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, 2011
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 [X] NO [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act (check one):
[ ] Large accelerated filer
|
[X] 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 26, 2011 (the latest practicable date), 45,002,304
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,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
(In thousands, except share data)
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
101,983
|
|
$
|
95,263
|
|
Pre-funded social welfare grants receivable (note 3)
|
|
1,695
|
|
|
4,579
|
|
Accounts
receivable, net of allowances of September: $668; June: $728
|
|
78,172
|
|
|
82,780
|
|
Finance loans receivable
|
|
7,709
|
|
|
8,141
|
|
Deferred
expenditure on smart cards
|
|
-
|
|
|
51
|
|
Inventory (note 4)
|
|
5,781
|
|
|
6,725
|
|
Deferred
income taxes
|
|
15,192
|
|
|
15,882
|
|
Total current assets before settlement assets
|
|
210,532
|
|
|
213,421
|
|
Settlement assets (note 5)
|
|
159,542
|
|
|
186,668
|
|
Total current assets
|
|
370,074
|
|
|
400,089
|
|
PROPERTY, PLANT AND EQUIPMENT, NET OF ACCUMULATED
|
|
|
|
|
|
|
DEPRECIATION OF September: $46,910;
June: $50,007
|
|
32,409
|
|
|
35,807
|
|
EQUITY-ACCOUNTED INVESTMENTS (note 6)
|
|
1,639
|
|
|
1,860
|
|
GOODWILL (note 7)
|
|
188,409
|
|
|
209,570
|
|
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF
September: $37,561; June: $37,118 (note 7)
|
|
104,271
|
|
|
119,856
|
|
OTHER LONG-TERM ASSETS, including reinsurance
assets (note 8)
|
|
39,900
|
|
|
14,463
|
|
TOTAL ASSETS
|
|
736,702
|
|
|
781,645
|
|
LIABILITIES
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
Accounts payable
|
|
11,123
|
|
|
11,360
|
|
Other
payables
|
|
61,984
|
|
|
71,265
|
|
Current portion of long-term borrowings (note 10)
|
|
13,798
|
|
|
15,062
|
|
Income
taxes payable
|
|
10,791
|
|
|
6,709
|
|
Total current liabilities before settlement obligations
|
|
97,696
|
|
|
104,396
|
|
Settlement obligations (note 5)
|
|
159,542
|
|
|
186,668
|
|
Total current liabilities
|
|
257,238
|
|
|
291,064
|
|
DEFERRED INCOME TAXES
|
|
47,648
|
|
|
52,785
|
|
LONG-TERM BORROWINGS (note 10)
|
|
97,009
|
|
|
110,504
|
|
OTHER LONG-TERM LIABILITIES, including insurance policy liabilities
(note 8)
|
|
27,008
|
|
|
1,272
|
|
TOTAL LIABILITIES
|
|
428,903
|
|
|
455,625
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
NET1 EQUITY:
|
|
|
|
|
|
|
COMMON STOCK
|
|
|
|
|
|
|
Authorized:
200,000,000 with $0.001 par value;
Issued and outstanding shares, net of treasury - September: 45,002,304;
June:
45,152,805
|
|
59
|
|
|
59
|
|
PREFERRED STOCK
|
|
|
|
|
|
|
Authorized
shares: 50,000,000 with $0.001 par value;
Issued
and outstanding shares, net of treasury: 2011: -; 2010: -
|
|
-
|
|
|
-
|
|
ADDITIONAL PAID-IN-CAPITAL
|
|
136,903
|
|
|
136,430
|
|
TREASURY SHARES, AT COST: September:
13,455,090; June: 13,274,434
|
|
(175,823
|
)
|
|
(174,694
|
)
|
ACCUMULATED OTHER
COMPREHENSIVE LOSS
|
|
(71,257
|
)
|
|
(33,779
|
)
|
RETAINED EARNINGS
|
|
414,758
|
|
|
394,990
|
|
TOTAL NET1 EQUITY
|
|
304,640
|
|
|
323,006
|
|
NON-CONTROLLING INTEREST
|
|
3,159
|
|
|
3,014
|
|
TOTAL EQUITY
|
|
307,799
|
|
|
326,020
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
$
|
736,702
|
|
$
|
781,645
|
|
(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,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
REVENUE
|
$
|
99,926
|
|
$
|
64,283
|
|
|
|
|
|
|
|
|
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods
sold, IT processing, servicing and
support
|
|
32,944
|
|
|
18,067
|
|
|
|
|
|
|
|
|
Selling, general and administration
|
|
27,057
|
|
|
30,326
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
9,079
|
|
|
4,904
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
30,846
|
|
|
10,986
|
|
|
|
|
|
|
|
|
INTEREST INCOME
|
|
1,997
|
|
|
3,084
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
2,616
|
|
|
248
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
30,227
|
|
|
13,822
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE (Note 16)
|
|
10,552
|
|
|
6,207
|
|
|
|
|
|
|
|
|
NET INCOME FROM CONTINUING
OPERATIONS BEFORE
EARNINGS (LOSS)
FROM EQUITY-ACCOUNTED INVESTMENTS
|
|
19,675
|
|
|
7,615
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) FROM EQUITY-
ACCOUNTED INVESTMENTS
(Note 6)
|
|
85
|
|
|
(216
|
)
|
|
|
|
|
|
|
|
NET INCOME
|
|
19,760
|
|
|
7,399
|
|
|
|
|
|
|
|
|
ADD NET LOSS ATTRIBUTABLE TO NON-
CONTROLLING
INTEREST
|
|
(8
|
)
|
|
(30
|
)
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO NET1
|
$
|
19,768
|
|
$
|
7,429
|
|
|
|
|
|
|
|
|
Net income per share, in United States dollars
(
Note 14)
|
|
|
|
|
|
|
Basic earnings attributable to
Net1 shareholders
|
$
|
0.44
|
|
$
|
0.16
|
|
Diluted earnings
attributable to Net1 shareholders
|
$
|
0.44
|
|
$
|
0.16
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
d other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Additional
|
|
|
|
|
|
comprehensi
|
|
|
Total
|
|
|
Non-
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Paid-In
|
|
|
Retained
|
|
|
ve (loss)
|
|
|
Net1
|
|
|
controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Earnings
|
|
|
income
|
|
|
Equity
|
|
|
Interests
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2011
|
|
58,427,239
|
|
$
|
59
|
|
|
(13,274,434
|
)
|
$
|
(174,694
|
)
|
$
|
136,430
|
|
$
|
394,990
|
|
$
|
(33,779
|
)
|
$
|
323,006
|
|
$
|
3,014
|
|
$
|
326,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
|
|
30,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
496
|
|
|
|
|
|
|
|
|
496
|
|
|
|
|
|
496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury shares acquired (Note 11)
|
|
|
|
|
|
|
|
(180,656
|
)
|
|
(1,129
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,129
|
)
|
|
|
|
|
(1,129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilization of APIC pool related to
vested
restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidation of SmartSwitch Nigeria
(note
13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
280
|
|
|
280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,768
|
|
|
|
|
|
19,768
|
|
|
(8
|
)
|
|
19,760
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in
foreign currency
translation
reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,478
|
)
|
|
(37,478
|
)
|
|
(127
|
)
|
|
37,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2011
|
|
58,457,394
|
|
$
|
59
|
|
|
(13,455,090
|
)
|
$
|
(175,823
|
)
|
$
|
136,903
|
|
$
|
414,758
|
|
$
|
(71,257
|
)
|
$
|
304,640
|
|
$
|
3,159
|
|
$
|
307,799
|
|
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,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Net income
|
$
|
19,768
|
|
$
|
7,429
|
|
|
|
|
|
|
|
|
Other comprehensive
income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in foreign
currency translation reserve
|
|
(37,478
|
)
|
|
27,490
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), net
of taxes
|
|
(37,478
|
)
|
|
27,490
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
(17,710
|
)
|
|
34,919
|
|
|
|
|
|
|
|
|
Less
(Add) comprehensive loss (gain)
attributable to non-controlling interest
|
|
135
|
|
|
(141
|
)
|
|
|
|
|
|
|
|
Comprehensive
(loss) income
attributable to Net1
|
$
|
(17,845
|
)
|
$
|
35,060
|
|
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,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income
|
$
|
19,760
|
|
$
|
7,399
|
|
Depreciation and amortization
|
|
9,079
|
|
|
4,904
|
|
Loss from equity-accounted investments
|
|
(85
|
)
|
|
216
|
|
Fair value adjustments
|
|
(221
|
)
|
|
(3,106
|
)
|
Interest payable
|
|
1,662
|
|
|
73
|
|
Profit on disposal of property, plant and
equipment
|
|
(8
|
)
|
|
(5
|
)
|
Profit on liquidation of SmartSwitch Nigeria
(note 13)
|
|
(3,994
|
)
|
|
-
|
|
Realized loss on sale of investments related
to
insurance business
|
|
25
|
|
|
-
|
|
Stock-based compensation charge
|
|
496
|
|
|
1,438
|
|
Facility fee amortized
|
|
116
|
|
|
-
|
|
Decrease in accounts receivable, pre-funded
social welfare
grants receivable and finance loans
receivable
|
|
3,248
|
|
|
10,957
|
|
Decrease (Increase) in deferred expenditure
on
smart cards
|
|
44
|
|
|
(2
|
)
|
Increase in inventory
|
|
(319
|
)
|
|
(2,102
|
)
|
Increase in accounts payable and other payables
|
|
331
|
|
|
6,025
|
|
(Decrease) Increase in taxes payable
|
|
(3,607
|
)
|
|
5,134
|
|
Increase (Decrease) in deferred taxes
|
|
692
|
|
|
(773
|
)
|
Net cash provided by operating activities
|
|
27,219
|
|
|
30,158
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Capital expenditures
|
|
(4,466
|
)
|
|
(768
|
)
|
Proceeds from disposal of property, plant and
equipment
|
|
94
|
|
|
7
|
|
Acquisition of SmartLife, net of cash acquired
|
|
(1,673
|
)
|
|
-
|
|
Advance of loans to equity-accounted investment
|
|
-
|
|
|
(375
|
)
|
Repayment of loan by equity-accounted
investment
|
|
33
|
|
|
373
|
|
Purchase of investments related to insurance
business
|
|
(2,320
|
)
|
|
-
|
|
Proceeds from maturity of investments related to
insurance
business
|
|
2,321
|
|
|
-
|
|
Net change in settlement assets
|
|
3,447
|
|
|
(15,544
|
)
|
Net cash used in investing activities
|
|
(2,564
|
)
|
|
(16,307
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
Loan portion related to options
|
|
-
|
|
|
20
|
|
Acquisition of treasury stock
|
|
(1,129
|
)
|
|
-
|
|
Net change in settlement obligations
|
|
(3,447
|
)
|
|
15,544
|
|
Net cash
(used in) generated from financing
activities
|
|
(4,576
|
)
|
|
15,564
|
|
Effect of exchange rate changes on cash
|
|
(13,360
|
)
|
|
17,004
|
|
Net increase in cash and cash equivalents
|
|
6,719
|
|
|
46,419
|
|
Cash and cash equivalents beginning of
period
|
|
95,264
|
|
|
153,742
|
|
Cash and cash equivalents end of
period
|
$
|
101,983
|
|
$
|
200,161
|
|
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, 2011 and 2010
(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, 2011 and 2010, 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, 2011. 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.
The
Company has included updates to its accounting policies as a result of its
acquisition of The SmartLife Insurance Company Limited (SmartLife) (formerly
known as Saambou Life Assurers Limited) in July 2011 for ZAR 13 million
(approximately $1.8 million).
Policy
Reserves and Liabilities
Reserves
for future policy benefits and claims payable:
The
Company determines its reserves for future policy benefits under its life
insurance products using the financial soundness valuation method and
assumptions as of the issue date as to mortality, interest, persistency and
expenses plus provisions for adverse deviations.
Deposits
on investment contracts
For
the Companys interest-sensitive life contracts, liabilities approximate the
policyholders account value. For deferred annuities, the fixed option on
variable annuities, guaranteed investment contracts and other investment
contracts, the liability is the policyholders account value.
Reinsurance
contracts held
The
Company enters into reinsurance contracts with reinsurers under which the
Company is compensated for the entire amount or a portion of losses arising on
one or more of the insurance contracts it issues.
The
expected benefits to which the Company is entitled under its reinsurance
contracts held are recognized as reinsurance assets. These assets consist of
short-term balances due from reinsurers (classified within accounts receivable,
net) as well as long-term receivables (classified with other long-term assets)
that are dependent on the present value of expected claims and benefits arising
net of expected premiums payable under the related reinsurance contracts.
Amounts recoverable from or due to reinsurers are measured consistently with the
amounts associated with the reinsured contracts and in accordance with the terms
of each reinsurance contract.
Reinsurance
assets are assessed for impairment at each balance sheet date. If there is
reliable objective evidence that amounts due may not be recoverable, the Company
reduces the carrying amount of the reinsurance asset to its recoverable amount
and recognizes that impairment loss in its condensed consolidated statement of
operations.
Reinsurance
premiums are recognized when due for payment under each reinsurance contract.
7
1.
Basis
of Presentation and Summary of Significant Accounting Policies (continued)
Recent
accounting pronouncements adopted
In
December 2010, the Financial Accounting Standards Board (FASB) issued guidance
regarding
Step 2 of the goodwill impairment test for reporting units with
zero or negative carrying amounts
. The guidance modifies Step 1 of the
goodwill impairment test for reporting units with zero or negative carrying
amounts and requires the company to perform Step 2 if it is more likely than not
that a goodwill impairment may exist. The guidance is effective for fiscal years
and interim periods within those years, beginning after December 15, 2010. Early
adoption is not permitted. The Company adopted the guidance on July 1, 2011 and
it did not have an impact on the Companys condensed consolidated financial
statements because none of its reporting units have zero or negative carrying
amounts.
In
May 2011, the FASB issued guidance regarding fair value measurement amendments
to achieve common fair value measurement and disclosure requirements in GAAP and
International Financial Reporting Standards (IFRSs). The guidance improves the
comparability of fair value measurements presented and disclosed in accordance
with GAAP and IFRSs by changing the wording used to describe many of the
requirements in GAAP for measuring fair value and disclosure of information. The
amendments to this guidance provide explanations on how to measure fair value
but do not require any additional fair value measurements and do not establish
valuation standards or affect valuation practices outside of financial
reporting. The amendments clarify existing fair value measurements and
disclosure requirements to include application of the highest and best use and
valuation premises concepts; measuring fair value of an instrument classified in
a reporting entitys equity; and disclosures requirements regarding quantitative
information about unobservable inputs categorized within Level 3 of the fair
value hierarchy. In addition, clarification is provided for measuring the fair
value of financial instruments that are managed in a portfolio and the
application of premiums and discounts in a fair value measurement. The guidance
is effective for fiscal years and interim periods within those years, beginning
after December 15, 2010. The adoption of this guidance did not have a
significant impact on the Companys consolidated financial statements.
Recent
accounting pronouncements not yet adopted as of September 30, 2011
In
June 2011, the FASB issued guidance regarding the presentation of comprehensive
income. The guidance improves the comparability, consistency, and transparency
of financial reporting and increases the prominence of items reported in other
comprehensive income. The amendments to the guidance requires entities to
present the total of comprehensive income, the components of net income, and the
components of other comprehensive income either in a single continuous statement
of comprehensive income or in two separate but consecutive statements. Entities
are no longer permitted to present components of other comprehensive income as
part of the statement of changes in equity. Any adjustments for items that are
reclassified from other comprehensive income to net income are to be presented
on the face of the entities' financial statement regardless of the method of
presentation for comprehensive income. The amendments do not change items to be
reported in comprehensive income or when an item of other comprehensive income
must be reclassified to net income, nor do the amendments change the option to
present the components of other comprehensive income either net of related tax
effects or before related tax effects. This guidance is effective for fiscal
years, and interim periods within those years, beginning on or after December
15, 2011. The Company currently presents its comprehensive income in a single
continuous statement of comprehensive income and therefore the adoption of this
guidance will not impact its presentation of comprehensive income.
In
September 2011, the FASB issued guidance regarding
Testing Goodwill for
Impairment
. The guidance allows an entity to first assess qualitative
factors to determine whether it is necessary to perform the two-step
quantitative goodwill impairment test. Under this guidance, an entity would not
be required to calculate the fair value of a reporting unit unless the entity
determines, based on a qualitative assessment, that it is more likely than not
that its fair value is less than its carrying amount. The guidance includes a
number of events and circumstances for an entity to consider in conducting the
qualitative assessment. The guidance is effective for annual and interim
goodwill impairment tests performed for fiscal years beginning after December
15, 2011. Early adoption is permitted. The Company is currently evaluating the
impact of this guidance on its goodwill impairment testing process.
2.
Acquisitions
KSNET
On
October 29, 2010, the Company acquired KSNET for KRW 270 billion (approximately
$240 million based on exchange rates on October 29, 2010), subject to
post-closing working capital adjustment which is still being determined between
the Company and the former shareholders of KSNET.
8
2.
Acquisitions
(continued)
SmartLife
On
July 1, 2011, the Company acquired SmartLife (formerly known as Saambou Life
Assurers Limited), a South African long-term insurance company, for ZAR 13
million (approximately $1.8 million) in cash. Prior to its acquisition by the
Company, SmartLife had been administered as a ring-fenced life-insurance license
by a large South African insurance company, had not written any new insurance
business for a number of years and had reinsured all of its risk exposure under
its life insurance products. SmartLife has been allocated to the Companys
financial services operating segment.
The
acquisition of SmartLife provides the Company with an opportunity to offer
relevant insurance products directly to its existing customer and employee base
in South Africa. The Company intends to offer this customer base a full spectrum
of products applicable to this market segment, including credit life, group
life, funeral and education insurance policies.
The
preliminary purchase price allocation, translated at the foreign exchange rates
applicable on the date of acquisition, is provided in the table below:
Cash and cash equivalents
|
$
|
168
|
|
Accounts receivable, net
|
|
150
|
|
Financial investments (allocated to other
long-term assets)
|
|
3,059
|
|
Reinsurance assets (allocated to other long-term assets)
|
|
28,492
|
|
Other payables
|
|
(189
|
)
|
Policy holder liabilities (allocated to other long-term
liabilities)
|
|
(29,838
|
)
|
Total
purchase price
|
$
|
1,842
|
|
The
preliminary purchase price allocation is based on management estimates as of
September 30, 2011, and may be adjusted up to one year following the closing of
the acquisition. The purchase price allocation has not been finalized, as
management has not yet analyzed in detail the assets acquired and liabilities
assumed. The Company expects to finalize the purchase price allocation on or
before June 30, 2012.
Pro
forma results of operations have not been presented because the effect of the
SmartLife acquisition, individually and in the aggregate, was not material to
the Companys results of operations. During the three months ended September 30,
2011, the Company did not incur any acquisition-related expenditure. Since the
closing of the acquisition, SmartLife has contributed revenue and net income of
$0.03 million.
3.
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
2011 payment service commenced during the last five days of September 2011 and
was offered at merchant locations only.
4.
Inventory
The
Companys inventory comprised the following categories as of September 30, 2011
and June 30, 2011.
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
Raw materials
|
$
|
14
|
|
$
|
24
|
|
Finished goods
|
|
5,767
|
|
|
6,701
|
|
|
$
|
5,781
|
|
$
|
6,725
|
|
5.
Settlement
assets and settlement obligations
Settlement
assets comprise (1) cash received from the South African government that the
Company holds pending disbursement to beneficiaries of social welfare grants,
(2) cash received from health care plans which the Company disburses to health
care service providers once it adjudicates claims and (3) cash received from
customers on whose behalf the Company processes payroll payments that the
Company will disburse to customer employees, payroll-related payees and other
payees designated by the customer.
9
5.
Settlement
assets and settlement obligations (continued)
Settlement
obligations comprise (1) amounts that the Company is obligated to disburse to
beneficiaries of social welfare grants, (2) amounts which are due to health care
service providers after claims have been adjudicated and reconciled, provided
that the Company shall have previously received such funds from health care plan
customers and (3) amounts that the Company is obligated to pay to customer
employees, payroll-related payees and other payees designated by the customer.
6.
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.
The
Companys outstanding foreign exchange contracts are as follows: As of September
30, 2011 None.
As
of June 30, 2011
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. The Company, through its recently acquired insurance
business, maintains investments in fixed maturity investments which are exposed
to fluctuations in interest rates.
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.
10
6.
Fair
value of financial instruments and equity-accounted investments (continued)
Fair
value of financial instruments (continued)
Risk
management (continued)
Credit
risk (continued)
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.
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.
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 its significant financial assets and liabilities at fair value.
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 applies 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 are 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.
Asset
measured at fair value using significant unobservable inputs investment in
Finbond Group Limited (Finbond)
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, 2011, 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 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.
11
6.
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, 2011 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to insurance business (included in
other
long-term assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
|
2,646
|
|
$
|
-
|
|
$
|
-
|
|
$
|
2,646
|
|
|
Mutual funds: interest-bearing
instruments
|
|
7
|
|
|
-
|
|
|
-
|
|
|
7
|
|
|
Investment in Finbond (available for
sale
assets included in other long-term assets)
|
|
-
|
|
|
-
|
|
|
7,056
|
|
|
7,056
|
|
|
Other
|
|
-
|
|
|
258
|
|
|
-
|
|
|
258
|
|
|
Total
assets at fair value
|
$
|
2,653
|
|
$
|
258
|
|
$
|
7,056
|
|
$
|
9,967
|
|
The
following table presents the Companys assets and liabilities measured at fair
value on a recurring basis as of June 30, 2011 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 Finbond
(available
for sale assets included in other
long-term
assets)
|
|
-
|
|
|
|
|
$
|
8,161
|
|
$
|
8,161
|
|
|
Other
|
|
-
|
|
$
|
275
|
|
|
-
|
|
|
275
|
|
|
Total assets at
fair value
|
|
-
|
|
$
|
275
|
|
$
|
8,161
|
|
$
|
8,436
|
|
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, 2011, SmartSwitch Namibia repaid
outstanding loans, including outstanding interest. The repayments received have
been allocated to the equity-accounted investments presented in the Companys
condensed consolidated balance sheet as of September 30, 2011, and reduced 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 the Companys
condensed consolidated statement of cash flows for the three months ended
September 30, 2011.
12
6.
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)
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 the purchaser 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 and the
functional currency of VTU Colombia is the Colombian peso.
Summarized
below is the Companys interest in equity-accounted investments as of June 30,
2011 and September 30, 2011:
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Loans
|
|
|
(Loss)
|
|
|
Elimination
|
|
|
|
Total
|
|
Balance as of June 30, 2011
|
$
|
4,051
|
|
$
|
1,630
|
|
$
|
(3,828
|
)
|
$
|
7
|
|
|
$
|
1,860
|
|
Loan repaid
|
|
-
|
|
|
(33
|
)
|
|
-
|
|
|
-
|
|
|
|
(33
|
)
|
Interest repaid
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(37
|
)
|
|
|
(37
|
)
|
Earnings from equity-accounted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investments
|
|
-
|
|
|
-
|
|
|
59
|
|
|
26
|
|
|
|
85
|
|
SmartSwitch Namibia
(1)
|
|
-
|
|
|
-
|
|
|
55
|
|
|
9
|
|
|
|
64
|
|
SmartSwitch
Botswana
(1)
|
|
-
|
|
|
-
|
|
|
4
|
|
|
17
|
|
|
|
21
|
|
VTU Colombia
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Foreign currency adjustment
(2)
|
|
(397
|
)
|
|
(17
|
)
|
|
188
|
|
|
(10
|
)
|
|
|
(236
|
)
|
Balance as of September 30, 2011
|
$
|
3,654
|
|
$
|
1,580
|
|
$
|
(3,581
|
)
|
$
|
(14
|
)
|
|
$
|
1,639
|
|
(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, 2011 and 2010.
7.
Goodwill
and intangible assets Goodwill
Summarized
below is the movement in the carrying value of goodwill for the three months
ended September 30, 2011.
|
|
Carrying
|
|
|
|
value
|
|
|
|
|
|
Balance as of June 30, 2011
|
$
|
209,570
|
|
Foreign currency adjustment
(1)
|
|
(21,161
|
)
|
Balance as of September 30, 2011
|
$
|
188,409
|
|
(1) the foreign currency adjustment represents the effects of the fluctuations
between the ZAR against the US dollar and the KRW against the US dollar.
13
7.
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, 2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
SA transaction-based
activities
|
$
|
36,319
|
|
$
|
42,005
|
|
International transaction-based activities
|
|
114,412
|
|
|
124,895
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
Hardware, software and
related technology sales
|
|
37,678
|
|
|
42,670
|
|
Total
|
$
|
188,409
|
|
$
|
209,570
|
|
Intangible
assets
Carrying
value and amortization of intangible assets
Summarized
below is the carrying value and accumulated amortization of the intangible
assets as of September 30, 2011 and June 30, 2011:
|
|
|
As
of September 30, 2011
|
|
|
As
of June 30, 2011
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
90,589
|
|
$
|
(15,621
|
)
|
$
|
74,968
|
|
$
|
100,155
|
|
$
|
(15,283
|
)
|
$
|
84,872
|
|
|
Software and unpatented
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
technology
|
|
33,898
|
|
|
(10,006
|
)
|
|
23,892
|
|
|
37,697
|
|
|
(8,999
|
)
|
|
28,698
|
|
|
FTS patent
|
|
4,840
|
|
|
(4,840
|
)
|
|
-
|
|
|
5,598
|
|
|
(5,598
|
)
|
|
-
|
|
|
Exclusive licenses
|
|
4,506
|
|
|
(4,506
|
)
|
|
-
|
|
|
4,506
|
|
|
(4,506
|
)
|
|
-
|
|
|
Trademarks
|
|
7,231
|
|
|
(2,140
|
)
|
|
5,091
|
|
|
8,130
|
|
|
(2,288
|
)
|
|
5,842
|
|
|
Customer database
|
|
768
|
|
|
(448
|
)
|
|
320
|
|
|
888
|
|
|
(444
|
)
|
|
444
|
|
|
Total finite-lived intangible assets
|
$
|
141,832
|
|
$
|
(37,561
|
)
|
$
|
104,271
|
|
$
|
156,974
|
|
$
|
(37,118
|
)
|
$
|
119,856
|
|
Aggregate
amortization expense on the finite-lived intangible assets for the three months
ended September 30, 2011, was approximately $4.8 million (three months ended
September 30, 2010, was approximately $3.9 million).
Future
estimated annual amortization expense for the next five fiscal years, assuming
exchange rates prevailing on September 30, 2011, 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
|
$16,177
|
2012
|
13,789
|
2013
|
13,789
|
2014
|
10,693
|
2015
|
$8,423
|
14
8.
Reinsurance
assets and policy holder liabilities under insurance and investment contracts
Reinsurance
assets and policy holder liabilities under insurance contracts
Summarized
below is the movement in reinsurance assets and policy holder liabilities under
insurance contracts during the three months ended September 30, 2011:
|
|
Reinsurance
|
|
|
Insurance
|
|
|
|
assets (1)
|
|
|
contracts (2)
|
|
|
|
|
|
|
|
|
Balances acquired
|
$
|
28,492
|
|
$
|
(28,492
|
)
|
Insurance premiums
|
|
-
|
|
|
-
|
|
Claims and policyholders
benefits under insurance contracts
|
|
-
|
|
|
-
|
|
Foreign currency adjustment
(3)
|
|
(4,056
|
)
|
|
4,056
|
|
Balance
as of September 30, 2011
|
$
|
24,436
|
|
$
|
(24,436
|
)
|
(1)
Included in other long-term
assets;
(2)
Included in other long-term
liabilities;
(3)
The foreign currency adjustment represents the effects of the fluctuations
between the ZAR against the US dollar.
The
Company has agreements with reinsurance companies in order to limit its losses
from large insurance contracts, however, if the reinsurer is unable to meet its
obligations, the Company retains the liability.
The
value of insurance contract liabilities is based on best estimates assumptions
of future experience plus prescribed margins, as required in the markets in
which these products are offered, namely South Africa. The process of deriving
the best estimates assumptions plus prescribed margins includes assumptions
related to future mortality and morbidity (an appropriate base table of standard
mortality is chosen depending on the type of contract and class of business),
withdrawals (based on recent withdrawal investigations and expected future
trends), investment returns (based on government treasury rates adjusted by an
applicable margin), and expense inflation (based on a 10 year real return on
CPI-linked government bonds from the risk-free rate and adding an allowance for
salary inflation and book shrinkage of 1% per annum).
Assets
and policy holder liabilities under investment contracts
Summarized
below is the movement in assets and policy holder liabilities under investment
contracts during the three months ended September 30, 2011:
|
|
|
|
|
Investment
|
|
|
|
Assets (1)
|
|
|
contracts (2)
|
|
|
|
|
|
|
|
|
Balances acquired
|
$
|
1,346
|
|
$
|
(1,346
|
)
|
Insurance premiums
|
|
-
|
|
|
-
|
|
Claims and policyholders
benefits under insurance contracts
|
|
-
|
|
|
-
|
|
Foreign currency adjustment
(3)
|
|
(191
|
)
|
|
191
|
|
Balance
as of September 30, 2011
|
$
|
1,155
|
|
$
|
(1,155
|
)
|
(1) Included in other long-term assets;
(2) Included in other long-term liabilities;
(3) The foreign currency
adjustment represents the effects of the fluctuations between the ZAR against
the US dollar.
The
Company does not offer any investment products with guarantees related to
capital or returns.
9.
Short-term
credit facilities
The
Companys ZAR 250 million ($31.6 million, translated at exchange rates
applicable as of September 30, 2011) short-term South African credit facility is
described in Note 11 to the Companys audited consolidated financial statements
included in its Annual Report on Form 10-K for the year ended June 30, 2011. As
of September 30, 2011, the overdraft rate on this facility was 7.85% . Certain
South African subsidiaries have ceded trade receivables with an aggregate value
of approximately $17.8 million, translated at exchange rates applicable as of
September 30, 2011, 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, 2011 and June 30, 2011, the
Company had utilized none of its South African short-term facility.
Management
believes that this facility is sufficient in order to meet the Companys future
obligations as they arise.
15
10. Long-term borrowings
The
Companys KRW 130.5 billion ($110.8 million, translated at exchange rates
applicable as of September 30, 2011) Korean senior secured loan facility is
described in Note 12 to the Companys audited consolidated financial statements
included in its Annual Report on Form 10-K for the year ended June 30, 2011. The
interest rate in effect on September 30, 2011 was 7.69% . Interest expense
during the three months ended September 30, 2011 was $2.4 million. The first
scheduled principal repayment of $6.9 million, translated at exchange rates
applicable as of September 30, 2011, is due on October 29, 2011, and has been
classified as current in the Companys condensed consolidated balance sheet.
11. Capital structure
Common
stock repurchases
The
Company repurchased 180,656 shares during the three months ended September 30,
2011, for approximately $1.1 million. The Company did not repurchase any of its
shares during the three months ended September 30, 2010.
12. Stock-based compensation
Stock
option and restricted stock activity
Options
The
following table summarizes stock option activity for the three months ended
September 30, 2011, and 2010:
|
|
|
|
|
|
|
|
|
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, 2011
|
|
2,120,656
|
|
$
|
18.44
|
|
|
6.82
|
|
$
|
243
|
|
|
|
|
|
Granted
under Plan
|
|
165,000
|
|
|
6.59
|
|
|
10.00
|
|
|
|
|
$
|
297
|
|
|
Outstanding September 30,
2011
|
|
2,285,656
|
|
$
|
17.58
|
|
|
6.80
|
|
$
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding July 1, 2010
|
|
1,813,656
|
|
$
|
19.76
|
|
|
7.41
|
|
$
|
585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding September 30, 2010
|
|
1,813,656
|
|
$
|
19.76
|
|
|
7.16
|
|
$
|
366
|
|
|
|
|
No
stock options became exercisable during the three months ended September 30,
2011 and 2010.
No
stock options were exercised during the three months ended September 30, 2011.
During the three months ended September 30, 2010, the Company received
approximately $0.02 million from repayment of stock option-related loans. The
Company issues new shares to satisfy stock option exercises.
The
following table summarizes restricted stock activity for the three months ended
September 30, 2011, and 2010:
|
|
|
Number of Shares
|
|
|
Weighted Average
|
|
|
|
|
of Restricted Stock
|
|
|
Grant Date Fair Value
|
|
|
Non-vested July 1, 2011
|
|
103,672
|
|
|
-
|
|
|
Granted August
2011
|
|
30,155
|
|
|
$199
|
|
|
Vested September 2011
|
|
(6,157
|
)
|
|
-
|
|
|
Non-vested September 30, 2011
|
|
127,670
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
-
|
|
The
fair value of restricted stock vested during the three months ended September
30, 2011 and 2010, was $0.04 million and $2.3 million, respectively.
16
12. Stock-based compensation (continued)
Stock-based
compensation charge and unrecognized compensation cost
The
Company has recorded a stock compensation charge of $0.5 million and $1.4
million for the three months ended September 30, 2011 and 2010, respectively,
which comprised:
|
|
|
|
|
|
Allocated to cost of
goods
|
|
|
Allocated to
|
|
|
|
|
Total
|
|
|
sold, IT processing,
|
|
|
selling, general and
|
|
|
|
|
charge
|
|
|
servicing and support
|
|
|
administration
|
|
|
Three months ended September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
496
|
|
$
|
-
|
|
$
|
496
|
|
|
Total
three months ended September 30, 2011
|
$
|
496
|
|
$
|
-
|
|
$
|
496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
1,438
|
|
$
|
51
|
|
$
|
1,387
|
|
|
Total
three months ended September 30, 2010
|
$
|
1,438
|
|
$
|
51
|
|
$
|
1,387
|
|
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, 2011, the total unrecognized compensation cost related to stock
options was approximately $1.2 million, which the Company expects to recognize
over approximately three years. As of September 30, 2011, the total unrecognized
compensation cost related to restricted stock awards was approximately $1.0
million, which the Company expects to recognize over approximately three years.
As
of September 30, 2011, the Company has recorded a deferred tax asset of
approximately $0.9 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.
13. Profit on liquidation of SmartSwitch Nigeria
The
Company has ceased operations in the Federation of Nigeria due to an inability
to implement its technology on a profitable basis. The Company, together with
the other shareholders, agreed to liquidate SmartSwitch Nigeria, the company
through which operating activities in Nigeria were performed. SmartSwitch
Nigeria was capitalized primarily with shareholder loans. The Company eliminated
its portion of the loan funding on consolidation, and included the loans due to
the non-controlling interest in long-term borrowings on its June 30, 2011,
consolidated balance sheet. The shareholders of SmartSwitch Nigeria have agreed
to waive all outstanding capital and interest repayments related to the loan
funding initially provided as part of the liquidation processes. The non-cash
profit on liquidation of SmartSwitch Nigeria of $4.0 million includes the write
back of all assets and liabilities, including non-controlling interest loans, of
SmartSwitch Nigeria, except for expected liabilities related to the liquidation
of SmartSwitch Nigeria. The profit has been allocated to corporate/eliminations.
14. Earnings per share
Basic
earnings per share include 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, 2011 and 2010,
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, 2011 and
2010, includes the dilutive effect of a portion of the restricted stock awards
granted to employees 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, 2011 and 2010, the vesting conditions in
respect of a portion of the awards had not been satisfied.
17
14. Earnings per share (continued)
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, 2011 and 2010.
|
|
|
Three months ended
|
|
|
|
|
September
30,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
000
|
|
|
000
|
|
|
Weighted average number of outstanding shares
of common stock basic
|
|
45,056
|
|
|
45,384
|
|
|
Weighted average effect of dilutive securities: employee stock
options
|
|
29
|
|
|
32
|
|
|
Weighted average number of outstanding shares
of common stock diluted
|
|
45,085
|
|
|
45,416
|
|
15. Operating segments
The
Company discloses segment information as reflected in the management information
systems reports that its chief operating decision maker uses 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. A description of the Companys operating segments is
contained in Note 19 to the Companys audited consolidated financial statements
included in its Annual Report on Form 10-K for the year ended June 30, 2011.
The
Company has reallocated its EP Kiosk business unit to the South African
transaction-based activities segment from the hardware, software and related
technology segment, as the unit is no longer in pilot phase and now forms part
of EasyPay. Following XeoHealths first contract signing, the Company has
allocated its revenue and costs to the international transaction-based
activities segment, which were previously included in the South African
transaction-based activities segment. Revenue and administration costs related
to the Companys comprehensive financial services offerings are all included in
the financial services segment. The effect of these reallocations has not
significantly impacted the Companys reported results. Restated amounts for the
three months ended September 30, 2010, also include the effects of reallocating
the Companys initiatives in Iraq, Nigeria and Net1 VCC. The impact of these
reallocations on the Companys revenue, operating income (loss) and net income
(loss) is presented in the table below:
|
|
|
Three
months ended September 30, 2010
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
|
previously
|
|
|
|
|
|
|
|
Restated
|
|
|
reported
|
|
|
Difference
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues to external customers
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
$
|
44,889
|
|
$
|
44,892
|
|
$
|
(3
|
)
|
|
International transaction-based
activities
|
|
470
|
|
|
-
|
|
|
470
|
|
|
Smart card accounts
|
|
7,970
|
|
|
7,970
|
|
|
-
|
|
|
Financial services
|
|
1,250
|
|
|
1,248
|
|
|
2
|
|
|
Hardware, software and related technology
sales
|
|
9,704
|
|
|
10,173
|
|
|
(469
|
)
|
|
Total
|
|
64,283
|
|
|
64,283
|
|
|
-
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
17,748
|
|
|
17,776
|
|
|
(28
|
)
|
|
International transaction-based activities
|
|
(708
|
)
|
|
-
|
|
|
(708
|
)
|
|
Smart card accounts
|
|
3,622
|
|
|
3,622
|
|
|
-
|
|
|
Financial services
|
|
797
|
|
|
929
|
|
|
(132
|
)
|
|
Hardware, software and
related technology sales
|
|
(2,339
|
)
|
|
(2,660
|
)
|
|
321
|
|
|
Corporate/Eliminations
|
|
(8,134
|
)
|
|
(8,681
|
)
|
|
547
|
|
|
Total
|
|
10,986
|
|
|
10,986
|
|
|
-
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
12,806
|
|
|
12,623
|
|
|
183
|
|
|
International transaction-based activities
|
|
(866
|
)
|
|
-
|
|
|
(866
|
)
|
|
Smart card accounts
|
|
2,610
|
|
|
2,610
|
|
|
-
|
|
|
Financial services
|
|
573
|
|
|
669
|
|
|
(96
|
)
|
|
Hardware, software and
related technology sales
|
|
(1,828
|
)
|
|
(2,061
|
)
|
|
233
|
|
|
Corporate/Eliminations
|
|
(5,866
|
)
|
|
(6,412
|
)
|
|
546
|
|
|
Total
|
$
|
7,429
|
|
$
|
7,429
|
|
$
|
-
|
|
18
15. Operating segments (continued)
The
Company currently has five reportable segments: South African transaction-based
activities, international transaction-based activities, smart card accounts,
financial services and hardware, software and related technology sales. Each
segment, other than international transaction-based activities and 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
South African transaction-based activities segment currently consists mainly of
a state pension and welfare benefit distribution service provided to the South
African government and transaction processing for retailers, utilities,
medical-related claim service customers and banks. Fee income is earned based on
the number of beneficiaries included in the government pay-file as well as from
merchants and card holders using the Companys merchant retail application. In
addition, utility providers and 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, 2011, there was
one such customer, providing 41% of total revenue (2010: one such customer,
providing 60% of total revenue).
The
international transaction-based activities segment currently consists mainly of
KSNET which generates revenue from the provision of payment processing services
to merchants and card issuers through its VAN. This segment generates fee
revenue from the provision of payment processing services and to a lesser extent
from the sale of goods, primarily point of sale terminals, to customers in
Korea. The segment also generates transaction fee revenue from transaction
processing of UEPS-enabled smartcards through NUETS initiative in Iraq and going
forward revenue earned by XeoHealth in the United States.
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. As a result of the acquisition of SmartLife, we earn premium income from
the sale of life insurance products and investment income.
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. The segment also includes the operations of
Net1 UTA, which comprise mainly hardware sales. 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.
Corporate/eliminations
includes the Companys head office cost centers in addition to the elimination
of inter-segment transactions. The profit related to the liquidation of
SmartSwitch Nigeria has been allocated to corporate/eliminations.
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,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Revenues to external customers
|
|
|
|
|
|
|
SA transaction-based activities
|
$
|
49,902
|
|
$
|
44,889
|
|
International transaction-based
activities
|
|
30,255
|
|
|
470
|
|
Smart card accounts
|
|
8,252
|
|
|
7,970
|
|
Financial services
|
|
2,111
|
|
|
1,250
|
|
Hardware, software and related technology
sales
|
|
9,406
|
|
|
9,704
|
|
Total
|
$
|
99,926
|
|
$
|
64,283
|
|
19
15. Operating segments (continued)
|
|
Three months ended
|
|
|
|
September
30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Inter-company revenues
|
|
|
|
|
|
|
SA transaction-based activities
|
$
|
1,113
|
|
$
|
936
|
|
International transaction-based
activities
|
|
-
|
|
|
-
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
Hardware, software and related technology
sales
|
|
318
|
|
|
262
|
|
Total
|
|
1,431
|
|
|
1,198
|
|
Operating income (loss)
|
|
|
|
|
|
|
SA transaction-based
activities
|
|
20,183
|
|
|
17,748
|
|
International transaction-based activities
|
|
684
|
|
|
(708
|
)
|
Smart card accounts
|
|
3,750
|
|
|
3,622
|
|
Financial services
|
|
1,411
|
|
|
797
|
|
Hardware, software and
related technology sales
|
|
1,937
|
|
|
(2,339
|
)
|
Corporate/Eliminations
|
|
2,881
|
|
|
(8,134
|
)
|
Total
|
|
30,846
|
|
|
10,986
|
|
Interest earned
|
|
|
|
|
|
|
SA transaction-based
activities
|
|
-
|
|
|
-
|
|
International transaction-based activities
|
|
-
|
|
|
-
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
Hardware, software and
related technology sales
|
|
-
|
|
|
-
|
|
Corporate/Eliminations
|
|
1,997
|
|
|
3,084
|
|
Total
|
|
1,997
|
|
|
3,084
|
|
Interest expense
|
|
|
|
|
|
|
SA transaction-based
activities
|
|
76
|
|
|
156
|
|
International transaction-based activities
|
|
44
|
|
|
70
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
Hardware, software and
related technology sales
|
|
10
|
|
|
1
|
|
Corporate/Eliminations
|
|
2,486
|
|
|
21
|
|
Total
|
|
2,616
|
|
|
248
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
SA transaction-based activities
|
|
2,142
|
|
|
2,176
|
|
International transaction-based
activities
|
|
6,649
|
|
|
14
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
117
|
|
|
133
|
|
Hardware, software and related technology
sales
|
|
171
|
|
|
2,421
|
|
Corporate/Eliminations
|
|
-
|
|
|
160
|
|
Total
|
|
9,079
|
|
|
4,904
|
|
|
|
|
|
|
|
|
Income taxation expense
|
|
|
|
|
|
|
SA transaction-based
activities
|
|
5,631
|
|
|
4,785
|
|
International transaction-based activities
|
|
335
|
|
|
121
|
|
Smart card accounts
|
|
1,051
|
|
|
1,014
|
|
Financial services
|
|
394
|
|
|
223
|
|
Hardware, software and
related technology sales
|
|
440
|
|
|
(506
|
)
|
Corporate/Eliminations
|
|
2,701
|
|
|
570
|
|
Total
|
$
|
10,552
|
|
$
|
6,207
|
|
20
15. Operating segments (continued)
|
|
Three months ended
|
|
|
|
September
30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
SA transaction-based activities
|
$
|
14,477
|
|
$
|
12,806
|
|
International transaction-based
activities
|
|
433
|
|
|
(866
|
)
|
Smart card accounts
|
|
2,700
|
|
|
2,610
|
|
Financial services
|
|
1,016
|
|
|
573
|
|
Hardware, software and related technology sales
|
|
1,486
|
|
|
(1,828
|
)
|
Corporate/Eliminations
|
|
(344
|
)
|
|
(5,866
|
)
|
Total
|
|
19,768
|
|
|
7,429
|
|
|
|
|
|
|
|
|
Expenditures for long-lived assets
|
|
|
|
|
|
|
SA transaction-based activities
|
|
588
|
|
|
542
|
|
International transaction-based activities
|
|
3,751
|
|
|
151
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
73
|
|
|
59
|
|
Hardware, software and related
technology sales
|
|
54
|
|
|
16
|
|
Corporate/Eliminations
|
|
-
|
|
|
-
|
|
Total
|
$
|
4,466
|
|
$
|
768
|
|
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.
16. 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, 2011, 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, 2011, was 34.9%, as a result of the
non-taxable profit on liquidation of SmartSwitch Nigeria, fewer non-deductible
expenses, including interest expense related to the Companys long-term Korean
borrowings. 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.
The
Company increased its unrecognized tax benefits by $0.1 million, during the
three months ended September 30, 2011. As of September 30, 2011, the Company had
accrued interest related to uncertain tax positions of approximately $0.2
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, Korea, Austria, the
Russian Federation and in the US federal jurisdiction. As of September 30, 2011,
the Company is no longer subject to income tax examination by the South African
Revenue Service for years before September 30, 2008. In 2011, the Korea National
Tax Service had effectively completed the examination of the Companys returns
in Korea related to years 2006 through 2010. The Company is subject to income
tax in other jurisdictions outside South Africa and Korea, none of which are
individually material to its financial position, statement of cash flows, or
results of operations.
21
17.
Subsequent
events
On
October 3, 2011, the Company acquired the South African prepaid airtime and
electricity businesses of Eason & Son, Ltd (Eason), an Irish private
limited company, for approximately $4.6 million in cash. The principal assets
acquired comprise prepaid airtime and electricity businesses customer and
supplier lists, debtor books, inventory, point of service terminals and a
perpetual license to utilize Easons internally developed transaction-based
system software (EBOS). The business will be integrated with EasyPay and
allocated to the Companys South African transaction-based activities operating
segment. The Company believes that the acquisition will enable it to expand its
prepaid customer base and over time integrate all of its prepaid offerings onto
the EBOS system.
22
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
The
following discussion should be read in conjunction with our Annual Report on
Form 10-K for the year ended June 30, 2011 and the unaudited condensed
consolidated financial statements and the accompanying notes included in this
Form 10-Q.
Forward-looking statements
Some
of the statements in this 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 Item 1A.Risk Factors and elsewhere in our Annual Report on Form
10-K for the year ended June 30, 2011. 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 Form 10-Q to conform those statements to
reflect the occurrence of unanticipated events, except as required by applicable
law.
You
should read this 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 the First Quarter of Fiscal
2012
South
Africa
SASSA
update
Under
our SASSA contract, we 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). The 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.
In
August 2011, we signed a further six-month extension of our contract with SASSA
on the same terms and conditions. As a result of the extension, the contract is
currently in effect through March 31, 2012. SASSA has advised that the
procurement process for the social grants payment tender is still underway and
has requested the extension of Net1s current contract to ensure continuity in
service delivery. We are participating in the tender process and have submitted
our proposal. The proposals received by SASSA are currently being evaluated.
SASSA has asked us, and we have agreed, to extend the validity period of our
proposal from October 27, 2011 to March 31, 2012, to allow the various
evaluation and adjudication committees to complete their work.
See
Item 1ARisk Factors in our Annual Report on Form 10-K for the year ended June
30, 2011 for more information and the risks associated with our SASSA contract
and the current tender.
Acquisition
of SmartLife
On
July 1, 2011, we acquired The SmartLife Insurance Company Limited, or SmartLife,
a South African long-term insurance company, for ZAR 13 million (approximately
$1.8 million) in cash. Prior to its acquisition by us, Smart Life had been
administered as a ring-fenced life-insurance license by a large South African
insurance company, had not written any new insurance business for a number of
years and had reinsured all of its risk exposure under its life insurance
products. SmartLife has been allocated to our financial services operating
segment.
The
acquisition of SmartLife provides us with an opportunity to offer relevant
insurance products directly to our existing customer and employee base in South
Africa. We intend to offer this customer base a full spectrum of products
applicable to this market segment, including credit life, group life, funeral
and education insurance policies. We expect SmartLife to commence writing
policies in the second quarter of fiscal 2012.
23
South
African transaction processors
During
the first quarter of fiscal 2012, our South African transaction processors
continued with the business development initiatives commenced during fiscal
2011. We are in the process of refocusing EasyPays activities on higher-margin
value-added services, including alternative transacting channels EP Kiosk, new
EasyPay website and EasyPay WAP (mobile). We have discontinued certain
inefficient processing services, such as hosting of financial institution
servers. We expect these refocusing efforts at EasyPay to provide additional
capacity and resources, without negatively affecting operating margin. FIHRST
commenced with the marketing of its new web-based platform, Helios, while
MediKredit signed agreements with new providers, including public hospitals,
private hospitals and specialist doctors, and has commenced adjudication and
processing activities for these providers.
Outside
South Africa
Republic
of Korea - KSNET
The
KSNET management team has commenced a number of strategic initiatives in the
Republic of Korea to maintain our current market share and to expand into
adjacent markets. We have embarked on a number of medium-term initiatives which
will be funded from our existing Korean cash reserves. We do not expect to use
funds generated by our other operations to fund these initiatives in Korea,
although certain repayments of the KSNET acquisition loan facility may be repaid
from head office.
XeoHealth
We
have signed a contract with Community Behavioral Health, or CBH, a
not-for-profit corporation contracted by the City of Philadelphia to provide
mental health and substance abuse services for Philadelphia County Medicaid
recipients, under which it will license our XeoRules
TM
SaaS offering
and provide implementation and ongoing support. The initial term of the contract
is five years, with five consecutive one-year renewal periods at the option of
CBH. We will earn an initial project implementation fee, followed by a monthly
fee based on the number of members, with a guaranteed minimum amount, once the
system is live. We expect to begin adjudicating actual claims in December 2011.
We
have also been subcontracted by Cognosante LLC, a U.S. provider of health IT
services to state and federal agencies and regional health organizations, to
assist with the provision of recovery audit contractor, or RAC, services to the
North Dakota Department of Human Services, Medical Services Division. We will
earn a fee based on a percentage of the final recoveries identified by our
XeoRules
TM
claims re-adjudicating service for the past five years, as
well as the desk review recovery referrals identified through our
XeoRules
TM
engine until June 30, 2013.
XeoRules
TM
is XeoHealths internally developed 5010 and ICD-10 compliant real-time claims
adjudication engine. XeoRules
TM
significantly reduces the time and
radically improves the efficiency and accuracy of healthcare claims adjudication
and data processing. We continue to enjoy significant interest from various
participants in the U.S. healthcare industry in our solution for the current and
newly mandated Health Insurance Portability and Accountability Act, electronic
data interchange transactions.
Net1
Virtual Card
We
launched our VCPay
TM
offering in the United States during fiscal
2011. Our mobile phone-based virtual payment card application is designed to
eliminate fraud in CNP transactions. During the first quarter of fiscal 2012, we
engaged the services of a specialist advisory firm to assist us with the general
management of our VCPay
TM
initiatives in the USA, the identification
of the various strategic channels for VCPay
TM
deployment and the
commercialization of VCPay
TM
in our targeted industry verticals.
Net1
UTA
In
July 2011, Net1 UTA signed a contract with Banamex, a leading bank in Mexico and
part of Citigroup, for the delivery of VCPay. Banamex will offer VCPay to its
customers as an application that can be downloaded to a mobile phone and linked
to the customers credit and/or debit card accounts. VCPay allows consumers to
securely generate an offline, one-time use MVC number for a specific limit or
purchase amount on their mobile handsets to buy goods and services or perform
bill payments in any card not present environment. We expect Banamex to launch
VCPay
TM
during the third quarter of fiscal 2012.
Liquidation
of SmartSwitch Nigeria
We
ceased operations in the Federation of Nigeria during fiscal 2011 and finally
liquidated our subsidiary during the first quarter of fiscal 2012. Footnote 13
to the unaudited condensed consolidated financial statements contains the final
liquidation details.
24
The
African Continent and Iraq
During
fiscal 2011, NUETS recorded revenue from transaction fees and the delivery of
UEPS-enabled smartcards under its contract with the government of Iraq. NUETS
expects to generate ongoing revenues from transaction fees under the Iraqi
contract during fiscal 2012. NUETS has entered the second phase of its
initiative in Ghana and now generates recurring income in the form of hardware
and software maintenance fees.
NUETS
continued to service its current customers on the African continent and in Iraq
and continued its business development efforts, including responding to a number
of tenders, in multiple countries on the African continent during the year. In
addition, NUETS has developed a limited investment / software as a service
business model and we expect to deploy the UEPS technology in selected African
markets using this approach during fiscal 2012.
During
the first quarter of fiscal 2012, SmartSwitch Namibia generated incremental
transaction fees from transactions conducted between Namibian merchants and
UEPS-enabled smartcards. SmartSwitch Botswana generated transaction fees during
the first quarter of fiscal 2012 from the payment of food voucher grants. We
expect SmartSwitch Namibia and Botswana to continue generating transaction fees
during fiscal 2012.
Reallocation of certain activities among reporting segments
During
the first quarter of fiscal 2012, we made the following changes to our reporting
segments:
-
We have reallocated our EP Kiosk business unit to the South African
transaction-based activities segment from the hardware, software and related
technology sales segment, as the unit is no longer in pilot phase and now
forms part of EasyPay;
-
Following XeoHealths first contract announcement, we have allocated its
revenue and costs to the international transaction-based activities segment
which were previously included in the South African transaction-based
activities segment; and
-
Revenue and administration costs related to our comprehensive financial
services offerings are now all included in the financial services segment.
The tables below present our revenue and operating income, both as reported and
as revised to reflect the reallocations described above, for each quarter of
fiscal 2011:
Table 1
|
|
|
South
|
|
|
|
|
|
|
|
|
|
|
|
Hardware,
|
|
|
|
|
|
|
|
African
|
|
|
International
|
|
|
|
|
|
|
|
|
software
|
|
|
|
|
Revenue $ 000
|
|
|
transaction-
|
|
|
transaction-
|
|
|
|
|
|
|
|
|
and related
|
|
|
|
|
|
|
|
based
|
|
|
based
|
|
|
Smartcard
|
|
|
Financial
|
|
|
technology
|
|
|
|
|
|
|
|
activities
|
|
|
activities
|
|
|
accounts
|
|
|
services
|
|
|
sales
|
|
|
Total
|
|
|
Reported
|
|
|
44,892
|
|
|
-
|
|
|
7,970
|
|
|
1,248
|
|
|
10,173
|
|
|
64,283
|
|
Q1 2011
|
Revised
|
|
|
44,889
|
|
|
470
|
|
|
7,970
|
|
|
1,250
|
|
|
9,704
|
|
|
64,283
|
|
|
Difference
|
|
|
(3
|
)
|
|
470
|
|
|
-
|
|
|
2
|
|
|
(469
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
46,588
|
|
|
16,950
|
|
|
8,434
|
|
|
1,623
|
|
|
15,416
|
|
|
89,011
|
|
Q3 2011
|
Revised
|
|
|
46,737
|
|
|
17,385
|
|
|
8,434
|
|
|
1,651
|
|
|
14,804
|
|
|
89,011
|
|
|
Difference
|
|
|
149
|
|
|
435
|
|
|
-
|
|
|
28
|
|
|
(612
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
47,313
|
|
|
24,627
|
|
|
8,288
|
|
|
2,168
|
|
|
10,362
|
|
|
92,758
|
|
Q2 2011
|
Revised
|
|
|
47,313
|
|
|
24,627
|
|
|
8,288
|
|
|
2,171
|
|
|
10,359
|
|
|
92,758
|
|
|
Difference
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3
|
|
|
(3
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
50,267
|
|
|
27,900
|
|
|
8,623
|
|
|
2,274
|
|
|
8,304
|
|
|
97,368
|
|
Q4 2011
|
Revised
|
|
|
50,267
|
|
|
27,900
|
|
|
8,623
|
|
|
2,278
|
|
|
8,300
|
|
|
97,368
|
|
|
Difference
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4
|
|
|
(4
|
)
|
|
-
|
|
25
Table
2
|
|
South
|
|
|
|
|
|
|
|
|
|
|
|
Hardware,
|
|
|
|
|
|
|
|
|
|
African
|
|
|
International
|
|
|
|
|
|
|
|
|
software
|
|
|
|
|
|
|
|
Operating
income (loss) $ '000
|
|
transaction-
|
|
|
transaction-
|
|
|
|
|
|
|
|
|
and related
|
|
|
|
|
|
|
|
|
|
|
based
|
|
|
based
|
|
|
Smartcard
|
|
|
Financial
|
|
|
technology
|
|
|
Corp/
|
|
|
|
|
|
|
|
activities
|
|
|
activities
|
|
|
accounts
|
|
|
services
|
|
|
sales
|
|
|
Elims
|
|
|
Total
|
|
Q1 2011
|
Reported
|
|
17,776
|
|
|
-
|
|
|
3,622
|
|
|
929
|
|
|
(2,660
|
)
|
|
(8,681
|
)
|
|
10,986
|
|
Revised
|
|
17,748
|
|
|
(708
|
)
|
|
3,622
|
|
|
797
|
|
|
(2,339
|
)
|
|
(8,134
|
)
|
|
10,986
|
|
Difference
|
|
(28
|
)
|
|
(708
|
)
|
|
-
|
|
|
(132
|
)
|
|
321
|
|
|
547
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q3 2011
|
Reported
|
|
18,547
|
|
|
327
|
|
|
3,832
|
|
|
1,231
|
|
|
(319
|
)
|
|
(1,644
|
)
|
|
21,974
|
|
Revised
|
|
18,578
|
|
|
139
|
|
|
3,832
|
|
|
1,028
|
|
|
(49
|
)
|
|
(1,554
|
)
|
|
21,974
|
|
Difference
|
|
31
|
|
|
(188
|
)
|
|
-
|
|
|
(203
|
)
|
|
270
|
|
|
90
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q2 2011
|
Reported
|
|
18,309
|
|
|
780
|
|
|
3,767
|
|
|
1,701
|
|
|
(44,584
|
)
|
|
(2,098
|
)
|
|
(22,125
|
)
|
Revised
|
|
18,566
|
|
|
274
|
|
|
3,767
|
|
|
1,540
|
|
|
(44,086
|
)
|
|
(2,186
|
)
|
|
(22,125
|
)
|
Difference
|
|
257
|
|
|
(506
|
)
|
|
-
|
|
|
(161
|
)
|
|
498
|
|
|
(88
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q4 2011
|
Reported
|
|
20,347
|
|
|
811
|
|
|
3,919
|
|
|
1,797
|
|
|
(2,367
|
)
|
|
2,086
|
|
|
26,593
|
|
Revised
|
|
20,776
|
|
|
75
|
|
|
3,919
|
|
|
1,634
|
|
|
(1,898
|
)
|
|
2,087
|
|
|
26,593
|
|
Difference
|
|
429
|
|
|
(736
|
)
|
|
-
|
|
|
(163
|
)
|
|
469
|
|
|
1
|
|
|
-
|
|
Furthermore,
the activities of Net1 UTA related primarily to the commercialization of our MVC
offering during the first quarter of fiscal 2012 have been allocated to our
international transaction-based activities operating segment.
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, 2011.
-
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,
2011, 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, 2011
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, 2011, including the expected dates of adoption and effects on
financial condition, results of operations and cash flows.
26
Currency Exchange Rate Information
Actual
exchange rates
The
actual exchange rates for and at the end of the periods presented were as
follows:
Table 3
|
|
Three months ended
|
|
|
Year ended
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011(1)
|
|
ZAR : $ average exchange rate
|
|
7.1357
|
|
|
7.3577
|
|
|
7.0286
|
|
Highest ZAR : $ rate during period
|
|
8.4739
|
|
|
7.7809
|
|
|
7.7809
|
|
Lowest ZAR : $ rate during period
|
|
6.6096
|
|
|
6.9190
|
|
|
6.4925
|
|
Rate at end of period
|
|
7.9165
|
|
|
6.9750
|
|
|
6.8449
|
|
|
|
|
|
|
|
|
|
|
|
KRW : $ average exchange rate
|
|
1,083
|
|
|
-
|
|
|
1,113
|
|
Highest KRW : $ rate during period
|
|
1,197
|
|
|
-
|
|
|
1,169
|
|
Lowest KRW : $ rate during period
|
|
1,029
|
|
|
-
|
|
|
1,059
|
|
Rate at end of period
|
|
1,178
|
|
|
-
|
|
|
1,079
|
|
(1)
KRW : $ average, highest and lowest exchange rates are from November 1, 2010
to June 30, 2011.
27
Translation
exchange rates
We
are required to translate our results of operations from ZAR and KRW to US
dollars on a monthly basis. Thus, the average rates used to translate this data
for the three months ended September 30, 2011 and 2010, 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 4
|
|
Three months ended
|
|
|
Year ended
|
|
|
|
September
30,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
Income and expense items: $1 = ZAR .
|
|
7.0939
|
|
|
7.4053
|
|
|
6.9962
|
|
Income and expense items: $1 = KRW
|
|
1,086
|
|
|
n/a
|
|
|
1,121
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items: $1 = ZAR
|
|
1,178
|
|
|
n/a
|
|
|
1,079
|
|
Results of operations
The
discussion of our consolidated overall results of operations is based on amounts
as reflected in our audited consolidated financial statements which are prepared
in accordance with US GAAP. We analyze our results of operations both in US
dollars, as presented in the consolidated financial statements, and
supplementally in 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.
First
quarter of fiscal 2011 results do not include KSNET or SmartLife. In addition,
the following discussion gives effect to the reallocation of certain activities
among our business segments as described above.
28
We
analyze our business and operations in terms of five inter-related but
independent operating segments: (1) South African transaction-based activities,
(2) international transaction-based activities, (3) smart card accounts, (4)
financial services, and (5) 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.
First
quarter of fiscal 2012 compared to first quarter of fiscal 2011
The
following factors had an influence on our results of operations during the first
quarter of fiscal 2012 as compared with the same period in the prior year:
-
Favorable impact from the weakness of the US dollar:
The US
dollar depreciated by 4% compared to the ZAR during the first quarter of
fiscal 2012 compared to the first quarter of fiscal 2011 which positively
impacted our reported results;
-
Inclusion of revenue contribution from KSNET at lower operating
margin (before acquired intangible asset
amortization) than our
legacy business:
The inclusion of KSNET contributed to an increase in
revenues for fiscal 2012; however, because KSNET has an operating margin
(before acquired intangible asset amortization) that is lower than our legacy
businesses, it reduced our overall operating margin. KSNET also contributed to
the increase in selling, general and administration and depreciation and
amortization expenses;
-
Improved operating income and margins from hardware, software and
related technology sales segment:
Operating income and margins from
our hardware, software and related technology sales segment increased as a
result of increased ad hoc sales;
-
Intangible asset amortization related to acquisition:
Our
reported results for the first quarter of fiscal 2012 were adversely impacted
by additional intangible asset amortization related to the acquisition of
KSNET;
-
Lower interest income and increased interest expense resulting from
KSNET acquisition:
We paid the KSNET purchase price with a combination
of cash and long-term debt, which reduced interest income and increased
interest expense;
-
Profit on liquidation of SmartSwitch Nigeria:
We recorded a
non-cash profit of $4.0 million on the liquidation of SmartSwitch Nigeria; and
-
Fiscal 2011 unrealized foreign exchange loss and transaction-related
expenses:
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 5
|
|
(US
GAAP)
|
|
|
|
Three
months ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
$%
|
|
|
|
$ 000
|
|
|
$000
|
|
|
change
|
|
Revenue
|
|
99,926
|
|
|
64,283
|
|
|
55%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
32,944
|
|
|
18,067
|
|
|
82%
|
|
Selling, general and administration
|
|
27,057
|
|
|
30,326
|
|
|
(11)%
|
|
Depreciation and amortization
|
|
9,079
|
|
|
4,904
|
|
|
85%
|
|
Operating income
|
|
30,846
|
|
|
10,986
|
|
|
181%
|
|
Interest income
|
|
1,997
|
|
|
3,084
|
|
|
(35)%
|
|
Interest expense
|
|
2,616
|
|
|
248
|
|
|
955%
|
|
Income before income taxes
|
|
30,227
|
|
|
13,822
|
|
|
119%
|
|
Income tax expense
|
|
10,552
|
|
|
6,207
|
|
|
70%
|
|
Net income before loss from equity-accounted investments
|
|
19,675
|
|
|
7,615
|
|
|
158%
|
|
Income (Loss) from equity-accounted investments
|
|
85
|
|
|
(216
|
)
|
|
(139)%
|
|
Net income
|
|
19,760
|
|
|
7,399
|
|
|
167%
|
|
Add net loss attributable to non-controlling
interest
|
|
(8
|
)
|
|
(30
|
)
|
|
(73)%
|
|
Net income attributable to us
|
|
19,768
|
|
|
7,429
|
|
|
166%
|
|
29
|
|
In South African Rand
|
|
Table 6
|
|
(US
GAAP)
|
|
|
|
Three
months ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
ZAR
|
|
|
|
ZAR
|
|
|
ZAR
|
|
|
%
|
|
|
|
000
|
|
|
000
|
|
|
change
|
|
Revenue
|
|
708,865
|
|
|
476,035
|
|
|
49%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
233,702
|
|
|
133,791
|
|
|
75%
|
|
Selling, general and administration
|
|
191,940
|
|
|
224,573
|
|
|
(15)%
|
|
Depreciation and amortization
|
|
64,405
|
|
|
36,315
|
|
|
77%
|
|
Operating income
|
|
218,818
|
|
|
81,356
|
|
|
169%
|
|
Interest income
|
|
14,167
|
|
|
22,838
|
|
|
(38)%
|
|
Interest expense
|
|
18,558
|
|
|
1,837
|
|
|
910%
|
|
Income before income taxes
|
|
214,427
|
|
|
102,357
|
|
|
109%
|
|
Income tax expense
|
|
74,855
|
|
|
45,965
|
|
|
63%
|
|
Net income before loss from equity-accounted investments
|
|
139,572
|
|
|
56,392
|
|
|
148%
|
|
Income (Loss) from equity-accounted investments
|
|
603
|
|
|
(1,600
|
)
|
|
(138)%
|
|
Net income
|
|
140,175
|
|
|
54,792
|
|
|
156%
|
|
Add net loss attributable to non-controlling
interest
|
|
(57
|
)
|
|
(222
|
)
|
|
(74)%
|
|
Net income attributable to us
|
|
140,232
|
|
|
55,014
|
|
|
155%
|
|
Analyzed in ZAR, the increase in revenue for the first quarter of fiscal 2012 was primarily due to the inclusion of KSNET, modest growth in our pension and welfare business, an increase in the number of UEPS-based loans made, higher utilization of our UEPS system in Iraq and increased ad hoc hardware, software and related technology sales. Analyzed in ZAR, cost of goods sold, IT processing, servicing and support for the first quarter of fiscal 2012 was higher primarily due to the inclusion of KSNET and expenses related to these ad hoc hardware, software and related technology sales.
The
increase in selling, general and administration expense as of result of the
KSNET acquisition was offset by lower stock-based compensation charge, primarily
because the performance-based restricted stock granted in August 2007 was fully
expensed in prior periods and due to the non-cash profit related to the
liquidation of SmartSwitch Nigeria of $4.0 million. During the first quarter of
fiscal 2011, selling, general and administration expense included 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 2012 and 2011 was 31%
and 17%, respectively. We discuss the components of the operating income margin
under Results of operations by operating segment, however the increase is
attributable to lower stock-based compensation charges in the first quarter of
fiscal 2012 compared with fiscal 2011 and a unrealized foreign exchange loss and
transaction-related costs during fiscal 2011.
In
ZAR, depreciation and amortization increased during the first quarter of fiscal
2012 primarily as a result of KSNET intangible asset amortization, but was
partially offset by no Net1 UTA intangible asset amortization during the first
quarter of fiscal 2012, as the Net1 UTA customer relationships were fully
impaired in fiscal 2011. The intangible asset amortization related to our
various acquisitions has been allocated to our operating segments as presented
in the tables below:
|
|
Three months ended
|
|
Table 7
|
|
September
30,
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
$000
|
|
|
|
$000
|
|
Amortization included in depreciation and amortization
expense:
|
|
4,814
|
|
|
|
3,663
|
|
South African transaction-based activities
|
|
1,406
|
|
|
|
1,346
|
|
International transaction-based
activities
|
|
3,307
|
|
|
|
-
|
|
Hardware, software and related technology
sales (1)
|
|
101
|
|
|
|
2,317
|
|
(1) Three months ended September
30, 2010, includes Net1 UTA customer relationship amortization of $2.2 million.
30
|
|
Three months ended
|
|
Table 8
|
|
September
30,
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
ZAR 000
|
|
|
|
ZAR 000
|
|
Amortization included in depreciation and amortization
expense:
|
|
34,150
|
|
|
|
27,131
|
|
South African transaction-based activities
|
|
9,973
|
|
|
|
9,972
|
|
International transaction-based
activities
|
|
23,460
|
|
|
|
-
|
|
Hardware, software and related technology
sales (1)
|
|
717
|
|
|
|
17,159
|
|
(1)
Three months ended September 30, 2010, includes Net1 UTA customer relationship
amortization of ZAR 16.0 million.
Interest
on surplus cash for the first quarter of fiscal 2012 decreased to $2.0 million
(ZAR 14.2 million) from $3.1 million (ZAR 22.8 million) for fiscal 2011. The
decrease resulted primarily from lower average daily ZAR cash balances during
the first quarter of fiscal 2012 as a result of the payment of a portion of the
KSNET purchase price in cash as well as lower deposit rates resulting from the
decrease in the South African prime interest rate from an average of
approximately 9.89% per annum for fiscal 2011 to 9.00% per annum for fiscal
2012.
The
first quarter of fiscal 2012 interest expense increased to $2.6 million (ZAR
18.6 million) from $0.2 million (ZAR 1.8 million) for fiscal 2011 due to the
incurrence of long-term debt to fund a portion of the KSNET purchase price.
Interest expense includes amortized debt facility fees of $0.1 million (ZAR 0.8
million).
Total
tax expense for the first quarter of fiscal 2012 increased to $10.6 million (ZAR
74.8 million) from $6.2 million (ZAR 46.0 million) in fiscal 2011. Deferred tax
assets and liabilities are measured utilizing the enacted fully-distributed tax
rate. Our total tax expense increased primarily due to an increase in overall
profitability. Our effective tax rate for the first quarter of fiscal 2012 was
34.9%, compared to 44.9% for fiscal 2011. The change was primarily due to the
non-taxable profit on liquidation of SmartSwitch Nigeria and fewer
non-deductible expenses, including stock-based compensation charges and
acquisition-related expenses, which was offset by non-deductible interest
expenses related to our Korean long-term debt.
Net
income from equity-accounted investments for the first quarter of fiscal 2012
increased from the prior year primarily due to an increase in transaction fees
generated by SmartSwitch Namibia and SmartSwitch Botswana.
Results
of operations by operating segment
The
composition of revenue and the contributions of our business activities to
operating income (loss) are illustrated below.
Table 9
|
|
In United States Dollars (US GAAP)
|
|
|
|
Three months ended September 30,
|
|
|
|
2011
|
|
|
|
% of
|
|
|
|
2010
|
|
|
|
% of
|
|
|
|
%
|
|
Operating Segment
|
|
000
|
|
|
|
total
|
|
|
|
000
|
|
|
|
total
|
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
49,902
|
|
|
|
50%
|
|
|
|
44,889
|
|
|
|
70%
|
|
|
|
11%
|
|
International transaction-based activities
|
|
30,255
|
|
|
|
30%
|
|
|
|
470
|
|
|
|
1%
|
|
|
|
6,337%
|
|
Smart card accounts
|
|
8,252
|
|
|
|
8%
|
|
|
|
7,970
|
|
|
|
12%
|
|
|
|
4%
|
|
Financial services
|
|
2,111
|
|
|
|
2%
|
|
|
|
1,250
|
|
|
|
2%
|
|
|
|
69%
|
|
Hardware, software and related technology sales
|
|
9,406
|
|
|
|
10%
|
|
|
|
9,704
|
|
|
|
15%
|
|
|
|
(3)%
|
|
Total consolidated
revenue
|
|
99,926
|
|
|
|
100%
|
|
|
|
64,283
|
|
|
|
100%
|
|
|
|
55%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
20,183
|
|
|
|
65%
|
|
|
|
17,748
|
|
|
|
162%
|
|
|
|
14%
|
|
Operating income before amortization
|
|
21,589
|
|
|
|
|
|
|
|
19,094
|
|
|
|
|
|
|
|
13%
|
|
Amortization of intangible
assets
|
|
(1,406
|
)
|
|
|
|
|
|
|
(1,346
|
)
|
|
|
|
|
|
|
4%
|
|
International transaction-based activities
|
|
684
|
|
|
|
2%
|
|
|
|
(708
|
)
|
|
|
(6)%
|
|
|
|
nm
|
|
Operating income (loss)
before amortization .
|
|
3,991
|
|
|
|
|
|
|
|
(708
|
)
|
|
|
|
|
|
|
nm
|
|
Amortization of intangible assets
|
|
(3,307
|
)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
nm
|
|
Smart card accounts
|
|
3,750
|
|
|
|
12%
|
|
|
|
3,622
|
|
|
|
33%
|
|
|
|
4%
|
|
Financial services
|
|
1,411
|
|
|
|
5%
|
|
|
|
797
|
|
|
|
7%
|
|
|
|
77%
|
|
Hardware, software and related technology
sales
|
|
1,937
|
|
|
|
6%
|
|
|
|
(2,339
|
)
|
|
|
(21)%
|
|
|
|
nm
|
|
Operating income (loss) before amortization
.
|
|
2,038
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
nm
|
|
Amortization of intangible
assets
|
|
(101
|
)
|
|
|
|
|
|
|
(2,317
|
)
|
|
|
|
|
|
|
nm
|
|
Corporate/eliminations
|
|
2,881
|
|
|
|
10%
|
|
|
|
(8,134
|
)
|
|
|
(75)%
|
|
|
|
nm
|
|
Total consolidated
operating income
|
|
30,846
|
|
|
|
100%
|
|
|
|
10,986
|
|
|
|
100%
|
|
|
|
181%
|
|
31
Table 10
|
|
In South African Rand (US GAAP)
|
|
|
|
Three months ended September 30,
|
|
|
|
2011
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
|
% of
|
|
|
|
ZAR
|
|
|
|
% of
|
|
|
|
%
|
|
Operating Segment
|
|
000
|
|
|
|
total
|
|
|
|
000
|
|
|
|
total
|
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
354,000
|
|
|
|
50%
|
|
|
|
332,417
|
|
|
|
70%
|
|
|
|
6%
|
|
International transaction-based activities
|
|
214,626
|
|
|
|
30%
|
|
|
|
3,480
|
|
|
|
1%
|
|
|
|
6,067%
|
|
Smart card accounts
|
|
58,539
|
|
|
|
8%
|
|
|
|
59,020
|
|
|
|
12%
|
|
|
|
(1)%
|
|
Financial services
|
|
14,975
|
|
|
|
2%
|
|
|
|
9,257
|
|
|
|
2%
|
|
|
|
62%
|
|
Hardware, software and related technology sales
|
|
66,725
|
|
|
|
10%
|
|
|
|
71,861
|
|
|
|
15%
|
|
|
|
(7)%
|
|
Total consolidated
revenue
|
|
708,865
|
|
|
|
100%
|
|
|
|
476,035
|
|
|
|
100%
|
|
|
|
49%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
143,176
|
|
|
|
65%
|
|
|
|
131,429
|
|
|
|
162%
|
|
|
|
9%
|
|
Operating income before amortization
|
|
153,149
|
|
|
|
|
|
|
|
141,401
|
|
|
|
|
|
|
|
8%
|
|
Amortization of intangible
assets
|
|
(9,973
|
)
|
|
|
|
|
|
|
(9,972
|
)
|
|
|
|
|
|
|
0%
|
|
International transaction-based activities
|
|
4,852
|
|
|
|
2%
|
|
|
|
(5,242
|
)
|
|
|
(6)%
|
|
|
|
nm
|
|
Operating income (loss)
before amortization .
|
|
28,312
|
|
|
|
|
|
|
|
(5,242
|
)
|
|
|
|
|
|
|
nm
|
|
Amortization of intangible assets
|
|
(23,460
|
)
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
nm
|
|
Smart card accounts
|
|
26,602
|
|
|
|
12%
|
|
|
|
26,822
|
|
|
|
33%
|
|
|
|
(1)%
|
|
Financial services
|
|
10,009
|
|
|
|
5%
|
|
|
|
5,902
|
|
|
|
7%
|
|
|
|
70%
|
|
Hardware, software and related technology
sales
|
|
13,741
|
|
|
|
6%
|
|
|
|
(17,320
|
)
|
|
|
(21)%
|
|
|
|
nm
|
|
Operating income (loss) before amortization
.
|
|
14,458
|
|
|
|
|
|
|
|
(161
|
)
|
|
|
|
|
|
|
nm
|
|
Amortization of intangible
assets
|
|
(717
|
)
|
|
|
|
|
|
|
(17,159
|
)
|
|
|
|
|
|
|
nm
|
|
Corporate/eliminations
|
|
20,438
|
|
|
|
10%
|
|
|
|
(60,235
|
)
|
|
|
(75)%
|
|
|
|
nm
|
|
Total consolidated
operating income
|
|
218,818
|
|
|
|
100%
|
|
|
|
81,356
|
|
|
|
100%
|
|
|
|
169%
|
|
South
African transaction-based activities
In ZAR, the increases in segment revenue were primarily due to modest growth in our pension and welfare business and increased transaction volumes at MediKredit. Segment revenues include the transaction fees we earn through our merchant acquiring system and reflect the elimination of inter-company transactions. Operating income margin remained flat at 40% year over year.
Pension
and welfare operations:
Our pension and welfare operations continue to generate the majority of our revenues and operating income in this operating segment. Modest revenue growth as well as operational efficiencies contributed directly to the increase in our operating income.
South
African transaction processors:
The
table below presents the total volume and value processed during the first
quarter of fiscal 2012 and 2011:
Table 11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
|
|
Total
volume (000s)
|
|
|
Total
value $ (000)
|
|
|
Total
value ZAR (000)
|
|
processor
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
EasyPay
|
|
143,238
|
|
|
176,020
|
|
|
4,439,600
|
|
|
5,055,666
|
|
|
31,494,077
|
|
|
37,438,728
|
|
Remaining core
|
|
119,286
|
|
|
121,993
|
|
|
3,604,618
|
|
|
3,225,782
|
|
|
25,570,798
|
|
|
23,887,886
|
|
Discontinued
|
|
23,952
|
|
|
54,027
|
|
|
834,982
|
|
|
1,829,884
|
|
|
5,923,279
|
|
|
13,550,842
|
|
MediKredit
|
|
2,846
|
|
|
2,543
|
|
|
170,363
|
|
|
113,670
|
|
|
1,208,540
|
|
|
841,758
|
|
FIHRST
|
|
5,839
|
|
|
5,492
|
|
|
2,545,089
|
|
|
2,018,993
|
|
|
18,054,605
|
|
|
14,951,248
|
|
We
are refocusing EasyPays activities on higher-margin value-added services and
have terminated certain inefficient activities such as the hosting of processing
servers for financial institutions. We have restated the 2010 transaction
volumes and values in the table above to reflect the consolidation of
value-added services through EasyPay and to reflect the remaining core
processing activities. EasyPays core transaction volumes during the first
quarter of fiscal 2012 were slightly lower compared with the prior year due to
significantly higher transaction volumes experienced during the soccer world cup
event in South Africa during July 2010. MediKredit volumes and values were
higher due to increased adjudication and processing activities for new
providers, including public hospitals, private hospitals and specialist doctors.
FIHRST volumes and values increased due to an increased number of customers
(volumes and values) and higher once off off-payroll (salary; bonus and;
statutory and third-party deductions) amounts paid (values).
32
Key
statistics of our merchant acquiring system:
The
key statistics and indicators of our merchant acquiring system during the first
quarter of fiscal 2012 and 2011, in each of the South African provinces where we
distribute social welfare grants are summarized in the table below:
Table 12
|
|
Three months ended
|
|
|
|
September
30,
|
|
|
|
2011
|
|
|
2010
|
|
Total POS devices installed as of period end
|
|
4,867
|
|
|
4,772
|
|
Number of participating UEPS retail locations as of period
end
|
|
2,438
|
|
|
2,511
|
|
Value of transactions processed through POS
devices during the quarter (1) (in $ 000)
|
|
493,760
|
|
|
399,637
|
|
Value of transactions processed through POS devices during
the completed pay cycles for the
quarter (2) (in $ 000)
|
|
471,942
|
|
|
395,479
|
|
Value of transactions processed through POS
devices during the quarter (1) (in ZAR 000)
|
|
3,523,339
|
|
|
2,940,416
|
|
Value of transactions processed through POS devices during
the completed pay cycles for
the quarter (2) (in ZAR 000)
|
|
3,367,648
|
|
|
2,909,818
|
|
Number of grants paid through POS devices during
the quarter (1)
|
|
5,091,858
|
|
|
4,819,458
|
|
Number of grants paid through POS devices during the completed
pay cycles for the quarter (2)
|
|
4,960,121
|
|
|
4,710,596
|
|
Average number of grants processed per terminal
during the quarter (1)
|
|
1,040
|
|
|
1,008
|
|
Average number of grants processed per terminal during the
completed pay cycles for the quarter (2)
|
|
1,014
|
|
|
985
|
|
(1)
Refers to events occurring during the quarter (i.e., based on three calendar
months).
(2)
Refers to events occurring during the completed pay cycle.
International
transaction-based activities
KSNET continues to contribute the majority of our revenues in this
operating segment. Operating margin for the segment is lower than our legacy
South African transaction-based businesses and was negatively impacted by
start-up expenditures related to our XeoHealth launch in the United States, MVC
activities at Net1 UTA and on-going losses at Net1 Virtual Card, but these
expenses were partially offset by revenue contributions from KSNET, XeoHealth
and NUETS initiative in Iraq.
Our
results for the first quarter of fiscal 2012 include KSNET intangible asset
amortization.
Smart
card accounts
Operating
income margin from providing smart card accounts was constant at 45% for each of
first quarter of fiscal 2012 and 2011.
In ZAR, revenue from the provision of smart card accounts was relatively constant on a year-over-year basis. A total number of 3,565,525 smart card accounts were active at September 30, 2011, compared to 3,553,437 active accounts as at September 30, 2010.
Financial
services
Revenue
from UEPS-based lending increased primarily due to an increase in the number of
loans granted. Our current UEPS-based lending portfolio comprises loans made to
qualifying old age grant recipients 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 67% in fiscal 2012
from 64%, primarily as a result of increased UEPS-based lending activities.
SmartLife did not contribute significantly to our operating income in the first
quarter of fiscal 2012 as it had not commenced operating activities under its
new business model.
33
Hardware,
software and related technology sales
The
decrease in revenue was due to a lower contribution from Net1 UTA and the
increase in operating income was due to an increase in higher margin ad hoc
South African-based contributors hardware and software sales. Net1 UTA has
successfully contained its operating costs and generated higher-margin ad hoc
service and development revenues during the first quarter of fiscal 2012.
Overall our operating income margin in this segment has improved during the
first quarter of fiscal 2012 due the sale of more software and license revenues
compared to 2011, which contribute higher margins compared to hardware sales.
The operating income and operating margin improvements from both the South
African-based contributors and Net 1 UTA during the quarter were primarily due
to orders which may not continue in future quarters.
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 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
decrease in our corporate expenses resulted primarily from the lower stock-based
compensation charges, primarily because the performance-based restricted stock
granted in August 2007 was fully expensed in prior periods and due to the $4.0
million profit related to the liquidation of SmartSwitch Nigeria. These expense
reductions were offset by higher corporate head office-related expenses. In
addition, our first quarter of fiscal 2011 results include transaction related
expenditures of $3.4 million (ZAR 24.9 million) and a unrealized 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 include 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.
Liquidity and Capital Resources
Our
business has historically generated and continues to generate high levels of
cash. At September 30, 2011, our cash balances were $102.0 million, which
comprised mainly ZAR-denominated balances of ZAR 651.9 million ($82.3 million),
KRW-denominated balances of KRW 15.1 billion ($12.8 million) and US
dollar-denominated balances of $4.0 million and other currency deposits,
primarily euro, of $2.9 million. The increase in our cash balances from June 30,
2011, has resulted primarily from cash generated from operations. We currently
believe that our cash and credit facilities described below are sufficient to
fund our current operations for at least the next four quarters.
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. We have invested surplus cash in Korea in short-term investment
accounts at Korean banking institutions. In addition, we are required to invest
the interest payable under our Korean debt facilities due in the next six months
in an interest reserve account in Korea.
Historically,
we have financed most of our operations, research and development, working
capital, capital expenditures and acquisitions through our internally generated
cash. When considering whether to borrow under our financing facilities, we
consider the cost of capital, cost of financing, opportunity cost of utilizing
surplus cash and availability of tax efficient structures to moderate financing
costs.
We
have a South African short-term credit facility of approximately ZAR 250 million
($31.6 million) which remained fully undrawn as of September 30, 2011.
As
of September 30, 2011, we had outstanding long-term debt of 130.5 billion KRW
(approximately $110.8 million translated at exchange rates applicable as of
September 30, 2011) under credit facilities with a group of Korean banks. The
loans bear interest at the Korean CD rate in effect from time to time (3.59% as
of September 30, 2011) plus a margin of 4.10% . Semi-annual principal payments
of approximately $6.9 million (translated at exchange rates applicable as of
September 30, 2011) are due commencing in October 2011, with final maturity
scheduled for October 2015.
34
Cash
flows from operating activities
First
quarter of fiscal 2012
Net
cash provided by operating activities for the first quarter of fiscal 2012 was
$27.2 million (ZAR 193.1 million) compared to $30.2 million (ZAR 223.2 million)
for the first quarter of fiscal 2011. The decrease resulted from the reductions
of interest income and increased interest expense as described above and tax
payment more than offsetting an increase in cash resulting from increased
operating activities.
During
the first quarter of fiscal 2012, we paid South African tax of $3.4 million (ZAR
25.5 million) related to our 2011 tax year and provisional Korean taxes of $0.5
million related to our tax year ended December 31, 2011. During the first
quarter of fiscal 2011, we made South African tax payments of $1.8 million (ZAR
12.7 million) related to our 2010 tax year.
Taxes
paid during the first quarter of fiscal 2012 and 2011 were as follows:
Table 13
|
|
Quarter
ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
$
|
|
|
$
|
|
|
ZAR
|
|
|
ZAR
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxation paid related to prior years
|
|
3,401
|
|
|
1,774
|
|
|
25,461
|
|
|
12,716
|
|
Taxation refunds received
|
|
(157
|
)
|
|
(172
|
)
|
|
(1,065
|
)
|
|
(1,302
|
)
|
Total South African
taxes paid
|
|
3,244
|
|
|
1,602
|
|
|
24,396
|
|
|
11,414
|
|
Foreign taxes paid:
Korea
|
|
537
|
|
|
-
|
|
|
3,810
|
|
|
-
|
|
Total
tax paid
|
|
3,781
|
|
|
1,602
|
|
|
28,206
|
|
|
11,414
|
|
We
expect to pay our first provisional payments in South Africa related to our 2012
tax year in the second quarter of fiscal 2012.
Cash
flows from investing activities
First
quarter of fiscal 2012
Cash
used in investing activities for the first quarter of fiscal 2012 includes
capital expenditure of $4.5 million (ZAR 31.7 million), primarily for the
acquisition of payment processing terminals in Korea, POS devices to service our
merchant acquiring system in South Africa and payment vehicles to service
pension and welfare beneficiaries.
We
received principal loan repayments from SmartSwitch Namibia of $0.03 million and
$0.4 million during the first quarter of fiscal 2012 and 2011, respectively.
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. In July 2010, we provided additional loan funding to VTU Colombia of
approximately $0.4 million.
Cash
flows from financing activities
First
quarter of fiscal 2012
During
the first quarter of fiscal 2012, we acquired 180,656 shares of our common stock
for $1.1 million.
There
were no significant cash flows from financing activities during the first
quarter of fiscal 2011.
Off-Balance Sheet Arrangements
We
have no off-balance sheet arrangements.
Capital Expenditures
We
operate in an environment where the payment of social welfare grants requires
substantial capital investment to establish an operational infrastructure when a
contract commences. Further capital investment is required when the number of
beneficiaries increases to the point where the maximum capacity of the original
infrastructure is exceeded.
35
Our
capital expenditures for the first quarter of fiscal 2012 and 2011 are discussed
under Liquidity and Capital ResourcesCash flows from investing activities.
All
of our capital expenditures for the past three fiscal years were funded through
internally generated funds. We had outstanding capital commitments as of
September 30, 2011, of $1.7 million related mainly to computer equipment ordered
in order to maintain and expand activities. We anticipate that capital spending
for the second quarter of fiscal 2012 will relate primarily to on-going
replacement of equipment used to administer and distribute social welfare
grants, provide a switching service through EasyPay and expand our operations in
Korea. We expect to fund these expenditures through internally generated
funds.
Contingent Liabilities, Commitments and Contractual
Obligations
The
following table sets forth our contractual obligations as of September 30,
2011:
Table 14
|
|
Payments
due by Period, as of September 30, 2011 (in $ 000s)
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
than 1
|
|
|
1-3
|
|
|
3-5
|
|
|
than 5
|
|
|
|
Total
|
|
|
year
|
|
|
years
|
|
|
years
|
|
|
years
|
|
Long-term debt obligations (A)
|
$
|
132,141
|
|
$
|
21,012
|
|
$
|
39,085
|
|
$
|
72,044
|
|
$
|
-
|
|
Operating lease obligations
|
|
4,317
|
|
|
2,438
|
|
|
1,177
|
|
|
702
|
|
|
-
|
|
Purchase obligations
|
|
5,646
|
|
|
5,646
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other long-term obligations
|
|
1,417
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,417
|
|
Total
|
$
|
143,521
|
|
$
|
29,096
|
|
$
|
40,262
|
|
$
|
72,746
|
|
$
|
1,417
|
|
(A)
- Includes $110.8 million of long-term debt discussed under Liquidity and
capital resources and includes
interest
payable at the rate applicable as of September 30, 2011.
36
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
In
addition to the tables below, see note 6 to the unaudited condensed consolidated
financial statements for a discussion of market risk.
The
following table illustrates the effect on our annual expected interest charge,
translated at exchange rates applicable as of September 30, 2011, as a result of
a change in the Korean CD rate. The effects of a hypothetical 1% increase and a
1% decrease in the Korean CD rate as of September 30, 2011, is shown. The
selected 1% hypothetical change does not reflect what could be considered the
best or worst case scenarios.
|
|
As
of September 30, 2011
|
|
Table 15
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
annual
|
|
|
|
|
|
|
|
|
|
expected
|
|
|
|
Annual
|
|
|
|
|
|
interest charge
|
|
|
|
expected
|
|
|
Hypothetical
|
|
|
after change in
|
|
|
|
interest
|
|
|
change in
|
|
|
Korean CD
|
|
|
|
charge
|
|
|
Korean CD
|
|
|
rate
|
|
|
|
($ 000)
|
|
|
rate
|
|
|
($ 000)
|
|
Interest on Korean long-term debt
|
|
8,521
|
|
|
1%
|
|
|
9,629
|
|
|
|
|
|
|
(1)%
|
|
|
7,413
|
|
The following table summarizes our exchange-traded equity securities with equity
price risk as of September 30, 2011. The effects of a hypothetical 10% increase
and a 10% decrease in market prices as of September 30, 2011, 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, 2011
|
|
Table 16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
7,056
|
|
|
10%
|
|
|
7,762
|
|
|
0.23%
|
|
|
|
|
|
|
(10)%
|
|
|
6,350
|
|
|
(0.23)%
|
|
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, 2011. 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, 2011.
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, 2011, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
37
Part II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
The
table below presents information relating to purchases of our common stock
during the first quarter of fiscal 2012:
|
|
|
|
|
|
|
|
(c)
|
|
|
(d)
|
|
|
|
|
|
|
|
|
|
Total number
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
of shares
|
|
|
dollar value
|
|
|
|
|
|
|
|
|
|
purchased as
|
|
|
of shares that
|
|
|
|
|
|
|
(b)
|
|
|
part of
|
|
|
may yet be
|
|
|
|
(a)
|
|
|
Average price
|
|
|
publicly
|
|
|
purchased
|
|
|
|
Total number
|
|
|
paid per
|
|
|
announced
|
|
|
under the
|
|
|
|
of shares
|
|
|
share
|
|
|
plans or
|
|
|
plans or
|
|
Period
|
|
purchased
|
|
|
(US dollars)
|
|
|
programs
|
|
|
programs
(1)
|
|
July 2011
|
|
-
|
|
|
-
|
|
|
-
|
|
|
98,977,410
|
|
August 2011
|
|
-
|
|
|
-
|
|
|
-
|
|
|
98,977,410
|
|
September 2011
|
|
180,656
|
|
|
6.25
|
|
|
180,656
|
|
|
97,848,570
|
|
Total
|
|
180,656
|
|
|
|
|
|
180,656
|
|
|
|
|
(1)
On February 5, 2010, we announced that our Board of Directors had authorized the
repurchase of up to $50 million of our common stock from time to time in open
market transactions. On May 5, 2010, we announced that our Board of Directors
had increased this authorization to an aggregate of up to $100 million. The
authorization has no expiration date.
Item 6. Exhibits
The
following exhibits are filed as part of this Form 10-Q:
*
Filed herewith.
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 October 27, 2011.
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
38
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