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, 1998.
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________
TO___________.
Commission File No. 0-27494
FIRST SOUTH AFRICA CORP., LTD
(Exact name of registrant as specified in its charter)
Bermuda Not Applicable
(State or other jurisdiction of (I.R.S. 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: (310) 212-7910
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 PROCEEDING 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, 1996 was
7,841,464.
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
REPORT OF THE INDEPENDENT AUDITORS
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets at September 30, 1998 and
June 30, 1998 ...........................................................................
Unaudited Consolidated Statements of Income for the three months ended
September 30, 1998 and 1997..............................................................
Unaudited Consolidated Statements of Changes in Stockholders' Investment for the
period June 30, 1998 to September 30, 1998...............................................
Notes to the unaudited Consolidated Financial Statements.........................................
Item 2: Management's Discussion and Analysis of Financial Condition and Results of
operations.......................................................................................
Item 3: Qualitative and Qualitative Disclosures about Market Risk........................................
PART II - OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K.................................................................
</TABLE>
2
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30, June 30,
1998 1998
$ $
------------- ----------
<S> <C> <C>
Current assets
Cash on hand 14,874,811 17,948,991
Trade accounts receivable 20,026,203 16,871,292
Less: Allowances for bad debts (678,776) (833,785)
------------ ------------
19,347,426 16,037,507
Inventories (net) 13,053,476 11,742,613
Prepaid expenses and other current assets 1,857,878 1,711,428
--------- -----------
Total current assets 49,133,591 47,440,539
Property, plant and equipment 32,504,964 31,410,837
Less: Accumulated depreciation (12,140,352) (11,423,572)
------------ ------------
20,364,612 19,987,265
Intangible assets (net) 22,349,247 20,045,983
Deferred charges (net) 1,093,750 1,448,199
Other assets 300,879 261,735
------------ ------------
93,242,079 89,183,721
============ ============
</TABLE>
3
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' INVESTMENT
September 30, June 30,
1998 1998
$ $
------------- --------
<S> <C> <C>
Current liabilities
Bank overdraft payable 3,753,335 2,787,965
Current portion of long term debt 1,869,711 2,256,275
Trade accounts payable 11,783,195 9,205,092
Other provisions and accruals 10,898,398 4,506,770
Dividend payable 567,726 558,185
Other taxes payable 294,877 1,064,432
Income tax payable 2,373,183 1,790,874
---------- ---------
Total current liabilities 31,540,425 22,169,593
Long term debt 26,396,922 28,945,426
Deferred income taxes 550,113 529,405
------------ ------------
58,487,460 51,644,424
---------- ----------
Stockholders' investment
Capital stock:
A class common stock, $0.01 par value - authorized 23,000,000 shares, issued
and outstanding 6,019,708 shares (June 1998: 5,649,224 shares) 60,198 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 29,893,370 28,288,404
Retained earnings 1,460,013 7,209,977
--------- -----------
31,432,384 35,573,635
4
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED BALANCE SHEETS
Minority stockholders' investment 20,074,454 19,677,124
---------- ----------
51,506,838 55,250,759
---------- ----------
Foreign currency translation adjustments (16,752,219) (17,711,462)
------------ ------------
34,754,619 37,539,297
---------- ----------
93,242,079 89,183,721
========== ==========
</TABLE>
5
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1998 1997
$ $
---------- ----------
<S> <C> <C>
Revenues 25,264,876 21,461,433
========== ==========
Operating expenses
Cost of sales 16,359,871 12,698,212
Selling, general and administrative costs 8,570,237 7,316,524
Extraordinary share repurchase charge 4,633,825 -
Retrenchment cost provision 500,000 -
----------- -----------
30,063,933 20,014,736
---------- ----------
Operating (loss)/ income (4,799,057) 1,446,697
Other income 87,209 243,082
Interest income/( expense) (106,536) 175,741
--------- ----------
(Loss)/income from consolidated companies before income taxes (4,818,384) 1,865,520
Provision for taxes on income (520,169) (446,193)
------------ -----------
(5,338,553) 1,419,327
Minority interest in consolidated subsidiary companies (411,411) (430,701)
------------ -----------
Net income (5,749,964) 988,626
============ ===========
Basic earnings per share (0,76) 0,18
Fully diluted earnings per share (0,53) 0,15
Weighted average number of shares outstanding
Basic earnings per share 7,584,325 5,383,492
Fully diluted earnings per share 10,219,226 8,154,164
</TABLE>
6
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
$ $
----- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (5,749,964) 988,626
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 877,453 594,612
Deferred income taxes 11,108 (111,706)
Net loss on sale of assets - 20,162
Net loss on sale of subsidiary 15,408 -
Net loss on redemption of Debenture funding 94,259 -
Effect of changes in current assets and current liabilities (934,922) (1,665,749)
Effect of extraordinary provisions raised 5,133,825 -
Net gain on First SA Food shares purchased from minorities (11,743) -
Minority interest in consolidated subsidiary companies 411,411 430,701
------- -----------
Net cash (utilised)/provided by operating activities (153,165) 256,646
--------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (1,275,699) (681,483)
Proceeds on disposal of property, plant and equipment 653,627 18,083
Additional purchase price payments (2,085,313) (2,886,407)
Other assets acquired (40,106) (147,487)
Acquisitions of subsidiaries (net of cash of $33,856) - (2,238,196)
Proceeds on disposal of subsidiary (net of cash of $9,633) 49,191 -
Net cash used in investing activities (2,698,300) (5,935,490)
----------- -----------
Cash flows from financing activities:
Net (repayments)/borrowings in bank overdrafts 874,368 (10,217)
Borrowings of long term debt 825,654 308,179
Redemption of debenture debt (2,733,810) -
Reduction in deferred debt issue costs - 46,000
Repayments in short term debt (405,053) (165,041)
Proceeds on stock issues 1,033,613 1,770,130
--------- ---------
Net cash used in/(provided in) financing activities (405,228) 1,949,051
---------- ---------
7
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Effect of exchange rate changes on cash 182,513 (449,537)
Cash utilised by operations (3,074,180) (4,179,330)
Cash on hand at beginning of period 17,948,991 19,889,111
---------- ----------
Cash on hand at end of period 14,874,811 15,709,781
========== ==========
</TABLE>
8
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
First South First South First South
Africa 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
$ $ $ $ $ $ $
------------ ----------- ---------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
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
=========== ========== ======= ========== ========= ============ ==========
</TABLE>
9
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 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
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 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.
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
=========
10
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
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
U.S. 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.
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.
11
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
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).
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.
12
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Fair value of financial instruments
As at September 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:
September 30, June 30,
1998 1998
$ $
------------- ---------
Finished goods 8,091,793 7,156,784
Work in progress 881,448 649,465
Raw materials and ingredients 3,421,609 3,220,748
Supplies 937,932 959,396
---------- ----------
Inventories (Gross) 13,332,782 11,986,393
Less: Valuation allowances (279,306) (243,780)
------------ ------------
Inventories (Net) 13,053,476 11,742,613
========== ==========
13
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 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 $4,633,825 represents the aggregate shortfall on the
warranted share price at the prevailing exchange rate at September 30,
1998. In terms of the agreements entered with the previous vendors they
have exercised a put option on the Company, which will result 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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Basic earnings per share for the quarter (1998)
Net income available to common stockholders (5,749,964)
===========
Shares Fraction of weighted
Dates outstanding outstanding period average shares
----------- ----------- --------------
Balance at July 1, 1998 7,472,324 1,0 7,472,324
Additional purchase price consideration shares issued 242,684 0,1 2,638
Debentures converted to shares during the quarter 122,700 0,9 109,363
---------- ----------
Weighted average shares 7,837,708 7,584,325
--------- ---------
Basic earnings per share for the quarter (1997)
Net income available to common stockholders 988,626
=======
14
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Shares Fraction of weighted
Dates outstanding outstanding period average shares
----------- ----------- --------------
Balance at July 1, 1997 5,359,614 1,0 5,359,614
Additional purchase consideration shares issued 57,127 0,0 157
Acquisition of subsidiaries on January 1, 1997 27,624 0,0 76
Warrants converted to shares during the quarter 159,425 0,2 23,645
---------- ----------
Weighted average shares 5,603,790 5,383,492
---------
</TABLE>
Diluted earnings per share for the quarter (1998)
Net income available to common stockholders (5,749,964)
Add impact of assumed conversions 336,863
----------
Adjusted net income available to common stockholders (5,413,101)
-----------
Weighted average shares 7,584,325
Warrants and options not yet exercised -
9% convertible debentures 1,055,954
Increasing rate debentures 1,578,947
---------
Adjusted weighted average shares 10,219,226
----------
Diluted earnings per share for the quarter (1997)
Net income available to common stockholders 988,626
Add impact of assumed conversions 254,393
-------
Adjusted net income available to common stockholders 1,243,019
=========
Weighted average shares 5,383,492
Warrants and options not yet exercised 1,104,005
9% Convertible Debentures 1,666,667
---------
Adjusted weighted average shares 8,154,164
---------
15
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 31, 1998 AND 1997
BACKGROUND AND HISTORY
The Company was incorporated in September 1995 with the intention of actively
pursuing acquisitions fitting a pre-defined investment strategy. The broad
strategy followed in all investment decisions is as follows:
o Turnover is to be within the range of $5 - $50 million
o Net income must yield a sustainable above average return on investment.
o Growth in turnover must be above average growth rates and must be
sustainable over the medium term.
o The industry in which the target operates must meet the pre-defined
industry sectors identified by management as sectors meeting our broad
investment strategy.
First South Africa Corp has, through its South African subsidiary, First South
African Holdings (Pty) Ltd., acquired seventeeen South African subsidiaries
which have met the acquisition criteria identified above.
These acquisitions (following certain mergers of a number of the acquired
subsidiaries) are listed below and are engaged in the following industry
segments:
Processed Foods
o Piemans Pantry
o Astoria Bakery
o Seemann's Quality Meat Products
o Gull Foods
o Fifers Bakery
Lifestyle Products
o SA Leisure
o Galactex
o Republic Umbrella
o Tradewinds
Packaging Equipment and Materials
o Starpak
16
<PAGE>
o Pakmatic
o Pacforce
Industrial Manufacturing
o L.S. Pressings
Involved in the manufacture of metal washers used in the fastener
industry
o Europair
Involved in the manufacture and distribution of air conditioning and
refrigeration components.
FINANCING
o 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.
o Bridging Finance
Bridging finance was raised to finance acquisitions made prior to the IPO.
o 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.
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.
17
<PAGE>
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
September 30, September 30,
1998 1997
------------- -------------
Rate of exchange vs $1 6.14 4.66
Depreciation 32%
The annual rate of inflation for South Africa was approximately 8% 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.
COMPARISON TO PRIOR PERIODS
o THREE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS SEPTEMBER 30, 1997
SALES
Sales have increased by 18 % to $25,264,876 from $21,461,433.
This is better interpreted as a net, after inflation increase in South
African Rand of 46%.
This increase is primarily attributable to acquisitions that the Company
had completed since October 1, 1997.
The results for the three months ended September 30, 1997 do not include
the following operations:
o Galactex
o SA Leisure
o Republic Umbrella
o Tradewinds Parasol
o Pacforce
18
<PAGE>
The sales from these companies for the three months ended September 30,
1998 total $7,902,304
The contribution by the individual business segments towards total sales
for the three months ended September 30, is as follows:
1998 1997
% %
---- ----
Processed Foods 50.1 67.0
Lifestyle Products 26.2 -
Packaging equipment and materials 9.6 11.1
Industrial Manufacturing 14.1 21.9
100.0 100.0
The Rand value of sales in each business segment have increased over the
prior period, however due to the deterioration in the Rand against the
Dollar the Dollar sales value in the Industrial Manufacturing segment
has decreased over prior year. The overall Rand increase can be
explained by:
o Additional acquisitions in the Packaging equipment and materials
and by the addition of the Lifestyle products business segment.
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 The decrease in Dollar sales in the Industrial segment is due to
management's change of focus away from this sector 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.
COST OF SALES
Cost of goods sold of $16,359,871, (representing 64.8% of sales) has
increased from $12,698,212 (representing 59.2% 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 September 30, is as follows:
19
<PAGE>
1998 1997
% %
---- ----
Processed Foods 56.2 56.5
Lifestyle Products 73.0 -
Packaging equipment and materials 81.1 78.0
Industrial Manufacturing 68.7 67.5
The overall increase in the percentage of cost of goods sold can be
explained by the relative value of the cost of goods sold in the Lifestyle
sector, which was not in existence in the prior year. The segment analysis
is presented below.
o Processed Foods
The cost of goods sold in this segment has not changed significantly.
o Packaging equipment and materials
The acquisition of a Company that generates lower gross margins than
those owned by the Company in the prior period and the difficult trading
conditions experienced during the 1998 quarter.
o Lifestyle Products
This segments' margins are low due to the competitive nature of the
products necessitating reasonably low margins overall.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, General and Administrative costs of $16,359,871, (representing
33.9 % of sales) has increased from $7,316,524 (representing 34.1% 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 586,804 357,338
Amortisation of intangibles and other assets 290,649 237,274
------- -------
877,435 594,612
------- -------
Percentage of total sales 3.5 2.8
Intangibles are principally goodwill, trademarks, intellectual property and
restraint of trade agreements.
20
<PAGE>
The selling, general and administrative costs of the individual business
segments as a percentage of sales for the three months ended September
30, is as follows:
1998 1997
% %
---- ----
Processed Foods 35.8 33.7
Lifestyle Products 21.0 -
Packaging equipment and materials 28.6 33.4
Industrial Manufacturing 27.4 28.6
Corporate (Percentage of total sales) 0.9 2.2
The overall decrease in the percentage of selling, general and
administrative costs can be explained by the following:
o Packaging equipment and materials and Industrial manufacturing
Lower operating costs due to more efficient operations and
restructuring within this sector.
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.
INTEREST EXPENSE
Interest expense of $106,536 has decreased from an income of $175,741 for
the comparative period in the prior year.
Interest for the quarter ended September 30, 1998 consists of:
o Interest income earned on First South Africa Corp's cash balances and
surplus funds in the processed foods business.
o Interest expense incurred in the other operating business segments and
interest expense of approximately $330,000 on the 9% and floating rate
convertible debenture issuances that were completed in August and
October 1997.
OTHER INCOME
Other income of $87,209 has decreased from $243,082 for the comparative
period in the prior year.
21
<PAGE>
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 $5,338,553 has decreased from an
income of $1,419,327, a significant decrease over the comparative period in
the prior year.
Included in the loss for the current quarter is a provision of $4,633,825
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 provision of $500,000 has also been raised for future retrenchment costs
in the packaging segment as the Company proceeds with the restructure of
the businesses in this segment.
Net loss of $5,749,964 represents a loss of $0.76 a share as compared to
net income of $988,626 representing $0.18 per share in the comparative
period in the prior year. After factoring out the extraordinary provisions,
the loss per share for the current quarter equates to $0.08 per share.
The reason for the loss is due to the poor performance of the packaging and
industrial manufacturing segments.
The current market value of the Company's 65% stake in First SA Food
Holdings Limited is approximately $39 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.
Currently the Company owns an effective 84.3% interest in the lifestyle
segment.
For purposes of the Company's earnings per share calculation the Company
had a weighted average 7,584,325 shares outstanding as opposed to 5,495,119
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 Class A warrants and Class B warrants that were
outstanding in terms of a warrant swap exercise performed during the prior
fiscal year. This has had a negative impact on the basic earnings per share
calculation.
FINANCING
o Internally Generated funding
As of September 30, 1998, the Company had net cash of $14,874,811 with
working capital of $17,593,166. As of September 30, 1998, the Company had a
total of $26,396,922 in debt, of which
22
<PAGE>
amount $20,656 million related to the Company's 9% and increasing rate
subordinated convertible debentures with the remainder being bank debt. Of
the bank debt, $1,869,711 was classified as current.
Cash flows utilized by operating activities for the period ended September
30,1998 totaled $153,165. Cash flows used in investing activities totaled
$2,698,300 of which the Company realized $49,191 on the disposal of one of
its non-core operating subsidiaries. The Company expended $2,085,313 on
additional purchase price payments and purchased $622,072 in net additions
to property, plant and equipment of its subsidiaries. Net cash utilized in
financing activities amounted to $405,228. This included the redemption of
debentures amounting to $2,733,810.
o Future commitments
Under the various acquisition agreements, the Company anticipates having to
spend approximately $4.62 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 the Company's operations, 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.
23
<PAGE>
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
which ordered to ensure that the Cmpany will be Year 2000
compliant from an information management perspective.
The extent of usage of non IT systems within the group is limited
to a small number of systems, which are in the process of being
tested to ensure year 2000 compliance. These processes, however
are not of the nature that would materially 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 being 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 material 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.
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
being 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 there state of readiness to us and
what steps are being taken by them to ensure that they are fully
year 2000 compliant.
24
<PAGE>
The possible impact on the Company from this risk is significant
and all steps are being taken to ensure that this risk is
adequately addressed.
o Continency 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, the Company can provide no
assurance that its plans will be sufficient to prevent disruption
and the likely impact that this may have on the Company 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
of the Company which are sole suppliers, the Company may be
unable to cover this risk sufficiently and, therefore the Company
is attempting to the best of our ability to assess the state of
readiness of these suppliers.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
o 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 straight-forward instruments
with liquid markets.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - 27.1 Financial Data Schedule.
(b) Reports on Form 8-K - None.
25
<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 13, 1998
FIRST SOUTH AFRICA CORP., LTD.
By: /s/ Clive Kabatznik
----------------------------------
Clive Kabatznik
Chief Executive Officer, President
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<PERIOD-START> JUL-01-1998
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