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 September 30, 2010
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 has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
YES [ ] 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 October 31, 2010 (the latest practicable date), 45,392,353
shares of the registrants common stock, par value $0.001 per share, net of
treasury shares, 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)
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(In thousands, except share data)
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
200,161
|
|
$
|
153,742
|
|
Pre-funded social welfare grants receivable (Note 2)
|
|
4,597
|
|
|
6,660
|
|
Accounts receivable, net of allowances of September: $885;
June: $807
|
|
37,225
|
|
|
41,854
|
|
Finance loans receivable, net of allowances of September: $-;
June: $-
|
|
5,523
|
|
|
4,221
|
|
Deferred expenditure on smart cards
|
|
2
|
|
|
-
|
|
Inventory (Note 3)
|
|
6,144
|
|
|
3,622
|
|
Deferred income taxes
|
|
18,546
|
|
|
16,330
|
|
Total current assets before settlement assets
|
|
272,198
|
|
|
226,429
|
|
Settlement assets
|
|
107,407
|
|
|
83,661
|
|
Total current assets
|
|
379,605
|
|
|
310,090
|
|
OTHER LONG-TERM ASSETS, including available
for sale securities (Note 4)
|
|
8,130
|
|
|
7,423
|
|
PROPERTY, PLANT AND EQUIPMENT, NET OF ACCUMULATED
DEPRECIATION OF September: $39,683; June: $35,271
|
|
7,637
|
|
|
7,286
|
|
EQUITY-ACCOUNTED INVESTMENTS (Note 4)
|
|
2,376
|
|
|
2,598
|
|
GOODWILL (Note 6)
|
|
83,203
|
|
|
76,346
|
|
INTANGIBLE ASSETS, NET OF ACCUMULATED
AMORTIZATION OF September: $41,477; June: $34,226 (Note 5)
|
|
71,646
|
|
|
68,347
|
|
TOTAL ASSETS
|
|
552,597
|
|
|
472,090
|
|
LIABILITIES
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
Accounts payable
|
|
5,175
|
|
|
3,596
|
|
Other payables
|
|
58,847
|
|
|
50,855
|
|
Income taxes payable
|
|
9,330
|
|
|
3,476
|
|
Total current liabilities before settlement obligations
|
|
73,352
|
|
|
57,927
|
|
Settlement obligations
|
|
107,407
|
|
|
83,661
|
|
Total current liabilities
|
|
180,759
|
|
|
141,588
|
|
DEFERRED INCOME TAXES
|
|
43,766
|
|
|
38,858
|
|
OTHER LONG-TERM LIABILITIES, including non-controlling
interest loans
|
|
4,413
|
|
|
4,343
|
|
TOTAL LIABILITIES
|
|
228,938
|
|
|
184,789
|
|
COMMITMENTS AND CONTINGENCIES
|
|
-
|
|
|
-
|
|
EQUITY
|
|
|
|
|
|
|
NET1
EQUITY:
|
|
|
|
|
|
|
COMMON STOCK (Note 7)
Authorized: 200,000,000 with $0.001 par value;
Issued and outstanding shares, net of treasury - September:
45,392,353; June: 45,378,397
|
|
59
|
|
|
59
|
|
PREFERRED STOCK
Authorized shares: 50,000,000 with $0.001 par value;
Issued and outstanding shares, net of treasury:
2010: -; 2009: -
|
|
-
|
|
|
-
|
|
ADDITIONAL PAID-IN-CAPITAL
|
|
134,841
|
|
|
133,543
|
|
TREASURY SHARES, AT COST: September: 13,149,042; June: 13,149,042
|
|
(173,671
|
)
|
|
(173,671
|
)
|
ACCUMULATED OTHER COMPREHENSIVE
LOSS
|
|
(38,906
|
)
|
|
(66,396
|
)
|
RETAINED EARNINGS
|
|
399,772
|
|
|
392,343
|
|
TOTAL
NET1 EQUITY
|
|
322,095
|
|
|
285,878
|
|
NON-CONTROLLING INTEREST
|
|
1,564
|
|
|
1,423
|
|
TOTAL EQUITY
|
|
323,659
|
|
|
287,301
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
$
|
552,597
|
|
$
|
472,090
|
|
(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
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except per share
data)
|
|
REVENUE
|
$
|
64,283
|
|
$
|
65,514
|
|
EXPENSE
|
|
|
|
|
|
|
Cost of goods sold, IT
processing, servicing and support
|
|
18,067
|
|
|
16,827
|
|
Selling, general and
administration
|
|
30,326
|
|
|
17,740
|
|
Depreciation and amortization
|
|
4,904
|
|
|
4,579
|
|
OPERATING INCOME
|
|
10,986
|
|
|
26,368
|
|
INTEREST INCOME, net
|
|
2,836
|
|
|
2,371
|
|
INCOME BEFORE INCOME TAXES
|
|
13,822
|
|
|
28,739
|
|
INCOME TAX EXPENSE (Note 11)
|
|
6,207
|
|
|
11,031
|
|
NET INCOME FROM CONTINUING OPERATIONS
BEFORE LOSS FROM EQUITY- ACCOUNTED INVESTMENTS
|
|
7,615
|
|
|
17,708
|
|
LOSS FROM EQUITY-ACCOUNTED INVESTMENTS (Note 4)
|
|
(216
|
)
|
|
(111
|
)
|
NET INCOME
|
|
7,399
|
|
|
17,597
|
|
ADD: NET LOSS ATTRIBUTABLE TO NON- CONTROLLING INTEREST
|
|
(30
|
)
|
|
(344
|
)
|
NET INCOME ATTRIBUTABLE TO NET1
|
$
|
7,429
|
|
$
|
17,941
|
|
Net income per share, in United States dollars
(
Note 8)
|
|
|
|
|
|
|
Basic
earnings attributable to Net1 shareholders
|
$
|
0.16
|
|
$
|
0.37
|
|
Diluted earnings attributable to
Net1 shareholders
|
$
|
0.16
|
|
$
|
0.37
|
|
See Notes to Unaudited Condensed
Consolidated Financial Statements
3
NET 1 UEPS TECHNOLOGIES, INC.
|
Unaudited Condensed Consolidated Statement of Changes
in Equity (in thousands)
|
|
|
Net 1 UEPS Technologies, Inc. Shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Paid-In
|
|
|
Retained
|
|
|
comprehensive
|
|
|
Total Net1
|
|
|
controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Earnings
|
|
|
(loss) income
|
|
|
Equity
|
|
|
Interests
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2010
|
|
58,527,439
|
|
$
|
59
|
|
|
(13,149,042
|
)
|
$
|
(173,671
|
)
|
$
|
133,543
|
|
$
|
392,343
|
|
$
|
(66,396
|
)
|
$
|
285,878
|
|
$
|
1,423
|
|
$
|
287,301
|
|
Restricted stock granted
|
|
13,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan portion related to options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
Stock-based compensation charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,438
|
|
Utilization of APIC pool related to vested
restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(160
|
)
|
Comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,429
|
|
|
|
|
|
7,429
|
|
|
(30
|
)
|
$
|
7,399
|
|
Other comprehensive
income
(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in
foreign
currency translation
reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,490
|
|
|
27,490
|
|
|
171
|
|
|
27,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2010
|
|
58,541,395
|
|
$
|
59
|
|
|
(13,149,042
|
)
|
$
|
(173,671
|
)
|
$
|
134,841
|
|
$
|
399,772
|
|
$
|
(38,906
|
)
|
$
|
322,095
|
|
$
|
1,564
|
|
$
|
323,659
|
|
See Notes to Unaudited Condensed
Consolidated Financial Statements
4
NET 1 UEPS TECHNOLOGIES, INC.
|
Unaudited Condensed Consolidated Statements of
Comprehensive Income
|
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Net income
|
$
|
7,429
|
|
$
|
17,597
|
|
|
|
|
|
|
|
|
Other comprehensive income,
net of taxes:
|
|
|
|
|
|
|
Movement in foreign
currency translation reserve
|
|
27,490
|
|
|
13,585
|
|
Total other comprehensive income, net of
taxes
|
|
27,490
|
|
|
13,585
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
34,919
|
|
|
31,182
|
|
Add comprehensive loss attributable to non-controlling interest
|
|
(141
|
)
|
|
(246
|
)
|
Comprehensive income attributable to Net1
|
$
|
35,060
|
|
$
|
31,428
|
|
See Notes to Unaudited Condensed
Consolidated Financial Statements
5
NET 1 UEPS TECHNOLOGIES, INC.
|
Unaudited Condensed Consolidated Statements of Cash
Flows
|
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income
|
$
|
7,399
|
|
$
|
17,597
|
|
Depreciation and amortization
|
|
4,904
|
|
|
4,579
|
|
Loss from equity-accounted investments
|
|
216
|
|
|
111
|
|
Fair value adjustments
|
|
(3,106
|
)
|
|
(142
|
)
|
Interest payable
|
|
73
|
|
|
78
|
|
Profit on disposal of property, plant and
equipment
|
|
(5
|
)
|
|
(1
|
)
|
Stock-based compensation charge
|
|
1,438
|
|
|
1,422
|
|
Decrease in accounts receivable, pre-funded
social welfare
|
|
|
|
|
|
|
grants receivable and finance loans receivable
|
|
10,957
|
|
|
5,529
|
|
Increase in deferred expenditure on smart
cards
|
|
(2
|
)
|
|
(30
|
)
|
(Increase) Decrease in inventory
|
|
(2,102
|
)
|
|
1,015
|
|
Increase in accounts payable and other
payables
|
|
6,025
|
|
|
25
|
|
Increase in taxes payable
|
|
5,134
|
|
|
6,211
|
|
(Decrease) Increase in deferred taxes
|
|
(773
|
)
|
|
575
|
|
Net cash provided by operating
activities
|
|
30,158
|
|
|
36,969
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Capital expenditures
|
|
(768
|
)
|
|
(641
|
)
|
Proceeds from disposal of property, plant
and equipment
|
|
7
|
|
|
49
|
|
Advance of loans to equity-accounted investment
|
|
(375
|
)
|
|
-
|
|
Repayment of loan by equity-accounted
investment
|
|
373
|
|
|
-
|
|
Net change in settlement assets
|
|
(15,544
|
)
|
|
-
|
|
Net cash used in
investing activities
|
|
(16,307
|
)
|
|
(592
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
Loan portion related to options
|
|
20
|
|
|
720
|
|
Treasury stock acquired
|
|
-
|
|
|
(126,304
|
)
|
Net change in settlement obligations
|
|
15,544
|
|
|
-
|
|
Repayment of loans
|
|
-
|
|
|
(137
|
)
|
Net cash
generated from (used in) financing
activities
|
|
15,564
|
|
|
(125,721
|
)
|
Effect of exchange rate changes on cash
|
|
17,004
|
|
|
7,870
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
46,419
|
|
|
(81,474
|
)
|
Cash and cash equivalents beginning of period
|
|
153,742
|
|
|
220,786
|
|
Cash and cash equivalents end of
period
|
$
|
200,161
|
|
$
|
139,312
|
|
See Notes to Unaudited Condensed
Consolidated Financial Statements
6
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the Unaudited Condensed Consolidated
Financial Statements
|
for the Three Months Ended September 30, 2010 and
2009
|
(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 months ended September 30, 2010 and 2009 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,
2010. 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 ruble 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 total 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
On
July 1, 2010, the Company adopted the new Financial Accounting Standards Board
(FASB) guidance on the consolidation of variable interest entities. This
guidance changed how a reporting entity determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a reporting entity
is required to consolidate another entity is based on, among other things, the
other entitys purpose and design and the reporting entitys ability to direct
the activities of the other entity that most significantly impact the other
entitys economic performance. The guidance also requires a reporting entity to
provide additional disclosures about its involvement with variable interest
entities and any significant changes in risk exposure due to such involvement.
The adoption of this guidance did not have an impact on the Companys condensed
consolidated financial statements.
On
July 1, 2010, the Company adopted the new FASB guidance issued on the accounting
for transfers of financial assets. This guidance requires more information about
transfers of financial assets, including securitization transactions, and where
entities have continuing exposure to the risks related to transferred financial
assets. It eliminates the concept of a qualifying special-purpose entity,
changes the requirements for de-recognizing financial assets, and requires
additional disclosures. The adoption of this guidance did not have an impact on
the Companys condensed consolidated financial statements.
7
1. Basis of
Presentation and Summary of Significant Accounting Policies (continued)
Recent
accounting pronouncements adopted (continued)
On
July 1, 2010, the Company adopted the new FASB guidance on revenue recognition
in multiple-deliverable revenue arrangements. The guidance amended the existing
guidance on allocating consideration received between the elements in a
multiple-deliverable arrangement and established a selling price hierarchy for
determining the selling price of a deliverable. The selling price used for each
deliverable will be based on vendor-specific objective evidence (VSOE) if
available, third-party evidence if VSOE is not available, or estimated selling
price if neither VSOE nor third-party evidence is available. The guidance
replaced the term fair value in the revenue allocation with selling price to
clarify that the allocation of revenue is based on entity specific assumptions
rather than the assumptions of a market place participant. The guidance
eliminates the residual method of allocation and requires that arrangement
consideration be allocated using the relative selling price method. It also
significantly expands the disclosures related to a vendors multiple-deliverable
revenue arrangements. The adoption of this guidance did not have an impact on
the Companys condensed consolidated financial statements for the periods
presented..
On
July 1, 2010, the Company adopted the new FASB guidance which amended the scope
of existing software revenue recognition accounting. Tangible products
containing software components and non-software components that function
together to deliver the products essential functionality would be scoped out of
the accounting guidance on software and accounted for based on other appropriate
revenue recognition guidance. This guidance must be adopted in the same period
that the company adopts the amended guidance for arrangements with multiple
deliverables described in the preceding paragraph. The adoption of this guidance
did not have an impact on the Companys condensed consolidated financial
statements for the periods presented.
On
July 1, 2010, the Company adopted new FASB guidance on the effect of
denominating the exercise price of a share-based payment award in the currency
of the market in which the underlying equity security trades. This guidance
clarifies that an employee share-based payment award with an exercise price
denominated in the currency of a market in which a substantial portion of the
entitys equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The adoption of this guidance did not have an impact on the Companys
condensed consolidated financial statements for the periods presented.
Recent accounting pronouncements not yet adopted as of September 30,
2010
In July 2010, the FASB issued amendments to the disclosure
requirements about the credit quality of financing receivables and the allowance
for credit losses. The purpose of the additional disclosures is to enable users
of financial statements to better understand the nature of credit risk inherent
in an entitys portfolio of financing receivables and how that risk is analyzed.
For end of period balances, the new disclosures are required to be made in all
interim and annual periods ending on or after December 15, 2010. For activity
during a reporting period, the disclosures are required to be made in all
interim and annual periods after January 1, 2011. These changes will not have an
impact on the Companys condensed consolidated financial results as this
guidance only relates to additional disclosures.
2. Pre-funded social
welfare grants receivable
Pre-funded
social welfare grants receivable represents amounts pre-funded by the Company to
certain merchants participating in the merchant acquiring system. The October
2010 payment service commenced during the last four days of September 2010 and
was offered at merchant locations only.
3. Inventory
The Companys inventory comprised the following categories as of
September 30, 2010 and June 30, 2010.
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
$
|
160
|
|
$
|
75
|
|
|
Finished goods
|
|
5,984
|
|
|
3,547
|
|
|
|
$
|
6,144
|
|
$
|
3,622
|
|
8
4. Fair value of
financial instruments and equity-accounted investments
Fair value of financial
instruments
Risk management
The
Company seeks to reduce its 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, the Company uses
financial instruments in order to economically hedge its exposure to exchange
rate and interest rate fluctuations arising from its operations. The Company is
also exposed to equity price and liquidity risks as well as credit risks.
Currency exchange risk
The
Company is subject to currency exchange risk because it purchases inventories
that it is required to settle in other currencies, primarily the euro and US
dollar. The Company uses foreign exchange forward contracts in order to limit
its 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. In addition, during the first quarter of fiscal 2011, the Company
entered into foreign exchange forward contracts in order to hedge the
fluctuations in the ZAR/ US dollar related to the anticipated flow of funds from
South Africa to the United States to fund a portion of the KSNET, Inc. (KSNET)
purchase price.
The Companys outstanding foreign exchange contracts are as follows:
As of September 30, 2010
|
|
|
|
|
Fair market
|
|
|
|
|
Notional
amount
|
|
Strike price
|
|
|
value price
|
|
|
Maturity
|
|
EUR 480,000
|
|
ZAR 9.7960
|
|
|
ZAR 9.5740
|
|
|
November 10, 2010
|
|
EUR 288,000
|
|
ZAR 9.4669
|
|
|
ZAR 9.5356
|
|
|
October 15, 2010
|
|
ZAR 460,000,000
|
|
USD 0.1397
|
|
|
USD 0.1432
|
|
|
October 1, 2010
|
|
ZAR 460,000,000
|
|
USD 0.1401
|
|
|
USD 0.1426
|
|
|
October 1, 2010
|
|
As of September 30, 2009
None.
Translation risk
Translation
risk relates to the risk that the Companys results of operations will vary
significantly as the US dollar is its reporting currency, but it earns most of
its revenues and incurs most of its expenses in ZAR. The US dollar to ZAR
exchange rate has fluctuated significantly over the past two years. As exchange
rates are outside the Companys control, there can be no assurance that future
fluctuations will not adversely affect the Companys results of operations and
financial condition.
Interest rate risk
As
a result of its normal borrowing and leasing activities, the Companys operating
results are exposed to fluctuations in interest rates, which it manages
primarily through regular financing activities. The Company generally maintains
limited investment in cash equivalents and has occasionally invested in
marketable securities.
Credit risk
Credit
risk relates to the risk of loss that the Company would incur as a result of
non-performance by counterparties. The Company maintains credit risk policies
with regard to its 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
the Companys management deems appropriate.
With
respect to credit risk on financial instruments, the Company maintains 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.
9
4. Fair value of
financial instruments and equity-accounted investments (continued)
Fair
value of financial instruments (continued)
Risk management (continued)
Equity price and liquidity risk
Equity
price risk relates to the risk of loss that the Company would incur as a result
of the volatility in the exchange-traded price of equity securities that it
holds and the risk that it may not be able to liquidate these securities. On
March 1, 2009, the Company acquired approximately 22% of the issued share
capital of Finbond Group Limited (Finbond), which are exchange-traded equity
securities. The fair value of these securities as of September 30, 2010,
represented approximately 1% of the Companys total assets, including these
securities. The Company expects to hold these securities for an extended period
of time and it is not concerned with short-term equity price volatility with
respect to these securities provided that the underlying business, economic and
management characteristics of the company remain sound. The market price of
these securities may fluctuate for a variety of reasons, consequently, the
amount the Company may obtain in a subsequent sale of these securities may
significantly differ from the reported market value.
Liquidity
risk relates to the risk of loss that the Company would incur as a result of the
lack of liquidity on the exchange on which these securities are listed. The
Company may not be able to sell some or all of these securities at one time, or
over an extended period of time without influencing the exchange traded price,
or at all.
Financial instruments
The
following section describes the valuation methodologies the Company uses to
measure financial assets and liabilities at fair value.
Investments in common stock
In
general, and where applicable, the Company uses quoted prices in active markets
for identical assets or liabilities to determine fair value. This pricing
methodology would apply to Level 1 investments. If quoted prices in active
markets for identical assets or liabilities are not available to determine fair
value, then the Company uses quoted prices for similar assets and liabilities or
inputs other than the quoted prices that are observable either directly or
indirectly. These investments would be included in Level 2 investments. In
circumstances in which inputs are generally unobservable, values typically
reflect managements estimates of assumptions that market participants would use
in pricing the asset or liability. The fair values are therefore determined
using model-based techniques that include option pricing models, discounted cash
flow models, and similar techniques. Investments valued using such techniques
are included in Level 3 investments.
The
Company's Level 3 asset represents an investment of 84,632,525 shares of common
stock of Finbond. The Companys ownership interest in Finbond as of September
30, 2010, is approximately 22%. The Company has no rights to participate in the
financial, operating, or governance decisions made by Finbond. The Company also
has no participation on Finbonds board of directors whether through contractual
agreement or otherwise. Consequently, the Company has concluded that it does not
have significant influence over Finbond and therefore equity accounting is not
appropriate.
Finbonds
shares are traded on the JSE Limited (JSE) and the Company has designated such
shares as available for sale investments. The Company has concluded that the
market for Finbond shares is not active and consequently has employed
alternative valuation techniques in order to determine the fair value of such
stock. Currently, the operations of Finbond include primarily mortgage brokering
services, property investment and microlending. In determining the fair value of
Finbond, the Company has considered amongst other things Finbonds historical
financial information (including its most recent public accounts), press
releases issued by Finbond and its published net asset value. The Company
believes that the best indicator of fair value of Finbond is its published net
asset value and has used this value to determine the fair value.
Derivative transactions - Foreign exchange contracts
As
part of the Companys risk management strategy, the Company enters into
derivative transactions to mitigate exposures to foreign currencies using
foreign exchange contracts. These foreign exchange contracts are
over-the-counter customized derivative transactions. Substantially all of the
Companys derivative exposures are with counterparties that have long-term
credit ratings of BBB or better. The Company uses quoted prices in active
markets for similar assets and liabilities to determine fair value. The Company
has no derivatives that require fair value measurement under Level 1 or 3 of the
fair value hierarchy.
10
4. Fair value of
financial instruments and equity-accounted investments (continued)
Financial
instruments (continued)
The
following table presents the Companys assets and liabilities measured at fair
value on a recurring basis as of September 30, 2010 according to the fair value
hierarchy:
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
Price in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
(available for sale assets
included in
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER LONG-TERM ASSETS)
|
|
-
|
|
|
-
|
|
$
|
8,009
|
|
$
|
8,009
|
|
Total assets at
fair value
|
|
-
|
|
|
-
|
|
$
|
8,009
|
|
$
|
8,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
-
|
|
$
|
2,746
|
|
|
-
|
|
$
|
2,746
|
|
Total
liabilities at fair value
|
|
-
|
|
$
|
2,746
|
|
|
-
|
|
$
|
2,746
|
|
The
following table presents the Companys assets measured at fair value on a
recurring basis as of September 30, 2009 according to the fair value
hierarchy:
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
Price in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in common stock (available for sale assets
included in
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER LONG-TERM ASSETS)
|
|
-
|
|
|
-
|
|
$
|
7,401
|
|
$
|
7,401
|
|
Total assets at fair
value
|
|
-
|
|
|
-
|
|
$
|
7,401
|
|
$
|
7,401
|
|
Assets and liabilities measured at fair value on a nonrecurring
basis
The
Company measures its equity-accounted investments at fair value on a
nonrecurring basis. The Company has no liabilities that are measured at fair
value on a nonrecurring basis. These equity-accounted investments are recognized
at fair value when they are deemed to be other-than-temporarily impaired.
The
Company reviews the carrying values of its investments when events and
circumstances warrant and considers all available evidence in evaluating when
declines in fair value are other-than-temporary. The fair values of the
Companys investments are determined using the best information available, and
may include quoted market prices, market comparables, and discounted cash flow
projections. An impairment charge is recorded when the cost of the investment
exceeds its fair value and the excess is determined to be other-than-temporary.
The Company has not recorded any impairment charges during the reporting periods
presented herein.
During
the three months ended September 30, 2010, SmartSwitch Namibia commenced
repaying outstanding loans, including outstanding interest. The repayments
received have been allocated to the equity-accounted investments presented in
our condensed consolidated balance sheet as of September 30, 2010, and reduce
this balance. The cash inflow from principal repayments have been allocated to
cash flows from investing activities and the cash inflow from the interest
repayments have been included in cash flow from operating activities in our
condensed consolidated statement of cash flows for the three months ended
September 30, 2010.
11
4. Fair value of
financial instruments and equity-accounted investments (continued)
Financial instruments (continued)
Assets and liabilities measured at fair value on a nonrecurring basis
(continued)
In
July 2010, the Company provided additional loan funding of $375,000 for a
specific growth initiative at VTU Colombia. As of September 30, 2010, the
Companys share in VTU Colombias accumulated losses continued to exceed its
investment. VTU Colombias other shareholders are providing short-term funding
for continued operations and the Company has no obligation to provide any
additional funding at this stage.
The
Company has sold hardware, software and/or licenses to SmartSwitch Namibia and
SmartSwitch Botswana and defers recognition of 50% of the net income after tax
related to these sales until SmartSwitch Namibia and SmartSwitch Botswana has
used the purchased asset or has sold it to a third party. The deferral of the
net income after tax is shown in the Elimination column in the table below.
The
functional currency of the Companys equity-accounted investments is not the US
dollar and thus the investments are restated at the period end US dollar/foreign
currency exchange rate with an entry against accumulated other comprehensive
loss. The functional currency of SmartSwitch Namibia is the Namibian dollar, the
functional currency of SmartSwitch Botswana is the Botswana pula, the functional
currency of VTU Colombia is the Colombian peso and the functional currency of
Vinapay is the Vietnamese dong.
Summarized
below is the Companys interest in equity-accounted investments as of June 30,
2010 and September 30, 2010:
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Loans
|
|
|
(Loss)
|
|
|
Elimination
|
|
|
|
Total
|
|
Balance as of June 30, 2010
|
$
|
3,549
|
|
$
|
2,512
|
|
$
|
(3,905
|
)
|
$
|
442
|
|
|
$
|
2,598
|
|
Loans provided
|
|
|
|
|
375
|
|
|
|
|
|
|
|
|
|
375
|
|
Loan repaid
|
|
|
|
|
(441
|
)
|
|
|
|
|
|
|
|
|
(441
|
)
|
(Loss) Earnings from equity- accounted investments
|
|
-
|
|
|
-
|
|
|
(302
|
)
|
|
86
|
|
|
|
(216
|
)
|
SmartSwitch
Namibia
(1)
|
|
-
|
|
|
-
|
|
|
20
|
|
|
24
|
|
|
|
44
|
|
SmartSwitch Botswana
(1)
|
|
-
|
|
|
-
|
|
|
(54
|
)
|
|
62
|
|
|
|
8
|
|
VTU Colombia
|
|
-
|
|
|
-
|
|
|
(245
|
)
|
|
-
|
|
|
|
(245
|
)
|
VinaPay
|
|
-
|
|
|
-
|
|
|
(23
|
)
|
|
-
|
|
|
|
(23
|
)
|
Foreign currency adjustment
(2)
|
|
225
|
|
|
179
|
|
|
(298
|
)
|
|
(46
|
)
|
|
|
60
|
|
Balance as of September 30, 2010
|
$
|
3,774
|
|
$
|
2,625
|
|
$
|
(4,505
|
)
|
$
|
482
|
|
|
$
|
2,376
|
|
(1) includes the recognition of realized net
income.
(2)
the foreign currency adjustment represents the effects of the combined net
currency fluctuations between the functional currency of the equity-accounted
investments and the US dollar.
There
were no significant sales to these investees that require elimination during the
three months ended September 30, 2010 and 2009.
5. Goodwill and
intangible assets
Goodwill
Summarized below is the movement in the carrying value of goodwill for
the three months ended September 30, 2010.
|
|
Carrying
|
|
|
|
value
|
|
|
|
|
|
Balance as of June 30, 2010
|
$
|
76,346
|
|
Foreign currency adjustment
(1)
|
|
6,857
|
|
Balance as of September 30, 2010
|
$
|
83,203
|
|
(1)
the foreign currency adjustment represents the effects of the fluctuations
between the ZAR against the US dollar on the carrying value of goodwill.
12
5. Goodwill and
intangible assets (continued)
Goodwill (continued)
Goodwill has been allocated to the Companys reportable segments as
follows:
|
|
As of
|
|
|
As of
|
|
|
|
September
|
|
|
June 30,
|
|
|
|
30, 2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
$
|
41,221
|
|
$
|
37,568
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
Hardware, software and related technology sales
|
|
41,982
|
|
|
38,778
|
|
Total
|
$
|
83,203
|
|
$
|
76,346
|
|
Intangible assets
Summarized
below is the carrying value and accumulated amortization of the intangible
assets as of September 30, 2010 and June 30, 2010:
|
|
As of September 30, 2010
|
|
|
As of June 30, 2010
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
85,998
|
|
$
|
(27,673
|
)
|
$
|
58,325
|
|
$
|
77,452
|
|
$
|
(22,519
|
)
|
$
|
54,933
|
|
Software and
unpatented technology
|
|
12,121
|
|
|
(2,484
|
)
|
|
9,637
|
|
|
11,047
|
|
|
(1,343
|
)
|
|
9,704
|
|
FTS patent
|
|
5,494
|
|
|
(5,354
|
)
|
|
140
|
|
|
5,007
|
|
|
(4,880
|
)
|
|
127
|
|
Exclusive licenses
|
|
4,506
|
|
|
(4,103
|
)
|
|
403
|
|
|
4,506
|
|
|
(3,941
|
)
|
|
565
|
|
Trademarks
|
|
4,132
|
|
|
(1,645
|
)
|
|
2,487
|
|
|
3,766
|
|
|
(1,411
|
)
|
|
2,355
|
|
Customer database
|
|
872
|
|
|
(218
|
)
|
|
654
|
|
|
795
|
|
|
(132
|
)
|
|
663
|
|
Total finite-lived intangible assets
|
$
|
113,123
|
|
$
|
(41,477
|
)
|
$
|
71,646
|
|
$
|
102,573
|
|
$
|
(34,226
|
)
|
$
|
68,347
|
|
Aggregate amortization expense on the finite-lived intangible assets
for the three months ended September 30, 2010, was approximately $3.9 million
(three months ended September 30, 2009, was approximately $3.6 million).
Future
estimated annual amortization expense for the next five fiscal years, assuming
exchange rates prevailing on September 30, 2010, is presented in the table
below. Actual amortization expense in future periods could differ from this
estimate as a result of acquisitions, changes in useful lives, exchange rate
fluctuations and other relevant factors.
2011
|
$
|
15,819
|
|
2012
|
|
15,256
|
|
2013
|
|
13,637
|
|
2014
|
|
10,925
|
|
2015
|
$
|
10,925
|
|
6. Short-term
facilities
As
of September 30, 2010, the Company had a short-term facility in South African
Rand of approximately $35.8 million, translated at exchange rates applicable as
of September 30, 2010, with Nedbank Limited (Nedbank). As of September 30,
2010, the overdraft rate on this facility was 8.35% . Certain of the Companys
South African subsidiaries have provided a cross deed of suretyship whereby each
of these companies has bound itself as surety and co-principal debtor with each
other for the fulfillment of each other's obligations under the facility. These
South African subsidiaries have agreed that any debit and credit bank account
balances with Nedbank may be set off against each other. Certain South African
subsidiaries have ceded trade receivables with an aggregate value of
approximately $19.3 million, translated at exchange rates applicable as of
September 30, 2010, as security for the facility as well as the Companys
investment in Cash Paymaster Services (Proprietary) Limited, a wholly owned
South African subsidiary. As of September 30, 2010, the Company had utilized
none of its South African short-term facility.
13
6. Short-term facilities
(continued)
In
addition, Net1 UTA had short-term facilities of approximately $1.4 million,
translated at exchange rates applicable as of September 30, 2010, 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 September 30, 2010, the Company had utilized
none of its Austrian short-term facilities.
Management
believes that the Companys current short-term facilities are sufficient in
order to meet its future obligations as they arise.
7. Capital
structure
The
Companys capital structure is 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, 2010.
Common stock repurchases
During
the three months ended September 30, 2010, the Company did not repurchase any
shares. On July 28, 2009, the Company repurchased an aggregate of 9,221,526
shares of its common stock from two shareholders, who originally acquired their
shares in connection with the Aplitec transaction. The purchase price was $13.50
(ZAR 105.98) per share and was paid from the Companys cash reserves in ZAR for
an aggregate purchase price of $124.5 million (ZAR 977.3 million).
8. Earnings per
share
Basic
earnings per share includes restricted stock awards that meet the definition of
a participating security. Restricted stock awards are eligible to receive
non-forfeitable dividend equivalents at the same rate as common stock. Basic
earnings per share have been calculated using the two-class method and basic
earnings per share for the three months ended September 30, 2010 and 2009,
reflects only undistributed earnings.
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 months ended September 30, 2010 and
2009, 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 September 30, 2010 and 2009, the vesting
conditions in respect of a portion of the awards had been satisfied.
The
following table details the weighted average number of outstanding shares used
for the calculation of earnings per share for the three months ended September
30, 2010 and 2009.
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
000
|
|
|
000
|
|
Weighted average number of outstanding
shares of common stock basic
|
|
45,384
|
|
|
48,815
|
|
Weighted average effect of dilutive securities: employee
stock options
|
|
32
|
|
|
103
|
|
Weighted average number of outstanding
shares of common stock diluted
|
|
45,416
|
|
|
48,918
|
|
14
9. Stock-based
compensation
Stock
option and restricted stock activity
Options
The following table summarizes stock option activity for the three
months ended September 30, 2010, and 2009:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
Grant
|
|
|
|
Number
|
|
|
exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
Date Fair
|
|
|
|
of
shares
|
|
|
price
|
|
|
(in years)
|
|
|
Value
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding July 1, 2010
|
|
1,813,656
|
|
$
|
19.76
|
|
|
7.41
|
|
$
|
585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding September 30, 2010
|
|
1,813,656
|
|
$
|
19.76
|
|
|
7.16
|
|
$
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding July 1, 2009
|
|
1,896,994
|
|
$
|
19.03
|
|
|
8.30
|
|
$
|
1,576
|
|
|
|
|
Exercised
|
|
(83,338
|
)
|
|
-
|
|
|
-
|
|
$
|
1,667
|
|
|
|
|
Outstanding September 30, 2009
|
|
1,813,656
|
|
$
|
19.76
|
|
|
8.20
|
|
$
|
5,135
|
|
|
|
|
No stock options became exercisable during the three months ended
September 30, 2010 and 2009.
No
stock options were exercised during the three months ended September 30, 2010.
During the three months ended September 30, 2009, the Company received
approximately $0.3 million from stock options exercised and approximately $0.4
million from repayment of stock option-related loans. The Company issues new
shares to satisfy stock option exercises.
Restricted stock
The following table summarizes restricted stock activity for the three
months ended September 30, 2010, and 2009:
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Shares of
|
|
|
Grant
|
|
|
|
Restricted
|
|
|
Date Fair
|
|
|
|
Stock
|
|
|
Value
|
|
Non-vested July 1, 2010
|
|
407,828
|
|
|
-
|
|
Granted August 2010
|
|
13,956
|
|
$
|
185
|
|
Vested
September 2010
|
|
(201,704
|
)
|
|
-
|
|
Non-vested September 30, 2010
|
|
220,080
|
|
|
-
|
|
|
|
|
|
|
|
|
Non-vested July 1, 2009
|
|
597,162
|
|
|
-
|
|
Granted August
2009
|
|
10,098
|
|
$
|
185
|
|
Vested September 2009
|
|
(198,338
|
)
|
|
-
|
|
Non-vested September 30, 2009
|
|
408,922
|
|
|
-
|
|
The
fair value of restricted stock vested during the three months ended September
30, 2010 and 2009, was $2.3 million and $3.8 million, respectively.
15
9. Stock-based
compensation (continued)
Stock-based compensation charge and unrecognized compensation cost
The
Company has recorded a stock compensation charge of $1.4 million for each of the
three months ended September 30, 2010 and 2009, respectively, which
comprised:
|
|
|
|
|
Allocated to
|
|
|
|
|
|
|
|
|
|
cost of goods
|
|
|
|
|
|
|
|
|
|
sold, IT
|
|
|
Allocated to
|
|
|
|
|
|
|
processing,
|
|
|
selling,
|
|
|
|
Total
|
|
|
servicing
|
|
|
general and
|
|
|
|
charge
|
|
|
and support
|
|
|
administration
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
1,437
|
|
$
|
51
|
|
$
|
1,386
|
|
Total Three months ended September 30, 2010
|
$
|
1,437
|
|
$
|
51
|
|
$
|
1,386
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
1,422
|
|
$
|
51
|
|
$
|
1,371
|
|
Total Three months ended September 30, 2009
|
$
|
1,422
|
|
$
|
51
|
|
$
|
1,371
|
|
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 September 30, 2010, the total unrecognized compensation cost related to stock
options was approximately $4.0 million, which the Company expects to recognize
over approximately three and a half years. As of September 30, 2010, the total
unrecognized compensation cost related to restricted stock awards was
approximately $3.4 million, which the Company expects to recognize over
approximately one year.
As
of September 30, 2010, the Company has recorded a deferred tax asset of
approximately $0.8 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.
10. Operating
segments
The
Company discloses segment information as reflected in the management information
systems reports that its chief operating decision makers use in making decisions
and to report certain entity-wide disclosures about products and services, major
customers, and the countries in which the entity holds material assets or
reports material 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, operates 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
Transaction-based activities segment currently consists mainly of a state
pension and welfare benefit distribution service provided to the South African
government, transaction processing for retailers, utilities, medical-related
claim service customers and banks and transaction fees generated from
UEPS-enabled smartcards used in Iraq. 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 banks 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 the three months ended September 30, 2010, there was one such
customer providing 60% of total revenue (the three months ended September 30,
2009: there was one such customer providing 72% 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.
The
Financial services segment provides short-term loans as a principal and life
insurance products on an agency basis and generates initiation and services
fees.
16
10. Operating segments
(continued)
The
Hardware, software and related 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 Net1 UTA, 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
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Revenues to external customers
|
|
|
|
|
|
|
Transaction-based activities
|
$
|
44,892
|
|
$
|
44,978
|
|
Smart card accounts
|
|
7,970
|
|
|
8,074
|
|
Financial services
|
|
1,248
|
|
|
792
|
|
Hardware, software and
related technology sales
|
|
10,173
|
|
|
11,670
|
|
Total
|
|
64,283
|
|
|
65,514
|
|
Inter-company revenues
|
|
|
|
|
|
|
Transaction-based activities
|
|
936
|
|
|
1,031
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
Hardware, software and
related technology sales
|
|
262
|
|
|
518
|
|
Total
|
|
1,198
|
|
|
1,549
|
|
Operating income
|
|
|
|
|
|
|
Transaction-based activities
|
|
17,776
|
|
|
26,668
|
|
Smart card accounts
|
|
3,622
|
|
|
3,670
|
|
Financial services
|
|
929
|
|
|
531
|
|
Hardware, software and
related technology sales
|
|
(2,660
|
)
|
|
(1,713
|
)
|
Corporate/Eliminations
|
|
(8,681
|
)
|
|
(2,788
|
)
|
Total
|
|
10,986
|
|
|
26,368
|
|
Interest earned
|
|
|
|
|
|
|
Transaction-based
activities
|
|
-
|
|
|
-
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
Hardware, software and related
technology sales
|
|
-
|
|
|
-
|
|
Corporate/Eliminations
|
|
3,084
|
|
|
2,647
|
|
Total
|
|
3,084
|
|
|
2,647
|
|
Interest expense
|
|
|
|
|
|
|
Transaction-based activities
|
|
226
|
|
|
265
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
1
|
|
Hardware, software and
related technology sales
|
|
1
|
|
|
2
|
|
Corporate/Eliminations
|
|
21
|
|
|
8
|
|
Total
|
$
|
248
|
|
$
|
276
|
|
17
10. Operating segments
(continued)
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
Transaction-based activities
|
$
|
2,176
|
|
$
|
1,481
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
133
|
|
|
123
|
|
Hardware, software and related
technology sales
|
|
2,421
|
|
|
2,686
|
|
Corporate/Eliminations
|
|
174
|
|
|
289
|
|
Total
|
|
4,904
|
|
|
4,579
|
|
|
|
|
|
|
|
|
Income taxation expense
|
|
|
|
|
|
|
Transaction-based activities
|
|
4,960
|
|
|
7,512
|
|
Smart card accounts
|
|
1,014
|
|
|
1,027
|
|
Financial services
|
|
260
|
|
|
149
|
|
Hardware, software and related
technology sales
|
|
(596
|
)
|
|
34
|
|
Corporate/Eliminations
|
|
569
|
|
|
2,309
|
|
Total
|
|
6,207
|
|
|
11,031
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
Transaction-based activities
|
|
12,623
|
|
|
18,966
|
|
Smart card accounts
|
|
2,610
|
|
|
2,643
|
|
Financial services
|
|
669
|
|
|
381
|
|
Hardware, software and related
technology sales
|
|
(2,061
|
)
|
|
(1,733
|
)
|
Corporate/Eliminations
|
|
(6,412
|
)
|
|
(2,316
|
)
|
Total
|
|
7,429
|
|
|
17,941
|
|
|
|
|
|
|
|
|
Segment assets
|
|
|
|
|
|
|
Total
|
|
552,597
|
|
|
424,306
|
|
|
|
|
|
|
|
|
Expenditures for long-lived assets
|
|
|
|
|
|
|
Transaction-based activities
|
|
693
|
|
|
416
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
59
|
|
|
60
|
|
Hardware, software and related technology
sales
|
|
16
|
|
|
165
|
|
Corporate/Eliminations
|
|
-
|
|
|
-
|
|
Total
|
$
|
768
|
|
$
|
641
|
|
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.
11. Income tax in
interim periods
For
the purposes of interim financial reporting, the Company determines the
appropriate income tax provision 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, for instance non-deductible transaction-related expenses,
that are reported separately, and have an impact on the tax charge. The
cumulative effect of any change in the enacted tax rate, if and when applicable,
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 months ended September 30, 2010, the tax charge was calculated using
the expected effective tax rate for the year. The Companys effective tax rate
for the three months ended September 30, 2010, was 44.9% as a result of
non-deductible expenses, including transaction-related expenses relating to the
acquisition of KSNET.
18
11. Income tax in
interim periods (continued)
The Company increased its unrecognized tax benefits by $0.1 million
during the three months ended September 30, 2010. As of September 30, 2010, 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, the Russian
Federation and in the US federal jurisdiction. As of September 30, 2010, the
Company is no longer subject to income tax examination by the South African
Revenue Service for years before September 30, 2007. 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.
12. Subsequent
events
On October 29, 2010, the Company acquired KSNET for KRW 270 billion
(approximately $240 million based on exchange rates on October 29, 2010). The
acquisition of KSNET expands the Companys international footprint as well as
diversifies the Companys revenue, earnings and product portfolio. The
combination is expected to capitalize on multiple revenue synergies and provide
an established base in Asia for further business development activities in the
region.
The
Company financed a portion of the KSNET acquisition price and related
transaction expenses with the proceeds of a KRW 130.5 billion (approximately
$115.9 million based on October 29, 2010 exchange rates) five-year senior
secured loan facility provided by a consortium of banks under a facilities
agreement (the Facilities Agreement). The Facilities Agreement provides for
three separate facilities: a Facility A loan to the Companys wholly owned
subsidiary, Net1 Applied Technologies Korea (Net1 Korea), of up to KRW 130.5
billion (divided into Facility A1 (KRW 65.5 billion) and Facility A2 (KRW 65.0
billion)) and a Facility B loan to KSNET of up to KRW 65.0 billion. The Facility
B loan, if drawn, must be used to repay the Facility A2 loan and may be borrowed
only if Net1 Korea and KSNET complete a merger transaction with each other.
Interest on the loans is payable quarterly and is based on the Korean CD rate in
effect from time to time plus a margin of 4.10% for Facility A loans and 3.90%
for the Facility B loan. The Facility A1 loan matures on the fifth anniversary
of the initial drawdown with no required principal prepayments. Principal on the
Facility A2 loan and Facility B loan is repayable in scheduled installments,
beginning twelve months after initial drawdown and thereafter, semi-annually
with final maturity scheduled for 54 months after initial drawdown. The loans
are secured by substantially all of KSNETs assets, a pledge by Net1 Korea of
its entire equity interest in KSNET and a pledge by the immediate parent of Net1
Korea (also one of the Companys subsidiaries) of its entire equity interest in
Net1 Korea. The Facilities Agreement contains customary covenants that require
Net1 Korea and its consolidated subsidiaries to maintain certain specified
financial ratios (including a leverage ratio and a debt service coverage ratio)
and restrict their ability to make certain distributions with respect to their
capital stock, prepay other debt, encumber their assets, incur additional
indebtedness, make capital expenditures above specified levels, engage in
certain business combinations and engage in other corporate activities. The
loans under the Facilities Agreement are without recourse to, and the covenants
and other agreements contained therein do not apply to, the Company or any of
our subsidiaries (other than Net1 Korea and its subsidiaries, including
KSNET).
The
Company incurred transaction-related expenditures of $3.2 million during the
three months ended September 30, 2010, related to this acquisition and expects
to incur additional such expenses during the three months ending December 31,
2010. The Company is currently unable to quantify the amount of these additional
expenditures.
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, 2010, and in Part II, Item 1A of this
Quarterly Report on Form 10-Q. 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.
Business Developments During Fiscal 2011
South Africa
New SASSA contract
On
August 24, 2010, we entered into a new service level agreement with SASSA which
replaced our previous SASSA contract that expired on June 30, 2010. The new
agreement is retroactively effective from July 1, 2010 and expires on March 31,
2011. Under the contract, we continue to provide our social welfare grants
distribution service to SASSA in five of South Africas nine provinces
(KwaZulu-Natal, Limpopo, North West, Northern Cape and Eastern Cape). As was the
case with our previous contract, the new contract contains a standard pricing
formula for all provinces based on a transaction fee per beneficiary paid,
regardless of the number or amount of grants paid per beneficiary, calculated on
a guaranteed minimum number of beneficiaries per month. However, the new
contract provides for a reduction in both the level of the transaction fee per
beneficiary paid and the guaranteed minimum number of beneficiaries.
As
we previously announced when we signed the new contract, we continue to derive a
substantial percentage of our revenues from our SASSA contract, and thus we
expect that its terms will materially reduce our revenues, operating income, net
income and cash flow for fiscal 2011, unless we are able to offset reduced fees
from SASSA by increasing our revenues from our other business activities,
reducing expenses, or both.
EasyPay Kiosk pilot project
In
September 2010, we launched our EasyPay Kiosk, or EP Kiosk, pilot project at
select locations in the Gauteng province of South Africa. The EP Kiosk enables
users to purchase prepaid electricity and airtime and perform any post paid bill
payment service requirements using the interactive user-friendly touch screen
kiosk interface. The user will also be able to transfer prepaid voucher value to
other mobile phone users. Users can register their own prepaid voucher wallet on
the EP Kiosk, with access to the wallet guaranteed via biometric identification
of the user at time of registration. A five digit personal identification
number, or PIN, is also required by the user so as to facilitate transactions
done via their own mobile phones or via the website.
The
EP Kiosk is a cash-acceptor and does not issue change, rather it issues a
prepaid value voucher in lieu of change which can be used to purchase prepaid
electricity and airtime or perform any post paid bill payment service
requirements through an EP Kiosk or via the internet.
20
The
pilot project will last until the end of the second quarter of fiscal 2011 at
which time we will assess whether the EP Kiosk is a viable business medium.
Outside South Africa
Acquisition of KSNET, Inc., or KSNET, in the Republic of
Korea
On
October 29, 2010, we acquired 98.73% of KSNET, a leading Republic of Korea
payment processor, for KRW 270 billion (approximately $240 million based on
October 29, 2010 exchange rates). Most of KSNETs revenue is derived from the
provision of payment processing services to approximately 200,000 merchants and
to card issuers in Korea through its value-added network, or VAN. KSNET has a
diverse product offering and we believe it is the only total payments solutions
provider offering card VAN, payment gateway and banking VAN services in Korea,
which differentiates KSNET from other Korean payment solution providers and
allows it to cross-sell its products across its customer base.
The
acquisition of KSNET expands our international footprint as well as diversifies
our revenue, earnings and product portfolio. The combination is expected to
capitalize on multiple revenue synergies and provide an established base in Asia
for further business development activities in the region.
The African Continent and Iraq
During
the first quarter of fiscal 2011, we recorded revenue from transaction fees and
the delivery of UEPS-enabled smartcards under our contract with the government
of Iraq. We expect to generate ongoing revenues from transaction fees under our
Iraqi contract and from smart card sales during the second quarter of fiscal
2011. We have entered the second phase of our initiative in Ghana and now
generate recurring income in the form of hardware and software maintenance
fees.
We
continue to service our current customers on the African continent and in Iraq.
Our UETS business unit continued its business development efforts in multiple
new countries on the African continent during the quarter.
During
the first quarter of fiscal 2011, SmartSwitch Namibia generated incremental
transaction fees from prepaid airtime and electricity transactions and
transactions conducted between Namibian merchants and UEPS-enabled smartcards.
SmartSwitch Botswana generated transaction fees during the first quarter of
fiscal 2011 from the payment of food voucher grants. We expect SmartSwitch
Namibia and Botswana to continue generating transaction fees during the second
quarter of fiscal 2011.
SmartSwitch
Namibia is no longer dependent on shareholder funding and commenced repayment of
its shareholder loans and interest during the first quarter of fiscal 2011. We
expect SmartSwitch Botswana to commence the repayment of shareholder loan
funding and interest during the second quarter of fiscal 2011.
Net 1 Universal Technologies (Austria) AG, or Net1 UTA
Net1
UTAs operations are seasonal and the first quarter and third quarters are
historically its weakest. Growth at Net1 UTA during the first quarter of fiscal
2011 continued to be adversely impacted by our transitioning of its business
model from a hardware and software sale-oriented model to one which generates
recurring transaction fees, as well as by challenging economic conditions in
Eastern Europe. During the first quarter of fiscal 2011 we sold hardware and
software licenses to a customer in Uzbekistan.
Net1 Virtual Card
We
launched our VCPayTM, offering in the United States during the first quarter of
fiscal 2011. Our mobile phone-based virtual payment card application is designed
to eliminate fraud in Card-Not-Present (CNP) transactions. We have teamed up
with MetroPCS Communications, Inc., or MetroPCS, The Bancorp Bank, a
wholly-owned subsidiary of The Bancorp, Inc., FSV Payment Systems and MoneyGram
International to offer a comprehensive card issuing, processing and distribution
network to wireless subscribers in the United States.
MetroPCS
will offer VCpay to its prepaid customers as an application that will be
pre-loaded on new smartphones or can be downloaded on select existing devices.
VCpay allows a subscriber to generate a unique, one-time use prepaid virtual
card number to securely purchase goods and services or perform bill payments in
any CNP environment. We believe that the VCpay application is the first mobile
phone-based prepaid program with no requirement for the user to have a physical
card or a bank account. Subscribers can load their prepaid virtual accounts with
cash at any of MoneyGrams 40,000 U.S. agent locations, which are located in
most communities including many grocery, pharmacy and convenience store
chains.
21
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, 2010.
-
Deferred taxation;
-
Stock-based compensation;
-
Intangible assets acquired through acquisitions;
-
Accounts receivable and provision 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 adopted as of September 30,
2010, 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 September 30,
2010
Refer
to Note 1 of the unaudited condensed consolidated financial statements for a
full description of recent accounting pronouncements not yet adopted as of
September 30, 2010, including the expected dates of adoption and effects on
financial condition, results of operations and cash flows.
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
|
|
|
Year ended
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
ZAR : $ average exchange rate
|
|
7.3577
|
|
|
7.8270
|
|
|
7.6117
|
|
Highest ZAR : $ rate during period
|
|
7.7809
|
|
|
8.3187
|
|
|
8.3187
|
|
Lowest ZAR : $ rate during period
|
|
6.9190
|
|
|
7.2838
|
|
|
7.1731
|
|
Rate at end of period
|
|
6.9750
|
|
|
7.4327
|
|
|
7.6529
|
|
22
ZAR: US $ Exchange Rates
Translation exchange rates
We
are required to translate our results of operations from ZAR to US dollars on a
monthly basis. Thus, the average rates used to translate this data for the three
months ended September 30, 2010 and 2009, 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
|
|
|
Year ended
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Income and expense items: $1 = ZAR
|
|
7.4053
|
|
|
7.8153
|
|
|
7.6092
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items: $1 = ZAR
|
|
6.9750
|
|
|
7.4327
|
|
|
7.6529
|
|
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. The results of operation for the three months
ended September 30, 2010, include the operations of MediKredit and FIHRST, which
have been allocated to our transaction-based activities operating segment.
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.
23
First
quarter fiscal 2011 compared to the first quarter of fiscal 2010
The
following factors had an influence on our results of operations during the first
quarter of fiscal 2011 as compared with the same period in the prior year:
-
SASSA price and volume reductions:
Our new contract with
SASSA has reduced our revenue and operating income as a result of the
previously announced price and volume reductions;
-
Favorable impact from the weakness of the US dollar:
The US
dollar depreciated by 5% compared to the ZAR during the first quarter of
fiscal 2011 compared to fiscal 2010 which has had a positive impact on our
reported results;
-
Increased transaction volumes at EasyPay:
Our reported
results were favorably impacted by increased transaction volumes at EasyPay
resulting from growth in value-added services;
-
Increased revenue from MediKredit and FIRHST at lower operating
margins than other transaction-based
activity business:
Our MediKredit and FIHRST acquisitions positively impacted our revenue
during the first quarter of fiscal 2011, however, because MediKredit generated
a modest operating loss and FIHRST has operating margin that is lower than our
other transaction-based activity businesses, they negatively impacted our
operating margin. The inclusion of these businesses in our results has also
contributed to the increase in selling, general and administration expense;
-
Increased user adoption in Iraq:
Our reported results were
positively impacted by increased transaction revenues from the adoption of our
UEPS technology in Iraq;
-
Lower revenues and margins from hardware, software and related
technology sales segment:
Our hardware, software and related
technology sales segment continues to be adversely impacted by lower revenues
generated by card sales and software maintenance and development activities
and fewer ad hoc sales to Iraq when compared to a year ago, partially offset
by increased hardware sales by Net1 UTA;
-
Intangible asset amortization related to acquisitions:
Our
reported results were adversely impacted by additional intangible asset
amortization of approximately $0.5 million related to the acquisitions of
MediKredit and FIHRST during the third quarter of fiscal 2010; and
-
Non-recurring items included in selling, general and administration
expense:
During the first quarter of fiscal 2011, we recognized, in
selling, general and administration expense, an unrealized foreign exchange
loss of $2.6 million and incurred transaction-related expenses of $3.4
million, primarily for the acquisition of KSNET.
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 September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
$ %
|
|
|
|
$ 000
|
|
|
$ 000
|
|
|
change
|
|
Revenue
|
|
64,283
|
|
|
65,514
|
|
|
(2)%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
18,067
|
|
|
16,827
|
|
|
7%
|
|
Selling, general and administration
|
|
30,326
|
|
|
17,740
|
|
|
71%
|
|
Depreciation and amortization
|
|
4,904
|
|
|
4,579
|
|
|
7%
|
|
Operating income
|
|
10,986
|
|
|
26,368
|
|
|
(58)%
|
|
Interest income, net
|
|
2,836
|
|
|
2,371
|
|
|
20%
|
|
Income before income taxes
|
|
13,822
|
|
|
28,739
|
|
|
(52)%
|
|
Income tax expense
|
|
6,207
|
|
|
11,031
|
|
|
(44)%
|
|
Net income before loss from
equity-accounted investments
|
|
7,615
|
|
|
17,708
|
|
|
(57)%
|
|
Loss from equity-accounted investments
|
|
(216
|
)
|
|
(111
|
)
|
|
95%
|
|
Net income
|
|
7,399
|
|
|
17,597
|
|
|
(58)%
|
|
Add: net loss attributable to non-controlling interest
|
|
(30
|
)
|
|
(344
|
)
|
|
(91)%
|
|
Net income attributable to us
|
|
7,429
|
|
|
17,941
|
|
|
(59)%
|
|
24
|
|
In South African Rand
|
|
Table 4
|
|
(US GAAP)
|
|
|
|
Three months ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
ZAR
|
|
|
|
ZAR
|
|
|
ZAR
|
|
|
%
|
|
|
|
000
|
|
|
000
|
|
|
change
|
|
Revenue
|
|
476,035
|
|
|
512,011
|
|
|
(7)%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
133,791
|
|
|
131,508
|
|
|
2%
|
|
Selling, general and administration
|
|
224,573
|
|
|
138,644
|
|
|
62%
|
|
Depreciation and amortization
|
|
36,315
|
|
|
35,786
|
|
|
1%
|
|
Operating income
|
|
81,356
|
|
|
206,073
|
|
|
(61)%
|
|
Interest income, net
|
|
21,001
|
|
|
18,530
|
|
|
13%
|
|
Income before income taxes
|
|
102,357
|
|
|
224,603
|
|
|
(54)%
|
|
Income tax expense
|
|
45,965
|
|
|
86,210
|
|
|
(47)%
|
|
Net income before loss from
equity-accounted investments
|
|
56,392
|
|
|
138,393
|
|
|
(59)%
|
|
Loss from equity-accounted investments
|
|
(1,600
|
)
|
|
(867
|
)
|
|
85%
|
|
Net income
|
|
54,792
|
|
|
137,526
|
|
|
(60)%
|
|
Add: net loss attributable to non-controlling interest
|
|
(222
|
)
|
|
(2,688
|
)
|
|
(92)%
|
|
Net income attributable to us
|
|
55,014
|
|
|
140,214
|
|
|
(61)%
|
|
Analyzed
in ZAR, the decrease in revenue for the first quarter of fiscal 2011, was
primarily due to our new SASSA contract, discussed under Business developments
during fiscal 2011South AfricaSASSA update and fewer sales of hardware,
software and related technology, which was partially offset by higher revenues
due to the inclusion of FIHRST and MediKredit, increased transaction volumes at
EasyPay and higher utilization of our UEPS system in Iraq. Analyzed in ZAR, cost
of goods sold, IT processing, servicing and support for the first quarter of
fiscal 2011 was higher primarily due to the inclusion of FIHRST and
MediKredit.
Analyzed
in ZAR, selling, general and administration expenses increased during the first
quarter of fiscal 2011 primarily due to increases in goods and services
purchased from third parties and the inclusion of FIHRSTs and MediKredits
operations. During the first quarter of fiscal 2011, selling, general and
administration expense was also adversely impacted by an unrealized loss of $2.6
million (ZAR 19.1 million) on a foreign exchange contract related to an
intercompany dividend from South Africa to the United States to be used to
partially fund the acquisition of KSNET and transaction-related costs of $3.4
million (ZAR 24.9 million), primarily for the KSNET acquisition.
Our
operating income margin for the first quarter of fiscal 2011 and 2010 was 17%
and 40%, respectively. We discuss the components of the operating income margin
under Results of operations by operating segment, however the significant
decrease is attributable to the price and volumes reductions under our SASSA
contract and certain foreign exchange and transaction-related costs.
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 and the JSE, our compliance officers salary,
fees paid to consultants who assist with Sarbanes compliance, fees paid to our
independent accountants related to the audit and review process. This has
resulted in expenditures of $0.6 million (ZAR 4.2 million) and $0.7 million (ZAR
5.1 million) during the first quarter of fiscal 2011 and 2010, respectively.
25
In
ZAR, depreciation and amortization increased during fiscal 2011 primarily as a
result of intangible asset amortization related to the MediKredit and FIHRST
acquisitions. The intangible asset amortization and deferred tax effects related
to our various acquisitions are summarized in the tables below:
|
|
Three months ended
|
|
Table 5
|
|
September 30,
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
$ 000
|
|
|
|
$ 000
|
|
Amortization included in depreciation and
amortization expense:
|
|
3,664
|
|
|
|
3,324
|
|
Prism acquisition
|
|
436
|
|
|
|
413
|
|
RMT acquisition (1)
|
|
-
|
|
|
|
515
|
|
MediKredit acquisition
|
|
506
|
|
|
|
-
|
|
FIHRST acquisition
|
|
559
|
|
|
|
-
|
|
Net1 UTA acquisition
|
|
2,163
|
|
|
|
2,396
|
|
|
|
|
|
|
|
|
|
Deferred tax included in income tax expense:
|
|
1,056
|
|
|
|
883
|
|
Prism acquisition
|
|
146
|
|
|
|
138
|
|
RMT acquisition (1)
|
|
-
|
|
|
|
144
|
|
MediKredit acquisition
|
|
175
|
|
|
|
-
|
|
FIHRST acquisition
|
|
193
|
|
|
|
-
|
|
Net1 UTA acquisition
|
|
542
|
|
|
|
601
|
|
(1) the RMT intangibles were fully
amortized in fiscal 2010.
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Table 6
|
|
September 30,
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
ZAR 000
|
|
|
|
ZAR 000
|
|
Amortization included in depreciation and
amortization expense:
|
|
27,132
|
|
|
|
25,978
|
|
Prism acquisition
|
|
3,229
|
|
|
|
3,229
|
|
RMT acquisition (1)
|
|
-
|
|
|
|
4,024
|
|
MediKredit acquisition
|
|
3,745
|
|
|
|
-
|
|
FIHRST acquisition
|
|
4,140
|
|
|
|
-
|
|
Net1 UTA acquisition
|
|
16,018
|
|
|
|
18,725
|
|
|
|
|
|
|
|
|
|
Deferred tax included in income tax expense:
|
|
7,819
|
|
|
|
6,905
|
|
Prism acquisition
|
|
1,081
|
|
|
|
1,081
|
|
RMT acquisition (1)
|
|
-
|
|
|
|
1,127
|
|
MediKredit acquisition
|
|
1,294
|
|
|
|
-
|
|
FIHRST acquisition
|
|
1,430
|
|
|
|
-
|
|
Net1 UTA acquisition
|
|
4,014
|
|
|
|
4,697
|
|
(1) the RMT intangibles were fully
amortized in fiscal 2010.
|
|
|
|
|
|
|
|
Interest on surplus cash for the first quarter of fiscal 2011 increased
to $3.1 million (ZAR 22.8 million) from $2.6 million (ZAR 20.3 million) for the
first quarter of fiscal 2010. The increase in interest on surplus cash held in
South Africa was due to a higher average daily ZAR cash balance during the first
quarter of fiscal 2011 compared with the first quarter of fiscal 2010 offset by
lower deposit rates resulting from the adjustment in the South African prime
interest rate from an average of approximately 10.74% per annum for the first
quarter of fiscal 2010 to 9.89% per annum for the first quarter of fiscal
2011.
Interest
expense decreased during the first quarter of fiscal 2011 due to a decrease in
the average rates of interest on our short-term facilities. Finance costs
decreased to $0.2 million (ZAR 1.8 million) for the first quarter of fiscal 2011
from $0.3 million (ZAR 2.2 million) for the first quarter of fiscal 2010.
Total
tax expense for the first quarter of fiscal 2011 was $6.2 million (ZAR 46.0
million) compared with $11.0 million (ZAR 86.2 million) during the same period
in the prior fiscal year. Our total tax expense decreased primarily due to lower
taxable income resulting from the SASSA price and volume reductions and a
decrease in overall profitability. Our effective tax rate for the first quarter
of fiscal 2011 was 44.9%, compared to 38.4% for the first quarter of fiscal
2010. The change in our effective tax rate was primarily due to an increase in
non-deductible expenses, primarily related to the KSNET acquisition, during the
first quarter of fiscal 2011 compared to the first quarter of fiscal 2010.
26
Net
loss from equity-accounted investments for the first quarter of fiscal 2011
decreased from the prior year primarily due to an increase in transaction fees
generated by SmartSwitch Namibia and SmartSwitch Botswana. VTU Colombia and
VinaPay continue to incur losses.
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 September 30,
|
|
|
|
2010
|
|
|
% of
|
|
|
2009
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
$ 000
|
|
|
total
|
|
|
$ 000
|
|
|
total
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
44,892
|
|
|
70%
|
|
|
44,978
|
|
|
69%
|
|
|
-%
|
|
Smart card accounts
|
|
7,970
|
|
|
12%
|
|
|
8,074
|
|
|
12%
|
|
|
(1)%
|
|
Financial services
|
|
1,248
|
|
|
2%
|
|
|
792
|
|
|
1%
|
|
|
58%
|
|
Hardware, software and related technology
sales
|
|
10,173
|
|
|
16%
|
|
|
11,670
|
|
|
18%
|
|
|
(13)%
|
|
Total consolidated revenue
|
|
64,283
|
|
|
100%
|
|
|
65,514
|
|
|
100%
|
|
|
(2)%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
17,776
|
|
|
162%
|
|
|
26,668
|
|
|
101%
|
|
|
(33)%
|
|
Operating income before
amortization
|
|
19,122
|
|
|
|
|
|
27,450
|
|
|
|
|
|
(30)%
|
|
Amortization of intangible assets
|
|
(1,346
|
)
|
|
|
|
|
(782
|
)
|
|
|
|
|
72%
|
|
Smart card accounts
|
|
3,622
|
|
|
33%
|
|
|
3,670
|
|
|
14%
|
|
|
(1)%
|
|
Financial services
|
|
929
|
|
|
8%
|
|
|
531
|
|
|
2%
|
|
|
75%
|
|
Hardware, software and related technology
sales
|
|
(2,660
|
)
|
|
(24)%
|
|
|
(1,713
|
)
|
|
(6)%
|
|
|
55%
|
|
Operating (loss) income before
amortization
|
|
(343
|
)
|
|
|
|
|
829
|
|
|
|
|
|
(141)%
|
|
Amortization of
intangible assets
|
|
(2,317
|
)
|
|
|
|
|
(2,542
|
)
|
|
|
|
|
(9)%
|
|
Corporate/eliminations
|
|
(8,681
|
)
|
|
(79)%
|
|
|
(2,788
|
)
|
|
(11)%
|
|
|
211%
|
|
Total consolidated
operating income
|
|
10,986
|
|
|
100%
|
|
|
26,368
|
|
|
100%
|
|
|
(58)%
|
|
Table 8
|
|
In South African Rand (US GAAP)
|
|
|
|
Three months ended September 30,
|
|
|
|
2010
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
% of
|
|
|
ZAR
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
000
|
|
|
total
|
|
|
000
|
|
|
total
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
332,439
|
|
|
70%
|
|
|
351,516
|
|
|
69%
|
|
|
(5)%
|
|
Smart card accounts
|
|
59,020
|
|
|
12%
|
|
|
63,101
|
|
|
12%
|
|
|
(6)%
|
|
Financial services
|
|
9,242
|
|
|
2%
|
|
|
6,190
|
|
|
1%
|
|
|
49%
|
|
Hardware, software and related technology
sales
|
|
75,334
|
|
|
16%
|
|
|
91,204
|
|
|
18%
|
|
|
(17)%
|
|
Total consolidated revenue
|
|
476,035
|
|
|
100%
|
|
|
512,011
|
|
|
100%
|
|
|
(7)%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
131,637
|
|
|
162%
|
|
|
208,418
|
|
|
101%
|
|
|
(37)%
|
|
Operating income before
amortization
|
|
141,609
|
|
|
|
|
|
214,529
|
|
|
|
|
|
(34)%
|
|
Amortization of intangible assets
|
|
(9,972
|
)
|
|
|
|
|
(6,111
|
)
|
|
|
|
|
63%
|
|
Smart card accounts
|
|
26,822
|
|
|
33%
|
|
|
28,682
|
|
|
14%
|
|
|
(6)%
|
|
Financial services
|
|
6,880
|
|
|
8%
|
|
|
4,150
|
|
|
2%
|
|
|
66%
|
|
Hardware, software and related technology
sales
|
|
(19,698
|
)
|
|
(24)%
|
|
|
(13,388
|
)
|
|
(6)%
|
|
|
47%
|
|
Operating (loss) income before
amortization
|
|
(2,539
|
)
|
|
|
|
|
6,479
|
|
|
|
|
|
(139)%
|
|
Amortization of
intangible assets
|
|
(17,159
|
)
|
|
|
|
|
(19,867
|
)
|
|
|
|
|
(14)%
|
|
Corporate/eliminations
|
|
(64,285
|
)
|
|
(79)%
|
|
|
(21,789
|
)
|
|
(11)%
|
|
|
195%
|
|
Total consolidated
operating income
|
|
81,356
|
|
|
100%
|
|
|
206,073
|
|
|
100%
|
|
|
(61)%
|
|
27
Transaction-based activities
In
ZAR, the decreases in revenue were primarily due to the new SASSA nine month
contract at lower economics, which was partially offset by increased transaction
volumes at EasyPay, increased utilization of our UEPS system in Iraq and the
inclusion of MediKredit and FIHRST.
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 decreased to 40% from 59% a
year ago. The decrease was primarily due to the lower revenues generated under
our SASSA contract, additional intangible asset amortization related to the
acquisition of MediKredit and FIHRST and lower margins in our recently-acquired
transaction processing operations compared with legacy transaction-based
activities, which was partially offset by increased transaction fees from the
utilization of our UEPS system in Iraq.
Pension and welfare operations
:
Our
revenue and operating income related to our pension and welfare operations were
impacted by our new contract discussed under Business developments during
fiscal 2011South AfricaSASSA update. Our pension and welfare operations
continue to generate the majority of our revenues and operating income in this
operating segment and for us as a whole.
South African transaction processors:
The
table below presents the total volume and value processed during the first
quarter of fiscal 2011 and 2010 by our transaction processors:
Table 9
|
|
|
|
|
|
|
|
|
|
Transaction
|
|
Total volume (000s)
|
|
|
Total value $ (000)
|
|
|
Total value ZAR (000)
|
|
processor
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
EasyPay
|
|
174,101
|
|
|
152,881
|
|
|
5,039,411
|
|
|
4,274,260
|
|
|
37,318,352
|
|
|
33,404,547
|
|
MediKredit
|
|
2,543
|
|
|
-
|
|
|
113,670
|
|
|
-
|
|
|
841,758
|
|
|
-
|
|
FIHRST
|
|
5,492
|
|
|
-
|
|
|
2,018,993
|
|
|
-
|
|
|
14,951,248
|
|
|
-
|
|
Transaction
processing related to our Iraqi contract continued to grow sequentially through
fiscal 2010. This trend has continued into the first quarter of fiscal 2011.
Our
results for the first quarter of fiscal 2011 includes the intangible asset
amortization related to our MediKredit and FIHRST acquisitions but excludes
RMTs intangible assets which were fully amortized in the third quarter of
fiscal 2010. Our results for the first quarter of fiscal 2010 includes
amortization related to the RMT intangible assets.
28
Key statistics of our merchant acquiring system:
The
key statistics and indicators of our merchant acquiring system during the first
quarter of fiscal 2011 and 2010, in each of
Table 10
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Province included (1)
|
|
NC, EC, KZN, L and NW
|
|
|
NC, EC, KZN, L and NW
|
|
Total POS devices installed
|
|
4,772
|
|
|
4,528
|
|
Number of participating UEPS retail
locations
|
|
2,511
|
|
|
2,506
|
|
Value of transactions processed through POS devices during
the quarter (2) (in $ 000)
|
|
399,637
|
|
|
380,782
|
|
Value of transactions processed through POS
devices during the completed pay cycles for the quarter (3) (in $ 000)
|
|
395,479
|
|
|
366,786
|
|
Value of transactions processed through POS devices during
the quarter (2) (in ZAR 000)
|
|
2,940,416
|
|
|
2,980,378
|
|
Value of transactions processed through POS
devices during the completed pay cycles for the quarter (3) (in ZAR 000)
|
|
2,909,818
|
|
|
2,870,837
|
|
Number of grants paid through POS devices during the
quarter (2)
|
|
4,819,458
|
|
|
4,846,515
|
|
Number of grants paid through POS devices
during the completed pay cycles for the quarter (3)
|
|
4,710,596
|
|
|
4,675,128
|
|
Average number of grants processed per terminal during the
quarter (2) .
|
|
1,008
|
|
|
1,082
|
|
Average number of grants processed per
terminal during the completed pay cycles for the quarter (3)
|
|
985
|
|
|
1,044
|
|
the South African provinces where we
distribute social welfare grants are summarized in the table below:
|
(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.
|
Smart
card accounts
In
ZAR, revenue from the provision of smart card-based accounts decreased in
proportion to the lower number of beneficiaries serviced through our SASSA
contract. A total number of 3,553,437 smart card-based accounts were active at
September 30, 2010, compared to 3,794,827 active accounts as at September 30,
2009. The decrease in the number of active accounts resulted largely from the
suspension and removal of invalid or fraudulent grants by SASSA.
Operating
income margin from providing smart card accounts was constant at 45% for the
first quarter of fiscal 2011 and 2010.
Financial services
Revenue
from UEPS-based lending increased primarily due to an increase in the number of
loans granted. In addition, on average, the return on these UEPS-based loans was
higher. Our current UEPS-based lending portfolio comprises loans made to elderly
pensioners in some of the provinces where we distribute social welfare grants.
We insure the UEPS-based lending book against default and thus no allowance is
required.
Operating
income margin for the financial services segment increased to 74% for the first
quarter of fiscal 2011 from 67% for the first quarter of fiscal 2010 primarily
due to an increase in lending activity.
29
Hardware, software and related technology sales
The following table presents our revenue and operating income during
the first quarter of fiscal 2011 and 2010:
|
|
Three months ended
|
|
Table 11
|
|
September 30,
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
$ 000
|
|
|
|
$ 000
|
|
Revenue
|
|
10,173
|
|
|
|
11,670
|
|
Hardware, software and related
technology sales excluding Net1 UTA
|
|
6,520
|
|
|
|
10,622
|
|
Net1 UTA
|
|
3,653
|
|
|
|
1,048
|
|
|
|
|
|
|
|
|
|
Operating (loss) income before amortization
of intangible assets
|
|
(343
|
)
|
|
|
829
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
(2,660
|
)
|
|
|
(1,713
|
)
|
Hardware, software and related
technology sales excluding Net1 UTA
|
|
(594
|
)
|
|
|
1,993
|
|
Net1 UTA
|
|
(2,066
|
)
|
|
|
(3,706
|
)
|
Net1 UTA excluding amortization of
acquisition related intangible assets
|
|
97
|
|
|
|
(1,310
|
)
|
Amortization of acquisition related intangible assets
|
|
(2,163
|
)
|
|
|
(2,396
|
)
|
|
|
Three months ended
|
|
Table 12
|
|
September 30,
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
ZAR 000
|
|
|
|
ZAR 000
|
|
Revenue
|
|
75,334
|
|
|
|
91,204
|
|
Hardware, software and related
technology sales excluding Net1 UTA
|
|
48,282
|
|
|
|
83,014
|
|
Net1 UTA
|
|
27,052
|
|
|
|
8,190
|
|
|
|
|
|
|
|
|
|
Operating (loss) income before amortization
of intangible assets
|
|
(2,539
|
)
|
|
|
6,479
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
(19,698
|
)
|
|
|
(13,388
|
)
|
Hardware, software and related
technology sales excluding Net1 UTA
|
|
(4,398
|
)
|
|
|
15,575
|
|
Net1 UTA
|
|
(15,300
|
)
|
|
|
(28,963
|
)
|
Net1 UTA excluding amortization of
acquisition related intangible assets
|
|
718
|
|
|
|
(10,238
|
)
|
Amortization of acquisition related intangible assets
|
|
(16,018
|
)
|
|
|
(18,725
|
)
|
The
decrease in revenue was primarily due to lower revenues generated by card sales
and software maintenance and development, as well as lower ad hoc hardware sales
to Iraq in 2011 as compared with the prior year, which was offset marginally by
increased hardware sales by Net1 UTA. In ZAR, the decrease in operating income
was primarily due to lower sales activity
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 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 our portion of
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 corporate expenses resulted from higher corporate head
office-related expenditure, including the effects of inflation in South Africa,
stock-based compensation charges, transaction related expenditures of $3.4
million (ZAR 24.9 million) and a unrealized foreign exchange loss on a foreign
exchange contract of $2.6 million (ZAR 19.1 million) related to an intercompany
dividend from South Africa to the United States to be used to partially fund the
acquisition of KSNET.
Our
corporate expenses also includes expenditure related to compliance with
Sarbanes; non-executive directors fees; employee and executive salaries and
bonuses; stock-based compensation; legal and audit fees; directors and officers
insurance premiums; telecommunications expenses; property-related expenditures
including utilities, rental, security and maintenance; and elimination
entries.
30
Liquidity and Capital Resources
Our
business has historically generated and continues to generate high levels of
cash. At September 30, 2010, our cash balances were $200.2 million, which
comprised mainly ZAR-denominated balances of ZAR 1,239.6 million ($177.7
million), US dollar-denominated balances of $14.5 million and other currency
deposits, primarily euro, of $8.0 million. On October 29, 2010, we used
approximately $124 million of our cash to fund a portion of the KSNET purchase
price.
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.
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:
-
cost of capital;
-
cost of financing;
-
opportunity cost of utilizing surplus cash; and
-
availability of tax efficient structures to moderate financing costs.
We
financed a portion of the KSNET acquisition price and related transaction
expenses with the proceeds of a KRW 130.5 billion (approximately $115.9 million
based on October 29, 2010 exchange rates) five-year senior secured loan facility
provided by a consortium of banks under a facilities agreement (the Facilities
Agreement). The Facilities Agreement provides for three separate facilities: a
Facility A loan to our wholly owned subsidiary, Net1 Applied Technologies Korea,
or Net1 Korea, of up to KRW 130.5 billion (divided into Facility A1 (KRW 65.5
billion) and Facility A2 (KRW 65.0 billion)) and a Facility B loan to KSNET of
up to KRW 65.0 billion. The Facility B loan, if drawn, must be used to repay the
Facility A2 loan and may be borrowed only if Net1 Korea and KSNET complete a
merger transaction with each other. Interest on the loans is payable quarterly
and is based on the Korean CD rate in effect from time to time plus a margin of
4.10% for Facility A loans and 3.90% for the Facility B loan. The Facility A1
loan matures on the fifth anniversary of the initial drawdown with no required
principal prepayments. Principal on the Facility A2 loan and Facility B loan is
repayable in scheduled installments, beginning twelve months after initial
drawdown and thereafter, semi-annually with final maturity scheduled for 54
months after initial drawdown. The loans are secured by substantially all of
KSNETs assets, a pledge by Net1 Korea of its entire equity interest in KSNET
and a pledge by the immediate parent of Net1 Korea (also one of our
subsidiaries) of its entire equity interest in Net1 Korea. The Facilities
Agreement contains customary covenants that require Net1 Korea and its
consolidated subsidiaries to maintain certain specified financial ratios
(including a leverage ratio and a debt service coverage ratio) and restrict
their ability to make certain distributions with respect to their capital stock,
prepay other debt, encumber their assets, incur additional indebtedness, make
capital expenditures above specified levels, engage in certain business
combinations and engage in other corporate activities. The loans under the
Facilities Agreement are without recourse to, and the covenants and other
agreements contained therein do not apply to, us or any of our subsidiaries
(other than Net1 Korea and its subsidiaries, including KSNET).
We
have a unique cash flow cycle due to the funding mechanism under our SASSA
contact and our pre-funding of merchants. Under our SASSA contract, we receive
the grant funds 48 hours prior to the provision of the service and any interest
we earn on these amounts is for the benefit of SASSA. In addition, we pre-fund
certain merchants who facilitate the distribution of grants through our merchant
acquiring system. When grants are paid at merchant locations before the start of
the payment service at pay points, we pre-fund 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.
We
currently believe that our cash and available credit facilities are sufficient
to meet our business requirements for at least the next four quarters, including
working capital requirements, capital expenditures and debt service
obligations.
Cash flows from operating activities
Three months ended September 30, 2010
Net
cash provided by operating activities for the first quarter of fiscal 2011 was
$30.2 million (ZAR 223.2 million) compared to $37.0 million (ZAR 289.1 million)
for the first quarter of fiscal 2010. Our net cash from operating activities
decreased primarily due to the SASSA price and volume reductions which were
effective July 1, 2010.
31
During
the first quarter of fiscal 2011 we made additional second provisional tax
payments of $1.8 million (ZAR 12.7 million) related to our 2010 tax year in
South Africa. During the first quarter of fiscal 2010 we made an additional
second provisional tax payment of $3.9 million (ZAR 29.6 million) related to our
2009 tax year in South Africa. See the table below for a summary of all taxes
paid (refunded).
Taxes paid during the first quarter of fiscal 2011 and 2010
were as follows:
Table 13
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
$
|
|
|
$
|
|
|
ZAR
|
|
|
ZAR
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxation paid related to prior years
|
|
1,774
|
|
|
3,929
|
|
|
12,716
|
|
|
29,611
|
|
Taxation refunds received
|
|
(172
|
)
|
|
(238
|
)
|
|
(1,302
|
)
|
|
(1,900
|
)
|
Total tax paid
|
|
1,602
|
|
|
3,691
|
|
|
11,414
|
|
|
27,711
|
|
We
expect to pay our first provisional payments in South Africa related to our 2011
tax year in the second quarter of fiscal 2011.
Cash flows from investing activities
Three months ended September 30, 2010
Cash
used in investing activities for the first quarter of fiscal 2011 includes
capital expenditure of $0.8 million (ZAR 5.7 million), primarily for the
acquisition of kiosks to service our EasyPay Kiosk pilot project, the
replacement of computer and electronic hardware and the replacement of motor
vehicles.
SmartSwitch
Namibia commenced repayment of loans provided by its shareholders during the
first quarter of fiscal 2010 and cash flows from investing activities for the
first quarter of fiscal 2011 includes principal repayments of $0.4 million. In
July 2010, we provided additional loan funding to VTU Colombia of approximately
$0.4 million.
Cash
used in investing activities for the first quarter of fiscal 2010 includes
capital expenditure of $0.6 million (ZAR 5.0 million), primarily for the
acquisition of POS devices to service our merchant acquiring system,
improvements to leasehold property and the acquisition of computer
equipment.
Cash flows from financing activities
Three months ended September 30, 2010
There were no significant cash flows from financing activities during
the first quarter of fiscal 2011.
During
the first quarter of fiscal 2010 we repurchased, using our ZAR reserves,
9,221,526 shares of our common stock from Brait S.A. and its investment entities
affiliates for $13.50 (ZAR 105.98) per share, for an aggregate repurchase price
of $124.5 million (ZAR 977.3 million). In addition, we incurred costs of
approximately $0.5 million (ZAR 3.9 million) related to the repurchase of these
shares. During the first quarter of fiscal 2010, we also paid $1.3 million on
account of shares we repurchased on June 30, 2009, under our share buy-back
program. We also received $0.7 (ZAR 5.5 million) from employees exercising stock
options and repaying loans.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Capital Expenditures
We
discuss our capital expenditures during the first quarter of fiscal 2011 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 September 30, 2010. We anticipate that capital spending for
the second quarter of fiscal 2011 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.
32
Contingent Liabilities, Commitments and Contractual
Obligations
We
lease various premises under operating leases. Our minimum future commitments
for leased premises as well as other commitments are as follows:
Table 14
|
|
Payments due by Period, as at September 30, 2010 (in $
000s)
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
than 1
|
|
|
1-3
|
|
|
3-5
|
|
|
than 5
|
|
|
|
Total
|
|
|
year
|
|
|
years
|
|
|
years
|
|
|
years
|
|
Interest-bearing liabilities
|
$
|
4,413
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
4,413
|
|
Operating lease obligations
|
|
7,017
|
|
$
|
3,388
|
|
$
|
2,897
|
|
$
|
732
|
|
|
-
|
|
Purchase obligations
|
|
2,960
|
|
|
2,960
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Capital commitments
|
|
7
|
|
|
7
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
14,397
|
|
$
|
6,355
|
|
$
|
2,897
|
|
$
|
732
|
|
$
|
4,413
|
|
33
Item
3. Quantitative and Qualitative Disclosures About Market Risk
We
seek to reduce our exposure to currencies other than the South African rand, or
ZAR, 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 equity
price and liquidity risks as well as 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 ZAR, on the one hand, and the US
dollar and the euro, on the other hand. In addition, during the first quarter of
fiscal 2011, we entered into foreign exchange contracts in order to hedge the
fluctuations in the ZAR/ US dollar related to the anticipated flow of funds from
South Africa to the United States to fund a portion of the KSNET purchase price.
As of September 30, 2010 and 2009, our outstanding foreign exchange contracts
were as follows:
As of
September 30, 2010
|
|
|
|
|
Fair market
|
|
|
|
|
Notional amount
|
|
Strike price
|
|
|
value price
|
|
|
Maturity
|
|
EUR 480,000
|
|
ZAR 9.7960
|
|
|
ZAR 9.5740
|
|
|
November 10, 2010
|
|
EUR 288,000
|
|
ZAR 9.4669
|
|
|
ZAR 9.5356
|
|
|
October 15, 2010
|
|
ZAR 460,000,000
|
|
USD 0.1397
|
|
|
USD 0.1432
|
|
|
October 1, 2010
|
|
ZAR 460,000,000
|
|
USD 0.1401
|
|
|
USD 0.1426
|
|
|
October 1, 2010
|
|
As of
September 30, 2009
None.
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. The
interest earned on our bank balances and short term cash investments is
dependent on the prevailing interest rates in the jurisdictions where our cash
reserves are invested.
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.
Equity Price and Liquidity Risk
Equity
price risk relates to the risk of loss that we would incur as a result of the
volatility in the exchange-traded price of equity securities that we hold and
the risk that we may not be able to liquidate these securities. We have invested
in approximately 22% of the issued share capital of Finbond Group Limited, which
are exchange-traded equity securities. The fair value of these securities as of
September 30, 2010, represented approximately 1% of our total assets, including
these securities. We expect to hold these securities for an extended period of
time and we are not concerned with short-term equity price volatility with
respect to these securities provided that the underlying business, economic and
management characteristics of the company remain sound.
34
The
market price of these securities may fluctuate for a variety of reasons,
consequently, the amount we may obtain in a subsequent sale of these securities
may significantly differ from the reported market value.
Liquidity
risk relates to the risk of loss that we would incur as a result of the lack of
liquidity on the exchange on which these securities are listed. We may not be
able to sell some or all of these securities at one time, or over an extended
period of time without influencing the exchange traded price, or at all.
The
following table summarizes our exchange traded equity securities with equity
price risk as of September 30, 2010. The effects of a hypothetical 10% increase
and a 10% decrease in market prices as of September 30, 2010 is also shown. The
selected 10% hypothetical change does not reflect what could be considered the
best or worst case scenarios. Indeed, results could be far worse due both to the
nature of equity markets and the aforementioned liquidity risk.
|
|
As of September 30, 2010
|
|
Table 15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hypothetical
|
|
|
|
|
|
|
|
|
|
Estimated fair
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
value after
|
|
|
Increase
|
|
|
|
Fair
|
|
|
|
|
|
hypothetical
|
|
|
(Decrease) in
|
|
|
|
value
|
|
|
Hypothetical
|
|
|
change in price
|
|
|
Shareholders
|
|
|
|
($ 000)
|
|
|
price change
|
|
|
($ 000)
|
|
|
Equity
|
|
Exchange-traded equity securities
|
|
8,009
|
|
|
10%
|
|
|
8,810
|
|
|
0.25%
|
|
|
|
8,009
|
|
|
(10
|
)%
|
|
7,208
|
|
|
(0.25)%
|
|
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 September 30, 2010. 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 September 30, 2010.
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 September 30, 2010, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
35
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, 2010, for a discussion of our risk factors. In
addition, we have identified the following risk factors related to our recent
acquisition of KSNET:
We
will face challenges in integrating KSNET into our company and we will likely
not include KSNET in our internal control certification and attestation for
fiscal 2011.
On
October 29, 2010, we acquired KSNET, a large payment processor in the Republic
of Korea for 270 million KRW, or approximately $240 million (based on October
29, 2010 exchange rates). This acquisition was the largest acquisition we have
effected to date. Integrating KSNET into our company will require significant
attention from our senior management which may divert their attention from our
day to day business. The difficulties of integration may be increased by
geographical distance between South Africa and Korea, language and cultural
differences and the necessity of retaining and integrating personnel, including
KSNETs key employees. In addition, our management certification and auditor
attestation regarding the effectiveness of our internal control over financial
reporting as of June 30, 2011, will likely exclude the operations of KSNET. If
we are unable to successfully integrate KSNETs operations into our internal
control over financial reporting, our internal control over financial reporting
may not be effective.
We
incurred secured debt on October 29, 2010, to fund the acquisition of KSNet
which requires us to comply with restrictive and financial covenants. If we are
unable to comply with these covenants, we could default on this debt, which
would have a material adverse effect on our business and financial
condition.
We
financed a portion of the KSNET acquisition price and related transaction
expenses with the proceeds of a KRW 130.5 billion (approximately $115.9 million
based on October 29, 2010 exchange rates) five-year secured loan facility under
the Facilities Agreement. The loans are secured by substantially all of KSNETs
assets, a pledge by Net1 Korea of its entire equity interest in KSNET and a
pledge by the immediate parent of Net1 Korea (also one of our subsidiaries) of
its entire equity interest in Net1 Korea. The Facilities Agreement contains
covenants that require Net1 Korea and its consolidated subsidiaries to maintain
certain specified financial ratios (including a leverage ratio and a debt
service coverage ratio) and restrict their ability to make certain distributions
with respect to their capital stock, prepay other debt, encumber their assets,
incur additional indebtedness, make capital expenditures above specified levels,
engage in certain business combinations and engage in other corporate
activities. Although these covenants only apply to our Korean subsidiaries,
these security arrangements and covenants may reduce our operating flexibility
or our ability to engage in other transactions that may be beneficial to us. If
we are unable to comply with these covenants, we could be in default under the
Facilities Agreement and the indebtedness thereunder could be accelerated. If
this were to occur, we might not be able to obtain waivers of default or to
refinance the debt with another lender and as a result, our business and
financial condition would suffer.
Our ability to operate KSNET successfully will depend on the continued
services of KSNETs employees.
We
will rely on the continued services of the existing KSNETs management team. The
services of these individuals will be important to the continued growth and
success of the KSNET business and to our ability to integrate KSNET with the
rest of our company. If we were to lose the services of these key employees, our
ability to operate KSNET successfully would likely be materially and adversely
impacted.
36
Item 6. Exhibits
The following exhibits are filed as part of this Form 10-Q
Exhibit
Number
|
Description
|
2.1
|
Share Purchase Agreement, dated as of September 14, 2010,
by and among the Company, Payment Services Asia LLC and H&Q NPS Van
Investment, Ltd. (incorporated by reference to Exhibit 2.1 to our Form 8-K
filed on September 16, 2010)
|
10.51
|
Senior Facilities Agreement dated October 29, 2010,
between Net 1 Applied Technologies Korea, as borrower, Hana Daetoo
Securities Co., Ltd., as mandated lead arranger, Shinhan Bank and Woori
Bank, as co-arrangers, the financial institutions listed therein as
original lenders and Hana Bank, as agent and security agent (incorporated
by reference to Exhibit 10.51 to our Form 8-K filed on November 3, 2010)
|
10.52*
|
Service Level Agreement, dated as of August 24, 2010,
between the South African Social Security Agency and Cash Paymaster
Services (Pty) Limited, a wholly-owned subsidiary of the Company
|
31.1
|
Certification of Principal Executive Officer pursuant to
Rule 13a-14(a) under the Exchange Act
|
31.2
|
Certification of Principal Financial Officer pursuant to
Rule 13a-14(a) under the Exchange Act
|
32
|
Certification pursuant to 18 USC Section 1350
|
* Confidential treatment is being requested for certain
portions of this Exhibit pursuant to Rule 24b-2 of the Exchange Act which
portions have been omitted and filed separately with the Securities and Exchange
Commission.
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 November 9, 2010.
|
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 Gideon Kotzé
|
|
Chief Financial Officer, Treasurer and
Secretary, Director
|
37
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