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, 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 [X] No [_]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [_] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of common stock outstanding as of February 11, 1998 was
7,023,443.
<PAGE>
FIRST SOUTH AFRICA CORP., LTD
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1997
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets at December 31,
1997 and June 30, 1997 3-4
Unaudited Consolidated Statements of Income for the
three months and for the six months ended December 31,
1997 and 1996 5
Unaudited Consolidated Statements of Cash Flows for the
six months ended December 31, 1997 and 1996 6-7
Unaudited Consolidated Statement of Changes in
Stockholders' Investment for the period June 30, 1997 to
December 31, 1997 8
Notes to the unaudited Consolidated Financial Statements 9-16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders. 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
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<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, June 30,
1997 1997
$ $
------------ ------------
Current assets
Cash on hand 19,147,855 19,889,111
Trade accounts receivable 25,072,456 12,000,224
Less: Allowances for bad debts (700,111) (696,279)
------------ ------------
24,372,345 11,303,945
Inventories (net) 12,105,570 7,219,960
Prepaid expenses and other current assets 1,586,665 934,263
------------ ------------
Total current assets 57,212,436 39,347,279
Property, plant and equipment 36,154,007 16,197,605
Less: Accumulated depreciation (13,202,061) (4,849,396)
------------ ------------
22,951,946 11,348,209
Intangible assets (net) 21,679,950 12,620,822
Deferred charges (net) 1,626,299 838,439
Other assets 112,150 42,730
------------ ------------
103,582,780 64,197,479
============ ============
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<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' INVESTMENT
December 31, June 30,
1997 1997
$ $
------------ ------------
<S> <C> <C>
Current liabilities
Bank overdraft payable 3,781,226 --
Current portion of long term debt 1,717,813 1,673,712
Trade accounts payable 13,116,384 6,755,823
Other provisions and accruals 4,549,510 3,184,428
Other taxes payable 614,110 654,653
Income tax payable 1,661,721 1,721,079
------------ ------------
Total current liabilities 25,440,764 13,989,695
Long term debt 33,407,854 13,341,758
Deferred income taxes 380,952 358,446
------------ ------------
59,229,570 27,689,899
------------ ------------
Minority shareholders' investment 17,681,564 13,287,566
Stockholders' investment
Capital stock:
Common stock, $0.01 par value - authorized 23,000,000 shares, issued and
outstanding 5,249,749 shares 52,497 35,361
B class common stock, $0.01 par value - authorized 2,000,000 shares,
issued and
outstanding 1,822,500 shares 18,725 18,691
Preferred stock, $0.01 par value, - authorized 5,000,000 shares, issued and
outstanding nil shares -- --
Capital in excess of par 26,620,255 22,891,093
Retained earnings 5,336,073 2,803,065
Foreign currency translation adjustments (5,355,904) (2,528,196)
------------ ------------
103,582,780 64,197,479
============ ============
</TABLE>
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<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FOR
THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
$ $
----------- -----------
<S> <C> <C>
Revenues 35,605,750 14,116,257
----------- -----------
Operating expenses
Cost of sales 22,633,124 7,839,089
Selling, general and administrative costs 10,381,827 4,987,398
----------- -----------
33,014,951 12,826,487
----------- -----------
Operating income 2,590,799 1,289,770
Other income 391,826 310,692
Interest income/( expense) 81,916 (359,122)
----------- -----------
Income from consolidated companies before income taxes 3,064,541 1,241,340
Provision for taxes on income (791,625) (243,984)
----------- -----------
2,272,916 997,356
Minority interest in consolidated subsidiary companies (728,534) --
----------- -----------
Net income 1,544,382 997,356
=========== ===========
Basic earnings per share 0.24 0.21
Fully diluted earnings per share 0.21 0.20
</TABLE>
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<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FOR
THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
$ $
----------- -----------
<S> <C> <C>
Revenues 57,067,182 25,807,141
----------- -----------
Operating expenses
Cost of sales 35,331,337 14,052,806
Selling, general and administrative costs 17,698,351 9,241,682
----------- -----------
53,029,688 23,294,488
----------- -----------
Operating income 4,037,494 2,512,653
Other income 634,911 510,601
Interest income/( expense) 257,657 (574,208)
----------- -----------
Income from consolidated companies before income taxes 4,930,062 2,449,046
Provision for taxes on income (1,237,819) (622,555)
----------- -----------
3,692,243 1,826,491
Minority interest in consolidated subsidiary companies (1,159,235) --
----------- -----------
Net income 2,533,008 1,826,491
=========== ===========
Basic earnings per share 0.43 0.38
Fully diluted earnings per share 0.38 0.38
</TABLE>
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<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
$ $
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income 2,533,008 1,826,491
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Deferred income taxes 1,656,970 715,218
Net loss/(gain) on sale of assets (4,735) (14,799)
Effect of changes in current assets and current liabilities 39,317 (236,737)
Minority interest in consolidated subsidiary companies (1,540,663) 2,399,596
1,159,235 --
----------- -----------
Net cash provided by operating activities 3,843,132 4,689,769
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (2,571,840) (388,983)
Proceeds on disposal of property, plant and equipment 58,749 347,125
Proceeds on disposal of investment in First SA Lifestyle Holdings Limited 3,507,424 --
Additional purchase price payments (2,848,220) --
Other assets acquired (194,307) --
Acquisitions of subsidiaries (net of cash of $561,789) (22,280,797) (5,244,457)
----------- -----------
Net cash used in investing activities (24,328,991) (5,286,315)
----------- -----------
Cash flows from financing activities:
Net borrowings in bank overdrafts 1,796,476 1,321,029
Borrowings of long term debt 16,047,060 110,327
Reduction in deferred debt issue costs (883,843) --
Borrowings/(repayments) in short term debt 102,423 (1,967,060)
Proceeds on stock issues 3,746,327 --
----------- -----------
Net cash provided in financing activities 20,808,443 (535,704)
----------- -----------
Effect of exchange rate changes on cash (1,063,840) (78,313)
----------- -----------
Cash utilised by operations (741,256) (1,210,563)
Cash on hand at beginning of period 19,889,111 4,682,035
----------- -----------
Cash on hand at end of period 19,147,855 3,471,472
=========== ===========
</TABLE>
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<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
First South
First South Africa Corp., Foreign
Africa Corp., Ltd. Capital in currency
Ltd. Class B excess of Retained translation
common stock common stock par earnings adjustments Total
$ $ $ $ $ $
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 35,361 18,691 22,891,093 2,803,065 (2,528,196) 23,220,014
Issuance of stock to FSAC escrow agent 847 -- -- -- -- 847
Issuance of stock to acquire subsidiaries -- 20 699,414 -- -- 699,434
Proceeds on warrants exercised 1,595 -- 1,068,259 -- -- 1,069,854
Net income -- -- -- 988,626 -- 988,626
Translation adjustment -- -- -- -- (1,106,252) (1,106,252)
----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 1997 37,803 18,711 24,658,766 3,791,691 (3,634,448) 24,872,523
=========== =========== =========== =========== =========== ===========
Issuance of stock to FSAC escrow agent 683 -- -- -- -- 683
Issuance of stock to acquire subsidiaries 1,429 14 1,480,071 -- -- 1,481,514
Warrant swap out at par value 11,738 -- (11,738) -- -- --
Proceeds on warrants exercised 744 -- 449,506 -- -- 450,250
Proceeds on options exercised 100 -- 43,650 -- -- 43,750
Net income -- -- -- 1,544,382 -- 1,544,382
Translation adjustment -- -- -- -- (1,721,456) (1,721,456)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 52,497 18,725 26,620,255 5,336,073 (5,355,904) 26,671,646
=========== =========== =========== =========== =========== ===========
</TABLE>
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<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
1. ORGANIZATION AND PRINCIPLE ACTIVITIES OF THE GROUP
First South Africa Corp., Ltd. (the "Company") was founded on September 6,
1995. The purpose of the Company is to acquire and operate South African
companies.
The principle activities of the group include the following:
ENGINEERING INTERESTS
The business of manufacturing, servicing and selling packaging machines,
receiving commission income, receiving rental income, manufacture of
washers for use in the fastener industry, manufacture and supply of
air-conditioning products.
FOOD INTERESTS
The manufacture, sale and distribution of both ready to eat and ready for
bake off pastry related food products, the manufacture, sale and
distribution of high margin speciality breads and staple breads, the
manufacture and sale of a wide range of prepared food products and the
manufacture, sale and distribution of a wide range of processed meat
products.
LIFESTYLE INTERESTS
The manufacture, sale and distribution of plastic, wooden and steel
outdoor products aimed at the leisure market.
- 9 -
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
2. ACQUISITIONS
On July 1, 1997, the company acquired 100% of the Common Stock of Fifers
Bakery (Pty) Ltd. for an aggregate net purchase price of $1,844,890. This
acquisition was accounted for using the purchase method of accounting. The
assets and liabilities were recorded at fair market value as determined by
management.
On October 1, 1997 the Company acquired an effective 81% of, the common
stock of SA Leisure (Proprietary) Limited, and the businesses of Galactex
Outdoor (Proprietary) Limited and Republic Umbrella Manufacturers
(Proprietary) limited for an aggregate net purchase price of $ 19,924,638,
and the common stock of Pacforce (Proprietary) Limited for $276,444. The
acquisitions were accounted for using the purchase method of accounting.
The assets and liabilities were recorded at fair market value as
determined by management.
The purchase consideration has been decreased to give effect to the debt
ceded to the holding company in the acquisitions.
$
----------
Acquisition costs
Stock issued in lieu of cash 2,180,948
19,865,024
----------
Cash consideration (net of debt ceded to holding company)
Purchase price to be allocated 22,045,972
==========
Summary allocation of purchase price
Current assets 17,388,349
Property, plant and equipment 11,063,713
Other assets 4,967,809
Goodwill 2,677,933
----------
Total assets acquired 36,097,804
Current liabilities 8,902,964
Long term debt 4,299,276
Deferred income taxes 52,979
Debt ceded to holding company 796,613
----------
Total liabilities assumed 14,051,832
----------
22,045,972
==========
The Company is required to make additional payments to the former owners based
on a multiple of pre-tax earnings. These payments are to be made by the issue of
stock and cash over the next five years.
Additional purchase price payments made during the current year total
$2,848,220. This amount was allocated as follows:
Goodwill $ 583,279
Recipes 865,842
Trademarks 1,399,099
2,848,220
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<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
2. ACQUISITIONS (continued)
The unaudited pro forma financial information tabled below has been
prepared assuming that all of the acquisitions which occurred subsequent
to June 30, 1996 had taken place and that operations had commenced on July
1, 1996, an adjustment has been made to eliminate the minority interest in
the net income of consolidated subsidiaries assuming that the disposal of
an effective 30% interest in First SA Food Holdings Limited had taken
place on July 1, 1996.
<TABLE>
<CAPTION>
July 1 to July 1, to
December 31, December 31,
1997 1996
$ $
---------- ----------
<S> <C> <C>
Revenues 66,869,373 54,434,733
-----------
Net income before minority interest in consolidated subsidiaries 4,330,777 3,256,607
Minority interest in consolidated subsidiary companies (1,274,316) (712,429)
-----------
Net income 3,056,461 2,544,178
Basic earnings per share 0.52 0.43
Weighted average number of shares in issue 5,870,015 5,870,015
</TABLE>
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<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
3. SUMMARY OF ACCOUNTING POLICIES
The consolidated financial statements should be read in conjunction with
the Company's financial statements which have been prepared in accordance
with US generally accepted accounting principles and incorporate the
following significant accounting policies:
CONSOLIDATION
First South Africa Corp., Ltd., consolidates its majority owned
subsidiaries. The consolidated financial statements include the accounts
of the Company and its subsidiaries. Minority interests have been taken
into account when determining the net income due to the Company. Material
intercompany transactions have been eliminated on consolidation.
ACCOUNTING ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, disclosure of contingent liabilities
at the financial statement date and reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements reflects all adjustments which
are, in the opinion of management, necessary for a fair presentation of
the consolidated financial statements for an interim period. All such
adjustments are of a normal recurring nature. The operating results may
not be indicative of the results for a full fiscal year.
EARNINGS PER SHARE
The Company has adopted SFAS 128 (Earnings per Share) whereby earnings are
calculated as follows:
Basic Earnings per share is calculated by dividing income available for
distribution to common stockholders by the weighted average number of
common shares outstanding.
Diluted earnings per share is calculated giving full effect to all
dilutive common shares that were outstanding during the period.
INTANGIBLE ASSETS
Goodwill, recipes and other intellectual property, and trademarks are
being amortised on a straight line basis over a period of twenty to twenty
five years. If facts and circumstances were to indicate that the carrying
amount of goodwill, recipes and other intellectual property is impaired,
the carrying amount would be reduced to an amount representing the
discounted future cash flows to be generated by the operation.
Also included in intangible assets are non competition agreements relating
to the Europair acquisition which are being amortised on a straight line
basis over the six year term of the agreements.
The company has adopted Statement of Financial Accounting Standards No.
121 ("SFAS 121") "Accounting for the impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of". No impairments in long-lived
assets has taken place.
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.
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<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
3. SUMMARY OF ACCOUNTING POLICIES (continued)
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 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 December 31, 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 issuance in 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.
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<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
4. INVENTORIES
Inventories consist of the following:
December 31, June 30,
1997 1997
$ $
---------- ---------
Finished goods 7,953,256 4,032,523
Work in progress 510,624 532,144
Raw materials and ingredients 3,296,532 2,365,213
Supplies 985,852 716,081
---------- ---------
Inventories (Gross) 12,746,264 7,645,961
Less: Valuation allowances (640,694) (426,001)
---------- ---------
Inventories (Net) 12,105,570 7,219,960
========== =========
5. COMMITMENTS
The Company is required to make additional payments to the former owners
based on a multiple of pre-tax earnings . These payments are to be made by
the issue of stock and cash over the next two to five years.
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<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
6. EARNINGS PER SHARE
Earnings per share data is calculated as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE FOR THE QUARTER
Net income available to common stockholders 1,544,382
---------
Shares Fraction Weighted
DATES OUTSTANDING outstanding of 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 0.80 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
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
---------
</TABLE>
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<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
6. EARNINGS PER SHARE (continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Basic earnings per share for the year to date
Net income available to common stockholders 2,533,008
---------
Shares Fraction Weighted
Dates outstanding outstanding of Period Average Shares
- ----------------- ----------- --------- --------------
July 1, 1997 5,359,615 1.00 5,359,615
July 1 - September 30, 1997
Additional purchase price payments 57,127 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
--------- ---------
</TABLE>
DILUTED EARNINGS PER SHARE FOR THE YEAR TO DATE
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
---------
The prior year comparative figures have been restated using the same principles
as above.
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<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
FIRST SOUTH AFRICA CORP., LTD
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. Processed foods through Piemans Pantry, Astoria Bakery, Seemanns,
Gull Foods and Fifers Bakery.
2. Lifestyle products through SA Leisure, Republic and Galactex.
3. Packaging equipment and materials through Starpak, Alfapak, Pakmatic
and Pacforce.
4. Industrial manufacturing which includes the manufacture of metal
washers used in the fastener industry through LS Pressings and Paper
and Metal. The manufacture and distribution of air conditioning and
refrigeration machinery components through Europair Refrigeration
and First Strut.
The Company has funded itself since inception primarily through stockholders'
loans and capital contributions and the bridge financing of Notes and Warrant,
the proceeds if its Initial Public Offering completed in January 1996 and 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.
The average annual rate of inflation in South Africa since the period ended
December 31, 1996 until December 31, 1997 was approximately 6.7%.
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 Six Months Six Months
ended Dec. 31, ended Dec. 31, ended Dec. 31, ended Dec. 31,
1996 1997 1996 1997
---- ---- ---- ----
$1 = R4.63 $1 = R4.86 $1 = R4.54 $1 = R4.76
Depreciation of 5.0% 4.8%
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 December 31, 1997,
versus the comparable period in 1996, the depreciation of the South African Rand
to the dollar equaled 5% while the annual rate of inflation was 6.7%. For the
six months ended December 31, 1997 versus the comparable period in 1996, the
depreciation of the South African Rand to the dollar equaled 4.8% while the
annual rate of inflation was 6.7%. In order for the Company to report dollar
growth in revenues and earnings it would need to have generated growth of 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.
- 17 -
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1996
Sales for the three months ended December 31, 1997 increased 152% to $35,605,750
from $14,116,257 for the comparable period in 1996. In local currency this
reflects a net increase after inflation of 150%. This increase is primarily due
to the acquisitions the Company has completed since December 31, 1997. Results
for the three months ended December 31, 1996 reflect the operations of Piemans
Pantry, Astoria Bakery and Seemanns Meat Products alone.
For the three months ended December 31, 1997, the Company's processed foods
operations contributed approximately 44.9% of the Company's sales versus 62.7%
for the comparable period in 1996. The Company's lifestyle operations
contributed approximately 31.5% of sales for the three months ended December 31,
1997 versus 0% for the comparable period in 1996 since these operations were
acquired in October 1997. The Company's packaging operations contributed
approximately 10.4% of sales for the three months ended December 31, 1997 versus
10.1% for the comparable period in 1996. The Company's industrial operations
contributed approximately 13.2% of sales for the three months ended December 31,
1997 versus 27.1% 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 December 31, 1997 were
$22,633,124, or 63.6 % of sales versus $7,839,089 or 55.5%, for the comparable
period in 1996. For the three months ended December 31, 1997 the cost of goods
for the Company's processed food operations were approximately 56.4% versus 51%
in the comparable period in 1996. Cost of sales for the lifestyle operations
were approximately 63.4%. The Company's lifestyle acquisitions were consummated
effective October 1, 1997. Cost of sales for the packaging operations were
approximately 76% versus 59.4% in the comparable period in 1996. Cost of sales
for the industrial operations were approximately 81% versus 64.5% 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 and industrial operations. The
increase in the industrial operations cost of goods is due primarily to the poor
performance of one division in this segment. 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 December 31, 1996.
Sales, general and administrative costs ("SG&A") increased to $10,381,827 for
the three months ended December 31, 1997 from $4,987,398 for the comparable
period in 1996 or 29.2% of sales versus 35.3% of sales. For the three months
ended December 31, 1997, SG and A expenses for the Company's processed food
operations were approximately 32% versus 37.2% in the comparable period in 1996.
SG and A expenses for the lifestyle operations were approximately 26.9%. The
Company's lifestyle acquisitions were consummated effective October 1, 1997. SG
and A expenses for the packaging operations were approximately 35% versus 28.3%
in the comparable period in 1996. SG and A expenses for the industrial
operations were approximately 29.6% versus 30.9% in the comparable period in
1996. The Company's corporate SG and A expenses were approximately $390,000 or
1.1% of sales for the three months ended December 31, 1997 versus approximately
$218,087 or 1.5% 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 as well as the lower overall SG and A percentage incurred by the
Company's new lifestyle acquisitions.
Interest received was $81,839, for the three months ended December 31, 1997
versus an interest expense of $359,122 for the comparable period in 1996. The
interest income for the 1997 period is primarily attributable to interest earned
on the Company's cash balances in its processed foods businesses. In addition,
during the three months ended December 31, 1997, the Company incurred a net
interest expense of approximately $350,000 for interest on the 9% and floating
rate convertible debenture issuances that were completed in August and October
1997.
Other income for the three months ended December 31, 1997 was $391,913 versus
$305,898 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 December 31, 1997 was $1,544,382 or
a gain of $0.24 a share as compared to a net profit of $997,356 or $0.21 a share
in the comparable period in 1996. During the period ended December 31, 1997 the
Company's net earnings included a provision of $728,534 for the 30% minority
interest in its publicly traded subsidiary First SA Food Holdings, Ltd.
- 18 -
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
as well as an approximate 18% minority interests in its First SA Lifestyle
Holdings subsidiary. For purposes of its earning per share calculation for the
three months ended December 31, 1997, the Company had 6,339,882 shares
outstanding compared to 4,851,399 for the comparable period in 1996.
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1997
Sales for the six months ended December 31, 1997 increased 121% to $57,067,182
from $25,807,141 for the comparable period in 1996. In local currency this
reflects a net increase after inflation of %. This increase is primarily due to
the acquisitions the Company has completed since December 31, 1996. Results for
the six months ended December 31, 1996 reflect the operations of Piemans Pantry,
Astoria Bakery and Seemanns Meat Products alone.
For the six months ended December 31, 1997, the Company's processed foods
operations contributed approximately 53.1 % of the Company's sales versus 59.7%
for the comparable period in 1996. The Company's lifestyle operations
contributed approximately 19.7% of sales for the six months ended December 31,
1997 versus 0% for the comparable period in 1996 since the operations were
acquired in October 1997. The Company's packaging operations contributed
approximately 10.8% of sales for the six months ended December 31, 1997 versus
11.1 % for the comparable period in 1996. The Company's industrial operations
contributed approximately 16.3 % of sales for the six months ended December 31,
1997 versus 29.3 % 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 six months ended December 31, 1997 were $35,331,337,
or 61.9 % of sales versus $14,052,806 or 54.4%, for the comparable period in
1996. For the six months ended December 31, 1997 the cost of goods for the
Company's processed food operations were approximately 56.3% versus 49.7% in the
comparable period in 1996. Cost of sales for the lifestyle operations were
approximately 63.4%. The Company's lifestyle acquisitions were consummated
effective October 1, 1997. Cost of sales for the packaging operations were
approximately 74.9% versus 58.7 % in the comparable period in 1996. Cost of
sales for the industrial operations were approximately 71.1% versus 62.4 % 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 and industrial operations. The
increase in the industrial operations cost of goods is due primarily to the poor
performance of one division in this segment. 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 six months ended December 31, 1996.
Sales, general and administrative costs increased to $17,698,351 for the six
months ended December 31, 1997 from $9,241,682 for the comparable period in 1996
or 31% of sales versus 35.8% of sales. For the six months ended December 31,
1997, SG and A expenses for the Company's processed food operations were
approximately 33% versus 38.5% in the comparable period in 1996. SG and A
expenses for the lifestyle operations were approximately 26.9%. The Company's
lifestyle acquisitions were consummated effective October 1, 1997. SG and A
expenses for the packaging operations were approximately 34.5% versus 23.2% in
the comparable period in 1996. SG and A expenses for the industrial operations
were approximately 27.1% versus 28.3% in the comparable period in 1996. The
Company's corporate SG and A expenses were approximately $720,000 or 1.3% of
sales for the six months ended December 31, 1997 versus approximately $550,000
or 2.1% 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 as well as
the lower overall SG and A percentage incurred by the Company's new lifestyle
acquisitions.
Interest received was $257,657, for the six months ended December 31, 1997
versus an interest expense of $574,208 for the comparable period in 1996. The
interest income for the 1997 period is primarily attributable to interest earned
on the Company's cash balances in its processed foods businesses. In addition,
during the six months ended December 31, 1997, the Company incurred a net
interest expense of approximately $625,000 for interest on the 9% and floating
rate convertible debenture issuances that were completed in August and October
1997.
Other income for the six months ended December 31, 1997 was $634,911 versus
$510,601 in the comparable period in 1996. This is primarily made up of rebates
and discounts earned by the Company's operating subsidiaries.
- 19 -
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Net profit for the six month period ended December 31, 1997 was $2,533,008 or a
gain of $0.43 a share as compared to a net profit of $1,826,491 or $0.38 a share
in the comparable period in 1996. During the period ended December 31, 1997 the
Company's net earnings included a provision of $1,159,235 for the 30% minority
interests in its publicly traded subsidiary First SA Food Holdings, Ltd. as well
as an approximate 18% minority interest in its First SA Lifestyle Holdings
subsidiary. For purposes of its earning per share calculation for the six months
ended December 31, 1997, the Company had 5,870,015 shares outstanding as
compared to 4,765,377 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. In October 1997, the
Company raised approximately $14.2 million in net proceeds from the issuance of
15,000 increasing rate debentures. Such debentures mature on October 30, 2001
and are convertible any time prior to maturity at $9.50 a share. Proceeds from
these offerings have been and will continue to be primarily utilized to fund the
Company's acquisitions as well as to provide a certain amount of working capital
to its South African subsidiaries.
At December 31, 1997, the Company had cash on hand of $19.1 million with working
capital of $33.4 million. As of December 31, 1997 the Company had a total debt
of $38,906,893 of which amount $25 million related to the Company's 9%
subordinated convertible debentures and its increasing rate convertible
debentures , with the remainder being bank debt. Of the bank debt, $5,499,039
was classified as current. The Company currently has approximately $1,560,000
available in bank credit lines, which lines are unsecured and renewable on an
annual basis.
Cash flows provided by operating activities for the six months ended December
31, 1997 and December 31, 1996, totaled $3,843,132 and $4,689,769 respectively.
Cash flows used in investing activities for the six months ended December 31,
1997 and December 31, 1996 totaled $24,328,991 and $5,286,315 respectively. For
the six months ended December 31, 1997 $22,280,797 was utilized for the
acquisition of subsidiaries and $2,848,220 for additional purchase price
payments. In the comparable period in 1996 $5,244,457 was used for the
acquisition of subsidiaries. Net cash provided by financing activities was
$20,808,443, during the six months ended December 31, 1997 while $535,704 was
utilized in the corresponding period in the prior year. This increase is
primarily attributable to the proceeds of warrants exercised and long term debt
borrowings incurred during the period.
The Company's operating subsidiaries generally collect their receivables within
65 to 90 days and reserve approximately 5% for doubtful accounts. Historically,
the Company's operating and capital needs have been met by internal cash flow
and outside bank borrowings. It is management's belief that capital expenditures
for the foreseeable future can continue to be met by internal cash flow and
outside bank borrowings.
As of December 31, 1997, the Company had cash of approximately $19.1 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 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.
- 20 -
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
The Company may be required to incur additional indebtedness or equity financing
in connection with future acquisitions. There is no assurance that the Company
will be able to incur additional indebtedness or raise additional equity to
finance future acquisitions on terms acceptable to management, if at all.
"Safe Harbor" Statement under the private Securities Litigation Reform Act of
1995: The statements above which are not historical facts are forward-looking
statements that involve risks and uncertainties, including, but not limited to,
demand for the Company's products and market acceptance risks, the effect of
economic conditions, the impact of competitive products and pricing, product
development, commercialization and technological difficulties, capacity, and
supply constraints or difficulties, the results of financing efforts, and other
risks detailed in the Company's Securities and Exchange Commission filings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of shareholders of the Company was held on December 17,
1997 for the purpose of (i) electing five directors to serve as the Board of
Directors until the next annual meeting of stockholders and until their
successors are duly elected and qualified), (ii) approving a proposal to amend
the Company's 1995 Stock Option Plan and (iii) ratifying the appointment of the
Company's independent certified public accountants for the fiscal year ending
June 30, 1998. Proxies for the meeting were solicited pursuant to Regulation 14A
of the Securities Exchange Act of 1934 and there was no solicitation in
opposition.
1. At the Meeting, Michael Levy, Clive Kabatznik, Charles S. Goodwin,
Cornelius J. Roodt and Mfundiso J. Njeke were elected as directors of the
Company by the following vote:
Votes
-----
For Withheld
--- --------
Michael Levy 10,663,540 800
Clive Katatznik 10,663,540 800
Charles S. Goodwin 10,663,540 800
Cornelius J. Roodt 10,663,540 800
Mfundiso J. Njeke 10,663,540 800
2. The proposal to amend the 1995 Stock Option Plan was approved by the
following vote:
For Against Non Votes Abstentions
--- ------- --------- -----------
8,889,486 354,755 1,420,420 2,198
3. Over 99% of the votes cast at the meeting voted in favor of the
ratification of Price Waterhouse as the Company's independent public
accountants.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company filed an amended Current Report on Form 8-K/A with the
Commission on January 22, 1998. The following item was reported by the Company
on the Form 8-K/A: Financial Statements of Businesses Acquired (Piemans Pantry
(Proprietary) Limited and Surfs Up Investments (Proprietary) Ltd. and certain
Pro Forma Financial Information.
- 21 -
<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: February 16, 1998
FIRST SOUTH AFRICA CORP., LTD.
By: /s/ Clive Kabatznik
----------------------------------
Clive Kabatznik
Chief Executive Officer, President
and Chief Financial Officer
- 22 -
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<NAME> FIRST SOUTH AFRICA CORP., LTD.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 19,147,855
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<RECEIVABLES> 25,072,456
<ALLOWANCES> 700,111
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