UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from _____________ to_____________
Commission file number:
000-31203
NET 1 UEPS TECHNOLOGIES,
INC.
(Exact name of registrant as specified in its
charter)
Florida
|
98-0171860
|
(State or other jurisdiction
|
(IRS Employer
|
of incorporation or organization)
|
Identification No.)
|
President Place, 4
th
Floor, Cnr. Jan
Smuts Avenue and Bolton Road
Rosebank, Johannesburg 2196 , South
Africa
(Address of principal executive offices, including zip
code)
Registrants telephone number, including area code:
27-11-343-2000
Not Applicable
(Former Name, Former Address and
Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act (check one):
[X] Large accelerated filer
|
[ ] Accelerated filer
|
|
|
[ ] Non-accelerated filer
|
[ ] Smaller reporting company
|
(do not check if a smaller reporting company)
|
|
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X ]
As of January 31, 2009 (the latest practicable date), 55,673,186
shares of the registrants common stock, par value $0.001 per share, were
outstanding.
Form 10-Q
NET 1 UEPS TECHNOLOGIES, INC.
Table of Contents
1
Part I. Financial Information
Item 1. Financial Statements
NET 1 UEPS TECHNOLOGIES, INC.
Condensed Consolidated
Balance Sheets
|
|
Unaudited
|
|
|
(A)
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
(In thousands, except share data)
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
124,656
|
|
$
|
272,475
|
|
Pre-funded social welfare grants receivable
|
|
50,848
|
|
|
35,434
|
|
Accounts receivable, net of allowances of December: $157;
June: $260
|
|
30,766
|
|
|
21,797
|
|
Finance loans receivable, net of allowances of December: $1,020;
June: $1,007
|
|
4,113
|
|
|
4,301
|
|
Deferred expenditure on smart cards
|
|
89
|
|
|
78
|
|
Inventory
|
|
6,263
|
|
|
6,052
|
|
Deferred income taxes
|
|
5,327
|
|
|
5,597
|
|
Total current assets
|
|
222,062
|
|
|
345,734
|
|
LONG-TERM RECEIVABLE
|
|
150
|
|
|
207
|
|
PROPERTY, PLANT AND EQUIPMENT, NET OF ACCUMULATED
|
|
|
|
|
|
|
DEPRECIATION OF December: $23,238; June:
$24,753
|
|
6,834
|
|
|
6,291
|
|
EQUITY-ACCOUNTED INVESTMENTS
|
|
2,603
|
|
|
2,685
|
|
GOODWILL
|
|
106,708
|
|
|
76,938
|
|
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF
|
|
|
|
|
|
|
December: $20,101; June: $16,486
|
|
79,374
|
|
|
22,216
|
|
TOTAL ASSETS
|
|
417,731
|
|
|
454,071
|
|
LIABILITIES
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
Bank overdraft
|
|
101
|
|
|
-
|
|
Accounts payable
|
|
3,411
|
|
|
4,909
|
|
Other payables
|
|
46,660
|
|
|
57,432
|
|
Income taxes payable
|
|
15,090
|
|
|
14,162
|
|
Total current liabilities
|
|
65,262
|
|
|
76,503
|
|
DEFERRED INCOME TAXES
|
|
33,929
|
|
|
33,474
|
|
OTHER LONG-TERM LIABILITIES, including
minority interest loans
|
|
3,994
|
|
|
3,766
|
|
COMMITMENTS AND CONTINGENCIES
|
|
-
|
|
|
-
|
|
TOTAL LIABILITIES
|
|
103,185
|
|
|
113,743
|
|
MINORITY INTEREST
|
|
2,600
|
|
|
-
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
COMMON STOCK
|
|
|
|
|
|
|
Authorized: 200,000,000 with $0.001 par value;
|
|
|
|
|
|
|
Issued shares - December: 55,673,186; June: 53,423,552
|
|
58
|
|
|
52
|
|
SPECIAL CONVERTIBLE PREFERRED STOCK
|
|
|
|
|
|
|
Authorized: 50,000,000 with $0.001 par value;
|
|
|
|
|
|
|
Issued and outstanding shares - December: 0; June: 4,882,429
|
|
-
|
|
|
5
|
|
B CLASS PREFERENCE SHARES
|
|
|
|
|
|
|
Authorized: 330,000,000 with $0.001 par value;
|
|
|
|
|
|
|
Issued and outstanding shares (net of shares held by Net1) -
December: 0; June:
|
|
|
|
|
|
|
35,975,818
|
|
-
|
|
|
6
|
|
ADDITIONAL PAID-IN-CAPITAL
|
|
122,975
|
|
|
119,283
|
|
TREASURY SHARES, AT COST: December:
2,726,409; June: 306,269
|
|
(32,707
|
)
|
|
(7,950
|
)
|
ACCUMULATED OTHER COMPREHENSIVE LOSS
|
|
(99,138
|
)
|
|
(37,820
|
)
|
RETAINED EARNINGS
|
|
320,758
|
|
|
266,752
|
|
TOTAL SHAREHOLDERS EQUITY
|
|
311,946
|
|
|
340,328
|
|
TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY
|
$
|
417,731
|
|
$
|
454,071
|
|
(A)
Derived from audited financial statements
|
|
|
|
|
|
|
See Notes to Unaudited Condensed
Consolidated Financial Statements
2
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Statements of Operations
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share
data)
|
|
|
(In thousands, except per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
$
|
61,388
|
|
$
|
68,500
|
|
$
|
129,323
|
|
$
|
128,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD, IT
PROCESSING,
|
|
|
|
|
|
|
|
|
|
|
|
|
SERVICING AND SUPPORT
|
|
17,175
|
|
|
20,175
|
|
|
36,411
|
|
|
35,318
|
|
SELLING, GENERAL AND
ADMINISTRATION
|
|
15,311
|
|
|
17,266
|
|
|
33,309
|
|
|
33,730
|
|
DEPRECIATION AND AMORTIZATION
|
|
4,261
|
|
|
2,833
|
|
|
7,684
|
|
|
5,579
|
|
IMPAIRMENT OF GOODWILL
|
|
1,836
|
|
|
-
|
|
|
1,836
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
22,805
|
|
|
28,226
|
|
|
50,083
|
|
|
54,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOREIGN EXCHANGE GAIN RELATED TO
|
|
|
|
|
|
|
|
|
|
|
|
|
SHORT-TERM INVESTMENT
|
|
20,581
|
|
|
-
|
|
|
26,657
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME, net
|
|
2,303
|
|
|
4,116
|
|
|
5,465
|
|
|
7,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
45,689
|
|
|
32,342
|
|
|
82,205
|
|
|
61,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE
|
|
16,999
|
|
|
11,788
|
|
|
26,901
|
|
|
22,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME FROM CONTINUING OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
BEFORE MINORITY INTEREST AND LOSS FROM
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY-ACCOUNTED INVESTMENTS
|
|
28,690
|
|
|
20,554
|
|
|
55,304
|
|
|
38,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY INTEREST
|
|
702
|
|
|
-
|
|
|
762
|
|
|
(196
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM EQUITY-ACCOUNTED
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENTS
|
|
226
|
|
|
236
|
|
|
536
|
|
|
520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
$
|
27,762
|
|
$
|
20,318
|
|
$
|
54,006
|
|
$
|
38,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings, in cents common stock
and linked
|
|
|
|
|
|
|
|
|
|
|
|
|
units
|
|
49.2
|
|
|
35.6
|
|
|
94.8
|
|
|
67.0
|
|
Diluted earnings, in cents common
stock and
|
|
|
|
|
|
|
|
|
|
|
|
|
linked units
|
|
49.1
|
|
|
35.2
|
|
|
94.4
|
|
|
66.4
|
|
See Notes to Unaudited Condensed
Consolidated Financial Statements
3
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Statements of Cash Flows
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
27,762
|
|
$
|
20,318
|
|
$
|
54,006
|
|
$
|
38,246
|
|
Depreciation and amortization
|
|
4,261
|
|
|
2,833
|
|
|
7,684
|
|
|
5,579
|
|
Impairment of goodwill
|
|
1,836
|
|
|
-
|
|
|
1,836
|
|
|
-
|
|
Loss from equity-accounted investments
|
|
226
|
|
|
236
|
|
|
536
|
|
|
520
|
|
Fair value adjustment related to financial liabilities
|
|
650
|
|
|
(169
|
)
|
|
614
|
|
|
(242
|
)
|
Fair value of FAS 133 derivative
adjustments
|
|
(3,122
|
)
|
|
(17
|
)
|
|
(3,058
|
)
|
|
(10
|
)
|
Unrealized foreign exchange reversal (gain) related to
|
|
|
|
|
|
|
|
|
|
|
|
|
short-term investment
|
|
5,061
|
|
|
-
|
|
|
(1,015
|
)
|
|
-
|
|
Interest payable
|
|
(408
|
)
|
|
124
|
|
|
231
|
|
|
241
|
|
Profit on disposal of property, plant and
equipment
|
|
(1
|
)
|
|
(76
|
)
|
|
-
|
|
|
(86
|
)
|
Minority interest
|
|
702
|
|
|
-
|
|
|
762
|
|
|
(196
|
)
|
Stock-based compensation charge
|
|
1,346
|
|
|
911
|
|
|
2,551
|
|
|
1,752
|
|
Facility fee amortized
|
|
352
|
|
|
-
|
|
|
1,100
|
|
|
-
|
|
Decrease (Increase) in accounts receivable,
pre-funded
|
|
|
|
|
|
|
|
|
|
|
|
|
social welfare grants receivable and finance loans
|
|
|
|
|
|
|
|
|
|
|
|
|
receivable
|
|
8,350
|
|
|
(23,786
|
)
|
|
(37,791
|
)
|
|
(18,248
|
)
|
(Increase) Decrease in deferred expenditure on smart
|
|
|
|
|
|
|
|
|
|
|
|
|
cards
|
|
(4
|
)
|
|
166
|
|
|
(27
|
)
|
|
260
|
|
Decrease (Increase) in inventory
|
|
511
|
|
|
186
|
|
|
294
|
|
|
(1,579
|
)
|
(Decrease) Increase in accounts payable and
other
|
|
|
|
|
|
|
|
|
|
|
|
|
payables
|
|
(3,174
|
)
|
|
(12,106
|
)
|
|
(17,589
|
)
|
|
313
|
|
Increase (Decrease) in taxes payable
|
|
775
|
|
|
(7,128
|
)
|
|
4,184
|
|
|
(6,632
|
)
|
Increase (Decrease) in deferred taxes
|
|
751
|
|
|
2,939
|
|
|
(1,419
|
)
|
|
4,756
|
|
Net cash provided by
(used in) operating activities
|
|
45,874
|
|
|
(15,569
|
)
|
|
12,899
|
|
|
24,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(439
|
)
|
|
(1,205
|
)
|
|
(3,283
|
)
|
|
(1,876
|
)
|
Proceeds from disposal of property, plant
and equipment
|
|
1
|
|
|
77
|
|
|
2
|
|
|
118
|
|
Acquisition of BGS, net of cash acquired
|
|
(458
|
)
|
|
-
|
|
|
(95,786
|
)
|
|
-
|
|
Acquisition of shares in equity-accounted
investments
|
|
(50
|
)
|
|
-
|
|
|
(600
|
)
|
|
-
|
|
Net cash used in investing
activities
|
|
(946
|
)
|
|
(1,128
|
)
|
|
(99,667
|
)
|
|
(1,758
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issue of share capital, net
of share issue
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses
|
|
-
|
|
|
-
|
|
|
155
|
|
|
150
|
|
Treasury stock acquired
|
|
(24,752
|
)
|
|
-
|
|
|
(24,752
|
)
|
|
|
|
Proceeds from short-term loan facility
|
|
-
|
|
|
-
|
|
|
110,000
|
|
|
-
|
|
Repayment of short-term loan facility
|
|
(110,000
|
)
|
|
-
|
|
|
(110,000
|
)
|
|
-
|
|
Payment of facility fee
|
|
-
|
|
|
-
|
|
|
(1,100
|
)
|
|
-
|
|
Proceeds from bank overdrafts
|
|
94
|
|
|
1,453
|
|
|
95
|
|
|
1,462
|
|
Repayment of bank overdraft
|
|
-
|
|
|
(1,426
|
)
|
|
-
|
|
|
(1,442
|
)
|
Net cash (used in)
provided by financing activities
|
|
(134,658
|
)
|
|
27
|
|
|
(25,602
|
)
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
(31,538
|
)
|
|
1,889
|
|
|
(35,449
|
)
|
|
5,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash
equivalents
|
|
(121,268
|
)
|
|
(14,781
|
)
|
|
(147,819
|
)
|
|
29,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning of
period
|
|
245,924
|
|
|
215,522
|
|
|
272,475
|
|
|
171,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of
period
|
$
|
124,656
|
|
$
|
200,741
|
|
$
|
124,656
|
|
$
|
200,741
|
|
See Notes to Unaudited Condensed
Consolidated Financial Statements
4
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the Unaudited Condensed Consolidated
Financial Statements
|
for the Three and Six Months Ended December 31, 2008
and 2007
|
(All amounts stated in thousands of United States
Dollars, unless otherwise stated)
|
1.
Basis of Presentation and Summary
of Significant Accounting Policies
|
Unaudited Interim Financial
Information
The accompanying unaudited
condensed consolidated financial statements include all majority-owned
subsidiaries over which the Company exercises control and have been prepared in
accordance with US generally accepted accounting principles (GAAP) and the
rules and regulations of the Securities and Exchange Commission for quarterly
reports on Form 10-Q and include all of the information and disclosures required
for interim financial reporting. The results of operations for the three and six
months ended December 31, 2008 and 2007 are not necessarily indicative of the
results for the full year. The Company believes that the disclosures are
adequate to make the information presented not misleading.
These financial statements should
be read in conjunction with the financial statements, accounting policies and
financial notes thereto included in the Companys Annual Report on Form 10-K for
the fiscal year ended June 30, 2008. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments), which are
necessary for a fair representation of financial results for the interim periods
presented.
References to the Company refer
to Net1 and its consolidated subsidiaries, unless the context otherwise
requires. References to Net1 are references solely to Net 1 UEPS Technologies,
Inc.
Translation of foreign
currencies
The primary functional currency
of the Company is the South African Rand (ZAR) and its reporting currency is
the US dollar. The Company also has consolidated entities which have the euro,
Russian rouble or Indian rupee as their functional currency. The current rate
method is used to translate the financial statements of the Company to US
dollar. Under the current rate method, assets and liabilities are translated at
the exchange rates in effect at the balance sheet date. Revenues and expenses
are translated at average rates for the period. Translation gains and losses are
reported in accumulated other comprehensive income in shareholders equity.
Foreign exchange transactions are
translated at the spot rate ruling at the date of the transaction. Monetary
items are translated at the closing spot rate at the balance sheet date.
Transactional gains and losses are recognized in income for the period.
Recent accounting pronouncements
adopted
Effective July 1, 2008, the
Company adopted Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standard (SFAS) No. 157,
Fair Value Measurements
(FAS 157) for financial assets and liabilities, which provides a single
definition of fair value, establishes a framework for the measurement of fair
value and expands disclosure about the use of fair value to measure assets and
liabilities; however, it does not require any new fair value measurements.
In determining the fair value of
our assets and liabilities, the Company uses various valuation approaches,
predominantly the market and income approaches. FAS 157 establishes a hierarchy
for information and valuations used in measuring fair value that is broken down
into three levels based on its reliability. Level 1 valuations are based on
quoted prices in active markets for identical assets or liabilities that we have
the ability to access. Level 2 valuations are based on quoted prices in markets
that are not active or for which all significant inputs are observable, directly
or indirectly. Level 3 valuations are based on information that is unobservable
and significant to the overall fair value measurement.
In October 2008, the FASB issued
FSP FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active
(FAS 157-3) which clarifies the
application of FAS 157 in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. FAS 157-3 was effective
upon issuance.
The adoption of FAS 157 and FAS
157-3 for financial assets and liabilities has not had a material effect on the
Companys results of operations or financial position.
5
1.
Basis of Presentation and Summary
of Significant Accounting Policies (continued)
|
Recent accounting pronouncements
adopted
(continued)
Effective July 1, 2008, the
Company adopted FASB SFAS No.159,
The Fair Value Option for Financial Assets
and Financial Liabilities (
FAS 159). FAS 159 expands the use of fair value
accounting to eligible financial assets and liabilities. The Company evaluated
its existing financial instruments and elected not to adopt the fair value
option on its financial instruments. However, because the FAS 159 election is
based on an instrument-by-instrument election at the time the Company first
recognizes an eligible item or enters into an eligible firm commitment, the
Company may decide to exercise the option on new items when business reasons
support doing so in future. As a result, the adoption of FAS 159 has not had a
material effect on the Companys results of operations or financial
position.
Recent accounting pronouncements
not yet adopted as of December 31, 2008
In December 2007, the FASB issued
SFAS No. 141(revised 2007),
Business Combinations
(FAS 141R). FAS 141R
replaces SFAS No. 141, Business Combinations (FAS 141). FAS 141R retains the
fundamental requirements in FAS 141 that the acquisition method of accounting
(defined in FAS 141 as the purchase method) be used for all business
combinations and for an acquirer to be identified for each business combination.
FAS 141R requires the acquiring entity in a business combination to recognize
the assets acquired and liabilities assumed at the acquisition date. FAS 141R
also requires acquisition-related costs to be recognized separately from the
business combination. FAS 141R applies prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The Company is
currently assessing FAS 141R and has not yet determined the impact that the
adoption of this standard will have on its financial position or results of
operations.
In December 2007, the FASB issued SFAS
No. 160,
Noncontrolling Interests in Consolidated Financial Statements
(FAS 160). FAS 160 establishes a single method of accounting for changes
in a parents ownership interest in a subsidiary that does not result in
deconsolidation. FAS 160 clarifies that all of those transactions are equity
transactions if the parent retains its controlling financial interest in the
subsidiary. FAS 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. Earlier adoption is
prohibited. However, FAS 160 shall be applied prospectively as of the beginning
of the fiscal year in which it is initially applied, except for the presentation
and disclosure requirements. The presentation and disclosure requirements shall
be applied retrospectively for all periods presented. The Company is currently
assessing FAS 160 and has not yet determined the impact that the adoption of
this standard will have on its financial position or results of operations.
In May 2008, the FASB issued SFAS
No. 162,
The Hierarchy of Generally Accepted Accounting Principles
(FAS
162). FAS 162 identifies the sources of accounting principles and the framework
for selecting the principles to be used in the preparation of financial
statements under US GAAP. FAS 162 is effective 60 days following the SECs
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411,
The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles
. It is not expected that FAS 162 will change
current practice.
In February 2008, the FASB issued
FASB Staff Position (FSP) FAS 157-2 (FSP FAS 157-2) which delays the
effective date of FAS 157 for all nonrecurring fair value measurements of
nonfinancial assets and nonfinancial liabilities until fiscal years beginning
after November 15, 2008. Entities are encouraged to adopt FAS 157 for
measurements of nonfinancial assets and nonfinancial liabilities in its entirety
as long as they have not yet issued financial statements during that year. An
entity that chooses to adopt FAS 157 in its entirety must do so for all
nonfinancial assets and nonfinancial liabilities within its scope. The Company
is currently reviewing the impact of the adoption of SFAS No. 157 for all
non-financial assets and liabilities on its financial statements.
In April 2008, the FASB issued
FSP No. FAS 142-3,
Determination of the Useful Life of Intangible Assets
(FSP FAS 142-3). This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under FASB Statement No. 142,
Goodwill and
Other Intangible Assets
(FAS 142). The intent of FSP FAS 142-3 is to
improve the consistency between the useful life of an intangible asset
determined under FAS 142 and the period of expected cash flows used to measure
the fair value of the asset under FAS 141. FSP FAS 142-3 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early adoption is prohibited. The
Company is currently assessing FSP FAS 142-3 and has not yet determined the
impact that the adoption of this standard will have on its financial position or
results of operations.
6
On August 27, 2008, the Company
acquired 80.1% of the issued share capital of BGS Smartcard Systems AG (BGS),
an Austrian private company for a total consideration of $101.6 million in cash
and the issuance of an aggregate of 40,134 shares of Net1 common stock to
certain former BGS shareholders. As described in note 10, the Company financed
the cash portion of the purchase price with the proceeds of short-term bank
financing which was repaid in full on October 16, 2008. For practical purposes
the acquisition date has been set as August 31, 2008.
BGS provides smart card-based
payment systems to banks, enterprises and government authorities in Russia,
Ukraine, Uzbekistan, India and Oman. BGS system, Dual Universal Electronic
Transactions (DUET), was developed by BGS as a derivative of the first version
of our Universal Electronic Payment System (UEPS) technology that the Company
licensed to BGS in 1993. BGS largest customer is Sberbank, the largest
financial institution in Russia, which owns the remaining 19.9% of BGS. The
Company acquired BGS because it fits in well with the Companys strategy to grow
in developing economies.
The following table sets forth
the components of the purchase price for the BGS acquisition using exchange
rates applicable as of August 31, 2008:
Cash paid at closing to former BGS
shareholders
|
$
|
101,611
|
|
Cash payable to former BGS shareholders on March 31, 2009
|
|
2,213
|
|
40,134 shares of Net1 common stock valued
at $24.46 per share issued to certain former BGS
|
|
|
|
shareholders
|
|
982
|
|
Estimated costs directly related to the
acquisition
|
|
2,915
|
|
Total purchase price
|
$
|
107,721
|
|
The following table sets forth the
preliminary allocation of the purchase price:
Cash and cash equivalents
|
$
|
6,283
|
|
Accounts receivable, net
|
|
3,218
|
|
Inventory
|
|
740
|
|
Property, plant and equipment
|
|
350
|
|
Intangible assets (see Note 9)
|
|
68,859
|
|
Trade and other payables
|
|
(7,181
|
)
|
Other long-term liabilities
|
|
(631
|
)
|
Deferred tax assets
|
|
10,657
|
|
Deferred tax liabilities (see Note 9)
|
|
(17,214
|
)
|
Minority interests
|
|
(1,838
|
)
|
Goodwill (see Note 9)
|
|
44,478
|
|
Total purchase price
|
$
|
107,721
|
|
The preliminary purchase price
allocation was based on management estimates as of December 31, 2008, and may be
adjusted up to one year following the closing of the transaction. The purchase
price allocation has not been finalized as management is still in the process of
performing its detailed analysis of assets and liabilities and contingencies
acquired.
7
2.
Acquisition of BGS (continued)
|
The results of BGS operations
are reflected in the Companys financial statements from September 1, 2008. The
following pro forma consolidated results of operations have been prepared as if
the acquisition of BGS had occurred on July 1, 2008 and 2007, respectively:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Actual
|
|
|
Pro forma
|
|
|
Pro forma
|
|
|
Pro forma
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
(1)
|
|
61,388
|
|
|
80,354
|
|
|
131,881
|
|
|
143,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before minority interest and
earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
from equity-accounted investments
(1)
|
|
28,690
|
|
|
21,358
|
|
|
50,325
|
|
|
35,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(1)
|
|
27,762
|
|
|
20,299
|
|
|
49,208
|
|
|
34,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic (in cents)
|
|
49.2
|
|
|
35.5
|
|
|
86.4
|
|
|
59.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share diluted (in cents)
|
|
49.1
|
|
|
35.1
|
|
|
86.0
|
|
|
59.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of outstanding shares of
|
|
|
|
|
|
|
|
|
|
|
|
|
common stock and linked units used to
calculate
|
|
|
|
|
|
|
|
|
|
|
|
|
basic earnings per share
|
|
56,469,618
|
|
|
57,176,968
|
|
|
56,965,131
|
|
|
57,163,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of outstanding shares of
|
|
|
|
|
|
|
|
|
|
|
|
|
common stock and linked units used to
calculate
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted earnings per share
|
|
56,593,774
|
|
|
57,771,381
|
|
|
57,192,290
|
|
|
57,631,973
|
|
(1) Revenue, net income before
minority interest and earnings from equity-accounted investments and net income
have been translated from the functional currencies, primarily ZAR and euro
(€), to US dollar, using the average exchange rate applicable for the period.
The average US dollar/ ZAR exchange rate for the three and six months ended
December 31, 2008 and 2007, was $1:9.8291; $1:6.7765; $1:8.8009 and $1:6.9446,
respectively. The average US dollar/ € exchange rate for the three and six
months ended December 31, 2008 and 2007, was $1:0.7599; $1:0.6907; $1:0.7124 and
$1:0.7094, respectively. The significant fluctuation in the US dollar/ ZAR
exchange rates has negatively impacted the Companys reported results.
The unaudited pro forma financial
information above reflects the following pro forma adjustments applied using the
principles of Article 11 of Regulation S-X under the Securities Exchange Act of
1934:
a) An adjustment to reduce
interest income on the Companys cash reserves for the three months ended
December 31, 2007 and the six months ended December 31, 2008 and 2007, as a
result of the payment of the cash portion of the purchase price of $107.7
million, at an assumed pre-tax South African interest rate of 10.7%, 10.8% and
10.7% respectively. This adjustment also assumes that the cash had been paid out
50 days after the beginning of the period presented, rather than at the
beginning of the period, because the Company financed the cash portion of the
purchase price with the proceeds of a loan facility that was repaid in full 50
days after closing of the Acquisition, and thus, continued to earn interest on
these cash reserves for the first 50 days of the period until the loan was
repaid in full. The adjustment has been tax-effected using a fully-distributed
rate for the three months ended December 31 2007 and the six months ended
December 31, 2008 and 2007, of 36.89%, 34.55% and 36.89%, respectively;
b) An adjustment to decrease
interest income, net for the three months ended December 31, 2007 and the six
months ended December 31, 2008 and 2007, for the interest on the short-term
facility of $0.3 million, $0.8 million and $0.8 million and the facility fee of
$0.4 million, $1.1 million and $1.1 million, respectively. The interest and
facility fee are not deductible for taxation purposes;
c) An adjustment to increase
amortization expense based on the estimated fair value of the identifiable
intangible asset from the purchase price allocation, which are being amortized
over its estimated useful life of seven years, of approximately $2.4 million,
$4.7 million and $4.7 million for the three months ended December 31, 2007 and
the six months ended December 31, 2008 and 2007, as well as the related
adjustment to deferred tax of $0.6 million, $1.2 million and $1.2 million,
respectively.
3.
Costs related to JSE listing
|
The Company completed its inward
listing, a secondary listing, on the JSE Limited (JSE) in South Africa on
October 8, 2008. The Company did not issue any additional shares in connection
with the listing, however, the listing did result in a trigger event which
converted all of the Companys special convertible preferred stock to common
stock (see note 11). The Companys selling, general and administration expense
includes the costs incurred related to the listing on the JSE.
8
3.
Costs related to JSE listing
(continued)
|
The table below presents the
costs incurred in connection with the Companys listing on the JSE during the
three and six months ended December 31, 2008:
|
|
Three
|
|
|
Six
|
|
|
|
months
|
|
|
months
|
|
|
|
ended
|
|
|
ended
|
|
|
|
December
|
|
|
December
|
|
|
|
31, 2008
|
|
|
31, 2008
|
|
Advisory fee to sponsor
|
|
-
|
|
$
|
122
|
|
Legal fees
|
$
|
52
|
|
|
174
|
|
Regulatory and filing fees
|
|
-
|
|
|
93
|
|
Printing
|
|
-
|
|
|
47
|
|
Accounting fees
|
|
-
|
|
|
27
|
|
Other
|
|
32
|
|
|
32
|
|
Total costs
related to JSE listing
|
$
|
84
|
|
$
|
495
|
|
4.
Foreign exchange gain related to
short-term investment
|
The Company entered into an asset
swap arrangement (in the form of a $110 million 32-day call account instrument)
in order to facilitate the short-term loan facility described in note 10,
however this asset swap arrangement was not linked to the loan facility and did
not require redemption on the same date as the repayment of the loan facility.
The Company earned interest at a rate of one month US dollar London Interbank
Offered Rate (LIBOR) plus 0.25% on this instrument. The Company gave a call
notice to the obligor on September 10, 2008, and the capital of $110 million (or
ZAR 1,100.7 million) and interest on this instrument was repaid on October 16,
2008. The Company has realized a foreign exchange gain of approximately $20.6
million and $26.7 million for the three and six months ended December 31,
2008.
5.
Pre-funded social welfare grants
receivable
|
The pre-funded social welfare
grants receivable represents the amounts due from provincial governments, as the
Company pre-funds social welfare grant payments on behalf of the government in
these provinces and pre-funding provided to certain merchants participating in
our merchant acquiring system. The pre-funded amounts are typically reimbursed
to the Company within two weeks after the disbursement of the grants. The grant
payment service normally commences during the week before the start of a
calendar month at government pay points and merchant locations. The January 2009
payment service commenced during the last four days of December 2008 and was
offered at merchant locations only.
6.
Deferred expenditure on smart
cards
|
The deferred expenditure on smart
cards represents amounts paid for smart cards used in the administration and
distribution of grants to beneficiaries. These expenditures are deferred and
written off over the period of the contract with the provincial government.
The Companys inventory comprised the
following categories as of December 31, 2008 and June 30, 2008.
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
Raw materials
|
$
|
444
|
|
$
|
111
|
|
Finished goods
|
|
5,819
|
|
|
5,941
|
|
|
$
|
6,263
|
|
$
|
6,052
|
|
9
8.
Equity-accounted investments
|
The percentage ownership and
functional currency of the Companys equity-accounted investments is presented
in the table below:
|
%
|
Functional currency of
|
|
Owned
|
the equity-accounted
|
Equity-accounted investment
|
by Net1
|
investment
|
SmartSwitch Namibia (Pty) Ltd (SmartSwitch
Namibia)
|
50%
|
Namibia Dollar
|
SmartSwitch Botswana (Pty) Ltd (SmartSwitch Botswana)
|
50%
|
Botswana Pula
|
VTU De Colombia S.A. (VTU Colombia)
|
50%
|
Colombian Peso
|
Vietnam Payment Technologies Joint Stock Company
(VinaPay)
|
30%
|
Vietnamese Dong
|
In October 2008, SmartSwitch
Namibia converted approximately $1.6 million of its total loan funding received
to equity. The Companys current shareholding remains at 50%. As a result, our
loan funding has decreased by $0.8 million and our interest in SmartSwitch
Namibias equity has increased by $0.8 million.
In August 2008, the Company
acquired additional shares in VinaPay for approximately $0.3 million. The
Companys current shareholding remains at 30%. These funds will be used to fund
operating activities.
During the six months ended
December 31, 2008, the Company acquired additional shares in VTU Colombia for
approximately $0.3 million. The Companys current shareholding remains at 50%.
These funds will be used to fund operating activities.
The functional currency of the
Companys equity-accounted investments is not the US dollar and thus the
equity-accounted investments are restated at the period end US dollar/foreign
currency exchange rate with an entry against accumulated other comprehensive
income.
Summarized below is the Companys
interest in equity-accounted investments as of June 30, 2008 and December 31,
2008:
|
Equity
|
Loans
|
Loss
|
Elimination
|
|
Total
|
|
|
|
|
|
|
|
Balance as of June 30, 2008
|
$1,984
|
$3,312
|
$(2,295)
|
$(316)
|
|
$2,685
|
Share capital acquired
|
1,423
|
(823)
|
-
|
-
|
|
600
|
Share capital acquired
VinaPay
|
300
|
-
|
-
|
-
|
|
300
|
Share capital acquired VTU
|
|
|
|
|
|
|
Colombia
|
300
|
-
|
-
|
-
|
|
300
|
Loan converted to equity
|
|
|
|
|
|
|
SmartSwitch Namibia
|
823
|
(823)
|
-
|
-
|
|
-
|
(Loss) Earnings from equity-
|
|
|
|
|
|
|
accounted investments
|
-
|
-
|
(762)
|
226
|
|
(536)
|
(Loss) Earnings from equity-
|
|
|
|
|
|
|
accounted investment
|
|
|
|
|
|
|
SmartSwitch Namibia
(1)
|
-
|
-
|
(105)
|
102
|
|
(3)
|
(Loss) Earnings from equity-
|
|
|
|
|
|
|
accounted investment
|
|
|
|
|
|
|
SmartSwitch
Botswana
(1)
|
-
|
-
|
(154)
|
124
|
|
(30)
|
Loss from equity-accounted
|
|
|
|
|
|
|
investment VTU Colombia
|
-
|
-
|
(444)
|
-
|
|
(444)
|
Loss from equity-accounted
|
|
|
|
|
|
|
investment VinaPay
|
-
|
-
|
(59)
|
-
|
|
(59)
|
Foreign currency adjustment
(2)
|
(270)
|
(409)
|
400
|
133
|
|
(146)
|
Balance as of December 31, 2008
|
$3,137
|
$2,080
|
$(2,657)
|
$43
|
|
$2,603
|
(1) includes the recognition of
realized net income as described below.
(2)
the foreign currency adjustment represents the effects of the combined net
fluctuations between the functional currency of the equity-accounted investments
and the US dollar.
10
8.
Equity-accounted investments
(continued)
|
The Company is required to
eliminate its percentage of the net income generated from sales to its
equity-accounted investments. The revenue generated and associated costs related
to these sales are included in the line item captions above net income from
continuing operations before minority interest and earnings (loss) from
equity-accounted investments in the unaudited condensed consolidated statement
of operations for the three and six months ended December 31, 2008 and 2007. The
realized amount related to the elimination is included in the loss from
equity-accounted investments line in the unaudited condensed consolidated
statement of operations for the three and six months ended December 31, 2008 and
2007. The Company will recognize this net income from these sales during the
period in which the hardware and software it has sold to its equity-accounted
investments are utilized in its operations, or has been sold to third party
customers, as the case may be.
9.
Goodwill and intangible assets
|
On August 27, 2008, the Company
acquired 80.1% of the issued share capital of BGS, for a total consideration of
$101.6 million in cash and the issuance of an aggregate of 40,134 shares of Net1
common stock to certain former BGS shareholders. As described in note 10, the
Company financed the cash portion of the purchase price with the proceeds of
short-term bank financing which was repaid in full on October 16, 2008. For
practical purposes the acquisition date has been set as August 31, 2008. The
goodwill associated with the acquisition of BGS represents the excess of cost
over the fair value of acquired net assets. A portion of the goodwill is tax
deductible. See note 2 for the allocation of the purchase price to the fair
value of acquired net assets.
Goodwill
The goodwill associated with the
acquisition of BGS has been allocated to the Companys hardware, software and
related technology sales segment on August 31, 2008 (see note 2).
Summarized below is the movement in
carrying value of goodwill for the six months ended December 31, 2008.
|
|
Carrying
|
|
|
|
value
|
|
|
|
|
|
Balance as of July 1, 2008
|
$
|
76,938
|
|
Acquisition of BGS as of August 31, 2008
|
|
44,478
|
|
Impairment of goodwill
|
|
(1,836
|
)
|
Foreign currency adjustment
(1)
|
|
(12,872
|
)
|
Balance as of December 31, 2008
|
$
|
106,708
|
|
(1) the foreign currency
adjustment represents the effects of the fluctuations between the South African
rand and the euro against the US dollar on the carrying value of goodwill.
The Companys management has
concluded that it is probable that a portion of the goodwill allocated to the
financial services operating segment is impaired as a result of the
deteriorating trading conditions of this operating segment, the Companys
managements strategic decision not to grow this business and the offer received
for the traditional microlending business in January 2009 (see also note 17).
The Company is still in the process of performing an impairment analysis for the
financial services operating segment and has recognized the best estimate of
that loss as of December 31, 2008. The initial fair market value of this segment
was determined by the Companys management as the sum of the amount to be paid
by the purchaser and the book value of the remaining segment post-sale assets,
which were evaluated by the Companys management to approximate their fair
value. The Company is still completing the second step of the goodwill
impairment test. The impairment of goodwill for the three and six months ended
December 31, 2008 included in our unaudited condensed consolidated statement of
operations is $1.8 million. Any adjustment to the initial estimate of the
impairment loss will be recognized during the third quarter of fiscal 2009.
As required by FAS 141 goodwill has
been allocated to the Companys reportable segments as follows:
|
|
As of
|
|
|
As of
|
|
|
|
December
|
|
|
June 30,
|
|
|
|
31, 2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
$
|
29,447
|
|
$
|
34,997
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
1,808
|
|
|
4,455
|
|
Hardware, software and related technology sales
|
|
75,453
|
|
|
37,486
|
|
Total
|
$
|
106,708
|
|
$
|
76,938
|
|
11
9.
Goodwill and intangible assets
(continued)
|
Intangible assets
Summarized below is the fair
value of the intangible asset acquired, translated at the exchange rate
applicable as of August 31, 2008, and the weighted-average amortization period
of the intangible asset:
|
|
|
|
|
Weighted-
|
|
|
|
Fair value
|
|
|
Average
|
|
|
|
as of
|
|
|
Amortization
|
|
|
|
August 31,
|
|
|
period (in
|
|
|
|
2008
|
|
|
years)
|
|
Finite-lived intangible asset:
|
|
|
|
|
|
|
Customer
relationships
|
$
|
68,859
|
|
|
7
|
|
A deferred tax liability of $17.2
million, at exchange rates applicable as of August 31, 2008, was recognized at
the Austrian statutory tax rate of 25% on August 31, 2008, related to the
intangible asset acquired.
Summarized below is the carrying
value and accumulated amortization of the intangible assets as of December 31,
2008 and June 30, 2008:
|
|
As of December 31, 2008
|
|
|
As of June 30, 2008
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
(1)
|
$
|
79,368
|
|
$
|
(5,880
|
)
|
$
|
73,488
|
|
$
|
15,679
|
|
$
|
(2,581
|
)
|
|
13,098
|
|
Software and unpatented
technology
|
|
8,394
|
|
|
(6,990
|
)
|
|
1,404
|
|
|
9,974
|
|
|
(6,638
|
)
|
|
3,336
|
|
FTS patent
|
|
4,048
|
|
|
(3,442
|
)
|
|
606
|
|
|
4,811
|
|
|
(3,850
|
)
|
|
961
|
|
Exclusive licenses
|
|
4,506
|
|
|
(2,969
|
)
|
|
1,537
|
|
|
4,506
|
|
|
(2,645
|
)
|
|
1,861
|
|
Trademarks
|
|
3,045
|
|
|
(710
|
)
|
|
2,335
|
|
|
3,618
|
|
|
(674
|
)
|
|
2,944
|
|
Customer contracts
|
|
114
|
|
|
(110
|
)
|
|
4
|
|
|
114
|
|
|
(98
|
)
|
|
16
|
|
Total finite-lived intangible
assets
|
$
|
99,475
|
|
$
|
(20,101
|
)
|
$
|
79,374
|
|
$
|
38,702
|
|
$
|
(16,486
|
)
|
$
|
22,216
|
|
(1)
Includes the customer relationships acquired as part of the BGS acquisition in
August 2008.
Aggregate amortization expense on
the finite-lived intangible assets for the three and six months ended December
31, 2008, was approximately $3.4 million and $5.8 million respectively (three
and six months ended December 31, 2007 was approximately $1.8 million and $3.5
million respectively). Future annual amortization expense is estimated at
approximately $11.7 million, however, this amount could differ from the actual
amortization as a result of changes in useful lives, exchange rate fluctuations
and other relevant factors.
10. Short-term facilities
|
As of December 31, 2008, the
Company had short-term facilities in South African Rand of approximately $52.8
million, translated at exchange rates applicable as of December 31, 2008. As a
result of the global liquidity crisis the Companys South African banks
increased the overdraft rate on the Companys short-term facilities on October
10, 2008, from 13.25% to 14.35% and as of December 31, 2008 the rate was 13.85%
. In addition, BGS has short-term facilities of approximately $1.4 million,
translated at exchange rates applicable as of December 31, 2008, with each of
two of Austrias largest banks. These facilities are available to the Company.
The interest rate applicable to these short-term facilities is negotiated when
the facilities are utilized. As of December 31, 2008, the Company had utilized
$0.1 million of its South African short-term facilities. The Companys
management believes its current short-term facilities are sufficient in order to
meet its future obligations to distribute social welfare grants.
Short-term loan facility
obtained to fund the BGS acquisition
The Company obtained a $110
million six month bank loan facility to fund the cash portion of the purchase
price for the BGS acquisition. The Company was entitled to settle the full
facility at any time during the six month period without incurring a prepayment
penalty. During the three and six months ended December 31, 2008, the Company
utilized approximately $103 million of this facility to pay the cash portion of
the purchase price, the $1.1 million facility fee and transaction-related costs.
The interest rate charged on this facility was LIBOR plus 2.50% .
The Company pledged $25 million
of its US dollar-denominated cash reserves and the A class shares and B class
shares it owned in its South African subsidiary, Net1 Applied Technologies South
Africa Limited (New Aplitec) as collateral security for the bank loan.
12
10. Short-term facilities (continued)
|
Short-term loan facility
obtained to fund the BGS acquisition (continued)
The Company paid the lender an
upfront facility fee of $1.1 million and has amortized the facility fee over the
period that the loan was outstanding. Included in interest income, net for the
three and six months ended December 31, 2008, is $0.4 million and $1.1 million,
respectively, related to the facility fee.
On October 16, 2008, the Company
used internally generated funds to repay the loan in full and all collateral
security arrangements were terminated.
11. Capital structure and creditor rights attached to
the B Class Loans
|
As described in Note 11 to the
Companys audited consolidated financial statements included within the
Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2008,
the Companys balance sheet reflected two classes of equity - common stock and
linked units. Effective October 2008, the linked units were all converted to
common stock as a result of the listing of the Companys common stock on the
JSE. The Company now has one class of equity, namely common stock.
During the three and six months
ended December 31, 2008, 4,801,291 and 4,882,429 shares of special convertible
preferred stock was converted to common stock. The trigger event that gave rise
to these conversions was the listing on the JSE Limited and requests by linked
unit-holders to sell and/or convert 35,377,959 and 35,975,818 linked units
during the three and six months ended December 31, 2008. The net result of these
conversions was that 35,377,959 and 35,975,818 B class preference shares and B
class loans were ceded to Net1 during the three and six months ended December
31, 2008, which converted 4,801,291 and 4,882,429 shares of special convertible
preferred stock to 4,801,291 and 4,882,429 shares of common stock in return for
the ownership of 35,377,959 and 35,975,818 B class preference shares and B class
loans. As a result of the conversion, the number of outstanding shares of common
stock has increased by 4,882,429 and the number of outstanding shares of special
convertible preferred stock has decreased by 4,882,429. In addition, as a result
of the conversion, Net1 owned all of the 236,977,187 B class preference shares
and B class loans.
On October 16, 2008, New Aplitec
repaid the A and B class loans to Net1 and acquired the B class preference
shares from Net1 for a total of approximately $84.7 million (ZAR 847.4 million
at the negotiated $:ZAR exchange rate on October 16, 2008). As a result, as of
October 16, 2008, the only class of shares that New Aplitec has in issue are its
A class ordinary shares, all of which are owned by Net1.
The entire consolidated net
income of the Company was attributable to the shareholders of the Company
comprising both the holders of Net1 common stock and the holders of linked units
prior to the Companys listing on the JSE. As discussed in note 11, all of the
remaining linked unit holders converted their linked units to common stock as a
result of listing of all of the Companys common stock on the JSE. As described
in note 11 to the Companys audited consolidated financial statements included
within the Companys Annual Report on Form 10-K for the fiscal year ended June
30, 2008, the linked units had the same rights and entitlements as those
attached to common stock. As a result of the conversion of all the linked units,
the entire consolidated net income of the Company is attributable to the holders
of Net1 common stock.
Diluted earnings per share have
been calculated to give effect to the number of additional shares of common
stock that would have been outstanding if the potential dilutive instruments had
been issued in each period. The calculation of diluted earnings per share for
the three and six months ended December 31, 2008, includes the dilutive effect
of a portion of the restricted stock awards granted to employees in August 2007
as these restricted stock awards are considered contingently issuable shares for
the purposes of the diluted earnings per share calculation and as of December
31, 2008, the vesting conditions in respect of a portion of the awards had been
satisfied.
The basic earnings per share for
the three and six months ended December 31, 2007, for the common stock and
linked units are the same and is calculated by dividing the net income by the
combined weighted average number (57.1 million) of common stock (51.5 million)
and special convertible preferred stock (5.6 million) in issue.
13
12. Earnings per share (continued)
The following tables detail the
weighted average number of outstanding shares used for the calculation of
earnings per share for the three and six months ended December 31, 2008 and
2007.
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
Weighted average number of outstanding
shares of
|
|
|
|
|
|
|
|
|
|
|
|
|
common stock basic
|
|
56,470
|
|
|
51,481
|
|
|
56,952
|
|
|
51,467
|
|
Weighted average effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
employee stock options
|
|
124
|
|
|
535
|
|
|
227
|
|
|
422
|
|
Weighted average number of outstanding
shares of
|
|
|
|
|
|
|
|
|
|
|
|
|
common stock diluted
|
|
56,594
|
|
|
52,016
|
|
|
57,179
|
|
|
51,889
|
|
|
|
Three months
ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
Weighted average number of outstanding
linked units
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
|
|
-
|
|
|
5,656
|
|
|
-
|
|
|
5,656
|
|
Weighted average effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
employee stock options
|
|
-
|
|
|
59
|
|
|
-
|
|
|
47
|
|
Weighted average number of outstanding
linked units
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted
|
|
-
|
|
|
5,715
|
|
|
-
|
|
|
5,703
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
Total weighted average number of
outstanding shares
|
|
|
|
|
|
|
|
|
|
|
|
|
used to calculate earnings per share
basic
|
|
56,470
|
|
|
57,137
|
|
|
56,952
|
|
|
57,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average number of outstanding shares
|
|
|
|
|
|
|
|
|
|
|
|
|
used to calculate
earnings per share diluted
|
|
56,594
|
|
|
57,731
|
|
|
57,179
|
|
|
57,592
|
|
13. Comprehensive (loss) income
The Companys comprehensive
(loss) income consists of net income and foreign currency translation gains and
losses which, under GAAP, are excluded from net income. Total comprehensive
(loss) income for the three and six months ended December 31, 2008 and 2007
was:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net income
|
$
|
27,762
|
|
$
|
20,318
|
|
$
|
54,006
|
|
$
|
38,246
|
|
Foreign currency translation adjustments
|
|
(50,048
|
)
|
|
2,275
|
|
|
(61,318
|
)
|
|
8,137
|
|
|
$
|
(22,286
|
)
|
$
|
22,593
|
|
$
|
(7,312
|
)
|
$
|
46,383
|
|
14
14. Stock-based compensation
Summary of Stock Option Activity
The following table summarizes
stock option activity for the three and six months ended December 31, 2008, and
2007:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Number of
|
|
|
exercise
|
|
|
Term
|
|
|
Value
|
|
|
|
shares
|
|
|
price
|
|
|
(in years)
|
|
|
($000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding July 1, 2008
|
|
953,378
|
|
$
|
18.20
|
|
|
7.4
|
|
$
|
5,813
|
|
Granted
|
|
560,000
|
|
$
|
24.46
|
|
|
10
|
|
|
-
|
|
Exercised
|
|
(50,006
|
)
|
|
-
|
|
|
-
|
|
|
1,270
|
|
Balance outstanding September 30, 2008
|
|
1,463,372
|
|
$
|
21.12
|
|
|
8.27
|
|
$
|
3,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding December 31, 2008
|
|
1,463,372
|
|
|
21.12
|
|
|
8.00
|
|
|
1,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding July 1, 2007
|
|
1,374,543
|
|
$
|
16.30
|
|
|
8.20
|
|
$
|
10,840
|
|
Exercised
|
|
(49,998
|
)
|
|
-
|
|
|
-
|
|
|
1,172
|
|
Balance outstanding September 30, 2007
|
|
1,324,545
|
|
$
|
16.80
|
|
|
8.00
|
|
$
|
13,782
|
|
Forfeitures
|
|
(96,623
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance outstanding December 31, 2007
|
|
1,227,922
|
|
$
|
16.31
|
|
|
7.70
|
|
$
|
16,021
|
|
No stock options became exercisable
during the three and six months ended December 31, 2008 and 2007.
During each of the six months
ended December 31, 2008 and 2007, the Company received approximately $0.2
million from stock options exercised. The Company issues new shares to satisfy
stock option exercises.
Stock-based compensation charge and
unrecognized compensation cost
The Company has recorded a net
stock compensation charge of $1.3 million and $0.9 million for the three months
ended December 31, 2008 and 2007, respectively, which comprised:
|
|
|
|
|
Allocated to
|
|
|
|
|
|
|
|
|
|
cost of goods
|
|
|
|
|
|
|
|
|
|
sold, IT
|
|
|
Allocated to
|
|
|
|
Total
|
|
|
processing,
|
|
|
selling,
|
|
|
|
charge
|
|
|
servicing
|
|
|
general and
|
|
|
|
(reversal)
|
|
|
and support
|
|
|
administration
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
1,346
|
|
$
|
61
|
|
$
|
1,285
|
|
Total
Three months ended December 31, 2008
|
$
|
1,346
|
|
$
|
61
|
|
$
|
1,285
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
1,197
|
|
$
|
100
|
|
$
|
1,097
|
|
Reversal of stock compensation
charge related to options
|
|
|
|
|
|
|
|
|
|
forfeited
|
|
(286
|
)
|
|
(147
|
)
|
|
(139
|
)
|
Total
Three months ended December 31, 2007
|
$
|
911
|
|
|
($47
|
)
|
$
|
958
|
|
15
14. Stock-based compensation (continued)
Stock-based compensation charge and unrecognized
compensation cost (continued)
The Company has recorded a net
stock compensation charge of $2.6 million and $1.8 million for the six months
ended December 31, 2008 and 2007, respectively, which comprised:
|
|
|
|
|
Allocated to
|
|
|
|
|
|
|
|
|
|
cost of goods
|
|
|
|
|
|
|
|
|
|
sold, IT
|
|
|
Allocated to
|
|
|
|
Total
|
|
|
processing,
|
|
|
selling,
|
|
|
|
charge
|
|
|
servicing
|
|
|
general and
|
|
|
|
(reversal)
|
|
|
and support
|
|
|
administration
|
|
Six months ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
2,551
|
|
$
|
122
|
|
$
|
2,429
|
|
Total - six months ended December 31, 2008
|
$
|
2,551
|
|
$
|
122
|
|
$
|
2,429
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
2,038
|
|
$
|
200
|
|
$
|
1,838
|
|
Reversal of stock compensation
charge related to options
|
|
|
|
|
|
|
|
|
|
forfeited
|
|
(286
|
)
|
|
(147
|
)
|
|
(139
|
)
|
Total Three months ended December 31, 2007
|
$
|
1,752
|
|
$
|
53
|
|
$
|
1,699
|
|
The stock-based compensation
charges have been allocated to cost of goods sold, IT processing, servicing and
support and selling, general and administration based on the allocation of the
cash compensation paid to the employees.
As of December 31, 2008, the
total unrecognized compensation cost related to stock options was approximately
$6.3 million, which the Company expects to recognize over approximately four
years. As of December 31, 2008, the total unrecognized compensation cost related
to restricted stock awards was approximately $9.0 million, which the Company
expects to recognize over approximately two years. As of December 31, 2008,
interest due from employees related to loans extended to fund stock option
exercises was approximately $0.1 million.
As of December 31, 2008, the
Company has recorded a deferred tax asset of approximately $0.6 million related
to the stock-based compensation charge recognized related to employees of Net1
as it is able to deduct the grant date fair value for taxation purposes in the
United States.
15. Operating segments
The Company discloses segment
information in accordance with FASB SFAS 131,
Disclosures about Segments of
an Enterprise and Related Information
, which requires companies to determine
and review their segments as reflected in the management information systems
reports that their managers use in making decisions and to report certain
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues.
The Company currently has four
reportable segments: Transaction-based activities, Smart card accounts,
Financial services and Hardware, software and related technology sales. Each
segment, other than the Hardware, software and related technology sales segment,
operate mainly within South Africa. The Companys reportable segments offer
different products and services and require different resources and marketing
strategies and share the Companys assets. The operations of BGS have been
allocated to the Hardware, software and related technology sales operating
segment.
The Transaction-based activities
segment currently consists mainly of a state pension and welfare benefit
distribution service provided to provincial governments in South Africa and
transaction processing for retailers, utilities and banks. Fee income is earned
based on the number of beneficiaries included in the government pay-file as well
as from merchants and card holders using the Companys merchant retail
application. In addition, utility providers and bankers are charged a fee for
transaction processing services performed on their behalf at retailers. This
segment has individually significant customers that each provides more than 10%
of the total revenue of the Company. For each of the three and six months ended
December 31, 2008, there were two such customers, providing 30% and 12%, and 30%
and 13%, respectively, of total revenue (three and six months ended December 31,
2007: three customers providing 29%, 15% and 10%, and 32%, 16% and 10%,
respectively, of total revenue).
The Smart card accounts segment
derives revenue from the provision of smart card accounts, as a fixed monthly
fee per card is charged for the maintenance of these accounts.
16
15. Operating segments (continued)
The Financial services segment
provides short-term loans as a principal and life insurance products on an
agency basis and generates interest income and initiation and services fees.
Interest income is recognized in the consolidated statement of operations as it
falls due, using the interest method by reference to the constant interest rate
stated in each loan agreement. As discussed under note 17 the Company is in the
process of selling its traditional microlending business included in this
operating segment and expects to close this sale by the end of March 2009. In
addition, the Company has recorded a goodwill impairment of $1.8 million which
was allocated to the financial services segment during the three and six months
ended December 31, 2008.
The Hardware, software-related
and technology sales segment markets, sells and implements the UEPS as well as
develops and provides Prism secure transaction technology, solutions and
services. From September 1, 2008, the segment includes the operations of BGS,
which comprise mainly hardware sales and licenses of the DUET system. The
segment undertakes smart card system implementation projects, delivering
hardware, software and business solutions in the form of customized systems.
Sales of hardware, SIM cards, cryptography services, SIM card licenses and other
software licenses are recorded within this segment. This segment also generates
rental income from hardware provided to merchants enrolled in the Companys
merchant retail application. Sales to SmartSwitch Nigeria Limited and the
related taxation implications are not reflected in revenue to external
customers, operating income, income taxation expense or net income after
taxation presented in the tables below.
Corporate/Eliminations includes the Companys head office cost
centers in addition to the elimination of inter-segment transactions.
The Company evaluates segment
performance based on operating income. The following tables summarize segment
information which is prepared in accordance with GAAP:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues to external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
$
|
32,820
|
|
$
|
39,991
|
|
$
|
73,164
|
|
$
|
78,155
|
|
Smart card accounts
|
|
6,711
|
|
|
9,637
|
|
|
15,281
|
|
|
18,773
|
|
Financial services
|
|
1,430
|
|
|
2,135
|
|
|
3,214
|
|
|
4,318
|
|
Hardware, software and
related technology sales
|
|
20,427
|
|
|
16,737
|
|
|
37,664
|
|
|
27,513
|
|
Total
|
|
61,388
|
|
|
68,500
|
|
|
129,323
|
|
|
128,759
|
|
Inter-company revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
783
|
|
|
1,142
|
|
|
1,793
|
|
|
2,221
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Hardware, software and
related technology sales
|
|
1,316
|
|
|
(262
|
)
|
|
2,018
|
|
|
(262
|
)
|
Total
|
|
2,099
|
|
|
880
|
|
|
3,811
|
|
|
1,959
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
17,653
|
|
|
21,381
|
|
|
39,291
|
|
|
41,970
|
|
Smart card accounts
|
|
3,050
|
|
|
4,380
|
|
|
6,945
|
|
|
8,532
|
|
Financial services
|
|
(1,570
|
)
|
|
458
|
|
|
(1,243
|
)
|
|
904
|
|
Hardware, software and
related technology sales
|
|
5,493
|
|
|
2,265
|
|
|
9,627
|
|
|
4,205
|
|
Corporate/Eliminations
|
|
(1,821
|
)
|
|
(258
|
)
|
|
(4,537
|
)
|
|
(1,479
|
)
|
Total
|
|
22,805
|
|
|
28,226
|
|
|
50,083
|
|
|
54,132
|
|
Interest earned
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based
activities
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Hardware, software and related
technology sales
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Corporate/Eliminations
|
|
5,053
|
|
|
6,978
|
|
|
11,783
|
|
|
12,266
|
|
Total
|
$
|
5,053
|
|
$
|
6,978
|
|
$
|
11,783
|
|
$
|
12,266
|
|
17
15. Operating segments (continued)
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
$
|
2,007
|
|
$
|
2,838
|
|
$
|
4,203
|
|
$
|
5,141
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Hardware, software and
related technology sales
|
|
83
|
|
|
16
|
|
|
195
|
|
|
19
|
|
Corporate/Eliminations
|
|
660
|
|
|
8
|
|
|
1,920
|
|
|
8
|
|
Total
|
|
2,750
|
|
|
2,862
|
|
|
6,318
|
|
|
5,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
915
|
|
|
1,233
|
|
|
2,029
|
|
|
2,431
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Financial services
|
|
102
|
|
|
104
|
|
|
215
|
|
|
208
|
|
Hardware, software and
related technology sales
|
|
2,952
|
|
|
1,156
|
|
|
4,827
|
|
|
2,269
|
|
Corporate/Eliminations
|
|
292
|
|
|
340
|
|
|
613
|
|
|
671
|
|
Total
|
|
4,261
|
|
|
2,833
|
|
|
7,684
|
|
|
5,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
4,699
|
|
|
5,478
|
|
|
10,277
|
|
|
10,892
|
|
Smart card accounts
|
|
854
|
|
|
1,271
|
|
|
1,944
|
|
|
2,475
|
|
Financial services
|
|
74
|
|
|
132
|
|
|
166
|
|
|
261
|
|
Hardware, software and
related technology sales
|
|
1,166
|
|
|
720
|
|
|
2,741
|
|
|
1,321
|
|
Corporate/Eliminations
|
|
10,206
|
|
|
4,187
|
|
|
11,773
|
|
|
7,711
|
|
Total
|
|
16,999
|
|
|
11,788
|
|
|
26,901
|
|
|
22,660
|
|
Net income after taxation
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based
activities
|
|
10,947
|
|
|
13,064
|
|
|
24,813
|
|
|
26,131
|
|
Smart card accounts
|
|
2,195
|
|
|
3,111
|
|
|
5,000
|
|
|
6,060
|
|
Financial services
|
|
(1,645
|
)
|
|
325
|
|
|
(1,410
|
)
|
|
640
|
|
Hardware, software and related
technology sales
|
|
3,895
|
|
|
1,506
|
|
|
6,776
|
|
|
2,843
|
|
Corporate/Eliminations
|
|
12,370
|
|
|
2,312
|
|
|
18,827
|
|
|
2,572
|
|
Total
|
|
27,762
|
|
|
20,318
|
|
|
54,006
|
|
|
38,246
|
|
Segment assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
417,731
|
|
|
424,031
|
|
|
417,731
|
|
|
424,031
|
|
Expenditures for long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
160
|
|
|
950
|
|
|
2,243
|
|
|
1,460
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Financial services
|
|
41
|
|
|
234
|
|
|
632
|
|
|
334
|
|
Hardware, software and
related technology sales
|
|
238
|
|
|
21
|
|
|
408
|
|
|
82
|
|
Corporate/Eliminations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
439
|
|
$
|
1,205
|
|
$
|
3,283
|
|
$
|
1,876
|
|
The segment information as
reviewed by the chief operating decision maker does not include a measure of
segment assets per segment as all of the significant assets are used in the
operations of all, rather than any one, of the segments. The Company does not
have dedicated assets assigned to a particular operating segment. Accordingly,
it is not meaningful to attempt an arbitrary allocation and segment asset
allocation is therefore not presented.
It is impractical to disclose
revenues from external customers for each product and service or each group of
similar products and services.
18
16. Income tax in interim periods
For the purposes of interim
financial reporting, the Company determines the appropriate income tax provision
in accordance with the guidance in APB Opinion 28,
Interim Reporting
, and
FASB Interpretation No. 18,
Accounting for Income Taxes in Interim
Periods
. Accordingly, the tax charge is calculated by first applying the
effective tax rate expected to be applicable for the full fiscal year to
ordinary income. This amount is then adjusted for the tax effect of significant
unusual or extraordinary items that are reported separately, and have an impact
on the tax charge. The cumulative effect of any change in the enacted tax rate
on the opening balance of deferred tax assets and liabilities is also included
in the tax charge as a discrete event in the interim period in which the
enactment date occurs.
For the three and six months
ended December 31, 2008, the tax charge was calculated using the expected
effective tax rate for the year (34.55%) . Our effective tax rate for the three
and six months ended December 31, 2008 was 37.2% and 32.7%, respectively, and
includes the effect of the change in the fully distributed tax rate from 35.45%
to 34.55% . The change in the fully distributed tax rate from 35.45% to 34.55%
is discussed below.
The Company increased its
unrecognized tax benefits by $0.1 million and $0.2 million and reduced its
deferred tax assets by approximately $0.1 million and $0.1 million during the
three and six months ended December 31, 2008, respectively. As of December 31,
2008, the Company had accrued interest related to uncertain tax positions of
approximately $0.1 million on its balance sheet.
The Company does not expect the
change related to unrecognized tax benefits will have a significant impact on
its results of operations or financial position in the next 12 months.
The Company files income tax
returns mainly in South Africa, Austria, Russian Federation and in the US
federal jurisdiction. As of December 31, 2008, the Company is no longer subject
to income tax examination by the South African Revenue Service for years before
December 31, 2004. The Company is subject to income tax in other jurisdictions
outside South Africa, none of which are individually material to its financial
position, statement of cash flows, or results of operations.
On February 20, 2008, the Finance
Minister of South Africa announced the decrease in statutory rate of taxation
for South African domiciled companies from 29% to 28% for all fiscal years
ending on or after April 1, 2008. The change in tax rate was promulgated on July
22, 2008. The fully distributed tax rate was reduced to 34.55% from 35.45%
during the first quarter of fiscal 2009 and has resulted in an income tax
benefit included in the Companys income tax expense line on its unaudited
condensed consolidated statements of operations for the six months ended
December 31, 2008. The income tax expense of approximately $26.9 million for the
six months ended December 31, 2008, includes an income tax benefit of
approximately $3.5 million resulting from the reversal of a portion of the
deferred tax assets and liabilities recognized as of June 30, 2008.
17. Subsequent events
In January 2009, the Company
entered into an agreement to sell its traditional microlending business to an
unrelated third party as a result of an unsolicited offer received in January
2009. The sale is subject to, amongst other conditions, a due diligence review
by the purchaser. We expect the transaction to be concluded in March 2009. The
assets and liabilities of the microlending business have not been classified as
held for sale as of December 31, 2008, because as at the balance sheet date
management had neither committed to a plan to sell the business nor initiated an
active program to locate a buyer.
19
Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations
The following discussion and
analysis of our financial condition and results of operations should be read in
conjunction with our unaudited condensed consolidated financial statements and
the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.
Forward-looking statements
Some of the statements in this
Quarterly Report on Form 10-Q constitute forward-looking statements. These
statements relate to future events or our future financial performance and
involve known and unknown risks, uncertainties and other factors that may cause
our or our industrys actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed, implied or inferred by these
forward-looking statements. Such factors include, among other things, those
listed under Risk Factors and elsewhere in our Annual Report on Form 10-K for
the year ended June 30, 2008. In some cases, you can identify forward-looking
statements by terminology such as may, will, should, could, would,
expects, plans, intends, anticipates, believes, estimates,
predicts, potential or continue or the negative of such terms and other
comparable terminology.
Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we do
not know whether we can achieve positive future results, levels of activity,
performance, or goals. Actual events or results may differ materially. We
undertake no obligation to update any of the forward-looking statements after
the date of this Quarterly Report on Form 10-Q to conform those statements to
reflect the occurrence of unanticipated events, except as required by applicable
law.
You should read this Quarterly
Report on Form 10-Q and the documents that we reference herein and the documents
we have filed as exhibits hereto and which we have filed with the Securities and
Exchange Commission completely and with the understanding that our actual future
results, levels of activity, performance and achievements may be materially
different from what we expect. We qualify all of our forward-looking statements
by these cautionary statements.
Trends and Material Developments Affecting our
Business
South African Provincial Contracts
On November 3, 2008, the South
African Social Security Agency, or SASSA, notified bidders that it has
terminated the tender process without awarding new contracts, citing a number of
defects in the original request for proposal published by SASSA and in the bid
evaluation process. SASSA also stated that it has deferred a decision about
commencing a new tender process.
Our current contracts expire on
March 31, 2009. We are currently in discussions with SASSA to determine the
extent, terms and conditions of any potential contract extensions. Until the
exact terms and conditions of these potential contract extensions are
formalized, we can not quantify the financial or business impact of any
variations to our current contractual terms.
Refer to discussion under Part II.
Other InformationItem 1A. Risk Factors.
International Expansion
BGS Acquisition
On August 27, 2008, we acquired
80.1% of the issued share capital of BGS Smartcard Systems AG, or BGS, an
Austrian private company. The results of BGS operations are reflected in our
financial statements from September 1, 2008. BGS activities are similar to
those performed by our hardware, software and related technology sales segment
and include payment system implementations which occur on an ad hoc basis.
During the second quarter of fiscal 2009 BGS delivered significant licenses and
hardware to its largest customer, the Savings Bank of the Russian Federation, or
Sberbank.
Iraq
We do not equity account or
consolidate the results of our activities in Iraq. Our UEPS banking and payment
system went live in Iraq during the first quarter of fiscal 2009 and we
commenced registration of war victims. We performed software development
activities and delivered ATMs and smart cards to an Iraqi consortium during
fiscal 2009. We expect to generate revenues in the third quarter of fiscal 2009
from the additional sale of smart cards and license fees during the first
quarter of fiscal 2010.
20
Ghana
We do not equity account or
consolidate the results of our activities in Ghana. During the second quarter of
fiscal 2009 we continued with the delivery of hardware including smart cards
under our contract with the Bank of Ghana. In addition, we continued delivery of
smart cards under additional purchase orders we received. Enrolment of e-zwich
users continued in Ghana during the second quarter of fiscal 2009. We expect to
deliver additional smart cards during the third quarter of fiscal 2009.
Namibia
We own 50% of SmartSwitch Namibia
(Proprietary) Limited, or SmartSwitch Namibia, and the other 50% is owned by
Namibia Post Limited, or NamPost, a government entity which provides post office
and banking services across Namibia. As of September 30, 2008, SmartSwitch
Namibia has activated 256,072 UEPS smart cards and has signed up 169 merchants
to accept the UEPS smart cards.
Botswana
We own 50% of Smartswitch
Botswana (Proprietary) Limited, or SmartSwitch Botswana, and the other 50% is
owned by Capricorn Investment Holdings (Botswana) Proprietary Limited, or
Capricorn, which owns 100% of Botswana-based Bank Gaborone Limited and the
majority holding in a number of financial services companies operating in
Botswana.
During the second quarter of
fiscal 2009, SmartSwitch Botswana continued registration of food voucher
recipients under the tender granted by the Department of Social Services in
Botswana. During the second quarter of fiscal 2009 the Botswana government
instructed SmartSwitch Botswana to delay the commencement of the project by six
months. We expect the distribution of funds for food using the UEPS technology
to start in the fourth quarter of fiscal 2009.
Nigeria
We consolidate SmartSwitch
Nigeria Limited, or SmartSwitch Nigeria, for financial accounting purposes as we
own 80% of the equity. This differs from the equity accounting treatment of our
investments in SmartSwitch Namibia and SmartSwitch Botswana. SmartSwitch Nigeria
has entered into a contract with the River State government for the distribution
of funds using our UEPS. The pilot project is scheduled to commence during the
third quarter of 2009 and will include up to 4,500 smart cards.
Colombia
We own 50% of VTU De Colombia SA,
or VTU Colombia, and have fully installed and integrated the VTU system in
Colombia. The VTU system in Colombia is now active with Colombias first and
third largest mobile operators. VTU Colombia currently operates in Bogotá,
Baranquilla and Cartegena and is expected to expand the VTU system nationally in
the next four quarters. VTU Colombia generates revenues from mobile phone users
when they purchase airtime using the VTU system.
21
VTU Colombia commenced VTU
operations in August 2007. The following chart presents the growth in VTU
Colombia revenue, in Colombian pesos, or COP, and the number of transactions
during the seventeen month period ended December 31, 2008:
VTU Colombia revenue and number of transactions
The average exchange rate during the
seventeen months ended December 31, 2008 was US$ 1: COP 2,015.
Vietnam
We own 30% of Vietnam Payment
Technologies, or VinaPay, which was authorized and licensed to commence business
activities at the end of May 2007. The VTU system became fully operational and
the first commercial transactions were performed by customers in late December
2007. VinaPay generates revenues from mobile phone users when they purchase
airtime using the VTU system. VinaPay experienced strong revenue growth during
the second quarter of fiscal 2009. In addition, we continue preliminary
discussions with two of Vietnams other mobile operators to utilize the VTU
system.
22
Commencing in August 2008,
VinaPays sales and customer service teams focused on increasing the potential
VTU distributors and sub-distributors base through a marketing promotion program
for its distribution network. The following chart presents the growth in VinaPay
revenue, in Vietnamese dong, or VND, and the number of transactions during the
twelve month period ended December 31, 2008:
VinaPay revenue and number of transactions
The average exchange rate during the
twelve months ended December 31, 2008 was US$ 1: VND 16,708.
Other Countries
We have also implemented UEPS
systems in Rwanda, Burundi, Malawi and Mozambique, some of which are considered
among the poorest countries in the world. In Malawi, our system has been
implemented by the Reserve Bank of Malawi as a national payment system.
In addition, our relationship
with MTN Group (Africa/Middle Easts largest mobile operator group) regarding
VTU continues to progress. Both MTN Ivory Coast and MTN Rwanda have purchased
VTU systems, bringing the number of MTN operators using VTU for electronic
pre-paid airtime top-up to six.
Listing on JSE Limited
On October 8, 2008, we listed all
of our outstanding shares of common stock on the JSE Limited, or JSE, in South
Africa. The listing, a secondary or inward listing, of all of our common stock
on the JSE was a trigger event and accordingly all remaining outstanding special
convertible preferred stock (together with B class shares and loans, linked
units) converted to Net1 common stock. As a result of the conversion, the number
of outstanding shares of common stock has increased by 4,801,291 and the number
of outstanding shares of special convertible preferred stock has decreased by
4,801,291 to nil. In addition, as a result of the conversion, Net1 owned all of
the 236,977,187 B class preference shares and B class loans. We are required to
maintain a register of shareholders in South Africa and on October 8, 2008,
these 4,801,291 shares of common stock were transferred to the South African
register.
23
On October 16, 2008, Net1 Applied
Technologies South Africa Limited, or New Aplitec, repaid the A and B class
loans to Net1 and acquired the B class preference shares from Net1 for a total
of approximately $84.7 million (ZAR 847.4 million at the negotiated $:ZAR
exchange rate on October 16, 2008). As a result, as of October 16, 2008, the
only class of shares that New Aplitec has in issue are its A class ordinary
shares, all of which are owned by Net1.
The main purposes for our listing on
the JSE were to:
-
enhance South African investors awareness of us, thereby enlarging our
potential investor base and increasing trade in our shares;
-
provide ourselves with an additional source from which capital to
facilitate growth can be obtained;
-
optimize and simplify our capital structure by eliminating the linked
units;
-
enable us to externalize our South African reserves when required;
-
externalize our South African reserves without incurring significant
leakage;
-
facilitate direct investment in our common stock by South African residents
and the investors utilizing the trading platform operated by the JSE; and
-
create additional liquidity for current South African investors.
As a result of our listing on the
JSE our shareholders are now able to trade their shares of common stock on the
Nasdaq Global Select Market, or Nasdaq, and the JSE. During the first half of
fiscal 2009, we incurred expenses of approximately $0.5 million related to our
inward listing on the JSE.
Progress of wage payment implementation
During the first quarter of
fiscal 2009, we entered into an agreement with our first major corporate
customer to utilize the wage payment system. Our customer is the largest
provider of security and guarding services in South Africa and employs
approximately 20,000 people. We commenced with the registration process during
the second quarter of fiscal 2009 and we expect to complete the enrollment of
all employees by the end of the third quarter of fiscal 2009.
Critical Accounting Policies
Our unaudited condensed
consolidated financial statements have been prepared in accordance with US GAAP,
which requires management to make estimates and assumptions about future events
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities. As future events and their effects cannot be
determined with absolute certainty, the determination of estimates requires
managements judgment based on a variety of assumptions and other determinants
such as historical experience, current and expected market conditions and
certain scientific evaluation techniques.
Critical accounting policies are
those that reflect significant judgments or uncertainties, and potentially may
result in materially different results under different assumptions and
conditions. Management has identified the following critical accounting policies
that are described in more detail in our Annual Report on Form 10-K for the year
ended June 30, 2008.
-
Revenue Recognition System Implementation Projects;
-
Deferred taxation;
-
Stock-based compensation;
-
Intangible assets acquired through the acquisition of Prism and BGS;
-
Accounts receivable and allowance for doubtful debts; and
-
Research and development.
Recent accounting pronouncements adopted
Refer to Note 1 of the unaudited
condensed consolidated financial statements for a full description of recent
accounting pronouncements, including the expected dates of adoption and effects
on financial condition, results of operations and cash flows.
Recent accounting pronouncements not yet adopted as of
December 31, 2008
Refer to Note 1 of the unaudited
condensed consolidated financial statements for a full description of recent
accounting pronouncements not yet adopted as of December 31, 2008, including the
expected dates of adoption and effects on financial condition, results of
operations and cash flows.
24
Currency Exchange Rate Information
Actual exchange
rates
The actual exchange rates for and at
the end of the periods presented were as follows:
Table 1
|
|
Three months ended
|
|
|
Six months ended
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
ZAR : $ average exchange rate
|
|
9.9576
|
|
|
6.7909
|
|
|
8.8718
|
|
|
6.9566
|
|
|
7.3123
|
|
Highest ZAR : $ rate during period
|
|
11.8506
|
|
|
7.0843
|
|
|
11.8506
|
|
|
7.5977
|
|
|
8.2440
|
|
Lowest ZAR : $ rate during period
|
|
8.2250
|
|
|
6.4262
|
|
|
7.1557
|
|
|
6.4262
|
|
|
6.4262
|
|
Rate at end of period
|
|
9.4649
|
|
|
6.8547
|
|
|
9.4649
|
|
|
6.8547
|
|
|
7.9645
|
|
ZAR: US $ Exchange Rates
Translation exchange
rates
We are required to translate our
results of operations from ZAR to U.S. dollars on a monthly basis. Thus, the
average rates used to translate this data for the three and six months ended
December 31, 2008 and 2007, vary slightly from the averages shown in the table
above. The translation rates we use in presenting our results of operations are
the rates shown in the following table:
Table 2
|
|
Three months ended
|
|
|
Six months ended
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
Income and expense items: $1 = ZAR .
|
|
9.8291
|
|
|
6.7765
|
|
|
8.8009
|
|
|
6.9446
|
|
|
7.2905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items: $1 = ZAR
|
|
9.4649
|
|
|
6.8547
|
|
|
9.4649
|
|
|
6.8547
|
|
|
7.9645
|
|
25
Results of operations
The discussion of our
consolidated overall results of operations is based on amounts as reflected in
Item 1 Financial Statements which are reported in US dollars and are
prepared in accordance with US GAAP. Our discussion analyzes our results of
operations both in US dollars and ZAR, because ZAR is the functional currency of
the entities which contribute the majority of our profits and is the currency in
which the majority of our transactions are initially incurred and measured. Due
to the significant impact of currency fluctuations between the US dollar and ZAR
on our reported results and because we use the US dollar as our reporting
currency, we believe that the supplemental presentation of our results of
operations in ZAR is useful to investors to understand the changes in the
underlying trends of our business.
We analyze our business and
operations in terms of four inter-related but independent operating segments:
(1) transaction-based activities, (2) smart card accounts, (3) financial
services, and (4) hardware, software and related technology sales. In addition,
corporate and corporate office activities that are impracticable to ascribe
directly to any of the other operating segments, as well as any inter-segment
eliminations, are included in corporate/eliminations.
Second quarter of fiscal 2009
compared to the second quarter of fiscal 2008
The following factors had a
significant influence on our results of operations during the second quarter of
fiscal 2009 as compared with the same period in the prior year:
-
increased net income resulting from a foreign exchange gain related to the
asset swap we entered into during the period that the short-term loan facility
was to remain outstanding;
-
significant weakening of the South African rand, our functional currency,
against the US dollar, our reporting currency, which had a negative impact on
our revenues and net income in US dollars;
-
increased revenues and operating income from sales of hardware and
licenses by BGS, which we acquired in the first quarter of fiscal 2009;
-
increased revenues and operating income in all provinces where we
distribute social welfare grants;
-
increased revenues and operating income from the continued adoption of our
merchant acquiring system by cardholders;
-
decrease in operating income as a result of the impairment of goodwill
assigned to the financial services operating segment;
-
decrease in operating income as a result of stock-based compensation
charges related to grants of stock options and restricted stock in August
2008.
Consolidated overall results of
operations
This discussion is based on the
amounts, which were prepared in accordance with US GAAP.
The following tables show the
changes in the items comprising our statements of operations, both in US dollars
and in ZAR:
|
|
In United States Dollars
|
|
Table 3
|
|
(US GAAP)
|
|
|
|
Three months ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
$ %
|
|
|
|
$ 000
|
|
|
$ 000
|
|
|
change
|
|
Revenue
|
|
61,388
|
|
|
68,500
|
|
|
(10)%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
17,175
|
|
|
20,175
|
|
|
(15)%
|
|
Selling, general and administration
|
|
15,311
|
|
|
17,266
|
|
|
(11)%
|
|
Depreciation and amortization
|
|
4,261
|
|
|
2,833
|
|
|
50%
|
|
Impairment of goodwill
|
|
1,836
|
|
|
-
|
|
|
|
|
Operating income
|
|
22,805
|
|
|
28,226
|
|
|
(19)%
|
|
Foreign exchange gain related to short-term
investment
|
|
20,581
|
|
|
-
|
|
|
|
|
Interest income, net
|
|
2,303
|
|
|
4,116
|
|
|
(44)%
|
|
Income before income taxes
|
|
45,689
|
|
|
32,342
|
|
|
41%
|
|
Income tax expense
|
|
16,999
|
|
|
11,788
|
|
|
44%
|
|
Income before minority interest and
earnings from
|
|
|
|
|
|
|
|
|
|
equity-accounted investments
|
|
28,690
|
|
|
20,554
|
|
|
40%
|
|
Minority interest
|
|
702
|
|
|
-
|
|
|
|
|
Loss from equity-accounted investments
|
|
226
|
|
|
236
|
|
|
(4)%
|
|
Net income
|
|
27,762
|
|
|
20,318
|
|
|
37%
|
|
26
|
|
In South African Rand
|
|
Table 4
|
|
(US GAAP)
|
|
|
|
Three months ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
ZAR
|
|
|
|
ZAR
|
|
|
ZAR
|
|
|
%
|
|
|
|
000
|
|
|
000
|
|
|
change
|
|
Revenue
|
|
603,387
|
|
|
464,192
|
|
|
30%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
168,815
|
|
|
136,716
|
|
|
23%
|
|
Selling, general and administration
|
|
150,493
|
|
|
117,003
|
|
|
29%
|
|
Depreciation and amortization
|
|
41,881
|
|
|
19,198
|
|
|
118%
|
|
Impairment of goodwill
|
|
18,046
|
|
|
-
|
|
|
|
|
Operating income
|
|
224,152
|
|
|
191,275
|
|
|
17%
|
|
Foreign exchange gain related to short-term
investment
|
|
202,292
|
|
|
-
|
|
|
|
|
Interest income, net
|
|
22,636
|
|
|
27,892
|
|
|
(19)%
|
|
Income before income taxes
|
|
449,080
|
|
|
219,167
|
|
|
105%
|
|
Income tax expense
|
|
167,084
|
|
|
79,882
|
|
|
109%
|
|
Income before minority interest and
earnings from
|
|
|
|
|
|
|
|
|
|
equity-accounted investments
|
|
281,996
|
|
|
139,285
|
|
|
102%
|
|
Minority interest
|
|
6,900
|
|
|
-
|
|
|
|
|
Loss from equity-accounted investments
|
|
2,221
|
|
|
1,599
|
|
|
39%
|
|
Net income
|
|
272,875
|
|
|
137,686
|
|
|
98%
|
|
Analyzed in ZAR the increase in
revenue and cost of goods sold, IT processing, servicing and support for the
second quarter of fiscal 2009, was primarily due to the higher volumes in our
transaction-based activities, a greater number of UEPS-based smart card holders
and inclusion of BGS.
Our operating income margin for
the second quarter of fiscal 2009 decreased to 37% from 41% for the second
quarter of fiscal 2008 mainly as a result of the increase in contribution from
our hardware, software and related technology sales segment, which generates a
lower margin than our transaction-based activities segment; impairment of
goodwill; increased intangible asset amortization related to the BGS
acquisition; increases in goods and services purchased from third parties,
including the effects of the increase in inflation in South Africa; and stock
based compensation charges.
Selling, general and
administration expense increased during the second quarter of fiscal 2009 from
the comparable quarter in fiscal 2008 primarily due to the stock-based
compensation charge related to the restricted stock grants awarded in the first
and third quarters of fiscal 2008, increases in goods and services purchased
from third parties, including the effects of the increase in inflation in South
Africa and expenses of $0.4 million related to our JSE listing.
Our direct costs of maintaining a
listing on Nasdaq and obtaining a listing on the JSE, as well as compliance with
the Sarbanes-Oxley Act of 2002, or Sarbanes, particularly Section 404 of
Sarbanes, includes independent directors fees, legal fees, fees paid to Nasdaq,
our compliance officers salary, fees paid to consultants who assist with
Sarbanes compliance, fees paid to the JSE and consultants and advisors assisting
with the JSE listing, and fees paid to our independent accountants related to
the audit and review process. This has resulted in expenditures of $0.4 million
(ZAR 4.3 million) and $0.5 million (ZAR 3.1 million) during the second quarters
of fiscal 2009 and 2008, respectively.
27
The table below presents the
amortization related to the acquired intangible assets recognized in the Prism
and BGS acquisitions and the related tax effects included in our reported
results for the second quarter of fiscal 2009 and 2008:
|
Three months ended
|
Table 5
|
December 31,
|
|
2008
|
|
2007
|
|
$
000
|
|
$
000
|
Amortization included in depreciation and
amortization expense:
|
3,157
|
|
1,468
|
Prism acquisition
|
1,012
|
|
1,468
|
BGS acquisition
|
2,145
|
|
-
|
|
|
|
|
Deferred tax included in income tax
expense:
|
881
|
|
532
|
Prism acquisition
|
344
|
|
532
|
BGS acquisition
|
537
|
|
-
|
|
Three months ended
|
Table 6
|
December 31,
|
|
2008
|
|
2007
|
|
ZAR 000
|
|
ZAR 000
|
Amortization included in depreciation and
amortization expense:
|
31,034
|
|
9,951
|
Prism acquisition
|
9,951
|
|
9,951
|
BGS acquisition
|
21,083
|
|
-
|
|
|
|
|
Deferred tax included in income tax
expense:
|
8,663
|
|
3,607
|
Prism acquisition
|
3,385
|
|
3,607
|
BGS acquisition
|
5,278
|
|
-
|
Property, plant and equipment
acquired to provide administration and distribution services to our customers is
depreciated over the shorter of expected useful life and the contract period
with the provincial government. We are currently in an extension phase with all
our contracts and the majority of our property, plant and equipment related to
the administration and distribution of social welfare grants has been written
off. Accordingly, depreciation expense related to these activities decreased
during the second quarter of fiscal 2009 compared with the second quarter of
fiscal 2008. This reduction in depreciation was partially offset by the increase
in depreciation related to new back-end processing computers and our
participating merchant POS terminals.
The foreign exchange gain
resulted from an asset swap arrangement (in the form of a 32-day call account
instrument) that we entered into in connection with the short-term bank
financing we obtained to fund the BGS acquisition. The call account instrument
was repaid to us with accrued interest on October 16, 2008.
In ZAR, interest on surplus cash
for the second quarter of fiscal 2009 increased to $5.1 million (ZAR 50.0
million) from $5.3 million (ZAR 35.8 million) for the second quarter of fiscal
2008. The increase in interest on surplus cash held in South Africa was due to a
higher average daily ZAR cash balance during the second quarter of fiscal 2009
compared with the second quarter of fiscal 2008 and higher deposit rates
resulting from the adjustment in the South African prime interest rate from an
average of approximately 14.08% per annum for the second quarter of fiscal 2008
to 15.39% per annum for the second quarter of fiscal 2009. We expect our
interest on surplus cash for the third quarter of fiscal 2009 to decrease
compared with the comparable period in the third quarter of fiscal 2008
primarily as a result of what we expect to be a lower average daily ZAR cash
balance and the reduction of the interest rate on most of our US dollar deposits
to 0%.
Included in interest expense is
the facility fee of approximately $0.4 million (ZAR 3.5 million) that we paid to
the lender under the short-term loan facility we obtained to fund the BGS
acquisition and approximately $0.3 million (ZAR 3.2 million) interest on the
short-term loan facility. Excluding the impact of this facility fee and the
interest, during the second quarter of fiscal 2009 interest expense increased
due to an increase in the average rates of interest on our short-term
facilities. In ZAR, excluding the impact of the facility fee and interest,
finance costs increased to $2.1 million (ZAR 20.3 million) for the second
quarter of fiscal 2009 from $2.3 million (ZAR 15.6 million) for the second
quarter of fiscal 2008.
28
Total tax expense for the second
quarter of fiscal 2009 was $17.0 million (ZAR 167.0 million) compared with $11.8
million (ZAR 79.9 million) during the same period in the comparable quarter of
the prior fiscal year. Our total tax expense increased, primarily due to the
foreign exchange gain discussed above. Our effective tax rate for the second
quarter of fiscal 2009 was 37.2%, compared to 36.4% for the second quarter of
fiscal 2008. The change in our effective tax rate was primarily due to an
increase in non-deductible expenses, including the impairment of goodwill charge
and the facility fee and interest related to the short-term loan facility,
during the second quarter of fiscal 2009 compared to the second quarter of
fiscal 2008.
Loss from equity-accounted
investments for the second quarter of fiscal 2009 and 2008 was $0.2 million (ZAR
2.2 million) and $0.2 million (ZAR 1.6 million), respectively.
Results of operations by operating
segment
The composition of revenue and the
contributions of our business activities to operating income are illustrated
below.
Table 7
|
|
|
|
|
In United States Dollars (US GAAP)
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
|
|
|
2008
|
|
|
% of
|
|
|
2007
|
|
|
% of
|
|
|
%
|
Operating Segment
|
|
$ 000
|
|
|
total
|
|
|
$ 000
|
|
|
total
|
|
|
change
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
32,820
|
|
|
53%
|
|
|
39,991
|
|
|
58%
|
|
|
(18 )%
|
Smart card accounts
|
|
6,711
|
|
|
11%
|
|
|
9,637
|
|
|
14%
|
|
|
(30 )%
|
Financial services
|
|
1,430
|
|
|
2%
|
|
|
2,135
|
|
|
3%
|
|
|
(33 )%
|
Hardware, software and related technology
sales
|
|
20,427
|
|
|
34%
|
|
|
16,737
|
|
|
25%
|
|
|
22%
|
Total consolidated revenue
|
|
61,388
|
|
|
100%
|
|
|
68,500
|
|
|
100%
|
|
|
(10 )%
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
17,653
|
|
|
77%
|
|
|
21,381
|
|
|
76%
|
|
|
(17 )%
|
Smart card accounts
|
|
3,050
|
|
|
13%
|
|
|
4,380
|
|
|
16%
|
|
|
(30 )%
|
Financial services
|
|
(1,570
|
)
|
|
(7)%
|
|
|
458
|
|
|
2%
|
|
|
(443 )%
|
Hardware, software and related technology
sales
|
|
5,493
|
|
|
24%
|
|
|
2,265
|
|
|
8%
|
|
|
143%
|
Corporate/eliminations
|
|
(1,821
|
)
|
|
(7)%
|
|
|
(258
|
)
|
|
(2)%
|
|
|
606%
|
Total consolidated
operating income
|
|
22,805
|
|
|
100%
|
|
|
28,226
|
|
|
100%
|
|
|
(19 )%
|
Table 8
|
|
|
|
|
In South African Rand (US GAAP)
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
% of
|
|
|
ZAR
|
|
|
% of
|
|
|
%
|
Operating Segment
|
|
000
|
|
|
total
|
|
|
000
|
|
|
total
|
|
|
change
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
322,590
|
|
|
53%
|
|
|
271,000
|
|
|
58%
|
|
|
19%
|
Smart card accounts
|
|
65,963
|
|
|
11%
|
|
|
65,305
|
|
|
14%
|
|
|
1%
|
Financial services
|
|
14,056
|
|
|
2%
|
|
|
14,468
|
|
|
3%
|
|
|
(3 )%
|
Hardware, software and related technology
sales
|
|
200,778
|
|
|
34%
|
|
|
113,419
|
|
|
25%
|
|
|
77%
|
Total consolidated revenue
|
|
603,387
|
|
|
100%
|
|
|
464,192
|
|
|
100%
|
|
|
30%
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
173,513
|
|
|
77%
|
|
|
144,889
|
|
|
76%
|
|
|
20%
|
Smart card accounts
|
|
29,979
|
|
|
13%
|
|
|
29,681
|
|
|
16%
|
|
|
1%
|
Financial services
|
|
(15,432
|
)
|
|
(7)%
|
|
|
3,104
|
|
|
2%
|
|
|
(597 )%
|
Hardware, software and related technology
sales
|
|
53,991
|
|
|
24%
|
|
|
15,349
|
|
|
8%
|
|
|
252%
|
Corporate/eliminations
|
|
(17,899
|
)
|
|
(7)%
|
|
|
(1,748
|
)
|
|
(2)%
|
|
|
924%
|
Total consolidated
operating income
|
|
224,152
|
|
|
100%
|
|
|
191,275
|
|
|
100%
|
|
|
17%
|
Transaction-based
activities
In ZAR, the increase in revenues
and operating income were primarily due to higher average revenue per grant paid
in all provinces where we provide a welfare distribution service, higher volumes
from four of our provincial contracts, increased revenues resulting from the
opening of the January 2009 pay file in all five provinces in the last four days
of December 2008 (as opposed to an early opening in only four provinces in the
prior year), continued adoption of our merchant acquiring system in the
provinces where we distribute welfare grants and increased transacting ability
at participating retailers POS devices in these provinces. We discuss these
factors in more detail below.
29
Revenues for transaction-based
activities include the transaction fees we earn through our merchant acquiring
system and reflect the elimination of inter-company transactions.
Operating income margin of our
transaction-based activities for the second quarter of fiscal 2009 increased to
54% from 53% during the second quarter of fiscal 2008. The increase in the
operating margin was due primarily to the early opening of the January 2009 pay
file and price increases described above and improved margins at EasyPay, which
was partially offset by continued inflationary increases in our cost
components.
Higher average revenue per grant
paid and higher overall volumes from our provincial
contracts
:
During the second quarter of
fiscal 2009, we experienced growth in four of the provinces where we administer
payments of social welfare grants. This growth was mainly due to an increase in
the number of child support grants and disability grants approved by the various
provincial governments. In total, the volume of payments processed during the
second quarter of fiscal 2009 increased 2% to 12,149,505 from the second quarter
of fiscal 2008. We believe that SASSA may experience budgetary constraints in
the foreseeable future and while we expect this to negatively impact on the
volume of grants distributed to social welfare recipients, we do not believe
that the volume of grants will decrease significantly from the current level. In
addition, we do not expect significant growth in the number of grant recipients
in the foreseeable future.
The volumes under existing
provincial contracts during the second quarter of fiscal 2009 as well as average
revenue per grant paid are detailed below:
Table 9
|
|
Three months ended December 31,
|
|
|
|
Number of
|
|
|
Average Revenue per Grant Paid
|
|
|
|
Grants Paid
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Province
|
|
2008
|
|
|
2007
|
|
|
$(1)
|
|
|
$(2)
|
|
|
ZAR(1)
|
|
|
ZAR(2)
|
|
KwaZulu-Natal
(A)
.
|
|
5,277,936
|
|
|
5,063,374
|
|
|
2.78
|
|
|
3.26
|
|
|
27.64
|
|
|
22.11
|
|
Limpopo
(B)
|
|
2,967,229
|
|
|
2,948,717
|
|
|
1.82
|
|
|
2.56
|
|
|
18.09
|
|
|
17.39
|
|
North West
(C)
|
|
1,321,175
|
|
|
1,230,354
|
|
|
2.44
|
|
|
3.16
|
|
|
24.31
|
|
|
21.43
|
|
Northern Cape
(D)
|
|
504,563
|
|
|
498,877
|
|
|
2.37
|
|
|
2.71
|
|
|
23.60
|
|
|
18.37
|
|
Eastern Cape
(E)
|
|
2,078,602
|
|
|
2,155,433
|
|
|
1.66
|
|
|
2.37
|
|
|
16.49
|
|
|
16.11
|
|
Total
|
|
12,149,505
|
|
|
11,896,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Average Revenue per Grant Paid
excludes $ 0.62 (ZAR 5.50) related to the provision of smart card
accounts.
(2) Average Revenue per Grant Paid
excludes $ 0.81 (ZAR 5.50) related to the provision of smart card
accounts.
(
A)
- in ZAR, the
increase in the Average Revenue per Grant Paid in KwaZulu-Natal was due to an
increase in the value of all grant types, which forms the basis of our
remuneration in this province as well as an inflation adjustment to the rate we
charge. During the second quarter of fiscal 2009 the South African government
announced an interim increase in the grant amounts payable to beneficiaries.
These increases were effective from October 2008, but paid in December 2008.
(B)
- in ZAR, the increase
in the Average Revenue per Grant Paid in Limpopo was due to the negotiated
annual price adjustment effective from January 2008.
(C)
- in ZAR, the increase
in the Average Revenue per Grant Paid in North West was due to the negotiated
annual price adjustment approved by the provincial government in September
2008.
(D)
- in ZAR, the increase
in the Average Revenue per Grant Paid in Northern Cape was due to the negotiated
annual price adjustment effective from January 2008.
(E)
- in ZAR, the increase
in the Average Revenue per Grant Paid in Eastern Cape was due to negotiated
price increases effective from January 2008.
Key statistics and indicators
related to our merchant acquiring system:
During the first quarter of
fiscal 2009 we performed an extensive exercise to identify those merchants that
had contracted to participate in our merchant acquiring system and had an
installed but unused POS device. After discussions with these merchants a number
of them cancelled their contracts to participate in our merchant acquiring
system. In addition, we have implemented procedures to identify merchants that
are abusing our merchant acquiring system. If a merchant is identified as
abusing the merchant acquiring system, its contract is terminated and its
equipment is removed. However, these contract cancellations and terminations
have had no impact on the number of grants paid through our merchant acquiring
system.
30
The key statistics and indicators
of our merchant acquiring system during the second quarter of fiscal 2009 and
2008, in each of the South African provinces where we distribute social welfare
grants are summarized in the table below:
Table 10
|
Three months ended
|
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
|
NC, EC,
|
|
NC, EC,
|
|
|
KZN, L
|
|
KZN, L
|
|
Province included (1)
|
and NW
|
|
and NW
|
|
Total POS devices installed
|
4,182
|
|
4,304
|
|
Number of participating UEPS retail
locations
|
2,385
|
|
2,532
|
|
Value of transactions processed through POS devices during
the quarter
|
|
|
|
|
(2) (in $ 000)
|
269,425
|
|
258,852
|
|
Value of transactions processed through POS devices during
the
|
|
|
|
|
completed pay cycles for the quarter (3)
(in $ 000)
|
253,967
|
|
275,456
|
|
Value of transactions processed through POS devices during
the quarter
|
|
|
|
|
(2) (in ZAR 000)
|
2,550,082
|
|
1,757,836
|
|
Value of transactions processed through POS devices during
the
|
|
|
|
|
completed pay cycles for the quarter (3)
(in ZAR 000)
|
2,496,496
|
|
1,870,595
|
|
Number of grants paid through POS devices during the
quarter (2)
|
4,383,642
|
|
3,439,226
|
|
Number of grants paid through POS devices
during the completed pay
|
|
|
|
|
cycles for the quarter (3)
|
4,328,107
|
|
3,661,101
|
|
Average number of grants processed per
terminal during the quarter (2) .
|
1,050
|
|
799
|
|
Average number of grants processed per terminal during the
completed
|
|
|
|
|
pay cycles for the quarter (3)
|
1,036
|
|
851
|
|
|
(1)
|
NC = Northern Cape, EC = Eastern Cape, KZN =
KwaZulu-Natal, L = Limpopo, NW = North West.
|
|
(2)
|
Refers to events occurring during the quarter (i.e.,
based on three calendar months).
|
|
(3)
|
Refers to events occurring during the completed pay
cycle.
|
The following chart presents the
number of POS devices installed and the average spend per POS device,
per pay
cycle and calendar month
, during the 18 month period ended January 31,
2009:
POS installations and utilization per POS
31
The following chart presents the
growth in the value of loads at merchant locations processed through our
installed base of POS devices,
per pay cycle and calendar month
, during
the 18 month period ended January 31, 2009:
Loads at merchant locations in South African Rand
The following graph presents the
number of social welfare grants loaded at merchant locations,
per pay cycle
and calendar month
, for the 18 month period ended January 31, 2009:
Number of social welfare grants loaded at merchant
locations
32
January 2009 pay
file
The January 2008 pay file was
opened in December 2007 at merchant locations in all provinces except
KwaZulu-Natal, where we distribute the highest number of grants and which
provides the highest revenue per grant paid. The January 2009 pay file was
opened in December 2008 at merchant locations in KwaZulu-Natal as well as all
other provinces, which resulted in an increase in revenue and operating income
of approximately $1.3 million (ZAR 12.5 million) for the second quarter of
fiscal 2009 compared with the second quarter of fiscal 2008.
EasyPay transaction
fees:
During the second quarter of
fiscal 2009 and 2008, EasyPay processed 156 million and 135 million transactions
with an approximate value of $3.7 billion (ZAR 36.2 billion) and $4.4 billion
(ZAR 30.3 billion), respectively. The average fee per transaction during the
second quarter of fiscal 2009 and 2008, was $0.02 (ZAR 0.21) and $0.03 (ZAR
0.21), respectively. Retailers in South Africa have released reports in the
South African media stating that retail sales during the quarter were stronger
than expected which resulted in an increase in transactions processed through
EasyPay. The South African retail sector has been remarkably resilient during
the global economic slowdown, however, we do not believe that this situation can
continue and we believe that the number of transactions processed through
EasyPay during the third quarter of fiscal 2009 will remain flat compared to the
third quarter of fiscal 2008. We do not expect a significant fluctuation, in
ZAR, in the average fee per transaction during the third quarter of fiscal
2009.
Operating income margins
generated by EasyPay during the second quarter of fiscal 2009 and 2008, were 47%
and 41%, respectively, which is lower than those generated by our social welfare
distribution business and reduced the operating income margins within our
transaction-based activities segment. Our operating income margin at EasyPay
increased primarily as a result of the implementation of a new integrated
switch, which has improved operating efficiencies. We expect the new integrated
switch to greatly enhance our offering at EasyPay and enable us to take
advantage of new business opportunities.
Amortization of EasyPay
intangible assets during the second quarter of fiscal 2009 and 2008 was $0.3
million (ZAR 3.2 million) and $0.5 million (ZAR 3.2 million), respectively, and
is included in the calculation of EasyPay operating margins. Operating income
margin before amortization of EasyPay intangible assets during the second
quarter of fiscal 2009 and 2008 was 57% and 53%, respectively.
Smart card accounts
Operating income margin from
providing smart card accounts was constant at 45% for the second quarter of
fiscal 2009 and 2008.
In ZAR, revenue from the
provision of smart card-based accounts grew in proportion to the higher number
of beneficiaries serviced through our social welfare payment contracts. A total
number of 4,061,100 smart card-based accounts were active at December 31, 2008,
compared to 3,976,684 active accounts as at December 31, 2007. The increase in
the number of active accounts resulted from an increase in the number of
beneficiaries in four provinces qualifying for government grants and the
transfer of beneficiaries in the North West province from the South African Post
Office to our system.
Financial services
In January 2009 we entered into
an agreement to sell our traditional microlending business and we expect the
sale to be concluded in the third quarter of fiscal 2009. We have recorded a
goodwill impairment of $1.8 million for the second quarter of fiscal 2009 as a
result of deteriorating trading conditions of this operating segment and from
our strategic decision not to grow the business. Excluding the impact of the
impairment charge, operating income decreased by 42% in US dollars and 5% in
ZAR, respectively.
Revenues from UEPS-based lending
decreased during the second quarter of fiscal 2009 compared with the second
quarter of fiscal 2008 primarily due to the lower number of loans granted. In
addition, on average, the return on these UEPS-based loans was lower during the
second quarter of fiscal 2009 compared with the second quarter of fiscal 2008.
Revenues from our traditional
microlending business decreased during the quarter due to increased competition,
our strategic decision not to grow this business, and an overall lower return on
traditional microlending loans as a result of compliance with the National
Credit Act, or NCA. The NCA regulates fees and interest charged on micro-lending
loans and imposes credit check obligations on lenders prior to granting of
credit to individuals. The loan portfolio of the traditional microlending
businesses has declined as a result of our strategic decision not to grow this
business and compliance with the NCA.
33
Some of the key indicators of these
businesses are illustrated below:
Table 11
|
|
As at December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
$ %
|
|
|
ZAR
|
|
|
ZAR
|
|
|
ZAR %
|
|
|
|
$ 000
|
|
|
$ 000
|
|
|
change
|
|
|
000
|
|
|
000
|
|
|
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional microlending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance loans receivable gross
|
|
2,368
|
|
|
5,336
|
|
|
(56)%
|
|
|
22,422
|
|
|
36,575
|
|
|
(39)%
|
|
Allowance for doubtful
finance loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
receivable
|
|
(1,020
|
)
|
|
(3,153
|
)
|
|
(68)%
|
|
|
(9,658
|
)
|
|
(21,612
|
)
|
|
(55)%
|
|
Finance
loans receivable net
|
|
1,348
|
|
|
2,183
|
|
|
(38)%
|
|
|
12,764
|
|
|
14,963
|
|
|
(15)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UEPS-based lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance loans receivable net and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gross
(i.e., no allowance)
|
|
2,765
|
|
|
4,086
|
|
|
(32)%
|
|
|
26,169
|
|
|
28,012
|
|
|
(7)%
|
|
Total finance loans receivable,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net
|
|
4,113
|
|
|
6,269
|
|
|
|
|
|
38,933
|
|
|
42,975
|
|
|
|
|
Excluding the goodwill
impairment, operating income margin for the financial services segment for the
second quarter of fiscal 2009 and 2008 was 21%.
Hardware, software and related technology sales
Since we acquired BGS in the
first quarter of fiscal 2009, our hardware, software and related technology
sales segment includes operating results for BGS for the entire second quarter
of fiscal 2009. The table below presents the contribution of BGS to our revenue
and operating income during the second quarter of fiscal 2009:
|
Three months ended
|
Table 12
|
December 31,
|
|
2008
|
|
2007
|
|
$
000
|
|
$
000
|
Revenue
|
20,427
|
|
16,737
|
Hardware, software and related
technology sales excluding BGS
|
9,883
|
|
16,737
|
BGS
|
10,544
|
|
-
|
|
|
|
|
Operating income
|
5,493
|
|
2,265
|
Hardware, software and related
technology sales excluding BGS
|
2,733
|
|
2,265
|
BGS
|
2,760
|
|
-
|
BGS excluding
amortization of acquisition related intangible assets
|
4,905
|
|
-
|
Amortization of acquisition related intangible assets
|
2,145
|
|
-
|
|
Three months
ended
|
Table 13
|
December 31,
|
|
2008
|
|
2007
|
|
ZAR 000
|
|
ZAR 000
|
Revenue
|
200,778
|
|
113,419
|
Hardware, software and related
technology sales excluding BGS
|
97,140
|
|
113,419
|
BGS
|
103,638
|
|
0
|
|
|
|
|
Operating income
|
53,991
|
|
15,349
|
Hardware, software and related
technology sales excluding BGS
|
26,862
|
|
15,349
|
BGS
|
27,129
|
|
-
|
BGS excluding
amortization of acquisition related intangible assets
|
48,212
|
|
-
|
Amortization of acquisition related intangible assets
|
21,083
|
|
-
|
The increase in revenues and
operating income was primarily due to the inclusion of BGS. In addition, during
the second quarter of fiscal 2009, we recognized revenue from the delivery of
hardware under our contract with an Iraqi consortium.
34
During the second quarter of
fiscal 2009 we delivered hardware, including smart cards, to the Bank of Ghana
and recognized revenue of approximately $3.4 million (ZAR 33.0 million). During
the second quarter of fiscal 2008 we continued software development and
customization activities related to the Ghanaian national switch and smart card
payment system contract. In addition, during the second quarter of fiscal 2008,
we commenced with the delivery of hardware to Ghana and our revenues included
approximately $5.6 million (ZAR 37.9 million) from software development and
customization activities and hardware related to this contract. Software
development and customization are high margin activities for us and contributed
to the increase in operating income during the second quarter of fiscal
2008.
During the second quarter of
fiscal 2009 and 2008 we recognized revenue of $0.1 million (ZAR 1.3 million) and
$2.0 million (ZAR 13.8 million), respectively, from sales of hardware to
Nedbank.
Amortization of Prism intangible
assets during the second quarter of fiscal 2009 and 2008 was approximately $0.7
million (ZAR 6.7 million) and $1.0 million (ZAR 6.7 million), respectively, and
reduced our operating income.
As we expand internationally,
whether through traditional selling arrangements to provide products and
services (such as in Ghana and Iraq) or through joint ventures (such as with
SmartSwitch Namibia and SmartSwitch Botswana), we expect to receive revenues
from sales of hardware and from software customization and licensing to
establish the infrastructure of POS terminals and smart cards necessary to
enable utilization of the UEPS and Dual Universal Electronic Transactions, or
DUET, technology in a particular country. To the extent that we enter into joint
ventures and account for the investment as an equity investment, we are required
to eliminate the sale of hardware, software and licenses to the investees. The
sale of hardware, software and licenses under these arrangements occur on an ad
hoc basis as new arrangements are established, which can materially affect our
revenues and operating income in this segment from period to period.
Corporate/eliminations
The increase in our operating
loss in this segment resulted from increases in corporate head office-related
expenditure, including the effects of the increase in inflation in South Africa,
stock-based compensation charges and the JSE listing costs. Our operating loss
includes expenditure related to compliance with Sarbanes, non-executive
directors fees; employee and executive salaries and bonuses; stock-based
compensation; legal and auditor fees; directors and officers insurance
premiums; telecommunications expenses; property-related expenditures including
utilities, rental, security and maintenance; and elimination entries.
First half of fiscal 2009 compared
to first half of fiscal 2008
The following factors had a
significant influence on our results of operations during the first half of
fiscal 2009 as compared with the same period in the prior year:
-
increased net income resulting from a foreign exchange rate gain related
to the asset swap we entered into during the period that the short-term loan
facility was to remain outstanding;
-
increased net income as a result of the change in our fully distributed
tax rate from 35.45% to 34.55%;
-
significant weakening of the South African rand, our functional currency,
against the US dollar, our reporting currency, which had a negative impact on
our revenues and net income in US dollars;
-
increased revenues and operating income from sales of hardware and
licenses by BGS;
-
increased revenues and operating income in all provinces where we
distribute social welfare grants;
-
increased revenues and operating income from hardware sales under our
contract to provide the Central Bank of Ghana with a National Switch and Smart
Card Payment System utilizing our UEPS technology;
-
increased revenues and operating income from the continued adoption of our
merchant acquiring system by cardholders;
-
decrease in operating income as a result of the amortization of intangible
assets identified related to the BGS acquisition;
-
decrease in operating income as a result of the impairment of goodwill
assigned to the financial services operating segment;
-
decrease in operating income as a result of stock-based compensation
charges related to grants of stock options and restricted stock in August
2008.
35
Consolidated overall results of
operations
This discussion is based on the
amounts which were prepared in accordance with US GAAP.
The following tables show the
changes in the items comprising our statements of operations, both in US dollars
and in ZAR:
|
|
In United States Dollars
|
|
Table 14
|
|
(US GAAP)
|
|
|
|
Six months ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
$ %
|
|
|
|
$ 000
|
|
|
$ 000
|
|
|
change
|
|
Revenue
|
|
129,323
|
|
|
128,759
|
|
|
0%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
36,411
|
|
|
35,318
|
|
|
3%
|
|
Selling, general and administration
|
|
33,309
|
|
|
33,730
|
|
|
(1)%
|
|
Depreciation and amortization
|
|
7,684
|
|
|
5,579
|
|
|
38%
|
|
Impairment of goodwill
|
|
1,836
|
|
|
-
|
|
|
|
|
Operating income
|
|
50,083
|
|
|
54,132
|
|
|
(7)%
|
|
Foreign exchange gain related to short-term
investment
|
|
26,657
|
|
|
-
|
|
|
|
|
Interest income, net
|
|
5,465
|
|
|
7,098
|
|
|
(23)%
|
|
Income before income taxes
|
|
82,205
|
|
|
61,230
|
|
|
34%
|
|
Income tax expense
|
|
26,901
|
|
|
22,660
|
|
|
19%
|
|
Income before minority interest and
earnings from
|
|
|
|
|
|
|
|
|
|
equity-accounted investments
|
|
55,304
|
|
|
38,570
|
|
|
43%
|
|
Minority interest
|
|
762
|
|
|
(196
|
)
|
|
(489)%
|
|
Loss from equity-accounted investments
|
|
536
|
|
|
520
|
|
|
3%
|
|
Net income
|
|
54,006
|
|
|
38,246
|
|
|
41%
|
|
|
|
In South African Rand
|
|
Table 15
|
|
(US GAAP)
|
|
|
|
Six months ended December 31,
|
|
|
|
|
|
|
2007
|
|
|
ZAR
|
|
|
|
2008
|
|
|
ZAR
|
|
|
%
|
|
|
|
ZAR 000
|
|
|
000
|
|
|
change
|
|
Revenue
|
|
1,138,155
|
|
|
894,180
|
|
|
27%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
320,448
|
|
|
245,270
|
|
|
31%
|
|
Selling, general and administration
|
|
293,149
|
|
|
234,241
|
|
|
25%
|
|
Depreciation and amortization
|
|
67,626
|
|
|
38,744
|
|
|
75%
|
|
Impairment of goodwill
|
|
16,158
|
|
|
-
|
|
|
|
|
Operating income
|
|
440,774
|
|
|
375,925
|
|
|
17%
|
|
Foreign exchange gain related to short-term
investment
|
|
234,606
|
|
|
-
|
|
|
|
|
Interest income, net
|
|
48,097
|
|
|
49,293
|
|
|
(2)%
|
|
Income before income taxes
|
|
723,477
|
|
|
425,218
|
|
|
70%
|
|
Income tax expense
|
|
236,752
|
|
|
157,365
|
|
|
50%
|
|
Income before minority interest and
earnings from
|
|
|
|
|
|
|
|
|
|
equity-accounted investments
|
|
486,725
|
|
|
267,853
|
|
|
82%
|
|
Minority interest
|
|
6,706
|
|
|
(1,361
|
)
|
|
|
|
Loss from equity-accounted investments
|
|
4,717
|
|
|
3,611
|
|
|
31%
|
|
Net income
|
|
475,302
|
|
|
265,603
|
|
|
79%
|
|
Analyzed in ZAR the increase in
revenue and cost of goods sold, IT processing, servicing and support for the
first half of fiscal 2009, was primarily due to the higher volumes in our
transaction-based activities, a greater number of UEPS-based smart card holders
and the acquisition of BGS, the sale of hardware to the Bank of Ghana and
Nedbank Limited, or Nedbank.
Our operating income margin for
the first half of fiscal 2009 decreased to 39% from 42% for the first half of
fiscal 2008 mainly as a result of the increase in contribution from our
hardware, software and related technology sales segment, which generates a lower
margin than our transaction-based activities segment; increased intangible asset
amortization related to the BGS acquisition and increases in goods and services
purchased from third parties, including the effects of the increase in inflation
in South Africa, and stock based compensation charges.
We recognized a foreign exchange
gain of $26.7 million (ZAR 234.6 million) resulting from an asset swap
arrangement we entered into in August 2008.
36
Selling, general and
administration expenses increased during the first half of fiscal 2009 from the
comparable half in fiscal 2008 primarily due to the stock-based compensation
charge related to the restricted stock grants awarded in the first and third
quarters of fiscal 2008, increases in goods and services purchased from third
parties, including the effects of the increase in inflation in South Africa and
expenses of $0.5 million related to our JSE listing.
Our direct costs of maintaining a
listing on Nasdaq and obtaining a listing on the JSE, as well as compliance with
the Sarbanes-Oxley Act of 2002, or Sarbanes, particularly Section 404 of
Sarbanes, includes independent directors fees, legal fees, fees paid to Nasdaq,
our compliance officers salary, fees paid to consultants who assist with
Sarbanes compliance, fees paid to the JSE and consultants and advisors assisting
with the JSE listing, and fees paid to our independent accountants related to
the audit and review process. This has resulted in expenditures of $1.3 million
(ZAR 11.8 million) and $1.0 million (ZAR 7.2 million) during the first halves of
fiscal 2009 and 2008, respectively.
The table below presents the
amortization related to the acquired intangible assets recognized in the Prism
and BGS acquisitions and the related tax effects included in our reported
results for the first half of fiscal 2009 and 2008:
|
Six months ended
|
Table 16
|
December 31,
|
|
2008
|
|
2007
|
|
$
000
|
|
$
000
|
Amortization included in depreciation and
amortization expense:
|
5,272
|
|
2,866
|
Prism acquisition
|
2,261
|
|
2,866
|
BGS acquisition
|
3,011
|
|
-
|
|
|
|
|
Deferred tax included in income tax
expense:
|
1,523
|
|
1,039
|
Prism acquisition
|
769
|
|
1,039
|
BGS acquisition
|
754
|
|
-
|
|
Six months ended
|
Table 17
|
December 31,
|
|
2008
|
|
2007
|
|
ZAR 000
|
|
ZAR 000
|
Amortization included in depreciation and
amortization expense:
|
46,401
|
|
19,902
|
Prism acquisition
|
19,902
|
|
19,902
|
BGS acquisition
|
26,499
|
|
-
|
|
|
|
|
Deferred tax included in income tax
expense:
|
13,406
|
|
7,214
|
Prism acquisition
|
6,770
|
|
7,214
|
BGS acquisition
|
6,636
|
|
-
|
Property, plant and equipment
acquired to provide administration and distribution services to our customers is
depreciated over the shorter of expected useful life and the contract period
with the provincial government. We are currently in an extension phase with all
our contracts and the majority of our property, plant and equipment related to
the administration and distribution of social welfare grants has been written
off. Accordingly, depreciation expense related to these activities has decreased
during the first half of fiscal 2009 compared with the first half of fiscal
2008. This reduction in depreciation was partially offset by the increase in
depreciation related to new back-end processing computers and our participating
merchant POS terminals.
In ZAR, interest on surplus cash
for the first half of fiscal 2009 increased to $11.8 million (ZAR 103.7 million)
from $12.3 million (ZAR 85.6 million) for the first half of fiscal 2008. The
increase in interest on surplus cash held in South Africa was due to a higher
average daily ZAR cash balance during the first half of fiscal 2009 compared
with the first half of fiscal 2008 and higher deposit rates resulting from the
adjustment in the South African prime interest rate from an average of
approximately 13.66% per annum for the first half of fiscal 2008 to 15.45% per
annum for the first half of fiscal 2009.
Included in interest expense is
the facility fee of approximately $1.1 million (ZAR 9.7 million) that we paid to
the lender under the short-term loan facility we obtained to fund the BGS
acquisition and approximately $0.8 million (ZAR 7.3 million) interest on the
short-term loan facility. Excluding the impact of this facility fee and the
interest, during the first half of fiscal 2009 interest expense increased due to
an increase in the average rates of interest on our short-term facilities. In
ZAR, excluding the impact of the facility fee and interest, finance costs
increased to $4.4 million (ZAR 38.7 million) for the first half of fiscal 2009
from $5.2 million (ZAR 36.2 million) for the first half of fiscal 2008.
37
Total tax expense for the first
half of fiscal 2009 was $26.9 million (ZAR 236.8 million) compared with $22.7
million (ZAR 157.4 million) during the same period in the comparable half of the
prior fiscal year. Deferred tax assets and liabilities are measured utilizing
the enacted fully distributed tax rate. Accordingly, a reduction in the fully
distributed tax rate from 35.45% to 34.55% results in lower deferred tax assets
and liabilities and the net change of $3.5 million (ZAR 26.5 million) is
included in our income tax expense in our unaudited condensed consolidated
statement of operations for the first half of fiscal 2009. In ZAR, without
giving effect to the change in our fully-distributed tax rate, our total tax
expense increased, primarily due to the foreign exchange gain discussed above.
Our effective tax rate for the first half of fiscal 2009 was 32.7%, compared to
37.2% for the first half of fiscal 2008. The change in our effective tax rate
was primarily due to reduction in our fully distributed tax rate to 34.55%,
offset by an increase in non-deductible expenses during the first half of fiscal
2009 compared to the first half of fiscal 2008.
Loss from equity-accounted
investments for the first half of fiscal 2009 and 2008 was $0.5 million (ZAR 4.7
million) and $0.5 million (ZAR 3.6 million), respectively.
Results of operations by operating segment
The composition of revenue and the contributions of our
business activities to operating income are illustrated below.
Table 18
|
|
In United States Dollars (US GAAP)
|
|
|
|
Six months ended December 31,
|
|
|
|
2008
|
|
|
% of
|
|
|
2007
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
$ 000
|
|
|
total
|
|
|
$ 000
|
|
|
total
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
73,164
|
|
|
57%
|
|
|
78,155
|
|
|
61%
|
|
|
(6)%
|
|
Smart card accounts
|
|
15,281
|
|
|
12%
|
|
|
18,773
|
|
|
15%
|
|
|
(19)%
|
|
Financial services
|
|
3,214
|
|
|
2%
|
|
|
4,318
|
|
|
3%
|
|
|
(26)%
|
|
Hardware, software and related technology
sales
|
|
37,664
|
|
|
29%
|
|
|
27,513
|
|
|
21%
|
|
|
37%
|
|
Total consolidated revenue
|
|
129,323
|
|
|
100%
|
|
|
128,759
|
|
|
100%
|
|
|
0%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
39,291
|
|
|
78%
|
|
|
41,970
|
|
|
78%
|
|
|
(6)%
|
|
Smart card accounts
|
|
6,945
|
|
|
14%
|
|
|
8,532
|
|
|
16%
|
|
|
(19)%
|
|
Financial services
|
|
(1,243
|
)
|
|
(2)%
|
|
|
904
|
|
|
2%
|
|
|
(238)%
|
|
Hardware, software and related technology
sales
|
|
9,627
|
|
|
19%
|
|
|
4,205
|
|
|
8%
|
|
|
129%
|
|
Corporate/eliminations
|
|
(4,537
|
)
|
|
(9)%
|
|
|
(1,479
|
)
|
|
(4)%
|
|
|
207%
|
|
Total consolidated
operating income
|
|
50,083
|
|
|
100%
|
|
|
54,132
|
|
|
100%
|
|
|
(7)%
|
|
Table 19
|
|
In South African Rand (US GAAP)
|
|
|
|
Six months ended December 31,
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
% of
|
|
|
ZAR
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
000
|
|
|
total
|
|
|
000
|
|
|
total
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
643,907
|
|
|
57%
|
|
|
542,755
|
|
|
61%
|
|
|
19%
|
|
Smart card accounts
|
|
134,486
|
|
|
12%
|
|
|
130,371
|
|
|
15%
|
|
|
3%
|
|
Financial services
|
|
28,286
|
|
|
2%
|
|
|
29,987
|
|
|
3%
|
|
|
(6)%
|
|
Hardware, software and related technology
sales
|
|
331,476
|
|
|
29%
|
|
|
191,067
|
|
|
21%
|
|
|
73%
|
|
Total consolidated revenue
|
|
1,138,155
|
|
|
100%
|
|
|
894,180
|
|
|
100%
|
|
|
27%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
345,795
|
|
|
78%
|
|
|
291,465
|
|
|
78%
|
|
|
19%
|
|
Smart card accounts
|
|
61,122
|
|
|
14%
|
|
|
59,251
|
|
|
16%
|
|
|
3%
|
|
Financial services
|
|
(10,939
|
)
|
|
(2)%
|
|
|
6,278
|
|
|
2%
|
|
|
(274)%
|
|
Hardware, software and related technology
sales
|
|
84,726
|
|
|
19%
|
|
|
29,202
|
|
|
8%
|
|
|
190%
|
|
Corporate/eliminations
|
|
(39,930
|
)
|
|
(9)%
|
|
|
(10,271
|
)
|
|
(4)%
|
|
|
289%
|
|
Total consolidated
operating income
|
|
440,774
|
|
|
100%
|
|
|
375,925
|
|
|
100%
|
|
|
17%
|
|
Transaction-based
activities
The increase in revenues and
operating income were primarily due to higher average revenue per grant paid in
all provinces where we provide a welfare distribution service, higher volumes
from four of our provincial contracts, continued adoption of our merchant
acquiring system in the provinces where we distribute welfare grants and
increased transacting ability at participating retailers POS devices in these
provinces. We discuss these factors in more detail below.
38
Revenues for transaction-based
activities include the transaction fees we earn through our merchant acquiring
system and reflect the elimination of inter-company transactions.
Operating income margin of our
transaction-based activities for the first half of each of fiscal 2009 and 2008
was 54%, as the price increases described above were offset by continued
inflationary increases in our cost components.
Higher average revenue per grant paid and higher overall
volumes from our provincial contracts
:
During the first half of fiscal
2009, we experienced growth in four of the provinces where we administer
payments of social welfare grants. This growth was mainly due to an increase in
the number of child support grants and disability grants approved by the various
provincial governments. In total, the volume of payments processed during the
first half of fiscal 2009 increased 2% to 24,279,501 from the first half of
fiscal 2008.
The volumes under existing
provincial contracts during the first half of fiscal 2009 as well as average
revenue per grant paid are detailed below:
Table 20
|
Six months ended December 31,
|
|
|
Number of
|
|
|
Average Revenue per Grant Paid
|
|
|
|
Grants Paid
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Province
|
|
2008
|
|
|
2007
|
|
|
$(1)
|
|
|
$(2)
|
|
|
ZAR(1)
|
|
|
ZAR(2)
|
|
KwaZulu-Natal
(A)
.
|
|
10,507,977
|
|
|
10,103,529
|
|
|
2.91
|
|
|
3.10
|
|
|
25.77
|
|
|
21.57
|
|
Limpopo
(B)
|
|
5,925,685
|
|
|
5,883,827
|
|
|
2.04
|
|
|
2.45
|
|
|
18.12
|
|
|
17.08
|
|
North West
(C)
|
|
2,706,712
|
|
|
2,449,413
|
|
|
2.82
|
|
|
3.06
|
|
|
25.01
|
|
|
21.26
|
|
Northern Cape
(D)
|
|
1,002,289
|
|
|
994,977
|
|
|
2.68
|
|
|
2.69
|
|
|
23.81
|
|
|
18.72
|
|
Eastern Cape
(E)
|
|
4,136,838
|
|
|
4,293,408
|
|
|
1.86
|
|
|
2.24
|
|
|
16.50
|
|
|
15.57
|
|
Total
|
|
24,279,501
|
|
|
23,725,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Average Revenue per Grant Paid
excludes $ 0.55 (ZAR 5.50) related to the provision of smart card
accounts.
(2) Average Revenue per Grant Paid
excludes $ 0.79 (ZAR 5.50) related to the provision of smart card
accounts.
(
A)
- in ZAR, the
increase in the Average Revenue per Grant Paid in KwaZulu-Natal was due to an
increase in the value of all grant types, which forms the basis of our
remuneration in this province as well as an inflation adjustment to the rate we
charge. During the second quarter of fiscal 2009, the South African government
announced an interim increase in the grant amounts payable to beneficiaries.
These increases were effective from October 2008, but paid in December 2008.
(B)
- in ZAR, the increase
in the Average Revenue per Grant Paid in Limpopo was due to the negotiated
annual price adjustment effective from January 2008.
(C)
- in ZAR, the increase
in the Average Revenue per Grant Paid in North West was due to the negotiated
annual price adjustment approved by the provincial government in September 2008.
(D)
- in ZAR, the increase
in the Average Revenue per Grant Paid in Northern Cape was due to the negotiated
annual price adjustment effective from January 2008.
(E)
- in ZAR, the increase
in the Average Revenue per Grant Paid in Eastern Cape was due to negotiated
price increases effective from January 2008.
Key statistics and indicators
related to our merchant acquiring system:
During the first half of fiscal
2009 we performed an extensive exercise to identify those merchants that had
contracted to participate in our merchant acquiring system and had an installed
but unused POS device. After discussions with these merchants a number of them
cancelled their contracts to participate in our merchant acquiring system. In
addition, we have implemented procedures to identify merchants that are abusing
our merchant acquiring system. If a merchant is identified as abusing the
merchant acquiring system, its contract is terminated and its equipment is
removed. However, these contract cancellations and terminations have had no
impact on the number of grants paid through our merchant acquiring system.
Refer to also to discussion under
Second quarter of fiscal 2009 compared to the second quarter of fiscal
2008Results of operations by operating segmentTransaction-based
activitiesContinued adoption of our merchant acquiring system.
39
January 2009 pay
file
The January 2008 pay file was
opened in December 2007 at merchant locations in all provinces except
KwaZulu-Natal, where we distribute the highest number of grants and which
provides the highest revenue per grant pad. The January 2009 pay file was opened
in December 2008 at merchant locations KwaZulu-Natal, as well as in all other
provinces, which resulted in an increase in revenue and operating income of
approximately $1.3 million (ZAR 12.5 million) for the first half of fiscal 2009
compared with the first half of fiscal 2008.
EasyPay transaction
fees:
During the first half of fiscal
2009 and 2008, EasyPay processed 291 million and 254 million transactions with
an approximate value of $7.7 billion (ZAR 67.9 billion) and $8.1 billion (ZAR
56.4 billion), respectively. The average fee per transaction during the first
half of fiscal 2009 and 2008, was $0.02 (ZAR 0.21) and $0.03 (ZAR 0.21),
respectively.
Operating income margins
generated by EasyPay during the first half of fiscal 2009 and 2008, were 45% and
40%, respectively, which is lower than those generated by our social welfare
distribution business and reduced the operating income margins within our
transaction-based activities segment. Amortization of EasyPay intangible assets
during the first half of fiscal 2009 and 2008 was $0.7 million (ZAR 6.5 million)
and $0.9 million (ZAR 6.5 million), respectively, and is included in the
calculation of EasyPay operating margins. Operating income margin before
amortization of EasyPay intangible assets during the first half of fiscal 2009
and 2008 was 55% and 53%, respectively.
Smart card accounts
Operating income margin from
providing smart card accounts was constant at 45% for the first half of fiscal
2009 and 2008.
In ZAR, revenue from the
provision of smart card-based accounts grew in proportion to the higher number
of beneficiaries serviced through our social welfare payment contracts. A total
number of 4,061,100 smart card-based accounts were active at December 31, 2008,
compared to 3,976,684 active accounts as at December 31, 2007. The increase in
the number of active accounts resulted from an increase in the number of
beneficiaries in four provinces qualifying for government grants and the
transfer of beneficiaries in the North West province from the South African Post
Office to our system.
Financial services
Excluding the impact of the
impairment charge, operating income decreased by 34% in US dollars and increased
by 18% in ZAR, respectively.
Revenues from UEPS-based lending
decreased during the first half of fiscal 2009 compared with the first half of
fiscal 2008 primarily due to the lower number of loans granted. In addition, on
average, the return on these UEPS-based loans was lower during the first half of
fiscal 2009 compared with the first half of fiscal 2008.
Revenues from our traditional
microlending business decreased during the half year due to increased
competition, our strategic decision not to grow this business, and an overall
lower return on traditional microlending loans as a result of compliance with
the National Credit Act, or NCA. The NCA regulates fees and interest charged on
micro-lending loans and imposes credit check obligations on lenders prior to
granting of credit to individuals. The loan portfolio of the traditional
microlending businesses has declined as a result of our strategic decision not
to grow this business and compliance with the NCA.
See also the discussion under
Second quarter of fiscal 2009 compared to the second quarter of fiscal
2008Results of operations by operating segmentFinancial Services.
Excluding the effects of the
goodwill impairment, operating income margin for the financial services segment
increased to 26% for the first half of fiscal 2009 from 21% for the first half
of fiscal 2008.
40
Hardware, software and related technology sales
Our Hardware, software and
related technology sales segment includes the results of BGS from September 1,
2008. The table below presents the contribution of BGS to our revenue and
operating income during the first half of fiscal 2009 and 2008:
|
Six months
ended
|
Table 22
|
December 31,
|
|
2008
|
|
2007
|
|
$
000
|
|
$
000
|
Revenue
|
37,664
|
|
27,513
|
Hardware, software and related
technology sales excluding BGS
|
26,055
|
|
27,513
|
BGS
|
11,609
|
|
-
|
|
|
|
|
Operating income
|
9,627
|
|
4,205
|
Hardware, software and related
technology sales excluding BGS
|
7,321
|
|
4,205
|
BGS
|
2,306
|
|
-
|
BGS excluding
amortization of acquisition related intangible assets
|
5,317
|
|
-
|
Amortization of acquisition related intangible assets
|
3,011
|
|
-
|
|
Six months ended
|
Table 23
|
December 31,
|
|
2008
|
|
2007
|
|
ZAR 000
|
|
ZAR 000
|
Revenue
|
331,476
|
|
191,067
|
Hardware, software and related
technology sales excluding BGS
|
229,307
|
|
191,067
|
BGS
|
102,169
|
|
0
|
|
|
|
|
Operating income
|
84,726
|
|
29,202
|
Hardware, software and related
technology sales excluding BGS
|
67,527
|
|
29,202
|
BGS
|
17,199
|
|
-
|
BGS excluding
amortization of acquisition related intangible assets
|
46,794
|
|
-
|
Amortization of acquisition related intangible assets
|
29,595
|
|
-
|
The increase in revenues and
operating income was primarily due to the inclusion of BGS and delivery of
hardware to Ghana and Nedbank. In addition, we completed software development
activities and delivered hardware under our contract with an Iraqi
consortium.
During the first half of fiscal
2009 we delivered hardware, including smart cards and terminals, to the Bank of
Ghana and recognized revenue of approximately $7.3 million (ZAR 63.4 million).
During the first half of fiscal 2008 we recognized revenue of approximately $6.5
million (ZAR 44.6 million) from software development and customization
activities and hardware related to this contract.
During the first half of fiscal
2009 and 2008 we recognized revenue of $2.5 million (ZAR 19.5 million) and $2.0
million (ZAR 13.8 million) from sales of hardware to Nedbank.
Amortization of Prism intangible
assets during the first half of fiscal 2009 and 2008 was approximately $1.5
million (ZAR 13.4 million) and $1.9 million (ZAR 13.4 million), respectively,
and reduced our operating income.
Corporate/eliminations
The increase in our operating
loss in this segment resulted from increases in corporate head office-related
expenditure, including the effects of the increase in inflation in South Africa,
stock-based compensation charges and the JSE listing costs. Our operating loss
includes expenditure related to compliance with Sarbanes, non-executive
directors fees; employee and executive salaries and bonuses; stock-based
compensation; legal and auditor fees; directors and officers insurance
premiums; telecommunications expenses; property-related expenditures including
utilities, rental, security and maintenance; and elimination entries.
41
Liquidity and Capital Resources
Our business has historically
generated and continues to generate high levels of cash. At December 31, 2008,
our cash balances were $124.7 million, which comprised mainly ZAR-denominated
balances of ZAR 820.4 million ($86.7 million) and US dollar-denominated balances
of $23.0 million. Our cash balances decreased from June 30, 2008, levels mainly
as a result of our acquisition of BGS, repurchases of our common stock under our
repurchase program, payment of taxes, the timing of receipt of payment from the
provincial governments and the pre-funding of social welfare grants for the
January 2009 payment cycle in the last days of December 2008.
We generally invest the surplus
cash held by our South African operations in overnight call accounts that we
maintain at South African banking institutions, and surplus cash held by our
non-South African companies in the US and European money markets. However, at
December 31, 2008, we held $15 million in a 32-day call account.
Historically, we have financed
most of our operations, research and development, working capital, capital
expenditures and acquisitions through our internally generated cash. We take the
following factors into account when considering whether to borrow under our
financing facilities:
We have a unique cash flow cycle
due to our obligations to pre-fund the payments of social welfare grants in the
KwaZulu-Natal and Eastern Cape provinces. We provide the funds required for the
grant payments on behalf of these provincial governments from our own cash
resources and are reimbursed within two weeks by the KwaZulu-Natal and Eastern
Cape governments, thus exposing ourselves to these provinces credit risk. These
obligations result in a peak funding requirement, on a monthly basis, of
approximately $35.9 million (ZAR 340 million) for each of the KwaZulu-Natal and
Eastern Cape contracts. The funding requirements are at peak levels for the
first three weeks of every month during the year. In addition, when grants are
paid at merchant locations before the start of the payment service at pay points
we are required to prefund these payments to the merchants distributing the
grants on our behalf. We typically reimburse these merchants within 48 hours
after they distribute the grants to the social welfare beneficiaries, however,
the provincial governments reimburse the amount due to us within two weeks after
the distribution date. This practice results in a significant net cash outflow
at the end of a month, and a quarter as the payment service generally commences
in the last few days of the month preceding new payment cycle month (for
instance, for the last two years, the January payment service commenced in the
last week of December at merchant locations and in January at pay points).
We currently believe that our
cash and credit facilities are sufficient to fund our current operations for at
least the next four quarters.
Cash flows from operating
activities
Three months ended December 31,
2008
Net cash inflows from operating
activities for the second quarter of fiscal 2009 was $45.9 million (ZAR 450.9
million) compared to net cash outflows from operating activities of $15.6
million (ZAR 105.6 million) for the second quarter of fiscal 2008. The increase
in net cash inflow during the second quarter of fiscal 2009 resulted from the
foreign exchange gain, the timing of the opening of the October 2008 pay file in
the last week of September 2008 and increased activity in our transaction based
activities and hardware, software and related technology sales segments, offset
by the opening of the January 2009 pay file in the last four days of December
2008 at merchant locations in all provinces. We reimbursed merchants for the
January 2009 grants distributed by them during December 2008.
During the second quarter of
fiscal 2009 we made our first provisional tax payments of $9.9 million (ZAR 99.1
million) related to our 2009 tax year and our third provisional payments related
to our 2008 tax year of $2.9 million (ZAR28.7 million) in South Africa. We made
second provisional payments of $1.0 million (ZAR 9.9 million) related to our
2008 tax year in Europe, primarily Austria. In addition, we paid Secondary Tax
on Companies, or STC, of $2.2 million (ZAR 22.3 million) related to dividends
paid by New Aplitec to Net1.
During the three months ended
December 31, 2007, we paid a $12.3 million (ZAR 84.3 million) first provisional
payment for our 2008 tax year. In addition, we paid a $3.9 million (ZAR 26.5
million) third provisional payment for our 2007 tax year. See the table below
for a summary of all taxes paid.
42
Taxes paid during the second quarter of fiscal 2009 and 2008
were as follows:
Table 24
|
|
|
|
|
Three months ended December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
$
|
|
|
$
|
|
|
ZAR
|
|
|
ZAR
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First provisional payments
|
|
9,899
|
|
|
12,274
|
|
|
99,092
|
|
|
84,333
|
|
Second provisional payments
|
|
993
|
|
|
-
|
|
|
9,940
|
|
|
-
|
|
Third provisional payments
|
|
2,868
|
|
|
3,861
|
|
|
28,704
|
|
|
26,526
|
|
Secondary taxation on companies
|
|
2,230
|
|
|
-
|
|
|
22,318
|
|
|
-
|
|
Total tax paid
|
|
15,990
|
|
|
16,135
|
|
|
160,054
|
|
|
110,859
|
|
We expect to pay additional first
provisional payments in South Africa related to our 2009 tax year in the third
quarter of fiscal 2009 of ZAR 26.1 million.
Six months ended December 31,
2008
Net cash inflows from operating
activities for the first half of fiscal 2009 was $12.9 million (ZAR 113.5
million) compared to net cash inflows from operating activities of $24.7 million
(ZAR 171.4 million ) for the first half of fiscal 2008. The decrease in net cash
inflow during the second quarter of fiscal 2009 resulted primarily from an
increased use of cash in December 2008 as compared to December 2007 as a result
of timing difference relating to the opening of the January pay file from year
to year (and thus our commencement of our payment service), which was offset by
the foreign exchange gain and increased activity in our transaction based
activities and hardware, software and related technology sales segments. We
commenced our grant payment service for January 2008 in the last few days of
December 2007 at merchant locations in four provinces and therefore utilized
less cash to pay the January grants in December during fiscal 2008 compared with
fiscal 2009.
During the first half of fiscal
2009 we made a third provisional payment of $2.9 million (ZAR28.7 million) and
an additional second provisional payment of $8.6 million (ZAR 66.9 million)
related to our 2008 tax year in South Africa. In addition, we paid our first
provisional tax payments of $9.9 million (ZAR 99.1 million) related to our 2009
tax year in South Africa. We paid taxes of $1.2 million related to our 2008 tax
year in the United States and $1.0 million (ZAR 9.9 million) related to our 2008
tax year in Europe, primarily Austria. Finally, we paid Secondary Tax on
Companies of $2.2 million (ZAR 22.3 million) related to dividends paid by New
Aplitec to Net1. See the table below for a summary of all taxes paid
(refunded).
Taxes paid during the first half of
fiscal 2009 and 2008 were as follows:
Table 25
|
|
|
|
|
Six months ended December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
$
|
|
|
$
|
|
|
ZAR
|
|
|
ZAR
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First provisional payments
|
|
9,899
|
|
|
12,274
|
|
|
99,092
|
|
|
84,333
|
|
Second provisional payments
|
|
9,595
|
|
|
8,357
|
|
|
76,826
|
|
|
60,465
|
|
Third provisional payments
|
|
2,868
|
|
|
3,861
|
|
|
28,704
|
|
|
26,526
|
|
Taxation refunds received
|
|
(61
|
)
|
|
(10
|
)
|
|
(471
|
)
|
|
(66
|
)
|
Secondary taxation on companies
|
|
2,230
|
|
|
-
|
|
|
22,318
|
|
|
-
|
|
Total tax paid
|
|
24,531
|
|
|
24,482
|
|
|
226,469
|
|
|
171,258
|
|
Cash flows from investing
activities
Three months ended December 31,
2008
Cash used in investing activities
for the second quarter of fiscal 2009 includes capital expenditure of $0.4
million (ZAR 4.3 million), of which $0.2 million (ZAR 1.7 million) relates to
equipment acquired for our card manufacturing facility. We were required to
relocate the card manufacturing facility because our landlord gave us notice and
cancelled our lease. We were required to upgrade the new premises and install
new support equipment, including air-conditioning and networking, in order to
commission our card manufacturing equipment.
43
During the second quarter of
fiscal 2009 we paid $0.5 million (ZAR 4.9 million) to consultants related to the
BGS acquisition. Under the stock purchase agreement, we will be required to pay
an additional $2.0 million (at the $:EUR exchange rate on December 31, 2008) to
the former shareholders of BGS on March 31, 2009.
In November 2008, we acquired
additional shares of VTU Colombia for approximately $0.1 million. Our
shareholding in VTU Colombia remains at 50%. These funds will be used to fund
operating activities.
Cash used in investing activities
for the three months ended December 31, 2007 includes capital expenditure of
$1.2 million (ZAR 8.2 million), of which $0.5 million (ZAR 3.5 million) relates
to renovations of our transaction-based activities segment head office and data
room, $0.2 million (ZAR 1.5 million) relates to capital expenditure to maintain
our EasyPay operations and $0.2 million (ZAR 1.1 million) relates the
acquisition of POS terminals for our merchant acquiring system.
Six months ended December 31,
2008
Cash used in investing activities
for the first half of fiscal 2009 includes capital expenditure of $3.3 million
(ZAR 28.89 million), of which $2.1 million (ZAR 16.1 million) relates to six
backend processing machines to maintain and expand current operations, $0.2
million (ZAR 1.7 million) relates to equipment acquired for our card
manufacturing facility and $0.2 million (ZAR 1.6 million) relates to
modifications to vehicles acquired to distribute social welfare grants.
During the first half of fiscal
2009 we paid $95.8 million (ZAR 748.2 million), net of cash received, for 80.1%
of the outstanding ordinary capital of BGS, which includes approximately $0.5
million paid to consultants.
During the first half of 2009 we
acquired additional shares of VinaPay for approximately $0.3 million. Our
current shareholding in VinaPay remains at 30%. These funds will be used to fund
operating activities.
During the first half of 2009 we
acquired additional shares of VTU Colombia for approximately $0.3 million. Our
shareholding in VTU Colombia remains at 50%. These funds will be used to fund
operating activities.
Cash used in investing activities
for the six months ended December 31, 2007 includes capital expenditure of $1.9
million (ZAR 13.0 million), of which $0.5 million (ZAR 3.5 million) relates to
renovations of the transaction-based activities segment head office and data
room, $0.2 million (ZAR 1.5 million) relates to capital expenditure to maintain
our EasyPay operations and $0.4 million (ZAR 2.9 million) relates the
acquisition of POS terminals for our merchant acquiring system.
Cash flows from financing
activities
Three months ended December 31,
2008
During the second quarter of
fiscal 2009, we repaid the $110 million short-term loan facility we obtained
during August 2008 to fund the BGS acquisition.
During the second quarter of
fiscal 2009 we acquired 2,419,581 shares of our common stock in open market
purchases for an aggregate of $24.8 million. These shares have been allocated to
our treasury stock.
There were no significant cash flows
from financing activities during the three months ended December 31, 2007.
Six months ended December 31,
2008
During the first half of fiscal
2009, we received and repaid the $110 million short-term loan facility described
above. In addition we paid the $1.1 million facility fee related to this
facility.
During the first half of fiscal 2009
we acquired 2,419,581 shares of our common stock for $24.8 million.
During the first half of each of
fiscal 2009 and 2008 we received $0.2 million (ZAR 1.2 million) and $0.2 million
(ZAR 1.1 million), respectively, from employees exercising stock options and
repaying loans.
Off-Balance Sheet Arrangements
We have no off-balance sheet
arrangements.
44
Capital Expenditures
We operate in an environment
where our contracts for the payment of social welfare grants require substantial
capital investment to establish our operational infrastructure when a contract
commences. Further capital investment is required when the number of
beneficiaries increases to the point where the maximum capacity of the original
infrastructure is exceeded.
We discuss our capital
expenditures during the second quarter and first half of fiscal 2009 under
Liquidity and capital resources Cash flows from investing activities.
All of our capital expenditures
for the past three fiscal years have been funded through internally generated
funds. We had outstanding capital commitments of $0.1 million as of December 31,
2008. We anticipate that capital spending for the third quarter of fiscal 2009
will relate primarily to on-going replacement of equipment used to administer
and distribute social welfare grants and provide a switching service through
EasyPay. We expect to fund these expenditures through internally generated
funds.
Contingent Liabilities, Commitments and Contractual
Obligations
We lease various premises under
operating leases. Our minimum future commitments for lease premises as well as
other commitments are as follows:
Table 26
|
|
Payments due by Period, as at December 31, 2008 (in $
000s)
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
than 1
|
|
|
1-3
|
|
|
3-5
|
|
|
than 5
|
|
|
|
Total
|
|
|
year
|
|
|
years
|
|
|
years
|
|
|
years
|
|
Operating lease obligations
|
|
4,708
|
|
|
1,767
|
|
|
2,552
|
|
|
389
|
|
|
-
|
|
Purchase obligations
|
|
3,300
|
|
|
3,300
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Capital commitments
|
|
7
|
|
|
7
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
8,015
|
|
|
5,074
|
|
|
2,552
|
|
|
389
|
|
|
-
|
|
45
Item 3. Quantitative and
Qualitative Disclosures About Market Risk
We seek to reduce our exposure to
currencies other than the South African rand through a policy of matching, to
the extent possible, assets and liabilities denominated in those currencies. In
addition, we use financial instruments to economically hedge our exposure to
exchange rate and interest rate fluctuations arising from our operations. We are
also exposed to credit risks.
Currency Exchange Risk
We are subject to currency
exchange risk because we purchase inventories that we are required to settle in
other currencies, primarily the euro and US dollar. We have used forward
contracts to limit our exposure in these transactions to fluctuations in
exchange rates between the South African rand, on the one hand, and the US
dollar and the euro, on the other hand. As of December 31, 2008 and 2007, our
outstanding foreign exchange contracts were as follows:
As of December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair market
|
|
|
|
Notional amount
|
|
Strike price
|
|
value price
|
|
Maturity
|
|
EUR
|
|
67,251
|
|
ZAR
|
|
13.6059
|
|
ZAR
|
|
13.3618
|
|
January 30, 2009
|
|
USD
|
|
656,000
|
|
ZAR
|
|
10.8230
|
|
ZAR
|
|
9.6020
|
|
March 13, 2009
|
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair market
|
|
|
|
Notional amount
|
|
Strike price
|
|
value price
|
|
Maturity
|
|
EUR
|
|
33,500
|
|
ZAR
|
|
9.9030
|
|
ZAR
|
|
10.1619
|
|
February 11, 2008
|
|
EUR
|
|
24,700
|
|
ZAR
|
|
10.3232
|
|
ZAR
|
|
10.2589
|
|
March 31, 2008
|
|
Translation Risk
Translation risk relates to the
risk that our results of operations will vary significantly as the US dollar is
our reporting currency, but we earn most of our revenues and incur most of our
expenses in ZAR. The US dollar to ZAR exchange rate has fluctuated significantly
over the past three years. As exchange rates are outside our control, there can
be no assurance that future fluctuations will not adversely affect our results
of operations and financial condition.
Interest Rate Risk
As a result of our normal
borrowing and leasing activities, our operating results are exposed to
fluctuations in interest rates, which we manage primarily through our regular
financing activities. We generally maintain limited investment in cash
equivalents and have occasionally invested in marketable securities. Typically,
for every 1% increase in SARBs repurchase, or repo rate, our interest expense
on pre-funding social welfare grants in the KwaZulu-Natal and Eastern Cape
provinces increases by $19,325 per month, while interest earned per month on any
surplus cash increases by $9,339 per $10.6 million (ZAR 100 million).
Credit Risk
Credit risk relates to the risk
of loss that we would incur as a result of non-performance by counterparties. We
maintain credit risk policies with regard to our counterparties to minimize
overall credit risk. These policies include an evaluation of a potential
counterpartys financial condition, credit rating, and other credit criteria and
risk mitigation tools as our management deems appropriate.
With respect to credit risk on
financial instruments, we maintain a policy of entering into such transactions
only with South African and European financial institutions that have a credit
rating of BBB or better, as determined by credit rating agencies such as
Standard & Poors, Moodys and Fitch Ratings.
46
Micro-lending Credit Risk
We are exposed to credit risk in
our microlending activities, which provides unsecured short-term loans to
qualifying customers. We manage this risk by assigning each prospective customer
a creditworthiness score, which takes into account a variety of factors such
as employment status, salary earned, other debts and total expenditures on
normal household and lifestyle expenses.
47
Item 4. Controls and Procedures
Evaluation of disclosure
controls and procedures
Under the supervision and with
the participation of our management, including our chief executive officer and
our chief financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended, as of
December 31, 2008. Management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on this evaluation, the chief executive officer and the chief financial
officer concluded that our disclosure controls and procedures were effective as
of December 31, 2008.
Changes in Internal Control over
Financial Reporting
There have not been any changes
in our internal control over financial reporting during the fiscal quarter ended
December 31, 2008, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
48
Part II. Other Information
Item 1A. Risk Factors
See Item 1A RISK FACTORS in Part
I of the Companys Annual Report on Form 10-K for the fiscal year ended June 30,
2008 for a discussion of the Companys risk factors. Except for the four risk
factors discussed below, there have been no material changes to these risk
factors.
SASSA recently notified
bidders that it has terminated the tender process to award contracts for the
distribution of social welfare payments and has deferred a decision regarding
commencing a new tender process. Until SASSA makes a further announcement, there
will continue to be substantial uncertainty about the future contract award
process. Our existing contracts are now terminable by SASSA on 30 days notice
and any non-renewal or termination of our contracts would materially and
adversely affect our business.
We currently derive a majority of
our revenues from contracts to distribute social welfare grants on behalf of
five of the nine provincial governments of South Africa. For the foreseeable
future, our revenues, results of operations and cash flows will depend on this
concentrated group of customers. During the years ended June 30, 2008, 2007 and
2006, and the six months ended December 31, 2008, we derived approximately 67%,
70%, 77% and 61%, respectively, of our revenues from payments made to us by
these provinces under our government social welfare contracts.
In early 2007, the South African
Social Security Agency, or SASSA, commenced a national tender for the award of
contracts to distribute social welfare grants throughout South Africa. We
participated in the tender process and timely submitted proposals for each of
South Africas nine provinces, as well as a proposal for the entire country.
There were a series of extensive delays during the tender process which resulted
in numerous extensions of our bid proposals as well as an extension of our
existing contracts. Our existing contracts currently expire on March 31, 2009;
however, SASSA retains the right to terminate any or all of these contracts on
30 days notice to us. On November 3, 2008, SASSA notified bidders that it had
terminated the tender process without awarding new contracts, citing a number of
defects in the original request for proposal published by SASSA and in the bid
evaluation process. SASSA also stated that it has deferred a decision about
commencing a new tender process. We are currently in discussions with SASSA to
determine the extent, terms and conditions of any potential contract extensions.
Until the exact terms and conditions of these potential contract extensions are
formalized, we can not quantify the financial or business impact of any
variations to our current contractual terms.
As a result of SASSAs decision
to terminate the tender process and to defer a decision about commencing a new
tender process, there is substantial uncertainty about the future contract award
process. We intend to continue to provide services under our existing contracts
according to their respective terms, as we have for over a decade, but we cannot
assure you that these contracts will continue past March 31, 2009. It is even
possible that SASSA could seek to terminate any or all of our contracts before
then. If SASSA does initiate a new tender process, we cannot assure you that the
tender will result in our receiving contracts to continue to distribute social
welfare grants in each of the five South African provinces where we currently
distribute them. Even if we do receive new contracts, or extensions of our
current contracts, we cannot predict the terms that such contracts will contain.
Any new contract or extension we receive may contain pricing or other terms,
such as provisions relating to early termination, that are not as favorable to
us as the contracts under which we currently operate. In addition, we believe it
is likely that any new tender specification would include a requirement for the
successful bidder to pre-fund the social welfare grants in the relevant province
for a one month period, as we currently are required to do under certain of our
existing provincial contracts, which would result in significant cash flow
funding requirements for the contractor. The recently terminated tender process
and the surrounding uncertainty consumed a substantial amount of our
managements time and attention during the past two years. Any future tender
initiated by SASSA would require our management to devote further resources to
the tender process which could adversely affect their ability to focus on other
matters, including potential international business development activities.
Moreover, even if we were to
receive new contracts or contract extensions containing similar economic terms
to those of our current contracts, our profit margins could be adversely
affected to the extent that any such contracts would require us to incur
significant capital expenditures during the initial implementation phase.
Historically, we have incurred a significant portion of the expenses associated
with these contracts during the initial implementation phase, which averages
approximately 18 months, and have historically enjoyed higher profit margins on
these contracts after the completion of the implementation period. Therefore, to
the extent that we were to be awarded a new contract that required significant
capital expenditures, our profit margins would be adversely affected if the
contract were to be terminated for any reason during the implementation
period.
49
Finally, if we were to be awarded
one or more contracts by SASSA, an unsuccessful tenderor could seek to challenge
the award, which could result in the contract being set aside or could require
us to expend time and resources in an attempt to defeat any such challenge.
Depreciation of the South
African rand against the US dollar has adversely affected and may continue to
adversely affect our reported operating results and our stock price.
The South African rand, or ZAR,
is the primary operating currency for our business operations while our
financial results are reported in US dollars. Our future revenues and profits
may experience significant fluctuations as the rate of exchange between the ZAR
and the US dollar fluctuates. We cannot assure you what effect, if any, changes
in the exchange rate of the ZAR against the US dollar will have on our results
of operations and financial condition. While the US dollar/ZAR exchange rate has
historically been volatile, the ZAR weakened against the US dollar during the
2008 fiscal year. Moreover, as a result of the recent dramatic changes in the
world financial markets, including the collapse of major financial institutions
and the perception that there may be a prolonged global recession that would
adversely affect developing economies like South Africas, the ZAR declined
significantly against the US dollar during the first and second quarters of
fiscal 2009. The depreciation of the ZAR may also be affected by political
instability in South Africa and neighboring Zimbabwe. Because our revenues are
primarily denominated in ZAR, the decline in the value of the ZAR against the US
dollar has adversely affected our reported results of operations. We also
believe that the recent decline in the trading price of our common stock is at
least partially attributable to the depreciation of the ZAR against the US
dollar. We cannot predict whether or not the depreciation of the ZAR against the
US dollar will continue; however continued weakness in the ZAR may adversely
affect our future operating results and may also continue to affect the price at
which our common stock trades. Refer to Item 7 Currency Exchange Rate
InformationActual exchange ratestable 3 and the graph beneath table 3
included in our Annual Report on Form 10-K and Item 2 Currency Exchange Rate
InformationActual exchange ratestable 1 and the graph beneath table 1 in this
Quarterly Report on Form 10-Q.
We generally do not engage in any
currency hedging transactions intended to reduce the effect of fluctuations in
foreign currency exchange rates on our results of operations, other than
economic hedging relating to our inventory purchases which are settled in US
dollars or euros. We have used forward contracts in order to hedge our economic
exposure to the ZAR/US dollar and ZAR/euro exchange rate fluctuations from these
foreign currency transactions. We cannot guarantee that we will enter into
hedging transactions in the future or, if we do, that these transactions will
successfully protect us against currency fluctuations.
It may be difficult for us
to implement our acquisition strategy especially in light of recent global
market and economic conditions.
Acquisitions are a significant
part of our long-term growth strategy as we seek to grow our business
internationally and to deploy our technologies in new markets outside South
Africa. We believe that it is frequently desirable to issue equity or
equity-linked securities, as full or partial consideration for strategic
acquisitions. However, the recent decline in our stock price as a result of
turmoil in the global financial markets, the fear of the prolonged global
recession and depreciation of the ZAR has reduced the feasibility of our
pursuing acquisitions in which we would issue our stock at least in the near
term. In addition, the conditions in the global credit markets and other related
trends affecting the banking industry have caused significant operating losses
and bankruptcies throughout the banking industry which has made acquisition
financing more difficult to obtain. Many lenders and institutional investors
have ceased to provide funding to even the most credit-worthy borrowers. If our
stock price remains too low to serve as acquisition currency or if we are unable
to obtain acquisition financing, we may be unable to take advantage of potential
acquisitions or to otherwise expand our business as planned.
50
The failure of any bank or
financial institution in which we keep our cash and cash equivalents may prevent
us from funding our business or may lead to substantial losses of
assets.
We maintain a significant amount
of cash and cash equivalents to fund our business operations at several major
South African and European banks and financial institutions. As of December 31,
2008, we maintained an aggregate of $124.7 million in cash and cash equivalents
which were deposited with such banks and financial institutions, excluding the
cash equivalent represented by the 32-day call instrument we terminated on
January12, 2009. Although we maintain a policy of entering into transactions
only with South African and European banks and financial institutions that have
a credit rating of BBB or better, as determined by credit rating agencies such
as Standard & Poors, Moodys and Fitch Ratings, due to the current credit
crisis and global economic conditions, it is possible that despite such ratings,
one or more of these banks or financial institutions may fail. The failure of
one or more of these institutions may cause us to lose a significant amount of
cash and cash equivalents. In addition to the actual value of our company which
would be reduced due to the loss of cash and cash equivalents, our business
could be materially and adversely affected by the failure of any institution
where we maintain our cash and cash equivalents because we require significant
amounts of cash to pre-fund the payment of social welfare grants. Failure to
meet our pre-funding obligations would result in a default under our provincial
contracts which require pre-funding. Although to date we have not experienced
any such losses or been prevented from funding our business operations, in light
of recent global economic conditions such losses may occur in the future.
51
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
On November 6, 2008, we announced
the authorization by our Board of Directors to repurchase up to $50 million of
our common stock at any time and from time to time through December 31, 2009.
The share repurchase
authorization will be used at our managements discretion, subject to
limitations imposed by SEC Rule 10b-18 and other legal requirements and subject
to price and other internal limitations established by our Board. Repurchases
will be funded from our available cash. Share repurchases may be made through
open market purchases, privately negotiated transactions, or both. The
authorization may be suspended, terminated or modified at any time for any
reason, including market conditions, the cost of repurchasing shares, liquidity
and other factors that management deems appropriate.
The table below presents the
number of shares purchased, the average price per share, the total number of
shares purchased as part of publically announced plans and programs and the
maximum number of shares that may yet be purchased under the plans or programs
for the second quarter of fiscal 2009:
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
Total number of
|
|
number (or
|
|
|
|
|
|
|
shares
|
|
approximate
|
|
|
|
|
|
|
purchased as
|
|
dollar value) of
|
|
|
|
|
|
|
part of
|
|
shares that may
|
|
|
|
|
Average price
|
|
publically
|
|
yet be
|
|
|
Total number
|
|
paid per
|
|
announced
|
|
purchased
|
|
|
of shares
|
|
share
|
|
plans or
|
|
under the plans
|
|
Period
|
purchased
|
|
(US dollars)
|
|
programs
|
|
or programs
|
|
November 2008
|
1,733,865
|
|
10.28
|
|
1,733,865
|
|
(1)
|
|
December 2008
|
686,275(2)
|
|
10.09
|
|
685,716
|
|
(1)
|
|
(1)
|
our board approved the repurchase of up to $50 million
shares of our common stock. During the second quarter of fiscal 2009 we
utilized $24.7 million of this authorization.
|
(2)
|
includes 559 shares of our common stock acquired from
linked unit holders upon listing on the JSE. The conversion of the linked
units to common stock resulted in fractional shares and we were required
to purchase these fractional shares from the linked unit
holders.
|
52
Item 4. Submission of Matters to a Vote of Security
Holders
Our Annual Meeting of Shareholders was
held on November 27, 2008 to consider the following proposals:
|
Proposal 1.
|
Election of directors;
|
|
Proposal 2.
|
Amend and restate our Articles of Incorporation
to:
|
|
|
(i) increase the number of authorized shares of
our common stock from 83,333,333 shares to 200,000,000 shares;
|
|
|
(ii) simplify our Articles of Incorporation by
deleting obsolete provisions; and
|
|
|
(iii) consolidate our Articles of Incorporation
so that the entire charter will be contained in one document; and
|
|
Proposal 3.
|
Ratification of appointment of independent
registered public accounting firm.
|
The following proposals were adopted by
the votes indicated:
Proposal 1:
|
|
For
|
Withheld
|
|
Dr. Serge C.P. Belamant
|
30,302,110
|
548,181
|
|
Herman G. Kotze
|
28,938,864
|
1,911,427
|
|
Christopher S. Seabrooke
|
19,082,683
|
11,767,608
|
|
Anthony C. Ball
|
30,637,498
|
212,793
|
|
Alasdair J. K. Pein
|
30,639,764
|
210,527
|
|
Paul Edwards
|
30,639,894
|
210,397
|
|
Tom Tinsley
|
30,639,764
|
210,527
|
Proposal 2:
|
|
For
|
Against
|
Abstained
|
|
Amend and restate our Articles of
|
|
|
|
|
Incorporation
|
37,451,861
|
7,921,834
|
10,212
|
Proposal 3:
|
|
For
|
Against
|
Abstained
|
|
Deloitte & Touche (South Africa)
|
45,375,059
|
5,296
|
3,552
|
53
Item 6. Exhibits
The following exhibits are filed as part of this Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on February 5, 2009.
NET 1 UEPS TECHNOLOGIES, INC.
By: /s/ Dr. Serge C.P. Belamant
Dr. Serge C.P. Belamant
Chief
Executive Officer, Chairman of the Board and Director
By: /s/ Herman Gideon Kotzé
Herman G. Kotzé
Chief
Financial Officer, Treasurer and Secretary, Director
54
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