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 September 30, 1997
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 [_] 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 November 12, 1997 was
5,674,749.
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PART 1. FINANCIAL INFORMATION PAGE
Item 1. First South Africa Corp., Ltd.
Consolidated Balance Sheets - Unaudited 3
Consolidated Statements of Income for the three months
ended September 30, 1997 and 1996 - Unaudited 4
Consolidated Statements of Cash Flows for the three months
ended September 30, 1997 and 1996 - Unaudited 5
Consolidated Statements of Changes in Stockholder's
Investment for the period June 30, 1997 to September 30, 1997 6
Notes to the Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation 12-15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, June 30,
1997 1997
$ $
----------- -----------
CURRENT ASSETS
Cash on hand 15,709,781 19,889,111
Trade accounts receivable 12,233,595 12,000,224
Less: Allowances for bad debts (625,591) (696,279)
----------- -----------
11,608,004 11,303,945
Inventories (net) 8,217,416 7,219,960
Prepaid expenses and other current assets 1,318,041 934,263
Deferred charges (net) 763,046 838,439
----------- -----------
TOTAL CURRENT ASSETS 37,616,288 40,185,718
Property, plant and equipment 17,060,233 16,197,605
Less: Accumulated depreciation (5,346,616) (4,849,396)
----------- -----------
11,713,617 11,348,209
Intangible assets (net) 16,663,164 12,620,822
Other assets 79,091 42,730
----------- -----------
66,072,160 64,197,479
=========== ===========
3
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' INVESTMENT\
<TABLE>
<CAPTION>
September 30, June 30,
1997 1997
$ $
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Bank overdraft payable -- --
Current portion of long term debt 1,505,759 1,673,712
Trade accounts payable 7,630,538 6,755,823
Other provisions and accruals 2,667,183 3,184,428
Other taxes payable 281,138 654,653
Income tax payable 1,739,168 1,721,079
----------- -----------
TOTAL CURRENT LIABILITIES 13,823,786 13,989,695
Long term debt 13,690,750 13,341,758
Deferred income taxes 239,496 358,446
----------- -----------
27,754,032 27,689,899
----------- -----------
Minority shareholders' investment 13,445,605 13,287,566
STOCKHOLDERS' INVESTMENT
Capital stock:
A class common stock, $0.01 par value - authorized
23,000,000 shares, issued and outstanding
3,780,315 shares 37,803 35,361
B class common stock, $0.01 par value - authorized
2,000,000 shares, issued and outstanding
1,822,500 shares 18,711 18,691
Preferred stock, $0.01 par value, - authorized
5,000,000 shares, issued and outstanding nil shares -- --
Capital in excess of par 24,658,766 22,891,093
Retained earnings 3,791,691 2,803,065
Foreign currency translation adjustments (3,634,448) (2,528,196)
----------- -----------
66,072,160 64,197,479
=========== ===========
</TABLE>
4
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
$ $
----------- -----------
<S> <C> <C>
Revenues 21,461,433 11,690,884
=========== ===========
Operating expenses
Cost of sales 12,698,212 6,213,717
Selling, general and administrative costs 7,316,524 4,254,284
----------- -----------
20,014,736 10,468,001
----------- -----------
Operating income 1,446,697 1,222,883
Other income 243,082 199,910
Interest income/( expense) 175,741 (215,087)
----------- -----------
Income from consolidated companies before income taxes 1,865,520 1,207,706
Provision for taxes on income (446,193) (378,571)
----------- -----------
1,419,327 829,135
Minority interest in consolidated subsidiary companies (430,701) --
----------- -----------
Net income 988,626 829,135
=========== ===========
Basic earnings per share 0.18 0.18
Fully diluted earnings per share 0.17 0.18
Weighted average number of shares outstanding
Basic earnings per share 5,495,119 4,679,356
Fully diluted earnings per share 7,337,754 4,679,356
</TABLE>
5
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE THREE MONTHS ENDED 30 SEPTEMBER 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
$ $
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income 988,626 829,135
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
Deferred income taxes 594,612 334,878
Net loss on sale of assets (111,706) (11,688)
Effect of changes in current assets and current liabilities 20,162 --
Minority interest in consolidated subsidiary companies (1,665,749) 904,731
430,701 --
----------- -----------
Net cash provided by operating activities 256,646 2,057,056
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (681,483) (144,745)
Proceeds on disposal of property, plant and equipment 18,083 --
Additional purchase price payments (2,886,407) --
Other assets acquired (147,487) (44,854)
Acquisitions of subsidiaries (net of cash of $33,856) (2,238,196) (2,673,865)
----------- -----------
Net cash used in investing activities (5,935,490) (2,863,464)
----------- -----------
Cash flows from financing activities:
Net (repayments)/borrowings in bank overdrafts (10,217) 2,049,273
Borrowings of long term debt 308,179 1,365,585
Reduction in deferred debt issue costs 46,000 --
Repayments in short term debt (165,041) (2,002,662)
Proceeds on stock issues 1,770,130 --
----------- -----------
Net cash provided in financing activities 1,949,051 1,412,196
----------- -----------
Effect of exchange rate changes on cash (449,537) 4,931
Cash (used) generated by operations (4,179,330) 610,719
Cash on hand at beginning of period 19,889,111 4,682,035
-----------
Cash on hand at end of period 15,709,781 5,292,754
=========== ===========
</TABLE>
6
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
Capital stock Foreign
First South Capital in currency
Africa Corp., excess of Retained translation
Ltd. par earnings adjustments Total
$ $ $ $ $
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 54,052 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 -- 1,023,689
Translation adjustment -- -- -- (1,106,252) (1,106,252)
----------- ----------- ----------- ----------- -----------
Balance at September 30, 1997 56,514 24,658,766 3,791,691 (3,634,448) 24,907,586
=========== =========== =========== =========== ===========
</TABLE>
7
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
1. PRINCIPLE ACTIVITIES OF THE GROUP
The principle 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.
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.
2. ORGANIZATION
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.
On July 1, 1997 the Company acquired 100% of the common stock of Fifers
Bakery (Proprietary) Limited for an aggregate net purchase price of $
1,844,890. The 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 First South African Holdings Corp. (Pty) Ltd. in the acquisition.
Fifers Bakery
(Pty)
Ltd
$
---------
Acquisition costs
Stock issued in lieu of cash 699,434
Cash consideration (net of debt ceded to holding company) 1,145,456
---------
Purchase price to be allocated 1,844,890
=========
Summary allocation of purchase price
Current assets 565,354
Property, plant and equipment 461,560
Other assets 33,238
Goodwill 1,796,136
---------
Total assets acquired 2,856,288
---------
Current liabilities 425,390
Long term debt 154,685
Deferred income taxes 4,161
Debt ceded to holding company 427,162
---------
Total liabilities assumed 1,011,398
---------
1,844,890
=========
8
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
3. SUMMARY OF ACCOUNTING POLICIES
The consolidated financial statements should be read in conjunction with
the consolidated financial statements included with the Company's Form 10K
which has 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 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
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.
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.
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:
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".
9
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
3. SUMMARY OF ACCOUNTING POLICIES (continued)
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 tp 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 September 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 from April through August 1997.
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.
10
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
4. INVENTORIES
Inventories consist of the following:
September 30, June 30,
1997 1997
$ $
---------- ----------
Finished goods 4,576,602 4,032,523
Work in progress 109,113 532,144
Raw materials and ingredients 2,931,945 2,365,213
Supplies 1,034,383 716,081
---------- ----------
Inventories (Gross) 8,652,043 7,645,961
Less: Valuation allowances (434,627) (426,001)
---------- ----------
Inventories (Net) 8,217,416 7,219,960
========== ==========
5. 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 September 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
had taken place on July 1, 1996.
July 1, to
September 30,
1996
$
-----------
Revenues 19,393,376
===========
Net income before minority interest in consolidated subsidiaries 1,273,192
Minority interest in consolidated subsidiary companies (243,250)
-----------
Net income 1,029,942
-----------
Basic earnings per share 0.19
Weighted average number of shares in issue 5,495,119
6. COMMITMENTS
The Company is required to make additional contingent payments to the
former owners of certain companies that it has acquired 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 three years. Under its various
acquisition agreements, the Company anticipates having to spend
approximately $2.25 million in cash for its contingent payments over the
next 12 months as well as approximately $1.85 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
11
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
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.
7. SUBSEQUENT EVENTS
On October 31, 1997, First South Africa Corp., Ltd. a Bermuda corporation
(the "Company"), consummated the private placement and sale of 15,000
Increasing Rate Senior Subordinated Convertible Debentures of the Company
due October 31, 2001 (the "Debentures"), at a purchase price of $1,000 per
Debenture, to two offshore investors including BT Global Credit Limited as
the lead investor (the "Offering") pursuant to an exemption from the
registration requirements of the Securities Act of 1933, as amended, (the
"Act") under Regulation S promulgated thereunder. The Debentures are
subject to the terms of an Indenture dated October 29, 1997 by and between
the Company and the American Stock Transfer & Trust Company, as Trustee.
Interest payable on the Debentures is 4% per annum for the year ending
October 31, 1998, 4.5% per annum for the two years ending October 31,
2000, and 5% per annum for the year ending October 31, 2001, payable on a
quarterly basis. In the event the Debentures shall not have been redeemed
or converted pursuant to the terms thereof and the Indenture prior to the
due date, the Company shall pay each registered holder of the Debentures
an additional amount equal to 22.25% of the principal amount of Debentures
held by each such registered holder.
The Debentures are convertible at any time (subject to prior redemption)
into shares of Common Stock at the initial conversion price of $9.50 per
share of Common Stock, subject to adjustment in certain events. The
Debentures are redeemable after one year if the Company's Common Stock
trades at more than $14.25 per share, subject to adjustment in certain
events, during an agreed upon period of time (30 consecutive market days
ending on the market day prior to the date on which the notice of
redemption is first given). The redemption value of the debenture is
122.25% of the principal amount.
The Company has paid Bankers Trust Company ("BTC") a fee equal to 4.5% of
the total offering amount and has agreed to reimburse BTC for its
reasonable legal expenses with respect to such transaction up to an amount
of $50,000.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company was incorporated in September 1995 to acquire, own and operate
closely held companies in South Africa with annual sales in the range of
approximately $5 million to $50 million. In this regard, the Company, through
its South African subsidiaries has acquired twelve South African companies
(collectively, the "Acquisitions" engaged in the following industry segments.
1. Packaging equipment and materials through Starpak, Alfapak and Pakmatic
2. Metal washers used in the fastener industry through LS Pressings and
Paper and Metal.
3. Air conditioning and refrigeration machinery components though Europair
Refrigeration and First Strut.
4. Processed foods through Piemans Pantry, Astoria Bakery, Seemanns, Gull
Foods and Fifers Bakery.
The Company has funded itself since inception primarily through stockholders'
loans and capital contributions and the Bridge Financing of Notes and Warrants
and the proceeds if its Initial Public Offering completed in January 1996, as
well as the issuance of subordinated convertible debentures. The Company
anticipates that it will derive revenues primarily through income generated from
the operations of acquired operating companies in South Africa.
The average annual rate of inflation in South Africa in the period commencing
September 30, 1996 and ending September 30, 1997 was approximately 8.6 %
The average rate for the South African Rand against the U.S. dollar for
the periods under discussion were as follows:
Three Months Three Months
ended Sept. 30, ended Sept. 30,
1996 1997
--------------- ---------------
$1 = R4.59 $1 =R4.66
Depreciation of 1.5%
13
<PAGE>
As the Company's results are reported in U.S. dollars, but revenues and earnings
are primarily generated in South African Rand, the local inflation rate and the
depreciation of the South African Rand against the US dollar for the periods in
question are important to further the understanding of the Company's results. In
general, if the rate of depreciation of the South African Rand to the U.S.
dollar for any comparable period is greater than the South African rate of
inflation for that same period then the Company would have had to generate local
revenues and earnings in excess of the South African inflation rate in order to
maintain dollar parity. For the three months ended September 30, 1997, versus
the comparable period in 1996, the depreciation of the South African Rand to the
dollar equaled 1.5% while the annual rate of inflation was 8.6%. In order for
the Company to report dollar growth in revenues and earnings it would need to
have generated growth of 1.5% through its local South African operations. The
results, therefore, for the period indicated above as reflected in U.S. dollars,
is less than inflation adjusted South African Rand for revenue and earnings
growth.
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1997
Sales for the three months ended September 30, 1997 increased 83.6% to
$21,461,433 from $11,690,884 for the comparable period in 1996. In local
currency this reflects a net increase after inflation of 76.5%. This increase is
primarily due to the acquisitions the Company has completed since September 30,
1996. Results for the three months ended September 30, 1996 reflect the
operations of L.S. Pressings, Starpak, Europair, Piemans Pantry and Astoria
Bakery alone.
For the three months ended September 30, 1997, the Company's processed foods
operations contributed approximately 66.9% of the Company's sales versus 56% for
the comparable period in 1996. The Company's air conditioning and refrigeration
operations contributed approximately 16.3% of sales for the three months ended
September 30, 1997 versus 21.9% for the comparable period in 1996. The Company's
packaging operations contributed approximately 11.4% of sales for the three
months ended September 30, 1997 versus 12.2% for the comparable period in 1996.
The Company's fastener operations contributed approximately 5.3% of sales for
the three months ended September 30, 1997 versus 10% for the comparable period
in 1996. Sales in all business segments increased. The overall increase can be
explained in some segments by additional acquisitions, but in general the
overall increase can be attributed to increasing 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. In
addition, the Company's subsidiaries have continued to purchase additional
manufacturing capacity to take advantage of this demand.
Cost of goods sold for the three months ended September 30, 1997 were
$12,698,212, or 59.2 % of sales versus $6,213,717 or 53.1%, for the comparable
period in 1996. For the three months ended September 30, 1997 the cost of goods
for the Company's processed food operations were approximately 56.2% versus 48%
in the comparable period in 1996. Cost of sales for the air conditioning and
refrigeration operations were approximately 61.2% versus 60.1% in the comparable
period in 1996. Cost of sales for the packaging operations were approximately
73.1% versus 58% in the comparable period in 1996. Cost of sales for the
fastener operations were approximately 58.8% versus 60.6% in the comparable
period in 1996.The overall increase in the percentage of cost of goods sold can
therefore be primarily explained by increases in the cost of goods ratios in the
processed food and packaging operations. The processed foods cost of goods
percentage is in line with its full fiscal 1997 ratio. The increase in the
packaging operations' cost of goods is due primarily to the poor performance of
one company in this segment as well as a new acquisition that traditionally
generates lower gross margins than those generated by the packaging operations
owned by the Company during the three months ended September 30, 1996.
Sales, general and administrative costs increased to$7,316,524 for the three
months ended September 30, 1997 from $4,254,284 for the comparable period in
1996 or 34.1% of sales versus 36.4% of sales. For the three months ended
September 30, 1997 SG and A expenses for the Company's processed food operations
were approximately 34.2% versus 40.3% in the comparable period in 1996. SG and A
expenses for the air conditioning and refrigeration operations were
approximately 30% versus 31.3% in the comparable period in 1996. SG and A
expenses for the packaging operations were approximately 33% versus 18% in the
comparable period in 1996. SG and A expenses for the fastener operations were
approximately 19% versus 20.9% in the comparable period in 1996. The Company's
corporate SG and A expenses were approximately $329,000 or 1.5% of sales for the
three months ended September 30, 1997 versus approximately $316,000 or 2.7% of
sales for the comparable period in 1996. The overall decrease in the percentage
SG and A expenses can therefore be primarily explained by decreases in the SG
and A ratios in the Company's processed foods operations.
Interest received was $175,741 for the three months ended September 30, 1997
versus an interest expense of $215,087 for the comparable period in 1996. The
interest income for for the 1997 period is primarily attributable to interest
earned on the Company's
14
<PAGE>
cash balances in its processed foods businesses. In addition, during the three
months ended September 30, 1997, the Company incurred a net interest expense of
approximately $250,000 for interest on the 9% convertible debentures issued
between April and August 1997.
Other income for the three months ended September 30, 1997 was $243,082 versus
$199,909 in the comparable period in 1996. This is primarily made up of rebates
and discounts earned by the Company's operating subsidiaries.
Net profit for the three month period ended September 30, 1997 was $988,626 or a
gain of $.18 a share as compared to a net profit of $829,135 or $.18 a share in
the comparable period in 1996 During the period ended September 30, 1997 the
Company's net earnings included a provision of $430,701 for the 30% minority
interests in its publicly traded subsidiary First SA Food Holdings, Ltd. For
purposes of its earning per share calculation for the three months ended
September 30, 1997, the Company had 5,495,119 shares outstanding ( includes
84,751 shares to be issued in fulfilment of acquisition agreements and
contingent acquisition payments entered into during the past three months) as
opposed to 4,679,356 for the comparable period in 1996.
Liquidity and Capital Resources
- -------------------------------
In January 1996, the Company raised approximately $9 million after all fees and
expenses from its initial public offering. In May 1997, the Company raised
approximately $9.2 million in net proceeds from the issuance of 10,000 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. 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 September 30, 1997, shows cash on hand of
$15,7 million with working capital of $23,8 million. As of September 30, 1997
the Company had a total debt of $15,196.519 of which amount $10 million related
to the Company's 9% subordinated convertible debentures , with the remainder
being bank debt. Of the bank debt, $1,505,759 was classified as current. The
Company currently has approximately $3.4 million available in bank credit lines,
which lines are unsecured and renewable on an annual basis.
Cash flows provided by operating activities for the three months ended September
30, 1997 and September 30, 1996, totaled $256,646 and $2,057,056 respectively.
Cash flows used in investing activities for the three months ended September 30,
1997 and September 30, 1996 totaled $5,935,490 and $2,863,464 respectively. For
the three months ended September 30, 1997 $2,238,196 was utilized for the
acquisition of subsidiaries and $2,886,407 for additional purchase price
payments. In the comparable period in 1996 $2,673,865 was used for the
acquisition of subsidiaries. Net cash provided by financing activities was
$1,949,051, during the three months ended September 30, 1997 while $1,412,196
was provided in the corresponding period in the prior year. This increase is
primarily attributable to proceeds of warrants exercised during the quarter.
The Company's operating subsidiaries generally collect their receivables within
65 to 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 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 September 30, 1997, the Company had cash of approximately $15.7 million.
Under its various acquisition agreements, the Company anticipates having to
spend approximately $2.25 million in cash for its contingent payments over the
next 12 months as well as approximately $1.85 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, through Swiss Bank Corporation,
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.
15
<PAGE>
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.
On October 31, 1997, the Company raised an additional $15 million from the
placement of senior subordinated convertible debentures (see Note 7 of the Notes
to the Unaudited Consolidated Financiala Statements for the Three Months Ended
September 30, 1997 and September 30, 1996 - Subsequent Events). The proceeds
from this offering will be used primarily to fund additional acquisitions.
"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,
political risks, risks related to currency exchange, economic risks, government
regulatory considerations, absence of substantive disclosure relating to
acquisitions, risks related to operations of he Company's direct and indirect
subsidiaries, possible fluctuations in operating results, competition, labour
relations, dependence on key personnel, control by insiders, potential adverse
effect of redemption of warrants, shares eligible for future sales, potential
anti-takeover effects of preferred stock, and limited rights of shareholders
under Bermuda law. The Company undertakes no obligation to release publicly the
result of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports of Form 8-K
The Company filed a Current Report on Form 8-K, the date of which was August 28,
1997, disclosing certain sales of equity securities pursuant to Regulation S.
16
<PAGE>
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: November 12, 1997
FIRST SOUTH AFRICA CORP., LTD.
By: /s/ Clive Kabatznik
---------------------------
Clive Kabatznik
Chief Executive Officer, President
and Chief Financial Officer
17
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