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 March 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 [_] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [_] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares of common stock outstanding as of May 12, 1997 was
4,142,500.
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
PART 1. FINANCIAL INFORMATION PAGE
Item 1. First South Africa Corp., Ltd.
Consolidated Balance Sheets - Unaudited 3
Consolidated Statements of Income for the
three months and for the six months ended
March 31, 1997 and 1996 - Unaudited 4
Consolidated Statements of Cash Flows for the
six months ended March 31, 1997 and
1996 - Unaudited 5
Consolidated Statements of Changes in Stockholder's
Investment for the period June 30, 1996 to March 31, 1997 6
Notes to the Combined Financial Statements 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation 12-15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
<PAGE>
FIRST SOUTH AFRICA CORP., LTD
CONSOLIDATED BALANCE SHEETS
ACTUAL
-----------------------
March 31, June 30,
1996 1996
$ $
----------- -----------
(UNAUDITED)
ASSETS
Current assets
Cash on hand 2,245,322 4,682,035
Receivables 11,241,016 5,833,542
Less: Allowances for ____________ (531,110) (402,333)
----------- -----------
10,709,906 5,431,209
Inventories (net) 6,740,715 2,510,868
Prepaid expenses and other current assets 1,010,110 451,551
----------- -----------
Total current assets 20,706,053 13,075,663
Property, plant and equipment 17,918,680 9,000,334
Less: Accumulated depreciation (5,888,082) (2,119,912)
----------- -----------
12,030,598 6,880,422
Goodwill 165,139 408,541
Recipes and other intellectual property 9,907,666 2,848,532
Other assets 12,667 318,286
Deferred income taxes 10,619 73,550
----------- -----------
42,832,742 23,604,994
=========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities
Current portion of long term debt 1,002,356 2,101,799
Bank overdraft and factoring facility 2,941,899 745,724
Trade accounts payable 7,225,415 2,162,257
Other provisions and accruals 6,304,376 1,923,371
Income taxes payable 1,599,287 1,518,095
----------- -----------
Total current liabilities 19,073,333 8,451,246
Long term debt 4,293,682 2,361,372
----------- -----------
Total liabilities 23,367,015 10,812,618
Stockholder's investment
Common stock 41,857 41,701
Capital in excess of par 22,059,698 18,518,986
Retained earnings (914,818) (3,887,407)
Foreign currency translation adjustments (1,728,317) (1,888,211)
Income restricted as to distribution 7,307 7,307
----------- -----------
42,832,742 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
MARCH 31, 1997 AND 1996
March 31, 1997 March 31, 1996
$ $
Revenues 18,729,799 4,186,375
=========== ===========
Operating expenses
Cost of sales 10,491,146 2,577,859
Selling, general and administrative expense 6,809,021 1,455,540
----------- -----------
17,300,167 4,033,399
Operating income 1,429,632 152,976
Other income 88,920 104,211
Interest expense (195,879) (100,652)
----------- -----------
Income before income taxes 1,322,673 (156,535)
Provision for taxes on income (176,575) (16,715)
----------- -----------
Net Income 1,146,098 (139,820)
=========== ===========
Net profit per share 0.23 (0.12)
Weighted average number 5,090,062 1,209,349
of shares outstanding
CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED
MARCH 31, 1997, AND 1996
March 31, 1997 March 31, 1996
$ $
Revenues 44,536,940 13,406,104
=========== ===========
Operating expenses
Cost of sales 24,543,952 8,128,789
Selling, general and administrative expense 16,050,703 4,274,943
----------- -----------
40,594,655 12,403,732
Operating income 3,942,285 1,002,372
Other income 599,521 269,292
Interest expense (770,087) (777,004)
----------- -----------
Income before income taxes 3,771,719 494,660
Provision for taxes on income (799,130) (296,486)
----------- -----------
Net Income 2,972,589 (198,174)
=========== ===========
Net profit per share 0.61 (0.16)
Weighted average number 4,902,280 1,209,349
of shares outstanding
4
<PAGE>
FIRST SOUTH AFRICA CORP., LTD
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS
ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
ACTUAL INCEPTION TO
March 31, March 31,
1997 1996
$ $
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) 2,972,589 (362,228)
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation 1,189,800 493,019
Amortization of other assets 208,524 0
Net gain on sale of assets (18,012) 0
Deferred income taxes (240,635) 29,559
Effect of changes in assets and liabilities 1,586,881 314,860
----------- -----------
Net cash provided by operating activities 6,180,417 416,092
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property, plant and equipment (2,526,740) (86,179)
Other assets (acquired)/disposed 287,069 (414,264)
Increase in loans to related companies 2,891 0
Acquisition of subsidiaries (net cash of $334,405) (7,935,813) --
----------- -----------
Net cash used in investing activities (10,172,593) (500,443)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings/(repayments) in bank overdrafts 1,867,474 (808,287)
Net borrowings of long term debt 720,806 366,503
Net repayments in loans from related companies -- (3,294)
Net borrowings in short term debt (1,099,443) 348,975
Other -- 0
----------- -----------
Net cash provided by financing activities (1,488,837) 8,169,324
----------- -----------
Effect of exchange rate changes on cash and assets (66,626) (52,583)
----------- -----------
Net increase/(decrease) in cash on hand (2,436,713) 8,137,556
Cash on hand at beginning of period 4,682,035 12,125
----------- -----------
Cash on hand at end of period 2,245,322 8,149,681
=========== ===========
</TABLE>
5
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT
FOR THE PERIOD JUNE 30, 1996 TO MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Capital stock
First South Income Foreign
Africa Corp., Capital in Retained restricted Currency
Ltd. excess of par earnings as to Translation
$ $ $ distribution Adjustments Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 41,805 20,746,840 (2,060,916) 7,307 (2,653,489) 16,081,547
Issuance of stock to acquire subsidiary
companies 52 1,312,858 -- -- -- 1,312,910
IPO Expenses written off (145,000) (145,000)
Net profit for the period -- -- 1,146,098 -- -- 1,146,098
Translation adjustment -- -- -- -- (925,172) (925,172)
----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 1997 41,857 22,059,698 (914,818) 7,307 (1,728,317) 19,465,727
=========== =========== =========== =========== =========== ===========
</TABLE>
6
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
1. Organization
------------
First South Africa Corp., Ltd. (the "Company"), was incorporated on September 6,
1995. The purpose of the Company is to acquire, own and operate closely-held
companies in South Africa with annual sales in the range of approximately $5
million to $50 million. 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.
On July 1, 1996 the Company acquired the business and assets of Astoria Bakery
CC and 100% of the common stock of 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.
On November 1, 1996 the company acquired 100% of the common stock of Seemanns
Meat Products (Proprietary) Limited and Hammer Street Investments (Proprietary)
Limited for an aggregate net purchase price of $3,810,054. 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 January 1, 1997 the company acquired the business and assets of Gull Foods CC
and 100% of the common stock of Trek Biltong (Proprietary) Limited for an
aggregate net purchase price of $5,293,079. 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.
Gull Foods Group
$
----------------
Acquisition costs
Stock in lieu of cash 1,312,910
Cash consideration 3,980,169
Purchase price to be allocated 5,293,079
Summary allocation of purchase price
Current assets 2,105,052
Property, plant and equipment 640,824
Recipes and other intangibles 3,920,291
---------
Total assets acquired 6,666,167
Current liabilities 1,146,049
Long term debt 227,039
Total liabilities assumed 1,373,088
---------
5,293,079
=========
7
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued).
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, manufacture, packaging, and distribution
of fresh processed meat products, and manufacture, packaging and distribution of
specialized added value food products.
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
December 31, 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.
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
8
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued).
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:
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 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.
o 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 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 estimated useful lives of 50 years.
9
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued).
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.
Fair Value of Financial Instruments
- - -----------------------------------
As of March 31,1997 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 consists 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 December 31, 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 three years from the date of this Prospectus 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.
10
<PAGE>
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued).
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 March 31, 1997, and as a result of the Offering, there were 2,300,000
Class A Warrants and 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.
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 this 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
holders of the Class B Common Stock in exchange for their 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 commons shares.
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
shares, in terms of this escrow agreement.
5. Inventories
-----------
Inventories consist of the following
March 31, June 30,
1997 1996
$ $
---------- ----------
Finished goods 3,352,278 2,077,679
Work-in-progress 697,030 272,377
Raw materials 2,424,214 501,562
Supplies 588,279 93,055
---------- ----------
Inventories (gross) 7,061,801 2,944,673
Less: Valuation allowances (400,238) (433,805)
---------- ----------
Inventories (net) 6,661,563 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.
January 1, to July 1, to
March 31, March 31,
1996 1996
$ $
---------- ----------
Revenues 16,074,771 50,658,928
---------- ----------
Net income 688,343 2,522,001
---------- ----------
Net profit per share 0.13 0.49
---------- ----------
Weighted average number of shares outstanding 5,176,084 5,176,084
11
<PAGE>
FIRST SOUTH AFRICA CORP., LTD
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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,
Seemanns Meat Products and Hammer Street Investments and do not 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.
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, Astoria Bakery, Seemanns Meat
Products and Gull Foods. 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
March 31, 1996 until March 31, 1997 was approximately 9.8%
The average rate for the South African Rand against the U.S. dollar for the
periods under discussion were as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
March 31, 1996 March 31, 1997 March 31, 1996 March 31, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$1 = R3.84 $1 = R4.49 $1 = R3.72 $1 = R4.52
Depreciation of 16.9% 21.5%
</TABLE>
Based on these figures, in evaluating the comparable sales and income numbers
for the Company for the three months ended March 31, 1997 versus the comparable
periods in 1996; 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 and six month periods ended March
31, 1997 versus the comparable period in 1996 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 7 %
in inflation-adjusted Rand growth for the three month period ended March 31,
1997 and more than 11 % in inflation-adjusted Rand growth for the nine month
period ended March 31, 1997, in order to report sales and profits in U.S.
dollars greater than those in the comparable periods in 1996.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
Sales for the three months ended March 31, 1997 were $18,729,799 versus
$4,186,375 for the comparable period in 1996. This increase is primarily due to
the acquisitions the Company has completed since its IPO on January 24, 1996.
All results for the three months ended March 31, 1996 relate to the results of
L.S. Pressings, Starpak and Europair alone.
Cost of goods sold for the three months ended March 31, 1997 were $10,491,146 or
56 % of sales versus $ 2,577,859 or 61.6%, for the comparable period in 1996.
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 $6,809,021 for the three months
ended March 31, 1997 or 33.6% of sales versus $1,455,540 for the comparable
period in 1996 or 34.7% of sales.
Interest expenses were $195,879 for the three months ended March 31, 1997 versus
$100,562 for the comparable period in 1996. The increase is primarily
attributable to the increase in the Company's bank borrowings and long term debt
for the nine months ended March 31, 1997 as compared to the comparable period in
1996. 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 March 31, 1997 was $88,920 versus
$104,211 in the comparable period in 1996. This is primarily made up of rebates
and other supplier discounts paid to the Company's operating subsidiaries.
Net profit for the three month period ended March 31, 1997, $1,146,098 or a gain
of $.23 a share as compared to a net loss of $139,820 or $.12 a share in the
comparable period in 1996. For purposes of its earning per share calculation for
the three months ended March 31, 1997, the Company had 5,090,062 shares
outstanding ( includes 1,033,583 shares to be issued in fulfilment of
acquisition agreements entered into during the past six months)as opposed to
1,209,349 for comparable period in 1996.
Nine Months Ended March 31, 1997 Compared to Nine Months Ended March 31, 1996
Sales for the nine months ended March 31, 1997 were $44,536,940 versus
$13,406,104 for the comparable period in 1996. This increase is primarily due to
the acquisitions the Company has completed since its IPO on January 24, 1996.
All results for the nine months ended March 31, 1996 relate to the results of
L.S.
Pressings, Starpak, and Europair alone.
Cost of goods sold for the six months ended March 31, 1997 were $24,543,952, or
55.1 % of sales versus $ 8,128,789 or 60.6%, for the comparable period in 1996.
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 $16,050,703 for the nine months
ended March 31, 1997 or 36% of sales versus $4,274,943 for the comparable period
in 1996 or 31.9% of sales. This increase can primarily be attributed to the
increased ratio of sales costs to revenues generated in the Company's processed
food 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 nine months ended March 31, 1997 which
were not incurred in the comparable period in 1996.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Interest expenses were $770,087 for the nine months ended March 31, 1997 versus
$777,004 for the comparable period in 1996. The interest expense for the nine
months ended March 31, 1996 includes a one time interest expense of $418,167
related to the interest charged to the Company as a result of its Bridge
Financing transaction which took place in November 1995. The operating interest
expenses of the Company's subsidiaries has increased from $358,837 to $770,087.
The increase is primarily attributable to the increase in the Company's bank
borrowings and long term debt for the nine months ended March 31, 1997 as
compared to the comparable period in 1996. 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 nine months ended March 31, 1997 was $599,521 versus
$269,292 in the comparable period in 1996. This is primarily made up of rebates
and other supplier discounts paid to the Company's operating subsidiaries.
Net profit for the nine month period ended March 31, 1997, was $2,972,589 or a
gain of $.61 a share as compared to a net loss of $198,174 or $.16 a share in
the comparable period in 1996. For purposes of its earning per share calculation
for the nine months ended March 31, 1997, the Company had 4,902,280 shares
outstanding ( includes 1,033,583 shares to be issued in fulfilment of
acquisition agreements entered into during the past six months)as opposed to
1,209,349 for the comparable period in 1996.
Liquidity and Capital Resources
- - -------------------------------
The Consolidated Balance Sheet as at, March 31, 1997, shows cash on hand of
$2,245,322 of which $2,162,918 was held by the operating subsidiaries. The
remainder reflects cash on hand from the net proceeds realized by the Company
from its IPO in January 1996.
The Company's consolidated working capital as at, March 31, 1997, was
$1,632,720. As at March 31, 1997, the Company had a total of $8,237,937 in bank
debt of which $3,944,255 was classified as current of which $2,941,899 reflected
bank overdrafts payable under the Company's operating subsidiaries' working
capital lines of credit.
Cash flows provided by operating activities for the nine months ended March 31,
1997 and March 31, 1996, totaled $6,180,417 and $416,092, respectively. Cash
flows used in investing activities for the six months ended March 31, 1997 and
March 31, 1996 totaled $10,172,593 and $500,443, respectively. For the nine
months ended March 31, 1997 $7,935,813 was utilized for the acquisition of
subsidiaries. In the comparable period in 1996 net cash used in investing
activities was primarily attributable to the purchase of assets. Net cash
provided by financing activities was ($1,488,837) during the nine months ended
March 31, 1997 while $8,169,324 was provided in the corresponding period in the
prior year. This decrease in the net cash provided by financing activities is
primarily attributable to the fact that the Company completed its initial public
offering in 1996 during the period in question.
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 its initial public 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
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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
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 5. SUBSEQUENT EVENTS
On April 21, 1997, the Company announced that the first tranche of a private
placement consisting of seven year senior subordinated convertible debentures
paying interest of 9% per annum on a quarterly basis had been completed.
Conversion price is $6.00 per share and the debentures are callable after one
year if First South Africa's common stock trades at more than $9.00 per share.
The offering, which expires May 31, 1997, can raise up to $10 million. The
placement agent for this financing is Value Investing Partners, Inc. To date,
the Company has received subscriptions for $5.375 million of these debentures.
The Company anticipates that it will ultimately raise between $6 million to $10
million in this debenture placement.
On April 23, 1997, the Company announced that its wholly owned subsidiary First
SA Food Holdings (Pty) Ltd had acquired the business of Gull Foods (Pty) Ltd., a
manufacturer of a broad range of fine quality value added prepared foods. The
terms of the acquisition call for an initial payment of approximately $3.1
million in cash and 245,000 shares of common stock. Three additional payments,
the value of which are contingent upon future performance shall be made over the
next three years. During its last fiscal year, Gull generated sales of
approximately $10.5 million.
On April 29, 1997, the Company announced that its subsidiary First SA Food
Holdings (Pty) Ltd. comprising all its food related interests, will be listed on
the Johannesburg Stock Exchange in early June 1997. First South Africa Corp.
intends to sell a 30% stake in this subsidiary and anticipates that it will
raise approximately $17 million.
15
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company filed an amended Form 8-K/A with the Commission on March 14, 1997.
This form was an amendment to the Form 8-K filed on October 24, 1996 which
stated that First South Africa Corp., Ltd., through its wholly owned subsidiary
corporation, First South African Holdings (Pty) ltd., acquired all of the
outstanding stock and assets of Astoria Bakery CC and Astoria Bakery Lesotho
(Pty) Ltd.
The following financial statements were filed with the above-referenced 8-K/A:
(a) Financial Statements of Business Acquired
Financial statements of Astoria Bakery CC ("ABCC") and Astoria Bakery
Lesotho (Proprietary) Limited ("ABL"):
(i) Unaudited Combined Balance Sheet at June 30, 1996;
(ii) Unaudited Combined Statements of Income for the four months ended
June 30, 1996 and 1995;
(iii)Unaudited Combined Statements of Cash Flows for the four Months
ended June 30, 1996 and 1995;
(iv) Notes to the Unaudited Combined Financial Statements for the four
months ended June 30, 1996 and 1995;
(v) Audited Combined Balance Sheet at February 29, 1996;
(vi) Audited Combined Statements of Income for the years ended
February 29, 1996 and February 28, 1995;
(vii)Audited Combined Statements of Cash Flows for the years ended
February 29, 1996 and February 28, 1995;
(viii) Audited Combined Statements of Changes in Stockholders'
Investment for the years ended February 29, 1996 and February 28,
1995; and
(ix) Notes to the Audited Combined Financial Statements for the years
ended February 29, 1996 and February 28, 1995.
(b) Pro Forma Financial Information
Provided herein on pages F-15 to F-17 are the following pro forma
consolidated financial statements for First South Africa Corp., Ltd.,
ABCC and ABL:
(i) Unaudited Pro Forma Consolidated Balance Sheet at June 30, 1996;
(ii) Unaudited Pro Forma Consolidated Statement of Income for the year
ended June 30, 1996; and
(iii)Notes to Unaudited Pro Forma Balance Sheet and Statement of
Income for the year ended June 30, 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: May 14, 1997
FIRST SOUTH AFRICA., LTD.
/s/ Clive Kabatznik
----------------------------------
Clive Kabatznik
Chief Executive Officer, President
and Chief Financial Officer
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