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 December 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: 809-295-1422
- --------------------------------------------------------------------------------
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 [ ] No [X]
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 February 13, 1999 was
5,705,966
First South Africa Corp., Ltd.
Item 1
Unaudited Consolidated Balance Sheets at December 31, 1998 and June 30, 1998
Unaudited Consolidated Statements of Income for the three months and for the six
months ended December 31, 1998 and 1997
Unaudited Consolidated Statements of Cash Flows for the six months ended
December 31, 1998 and 1997
Unaudited Consolidated Statement of Changes in Stockholders' Investment for the
period June 30, 1998 to December 31, 1998
Notes to the unaudited Consolidated Financial Statements
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of operations
Item 3: Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, June 30,
1998 1998
$ $
---------- ----------
Current assets
Cash on hand 14,693,204 17,948,991
Trade accounts receivable 22,752,977 16,871,292
Less: Allowances for bad debts (640,648) (833,785)
------------ ------------
22,112,329 16,037,507
Inventories (net) 12,434,152 11,742,613
Prepaid expenses and other current assets 3,384,827 1,711,428
---------- -----------
Total current assets 52,624,512 47,440,539
Property, plant and equipment 31,030,858 31,410,837
Less: Accumulated depreciation (11,860,821) (11,423,572)
------------ ------------
19,170,037 19,987,265
Intangible assets (net) 18,772,232 20,045,983
Deferred charges (net) 1,021,660 1,448,199
Other assets 350,465 261,735
----------- ------------
91,938,906 89,183,721
========== ==========
3
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' INVESTMENT
December 31, June 30,
1998 1998
$ $
------------ --------
Current liabilities
Bank overdraft payable 4,775,191 2,787,965
Current portion of long term debt 1,088,006 2,256,275
Trade accounts payable 13,767,686 9,205,092
Other provisions and accruals 6,333,377 4,506,770
Dividend payable - 558,185
Other taxes payable 565,097 1,064,432
Income tax payable 2,218,384 1,790,874
---------- ---------
Total current liabilities 28,747,741 22,169,593
Long term debt 26,786,727 28,945,426
Deferred income taxes 689,396 529,405
------------ ------------
56,223,864 51,644,424
----------
Stockholders' investment
Capital stock:
A class common stock, $0.01 par value - authorized 23,000,000 shares, issued
and outstanding 4,293,731 shares (June 1998: 5,649,224 shares) 42,938 56,492
B class common stock, $0.01 par value - authorized 2,000,000 shares, issued
and outstanding 1,822,500 shares 18,223 18,223
FSAH B Class common stock 580 539
Preferred stock, $0.01 par value, - authorized 5,000,000 shares, issued and
outstanding nil shares - -
Capital in excess of par 26,976,443 28,288,404
Retained earnings (2,565,653) 7,209,977
------------ -----------
24,472,531 35,573,635
Minority stockholders' investment 27,811,759 19,677,124
---------- ----------
52,284,290 55,250,759
---------- ----------
Foreign currency translation adjustments (16,569,248) (17,711,462)
------------ ------------
35,715,042 37,539,297
---------- ----------
91,938,906 89,183,721
========== ==========
4
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE THREE MONTHS ENDED 30 SEPTEMBER 1998 AND 1997
1998 1997
$ $
---------- ----------
Revenues 32,950,702 35,605,750
========== ==========
Operating expenses
Cost of sales 20,769,121 22,633,124
Selling, general and administrative costs 8,980,704 10,381,827
----------- ----------
29,749,825 33,014,951
---------- ----------
Operating income 3,200,877 2,590,799
Other income 208,057 391,826
Interest income/( expense) (458,896) 81,916
--------- -----------
(Loss)/income from consolidated companies before taxation 2,950,038 3,064,541
Provision for taxes on income (914,010) (791,625)
------------ ---------
2,036,028 2,272,916
Minority interest in consolidated subsidiary companies (1,102,264) (728,534)
-------------- -----------
Net income before extraordinary charges 933,764 1,544,382
Extraordinary loss on restructure of group (4,585,659) -
Provision for loss on share price warranty (373,771) -
Retrenchment cost provision - -
----------------- -----------------
Net (loss)/income (4,025,666) 1,544,382
Basic earnings per share (0,64) 0,24
Fully diluted earnings per share (0,39) 0,21
Weighted average number of shares outstanding
Basic earnings per share 6,254,649 5,383,492
Fully diluted earnings per share 8,780,762 8,154,164
5
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FOR
THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
$ $
----------- ----------
Revenues 58,215,578 57,067,182
========== ==========
Operating expenses
Cost of sales 37,128,992 35,331,337
Selling, general and administrative costs 17,550,941 17,698,351
---------- ----------
54,679,933 53,029,688
---------- ----------
Operating income 3,535,645 4,037,494
Other income 295,266 634,911
Interest income/( expense) (565,432) 257,657
--------- ------------
Income from consolidated companies before income taxes 3,265,479 4,930,062
Provision for taxes on income (1,434,179) (1,237,819)
----------- -----------
1,831,300 3,692,243
Minority interest in consolidated subsidiary companies (1,513,675) (1,159,235)
----------- ----------
Net income before extraordinary charges 317,625 2,533,008
Extraordinary loss on restructure of group (4,585,659) -
Loss on share price warranty (5,007,596) -
Retrenchment cost charge (500,000) -
------------ ---------
Net (loss)/income (9,775,630) 2,533,008
Basic earnings per share (1,41) 0,43
Fully diluted earnings per share (0,93) 0,38
Weighted average number of shares outstanding 6,910,833 5,897,115
Basic earnings per share
Fully diluted earnings per share 9,491,389 8,308,144
6
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
$ $
----- ----
Cash flows from operating activities:
Net income (9,775,630) 2,533,008
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,901,574 1,656,970
Capital redemption reserve fund 281,250 (4,735)
Deferred income taxes 162,897 -
Net loss on sale of assets - 39,317
Net gain on sale of subsidiary (384,919) -
Net loss on redemption of Debenture funding 282,359 -
Effect of changes in current assets and current liabilities (2,562,375) (1,540,663)
Effect of extraordinary provisions raised - -
Net gain on First SA Food shares purchased from minorities (33,655) -
Net loss on dilution of holding in First SA Food Holdings Limited 281,020 -
Extraordinary restructure write off of intangibles 4,585,659 -
Minority interest in consolidated subsidiary companies 1,513,675 1,159,235
--------- ---------
Net cash (utilised)/provided by operating activities (3,748,145) 3,843,132
----------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (1,818,244) (2,571,840)
Proceeds on disposal of property, plant and equipment 767,629 58,749
Proceeds on disposal of investment in First SA Lifestyle Holdings Limited - 3,507,424
Additional purchase price payments (2,085,313) (2,848,220)
Other assets acquired (89,019) (194,307)
Acquisitions of subsidiaries (net of cash of $33,856) - (22,280,797)
Proceeds on disposal of subsidiary (net of cash of $10,562) 48,262 -
Proceeds on disposal of part interest in First SA Food Holdings Limited 4,559,222 -
---------- ------------
Net cash used in investing activities 1,382,537 (24,328,991)
--------- ------------
Cash flows from financing activities:
Net (repayments)/borrowings in bank overdrafts 2,004,268 1,796,476
Borrowings of long term debt 1,493,164 16,047,060
Redemption of debenture debt (2,733,910) -
Reduction in deferred debt issue costs - (883,843)
Repayments in short term debt (1,158,727) 102,423
(Redemption)/Proceeds on stock issues (2,088,674) 3,746,327
----------- ---------
Net cash used in/(provided in) financing activities (2,438,879) 20,808,443
----------- ----------
Effect of exchange rate changes on cash 1,548,700 (1,063,840)
--------- -----------
Cash utilised by operations (3,255,787) (741,256)
Cash on hand at beginning of period 17,948,991 19,889,111
---------- ----------
Cash on hand at end of period 14,693,204 19,147,855
========== ==========
7
FIRST SOUTH AFRICA CORP., LTD.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' INVESTMENT
First South First South First South
frica Corp., Africa Corp., African
Ltd. Ltd. Holdings Foreign
A class B class B Class Capital in currency
common common common excess of Retained translation
stock stock stock par earnings adjustments Total
$ $ $ $ $ $ $
---------- -------- ------- ---------- -------- ----------- -----
Balance at 30 June 1998 56,492 18,223 539 28,288,404 7,209,977 (17,711,462) 17,862,173
Issuance of stock to FSAC escrow agent 2,434 - - (2,434) - - -
Conversion of debentures 1,272 573,828 575,100
Issuance of stock on additional
purchase price payments - - 41 1,033,572 - - 1,033,613
Net income - - - - (5,749,964) - (5,749,964)
Translation adjustment - - - - - 959,243 959,243
---------- ---------- ------- ---------- ----------- ---------- ----------
Balance at 30 September 1998 60,198 18,223 580 29,893,370 1,460,013 (16,752,219) 14,680,165
Redemption of stock from FSAC escrow agent (17,260) - - (2,916,927) - - (2,934,187)
Net loss - - - - (4,025,666) - (4,025,666)
Translation adjustment - - - - - 182,971 182,971
---------- --------- ------ ------------- ----------- ----------- ----------
Balance at 31 December 1998 42,938 18,223 580 26,976,443 (2,565,653) (16,569,248) 7,903,283
====== ====== === ========== =========== =========== =========
8
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
1. ORGANISATION AND PRINCIPAL 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 principal activities of the group include the following:
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.
Packaging interests
The business of manufacturing, servicing and selling packaging machines,
receiving commission income and receiving rental income.
Industrial interests
Manufacture of washers for use in the fastener industry and the manufacture
and supply of air-conditioning and refrigeration products.
2. ACQUISITIONS AND DISPOSALS OF SUBSIDIARIES
The Company disposed of its 70% shareholding in Humidair (Pty) Ltd for a
consideration of $58,824, realizing a loss on disposal of $15,409.
The Company disposed of its 100% interest in First Strut (Pty) Ltd for a
consideration of $nil, realizing a profit on disposal of $400,327.
The Company sold its 84.3% interest in First SA Lifestyle Holdings Limited
to First SA Food Holdings Limited in which an effective 57,5% interest has
been retained, this has resulted in a restructuring charge of $4,585,659
being charged to the income statement.
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 three years.
9
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
2. ACQUISITIONS AND DISPOSALS OF SUBSIDIARIES (continued)
Additional purchase price payments made during the current year total
$2,085,312. This amount was allocated as follows:
Goodwill 361,052
Recipes 1,129,745
Trademarks 594,515
---------
2,085,312
=========
These additional purchase price payments were made as follows:
Cash 1,051,699
Shares issued in lieu of cash 1,033,613
---------
2,085,312
=========
3. SUMMARY OF ACCOUNTING POLICIES
The consolidated financial statements 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.
Earnings per share
Earnings per share on common shares is based on net income and reflects
dilutive effects of any stock options and warrants which exist at year end.
10
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
3. SUMMARY OF ACCOUNTING POLICIES (continued)
Intangible assets
Goodwill, recipes and other intellectual property, and trademarks are being
amortized 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 amortized 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.
Foreign currency translation
The functional currency of the underlying companies is that of South
African Rands. Accordingly, the following rates of exchange have been used
for translation purposes:
o Assets and liabilities are translated into United States Dollars
using the exchange rates at the balance sheet date.
o Common stock and capital in excess of par are translated into
United States Dollars using historical rates at date of issuance.
o 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).
11
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
3. SUMMARY OF ACCOUNTING POLICIES (continued)
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 1998, 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.
Revenues
Revenues comprise net invoiced sales of washers, manufactured packaging
machines, spares and service charges, food products, lifestyle 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 sales 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:
December 31, June 30,
1998 1998
------------ --------
$ $
Finished goods 6,107,855 7,156,784
Work in progress 556,544 649,465
Raw materials and ingredients 4,900,390 3,220,748
Supplies 1,119,841 959,396
------------ ----------
Inventories (Gross) 12,684,630 11,986,393
Less: Valuation allowances (250,478) (243,780)
------------- ------------
Inventories (Net) 12,434,152 11,742,613
========== ==========
12
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
5. EXTRAORDINARY SHARE REPURCHASE CHARGE
In terms of agreements reached with the previous vendors of Piemans Pantry,
Seemann's Quality Meat Products, Gull Foods and Fifers Bakery, the Company
warranted the First South Africa Corp share price at September 30, 1998.
The charge of $5,007,596 represents the revised aggregate shortfall on the
warranted share price at the prevailing exchange rate at December 31, 1998.
In terms of the agreements entered with the previous vendors they have
exercised a put option on the Company, which resulted in their shares being
repurchased and cancelled in the second quarter of the current financial
year.
6. RETRENCHMENT COST PROVISION
A retrenchment cost provision of $500,000 has been raised to take into
account the future costs expected in the manpower reductions in the
packaging segment which is currently undergoing extensive reorganization.
7. 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 (4,025,666)
===========
Shares Fraction of weighted
Dates outstanding Outstanding period average shares
----------- ----------- --------------
Balance at October 1, 1998 7,837,708 1,0 7,837,708
Redemption of escrow shares during the quarter (1,583,059) 1,0 (1,583,059)
Weighted average shares 6,254,649 6,254,649
--------- ---------
Diluted earnings per share for the quarter (1998)
Net income available to common stockholders (4,025,666)
Add impact of assumed conversions 643,100
----------
Adjusted net income available to common stockholders (3,382,566)
-----------
Weighted average shares 6,254,649
Warrants and options not yet exercised -
9% convertible debentures 947,166
Increasing rate debentures 1,578,947
---------
Adjusted weighted average shares 8,780,762
---------
13
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
7. EARNINGS PER SHARE (continued)
Basic earnings per share for the quarter (1997)
Net income available to common stockholders 1,544,382
=========
Shares Fraction of weighted
Dates outstanding outstanding period average shares
----------- ----------- --------------
Balance at October 1, 1997 5,603,791 1,00 5,603,791
Acquisition of subsidiaries on October 1, 1997 211,224 1,00 211,224
Options converted to shares during the quarter 10,000 0,60 5,978
Warrants converted to shares during the quarter 74,401 0,81 59,891
Warrants swapped into shares during the quarter 1,173,476 0,39 458,998
--------- ----------
Weighted average shares 7,072,892 6,339,882
--------- ---------
Diluted earnings per share for the quarter (1997)
Net income available to common stockholders 1,544,382
Add impact of assumed conversions 391,590
----------
Adjusted net income available to common stockholders 1,935,972
---------
Weighted average shares 6,339,882
Warrants and options not yet exercised 160,090
9% convertible debentures 1,666,667
Increasing rate debentures 1,052,631
---------
Adjusted weighted average shares 9,219,270
---------
Basic earnings per share for the year to date (1998)
Net income available to common stockholders (9,775,630)
===========
Shares Fraction of weighted
Dates outstanding outstanding period average shares
----------- ----------- --------------
July 1, 1998 7,472,324 1,00 7,472,324
July 1 - September 30, 1998
Additional purchase price payments 242,684 0,51 122,661
Warrants converted to shares during the quarter 122,700 0,95 116,032
October 1 - December 31, 1997
Redemption of escrow shares during the quarter (1,583,059) 0,51 (800,134)
----------- ---- ---------
Weighted average shares 7,072,892 6,910,883
--------- ---------
14
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
7. EARNINGS PER SHARE (continued)
Diluted earnings per share for the year to date (1998)
Net income available to common stockholders (9,775,630)
Add impact of assumed conversions 979,963
----------
Adjusted net income available to common stockholders (8,795,667)
-----------
Weighted average shares 6,910,883
Warrants and options not yet exercised -
9% convertible debentures 1,001,559
Increasing rate debentures 1,578,947
------------
Adjusted weighted average shares 9,491,389
---------
Basic earnings per share for the year to date (1997)
Net income available to common stockholders 2,533,008
=========
Shares Fraction of weighted
Dates outstanding outstanding 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 50,5 28,874
Acquisition of subsidiaries 27,624 50,5 13,962
Warrants converted to shares during the quarter 159,425 79,4 126,617
October 1 - December 31, 1997
Acquisition of subsidiaries on October 1, 1997 211,224 0,50 105,612
Options converted to shares during the quarter 10,000 0,30 2,989
Warrants converted to shares during the quarter 74,401 40,2 29,946
Warrants swapped into shares during the quarter 1,173,476 229,500
--------- ----------
Weighted average shares 7,072,892 5,897,115
--------- ---------
Diluted earnings per share for the year to date (1997)
Net income available to common stockholders 2,533,008
Add impact of assumed conversions 645,983
----------
Adjusted net income available to common stockholders 3,178,991
---------
Weighted average shares 5,897,115
Warrants and options not yet exercised 218,046
9% convertible debentures 1,666,667
Increasing rate debentures 526,316
----------
Adjusted weighted average shares 8,308,144
----------
15
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of operations
BACKGROUND AND HISTORY
The Company was incorporated in September 1995 with the intention to actively
pursue acquisitions in South Africa and , if appropriate other countries as
well.
First South Africa Corp has, through its South African subsidiary, First South
African Holdings (Pty) Ltd, acquired fourteen South African subsidiaries.
These acquisitions are listed below and are engaged in the following industry
segments:
Processed Foods
Piemans Pantry
Astoria Bakery
Seemann's Quality Meat Products
Gull Foods
Fifers Bakery
Lifestyle Products
SA Leisure
Galactex
Republic Umbrella
Tradewinds
Packaging Equipment and Materials
Starpak
Pakmatic
Pacforce
Industrial Manufacturing
L.S. Pressings
Europair
FINANCING
Stockholders' funding
The Company has funded itself primarily through stockholders loans and
capital contributions.
Additional funds were raised from the proceeds of the Initial Public
Offering (IPO) completed in January 1996.
Bridging Finance
Bridging finance was raised to finance acquisitions made prior to the IPO.
Debentures
The Company has issued two tranches of subordinated convertible debentures
to raise funds for further acquisitions.
The Company anticipates that it will derive dividend income primarily through
income generated from the operations of acquired companies in South Africa.
16
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
December 31, December 31,
1998 1997
------------ ------------
Rate of exchange vs $1 5,80 4,86
Depreciation 19,3%
Six Months Six Months
ended ended
December 31, December 31,
1998 1997
------------- ------------
Rate of exchange vs $1 5,97 4,76
Depreciation 24,6%
The annual rate of inflation for South Africa was approximately 7% 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.
17
COMPARISON TO PRIOR PERIODS
In analyzing the Company's results it should be noted that, in response to the
current emerging market crisis, management have modified their strategy in
regard to the future growth of the Company's operations in South Africa. During
the quarter ended December 31, 1998, a subsidiary of the Company received
outside shareholder approval to complete the merger of its Lifestyle Products
operations with its Johannesburg Stock Exchange listed subsidiary First SA Food
Holdings. This merger resulted in the Company having a current 57.5% stake in
the enlarged listed Company - First SA Lifestyle Holdings Ltd. In addition
management disposed of two non core businesses during the three months ended
December 31, 1998. Management will continue to seek the sale of non core
businesses and anticipates that the future growth of the Company's South African
operations will be mainly generated through First SA Lifestyle Holdings. Future
growth of this subsidiary may require further financing from South African
sources and may result in the Company's ownership in this subsidiary falling
below 50%. It is management's belief that the Company's underlying value is
linked to the public value placed on the shares of First SA Lifestyle Holdings.
The value of the Company's shareholding in this subsidiary based on a closing
price of R2.80 and an exchange rate of R6.10 to the US dollar on February 12,
1999, was approximately $41 million.
THREE MONTHS ENDED DECEMBER 31, 1998 VERSUS DECEMBER 31 1997
SALES
Sales have decreased by 7,5 % to $32,950,702 from $35,605,750.
This decrease is primarily attributable to the deterioration in the
relative value of the South African Rand to the US Dollar. The increase
in revenues in rand terms amounted to 9.3%.
The contribution by the individual business segments towards total sales
for the three months ended December 31, is as follows:
1998 1997
% %
---- ----
Processed Foods 47,3 44,8
Lifestyle Products 31,8 31,5
Packaging equipment and materials 9,1 10,6
Industrial Manufacturing 11,8 13,1
----- -----
100,0 100,0
----- -----
The Rand value of sales in the Food and Lifestyle business segments have
increased over the prior period, however sales value in the Industrial
Manufacturing and Packaging segments has decreased over the prior year.
The overall Rand increase can be explained by:
o 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.
o Additional capital expenditure on increasing manufacturing
capacity has been made to exploit the additional demand
being experienced.
o Significant gains in export orders have been made by the
Lifestyle segment, providing a natural hedge against
currency deteriorations.
o The decrease in sales in the Industrial and packaging
segment is due to management's change of focus away from
these sectors which is not regarded as core business, as
well as difficult trading conditions experienced due to
the high relative interest rates and the difficult
economic environment prevalent in South Africa.
18
COST OF SALES
Cost of goods sold of $20,769,121, (Representing 63,0% of sales) has
decreased from $22,633,124 (Representing 63,5% 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
December 31, is as follows:
1998 1997
% %
---- ----
Processed Foods 55,3 56,4
Lifestyle Products 66,7 63,4
Packaging equipment and materials 77,8 74,9
Industrial Manufacturing 72,5 73,0
The overall decrease in the percentage of cost of goods sold can be
explained by the deterioration of the relative value of the Rand to the US
Dollar. The segment analysis is presented below.
o Processed Foods
The cost of goods sold in this segment has decreased due to operational
efficiencies being realised.
o Packaging equipment and materials
The difficult trading conditions experienced during the 1998 quarter has
resulted in a deterioration of the margins realised by this operating
sector.
o lifestyle Products
This segment's margins are low due to the competitive nature of the
products necessitating reasonably low margins overall.
The deterioration of the margin over the prior period is due to the
difficult trading conditions being experienced in South Africa. These
conditions are as a result of the emerging market crisis and the
unacceptably high level of real interest rates prevailing in South
Africa.
19
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, General and Administrative costs of $8,980,704, (Representing 27,3
% of sales) has decreased from $10,381,827 (Representing 29,2% 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 718,937 357,338
Amortisation of intangibles and other assets 305,184 237,274
------- -------
1,024,121 594,612
--------- -------
Percentage of total sales 3,1 1,7
Intangibles are principally Goodwill, trademarks, Intellectual property and
Restraint of Trade agreements.
The selling, general and administrative costs of the individual business
segments as a percentage of sales for the three months ended December 31,
is as follows:
1998 1997
% %
---- ----
Processed Foods 34,7 31,2
Lifestyle Products 19,5 26,9
Packaging equipment and materials 34,7 34,5
Industrial Manufacturing 23,0 28,6
Corporate (Percentage of total sales) 2,9 1,7
The changes in the percentage of Selling, general and administrative
costs can be explained by the following:
o Processed Foods
Increased selling, General and administration costs due to
a large fixed cost component of the food segment which
experienced lower than expected turnovers..
o Lifestyle Products
Low Selling, general and administrative costs in the
Lifestyle sector as compared to the other business segment
has resulted in an overall decrease in the Company's total
Selling, General and Administrative costs as a percentage
of sales.
A concerted effort has been made by the Lifestyle segment
to reduce overhead expenditure in line with the general
slow down in the economy.
20
INTEREST EXPENSE
Interest expense of $458,896 has decreased from an income of $81,916 for
the comparative period in the prior year.
Interest for the quarter ended December 31, 1998 consists of:
o Interest expense on the debenture finance raised, including a charge of
$281,250 for the debenture redemption reserve fund.
o Interest expense incurred in the other operating business segments,
which has offset interest income earned on surplus cash in the Food
segment.
OTHER INCOME
Other income of $208,057 has decreased from $391,826 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 decrease is attributable to a decrease in government incentives
received.
NET INCOME
Net loss from consolidated subsidiaries of $(4,025,666) has decreased from
an income of $1,544,382, a significant decrease over the comparative period
in the prior year.
Included in the loss for the current quarter is a loss on the restructure
of the group of $4,585,659 arising on the disposal of the Lifestyle
interests to First SA Food Holdings Limited and the subsequent change of
name of that company to First Lifestyle Holdings Limited. The loss
represents the revalue of Goodwill and Trademarks in the Lifestyle segment
to represent fair value at the time of the transaction. An additional
provision of $373,771 for share repurchase charges in terms of agreements
reached with the previous vendors of several of the food segment businesses
in terms of which the price at which First South Africa Corp., Ltd shares
were held in escrow on their behalf was warranted at a certain level. These
vendors have exercised a put option on the Company, requiring the
repurchase of the escrow shares resulting in the extraordinary charge.
Net loss of $4,025,666 represents a loss of $0,64 a share as compared to
net income of $1,544,382 representing $0,24 per share in the comparative
period in the prior year. After factoring out the extraordinary provisions
raised the income per share for the current quarter equates to $0,15 per
share.
The current market value of the Company's 57,5% stake in First Lifestyle
Holdings Limited is approximately $39,5 million. The Company intends to
continue to spin off minority interests in the 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 6,254,649 shares outstanding as opposed to 5,383,492
for the comparative period in the prior year.
The shares in issue includes an additional 1,173,476 shares issued on the
conversion of certain A warrants and B warrants that were outstanding in
terms of a warrant swap out exercise performed during the prior fiscal
year. This has had a negative impact on the basic earnings per share
calculation.
COMPARISON TO PRIOR PERIODS
o SIX MONTHS ENDED DECEMBER 31, 1998 VERSUS DECEMBER 31 1997
SALES
Sales have decreased by 2,0 % to $58,215,578 from $57,067,182.
21
This decrease in real terms is primarily attributable to the
deterioration in the relative value of the South African Rand to the US
Dollar. The increase in revenues in rand terms amounted to 25,7%.
The contribution by the individual business segments towards total sales
for the six months ended December 31, is as follows:
1998 1997
% %
---- ----
Processed Foods 48,5 52,9
Lifestyle Products 29,3 20,0
Packaging equipment and materials 9,3 10,8
Industrial Manufacturing 12,9 16,3
----- -----
100,0 100,0
----- -----
The Rand value of sales in the Food, Lifestyle and Packaging business
segments have increased over the prior period, however sales value in the
Industrial Manufacturing segments has decreased over the prior year.
The overall Rand increase can be explained by:
o 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.
o Additional capital expenditure on increasing manufacturing
capacity has been made to exploit the additional demand
being experienced.
o Significant gains in export orders have been made by the
Lifestyle segment, providing a natural hedge against
currency deteriorations.
o The decrease in sales in the Industrial segment is due to
management's change of focus away from this sectors which
is not regarded as core business, as well as difficult
trading conditions experienced due to the high relative
interest rates and the difficult economic environment
prevalent in South Africa.
22
COST OF SALES
Cost of goods sold of $37,128,992, (Representing 63,8% of sales) has
increased from $35,331,337 (Representing 61,9% 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 six months ended December
31, is as follows:
1998 1997
% %
---- ----
Processed Foods 56,2 56,5
Lifestyle Products 70,0 63,4
Packaging equipment and materials 79,3 76,0
Industrial Manufacturing 70,6 70,3
The overall increase in the percentage of cost of goods sold can be
explained by the deterioration of the South African economy and the
relative high interest rates which led to difficult economic trading
environments.
o Processed Foods
The cost of goods sold in this segment has decreased due to operational
efficiencies being realised.
o Packaging equipment and materials
The difficult trading conditions experienced during the 1998 quarter has
resulted in a deterioration of the margins realised by this operating
sector.
o lifestyle Products
This segments margins are low due to the competitive nature of the
products necessitating reasonably low margins overall. The decrease in
margins has been necessary to cover the largely fixed portion of
manufacturing overhead in certain of the operations.
The deterioration of the margin over the prior period is due to the
difficult trading conditions being experienced in South Africa. These
conditions are as a result of the emerging market crisis and the
unacceptably high level of real interest rates prevailing in South
Africa.
23
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, General and Administrative costs of $17,550,941, (Representing
30,2 % of sales) has decreased from $17,698,351 (Representing 31,01% 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 1,305,741 1,080,237
Amortisation of intangibles and other assets 595,833 576,733
------- -------
1,901,574 1,656,970
--------- ---------
Percentage of total sales 3,3 2,9
Intangibles are principally Goodwill, trademarks, Intellectual property and
Restraint of Trade agreements.
The selling, general and administrative costs of the individual business
segments as a percentage of sales for the six months ended December 31, is
as follows:
1998 1997
----- ----
% %
Processed Foods 33,7 32,8
Lifestyle Products 20,1 26,9
Packaging equipment and materials 31,9 34,1
Industrial Manufacturing 25,2 28,6
Corporate (Percentage of total sales) 2,9 1,7
The changes in the percentage of Selling, general and administrative
costs can be explained by the following:
o Processed Foods
Increased selling, General and administration costs due to
a large fixed cost component of the food segment which
experienced lower than expected turnovers.
o Lifestyle Products
Low Selling, general and administrative costs in the
Lifestyle sector as compared to the other business segment
has resulted in an overall decrease in the Company's total
Selling, General and Administrative costs as a percentage
of sales.
A concerted effort has been made by the Lifestyle segment
to reduce overhead expenditure in line with the general
slow down in the economy.
Due to the poor performance of the industrial and
manufacturing sectors, a conscious effort has been made
to reduce the level of overhead expenditure.
24
INTEREST EXPENSE
Interest expense of $565,432 has decreased from an income of $257,657 for
the comparative period in the prior year.
Interest for the six months ended December 31, 1998 consists of:
o Interest expense on the debenture finance raised, including a charge of
$281,250 for the debenture redemption reserve fund.
o Interest expense incurred in the other operating business segments,
which has offset interest income earned on surplus cash in the Food
segment.
OTHER INCOME
Other income of $295,266 has decreased from $634,911 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 decrease is attributable to a decrease in government incentives
received.
NET INCOME
Net loss from consolidated subsidiaries of $(9,775,630) has decreased from
an income of $2,533,008, a significant decrease over the comparative period
in the prior year.
Included in the loss for the current year is a loss on the restructure of
the group of $4,585,659 arising on the disposal of the Lifestyle interests
to First SA Food Holdings Limited and the subsequent change of name of that
company to First Lifestyle Holdings Limited. The loss represents the
revalue of Goodwill and Trademarks in the Lifestyle segment to represent
fair value at the time of the transaction. A provision of $5,007,596 for
share repurchase charges in terms of agreements reached with the previous
vendors of several of the food segment businesses in terms of which the
price at which First South Africa Corp., Ltd shares were held in escrow on
their behalf was warranted at a certain level. These vendors have exercised
a put option on the Company, requiring the repurchase of the escrow shares
resulting in the extraordinary charge. A retrenchment provision of $500,000
was also raised to restructure the non performing companies within the
Packaging and Industrial sectors.
Net loss of $9,775,630 represents a loss of $1,41 a share as compared to
net income of $2,533,008 representing $0,43 per share in the comparative
period in the prior year. After factoring out the extraordinary provisions
raised the income per share for the current quarter equates to $0,05 per
share.
For purposes of the Company's earnings per share calculation the Company
had a weighted average 6,910,883 shares outstanding as opposed to 5,897,115
for the comparative period in the prior year.
The shares in issue includes an additional 1,173,476 shares issued on the
conversion of certain A warrants and B warrants that were outstanding in
terms of a warrant swap out exercise performed during the prior fiscal
year. This has had an negative impact on the basic earnings per share
calculation.
25
FINANCING
o Internally Generated funding
As of December 31, 1998, the Company had net cash of $14,693,204 with
working capital of $23,876,771. As of December 31, 1998, the Company had a
total of $26,786,727 in debt, of which amount $20,656,000 related to the
Company's 9% and increasing rate subordinated convertible debentures with
the remainder being bank debt. Of the bank debt, $1,088,006 was classified
as current.
Cash flows utilized by operating activities for the period ended September
30,1998 totaled $3,748,145. Cash flows used in investing activities totaled
$2,698,300 of which the Company realized $48,242 on the disposal of one of
its non core operating subsidiaries. The Company expended $2,085,313 on
additional purchase price payments and purchased $1,818,244 in net
additions to property, plant and equipment of its subsidiaries. Net cash
utilized in financing activities amounted to $2,438,879. This included the
redemption of debentures amounting to $2,733,810. An additional $5,559,222
was generated by the disposal of a part interest in First Lifestyle
Holdings Limited.
26
o Future commitments
Under the various acquisition agreements, the Company anticipates having to
spend approximately $0,62 million in cash for its purchase price warrantees
issued to the previous vendors of Piemans Pantry, Seemann's Quality Meat
Products, Fifers Bakery and Astoria Bakery. The Company has contingent
payments over the next 12 months amounting to approximately $3,212,536. The
Company anticipates that this 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 anticipates that any longer
term contingent acquisition payments will be funded out of operating cash
flows of the acquired entities.
The Company's operating subsidiaries generally collect their receivables
within 65 - 90 days and reserve approximately 5% for doubtful accounts.
Historically, the companies' operating and capital needs have been met by
internal cash flow and outside bank borrowing. It is management's belief
that capital expenditures for the foreseeable future can continue to be met
by internal cash flow and bank borrowing. 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.
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.
YEAR 2000 COMPLIANCE
o State of Readiness
Due to the nature and type of operations falling under
First South Africa Corp., Ltd., none of the operating
entities have very sophisticated Information Technology
("IT") and non IT systems. The majority of the Management
information systems within the group are purchased
software packages.
Operating management in each operating entity has
evaluated or is currently evaluating the Year 2000
readiness of the Management information systems and
software upgrades have been purchased or on order to
ensure that the Company will be Year 2000 compliant from a
management information perspective.
The extent of usage of non IT systems within the group is
limited to one or two cases, these systems are in the
process of being tested to ensure year 2000 compliance,
however these processes are not of he nature that would
seriously disrupt the functioning of the Company should
any particular process fail.
While evaluating the Management Information Systems, a
thorough check of all hardware within the Company is being
carried out, Where necessary changes and upgrades are
being made to ensure that the Company is year 2000
compliant. These changes are not expected to be material
and the costs have already been provided for where the
amounts are considered to be significant.
o Costs to address year 2000 issues
Based on the assessments already carried out by the
Company and the ongoing assessments being performed, the
costs that have materialized to date and the costs that
are expected to materialize are not significant to the
Company or each individual entity as a whole. However,
there can be no guarantee that the costs involved will not
be material should a significant problem be subsequently
discovered.
27
The costs incurred to date have typically been to replace
aging hardware, which has not amounted to material amounts
and were already provided for in general capital
expenditure budgets and to upgrade the existing purchased
software, in each case upgrades are available from the
software suppliers who certify year 2000 compliance. The
costs incurred on the software upgrades have not been
material to date.
o Risk associated with Year 2000 issues
Based on risk assessments already carried out and
assessments which are due to take place, the Company feels
that due to the level of IT sophistication within the
Company that the risk of ceasing production and
distribution completely is minimal.
The Company is able to support a manual record keeping
system temporarily should there be a total IT system
failure.
In management's opinion, the significant risks that face
the Company are the states of readiness of the utility
suppliers, the Company's major suppliers, customers and
bankers.
Steps have been taken to ensure that these suppliers,
customers and bankers have confirmed their state of
readiness to us and what steps are being taken by them to
ensure that they are fully year 2000 compliant.
The likely impact on the Company from this risk is
significant and all steps are being taken to ensure that
this risk is adequately addressed.
o Contingency plans
The Company is developing a contingency plan which will
ensure that the production and distribution and the
recording of all transactions will be adequately covered
should there be a significant problem, however, we cannot
guarantee that these plans will be sufficient to prevent
disruption and the likely impact that this may have on the
group as a whole.
Where possible, alternative sources of supply have been
identified, should there be a significant disruption from
one of our suppliers. However, because there are
significant suppliers within the group which are sole
suppliers, we may be unable to cover this risk
sufficiently. As a result, we are attempting to the best
of our ability to assess the state of readiness of these
suppliers and to locate suppliers in other countries.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has used derivative financial instruments primarily to
reduce exposure to adverse fluctuations in foreign exchange rates with respect
to certain overseas purchases in order to lock in a specified exchange rate. The
Company does not enter into derivative financial instruments for trading
purposes. As a matter of policy all derivative positions are used to reduce risk
by hedging underlying economic exposure. The derivatives the Company has used in
the past were straightforward instruments with liquid markets.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
No Exhibits or reports on Form 8-K during the quarter.
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.
Date: February 16, 1999
FIRST SOUTH AFRICA., LTD.
/s/ Clive Kabatznik
---------------------------------
Clive Kabatznik
Chief Executive Officer, President
and Chief Financial Officer