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, 1996
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 II, 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 [_]
The number of shares of common stock outstanding as of November 12, 1996 was
4,142,500, consisting of 2,300,000 shares of Common Stock and 1,842,500 shares
of Class B Common Stock.
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
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, 1996 and 1995 - Unaudited 4
Consolidated Statements of Cash Flows for the three months
ended September 30, 1996 and 1995 - Unaudited 5
Consolidated Statements of Changes in Stockholder's
Investment for the period June 30, 1996 to September 30, 1996 6
Notes to the Combined Financial Statements 7-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation 14-16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
<PAGE>
FIRST SOUTH AFRICA CORP., LTD
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, June 30,
1996 1996
$ $
----------- -----------
ASSETS
Current assets
Cash on hand 5,292,754 4,682,035
Receivables 7,635,131 5,833,542
Less: Allowances for bad debts (397,882) (402,333)
----------- -----------
7,237,249 5,431,209
Inventories (net) 3,780,136 2,510,868
Prepaid expenses and other current assets 1,586,463 451,551
----------- -----------
Total current assets 17,896,602 13,075,663
Property, plant and equipment 10,477,089 9,000,334
Less: Accumulated depreciation (2,252,136) (2,119,912)
----------- -----------
8,224,953 6,880,422
Goodwill 435,981 408,541
Recipes and other intellectual property 5,155,407 2,848,532
Other assets 265,264 318,286
Deferred income taxes 85,238 73,550
----------- -----------
32,063,445 23,604,994
=========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities
Current portion of long term debt 99,138 2,101,799
Bank overdraft and factoring facility 3,233,407 745,724
Trade accounts payable 2,772,658 2,162,257
Other provisions and accruals 4,790,611 1,923,371
Income taxes payable 1,779,828 1,518,095
----------- -----------
Total current liabilities 12,675,642 8,451,246
Long term debt 5,115,962 2,361,372
Total liabilities 17,791,604 10,812,618
Stockholder's investment
Common stock 41,748 41,701
Capital in excess of par 19,558,560 18,518,986
Retained earnings (3,058,272) (3,887,407)
Foreign currency translation adjustments (2,277,502) (1,888,211)
Income restricted as to distribution 7,307 7,307
----------- -----------
32,063,445 23,604,994
=========== ===========
See accompanying notes to the financial statements
3
<PAGE>
FIRST SOUTH AFRICA CORP., LTD
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995
Company Predecessor(1)
September September
30, 1996 30, 1995
$ $
----------- -----------
REVENUES 11,690,884 2,930,544
=========== ===========
Operating expenses
Cost of sales 6,213,717 1,712,944
Selling, general and administrative expense 4,254,284 722,886
----------- -----------
10,468,001 2,435,830
OPERATING INCOME 1,222,883 494,714
Other income 199,909 --
Interest expense (215,087) (68,956)
----------- -----------
Income before income taxes 1,207,706 425,758
Provision for taxes on income (378,571) (149,015)
----------- -----------
NET INCOME 829,135 276,743
=========== ===========
Net profit per share .18 .33
Weighted average number
of shares outstanding 4,679,356 842,500
- --------
(1) The consolidated statement of income for the three months ended
September 30, 1995 reflects the combined operations of Starpak and
L.S. Pressings, the "predecessor companies" (see notes).
4
<PAGE>
FIRST SOUTH AFRICA CORP., LTD
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
Company Predecessor
September 30, September 30,
1996 1995
$ $
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income 829,135 276,743
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation 230,856 58,739
Amortization of other assets 104,022 --
Deferred income taxes (11,688) 23
Effect of changes in assets and liabilities 904,731 (309,554)
---------- ----------
Net cash provided by operating activities 2,057,056 25,951
---------- ----------
Cash flows from investing activities:
Net additions to property, plant and equipment (144,745) (111,458)
Other assets (acquired)/disposed (44,854) 15,858
Increase in loans to related companies -- (3,761)
Acquisition of subsidiaries (net cash of $238,279) (2,673,865) --
---------- ----------
Net cash used in investing activities (2,863,464) (99,361)
---------- ----------
Cash flows from financing activities:
Net borrowings in bank overdrafts 2,049,273 (57,211)
Net borrowings of long term debt 1,365,585 74,854
Net repayments in loans from related companies -- (584)
Net repayment in short term debt (2,002,662) (31,374)
Common stock issue -- 12,125
---------- ----------
Net cash provided by financing activities 1,412,196 (2,190)
---------- ----------
Effect of exchange rate changes on cash 4,931 (2,407)
---------- ----------
Net increase/(decrease) in cash on hand 610,719 (78,007)
Cash on hand at beginning of period 4,682,035 744,251
---------- ----------
Cash on hand at end of period 5,292,754 666,244
========== ==========
</TABLE>
The consolidated statements of cash flow for the three months ended September
30, 1995 reflects the combined cash flows of Starpak and LS Pressings, the
predecessor companies.
5
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
FOR THE PERIOD JUNE 30, 1995 TO SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Capital stock
First South Income Foreign
Africa Corp., Capital in Retained restricted as Currency
Ltd. excess of par earnings to Translation
$ $ $ distribution Adjustments Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 41,701 18,518,986 (3,887,407) 7,307 (1,888,211) 12,792,376
Issuance of stock to acquire subsidiary
companies 47 1,039,574 -- -- -- 1,039,621
Net profit for the period -- -- 829,135 -- -- 829,135
Translation adjustment -- -- -- -- (389,291) (389,291)
----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 1996 41,748 19,558,560 (3,058,272) 7,307 (2,277,502) 14,271,841
=========== =========== =========== =========== =========== ===========
</TABLE>
6
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
1. Organization
------------
First South Africa Corp., Ltd. (the "Company"), was incorporated on September 6,
1995. The purpose of the Company is to acquire and invest in South African
companies. The predecessor to the Company was the combined entity under common
control, Starpak (Proprietary) Limited and its subsidiary companies and LS
Pressings (Proprietary) Limited.
On January 24, 1996, subsequent to an initial public offering ("Offering") and
in terms of an agreement reached before the Offering, the Company acquired 100%
of the common stock of the business combination of Starpak (Proprietary) Limited
and its subsidiary companies and LS Pressings (Proprietary) Limited. The
acquisition was accounted for using the purchase method of accounting at net
book value at date of acquisition.
On January 24, 1996, also subsequent to the Offering and also in terms of an
agreement reached before the Offering, the Company acquired 100% of the common
stock of Europair Africa (Proprietary) Limited for an aggregate net purchase
price of $1,029,206. The acquisition was accounted for using the purchase method
of accounting. The assets and liabilities were taken over at fair market value
as determined by management.
On June 3, 1996 the Company acquired 100% of the common stock of the business
combination of Piemans Pantry (Proprietary) Limited and Surfs-Up Investments
Limited for an aggregate net purchase price of $5,314,045. The acquisition was
accounted for using the purchase method of accounting. The assets and
liabilities were taken over at fair market value as determined by management.
On July 1, 1996 the Company acquired 100% of the common stock of First Strut
(Proprietary) Limited for an aggregate net purchase price of $ 300,335 . The
acquisition was accounted for using the purchase method of accounting. The
assets and liabilities were taken over at fair market value as determined by
management.
First Strut (Pty) Ltd
$
---------
Acquisition costs
Stock in lieu of cash 115,513
Cash consideration 184,822
---------
Purchase price to be allocated 300,335
=========
Summary allocation of purchase price
Current assets 512,927
Property, plant and equipment 501,260
---------
Total assets acquired 1,014,187
---------
Current liabilities 457,349
Long term debt 256,503
Total liabilities assumed 713,852
---------
300,335
=========
7
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued).
On July 1, 1996 the Company acquired 100% of the common stock of the business
combination of Astoria Bakery CC and Astoria Bakery ( Lesotho) (Proprietary)
Limited for an aggregate net purchase price of $ 3,696,431 . The acquisition was
accounted for using the purchase method of accounting. The assets and
liabilities were taken over at fair market value as determined by management.
Astoria Group
$
---------
Acquisition costs
Stock in lieu of cash 924,108
Cash consideration 2,772,323
---------
Purchase price to be allocated 3,696,431
=========
Summary allocation of purchase price
Current assets 2,226,304
Property, plant and equipment 1,053,208
Recipes and other intellectual property 2,603,269
Goodwill 7,586
---------
Total assets acquired 5,890,367
---------
Current liabilities 1,061,434
Long term debt 1,132,502
Income restricted as to distribution 352,282
---------
Total liabilities assumed 2,193,936
---------
3,696,431
=========
2. Principle Activities of the Group
---------------------------------
The principle activities of the group include the business of manufacturing ,
servicing and selling packaging machines, receiving rental income, manufacture
of washers for use in the fastener industry, manufacture and supply of
air-conditioning products and the manufacture, sale and distribution of ready to
eat and ready to bake off pastry related food products, rye bread and a limited
number of confectionery items.
3. Summary of Significant Accounting Policies
------------------------------------------
Unaudited Interim Financial Statements
- --------------------------------------
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete Financial
Statements. In the opinion of management, the unaudited interim consolidated
financial statements contain all adjustments, consisting of normal recurring
accruals, necessary to present fairly the financial position of the Company at
September 30, 1996, and the results of operations and cash flows for the periods
presented. Results for the interim periods are not necessarily indicative of
results to be expected for the full year. These financial statements should be
read in conjunction with the financial statements and notes included in the Form
10-K for the period ended June 30, 1996.
8
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued).
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company ,
First South Africa Corp., Ltd. and its subsidiaries. All subsidiaries are wholly
owned and no minority interest exist. Material inter-company 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
effect 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 for the Company on common shares is based on net income and
reflects dilutive effects of any stock options which exist at period end.
Intangible Assets
- -----------------
Goodwill resulting from acquisitions, and recipes and other intellectual
property is 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 a 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 Company's operating subsidiaries is that of South
African Rand. Accordingly, the following rates of exchange have been used for
translation purposes:
* Assets and liabilities are translated into United States Dollars using the
exchange rates at the balance sheet date.
* Common stock and capital in excess of par are translated using historical
rates at date of issuance.
* Revenue, expenses, gains and losses are translated into United States
Dollars using the weighted average exchange rates for each year.
* The resultant translation adjustments are reported in the component of
shareholders' investment designated as "Foreign currency translation
adjustment."
Derivative Financial Instruments
- --------------------------------
The Company uses derivative financial instruments to reduce its exposure to
fluctuations in foreign exchange
9
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued).
rates by creating offsetting positions through the use of derivative financial
instruments. The market risk related to the foreign exchange option is offset by
changes in the valuation of the underlying profits being hedged.
The option premium is accounted for on the accrual basis, and is amortized over
the option terms. The notional amount of the option is the amount bought or sold
at maturity. Notional amounts are indicative of the extent of the Company's
involvement in the use of derivative financial instruments and are not a measure
of the Company's exposure to credit or market risk through its use of
derivatives.
Foreign assets and liabilities
- ------------------------------
Transactions in foreign currencies arise as a result of inventory purchases from
foreign countries and inter-company 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.
Property, Plant and Equipment
- -----------------------------
Land is stated at cost and is not depreciated. Buildings are depreciated on the
straight line basis over estimate useful live of 50 years.
Buildings, plant and equipment, and motor vehicles are written-off over their
estimated useful lives to each asset's residual value.
The following rates are considered appropriate:
Percentage
----------
Buildings 2%
Plant and equipment 10-33%
Motor vehicles 20%
Income Taxes
- ------------
Income tax expenses is based on reported earning before income taxes. Deferred
income taxes represent the impact of temporary differences between the amounts
of assets and liabilities recognized for financial reporting purposes and such
amounts recognized for tax purposes. Deferred taxes are measured by applying
currently enacted tax law.
10
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued).
Fair Value of Financial Instruments
- -----------------------------------
As of June 30,1996 the carrying value of accounts receivable, accounts payable
and investments approximate their fair value.
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. The Company recognizes revenues on an accrual basis.
4. Stockholders' Equity
--------------------
The authorized capital stock of the Company consist of an aggregate of
23,000,000 shares of Common Stock, par value $.01 per share (the "Common Stock")
, 2,000,000 shares of Class B Common Stock, par value $.01 per share (the "Class
B Common Stock"), and 5,000,000 shares of Preferred Stock, par value $.01 per
share.
As of September 30, 1996 there were 1,842,500 shares of Class B Common Stock
outstanding and 2,300,000 shares of Common Stock.
In connection with the Offering the Company has issued Unit Purchase Options to
the underwriter to purchase up to 200,000 Units comprised of 200,000 shares of
the Company's Common Stock and 200,000 Class A Warrants and 200,000 Class B
Warrants. The Unit Purchase Options are exercisable during the two year period
commencing January 24, 1999 at an exercise price of $6.00 per unit (120% of the
initial public offering price) subject to adjustments in certain events.
Holders of the Common Stock have one vote per share on each matter submitted to
a vote of the shareholders and a ratable right to the net assets of the Company
upon liquidation. Holders of the Common Stock do not have preemptive rights to
purchase additional shares of Common Stock or other subscription rights. The
Common Stock carries no conversion rights and is not subject to redemption or to
any sinking fund provisions.
The Class B Common Stock and the Common Stock are substantially identical on a
share-for-share basis, except that the holders of Class B Common Stock have five
votes per share on each matter considered by shareholders and the holders of the
Common Stock have one vote per share on each matter considered by shareholders,
and except that the holders of each class will vote as a separate class with
respect to any matter requiring class voting by The Companies Act 1981 of
Bermuda.
Each share of Class B Common Stock is automatically converted into one share of
Common Stock upon the death of the original holder thereof, or, the sale or
transfer of such stock to the public.
As of September 30, 1996, and as a result of the Offering, there were 2,300,000
Class A Warrants and 2,300,000 Class B Warrants outstanding.
Each Class A Warrant entitles the registered holder to purchase one share of
Common Stock and one Class B Warrant, at an exercise price of $6.50, until the
fifth anniversary of the date of the Offering.
Each Class B Warrant entitles the registered holder to purchase one share of
Common Stock at an exercise price of $8.75 per share at any time after issuance
until the fifth anniversary of the date of the Offering.
11
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued).
The First South African Holdings ("FSAH") escrow agreement was executed prior to
the closing of the Offering and provided for the concurrent issuance and
delivery of 729,979 shares of Class B Common Stock to the FSAH escrow agent. The
FSAH escrow agreement is intended to provide security for the holders of First
South African Holdings (Proprietary) Limited Class B common stock, who are
resident in South Africa and are prohibited in terms of South African law from
holding shares in a foreign company. The FSAH escrow agreement provides that the
parties to such agreement that are holders of FSAH Class B common stock will not
sell such shares of stock, but may tender the shares to the FSAH escrow agent
against payment therefor by the escrow agent, which payment may consist of the
proceeds obtained form the sale of an equal number of Class B Common Stock of
the Company, provided that the proceeds of the sale will be delivered to the
holder of the Class B Common Stock in exchange for the shares in First South
African Holdings ( Proprietary) Limited. These shares will be tendered to the
Company and they will be immediately converted to FSAH Class A common stock.
Included in the First South Africa Corp., Ltd Class B issued Common Stock is
1,266,835 First South African Holdings (Proprietary) Limited Class B common
stock, in terms of this escrow agreement.
5. Inventories
-----------
Inventories consist of the following
September 30, June 30,
1996 1996
$ $
---------- ----------
Finished goods 2,959,528 2,077,679
Work-in-progress 387,985 272,377
Raw materials 714,444 501,562
Supplies 132,551 93,055
---------- ----------
Inventories (gross) 4,194,508 2,944,673
Less: Valuation allowances (414,372) (433,805)
---------- ----------
Inventories (net) 3,780,136 2,510,868
========== ==========
6. Pro Forma Financial Information
-------------------------------
The unaudited pro forma financial information tables below has been prepared
assuming that all of the acquisitions noted under the Organization section of
this Form 10-Q had taken place and that operations had commenced on July 1,
1995.
July 1, to
September 30, 1995
$
----------
Revenues 11,419,998
----------
Net income 887,732
----------
Net profit per share 0.19
----------
Weighted average number of shares outstanding 4,679,356
----------
12
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued).
The unaudited pro forma financial information of the Company has been derived
from the historical financial statements of Starpak, LS Pressings, Europair,
Piemans Pantry, Surfs-Up Investments, First Strut and the Astoria Group and do
no purport to be indicative of the results that would have been actually
obtained if the acquisitions had occurred on July 1, 1995 nor is it indicative
of future results.
13
<PAGE>
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 subsidiary, FSAH, has acquired seven South African companies
(collectively, the "Acquisitions" engaged in the following industry segments (i)
the manufacture of high-quality plastic packaging machinery through Starpak,
(ii) the manufacture of washers for use in the fastener industry through L.S.
Pressings and its subsidiary Paper and Metal Industries, (iii) the manufacture
and supply of air conditioning and refrigeration products through Europair and
its subsidiary Europair Refrigeration, and (iv) the manufacture and distribution
of processed food products through Piemans Pantry and Astoria 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 of its Initial Public Offering completed in January 1996. 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 since the period ended
September 30, 1995 until September 30, 1996 was approximately 7.5%
The average rate for the South African Rand against the U.S. dollar for the
periods under discussion were as follows:
Three Months Ended Three Months Ended
September 30, 1995 September 30, 1996
------------------ ------------------
$1 = R3.65 $1 = R4.49
Depreciation of 23%
Based on these figures, in evaluating the comparable sales and income numbers
for the Company for the three months ended September 30, 1996 versus the
comparable periods in 1995; in the last 12 months the depreciation of the South
African Rand against the U.S. Dollar was far higher than the South African rate
of inflation. As a result, the increase in sales and profits for the three month
period ended September 30, 1996 versus the comparable period in 1995 was
generated through a net increase in the sales and earnings of the Company's
operating businesses. Based on the approximate difference between the rate of
inflation and the Rand depreciation against the U.S. dollar, the Company had to
generate more than 15.5% in inflation adjusted Rand growth in order to report
sales and profits in U.S. dollars greater than those in the comparable period in
1995.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
Sales for the three months ended September 30, 1996 were $11,690,884 versus
$2,930,544 for the comparable period in 1995. This increase is primarily due to
the acquisitions the Company has completed since its Offering on January 24,
1996. All results for the three months ended September 30, 1995 relate to the
results of L.S. Pressings and Starpak alone. These two companies are considered
the Company's predecessor.
Cost of goods sold for the three months ended September 30, 1996 were
$6,213,717, or 53.1% of sales versus $ 1,712,944 or 58.4%, for the comparable
period in 1995. This decrease in the percentage of cost of goods sold is
primarily due to the lower cost of goods percentage associated with the
Company's processed food operations.
Sales, general and administrative costs were $4,254,284 for the three months
ended September 30, 1996 or 36.4% of sales versus $722,886 for the comparable
period in 1995 or 24.7% of sales. This increase can primarily be attributed to
the increased ratio of sales costs to revenues generated in the Company's
processed food
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
operations as opposed to the manufacturing operations of the Company's
predecessor, as well as general and administrative costs incurred by the
Company's corporate offices during the three months ended September 30, 1996
which were not incurred in the comparable period in 1995.
Interest expenses were $215,087 for the three months ended September 30, 1996
versus $68,956 for the comparable period in 1995. This increase is primarily
attributable to the increase in the Company's bank borrowings and long term debt
for the three months ended September 30, 1996 as compared to the comparable
period in 1995. The Company's new acquisitions carry debt primarily related to
the financing of their plant and equipment. In addition the Company's subsidiary
First South African Holdings borrowed approximately $1,100,000 which it utilized
as a portion of its acquisition costs.
Other income for the three months ended September 30, 1996 was $199,909 versus
$0 in the comparable period in 1995. This is primarily made up of interest
earned by the Company and its South African operating subsidiaries on its
positive cash balances.
Net profit for the three month period ended September 30, 1996, was $829,135 or
$.18 a share as compared to a net profit of $276,743 or $.33 a share in the
comparable period in 1995. For purposes of its earning per share calculation for
the three months ended September 30, 1996, the Company had 4,679,355 shares
outstanding (including 536,855 shares to be issued in fulfilment of acquisition
agreements entered into during the past six months)as opposed to 842,500 shares
for the comparable period in 1995.
Liquidity and Capital Resources
- -------------------------------
The Consolidated Balance Sheet as at September 30, 1995, shows cash on hand of
$5,292,754 of which $820,356 was held by the operating subsidiaries. The
remainder reflects cash on hand from the net proceeds of the Offering realized
by the Company.
The Company's consolidated working capital as at September 30, 1996, was
$5,220,960. As at September 30, 1996, the Company had a total of $8,448,507 in
bank debt of which $3,332,545 was classified as current of which $3,233,407
reflected bank overdrafts payable under the Company's operating subsidiaries'
working capital lines of credit.
Cash flows provided by operating activities for the three months ended September
30, 1996 and September 30, 1995, totaled $2,057,056 and $25,951, respectively.
Cash flows used in investing activities for the three months ended September 30,
1996 and September 30, 1995 totaled $2,863,464 and $99,361, respectively. For
the three months ended September 30, 1996, $2,673,865 was utilized for the
acquisition of subsidiaries. In the comparable period in 1995, net cash used in
investing activities was primarily attributable to the purchase of assets and an
increase in loans to related companies. Net cash provided by financing
activities was $1,412,096 during the three months ended September 30, 1996, and
$2,190 was utilized in the corresponding period in the prior year. This increase
in the use of cash from financing activities is primarily attributable to an
increase in net borrowing of long term debt.
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, while the Company has primarily utilized the net
proceeds of the Offering to acquire subsidiaries in South Africa. The Company's
operating subsidiaries have budgeted approximately $850,000 for Capital
expenditures during the current fiscal year ended June 30, 1997. It is
management's belief that capital expenditures will continue to be met by
internal cash flow and bank borrowings. 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 May
1996, the Company, through Swiss Bank
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Corporation, purchased a 12 month option to acquire the equivalent of $5 million
in South African Rand at the strike price of Five Rand to the Dollar. This
option has the effect of hedging $5 million of the Company's fiscal 1997
earnings, in the event the exchange rate of the South African Rand falls below
this strike price. The cost of such option was approximately $150,000 and is
being amortized over the length of the option.
The Company intends to continue to pursue an aggressive acquisition strategy in
South Africa and anticipates utilizing a substantial portion of its cash
balances and operating earnings to fund this strategy to the extent that
suitable acquisition candidates can be identified.
The Company may be required to incur additional indebtedness or equity financing
in connection with future acquisitions. There is no assurance that the Company
will be able to incur additional indebtedness or raise additional equity to
finance future acquisitions on terms acceptable to management, if at all.
"Safe Harbor" Statement under the private Securities Litigation Reform Act of
1995: The statements above which are not historical facts are forward-looking
statements that involve risks and uncertainties, including, but not limited to,
demand for the Company's products and market acceptance risks, the effect of
economic conditions, the impact of competitive products and pricing, product
development, commercialization and technological difficulties, capacity, and
supply constraints or difficulties, the results of financing efforts, and other
risks detailed in the Company's Securities and Exchange Commission filings.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
On August 16, 1996 the Company filed an Amendment to Form 8-K which was
originally filed on June 11, 1996.
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.
Date: November 14, 1996
FIRST SOUTH AFRICA., LTD.
/s/ Clive Kabatznik
----------------------------
Clive Kabatznik
Chief Executive Officer, President
and Chief Financial Officer
17
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