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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission file number 0-27494
FIRST SOUTH AFRICA CORP., LTD.
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(Exact name of Registrant as specified in its charter)
Bermuda N/A
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Clarendon House, Church Street, Hamilton HM CX, Bermuda
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(Address of Principal Executive Offices with Zip Code)
Registrant's telephone number, including area code (441) 295-1422)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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("Common Stock")
Class A Redeemable Warrants
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("Class A Warrants")
Class B Redeemable Warrants
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("Class B Warrants")
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. [_]
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing. (See
definition of affiliate in Rule 405, 17 CFR 230.405).
The aggregate market value of the Registrants Common Stock held by
non-affiliates of the Registrant as of September 30, 1997, was $21,175,157.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
As of September 25, 1997 there were 3,694,498 shares of the Registrant's Common
Stock outstanding and 1,822,500 shares of the Registrant's Class B Common Stock.
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PART 1
ITEM 1. DESCRIPTION OF BUSINESS
The Company was organized to acquire, own and operate seasoned,
closely held companies in South Africa with annual sales in the range of
approximately $5 to $50 million. The Company has acquired through FSAH, twelve
businesses based in South Africa that are as a group engaged in the following
industry segments:
1. Packaging equipment and materials.
2. Metal washers used in the fastener industry.
3. Air conditioning and refrigeration machinery components.
4. Processed foods.
Upon completion of its initial public offering in January 1996, the
Company acquired Starpak (Pty) Limited, which is engaged in the manufacture of
high quality plastic packaging machinery; L.S. Pressing (Pty) Limited, which is
engaged in the manufacture of washers for use in the fastener industry; and
Europair Africa (Pty) Ltd., which is engaged in the manufacture and supply of
air conditioning products. In April 1996, L.S. Pressings acquired the assets and
business of Paper & Metal Industries, a small manufacturer of rough washers for
use in the fastener industry. In April 1996, Europair acquired the assets and
business of Universal Refrigeration, an agent and supplier of refrigeration
products. In June 1996, FSAH acquired Piemans Pantry, a manufacturer and
distributor of high quality meat pies. In October 1996, FSAH acquired Astoria
Bakery and Astoria Bakery Lesotho, manufacturers and distributors of speciality
baked breads and confectionary products. In November 1996, the Company acquired
the assets of Alfapak (Pty) Ltd., a manufacturer of plastic film and printed
plastic bags. In November 1996, Europair acquired the assets and business of
First Strut (Pty) Ltd, a manufacturer of electrical trunking conduits. In
January 1997, FSAH acquired Seemann's, a manufacturer and distributor of a wide
range of processed meat products. In April 1997, FSAH acquired the business and
assets of Gull Foods, a manufacturer of value-added prepared foods. In May 1997,
the Company acquired Pakmatic Company (Pty), Ltd., a distributor of automatic
process and packaging machinery. In June 1997, FSAH transferred all of the
shares of Piemans Pantry, Astoria, Seemanns and Gull Foods to FSA Food and
completed (i) the initial public offering in South Africa of 5,000,000 ordinary
shares of common stock of FSA Food, which shares are listed on the Johannesburg
Stock Exchange, (ii) an institutional private placement in South Africa of
20,000,000 ordinary shares of common stock of FSA Food, and (iii) a private
placement of 12,500,000 ordinary shares of common stock to management and staff.
As of August 11, 1997, FSAH owned 70% of the issued and outstanding shares of
FSA Food.
FSAH manages the Company's business interests in South Africa. FSAH
monitors the operational performance of its subsidiaries and seeks out
prospective acquisition candidates in businesses that complement or are
otherwise related to the Company's existing acquisitions, and in other
businesses that may be identified by the Company's management.
HISTORY
The Company was founded in September 1995 in response to management's
perception of a growing global interest in South Africa as an emerging market.
The Company believes that the recent relaxation of trade and financial sanctions
and the reintegration of South Africa into the world economic community may
increase the opportunity for improved growth in the South African economy in
general and more particularly in the industry segments in which the Company is
engaged. See Note 18 of the Notes to the Consolidated Financial Statements with
respect to certain financial information relating to industry segments of the
Company.
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STRATEGY
The Company intends to continue to focus its efforts on businesses
related to infrastructure development and consumer goods that the Company
believes are well situated to benefit from South Africa's on-going
transformation into an active participant in the global market place. The
Company's strategy is to expand and improve its current operations in the
industry sectors in which its operating subsidiaries are currently engaged, and
in other related industry sectors, by acquiring mid-size, closely held companies
in South Africa that operate efficiently, profitably and have seasoned
management. The Company believes that it can acquire these types of companies at
lower multiples of earnings than comparable companies would command in the
United States. The Company seeks to benefit from the combination of business
factors that South Africa has to offer, which includes a skilled work force,
effective and expanding infrastructure and increasing access to foreign markets.
The Company may also consider investments in businesses that are located in
other countries, or are engaged in other industries, and in South African
companies, the securities of which are publicly traded, that meet the Company's
price and quality requirements. The Company has and will continue to identify
potential acquisition candidates through the industry contacts of management and
the managements of its subsidiaries, as well as through other general business
sources. To date, the Company has financed its acquisitions through a
combination of cash, issuance of shares of stock of FSAH or the Company and debt
financing. The Company anticipates that it will continue to follow similar
financing strategies in its future acquisitions.
DESCRIPTION OF BUSINESSES IN EACH OF THE COMPANY'S INDUSTRY SEGMENTS
VALUE ADDED SPECIALTY FOODS
PIEMANS PANTRY
Piemans Pantry was acquired by the Company in June 1996. Piemans
Pantry manufactures, sells and distributes quality meat, vegetarian and fruit
pies, both in the baked and frozen, unbaked form. The business manufactures,
markets and distributes from its headquarters in Krugerdorp, Gauteng and has a
regional sales office in KwaZulu-Natal. Piemans Pantry strives to emphasize the
highest standards of quality control and consistency of product. It's major
customers are independent retail baker shops, pie shop franchises, in-store
bakeries, national bread bakery groups, institutional cafeterias and convenience
stores. Piemans Pantry's sales are conducted through its own employees, as well
as through distributors/agents. Approximately 60% of Piemans' sales are
internally generated with the remainder through agents. During the last fiscal
year the Spar Group (a cooperative of independent supermarkets) accounted for
19% of the Piemans Pantry's sales, while the London Pie Company (a pie store
franchise chain) contributed 15% of Piemans Pantry's sales. In the previous two
fiscal years, no customer accounted for more than 20% of Piemans Pantry's sales.
Piemans Pantry competes on the basis of quality. It faces competition
from a number of manufacturers, primarily those supplying to the lower end of
the market. Piemans Pantry believes that it has only one significant competitor
and that its market share is currently around 20%. Piemans Pantry's business is
slightly stronger in the months of July through October as well as in December.
However, these increases are not significant to make this a seasonal business.
Piemans Pantry manufactures to order on a daily basis. Backlog is therefore not
counted, nor is it relevant in the analysis of Piemans Pantry's business.
Piemans Pantry's principal suppliers for its pastry and filling
ingredients are both local and foreign companies. All suppliers except one have
immediate alternative sources. Piemans Pantry selects its suppliers on the basis
of quality and price and to date it has had no difficulty in obtaining
sufficient supplies.
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ASTORIA BAKERY
Astoria Bakery manufactures, sells and distributes high margin
specialty breads such as special rye breads in the Republic of South Africa from
its bakery in Randburg. Its major customer is Woolworths, a leading South
African high-end retail chain, accounting for approximately 65% of sales. In the
previous two fiscal years, Woolworths accounted for approximately 57% of
Astoria's sales. Astoria strives to emphasize the highest standards of quality
as well as uniqueness of product in its specialty lines. It faces competition
from a number of manufacturers, however, Astoria believes that it dominates the
market for specialty breads in Gauteng.
In addition, Astoria Bakers Lesotho manufactures, sells and
distributes staple bread to the Lesotho market, from its bakers in Maseru, the
capital of Lesotho. In Lesotho, Astoria has one major competitor who has 40% of
the Lesotho bread market. Astoria also has approximately 40% of this market and
the balance is controlled by in-store bakeries.
GULL FOODS
Gull Foods manufactures and sells a wide range of prepared food
products. Gull's product line includes over 150 products ranging from hamburger
patties, prepared sandwiches, salads, prepared pastas, pizzas, and flavored
breads. Gull manufactures and markets from its headquarters in Bronkhorstpruit,
a small town east of Pretoria. It strives to emphasize the highest standard of
quality in all its product lines. Its major customer is Woolworths, (a large
South African department store chain) which in Gull's last three fiscal years
has accounted for approximately 86% of Gull's revenues. Gull's remaining
business is derived from sales to the airline and institutional catering
industries.
Gull competes on the basis of quality and range of product. It
believes that it does not face direct competition in the Gauteng area of South
Africa and has a number of smaller competitors who supply to Woolworths in the
South African Cape. All of the products sold to Woolworths are marketed under
the Woolworths label. Gull generally sees an increase in its business during
November and December, as well as a seasonal increase during the Easter period.
However, these increases are not significant enough to make Gull a seasonable
business.
Gull sells its products to order and therefore does not carry a
backlog. Gull's suppliers are all located in South Africa. All of Gull's
suppliers have immediate alternative sources. Gull selects its suppliers on the
basis of quality and price and to date has had no difficulty obtaining adequate
supplies.
SEEMANNS
Seemanns manufactures, sells, and distributes a wide range of
processed meat products including products typically found in retail butcheries,
as well as high margin processed and smoked meat products. Seemanns
manufactures, markets and distributes from its headquarters in Randburg. It
strives to emphasize the highest standard of quality in all its product lines
and has become a well known brand name in its specialty areas. Its major
customers are its own retail outlets, accounting for approximately 35% of its
revenues, as well as the Pick n' Pay Group, one of South Africa's largest
supermarket chains, which accounted for approximately 35% of Seemanns' sales in
Seemanns fiscal year ending February 28, 1997. In the previous two years, Pick
n' Pay accounted for more than 10% but less than 20% of Seemanns' sales. In
addition, Seemanns sells to a number of institutional catering organizations,
restaurant chains, and other institutional customers. Seemanns competes on the
basis of quality and range of product. It faces competition from retail butchery
chains, as well as supermarket groups. As a manufacturer, Seemanns believes that
it has established a strong niche in the
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market for high quality smoked and processed meat products in the Johannesburg
area. Seemanns generally sees an increase in its business during November and
December, as well as a seasonal increase during the Easter period. However,
these increases are not significant enough to make Seemanns a seasonable
business.
Seemanns carries significant amounts of raw meat inventory, as it
purchases supplies on a market related basis. When raw materials are cheap,
Seemanns typically uses its strong cash resources, to stock pile meat at
favorable prices. On the manufacturing side however, Seemanns sells its
processed meats on a daily basis and therefore does not carry a significant
backlog of orders. Seemanns' principal suppliers are mostly local. All suppliers
have immediate alternative sources. Seemanns selects its suppliers on the basis
of quality and price and to date has had no difficulty obtaining adequate
supplies.
PLASTIC PACKAGING MACHINERY
STARPAK
Starpak manufactures high quality plastic packaging machinery and
does business under the name of Levy and Smith. Starpak's operations are located
in Johannesburg with service offices in Durban and Cape Town. Machinery
manufactured by Starpak is generally used by manufacturers to provide low cost
and high quality packaging for a broad spectrum of consumer goods. Its machines
are used in industries such as food, baking, beverages, cosmetics,
pharmaceuticals, chemicals, motor oils, printing, hardware and general trade.
Starpak markets its products directly and through independent sales agents. Over
96% of Starpak's sales are generated through its in-house sales force. During
the last fiscal year, no one customer accounted for more than 10% of Starpak's
annual sales. Prior to such time, Albany Bakeries, which developed a new bread
packaging product, and the Premier Group, which purchased a wide range of bakery
packaging equipment, accounted for more than 10% of Starpak's annual sales in
the previous two fiscal years.
Starpak competes on the basis of quality. Starpak faces competition
from major competitors whose machines are frequently less expensive, although
Starpak believes that they are of lower quality than machines produced by
Starpak. To the best of its knowledge, management estimates that the total
market for shrink packaging machinery in South Africa in 1996 was approximately
$11,100,000. Of this total market, Starpak has an estimated 46% share, with the
remainder of the market being serviced by a number of small packaging machine
manufacturing companies. In the past, Starpak has experienced a seasonal
down-turn in its business during the period commencing mid-December and ending
at the end of February. This down-turn appears to be due to the main summer
holidays in South Africa that occur during such period. The most active period
for receipt of orders has historically been from July to the beginning of
December. As of July 31, 1997, Starpak's backlog of firm orders was
approximately $920,784 compared to approximately $975,074 as of July 31, 1996.
Although Starpak's principal suppliers are foreign companies, each
principal supplier is represented locally in South Africa and to date, Starpak
has not experienced material difficulties or delays in obtaining products or
supplies. Almost all local suppliers are on thirty-day terms, while items
purchased directly from overseas suppliers require irrevocable letters of
credit. Motors, which comprise approximately 5% of the cost of the machines, are
imported directly from non-African sources. Other products obtained by Starpak
from its suppliers include electronic controllers, pneumatics, overloads,
contractors, switches and Teflon tape.
AIR CONDITIONING AND REFRIGERATION
EUROPAIR
Europair manufactures and supplies products, parts and accessories to
the heating, ventilation and air conditioning industry ("HVAC") in South Africa.
Europair's operations are located in Johannesburg with branch offices in Durban,
Cape Town, Port Elizabeth, East London, Nelspruit and Petersburg. Europair seeks
6
to provide a single source of components and accessories for original equipment
manufacturers, contractors and duct shops in South Africa and neighboring
countries. Its products include grilles, flexible ducting, flanging, insulation,
humidifiers, fire dampers and other accessory products for the air conditioning
industry. Europair markets its products primarily through its sales personnel
directly to air conditioning and building contractors as well as to other
agents.
Europair believes it is unique in South Africa in its increasing
capacity as a full-range supplier to the HVAC industry and believes it does not
currently compete directly with any supplier that offers as comprehensive a
range of products. Europair does, however, have a number of competitors in each
of its product groups. Increasingly, the threat of competition is presented by
less expensive imports, although such imports are sometimes lower quality and
the importers are generally unable to stock a broad range of products. As
Europair is in the air conditioning and refrigeration business it experiences a
seasonality that corresponds with the summer months in the Southern hemisphere.
Typically, sales are higher in the months of October through February.
Europair's firm order backlog does not represent a material portion of its
annual sales.
Europair relies on local suppliers to provide it with aluminum
extrusions, aluminum foil, fiberglass and other insulation material, fire
dampers, steel and wire in the manufacturing of Europair's products and for
inclusion in other products sold by Europair. The principal foreign suppliers of
Europair provide it with humidifiers, glue, air valves, vinyl, polyester, access
doors and fans. Ordinarily, Europair does not experience material difficulty in
procuring the raw materials required for its production processes. Aluminum
prices are, however, commodity driven and change frequently. The Durban factory
experienced a substantial inventory shortage with respect to its aluminum
requirements in October and November 1994 due to a countrywide shortage of
aluminum. In response to such shortage Europair has accumulated and maintains a
substantial stockpile of aluminum.
UNIVERSAL REFRIGERATION
Universal Refrigeration has been renamed Europair Refrigeration, it
is a wholly owned subsidiary of Europair engaged as an agent in the distribution
and supply of various refrigeration related products. Its sales are generated
through Europair's existing national sales network.
FASTENER INDUSTRY
L.S. PRESSINGS
L.S. Pressings and its subsidiary, Paper & Metal Industries,
manufacture washers for supply to distributors of nuts and bolts who in turn
distribute L. S. Pressing products to end users in various industries and
markets. L.S. Pressings' operations are located in Johannesburg. L.S Pressings
manufactures a full range of washers to metric, capital imperial as well as U.S.
specifications. In addition, it manufactures special size washers to suit
customers specific requirements. Washers are manufactured from mild steel, black
(heat tempered) steel, copper, brass, fiber and various plastics. Washers are
used in numerous industries, including automotive, electrical, furniture and
construction industries. They are also used for sealing purposes, water piping
and as a non-conductive element. L.S. Pressings has no sales representatives
with orders being placed directly by customers. Substantially all of the
customers are distributors who resell the washers to end users.
L.S. Pressings believes that it is the single largest supplier of
washers in the South African market, although a number of competitors compete
with L.S. Pressings in particular niches. L.S. Pressings' strongest competition
is from importers of standard size washers manufactured in Taiwan. However,
importers of Taiwanese washers generally do not offer a "one-stop" source of
supply and L.S. Pressings believes it competes successfully with respect to
pricing. As a result, the importers have not had a substantial impact on
7
L.S. Pressings' sales although there can be no assurance that this will remain
the case. L.S. Pressings believes that no other South African manufacturer of
washers offers a comparable range of products. L.S. Pressings typically
manufactures to order and delivers within approximately 10 days of order.
Backlog numbers are therefore not significant for L.S. Pressings and tend to
vary widely. However, as of July 31, 1997, L.S. Pressings' firm order backlog
was $46,758 as compared with $43,377 on July 31, 1996.
All of L.S. Pressings' suppliers are local companies. In the last
year there has been a shortage of scrap metal in South Africa, although L.S.
Pressings has had no material problems obtaining scrap required for its
operations. Spring washers, which comprise approximately 10% of L.S. Pressings'
annual sales, are manufactured using a different process to that adopted by L.S.
Pressings. As a result, L.S. Pressings purchases spring washers from
locally-represented suppliers. Apart from the month of December when its
factories are closed, there is no particular seasonality to these businesses.
REGULATION
The Company's South African business operation is subject to a number
of laws and regulations governing the use and disposition of hazardous
substances, air and water pollution and other activities that effect the
environment. The Company's management believes that each of its subsidiaries is
in substantial compliance with applicable South African law and the regulations
promulgated under such law and that no violation of any such law or regulation
by any such company has occurred which would have a material adverse effect on
the financial condition of the Company.
EMPLOYEES
As of September 25, 1997, in addition to its President who devotes
substantially all of his business time to the Company, the Company had only one
full-time salaried employee. "See Management Employment Agreements". As of such
date, FSAH had only four full-time salaried employees. The Company intends to
add employees as necessary to meet management and other requirements from time
to time. On July 1, 1996, FSAH entered into an employment agreement with
Cornelius J. Roodt to act as its Managing Director. See "Management- Employment
Agreements". As of September 25, 1997, the Company's operating subsidiaries
employed approximately 2,500 people.
ITEM 2.
PROPERTIES
The Company's principal executive offices are located at Clarendon
House, Church Street, Hamilton, HM 11, Bermuda, which space is made available to
the Company pursuant to a corporate services agreement entered into with a
corporate services company in Bermuda.. The Company's U.S. subsidiary, First
South African Management Corp. (FSAM) has its principal executive offices at
2665 South Bayshore Drive, Suite 702, Coconut Grove, Florida 33133. FSAM's
offices consist of approximately 2,000 square feet of office space in an office
section of Coconut Grove, Florida, which FSAM occupies pursuant to a three-year
lease agreement (expiring in 1999) with a monthly rental of $2,600. FSAH's
principal executive offices are located in the facilities of Europair in South
Africa.
Starpak and L.S. Pressings operate out of a facility made up of
adjacent buildings owned by Levy & Smith Properties (Proprietary) Limited, a
wholly-owned subsidiary of Starpak. The facility has a total lot size of
approximately 30,000 square feet. The facility has three floors at 85% coverage
equal to a total of 76,500 square feet. The Company anticipates that it will
require additional space and is considering the rental of additional space at a
nearby location. Starpak also has branches in Durban and Cape Town, South
Africa.
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Europair operates from premises and facilities that it owns in
Gauteng and from leased premises in KwaZulu-Natal, Western Cape and the Eastern
Cape. Pursuant to an option granted by the Company, Mr. Bruce Thomas (the Chief
Executive Officer of Europair) has acquired Europair's premises for $890,868 and
entered into a ten year lease (expiring in 2006) with Europair with respect to
such premises for an initial rental rate of $110,111 per annum. Europair
believes this property is well suited to Europair's operations and can
accommodate relatively large increases in manufacturing and storage. Europair's
other leased properties are located in Durban, Cape Town and Port Elizabeth.
Piemans Pantry operates from premises and facilities that it owns in
Krugersdorp. The facility has two floors with a total size of 38,000 square
feet. In addition, Piemans Pantry rents a retail facility in Krugersdorp, as
well as an office space in KwaZulu-Natal.
Paper & Metal Industries rents two adjacent industrial properties in
Germiston, Gauteng. The total size of the facility is 8,975 square feet. Paper &
Metal have a two year lease (expiring in 1998) at approximately $34,744 per
annum.
Astoria leases approximately 20,000 square feet of space in Randberg
for which it pays an annual rental amount of approximately $100,000 (pursuant to
a lease expiring in 2006). Astoria also leases approximately 6,000 square feet
in Lesotho for which it pays an annual rental amount of approximately $7,000
(pursuant to a lease expiring in 2006).
Gull operates from premises and facilities that it rents in
Bronkhorstspruit. Such premises include approximately 52,000 square feet of
space. Rental cost is approximately $44,000 per annum with a lease term of five
years. In addition, Gull rents a small manufacturing and retail facility of
approximately 4,000 square feet in downtown Johannesburg. Rental cost of these
premises is approximately $8,000 per annum with a lease term of five years.
Seemanns operates from premises and facilities that it owns in
Randburg. These premises include the retail outlet and comprises approximately
44,000 square feet.
ITEM 3.
LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries are subject to any
material legal proceedings.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On January 24, 1996 , the Company's Common stock and Units were
listed for quotation on the SmallCap Market on the Nasdaq System under the
symbols FSACF and FSAUF, respectively. The following table sets forth, for the
periods indicated the high and low bid prices for the Common Stock and Unites as
reported by Nasdaq. Quotation reflect prices between dealers, without retail
mark-up, mark down or commissions and may not necessarily represent actual
transactions.
High Bid Low Bid
-------- -------
Common Stock
- ------------
1996
3rd Quarter $ 4.75 $ 2.88
4th Quarter $ 6.00 $ 3.00
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High Bid Low Bid
-------- -------
1997
1st Quarter $ 6.50 $ 4.50
2nd Quarter $ 5.75 $ 4.00
3rd Quarter $ 7.38 $ 3.50
4th Quarter $ 8.75 $ 4.63
1998
1st Quarter(through September 24, 1997) $ 8.69 $ 7.13
Units
1996
3rd Quarter $ 6.50 $ 5.38
4th Quarter $ 10.00 $ 5.25
1997
1st Quarter $ 9.72 $ 6.75
2nd Quarter $ 11.00 $ 8.25
3rd Quarter $ 9.75 $ 6.75
4th Quarter $ 14.13 $ 6.38
1998
1st Quarter(through September 24, 1997) $ 13.75 $10.00
Class A Warrants
1996
3rd Quarter $ 3.00 $1.50
4th Quarter $ 2.87 $1.58
1997
1st Quarter $ 3.00 $2.25
2nd Quarter $ 5.00 $2.75
3rd Quarter $ 2.38 $1.25
4th Quarter $ 3.88 $1.06
1998
1st Quarter(through September 24, 1997) $ 3.875 $2.00
Class B Warrants
1996
3rd Quarter $ 1.62 $ .62
4th Quarter $ .88 $ .62
1997
1st Quarter $ 1.25 $ .25
2nd Quarter $ 1.50 $ .63
3rd Quarter $ 1.50 $ .59
4th Quarter $ 1.94 $ .39
1998
1st Quarter(through September 24, 1997) $ 1.875 $ 1.00
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The Company has not declared or paid any dividends on the Common
Stock and does not intend to declare or pay any dividends on the Common Stock in
the foreseeable future. The Company currently intends to reinvest earnings in
the development and expansion of its business. The declaration of dividends in
the future will be at the election of the Board of Directors and will depend
upon earnings, capital requirements and the financial position of the Company,
general economic conditions and other relevant factors.
As of September 24, 1996, there were approximately 1,430
shareholders, both of record and beneficial, of the Company's Common Stock.
In January, 1997, the Company entered into a stock option agreement
with Barretto Pacific Corporation ("BPC") pursuant to which the Company granted
BPC an option to purchase 25,000 shares of Common Stock at an exercise private
of $3.75 per share. Such option shall expire 180 days after the effectiveness of
the Registration Statement on Form S-1 with respect to the registration of the
Company's Debentures (as defined in the following paragraph) and certain other
securities of the Company as filed on August 13, 1997. Such option was granted
in consideration of certain services rendered by BPC for the Company. The
Company believes that such transaction is exempt from the registration
provisions of the Act in reliance on Section 4(2) of the Securities Act of 1933,
as amended (the "Act").
In April 1997 through August, 1997 the Registrant completed a private
placement of 10,000 senior Subordinated Convertible Debentures due June 15,
2004. The Registrant believes that such private placement is exempt from the
registration provisions of the Act in reliance upon Regulation D and Regulation
S promulgated under the Act. Value Investing Partners, Inc. earned a commission
equal to $700,000, a non-accountable expense allowance equal to $100,000 and
will receive 10 year warrants to purchase 135,000 shares of Common Stock at an
exercise price of $6.00 per share with respect to such private placement. (See
Item 12 "Certain Relationships and Related Transactions - FSAC Escrow
Agreements," for a description of the issuance of additional shares of Common
Stock in May 1997. The Company believes that such transaction is exempt from the
registration provisions of the Act in reliance on Section 4(2) of the Act.)
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL AND PRO FORMA
CONDENSED COMBINED FINANCIAL DATA
The following selected financial data for Starpak and L.S. Pressings,
the Company's predecessor, as of and for the periods presented have been derived
from the combined audited financial statements of Starpak and L.S. Pressings.
The unaudited financial data, in the opinion of management, contain all
adjustments (consisting only of normal and recurring adjustments) necessary for
a fair presentation of such data. The results of the interim periods are not
necessarily indicative of the results of a full year. All of the financial data
set forth below should be read in conjunction with the information appearing
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
SELECTED FINANCIAL INFORMATION
Predecessor Company (1) March 1, 1995 The Company
----------------------- ------------- ------------
Years ended February 28, to June 30, July 1, 1995 July 1, 1996
-------------------------- ----------- ------------- ------------
1995 to June 30, 1996 to June 30, 1997
---- ----------------- ----------------
1993 1994 1995
Statement of Operations Data $ $ $ $ $ $
------- ------- ------- ------- ---------- ---------
Net sales.......................... 6,256,667 6,851,457 8,826,856 3,297,507 14,911,097 66,575,931
Total operating expenses........... 5,818,092 6,414,144 8,179,083 292,806 19,833,942(3) 61,134,362
Operating income................... 438,575 437,313 647,773 334,701 (4,922,845) 5,441,569
Interest paid...................... 223,314 180,960 152,163 18,801 856,733(4) 858,067
Net income before tax and minority
interests...................... 269,251 321,319 536,440 359,045 (5,248,942) 8,379,511(5)
Net Income after tax............... 138,839 207,916 313,882 213,829 (5,737,560) 6,683,165
Predecessor Company (1)
February 28,
June
30, June 30,1997
1993 1994 1995 1996
Balance Sheet Data $ $ $ $ $
------- ------- ------- ------- ---------- ---------
Total assets....................... 3,976,769 3,976,974 5,161,709 23,604,994 64,197,149
Long term liabilities.............. 1,140,244 1,112,391 1,123,665 2,361,372 13,341,758
Net working capital................ 1,177,250 1,194,931 1,366,602 4,624,417 26,196,023
Stockholders' equity............... 1,527,356 1,580,826 1,828,656 12,792,376 23,220,014
- -----------
(1) Represents the combined results for Starpak and L.S. Pressings, which are
deemed to be the predecessor of the Company due to the Common ownership and
control of such entities. The Company's fiscal year end is June 30.
(2) No dividends were declared or paid during the periods presented.
(3) Includes a one time non cash escrow shares charge of $6,314,000 related to
the release of 1.1 million shares under the terms of an Earnout Escrow
Agreement between the Company, certain shareholders and the Underwriter of
the Company's Initial Public Offering.
(4) Includes a non cash charge of $396,000 relating to costs incurred in
connection with a November 1995 Bridge Note Financing.
(5) Includes a net gain of $3,327,478 on the sale of investment in First SA
Food Holdings, Ltd., L.C. As well as a minority interest of $35,224.
12
PRO FORMA FINANCIAL INFORMATION
The pro-forma information has been prepared assuming that the acquisitions had
taken place and that operations had commenced on July 1, 1995.
The pro-forma information does not purport to be indicative of the results that
would have been obtained if the acquisitions had occurred at the beginning of
the period, nor is it indicative of future results.
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1996 AND JUNE 30, 1995
(unaudited)
Proforma (Unaudited)
--------------------
Year ended Year ended
June 30, June 30,
1997 1996
$ $
----------- -----------
Revenues 78,596,647 71,374,856
----------- -----------
Operating expenses
Cost of sales 46,006,407 42,259,173
Selling, general and administrative costs 26,575,103 23,636,005
Non cash escrow share charge -- 6 ,314,000
----------- -----------
72,581,510 72,209,178
----------- -----------
Operating (loss)/income 6,015,137 (834,323)
Other income 3,904,884 872,766
Interest expense (823,912) (1,524 ,287
----------- -----------
(Loss)/income before income taxes and minority 9,096,109 (1,485,844)
interests
Provision for taxes on income (1,834, 833) (2,049,047)
----------- -----------
Minority interest in consolidated subsidiary
companies (135,224) --
----------- -----------
Net (loss)/income 7,136,979 (3,534,891)
=========== ===========
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
The Company was incorporated in September 1995 to acquire, own and
operate closely held companies in South Africa with annual sales in the range of
approximately $5 million to $50 million. In this regard, the Company, through
its South African subsidiaries has acquired twelve South African companies
(collectively, the "Acquisitions" engaged in the following industry segments.
1. Packaging equipment and materials through Starpak, Alfapak
and Pakmatic
2. Metal washers used in the fastener industry through LS
Pressings and Paper and Metal.
3. Air conditioning and refrigeration machinery components
though Europair Refrigeration and First Strut.
4. Processed foods through Piemans Pantry, Astoria Bakery,
Seemanns and Gull Foods.
See "Business" and "Certain Transactions." The Company has funded
itself since inception primarily through stockholders' loans and capital
contributions and the Bridge Financing of Notes and Warrants and the proceeds if
its Initial Public Offering completed in January 1996, as well as the issuance
of subordinated convertible debentures. The Company anticipates that it will
derive revenues primarily through income generated from the operations of
acquired operating companies in South Africa.
The annual rate of inflation in South Africa for the periods set
forth below was as follows:
Fiscal Year 1996 Fiscal Year 1997
---------------- ----------------
6.9% 8.8%
The average rate for the South African Rand against the U.S. dollar
for the periods under discussion were as follows:
Fiscal Year 1996 Fiscal Year 1997
---------------- ----------------
$1 = R3.85 $1 =R4.53
Depreciation of 17.7%
As the Company's results are reported in U.S. dollars, but revenues
and earnings are primarily generated in South African Rand, the local inflation
rate and the depreciation of the South African Rand against the US dollar for
the periods in question are important to further the understanding of the
Company's results. In general, if the rate of depreciation of the South African
Rand to the U.S. dollar for any comparable period is greater than the South
African rate of inflation for that same period then the Company would have had
to generate local revenues and earnings in excess of the South African inflation
rate in order to maintain dollar parity. For the period ended June 30, 1997, the
depreciation of the South African Rand to the dollar equaled 17.7% while the
annual rate of inflation was 8.8%. In order for the Company to report dollar
growth in revenues and earnings it would need to have generated growth of over
8.9% in inflation adjusted numbers through its local South African operations.
The results, therefore, for the period indicated above as reflected in U.S.
dollars, is in excess of inflation adjusted South African Rand for revenue and
earnings growth.
14
Results of Operations
This discussion should be read in conjunction with the Selected
Historical and Pro Forma Combined Financial Data and the financial statements
and notes thereto appearing elsewhere in this document. In this discussion, "Pro
Forma" includes all the combined results for the Company's acquisitions that
have been consummated since the Company's Initial Public Offering in January.
The "Pro Forma" results may not be representative of the actual results that
would have been achieved had such events actually occurred at the beginning of
the periods indicated.
15
FIRST SOUTH AFRICA CORPORATION, LTD.
Bermuda
Listed on NASDAQ
================================================================================
First South Africa First South African Holdings
Management Corp. South Africa
Delaware
- --------------------------------------------------------------------------------
First SA Food Holdings
Listed on Johannesburg
Stock Exchange
Specialty Food Air Conditioning and
Fasteners Manufacturing Packaging Refrigeration
L.S. Pressings Piemans Pantry* Starpak Europair
Acquired January 1996 Acquired June 1996 Acquired January 1996 Acquired January 1996
Purchase price: $1,900,905 Purchase price: $9,200,000 Purchase price: $838,545 Purchase price: $1,029,206
Paper & Metal Astoria Bakery* Alfapak Europair Refrigeration
Acquired April 1996 Acquired July 1996 Acquired November 1996 Acquired April 1996
Purchase price: $380,000 Purchase price: $4,400,000 Purchase price: $300,000 Purchase price: less than
$100,000
Seemanns Meat Products* Pakmatic First Strut
Acquired November 1996 Acquired April 1997 Acquired July 1996
Purchase price: $5,300,000 Purchase price: $1,228,000 Purchase price: $600,000
Gull Foods*
Acquired January 1997
Purchase price: $9,000,000
* These acquisitions include contingent payments based on a multiple of
future earnings. The purchase prices reflected for these acquisitions
include the Company's current estimate of the total price to be paid
after all contingent payments are made.
16
Due to the lack of comparative prior financial periods, and in order
to provide a meaningful reference point in the Management's Discussion and
Analysis, comparative twelve month pro forma results have been added for the
periods ended June 30, 1997 and 1996 respectively. These pro forma results
include the results for all of the Company's acquisitions, including those made
after January 24, 1996. Attention is drawn to the Management's Discussion and
Analysis for the Pro Forma periods mentioned above. This section provides the
most meaningful analysis of the Company's performance on a broader time scale.
Proforma (Unaudited)
Year Ended Year Ended
June 30, 1997 June 30, 1996
Costs of sales ................................... 58.0% 59.2%
Gross profit ..................................... 41.5% 40.8%
Selling, general and administrative expenses ..... 33.8% 33.1%
Interest expense ................................. 1.0% 2.1%
Operating income (pre non cash escrow charge) .... 7.7% 7.7%
Other income (net of other expenses) ............. 5.0% 1.2%
Income before income taxes( pre non cash escrow
charge) ...................................... 11.4% 6.8%
Income before income taxes ....................... 11.4% (2.1%)
Pro Forma Twelve Months Ended June 30, 1997
Compared to Pro Forma Twelve Months Ended June 30, 1996
Pro-forma sales for the 12 months ended June 30, 1997 increased 10.1%
to $78,596,647 from $71,374,856 for the period ended June 30, 1996. In local
currency, this increase was equal to approximately 28% which reflects a net
growth after inflation of approximately 19%. For the year ended June 30, 1997
the Company's processed foods operations contributed approximately 65.7% of the
Company's sales versus 67.7% for 1996. Air conditioning and refrigeration
segment for 1997 contributed approximately 15.8% of sales versus 12% for 1996.
The packaging equipment segment for 1997 contributed approximately 12.9% of
sales versus 12.8% for 1996. While the fastener segment for 1997 contributed
approximately 5.6% of sales versus 7.5% for 1996. Sales in all business segments
increased, except for the fastener segment. The overall increase can be
attributed to increasing demand for the Company's products as the middle class
base of consumers continues to grow as South Africa continues its transition to
more broad based economic participation. In addition, the Company's subsidiaries
have continued to purchase additional manufacturing capacity to take advantage
of this demand.
Pro-forma cost of goods sold were $46,006,407 and $42,259,173 for the
twelve months ended June 30, 1997 and 1996 respectively. This represented 58.5%
of sales for the twelve months ended June 30, 1997 versus 59.2 % for the
corresponding period in 1996. For the year ended June 30, 1997 the pro-forma
cost of goods for the Company's processed foods operations was approximately 56%
versus 58% for 1996. Air conditioning and refrigeration segment for 1997 was
approximately 66% versus 60% for 1996. The packaging equipment segment for 1997
was approximately 59% versus 56% for 1996. While the fastener segment for 1997
was approximately 62% versus 60% for 1996. The overall decrease can therefore be
primarily explained by improved productivity in the food companies due to
increased automation.
Pro-forma sales, general and administrative costs increased to
$26,575,103 from $23,636,005 for the twelve months ended June 30, 1997 and 1996
respectively. This represented 33.8% of sales for the twelve
17
months ended June 30, 1997 versus 33.1% for the corresponding period a year
earlier. For the year ended June 30, 1997 the SG and A expenses for the
Company's processed foods operations was approximately 34.5% of sales versus
34.4% for 1996. Air conditioning and refrigeration for 1997 was 30% versus 33.5%
in 1996. The packaging equipment segment for 1997 was 29.2% versus 31.6% in
1996. While the fastener segment for 1997 was 14.1% versus 13.2% for 1996. This
increase is primarily attributable to the Company's net corporate expenses. The
Company was formed in September 1995 and completed its Initial Public Offering
in January of 1996. As a result the pro-forma results for fiscal 1996 do not
reflect a full charge for the Company's corporate overhead. During fiscal 1996,
the Company expended approximately $400,000 in corporate overhead, while in 1997
this number increased to approximately $1.4 million. In addition, under the
terms of certain executive employment agreements, the Company recorded
approximately $300,000 in bonuses related to the gain on the sale of 30% of
First SA Food Holdings, Ltd., as part of its general SG&A expense.
Pro-forma Interest expenses decreased to 823,912 during the twelve
months ended June 30, 1997 from $1,524,827 for the twelve months ended June 30,
1996. Most of this decrease can be attributed to a non-cash charge of $396,000
that the Company took in connection with its November 1995 private placement of
Bridge Notes. In addition some of the Company's operating subsidiaries generated
interest on net cash balances which reduced the Company's consolidated net
interest.
Proforma other income was $3,904,884 and $872,766 for the twelve
months ended June 30, 1997 and 1996, respectively. This increase is primarily
attributable to a net gain of $3,327,478 on the sale of the Company's investment
in First SA Food Holdings Ltd. In June 1997, the Company completed the Initial
Public Offering of 5,000,000 ordinary shares of common stock of its subsidiary
First SA Food Holdings, which shares are listed on the Johannesburg Stock
Exchange; an institutional private placement in South Africa of 20,000,000
ordinary shares of common stock of FSA Food, and a private placement of
12,500,000 ordinary shares of common stock to management and staff. As of
September 30, 1997 the Company owned 70% of First SA Food.
The Company recorded a non-cash escrow share charge of $6,314,000 for
the year ended June 30, 1996. This charge relates to the release of 1,100,000
shares of Class B Common Stock from an Earnout Escrow Agreement that the Company
entered into with the underwriter of its January 24, 1996 Initial Public
Offering. Under the terms of this agreement, 1,100,000 shares were deposited in
escrow subject to the Company achieving certain pre-tax Pro Forma earnings
results. As the pro forma results for June 30, 1996 met the earnout requirements
of this agreement, the Company took this one time non-cash charge which was
calculated by multiplying 1,100,000 shares by the then current bid price of the
Company's Common Stock. The $6,314,000 charge was reflected as additional
Capital in Excess of Par in the June 30, 1996 Balance Sheets.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - PREDECESSOR COMPANY.
The annual rate of inflation in South Africa for the period set forth
below was as follows:
1993 1994 1995
---- ---- ----
13.9% 9.7% 8.6%
18
The average rate for the South African Rand against the U.S. dollar
for the periods under discussion were as follows:
Fiscal Year 1993 Fiscal Year 1994 Fiscal Year 1995
---------------- ---------------- ----------------
$1 = R2.90 $1 = R3.32 $1 = R3.53
Depreciation of 14.48% 6.3%
Based on these figures, in evaluating the comparable sales and
expense numbers for the companies in question for the period ended February 28,
1995 versus the period ended February 28, 1994, approximately 3.5% of the
increase in sales and expenses can be attributed to the net effect of the rate
of inflation of South Africa. The calendar year figures are provided with the
fiscal year figures as set forth above to provide an effective comparison of
inflation figures for the periods in question.
Results of Operations
This discussion should be read in conjunction with the Selected
Historical and Pro Forma Combined Financial Data and the financial statements
and notes thereto appearing elsewhere in this Prospectus. In this discussion,
"Historical" reflects the combined historical financial data of Starpak and L.S.
Pressings. Prior to the Company's Initial Public Offering, such entities were
each principally owned by FSA Stock Trust, a principal stockholder of the
Company, and are therefore treated as the Company's predecessor. "Pro Forma"
assumes the consummation of this Offering and the acquisition of Europair.
COMBINED RESULTS FOR STARPAK AND L.S. PRESSINGS
Period from March 1. 1995
As Percentage of Sales to June 30, 1995 1995 1994 1993
- ----------------------- ----------------- ---- ---- ----
Fiscal Year Ended February 28,
------------------------------
Costs of sales................................. 57.0% 57.3% 65.9% 66.0%
Gross profit................................... 43.0% 42.7% 34.1% 34.0%
Selling, general and administrative expenses... 32.8% 35.4% 27.7% 27.0%
Interest expense............................... .05% 1.7% 2.6% 3.6%
Operating income............................... 10.1% 7.3% 6.4% 7.0%
Other income (net of other expenses)........... 1.3% 0.5% 0.9% 0.9%
Income before income taxes..................... 10.9% 6.1% 4.7% 4.3%
Twelve Months Ended February 28, 1995 Compared to Twelve Months Ended
February 28, 1994
Historical sales for the twelve months ended February 28, 1995
increased 28.8% to $8,826,856 from $6,851,457 for the period ended February 28,
1994. As adjusted for inflation, historical sales volume increased approximately
25%. The increase included a 48% increase in sales of L.S. Pressings (or
approximately 45% volume increase) and a .05% decrease (a 3% volume increase
adjusting for inflation) in the sales of Starpak. The overall growth in the
volume of sales of the companies can be primarily attributable to the
improvement in macro-economic conditions in South Africa following the April
1994 elections, as described above.
The Historical cost of goods sold were $5,058,749 and $4,513,384 for
the twelve months ended February 28, 1995 and 1994, respectively. This
represented 57.3% of sales for the twelve months ended February 28, 1995 versus
65.9% for the corresponding period a year earlier. Decreases in cost of goods
sold were experienced in both Starpak and L.S. Pressings and can be attributed
primarily to more efficient production that resulted from the increase in
revenues, as both companies have relatively fixed manufacturing overhead costs.
In addition, labor costs as a percentage of sales were reduced, as there were a
number of work
19
stoppages in support of political causes prior to the elections which negatively
impacted on the cost of sales for the year ended February 28, 1994.
Historical sales, general and administrative costs increased 64% to
$3,120,334 from $1,900,760 for the twelve months ended February 28, 1995 and
1994, respectively. This represented 35.4% of sales for the twelve months ended
February 28, 1995 versus 27.7% for the corresponding period a year earlier.
These increases were experienced in both companies and can be attributed
primarily to increased expenditures in administrative personnel as well as an
increase of $213,280 in management profit sharing bonuses which resulted from an
increase in operating profits.
Historical interest expenses declined to $152,163 during the twelve
months ended February 28, 1995 from $180,960 for the twelve months ended
February 28, 1994. This decrease can be attributed primarily to a decline in the
average level of borrowings during the year. However, in order to support
expansion, the companies increased their investment in fixed assets during the
last quarter of the fiscal year. As a result, despite the lower average level of
borrowings during the year, the aggregate interest-bearing debt at February 28,
1995 was $1,180,000 while the corresponding balance at February 28, 1994 was
$1,070,000.
Historical other income was $40,830 and $64,966 for the twelve months
ended February 28, 1995 and 1994, respectively. The decrease can be attributed
primarily to a decline in other income earned by Starpak due to the release of
bad debt provisions in 1994, as well as a loss on the disposal of fixed assets.
During fiscal 1995 the South African tax authorities lowered
corporate income taxes from 40% to 35%. This has resulted in a 5% increase in
net income for the company for the year ended February 28, 1995 as compared to
the corresponding period in 1994.
Twelve Months Ended February 28, 1994 compared to Twelve Months Ended
February 28, 1993.
Historical sales for the twelve months ended February 28, 1994
increased 9.5% to $6,851,457 from $6,256,667 for the period ended February 28,
1994. The increase included a 3.7% increase in volume sales of L.S. Pressings,
and a 9.3% increase in the volume sales of Starpak.
Historical cost of goods sold were $4,513,384 and $4,128,047 for the
twelve months ended February 28, 1994 and 1993, respectively. This represented
65.9% of sales for the twelve months ended February 28, 1994 versus 66.0% for
the corresponding period in the prior year.
Historical sales, general and administrative costs increased to
$1,900,760 from $1,690,045 for the twelve months ended February 28, 1994 and
1993, respectively. This represented 27.7% of sales for the twelve months ended
February 28, 1994 versus 27.0% for the corresponding period in the prior year.
Historical interest expenses declined to $180,960 during the twelve
months ended February 28, 1994 from $223,314 for the twelve months ended
February 28, 1993. This decrease can be attributed primarily to a decline in the
level of borrowings. The reduction in interest expense for the fiscal year ended
February 28, 1994 relative to fiscal year ended February 28, 1993 was due
principally to a reduction in interest rates, as the prime borrowing rate was
reduced from 20.25% at February 28, 1993 to 15.25% at February 28, 1994.
Historical other income was $64,996 and $53,990 for the twelve months
ended February 28, 1994 and 1993, respectively.
20
LIQUIDITY AND CAPITAL RESOURCES
In January 1996, the Company raised approximately $9 million in net
proceeds after all fees and expenses from its Initial Public Offering. In May
1997, the Company raised approximately $9.2 million in net proceeds from the
issuance of 10,000 9% convertible debentures. Such debentures mature on June 15,
2004 and are convertible any time prior to maturity at a price of $6.00 per
share. In June 1997, the Company's subsidiary, First SA Food Holdings, raised
approximately $16.5 million in cash through the placement of its shares in South
Africa. Of this amount, approximately $5.5 million was retained by First South
African Holdings, while the remainder was retained by FSA Foods. Proceeds from
these offerings have been and will continue to be primarily utilized to fund the
Company's acquisitions as well as to provide a certain amount of working capital
to its South African subsidiaries.
As of June 30, 1997, the Company had cash of $19,889,111 with working
capital of $26,196,023. As of June 30, 1996, the Company had a total of
$15,015,170 in debt, of which amount $10 million related to the Company's 9%
subordinated convertible debentures with the remainder being bank debt. Of the
bank debt, $1,673,712 was classified as current. The Company currently has
$3,537,000 available in bank credit lines, which lines are unsecured and
renewable on an annual basis.
Cash flows provided by operating activities for the period ended June
30, 1997 totaled $2,730,571. Cash flows used in investing activities for the
period ended June 30, 1997 totaled $920,272 of which the Company realized
$16,479,827 on the disposal of its investment in First SA Food Holdings Ltd. The
Company expended $11,431,059 on the acquisition of subsidiaries, $1,801,032 on
the acquisition of recipes and other intellectual property, and purchased
$2,142,954 in net addition to property, plant and equipment of its subsidiaries.
Net cash provided by financing activities generated $11,759,220 during the
period ended June 30, 1997.
As of June 30, 1997, the Company had cash of approximately $20
Million. Under the various acquisition agreements, the Company anticipates
having to spend approximately $3.2 million in cash for its contingent payments
over the next 12 months as well as approximately $2.2 million in stock. 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. In this regard, the Company entered into a letter of intent to
acquire Fifers Bakery, a specialty confectionary manufacturer. Such acquisition
is anticipated to close by the end of October 1997. The Company will expend
approximately $1.6 million on closing to acquire this company. 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 5.8% 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. In addition, in July
1997, the Company, through Swiss Bank Corporation, purchased a 12 month option
to acquire the equivalent of $10 million in South African Rand at the strike
price of R5.50 to the Dollar. This option has the effect of hedging $10 million
of the Company's fiscal 1998 earnings, in the event the exchange rate of the
South African Rand falls below this strike price. The cost of such option was
approximately $133,000 and is being amortized over the length of the option.
21
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.
22
FIRST SOUTH AFRICA CORP., LTD.
INDEX TO FINANCIAL STATEMENTS
First South Africa Corp., Ltd.
Report of the independent auditors
Consolidated Balance Sheets at June 30, 1997
and 1996
Consolidated Statements of Income for the years
ended June 30, 1997 and 1996, the period March
1 to June 30, 1995 and the year ended February
28, 1995
Pro-forma Consolidated Statements of Income for
the years ended June 30, 1997 and 1996
(Unaudited)
Consolidated Statements of Cash Flows for the
years ended June 30, 1997 and 1996, the period
March 1 to June 30, 1995 and the year ended
February 28, 1995
Consolidated Statement of Changes in
Stockholders' Investment for the period
February 28, 1994 to June 30, 1997
Notes to the Consolidated Financial Statements
for the years ended June 30, 1997 and 1996, the
period March 1 to June 30, 1995 and the year
ended February 28, 1995
23
FIRST SOUTH AFRICA CORP., LTD.
REPORT OF THE INDEPENDENT AUDITORS
To the Board of Directors
of First South Africa Corp., Ltd.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statement of income, of cash flow and of changes in
stockholders' investment present fairly, in all material respects, the financial
position of First South Africa Corp., Ltd. and its subsidiaries at June 30, 1997
and 1996, and the results of their operations and their cash flows for the years
ended June 30, 1997 and 1996, the period March 1 to June 30, 1995 and the year
ended February 28, 1995 in conformity with generally accepted accounting
principles in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse
Sandton, South Africa
September 19, 1997
24
FIRST SOUTH AFRICA CORP., LTD.
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, June 30,
1997 1996
$ $
----------- -----------
Current assets
Cash on hand 19,889,111 4,682,035
Trade accounts receivable 12,000,224 5,833,542
Less: Allowances for bad debts (696,279) (402,333)
----------- -----------
11,303,945 5,431,209
Inventories (net) 7,219,960 2,510,868
Prepaid expenses and other current assets 934,263 451, 551
Deferred charges (net) 838,439 --
----------- -----------
Total current assets 40,185,718 13,075,663
Property, plant and equipment 16,197,605 9,000,334
Less: Accumulated depreciation (4,849,396) (2,119,912)
----------- -----------
11,348,209 6,880,422
Intangible assets (net) 12,620,822 3,363,923
Other assets 42,730 84,768
Loan to shareholder -- 126,668
Deferred income taxes -- 73,550
----------- -----------
64,197,479 23,604,994
=========== ===========
25
FIRST SOUTH AFRICA CORP., LTD.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current liabilities
Bank overdraft payable -- 745,724
Current portion of long term debt 1,673,712 2,101,799
Trade accounts payable 6,755,823 2,162,257
Other provisions and accruals 3,184,428 1,923,371
Other taxes payable 654,653 --
Income tax payable 1,721,079 1,518,095
----------- -----------
Total current liabilities 13,989,695 8,451,246
----------- -----------
Long term debt 13,341,758 2,361,372
Deferred income taxes 358,446 --
----------- -----------
27,689,899 10,812,618
----------- -----------
Minority shareholders' investment 13,287,566 --
Stockholders' investment
Capital stock:
A class common stock, $0.01 par value - authorized
23,000,000 shares, issued and outstanding
3,536,115 shares 35,361 22,000
B class common stock, $0.01 par value - authorized
2,000,000 shares, issued and outstanding
1,822,500 shares 18,691 19,701
Preferred stock, $0.01 par value, - authorized
5,000,000 shares, issued and outstanding nil shares -- --
Capital in excess of par 22,891,093 18,518,986
----------- -----------
Retained earnings 2,803,065 (3,880,100)
Foreign currency translation adjustments (2,528,196) (1,888,211)
----------- -----------
64,197,479 23,604,994
=========== ===========
26
FIRST SOUTH AFRICA CORP., LTD.
CONSOLIDATED STATEMENTS OF INCOME
Year ended Year ended March 1, Year ended
June 30, June 30, to June 30, February 28,
1997 1996 1995 1995
$ $ $ $
----------- ----------- ----------- -----------
Revenues 66,575,931 14,911,097 3,297,507 8,826,856
----------- ----------- ----------- -----------
Operating expenses
Cost of sales 37,869,755 8,385,511 1,881,686 5,058,749
Selling, general and administrative costs 23,264,607 5,134,431 1,081,120 3,120,334
Non cash compensation charge -- 6,314,000 -- --
----------- ----------- ----------- -----------
61,134,362 19,833,942 2,962,806 8,179,083
----------- ----------- ----------- -----------
Operating income/(loss) 5,441,569 (4,922,845) 334,701 647,773
Gain on disposal of subsidiary stock 3,327,478 -- -- --
Other income 468,531 539,636 43,145 40,830
Interest expense (858,067) (865,733) (18,801) (152,163)
----------- ----------- ----------- -----------
Income/(loss) from consolidated companies
before income taxes and minority interests 8,379,511 (5,248,942) 359,045 536,440
Provision for taxes on income (1,572,049) (488,618) (145,216) (222,558)
----------- ----------- ----------- -----------
6,807,462 (5,737,560) 213,829 313,882
Minority interest in consolidated subsidiary
companies (135,224) -- -- --
----------- ----------- ----------- -----------
Net income/(loss) from consolidated companies 6,672,238 (5,737,560) 213,829 313,882
Equity in net earnings of affiliated companies 10,927 -- -- --
----------- ----------- ----------- -----------
Net income/(loss) 6,683,165 (5,737,560) 213,829 313,882
=========== =========== =========== ===========
Basic earnings/(loss) per share $1,30 ($3,03) $ .39 $ .57
Fully diluted earnings per share $1,22 ($1,39) $ .39 $ .57
Weighted average number of shares outstanding
Basic earnings per share 5,139,855 1,893,463 547,890 547,890
Fully diluted earnings per share 5,594,912 1,893,463 547,890 547,890
27
FIRST SOUTH AFRICA CORP., LTD.
PRO-FORMA CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Year ended Year ended
June 30, June 30,
1997 1996
----------- -----------
Revenues 78,596,647 71,374,856
----------- -----------
Operating expenses
Cost of sales 46,006,407 42,259,173
Selling, general and administrative costs 26,575,103 23,636,005
Non cash compensation charge -- 6,314,000
----------- -----------
72,581,510 72,209,178
----------- -----------
Operating income/(loss) 6,015,137 (834,322)
Gain on disposal of subsidiary stock 3,327,478 --
Other income 577,406 872,766
Interest expense (823,912) (1,524,287)
----------- -----------
Income/(loss) from consolidated companies before income
taxes and minority interests 9,096,109 (1,485,843)
Provision for taxes on income (1,834,833) (2,049,047)
----------- -----------
7,261,276 (3,534,890)
Minority interest in consolidated subsidiary companies (135,224) --
----------- -----------
Net income/(loss) from consolidated companies 7,126,052 (3,534,890)
Equity in net earnings of affiliated companies 10,927 --
----------- -----------
Net income/(loss) 7,136,979 (3,534,890)
=========== ===========
Basic earnings/(loss) per share $1,34 ($0,66)
Fully diluted earnings per share $1,25 --
Weighted average number of shares outstanding
Basic earnings per share 5,345,208 5,345,208
Fully diluted earnings per share 5,800,266 --
The pro-forma information has been prepared assuming that all acquisitions had
taken place on July 1, 1995.
The pro-forma information does not purport to be indicative of the results that
would have been obtained if the acquisitions had occurred at the beginning of
the period, nor is it indicative of future results.
28
FIRST SOUTH AFRICA CORP., LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended Year ended March 1, Year ended
June 30, June 30, to June 30, February 28,
1997 1996 1995 1995
$ $ $ $
----------- ----------- ----------- -----------
Cash flows from operating activities:
Net income/(loss) 6,683,165 (5,737,560) 213,829 313,882
Adjustments to reconcile net income/(loss) to net
cash provided by operating activities:
Non-cash compensation charge -- 6,314,000 -- --
Depreciation and amortization 2,011,354 395,757 50,678 92,746
Deferred income taxes 349,543 (90,559) -- (69,295)
Net (gain)/loss on sale of assets (198,473) (22,523) 1,320 19,636
Net gain on sale of investment in
First SA Food Holdings Limited (3,327,478) -- -- --
Effect of changes in current assets
and current liabilities (2,922,764) 10,185 (94,090) (23,012)
Minority interest in consolidated
subsidiary companies 135,224 -- -- --
Assets acquired at a discount -- 7,307 -- --
----------- ----------- ----------- -----------
Net cash provided by operating activities 2,730,571 876,607 171,737 333,957
----------- ----------- ----------- -----------
Cash flows from investing activities:
Proceeds on disposal of investment in First
SA Food Holdings Limited 16,479,827 -- -- --
Additions to property, plant and equipment (3,325,153) (453,768) (166,124) (327,039)
Proceeds on disposal of property, plant and
equipment 1,182,199 -- -- --
Additional purchase price payments (2,023,835) -- -- --
Other assets acquired (42,676) (704,117) (16,502) 22,053
Decrease in loans to related companies 80,969 145,823 (280) 45,241
Acquisitions of subsidiaries (net of cash
of $985,410) (11,431,059) (4,498,043) -- --
----------- ----------- ----------- -----------
Net cash used in investing activities 920,272 (5,510,105) (182,906) (259,745)
----------- ----------- ----------- -----------
29
FIRST SOUTH AFRICA CORP., LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended Year ended March 1, Year ended
June 30, June 30, to June 30, February 28,
1997 1996 1995 1995
$ $ $ $
----------- ----------- ----------- -----------
Cash flows from financing activities:
Net (repayments)/borrowings in bank
overdrafts (1,155,094) 135,941 119,473 (26,269)
Borrowings of long term debt 10,601,298 -- 93,202 93,618
Repayments of long term debt (985,630) (1,525,613) -- --
Increase in deferred debt issue costs (853,683) -- -- --
Repayments in loans from related parties -- (880,034) -- --
Borrowings in loans from related parties -- -- -- 30,473
Borrowings in loans from stockholders -- 137,656 -- --
Borrowings in short term debt 689,682 1,954,673 -- 81,972
Repayments in short term debt (921,810) -- -- --
Proceeds on stock issues 4,384,458 9,197,446 -- --
----------- ----------- ----------- -----------
Net cash provided in financing activities 11,759,221 9,020,069 212,675 179,794
----------- ----------- ----------- -----------
Effect of exchange rate changes on cash (202,988) (448,787) (9,783) (16,573)
----------- ----------- ----------- -----------
Cash generated by operations 15,207,076 3,937, 784 191,723 237,433
Cash on hand at beginning of period 4,682,035 744,251 552,528 315,095
----------- ----------- ----------- -----------
Cash on hand at end of period 19,889,111 4,682,035 744,251 552,528
=========== =========== =========== ===========
30
FIRST SOUTH AFRICA CORP., LTD.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS INVESTMENT
[Part 1 of 2]
Capital stock Capital stock
First South Capital in LS Pressings
Africa Corp., excess of (Pty)
Ltd. par Ltd.
$ $ $
----------- ----------- -----------
Balance at February 28, 1994 -- -- 460,978
Net income -- -- --
Translation adjustment -- -- --
----------- ----------- -----------
Balance at February 28, 1995 -- -- 460,978
Net income -- -- --
Translation adjustment -- -- --
----------- ----------- -----------
Balance at June 30, 1995 -- -- 460,978
Issuance of stock to acquire predecessor
Starpak and LS Pressings 150 1,208,628 (460,978)
Issuance of stock to acquire subsidiary
companies 98 1,840,365 --
Other stock issues 28 260,024 --
Proceeds on First South Africa Corp, Ltd.
stock issues 41,425 9,896,646 --
Share issue expenses written off -- (1,000,677) --
Escrow stock released -- 6,314,000 --
Subsidiary assets acquired at a discount -- -- --
Net loss -- -- --
Translation adjustment -- -- --
----------- ----------- -----------
Balance at June 30, 1996 41,701 18,518,986 --
Issuance of stock to FSAH escrow agent 11,915 -- --
Issuance of stock to acquire subsidiaries 190 4,357,228 --
Proceeds on warrants exercised 246 159,879 --
Stock issue expenses written off -- (145,000) --
Net income for the year -- -- --
Translation adjustment -- -- --
----------- ----------- -----------
[Part 2 of 2]
Capital stock Capital in Foreign
Starpak excess of par currency
(Pty) Starpak (Pty) Retained translation
Ltd. Ltd. earnings adjustments Total
$ $ $ $ $
----------- ----------- ----------- ----------- -----------
Balance at February 28, 1994 1,010 746,790 1,322,442 (950,394) 580,826
Net income -- -- 313,882 -- 313,882
Translation adjustment -- -- -- (66,052) 66,052
----------- ----------- ----------- ----------- -----------
Balance at February 28, 1995 1,010 746,790 1,636,324 (1,016,446) 1,828,656
Net income -- -- 213,829 -- 213,829
Translation adjustment -- -- -- (24,488) (24,488)
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1995 1,010 746,790 1,850,153 (1,040,934) 2,017,997
Issuance of stock to acquire predecessor
Starpak and LS Pressings (1,010) (746,790) -- -- --
Issuance of stock to acquire subsidiary
companies -- -- -- -- 1,840,463
Other stock issues -- -- -- -- 260,052
Proceeds on First South Africa Corp, Ltd.
stock issues -- -- -- -- 9,938,071
Share issue expenses written off -- -- -- -- (1,000,677)
Escrow stock released -- -- -- -- 6,314,000
Subsidiary assets acquired at a discount -- -- 7,307 -- 7,307
Net loss -- -- (5,737,560) -- (5,737,560)
Translation adjustment -- -- -- (847,277) (847,277)
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1996 -- -- (3,880,100) (1,888,211) 12,792,376
Issuance of stock to FSAH escrow agent -- -- -- -- 11,915
Issuance of stock to acquire subsidiaries -- -- -- -- 4,357,418
Proceeds on warrants exercised -- -- -- -- 160,125
Stock issue expenses written off -- -- -- -- (145,000)
Net income for the year -- -- 6,683,165 -- 6,683,165
Translation adjustment -- -- -- (639,985) (639,985)
----------- ----------- ----------- ----------- -----------
31
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996, THE PERIOD MARCH 1, TO JUNE
30, 1995 AND THE YEAR
ENDED FEBRUARY 28, 1995
Capital stock Capital stock Capital stock Capital in Foreign
First South Capital in LS Pressings Starpak excess of par currency
Africa Corp., excess of (Pty) (Pty) Starpak (Pty) Retained translation
Ltd. par Ltd. Ltd. Ltd. earnings adjustments Total
$ $ $ $ $ $ $ $
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT JUNE 30, 1997 54,052 22,891,093 -- -- -- 2,803,065 (2,528,196) 23,220,014
========== ========== ========== ========== ========== ========== ========== ==========
32
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996, THE PERIOD MARCH 1, TO JUNE
30, 1995 AND THE YEAR
ENDED FEBRUARY 28, 1995
1. PRINCIPAL ACTIVITIES OF THE GROUP
The principal activities of the group include the following:
ENGINEERING INTERESTS
The business of manufacturing, servicing and selling packaging
machines, receiving commission income, receiving rental income,
manufacture of washers for use in the fastener industry, manufacture
and supply of air-conditioning products.
FOOD INTERESTS
The manufacture, sale and distribution of both ready to eat and ready
for bake off pastry related food products, the manufacture, sale and
distribution of high margin speciality breads and staple breads, the
manufacture and sale of a wide range of prepared food products and the
manufacture, sale and distribution of a wide range of processed meat
products.
2. ORGANIZATION
First South Africa Corp., Ltd. (the "Company") was founded on September
6, 1995. The purpose of the Company is to acquire and operate in South
African companies.
The following subsidiaries/businesses acquired, were accounted for
using the purchase method of accounting. The assets and liabilities
were recorded at fair market value as determined by management:
PURCHASE
PRICE
CONSIDERATION
SUBSIDIARY/BUSINESS DATE ACQUIRED $
Astoria Bakery CC and Astoria Bakery Lesotho (Pty) Ltd. July 1, 1996 2,344,123
First Strut (Pty) Ltd. July 1, 1996 175,836
Seemann's Quality Meat Products (Pty) Ltd. and
Hammer Street Investments CC November 1, 1996 2,989,077
Gull Foods CC and Trek Biltong CC January 1, 1997 5,288,629
Pakmatic Company (Pty) Ltd. and
Pakmatic Spares and Service (Pty) Ltd. March 1, 1997 924,379
----------
11,722,044
==========
The purchase consideration has been decreased to give effect to the
debt ceded to the holding company in the acquisition of all
subsidiaries/businesses with the exception of Gull Foods CC and Trek
Biltong CC, which has no debt ceded to the holding company.
33
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996, THE PERIOD MARCH 1, TO JUNE
30, 1995 AND THE YEAR
ENDED FEBRUARY 28, 1995
2. ORGANIZATION (continued)
Combined
purchase
consideration
and allocation
$
--------------
Acquisition costs
Stock issued in lieu of cash 3,685,866
Cash consideration (net of debt ceded to holding company) 7,897,235
Other direct expenses 138,943
----------
Purchase price to be allocated 11,722,044
==========
Summary allocation of purchase price
Current assets 6,138,945
Property, plant and equipment 3,974,294
Recipes and other intellectual property 7,131,434
Goodwill 694,108
----------
Total assets acquired 17,938,781
Current liabilities 4,055,918
Long term debt 1,387,301
Deferred income taxes 79,093
Debt ceded to holding company 694,425
----------
Total liabilities assumed 6,216,737
----------
Excess of assets over liabilities assumed 11,722,044
==========
The Company is required to make additional payments to the former
owners based on a multiple of pre-tax earnings. These payments are to
be made by the issue of stock and cash over the next two to three
years. In fiscal 1997, the Company paid $2,023,835 in cash and stock
under these contingent consideration arrangements.
34
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996, THE PERIOD MARCH 1, TO JUNE
30, 1995 AND THE YEAR
ENDED FEBRUARY 28, 1995
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 resulting from acquisitions, recipes and other intellectual
property, and trademarks are being amortised on a straight line basis
over a period of twenty to twenty five years. If facts and
circumstances were to indicate that the carrying amount of goodwill,
recipes and other intellectual property is impaired, the carrying
amount would be reduced to an amount representing the discounted future
cash flows to be generated by the operation.
Also included in intangible assets are non competition agreements
relating to the Europair acquisition which are being 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.
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:
* 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 into
United States Dollars using historical rates at date of
issuance.
35
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996, THE PERIOD MARCH 1, TO JUNE
30, 1995 AND THE YEAR
ENDED FEBRUARY 28, 1995
3. SUMMARY OF ACCOUNTING POLICIES (continued)
* 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".
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 recognized for financial
reporting purposes and such amounts recognized for tax purposes.
Deferred taxes are measured by applying currently enacted tax laws.
Fair value of financial instruments
As at June 30 1997, the carrying value of accounts receivable, accounts
payable and investments approximate their fair value. The carrying
value of long term debt approximates fair value, as the debt, other
than convertible debentures, interest rates are keyed to the prime
lending rate. The convertible debentures are believed to approximate
fair market due to their recent issuance in June 1997.
36
FIRST SOUTH AFRICA CORP., LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996, THE PERIOD MARCH 1, TO JUNE
30, 1995 AND THE YEAR
ENDED FEBRUARY 28, 1995
3. SUMMARY OF ACCOUNTING POLICIES (continued)
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.
Revenues are stated net of allowances granted to customers and trade
discounts. Returns of defective products are offset against revenues.
Due to the low incidence of warranty returns, where warranties are
provided to customers, the warranty costs are charged to cost of goods
sold as and when incurred.
Gain on disposal of subsidiary stock
Subsidiary stock disposed of during the period is recognized as a gain
in the statement of income and is separately disclosed as a non
operating gain.
4. INVENTORIES
Inventories consist of the following: