aggregate net purchase price of $1,844,890. This
acquisition was accounted for using the purchase method of accounting. The
assets and liabilities were recorded at fair market value as determined by
management.
On October 1, 1997 the Company acquired an effective 81% of, the common
stock of SA Leisure (Proprietary) Limited, and the businesses of Galactex
Outdoor (Proprietary) Limited and Republic Umbrella Manufacturers
(Proprietary) limited for an aggregate net purchase price of $ 19,924,638,
and the common stock of Pacforce (Proprietary) Limited for $276,444. The
acquisitions were accounted for using the purchase method of accounting.
The assets and liabilities were recorded at fair market value as determined
by management.
On March 1, 1998 the Company acquired 100% of the common stock of
Tradewinds CC for an aggregate net purchase price of $1,014,663. This
acquisition was accounted for using the purchase method of accounting. The
assets and liabilities were recorded at fair market value as determined by
management.
The purchase consideration has been decreased to give effect to the debt
ceded to the holding company in the acquisitions.
$
----------
Acquisition costs
Stock issued in lieu of cash 2,180,948
Cash consideration (net of debt ceded to holding company) 20,879,687
----------
Purchase price to be allocated 23,060,635
==========
Summary allocation of purchase price
Current assets 18,730,117
Property, plant and equipment 11,374,464
Other assets 4,967,809
Goodwill 3,445,323
----------
Total assets acquired 38,517,713
==========
Current liabilities 9,918,770
Long term debt 4,492,481
Deferred income taxes 52,979
Debt ceded to holding company 992,848
----------
TOTAL LIABILITIES ASSUMED 15,457,078
----------
23,060,635
==========
The Company is required to make additional payments to the former owners
based on a multiple of pre tax earnings. These payments are to be made by
the issue of stock and cash over the next five years.
Additional purchase price payments made during the current year total
$3,015,118. This amount was allocated as follows:
Goodwill $ 781,757
Recipes 853,769
Trademarks 1,379,592
----------
3,015,118
==========
10
FIRST SOUTH AFRICA CORP., LTD.
2. ACQUISITIONS (continued)
PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma financial information tabled below has been
prepared assuming that all of the acquisitions which occurred subsequent to
June 30, 1996 had taken place and that operations had commenced on July 1,
1996, an adjustment has been made to eliminate the minority interest in the
net income of consolidated subsidiaries assuming that the disposal of an
effective 30% interest in First SA Food Holdings Limited and First SA
Lifestyle Holdings Limited had taken place on July 1, 1996.
July 1 to July 1, to
March 31, March 31,
1998 1997
$ $
----------- -----------
Revenues 93,131,373 84,934,672
=========== ===========
Net income before minority interest in
consolidated subsidiaries 5,645,530 4,959,504
Minority interest in consolidated subsidiary
companies (1,788,538) (1,119,272)
----------- -----------
Net income 3,856,992 3,840,232
=========== ===========
Basic earnings per share 0.61 0.61
Weighted average number of shares in issue 6,283,410 6,283,410
11
FIRST SOUTH AFRICA CORP., LTD.
3. SUMMARY OF ACCOUNTING POLICIES
The consolidated financial statements should be read in conjunction with
the Companies financial statements which have been prepared in accordance
with US generally accepted accounting principles and incorporate the
following significant accounting policies:
CONSOLIDATION
First South Africa Corp., Ltd., consolidates its majority owned
subsidiaries. The consolidated financial statements include the accounts of
the Company, First South Africa Corp., Ltd. and its subsidiaries. Minority
interests have been taken into account when determining the net income due
to the Company. Material intercompany transactions have been eliminated on
consolidation.
ACCOUNTING ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of
the financial statements, disclosure of contingent liabilities at the
financial statement date and reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements reflects all adjustments which
are, in the opinion of management, necessary for a fair presentation of the
consolidated financial statements for an interim period. All such
adjustments are of a normal recurring nature. The operating results may not
be indicative of the results for a full fiscal year.
EARNINGS PER SHARE
The Company has adopted SFAS 128 (Earnings per Share) whereby earnings per
share are calculated as follows:
Basic Earnings per share is calculated by dividing income available for
distribution to common stockholders by the weighted average number of
common shares outstanding.
Diluted earnings per share is calculated giving full effect to all dilutive
common shares that were outstanding during the period.
INTANGIBLE ASSETS
Goodwill, recipes and other intellectual property, and trademarks are being
amortised on a straight line basis over a period of twenty to twenty five
years. If facts and circumstances were to indicate that the carrying amount
of goodwill, recipes and other intellectual property is impaired, the
carrying amount would be reduced to an amount representing the discounted
future cash flows to be generated by the operation.
Also included in intangible assets are non competition agreements relating
to the Europair acquisition which are being amortised on a straight line
basis over the six year term of the agreements.
The Company has adopted Statement of Financial Accounting Standards No. 121
("SFAS 121") "Accounting for the impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". No impairments in long-lived assets
has taken place.
12
FIRST SOUTH AFRICA CORP., LTD.
3. SUMMARY OF ACCOUNTING POLICIES (continued)
FOREIGN CURRENCY TRANSLATION
The functional currency of the underlying companies is that of South
African Rand. Accordingly, the following rates of exchange have been used
for translation purposes:
* Assets and liabilities are translated into United States Dollars using
the exchange rates at the balance sheet date.
* Common stock and capital in excess of par are translated into United
States Dollars using historical rates at date of issuance.
* Revenue, expenses, gains and losses are translated into United States
Dollars using the weighted average exchange rates for each year.
The resultant translation adjustments are reported in the component of
stockholders' investment designated as "Foreign currency translation
adjustment".
FOREIGN ASSETS AND LIABILITIES
Transactions in foreign currencies arise as a result of inventory purchases
from foreign countries and intercompany funding transactions between the
subsidiaries and First South Africa Corp., Ltd. Transactions in foreign
currencies are accounted for at the rates ruling on transaction dates.
Exchange gains and losses are charged to the income statement during the
period in which they are incurred. Foreign assets and liabilities of the
group which are not denominated in United States Dollars are converted into
United States Dollars at the exchange rates ruling at the financial year
end or at the rates of forward cover purchased. Forward cover is purchased
to hedge the currency exposure on foreign liabilities.
INVENTORIES
Inventories are valued at the lower of cost and net realizable value, using
both the first-in, first-out and the weighted average methods. The value of
work-in-progress and finished goods includes an appropriate portion of
manufacturing overheads. A valuation reserve has been established to reduce
the values of certain identified inventories (Determined to be obsolete or
otherwise impaired) to their estimated net realizable values (market or
selling price less costs to dispose).
PROPERTY, PLANT AND EQUIPMENT
Land is stated at cost and is not depreciated. Buildings are depreciated on
the straight line basis over estimated useful lives of 20 years.
Plant and equipment, and motor vehicles are written off over their
estimated useful lives of 5 to 10 years.
INCOME TAXES
Income tax expense is based on reported earnings before income taxes.
Deferred income taxes represent the impact of temporary differences between
the amounts of assets and liabilities recognised for financial reporting
purposes and such amounts recognised for tax purposes. Deferred taxes are
measured by applying currently enacted tax laws.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As at June 30 1997, the carrying value of accounts receivable, accounts
payable and investments approximate their fair value. The carrying value of
long term debt approximates fair value, as the debt, other than convertible
debentures, interest rates are keyed to the prime lending rate. The
convertible debentures are believed to approximate fair market due to their
recent issuance in June 1997.
13
FIRST SOUTH AFRICA CORP., LTD.
3. SUMMARY OF ACCOUNTING POLICIES (continued)
REVENUES
Revenues comprise net invoiced sales of washers, manufactured packaging
machines, spares and service charges, food products, air conditioning
systems, fans and related accessories, and rental income. Combined revenues
exclude sales to group companies.
Revenues are stated net of allowances granted to customers and trade
discounts. Returns of defective product are offset against revenues. Due to
the low incidence of warranty returns, where warranties are provided to
customers, the warranty costs are charged to cost of goods sold as and when
incurred.
GAIN ON DISPOSAL OF SUBSIDIARY STOCK
Subsidiary stock disposed of during the period is recognized as a gain in
the statement of income and is separately disclosed as a non operating
gain.
4. INVENTORIES
Inventories consist of the following:
March 31, June 30,
1997 1997
$ $
----------- -----------
Finished goods 9,765,019 4,032,523
Work in progress 1,021,820 532,144
Raw materials and ingredients 2,356,625 2,365,213
Supplies 1,018,016 716,081
----------- -----------
Inventories (Gross) 14,161,480 7,645,961
Less: Valuation allowances (209,067) (426,001)
----------- -----------
Inventories (Net) 13,952,413 7,219,960
=========== ===========
5. COMMITMENTS
The Company is required to make additional payments to the former owners based
on a multiple of pre tax earnings. These payments are to be made by the issue of
stock and cash over the next two to five years.
14
6. EARNINGS PER SHARE
Earnings per share data is calculated as follows:
BASIC EARNINGS PER SHARE FOR THE QUARTER (1998)
Net income available to common stockholders 917,715
==========
Shares Fraction weighted
Dates outstanding outstanding of period average shares
----------- --------- --------------
Balance at January 1, 1998 7,072,892 1.00 7,072,892
Options converted to shares during
the quarter 25,000 0.01 278
--------- ---------
Weighted average shares 7,097,892 7,073,170
========= =========
Basic earnings per share for the quarter (1997)
Net income available to common stockholders 1,146,098
=========
Shares Fraction weighted
Dates outstanding outstanding of period average shares
----------- --------- --------------
Balance at January 1, 1997 4,938,422 1.00 4,938,422
Acquisition of subsidiaries on
January 1, 1997 238,663 1.00 238,663
--------- ---------
Weighted average shares 5,177,085 5,177,085
========= =========
Diluted earnings per share for the quarter (1998)
Net income available to common stockholders 917,715
Add impact of assumed conversions 459,019
----------
Adjusted net income available to common stockholders 1,376,734
==========
Weighted average shares 7,073,170
Warrants and options not yet exercised 280,216
9% convertible debentures 1,666,667
Increasing rate debentures 1,578,947
----------
Adjusted weighted average shares 10,599,000
==========
15
6. EARNINGS PER SHARE (continued)
DILUTED EARNINGS PER SHARE FOR THE QUARTER (1997)
Net income available to common stockholders 1,146,098
Add impact of assumed conversions --
---------
ADJUSTED NET INCOME AVAILABLE TO COMMON STOCKHOLDERS 1,146,098
Weighted average shares 5,177,085
Warrants and options not yet exercised 94,198
---------
ADJUSTED WEIGHTED AVERAGE SHARES 5,271,283
---------
BASIC EARNINGS PER SHARE FOR THE YEAR TO DATE (1998)
Net income available to common stockholders 3,450,723
=========
Shares Fraction weighted
Dates outstanding outstanding of period average shares
----------- --------- --------------
July 1, 1997 5,359,615 1.00 5,359,615
July 1 - September 30, 1997
Additional purchase price payments 57,127 66.70 38,154
Acquisition of subsidiaries 27,624 66.70 18,450
Warrants converted to shares during the quarter 159,425 86.20 137,394
October 1 - December 31, 1997
Acquisition of subsidiaries on October 1, 1997 211,224 66.70 140,302
Options converted to shares during the quarter 10,000 0.30 5,292
Warrants converted to shares during the quarter 74,401 40.20 44,548
Warrants swapped into shares during the quarter 1,173,476 45.98 539,564
January 1 - March 31, 1998
Options converted to shares during the quarter 25,000 0.00 91
--------- ---------
WEIGHTED AVERAGE SHARES 7,097,892 6,283,410
16
BASIC EARNINGS PER SHARE FOR THE YEAR TO DATE (1997)
Net income available to common stockholders 2,972,589
=========
Shares Fraction weighted
Dates outstanding outstanding of period average shares
----------- --------- --------------
July 1, 1996 4,475,019 1.00 4,475,019
July 1 - September 30, 1996
Acquisition of subsidiaries on July 1, 1996 205,277 1.00 205,277
October 1 - December 31, 1997
Acquisition of subsidiary on November 1, 1996 258,066 55.60 143,370
January 1 - March 31, 1998
Acquisition of subsidiary on January 1, 1997 238,663 33.30 79,554
========= =========
WEIGHTED AVERAGE SHARES 5,177,025 4,903,220
========= =========
DILUTED EARNINGS PER SHARE FOR THE YEAR TO DATE (1998)
Net income available to common stockholders 3,450,723
Add impact of assumed conversions 1,120,246
---------
ADJUSTED NET INCOME AVAILABLE TO COMMON STOCKHOLDERS 4,570,969
---------
Weighted average shares 6,283,410
Warrants and options not yet exercised 674,860
9% convertible debentures 1,666,667
Increasing rate debentures 877,193
ADJUSTED WEIGHTED AVERAGE SHARES 9,502,130
---------
DILUTED EARNINGS PER SHARE FOR THE YEAR TO DATE (1997)
Net income available to common stockholders 2,972,589
Add impact of assumed conversions --
---------
ADJUSTED NET INCOME AVAILABLE TO COMMON STOCKHOLDERS 2,972,589
Weighted average shares 4,903,220
Warrants and options not yet exercised 82,147
---------
ADJUSTED WEIGHTED AVERAGE SHARES 4,985,367
---------
17
FIRST SOUTH AFRICA CORP., LTD
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1998
AND 1997
BACKGROUND AND HISTORY
The Company was incorporated in September 1995 with the intention to actively
pursue acquisitions fitting a pre defined investment strategy, The broad
strategy followed in all investment decisions is as follows:
* Turnover is to be within the range of $5 - $50 million
* Net income must yield a sustainable above average return on investment.
* Growth in turnover must be above average growth rates and must be
sustainable over the medium term.
* The industry in which the target operates must meet the pre defined
industry sectors identified by management as sectors meeting our broad
investment strategy.
First South Africa Corp has, through its South African subsidiary, First South
African Holdings (Pty) Ltd, acquired seventeen South African subsidiaries which
have met the acquisition criteria identified above.
The Company is engaged in the following industry segments:
1. PROCESSED FOODS
2. LIFESTYLE PRODUCTS
3. PACKAGING EQUIPMENT AND MATERIALS
4. INDUSTRIAL MANUFACTURING
18
FIRST SOUTH AFRICA CORP., LTD
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
SOUTH AFRICAN OPERATIONS
As the Company's results are reported in U.S. Dollars, but revenues are
primarily generated in South African Rand, the South African inflation rate and
the depreciation of the South African Rand against the U.S Dollar are important
to the understanding of the Company's results.
In broad terms, If the deterioration of the rand is in excess of the South
African inflation rate, then the Company would need to generate South African
revenue in excess of the South African inflation rate to maintain Dollar parity.
The average rate for the South African Rand against the U.S. Dollar for the
periods presented in this report are as follows:
Three Months Three Months
ended ended
March 31, March 31,
1998 1997
------------ ------------
Rate of exchange vs $1 4.97 4.49
Depreciation 9.3%
Nine Months Nine Months
ended ended
March 31, March 31,
1998 1997
------------ ------------
Rate of exchange vs $1 4.83 4.56
Depreciation 5.9%
The annual rate of inflation for South Africa was approximately 6% as reported
by the South African Central Statistical services.
The result reflected below is therefore greater than inflation adjusted South
African Rand for both revenue and earnings growth.
19
FIRST SOUTH AFRICA CORP., LTD
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
COMPARISON TO PRIOR PERIODS
* THREE MONTHS ENDED MARCH 31, 1998 VERSUS MARCH 31, 1997
SALES
Sales have increased by 51% to $28,218,692 from $18,729,799.
This is better interpreted as a net, after inflation increase in South
African Rand, of 54,3%.
This increase is primarily attributable to acquisitions that the
Company had completed since March 31, 1997.
The results for the three months ended March 31, 1997 do not include
the following operations:
* Fifers Bakery
* Galactex
* SA Leisure
* Republic Umbrella
* Pacforce
The sales from these companies for the three months ended March 31,
1998 total $8,272,635
The contribution by the individual business segments towards total
sales for the three months ended March 31, is as follows:
1998 1997
% %
------ ------
Processed Foods 51.9 67.2
Lifestyle Products 20.8 --
Packaging equipment and materials 11.8 9.8
Industrial Manufacturing 15.5 23.0
------ ------
100.0 100.0
====== ======
The Dollar value of sales in each business segment have increased over
the prior period. The overall increase can be explained by:
* Additional acquisitions in the Packaging equipment and materials
and Processed foods business segments, and by the addition of the
Lifestyle products business segment
* Increase in demand for the Company's products as the middle class
base of consumers continues to grow as South Africa's transition
to more broad based economic participation moves forward.
* Additional capital expenditure on increasing manufacturing
capacity has been made to exploit the additional demand being
experienced.
20
FIRST SOUTH AFRICA CORP., LTD
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
COST OF SALES
Cost of goods sold of $16,536,884, (Representing 58,6% of sales) has
increased from $10,491,146 (Representing 56% of sales) for the comparative
period in the prior year.
The cost of goods sold by the individual business segments as a percentage
of sales for the three months ended March 31, is as follows:
1998 1997
% %
------ ------
Processed Foods 56.1 53.7
Lifestyle Products 57.6 --
Packaging equipment and materials 64.5 56.0
Industrial Manufacturing 63.8 62.6
The overall increase in the percentage of cost of goods sold can be
explained by the following:
* PROCESSED FOODS
The cost of goods sold in this segment is in line with the expected cost of
goods sold percentage reflected in the full pro - forma fiscal 1997 ratio.
* PACKAGING EQUIPMENT AND MATERIALS
The acquisition of a Company that generates lower gross margins than those
owned by the Company in the prior period.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, General and Administrative costs of $9,732,843, (Representing
34,5% of sales) has increased from $6,809,021 (Representing 36,4% of sales)
for the comparative period in the prior year.
Included in Selling, General and administrative costs are the following non
cash charges:
1998 1997
------- -------
Depreciation 618,647 474,582
Amortisation of intangibles and other assets 357,010 208,524
------- -------
975,657 683,106
======= =======
Percentage of total sales 3.46% 3.65%
Intangibles are principally Goodwill, trademarks, Intellectual property and
Restraint of Trade agreements.
21
FIRST SOUTH AFRICA CORP., LTD
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
The selling, general and administrative costs of the individual business
segments as a percentage of sales for the three months ended March 31, is
as follows:
1998 1997
% %
------ ------
Processed Foods 34.9 36.2
Lifestyle Products 28.8 --
Packaging equipment and materials 36.7 40.2
Industrial Manufacturing 33.1 28.2
Corporate (Percentage of total sales) 0.9 1.6
The overall decrease in the percentage of Selling, general and
administrative costs can be explained by the following:
* PROCESSED FOODS
Lower overall Selling, General and Administrative expenses due to cost
containment and more efficient operations.
* Packaging equipment and materials
Lower operating costs due to more efficient operations and
restructuring within this sector.
* Lifestyle Products
Low Selling, general and administrative costs in the Lifestyle sector
as compared to the other business segments has resulted in an overall
decrease in the Company's total Selling, General and Administrative
costs as a percentage of sales.
INTEREST EXPENSE
Interest expense of $163,901 has decreased from $195,879 for the
comparative period in the prior year.
Interest for the quarter ended March 31, 1998 consists of:
* Interest income earned on First South Africa Corp's cash balances and
surplus funds in the processed foods business.
* Interest expense incurred in the other operating business segments and
interest expense of approximately $375,000 on the 9% and floating rate
convertible debentures that were issued during the months of April to
October 1997.
22
FIRST SOUTH AFRICA CORP., LTD
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
OTHER INCOME
Other income of $370,949 has increased from $88,920 for the comparative
period in the prior year.
Other income consists primarily of rebates, discounts received, commissions
and government incentives earned by the operating subsidiaries.
The significant increase is due to government incentives earned by the
Lifestyle products segment.
NET INCOME
Net income from consolidated subsidiaries of $1,467,158 has increased from
$1,146,098, an increase of 28%, for the comparative period in the prior
year.
Net income of $917,715 represents $0,13 a share as compared to $1,146,098
representing $0,22 per share in the comparative period in the prior year.
Net income for the quarter ended March 31, 1998 included a provision of
$549,443 for:
* A 30% minority interest in the Company's publicly traded subsidiary,
First SA Food Holdings limited
* An 18% minority interest in the Company's subsidiary First SA
Lifestyle Holdings Limited.
The current market value of the Company's 70% stake in First SA Food
Holdings Limited is approximately $95 million. The Company intends to spin
off minority interests in other subsidiary groups which will result in the
provision for minority interests increasing in future periods. This will
continue to effect comparative earnings per share data.
For purposes of the Company's earnings per share calculation the Company
had a weighted average 7,073,170 shares outstanding as opposed to 5,177,085
for the comparative period in the prior year.
The 7,073,170 shares includes an additional 1,247,877 shares issued on the
conversion of certain A warrants and B warrants that were outstanding in
terms of a warrant swap performed during the current fiscal year. This has
had negative impact on the basic earnings per share calculation.
NINE MONTHS ENDED MARCH 31, 1998 VERSUS MARCH 31, 1997
SALES
Sales have increased by 93% to $85,770,957 from $44,536,940.
This is better interpreted as a net, after inflation increase in South
African Rand, of 93%.
This increase is primarily attributable to acquisitions that the Company
had completed since March 31, 1997.
The results for the nine months ended March 31, 1997 do not include the
following operations:
* Fifers Bakery
* Galactex
* SA Leisure
* Republic Umbrella
* Pacforce
23
FIRST SOUTH AFRICA CORP., LTD
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
The sales from these companies for the nine months ended March 31, 1998
total $23,349,425.
The contribution by the individual business segments towards total sales
for the nine months ended March 31, is as follows:
1998 1997
% %
------ ------
Processed Foods 52.7 62.8
Lifestyle Products 20.1 --
Packaging equipment and materials 11.1 10.5
Industrial Manufacturing 16.1 26.7
------ ------
100.0 100.0
====== ======
The Dollar value of sales in each business segment have increased over the
prior period. The overall increase can be explained by:
* Additional acquisitions in the Packaging equipment and materials and
Processed foods business segments, and by the addition of the
Lifestyle products business segment
* Increase in demand for the Company's products as the middle class base
of consumers continues to grow as South Africa's transition to more
broad based economic participation moves forward.
* Additional capital expenditure on increasing manufacturing capacity
has been made to exploit the additional demand being experienced.
COST OF SALES
Cost of goods sold of $52,308,927, (Representing 61,0% of sales) has
increased from $24,543,952 (Representing 55,1% of sales) for the
comparative period in the prior year.
The cost of goods sold by the individual business segments as a percentage
of sales for the nine months ended March 31, is as follows:
1998 1997
% %
------ ------
Processed Foods 56.2 51.5
Lifestyle Products 61.4 --
Packaging equipment and materials 71.3 57.7
Industrial Manufacturing 68.8 62.5
24
FIRST SOUTH AFRICA CORP., LTD
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
The overall increase in the percentage of cost of goods sold can be
explained by the following:
* PROCESSED FOODS
The cost of goods sold in this segment is in line with the expected
cost of goods sold percentage reflected in the full pro - forma fiscal
1997 ratio.
* PACKAGING EQUIPMENT AND MATERIALS
The poor performance of one subsidiary and the acquisition of a
company that generates lower gross margins than those owned by the
Company in the prior period.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, General and Administrative costs of $27,475,571, (Representing
32,0% of sales) has increased from $16,050,703 (Representing 36,0% of
sales) for the comparative period in the prior year.
Included in Selling, General and administrative costs are the following non
cash charges:
1998 1997
--------- ---------
Depreciation 1,698,884 978,664
Amortisation of intangibles and other assets 933,743 419,660
--------- ---------
2,632,627 1,398,324
Percentage of total sales 3.07% 3.14%
Intangibles are principally Goodwill, trademarks, Intellectual property and
Restraint of Trade agreements.
25
FIRST SOUTH AFRICA CORP., LTD
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
The selling, general and administrative costs of the individual business
segments as a percentage of sales for the nine months ended March 31, is as
follows:
1998 1997
% %
------ ------
Processed Foods 33.6 37.5
Lifestyle Products 27.6 --
Packaging equipment and materials 36.7 29.9
Industrial Manufacturing 29.9 29.0
Corporate (Percentage of total sales) 1.1 1.6
The overall decrease in the percentage of Selling, general and
administrative costs can be explained by the following:
* PROCESSED FOODS
Lower overall Selling, General and Administrative expenses due to cost
containment and more efficient operations.
* LIFESTYLE PRODUCTS
Low Selling, general and administrative costs in the Lifestyle sector as
compared to the other business segments has resulted in an overall decrease
in the Company's total Selling, General and Administrative costs as a
percentage of sales.
INTEREST RECEIVED/EXPENSE
Interest received of $93,680 has increased from an interest expense of
$770,087 for the comparative period in the prior year.
Interest for the nine months ended March 31, 1998 consists of:
* Interest income earned on First South Africa Corp's cash balances and
surplus funds in the processed foods business.
* Interest expense incurred in the other operating business segments and
interest expense of approximately $1,050,000 on the 9% and floating
rate convertible debentures that were issued during the months of
April to October 1997.
26
FIRST SOUTH AFRICA CORP., LTD
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
OTHER INCOME
Other income of $1,050,860 has increased from $599,521 for the comparative
period in the prior year.
Other income consists primarily of rebates, discounts received, commissions
and government incentives earned by the operating subsidiaries.
The significant increase is due to government incentives earned by the
Lifestyle products segment.
NET INCOME
Net income from consolidated subsidiaries of $5,159,401 has increased from
$2,972,589, an increase of 73,6%, for the comparative period in the prior
year.
Net income of $3,450,723 represents $0,55 per share as compared to
$2,972,589 representing $0,61 per share in the comparative period in the
prior year. Net income for the nine months ended March 31, 1998 included a
provision of $1,708,678 for:
* A 30% minority interest in the Company's publicly traded subsidiary,
First SA Food Holdings limited
* An 18% minority interest in the Company's subsidiary First SA
Lifestyle Holdings Limited.
The current market value of the Company's 70% stake in First SA Food
Holdings Limited is approximately $95 million. The Company intends to spin
off minority interests in other subsidiary groups which will result in the
provision for minority interests increasing in future periods. This will
continue to effect comparative earnings per share data.
For purposes of the Company's earnings per share calculation the Company
had a weighted average number of shares outstanding of 6,283,410 shares
outstanding as opposed to 4,903,220 for the comparative period in the prior
year.
The 6,283,410 shares includes an additional weighted average 584,112 shares
issued on the conversion of certain A warrants and B warrants that were
outstanding in terms of a warrant swap performed during the current fiscal
year. This has had a negative impact on the basic earnings per share
calculation.
Liquidity and Capital Resources
- -------------------------------
In January 1996, the Company raised approximately $9 million in net proceeds
from its initial public offering. In the months of April to August 1997, the
Company raised approximately $9.2 million in net proceeds from the issuance of
$10,000,000 of 9% convertible debentures. Such debentures mature on June 15,
2004 and are convertible any time prior to maturity at $6.00 a share. In June
1997, the Company's subsidiary First SA Food Holdings raised approximately $16.5
million in cash through the placement of its shares in South Africa. Of this
amount, approximately $5.5 million was retained by First South African Holdings,
while the remainder was retained by First SA Food Holdings. In October 1997, the
Company raised approximately $15.2 million from the issuance of $15,000,000 of
increasing rate debentures. Such debentures mature on October 30, 2001 and are
convertible any time prior to maturity at $9.50 a share. Proceeds from these
offerings have been and will continue to be primarily utilized to fund the
Company's acquisitions as well as to provide a certain amount of working capital
to its South African subsidiaries.
The consolidated balance sheet as at March 31, 1998, shows cash on hand of
$20.99 million with working capital of $30.86 million. As of March 31, 1998 the
Company had a total debt of $39,256,416 of which amount $25 million related to
the Company's 9% subordinated convertible debentures and its increasing rate
convertible debentures , with the remainder being bank debt. Of the bank debt,
$6,603,280 was classified as current. The Company currently has approximately $3
million available in bank credit lines, which lines are unsecured and renewable
on an annual basis.
27
FIRST SOUTH AFRICA CORP., LTD
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
Cash flows provided by operating activities for the nine months ended March 31,
1998 and March 31, 1997, totaled $8,247,935 and $6,180,417 respectively. Cash
flows used in investing activities for the nine months ended March 31, 1998 and
March 31, 1997 totaled $26,567,450 and $10,172,593 respectively. For the nine
months ended March 31, 1998 $23,489,585 was utilized for the acquisition of
subsidiaries and $3,015,118 for additional purchase price payments. In the
comparable period in 1997, $7,935,813 was used for the acquisition of
subsidiaries. Net cash provided by financing activities was $20,965,974, during
the nine months ended March 31, 1998 while $1,488,837 was provided in the
corresponding period in the prior year. This increase is primarily attributable
to the proceeds of warrants exercised and long term debt borrowings incurred
during the period.
The Company's operating subsidiaries generally collect their receivables within
65 to 90 days and reserve approximately 5% for doubtful accounts. Historically,
the Company's operating and capital needs have been met by internal cash flow
and outside bank borrowings. It is management's belief that capital expenditures
for the foreseeable future can continue to be met by internal cash flow and
outside bank borrowings.
As of March 31, 1998, the Company had cash of approximately $21 million. Under
its various acquisition agreements, the Company anticipates having to spend
approximately $3.95 million in cash for its contingent payments over the next 12
months as well as approximately $2 million in stock. The Company anticipates
that its cash and operating cash flows will be sufficient to fully fund these
payments as well as fund the capital expenditures for its various operations.
Excess cash will also be utilized to fund additional acquisitions.
The Company's operating subsidiaries engage in certain hedging transactions with
respect to certain overseas purchases in order to lock in a specified exchange
rate. In addition, in July 1997, the Company purchased a 12-month option to
acquire the equivalent of $10 million in South African rand at the strike price
of R5.50 to the dollar. This option has the effect of hedging $10 million of the
Company's fiscal 1998 earnings, in the event the exchange rate of the South
African rand falls below this strike price. The cost of such option was
approximately $133,000 and is being amortized over the length of the option.
The Company intends to continue to pursue an aggressive acquisition strategy in
South Africa and anticipates utilizing a substantial portion of its cash
balances and operating earnings to fund this strategy to the extent that
suitable acquisition candidates can be identified.
The Company may be required to incur additional indebtedness or equity financing
in connection with future acquisitions. There is no assurance that the Company
will be able to incur additional indebtedness or raise additional equity to
finance future acquisitions on terms acceptable to management, if at all.
"Safe Harbor" Statement under the private Securities Litigation Reform Act of
1995: The statements above which are not historical facts are forward-looking
statements that involve risks and uncertainties, including, but not limited to,
demand for the Company's products and market acceptance risks, the effect of
economic conditions, the impact of competitive products and pricing, product
development, commercialization and technological difficulties, capacity, and
supply constraints or difficulties, the results of financing efforts, and other
risks detailed in the Company's Securities and Exchange Commission filings.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable at this time, it can give no assurance
that such expectations will prove to have been correct. Actual results could
differ materially based upon a number of factors including, but not limited to
the factors set forth above.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - 27.1 Financial Data Schedule.
(b) Reports on Form 8-K - None.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 14, 1998
FIRST SOUTH AFRICA CORP., LTD.
By: /s/ Clive Kabatznik
------------------------
Clive Kabatznik
Chief Executive Officer, President
and Chief Financial Officer