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, 2012
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 November 8, 2012 (the latest practicable date), 45,600,471
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,
|
|
|
|
2012
|
|
|
2012
|
|
|
|
(In thousands, except share data)
|
|
ASSETS
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
57,544
|
|
$
|
39,123
|
|
Pre-funded social welfare grants receivable
(Note 3)
|
|
8,971
|
|
|
9,684
|
|
Accounts receivable, net
of allowances of September: $955; June: $788
|
|
99,703
|
|
|
101,918
|
|
Finance loans receivable
|
|
6,787
|
|
|
8,141
|
|
Deferred expenditure on
smart cards
|
|
4,604
|
|
|
4,587
|
|
Inventory (Note 4)
|
|
7,129
|
|
|
6,192
|
|
Deferred income taxes
|
|
6,223
|
|
|
5,591
|
|
Total current
assets before settlement assets
|
|
190,961
|
|
|
175,236
|
|
Settlement assets (Note 5)
|
|
347,672
|
|
|
409,166
|
|
Total current assets
|
|
538,633
|
|
|
584,402
|
|
PROPERTY, PLANT AND EQUIPMENT, NET OF ACCUMULATED
|
|
|
|
|
|
|
DEPRECIATION OF September: $80,058; June: $74,242
|
|
54,475
|
|
|
52,616
|
|
EQUITY-ACCOUNTED INVESTMENTS (Note 6)
|
|
1,571
|
|
|
1,508
|
|
GOODWILL (Note 7)
|
|
187,570
|
|
|
182,737
|
|
INTANGIBLE ASSETS, net (Note 7)
|
|
93,327
|
|
|
93,930
|
|
OTHER LONG-TERM ASSETS, including reinsurance assets (Note
8)
|
|
40,570
|
|
|
40,700
|
|
TOTAL ASSETS
|
|
916,146
|
|
|
955,893
|
|
LIABILITIES
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
Accounts payable
|
|
14,722
|
|
|
13,172
|
|
Other payables
|
|
40,209
|
|
|
42,157
|
|
Current portion of long-term borrowings
(Note 10)
|
|
14,438
|
|
|
14,019
|
|
Income taxes payable
|
|
11,542
|
|
|
6,019
|
|
Total current
liabilities before settlement obligations
|
|
80,911
|
|
|
75,367
|
|
Settlement obligations (Note 5)
|
|
347,672
|
|
|
409,166
|
|
Total current liabilities
|
|
428,583
|
|
|
484,533
|
|
DEFERRED INCOME TAXES
|
|
21,065
|
|
|
20,988
|
|
LONG-TERM BORROWINGS (Note 10)
|
|
82,145
|
|
|
79,760
|
|
OTHER LONG-TERM LIABILITIES, including insurance
policy liabilities (Note 8)
|
|
25,998
|
|
|
25,791
|
|
TOTAL LIABILITIES
|
|
557,791
|
|
|
611,072
|
|
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: 45,600,471;
June:
45,548,902
|
|
59
|
|
|
59
|
|
PREFERRED STOCK
|
|
|
|
|
|
|
Authorized
shares: 50,000,000 with $0.001 par value;
Issued
and outstanding shares, net of treasury: September: -; June: -
|
|
-
|
|
|
-
|
|
ADDITIONAL PAID-IN-CAPITAL
|
|
155,895
|
|
|
153,360
|
|
TREASURY SHARES, AT COST:
September: 13,455,090; June: 13,455,090
|
|
(175,823
|
)
|
|
(175,823
|
)
|
ACCUMULATED OTHER COMPREHENSIVE LOSS
|
|
(71,467
|
)
|
|
(75,722
|
)
|
RETAINED EARNINGS
|
|
446,385
|
|
|
439,641
|
|
TOTAL NET1
EQUITY
|
|
355,049
|
|
|
341,515
|
|
NON-CONTROLLING
INTEREST
|
|
3,306
|
|
|
3,306
|
|
TOTAL EQUITY
|
|
358,355
|
|
|
344,821
|
|
TOTAL LIABILITIES
AND SHAREHOLDERS EQUITY
|
$
|
916,146
|
|
$
|
955,893
|
|
(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,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
REVENUE
|
$
|
111,682
|
|
$
|
99,926
|
|
|
|
|
|
|
|
|
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods
sold, IT processing, servicing and support
|
|
45,101
|
|
|
32,944
|
|
|
|
|
|
|
|
|
Selling,
general and administration
|
|
47,252
|
|
|
27,057
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
10,004
|
|
|
9,079
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
9,325
|
|
|
30,846
|
|
|
|
|
|
|
|
|
INTEREST INCOME
|
|
3,091
|
|
|
1,997
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
2,071
|
|
|
2,616
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
10,345
|
|
|
30,227
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE (note 16)
|
|
3,729
|
|
|
10,552
|
|
|
|
|
|
|
|
|
NET INCOME BEFORE EARNINGS FROM EQUITY- ACCOUNTED
INVESTMENTS
|
|
6,616
|
|
|
19,675
|
|
|
|
|
|
|
|
|
EARNINGS FROM EQUITY-ACCOUNTED INVESTMENTS
(note 6)
|
|
128
|
|
|
85
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
6,744
|
|
|
19,760
|
|
|
|
|
|
|
|
|
LESS (ADD) NET INCOME (LOSS) ATTRIBUTABLE TO
NON-CONTROLLING INTEREST
|
|
-
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO NET1
|
$
|
6,744
|
|
$
|
19,768
|
|
|
|
|
|
|
|
|
Net income per share, in United States
dollars
(note 13)
|
|
|
|
|
|
|
Basic earnings attributable
to Net1 shareholders
|
$
|
0.15
|
|
$
|
0.44
|
|
Diluted earnings
attributable to Net1 shareholders
|
$
|
0.15
|
|
$
|
0.44
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
3
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Comprehensive Income
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Net income
|
$
|
6,744
|
|
$
|
19,760
|
|
|
|
|
|
|
|
|
Movement in
foreign currency translation reserve
|
|
4,255
|
|
|
(37,605
|
)
|
Total other comprehensive income (loss), net of taxes
|
|
4,255
|
|
|
(37,605
|
)
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
10,999
|
|
|
(17,845
|
)
|
Less: (Less) Add comprehensive (gain) loss attributable to non-controlling
interest
|
|
-
|
|
|
135
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to Net1
|
$
|
10,999
|
|
$
|
(17,710
|
)
|
Certain amounts for the three months ended September 30, 2011,
have been reclassified to reflect the appropriate attribution of net income and
other movements between Net1 and its non-controlling interest.
See Notes to Unaudited Condensed Consolidated Financial
Statements
4
NET 1 UEPS
TECHNOLOGIES,
INC.
Unaudited
Condensed
Consolidated
Statement
of Changes in Equity (dollar
amounts
in
thousands)
|
|
Net 1 UEPS Technologies, Inc. Shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other
|
|
|
Total
|
|
|
Non-
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Paid-In
|
|
|
Retained
|
|
|
comprehensive
|
|
|
Net1
|
|
|
controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Earnings
|
|
|
(loss) income
|
|
|
Equity
|
|
|
Interest
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2012
|
|
59,003,992
|
|
$
|
59
|
|
|
(13,455,090
|
)
|
$
|
(175,823
|
)
|
$
|
153,360
|
|
$
|
439,641
|
|
$
|
(75,722
|
)
|
$
|
341,515
|
|
$
|
3,306
|
|
$
|
344,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
|
|
21,569
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of options by holders
|
|
30,000
|
|
|
-
|
|
|
|
|
|
|
|
|
240
|
|
|
|
|
|
|
|
|
240
|
|
|
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,116
|
|
|
|
|
|
|
|
|
1,116
|
|
|
|
|
|
1,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilization of APIC pool related to vested
restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pbel acquisition (Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,184
|
|
|
|
|
|
|
|
|
1,184
|
|
|
|
|
|
1,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,744
|
|
|
|
|
|
6,744
|
|
|
-
|
|
|
6,744
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in foreign
currency translation reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,255
|
|
|
4,255
|
|
|
|
|
|
4,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2012
|
|
59,055,561
|
|
$
|
59
|
|
|
(13,455,090
|
)
|
$
|
(175,823
|
)
|
$
|
155,895
|
|
$
|
446,385
|
|
$
|
(71,467
|
)
|
$
|
355,049
|
|
$
|
3,306
|
|
$
|
358,355
|
|
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,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income
|
$
|
6,744
|
|
$
|
19,760
|
|
Depreciation and amortization
|
|
10,004
|
|
|
9,079
|
|
Loss from equity-accounted investments
|
|
(128
|
)
|
|
(85
|
)
|
Fair value adjustments
|
|
(293
|
)
|
|
(221
|
)
|
Interest payable
|
|
1,192
|
|
|
1,662
|
|
Profit on disposal of property, plant and equipment
|
|
-
|
|
|
(8
|
)
|
Profit on liquidation of SmartSwitch Nigeria
|
|
-
|
|
|
(3,994
|
)
|
Realized loss on sale of investments related to insurance business
|
|
-
|
|
|
25
|
|
Stock-based compensation charge
|
|
1,116
|
|
|
496
|
|
Facility fee amortized
|
|
88
|
|
|
116
|
|
Decrease in accounts receivable, pre-funded
social welfare grants receivable and finance loans receivable
|
|
5,892
|
|
|
3,248
|
|
(Increase) Decrease in deferred expenditure on smart cards
|
|
(33
|
)
|
|
44
|
|
Increase in inventory
|
|
(926
|
)
|
|
(319
|
)
|
(Decrease ) Increase in accounts payable and other payables
|
|
(1,349
|
)
|
|
331
|
|
Increase (Decrease) in taxes payable
|
|
5,438
|
|
|
(3,607
|
)
|
(Decrease) Increase in deferred taxes
|
|
(2,016
|
)
|
|
692
|
|
Net cash provided by operating
activities
|
|
25,729
|
|
|
27,219
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Capital expenditures
|
|
(6,453
|
)
|
|
(4,466
|
)
|
Proceeds from disposal of property, plant and
equipment
|
|
105
|
|
|
94
|
|
Acquisition of Pbel, net of cash acquired
|
|
(1,913
|
)
|
|
-
|
|
Acquisition of Smart Life, net of cash acquired
|
|
-
|
|
|
(1,673
|
)
|
Repayment of loan by equity-accounted investment
|
|
3
|
|
|
33
|
|
Purchase of investments related to insurance
business
|
|
-
|
|
|
(2,320
|
)
|
Proceeds from maturity of investments related to insurance
business
|
|
545
|
|
|
2,321
|
|
Net change in settlement assets
|
|
60,779
|
|
|
3,447
|
|
Net cash provided by (used in) investing activities
|
|
53,066
|
|
|
(2,564
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Proceeds from issue of common stock
|
|
240
|
|
|
-
|
|
Acquisition of treasury stock
|
|
-
|
|
|
(1,129
|
)
|
Net change in settlement obligations
|
|
(60,779
|
)
|
|
(3,447
|
)
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
(60,539
|
)
|
|
(4,576
|
)
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
165
|
|
|
(13,360
|
)
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
18,421
|
|
|
6,719
|
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning
of period
|
|
39,123
|
|
|
95,264
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of
period
|
$
|
57,544
|
|
$
|
101,983
|
|
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, 2012 and 2011
(All amounts in tables stated in thousands or 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, 2012 and 2011, 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, 2012. 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.
Recent
accounting pronouncements adopted
In
September 2011, the Financial Accounting Standards Board 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 is not 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 Company adopted this guidance
beginning July 1, 2012. The adoption of this guidance did not have a significant
impact on the Companys condensed consolidated financial statements.
Recent
accounting pronouncements not yet adopted as of September 30, 2012
There
were no new accounting pronouncements not yet adopted by the Company during the
three months ended September 30, 2012.
7
2.
Acquisitions
Pbel
Proprietary Limited (Pbel)
On
September 14, 2012, the Company acquired all of the outstanding and issued
ordinary shares in Pbel, a South African private company, for ZAR 33 million
(approximately $3.8 million). ZAR 23 million of the purchase price was paid in
cash and the remaining ZAR 10 million will be paid in 142,236 shares of the
Companys common stock, subject to the achievement of predefined Pbel financial
performance milestones over the next three years. The Company is entitled to
vote 100% of the outstanding and issued shares of Pbel. The 142,236 shares are
divided into three equal tranches of 47,412 shares and the sellers will be
entitled to receive the shares for each tranche only if the milestones for that
particular tranche are achieved. However, the sellers will be entitled to
receive all 142,236 shares if the cumulative predefined Pbel projected profit
over the next three years is achieved or if the Company decides to abandon its
Mobile Virtual Card initiative.
The
Company had historically engaged the services of Pbel to perform software
development services, primarily software utilized on mobile phones and by
cash-accepting kiosks. All software developed was the Companys property. Prior
to the acquisition, Pbel was jointly owned by the Companys chief executive
officer, Dr. Serge Belamant and his son, Mr. Philip Marc Belamant. Dr. Belamant
is a non-employee director of Pbel and Mr. Philip Marc Belamant is its chief
executive officer. Prior to the acquisition, Mr. Philip Marc Belamant was not
employed by the Company.
The
Company believes that the acquisition of Pbel is important in the execution of
its strategy to commercialize and develop its world-wide virtual card patents
and to supply secure, leading edge technological solutions to the global
payments market with particular focus on mobile-based payment solutions. Mr.
Philip Marc Belamant, in his new position as Managing Director of Mobile
Solutions, will oversee the Companys Mobile Virtual Card, Kiosk, Web and WAP
application research and development activities as well as related global
business development initiatives.
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
|
$
|
731
|
|
Accounts receivable, net
|
|
152
|
|
Other current assets
|
|
10
|
|
Property, plant and equipment, net
|
|
92
|
|
Intangible assets (Note 7)
|
|
1,785
|
|
Goodwill (Note 7)
|
|
1,691
|
|
Other payables
|
|
(41
|
)
|
Income taxes payable
|
|
(91
|
)
|
Deferred tax liabilities
|
|
(500
|
)
|
Total
purchase price
|
$
|
3,829
|
|
The
preliminary purchase price allocation is based on management estimates as of
September 30, 2012, 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, 2013.
Pro
forma results of operations have not been presented because the effect of the
Pbel acquisition, individually and in the aggregate, was not material to the
Companys results of operations. During the three months ended September 30,
2012, the Company incurred acquisition-related expenditure of $0.05 million.
Since the closing of the acquisition, Pbel has contributed revenue and incurred
a net loss, after acquired intangible asset amortization, net of taxation, of
$0.1 million and 0.02 million, respectively.
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
2012 payment service commenced on October 1, 2012, but the Company pre-funded
certain merchants participating in the merchant acquiring systems in the last
two days of September 2012.
8
4.
Inventory
The
Companys inventory comprised the following categories as of September 30, 2012
and June 30, 2012.
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2012
|
|
|
2012
|
|
Raw materials
|
$
|
30
|
|
$
|
30
|
|
Finished goods
|
|
7,099
|
|
|
6,162
|
|
|
$
|
7,129
|
|
$
|
6,192
|
|
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.
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.
The
balances at each reporting date may vary widely depending on the timing of the
receipts and payments of these assets and obligations
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, 2012
None.
As
of June 30, 2012
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.
9
6.
Fair
value of financial instruments and equity-accounted investments (continued)
Fair
value of financial instruments (continued)
Risk
management (continued)
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.
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 156,788,712 shares of common
stock of Finbond, which are exchange-traded equity securities. 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 relate primarily to the provision of microlending
products. 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.
The
fair value of these securities as of September 30, 2012, represented
approximately 1% of the Companys total assets, including these securities.
10
6.
Fair
value of financial instruments and equity-accounted investments (continued)
The
following table presents the Companys assets and liabilities measured at fair
value on a recurring basis as of September 30, 2012 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
|
$
|
2,111
|
|
$
|
-
|
|
$
|
-
|
|
$
|
2,111
|
|
|
Investment in Finbond
(available for sale assets
included in other
long-term assets)
|
|
-
|
|
|
-
|
|
|
8,648
|
|
|
8,648
|
|
|
Other
|
|
-
|
|
|
880
|
|
|
-
|
|
|
880
|
|
|
Total
assets at fair value
|
$
|
2,111
|
|
$
|
880
|
|
$
|
8,648
|
|
$
|
11,639
|
|
The
following table presents the Companys assets and liabilities measured at fair
value on a recurring basis as of June 30, 2012, 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
|
$
|
2,628
|
|
$
|
-
|
|
$
|
-
|
|
$
|
2,628
|
|
|
Investment in Finbond
(available for sale assets
included in other
long-term assets)
|
|
-
|
|
|
-
|
|
|
8,679
|
|
|
8,679
|
|
|
Other
|
|
-
|
|
|
262
|
|
|
-
|
|
|
262
|
|
|
Total
assets at fair value
|
$
|
2,628
|
|
$
|
262
|
|
$
|
8,679
|
|
$
|
11,569
|
|
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.
Equity-accounted
investments
During
the three months ended September 30, 2012, SmartSwitch Namibia repaid its final
installment related to its outstanding loans and interest. The repayments
received have been allocated to the equity-accounted investments presented in
the Companys condensed consolidated balance sheet. 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, 2012.
11
6.
Fair
value of financial instruments and equity-accounted investments (continued)
Equity-accounted
investments (continued)
Summarized
below is the Companys interest in equity-accounted investments as of June 30,
2012 and September 30, 2012:
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Loans
|
|
|
(Loss)
|
|
|
Elimination
|
|
|
|
Total
|
|
Balance as of June 30, 2012
|
$
|
3,518
|
|
$
|
1,419
|
|
$
|
(3,411
|
)
|
$
|
(18
|
)
|
|
$
|
1,508
|
|
Loan repaid
|
|
-
|
|
|
(3
|
)
|
|
-
|
|
|
-
|
|
|
|
(3
|
)
|
Interest repaid
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(53
|
)
|
|
|
(53
|
)
|
Earnings from equity-accounted investments
|
|
-
|
|
|
-
|
|
|
123
|
|
|
5
|
|
|
|
128
|
|
SmartSwitch
Namibia
(1)
|
|
-
|
|
|
-
|
|
|
83
|
|
|
5
|
|
|
|
88
|
|
SmartSwitch
Botswana
(1)
|
|
-
|
|
|
-
|
|
|
40
|
|
|
-
|
|
|
|
40
|
|
Foreign currency
adjustment
(2)
|
|
(14
|
)
|
|
1
|
|
|
3
|
|
|
1
|
|
|
|
(9
|
)
|
Balance as of September 30, 2012
|
$
|
3,504
|
|
$
|
1,417
|
|
$
|
(3,285
|
)
|
$
|
(65
|
)
|
|
$
|
1,571
|
|
(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, 2012 and 2011.
7.
Goodwill
and intangible assets
Goodwill
Summarized
below is the movement in the carrying value of goodwill for the three months
ended September 30, 2012:
|
|
Carrying
|
|
|
|
value
|
|
|
|
|
|
Balance as of June 30, 2012
|
$
|
182,737
|
|
Acquisition of Pbel (Note 2)
|
|
1,691
|
|
Foreign currency
adjustment
(1)
|
|
3,142
|
|
Balance as
of September 30, 2012
|
$
|
187,570
|
|
(1) the foreign currency adjustment represents the effects of the fluctuations
between the South African rand and the Korean won, and the US dollar on the
carrying value.
Goodwill
associated with the acquisition of Pbel represents the excess of cost over the
fair value of acquired net assets. The Pbel goodwill is not deductible for tax
purposes. See Note 2 for the allocation of the purchase price to the fair value
of acquired net assets. Pbel has been allocated to our South African
transaction-based activities operating segment.
Goodwill
has been allocated to the Companys reportable segments as follows:
|
|
As of
|
|
|
As of
|
|
|
|
September
|
|
|
June 30,
|
|
|
|
30, 2012
|
|
|
2012
|
|
|
|
|
|
|
|
|
SA transaction-based
activities
|
$
|
36,286
|
|
$
|
34,692
|
|
International transaction-based activities
|
|
115,142
|
|
|
111,798
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
Hardware, software and
related technology sales
|
|
36,142
|
|
|
36,247
|
|
Total
|
$
|
187,570
|
|
$
|
182,737
|
|
12
7.
Goodwill
and intangible assets (continued)
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, 2012 and June 30, 2012:
|
|
|
As
of September 30, 2012
|
|
|
As
of June 30, 2012
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships(1)
|
$
|
94,915
|
|
$
|
(25,178
|
)
|
$
|
69,737
|
|
$
|
91,692
|
|
$
|
(22,617
|
)
|
$
|
69,075
|
|
|
Software and unpatented
technology(1)
|
|
37,427
|
|
|
(18,445
|
)
|
|
18,982
|
|
|
36,082
|
|
|
(15,968
|
)
|
|
20,114
|
|
|
FTS patent
|
|
4,607
|
|
|
(4,607
|
)
|
|
-
|
|
|
4,623
|
|
|
(4,623
|
)
|
|
-
|
|
|
Exclusive licenses
|
|
4,506
|
|
|
(4,506
|
)
|
|
-
|
|
|
4,506
|
|
|
(4,506
|
)
|
|
-
|
|
|
Trademarks
|
|
7,222
|
|
|
(2,675
|
)
|
|
4,547
|
|
|
7,125
|
|
|
(2,507
|
)
|
|
4,618
|
|
|
Customer database
|
|
731
|
|
|
(670
|
)
|
|
61
|
|
|
734
|
|
|
(611
|
)
|
|
123
|
|
|
Total finite-lived intangible assets
|
$
|
149,408
|
|
$
|
(56,081
|
)
|
$
|
93,327
|
|
$
|
144,762
|
|
$
|
(50,832
|
)
|
$
|
93,930
|
|
(1)
Includes the customer relationships and software and unpatented technology
acquired as part of the Pbel acquisition in September 2012.
Aggregate
amortization expense on the finite-lived intangible assets for the three months
ended September 30, 2012, was approximately $4.7 million (three months ended
September 30, 2011, was approximately $4.8, respectively).
Future
estimated annual amortization expense for the next five fiscal years, assuming
exchange rates prevailing on September 30, 2012, 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.
2013
|
$
|
17,815
|
|
2014
|
|
15,644
|
|
2015
|
|
15,583
|
|
2016
|
|
11,141
|
|
2017
|
|
8,733
|
|
Thereafter
|
$
|
29,128
|
|
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, 2012:
|
|
|
September 30, 2012
|
|
|
|
|
Reinsurance
|
|
|
Insurance
|
|
|
|
|
assets (1)
|
|
|
contracts (2)
|
|
|
Balance as of June 30, 2012
|
$
|
23,595
|
|
$
|
(23,701
|
)
|
|
Foreign currency adjustment
(3)
|
|
(83
|
)
|
|
83
|
|
|
Balance as of September
30, 2012
|
$
|
23,512
|
|
$
|
(23,618
|
)
|
|
(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.
|
13
8.
Reinsurance
assets and policy holder liabilities under insurance and investment contracts
(continued)
Reinsurance
assets and policy holder liabilities under insurance contracts (continued)
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), 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) and claim reporting delays
(based on average industry experience).
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, 2012:
|
|
September 30, 2012
|
|
|
|
|
|
|
Investment
|
|
|
|
Assets (1)
|
|
|
contracts (2)
|
|
Balances as of June 30, 2012
|
$
|
1,109
|
|
$
|
(1,109
|
)
|
Foreign currency adjustment
(3)
|
|
(4
|
)
|
|
4
|
|
Balance as of September
30, 2012
|
$
|
1,105
|
|
$
|
(1,105
|
)
|
|
(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 facility
The
Company has a ZAR 250 million ($30.1 million, translated at exchange rates
applicable as of September 30, 2012) short-term South African credit facility.
As of September 30, 2012, the overdraft rate on this facility was 7.85% . The
Company has ceded its investment in Cash Paymaster Services (Proprietary)
Limited, a wholly owned South African subsidiary, as security for the facility.
As of September 30, 2012, and June 30, 2012, 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.
10. Long-term borrowings
The
Companys KRW 108.7 billion ($96.6 million, translated at exchange rates
applicable as of September 30, 2012) 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, 2012. The
current carrying value as of September 30, 2012, is $96.6 million. As of
September 30, 2012, the carrying amount of the long-term borrowings approximated
fair value. The interest rate in effect on September 30, 2012, was 7.64% .
Interest expense during the three months ended September 30, 2012 and 2011,
respectively, was $1.87 million and $2.4 million.
The
third and fourth scheduled principal repayments are $7.2 million each,
translated at exchange rates applicable as of September 30, 2012, and have been
classified as current in the Companys condensed consolidated balance sheet. The
third repayment was paid on October 29, 2012 and the fourth repayment is due on
April 29, 2013.
11. Capital structure
Common
stock repurchases
The
Company did not repurchase any of its shares during the three months ended September
30, 2012. The Company repurchased 180,656 shares during the three months ended
September 30, 2011, for approximately $1.1 million.
14
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, 2012:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
Grant
|
|
|
|
|
|
|
|
average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
Date Fair
|
|
|
|
|
Number of
|
|
|
exercise
|
|
|
Term
|
|
|
Value
|
|
|
Value
|
|
|
|
|
shares
|
|
|
price
|
|
|
(in years)
|
|
|
($000)
|
|
|
($000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2012
|
|
2,247,583
|
|
$
|
16.28
|
|
|
6.43
|
|
$
|
602
|
|
|
|
|
|
Granted under Plan: August 2012
|
|
431,000
|
|
|
8.75
|
|
|
10.0
|
|
|
1,249
|
|
$
|
2.90
|
|
|
Exercised
|
|
(30,000
|
)
|
|
7.98
|
|
|
|
|
|
24
|
|
|
|
|
|
Outstanding September 30,
2012
|
|
2,648,583
|
|
$
|
15.15
|
|
|
6.74
|
|
$
|
978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2011
|
|
2,120,656
|
|
$
|
18.44
|
|
|
6.82
|
|
$
|
243
|
|
|
|
|
|
Granted under Plan: August 2011
|
|
165,000
|
|
|
6.59
|
|
|
10.0
|
|
|
297
|
|
$
|
1.80
|
|
|
Outstanding September 30,
2011
|
|
2,285,656
|
|
$
|
17.58
|
|
|
6.80
|
|
$
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These options have
an exercise price range of $6.59 to $24.46.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
1,428,916
|
|
$
|
18.93
|
|
|
5.3
|
|
$
|
394
|
|
|
|
|
During
the three months ended September 30, 2012, 85,000 stock options became
exercisable. Included in these 85,000 stock options are 30,000 stock options
with respect to which the Remuneration Committee of the Board agreed to
accelerate vesting prior to the resignation of a non-employee director. The
stock option vesting was accelerated in recognition of this directors long
service and valued contributions. No stock options became exercisable during the
three months ended September 30, 2011. During the three months ended September
30, 2012, the Company received approximately $0.2 million from 30,000 stock
options exercised by the non-employee director that resigned. No stock options
were exercised during the three months ended September 30, 2011. The Company
issues new shares to satisfy stock option exercises.
Restricted
stock
The
following table summarizes restricted stock activity for the three months ended
September 30, 2012 and 2011:
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Shares of
|
|
|
Grant Date
|
|
|
|
Restricted
|
|
|
Fair Value
|
|
|
|
Stock
|
|
|
($000)
|
|
Non-vested June 30, 2012
|
|
646,617
|
|
|
|
|
Granted August 2012
|
|
21,569
|
|
|
$189
|
|
Vested August 2012
|
|
(19,715
|
)
|
|
|
|
Non-vested - September
2012
|
|
648,471
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested June 30, 2011
|
|
103,672
|
|
|
|
|
Granted August 2011
|
|
30,155
|
|
|
$199
|
|
Vested August 2011
|
|
(6,157
|
)
|
|
|
|
Non-vested - September 2011
|
|
127,670
|
|
|
|
|
15
12. Stock-based compensation
(continued)
Stock
option and restricted stock activity (continued)
Restricted
stock (continued)
The
fair value of restricted stock vesting during the three months ended September
30, 2012 and 2011, respectively, was $0.2 million and $0.04 million. Included in
the 19,715 shares of restricted stock that vested during the three months ended
September 30, 2012, are 8,547 shares with respect to which the Remuneration
Committee of the Board agreed to accelerate vesting prior to the resignation of
a non-employee director. The restricted stock vesting was accelerated in
recognition of this directors long service and valued contributions.
Stock-based
compensation charge and unrecognized compensation cost
The
Company has recorded a stock compensation charge of $1.1 million and $0.5
million for the three months ended September 30, 2012 and 2011, respectively,
which comprised:
|
|
|
|
|
|
Allocated to cost
|
|
|
|
|
|
|
|
|
|
|
of goods sold, IT
|
|
|
Allocated to
|
|
|
|
|
|
|
|
processing,
|
|
|
selling, general
|
|
|
|
|
Total
|
|
|
servicing and
|
|
|
and
|
|
|
|
|
charge
|
|
|
support
|
|
|
administration
|
|
|
Three months ended September
30, 2012
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
1,116
|
|
$
|
-
|
|
$
|
1,116
|
|
|
Total three months ended September 30, 2012
|
$
|
1,116
|
|
$
|
-
|
|
$
|
1,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September
30, 2011
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
496
|
|
$
|
-
|
|
$
|
496
|
|
|
Total three months ended September 30, 2011
|
$
|
496
|
|
$
|
-
|
|
$
|
496
|
|
The
stock-based compensation charges have been allocated to selling, general and
administration based on the allocation of the cash compensation paid to the
employees.
As
of September 30, 2012, the total unrecognized compensation cost related to stock
options was approximately $1.9 million, which the Company expects to recognize
over approximately three years. As of September 30, 2012, the total unrecognized
compensation cost related to restricted stock awards was approximately $5.4
million, which the Company expects to recognize over approximately three years.
As
of September 30, 2012, the Company has recorded a deferred tax asset of
approximately $1.1 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. 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, 2012 and 2011,
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, 2012 and
2011, 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, 2012 and 2011, the vesting conditions in
respect of a portion of the awards had not been satisfied.
Options
to purchase 10,990,863 shares of the Companys common stock at prices ranging
from $7.98 to $24.46 per share were outstanding during the three months ended
September 30, 2012, but were not included in the computation of diluted earnings
per share because the options exercise prices were greater than the average
market price of the Companys common stock during the period. The options, which
expire at various dates through on August 22, 2022, and include the 8,955,000
equity instrument issued pursuant to BBBEE transaction, remained outstanding as
of September 30, 2012.
16
13. 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, 2012 and 2011:
|
|
|
Three months ended
|
|
|
|
|
September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
000
|
|
|
000
|
|
|
Weighted average number of outstanding shares
of common stock basic
|
|
45,515
|
|
|
45,056
|
|
|
Weighted average effect of dilutive securities: equity instruments
|
|
75
|
|
|
29
|
|
|
Weighted average number of outstanding shares
of common stock diluted
|
|
45,590
|
|
|
45,085
|
|
14. Supplemental cash flow
information
The
following table presents the supplemental cash flow disclosures for the three
months ended September 30, 2012 and 2011:
|
|
|
2012
|
|
|
2011
|
|
|
Cash received from interest
|
$
|
3,125
|
|
$
|
2,709
|
|
|
Cash paid for interest
|
$
|
2,000
|
|
$
|
3,128
|
|
|
Cash paid for income taxes
|
$
|
342
|
|
$
|
3,781
|
|
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 22 to the Companys audited consolidated financial statements
included in its Annual Report on Form 10-K for the year ended June 30, 2012.
The
following tables summarize segment information which is prepared in accordance
with GAAP:
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
|
|
|
|
|
SA transaction-based
activities
|
$
|
61,364
|
|
$
|
49,902
|
|
International transaction-based activities
|
|
31,649
|
|
|
30,255
|
|
Smart card accounts
|
|
8,364
|
|
|
8,252
|
|
Financial services
|
|
1,384
|
|
|
2,111
|
|
Hardware, software and
related technology sales
|
|
8,921
|
|
|
9,406
|
|
Total
|
|
111,682
|
|
|
99,926
|
|
Inter-company revenues
|
|
|
|
|
|
|
SA transaction-based activities
|
|
3,983
|
|
|
1,113
|
|
International transaction-based
activities
|
|
-
|
|
|
-
|
|
Smart card accounts
|
|
386
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
Hardware, software and related technology
sales
|
|
208
|
|
|
318
|
|
Total
|
|
4,577
|
|
|
1,431
|
|
Operating income (loss)
|
|
|
|
|
|
|
SA transaction-based
activities
|
|
6,400
|
|
|
20,183
|
|
International transaction-based activities
|
|
(171
|
)
|
|
684
|
|
Smart card accounts
|
|
2,385
|
|
|
3,750
|
|
Financial services
|
|
1,097
|
|
|
1,411
|
|
Hardware, software and
related technology sales
|
|
1,984
|
|
|
1,937
|
|
Corporate/Eliminations
|
|
(2,370
|
)
|
|
2,881
|
|
Total
|
$
|
9,325
|
|
$
|
30,846
|
|
17
15. Operating segments (continued)
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Interest earned
|
|
|
|
|
|
|
SA transaction-based
activities
|
$
|
-
|
|
$
|
-
|
|
International transaction-based activities
|
|
-
|
|
|
-
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
Hardware, software and
related technology sales
|
|
-
|
|
|
-
|
|
Corporate/Eliminations
|
|
3,091
|
|
|
1,997
|
|
Total
|
|
3,091
|
|
|
1,997
|
|
Interest expense
|
|
|
|
|
|
|
SA transaction-based
activities
|
|
143
|
|
|
76
|
|
International transaction-based activities
|
|
-
|
|
|
44
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
Hardware, software and
related technology sales
|
|
70
|
|
|
10
|
|
Corporate/Eliminations
|
|
1,858
|
|
|
2,486
|
|
Total
|
|
2,071
|
|
|
2,616
|
|
Depreciation and amortization
|
|
|
|
|
|
|
SA transaction-based
activities
|
|
3,141
|
|
|
2,142
|
|
International transaction-based activities
|
|
6,679
|
|
|
6,649
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
87
|
|
|
117
|
|
Hardware, software and
related technology sales
|
|
97
|
|
|
171
|
|
Corporate/Eliminations
|
|
-
|
|
|
-
|
|
Total
|
|
10,004
|
|
|
9,079
|
|
Income taxation expense (benefit)
|
|
|
|
|
|
|
SA transaction-based
activities
|
|
1,753
|
|
|
5,631
|
|
International transaction-based activities
|
|
(433
|
)
|
|
335
|
|
Smart card accounts
|
|
668
|
|
|
1,051
|
|
Financial services
|
|
312
|
|
|
394
|
|
Hardware, software and
related technology sales
|
|
438
|
|
|
440
|
|
Corporate/Eliminations
|
|
991
|
|
|
2,701
|
|
Total
|
|
3,729
|
|
|
10,552
|
|
Net income (loss)
|
|
|
|
|
|
|
SA transaction-based
activities
|
|
4,504
|
|
|
14,477
|
|
International transaction-based activities
|
|
343
|
|
|
433
|
|
Smart card accounts
|
|
1,716
|
|
|
2,700
|
|
Financial services
|
|
801
|
|
|
1,016
|
|
Hardware, software and
related technology sales
|
|
1,477
|
|
|
1,486
|
|
Corporate/Eliminations
|
|
(2,097
|
)
|
|
(344
|
)
|
Total
|
|
6,744
|
|
|
19,768
|
|
Expenditures for long-lived assets
|
|
|
|
|
|
|
SA transaction-based
activities
|
|
3,594
|
|
|
588
|
|
International transaction-based activities
|
|
2,703
|
|
|
3,751
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
145
|
|
|
73
|
|
Hardware, software and
related technology sales
|
|
11
|
|
|
54
|
|
Corporate/Eliminations
|
|
-
|
|
|
-
|
|
Total
|
$
|
6,453
|
|
$
|
4,466
|
|
The
segment information as reviewed by the chief operating decision maker does not
include a measure of segment assets per segment as all of the significant assets
are used in the operations of all, rather than any one, of the segments. The
Company does not have dedicated assets assigned to a particular operating segment.
Accordingly, it is not meaningful to attempt an arbitrary allocation and segment
asset allocation is therefore not presented.
It
is impractical to disclose revenues from external customers for each product and
service or each group of similar products and services.
18
16. Income tax
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, changes in tax law, valuation allowances and
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, 2012, 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, 2012, was 36.0%, as a result of an
increase in non-deductible expenses, including the transaction-related
expenditures, interest expense related to the Companys long-term Korean
borrowings and stock-based compensation charges. 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 and fewer
non-deductible expenses, including interest expense related to the Companys
long-term Korean borrowings.
Uncertain
tax positions
The
Company increased its unrecognized tax benefits by $1.1 million during the three
months ended September 30, 2012. As of September 30, 2012, the Company had
accrued interest related to uncertain tax positions of approximately $0.02
million on its balance sheet.
The
Company does not expect changes related to its 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, 2012,
the Company is no longer subject to income tax examination by the South African
Revenue Service for years before September 30, 2009. 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, cash flows, or results of
operations.
19
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, 2012, 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, 2012 and Item 1ARisk Factors and elsewhere
in this Form 10-Q. In some cases, you can identify forward-looking statements by
terminology such as may, will, should, could, would, expects,
plans, intends, anticipates, believes, estimates, predicts,
potential or continue or the negative of such terms and other comparable
terminology.
Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we do not know whether we can achieve positive future results,
levels of activity, performance, or goals. Actual events or results may differ
materially. We undertake no obligation to update any of the forward-looking
statements after the date of this 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.
Recent Developments
South
Africa
SASSA
We
commenced the second phase of the enrollment process in early July 2012 and plan
to be substantially complete by March 2013, in accordance with the enrollment
plan agreed with SASSA. Under our agreement with SASSA, we have to enroll both
the grant recipients (those individuals who receive the actual payment and are
issued with our UEPS/EMV smart card), as well as the grant beneficiaries (those
individuals who have qualified for the social grant, but are not necessarily the
recipient of the grant). By way of example, a parent who has three children and
receives a grant for all three children is the grant recipient, while the three
children are each classified individually as grant beneficiaries. In this case,
we capture the personal and biometric information of the parent and three
children, but only the parent is issued with an UEPS/EMV smart card. While the
number of grant recipients on a national basis has consistently been quantified
by SASSA at 9.4 million individuals, the number of beneficiaries is continually
being revised by SASSA on an ongoing basis from an initial estimate of
approximately 15.5 million, to the current estimate of approximately 21.6
million. As of September 30, 2012, we had enrolled approximately 1.7 million
grant recipients and 1.3 million beneficiaries associated with these recipients
in accordance with our second phase enrollment schedule, and issued them our
UEPS/EMV smart card. In order to complete the second phase of the implementation
on time, and given the significantly higher number of beneficiaries, we
increased the number of temporary employees from 2,500 to 5,500. The total
number of temporary employees we have hired is significantly more than the 2,500
we previously expected as the actual number of individuals (grant recipients
plus grant beneficiaries) that SASSA has asked us to enroll has increased
substantially and is currently estimated at 21.6 million, which is approximately
40% higher than the number originally anticipated. Once we have completed the
enrollment process, we expect to retain between 1,200 and 1,500 of these
temporary employees on a permanent basis. We do not receive additional
compensation for the enrollment of grant beneficiaries who are not otherwise
grant recipients because the pricing under our SASSA contract is based on the
number of grant recipients we pay, rather than the number of grant
beneficiaries.
See
also Results of operationsResults of operations by operating segmentSouth
African transaction-based activitiesKey statistics related to our pension and
welfare operations which presents additional information related to our
enrollment progress.
During
the first quarter of fiscal 2013 we incurred direct implementation expenses of
approximately $14.1 million (ZAR 116.6 million) including staff, travel,
premises hire for enrollment and stationery costs. We are unable to quantify the
value of time spent by our executives and pension and welfare operations
managers and staff that service the five provinces in which we operated under
the previous contract and that have assisted in the implementation of the
national award.
20
In
line with industry practice, we no longer amortize the cost of the smart cards
over the contract period and expense the cost of the card when issued on
enrollment. As a result of our decision to fully expense the UEPS/EMV smart
cards when they are issued, we expensed $1.7 million (ZAR 14.0 million) related
to the cost of the UEPS/EMV smart cards issued during the quarter, which is not
included in the $14.1 million (ZAR 116.6 million) above. We also incurred
approximately $3.3 million in capital expenditures, primarily to acquire payment
vehicles. Since inception of the implementation we have incurred cumulative
capital expenditures of $24.5 million. We anticipate cumulative capital
expenditures related to the ramp of our national contract to be in the $35
million range. We have lowered our expected capital expenditure range related to
the implementation of our SASSA contract given the decision to expense the cost
of smart cards rather than capitalize those costs.
See
Part II, Item 1Legal Proceedings for more information about legal proceedings
associated with our SASSA contract.
Acquisition
of Pbel
On
September 14, 2012, we acquired Pbel, a South African private company, for ZAR
33 million (approximately $3.8 million). ZAR 23 million of the purchase price
was paid in cash and the remaining ZAR 10 million will be paid in 142,236 shares
of our common stock, subject to the achievement of predefined Pbel financial
performance milestones over the next three years. We believe that the
acquisition of Pbel is an important step in the execution of our strategy to
commercialize and develop our world-wide virtual card patents and to supply
secure, leading edge technological solutions to the global payments market, with
particular focus on mobile-based payment solutions. Refer to Note 2 of our
condensed consolidated financial statements for additional information related
to this acquisition.
Outside
South Africa
XeoHealth
The
commencement of the recovery audit contractor, or RAC, services and desk review
recovery referrals identified through our XeoRules engine for Cognosante in
North Dakota was delayed due to our customer requesting changes to the criteria
which we deployed. We have incorporated these changes into our XeoRules engine
and commenced the auditing process, which covers five years of data in early
October 2012. We completed the audit in the last week of October 2012 and expect
to recognize revenues related to these activities in the second quarter of
fiscal 2013. We are currently unable to quantify the value of RAC service
revenues to be recognized.
XeoHealth
has also been subcontracted by Cognosante to provide both the automated audit
as well the analysis services as required by the RAC for the State of Missouri
Medicaid. We have recently completed the business rules and audit findings and
expect sign-off from Missouri which will enable us to commence performing services
in the third quarter of fiscal 2013. Similar to North Dakota, XeoHealth will
be compensated based on a percentage of the final recoveries identified by our
XeoRules claims re-adjudicating service for the audit period of three years,
as well as the desk review recovery referrals identified through our XeoRules
engine.
Mobile
Virtual Card
In
order to increase our efforts on the commercialization of our Mobile Virtual
Card initiative, we acquired Pbel during the first fiscal quarter of 2013, which
will now coordinate, support and grow our MVC activities globally. We
historically worked with Pbel on software development for our MVC and Kiosk
activities and this acquisition significantly enhances our technical team with
detailed product and market knowledge.
We
have also commenced software and system development to introduce VCPay along
with our partners in India and Spain in calendar 2013.
The
African Continent and Iraq
During
fiscal 2013, NUETS recorded revenue from transaction fees under its contract
with the government of Iraq.
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.
Our
partnership with MasterCard may also bring us additional business development
opportunities for current or future MasterCard member banks who seek the offline
and additional functionality incorporated in our new UEPS/EMV payment
technology.
21
Critical Accounting Policies
Our
unaudited condensed consolidated financial statements have been prepared in
accordance with US GAAP, which requires management to make estimates and
assumptions about future events that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities. As future
events and their effects cannot be determined with absolute certainty, the
determination of estimates requires managements judgment based on a variety of
assumptions and other determinants such as historical experience, current and
expected market conditions and certain scientific evaluation techniques.
Critical
accounting policies are those that reflect significant judgments or
uncertainties, and potentially may result in materially different results under
different assumptions and conditions. Management has identified the following
critical accounting policies that are described in more detail in our Annual
Report on Form 10-K for the year ended June 30, 2012:
-
Deferred taxation;
-
Stock-based compensation and equity instrument issued pursuant to BBBEE
transaction;
-
Intangible assets acquired through acquisitions;
-
Business combinations and the recoverability of goodwill;
-
Accounts receivable and provision for doubtful debts; and
-
Research and development.
Recent
accounting pronouncements adopted
Refer
to Note 1 of our condensed consolidated financial statements for a full
description of recent accounting pronouncements adopted, including the dates of
adoption and the effects on our condensed consolidated financial statements.
Recent
accounting pronouncements not yet adopted as of September 30, 2012
There
were no new accounting pronouncements not yet adopted by us during the three
months ended September 30, 2012.
Currency Exchange Rate Information
Actual
exchange rates
The
actual exchange rates for and at the end of the periods presented were as
follows:
Table 1
|
|
Three months ended
|
|
|
Year ended
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
ZAR : $ average exchange rate
|
|
8.2644
|
|
|
7.1357
|
|
|
7.7920
|
|
Highest ZAR : $ rate during period
|
|
8.5470
|
|
|
8.4739
|
|
|
8.6987
|
|
Lowest ZAR : $ rate during period
|
|
8.0444
|
|
|
6.6096
|
|
|
6.6096
|
|
Rate at end of period
|
|
8.3172
|
|
|
7.9165
|
|
|
8.2881
|
|
|
|
|
|
|
|
|
|
|
|
KRW : $ average exchange rate
|
|
1,137
|
|
|
1,083
|
|
|
1,130
|
|
Highest KRW : $ rate during period
|
|
1,156
|
|
|
1,197
|
|
|
1,202
|
|
Lowest KRW : $ rate during period
|
|
1,080
|
|
|
1,029
|
|
|
1,029
|
|
Rate at end of period
|
|
1,125
|
|
|
1,178
|
|
|
1,159
|
|
22
23
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, 2012 and 2011, vary slightly from the
averages shown in the table above. The translation rates we use in presenting
our results of operations are the rates shown in the following table:
Table 2
|
|
Three months ended
|
|
|
Year ended
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
Income and expense items: $1 = ZAR .
|
|
8.2606
|
|
|
7.0939
|
|
|
7.7186
|
|
Income and expense items: $1 = KRW
|
|
1,140
|
|
|
1,086
|
|
|
1,104
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items: $1 = ZAR
|
|
8.3172
|
|
|
7.9165
|
|
|
8.2881
|
|
Balance sheet items: $1 = KRW
|
|
1,125
|
|
|
1,178
|
|
|
1,159
|
|
Results of operations
The
discussion of our consolidated overall results of operations is based on amounts
as reflected in our unaudited condensed 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 2013, results include Pbel from September 1, 2012, and Eason for the
entire period. First quarter 2012, results do not include Pbel or Eason.
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 2013 compared to first quarter of fiscal 2012
The
following factors had an influence on our results of operations during the first
quarter of fiscal 2013 as compared with the same period in the prior year:
-
Unfavorable impact from the strengthening of the US dollar:
The US dollar appreciated by 16% against the ZAR during the first
quarter of fiscal 2013 which negatively impacted our reported results;
-
SASSA implementation costs:
We continued implementing our
SASSA contract during the first quarter of fiscal 2013 and incurred additional
implementation and staff costs; and
-
Profit on liquidation of SmartSwitch Nigeria
: In fiscal
2012, we recorded a non-cash profit of $4.0 million on the liquidation of
SmartSwitch Nigeria.
Consolidated
overall results of operations
This
discussion is based on the amounts which were prepared in accordance with US
GAAP.
24
The
following tables show the changes in the items comprising our statements of
operations, both in US dollars and in ZAR:
|
|
In United States Dollars
|
|
Table 3
|
|
(US GAAP)
|
|
|
|
Three months ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
$%
|
|
|
|
$ 000
|
|
|
$ 000
|
|
|
change
|
|
Revenue
|
|
111,682
|
|
|
99,926
|
|
|
12%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
45,101
|
|
|
32,944
|
|
|
37%
|
|
Selling, general and administration
|
|
47,252
|
|
|
27,057
|
|
|
75%
|
|
Depreciation and amortization
|
|
10,004
|
|
|
9,079
|
|
|
10%
|
|
Operating income
|
|
9,325
|
|
|
30,846
|
|
|
(70)%
|
|
Interest income
|
|
3,091
|
|
|
1,997
|
|
|
55%
|
|
Interest expense
|
|
2,071
|
|
|
2,616
|
|
|
(21)%
|
|
Income before income taxes
|
|
10,345
|
|
|
30,227
|
|
|
(66)%
|
|
Income tax expense
|
|
3,729
|
|
|
10,552
|
|
|
(65)%
|
|
Net income before earnings from equity-accounted investments
|
|
6,616
|
|
|
19,675
|
|
|
(66)%
|
|
Earnings from equity-accounted investments
|
|
128
|
|
|
85
|
|
|
51%
|
|
Net income
|
|
6,744
|
|
|
19,760
|
|
|
(66)%
|
|
Add net loss attributable to non-controlling
interest
|
|
-
|
|
|
(8
|
)
|
|
(100)%
|
|
Net income attributable to us
|
|
6,744
|
|
|
19,768
|
|
|
(66)%
|
|
|
|
In South African Rand
|
|
Table 4
|
|
(US GAAP)
|
|
|
|
Three months ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
ZAR
|
|
|
|
ZAR
|
|
|
ZAR
|
|
|
%
|
|
|
|
000
|
|
|
000
|
|
|
change
|
|
Revenue
|
|
922,560
|
|
|
708,865
|
|
|
30%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
372,561
|
|
|
233,702
|
|
|
59%
|
|
Selling, general and administration
|
|
390,330
|
|
|
191,940
|
|
|
103%
|
|
Depreciation and amortization
|
|
82,639
|
|
|
64,405
|
|
|
28%
|
|
Operating income
|
|
77,030
|
|
|
218,818
|
|
|
(65)%
|
|
Interest income
|
|
25,534
|
|
|
14,167
|
|
|
80%
|
|
Interest expense
|
|
17,108
|
|
|
18,558
|
|
|
(8)%
|
|
Income before income taxes
|
|
85,456
|
|
|
214,427
|
|
|
(60)%
|
|
Income tax expense
|
|
30,804
|
|
|
74,855
|
|
|
(59)%
|
|
Net income before earnings from equity-accounted investments
|
|
54,652
|
|
|
139,572
|
|
|
(61)%
|
|
Earnings from equity-accounted investments
|
|
1,057
|
|
|
603
|
|
|
75%
|
|
Net income
|
|
55,709
|
|
|
140,175
|
|
|
(60)%
|
|
Add net loss attributable to non-controlling
interest
|
|
-
|
|
|
(57
|
)
|
|
(100)%
|
|
Net income attributable to us
|
|
55,709
|
|
|
140,232
|
|
|
(60)%
|
|
Analyzed
in ZAR, the increase in revenue was primarily due to incremental revenue
resulting from our new SASSA contract and a higher contribution from KSNET.
Analyzed
in ZAR, the increase in cost of goods sold, IT processing, servicing and support
was primarily due to higher expenses related to the implementation of our new
SASSA contract.
Our
selling, general and administration expense increased primarily as a result of
the SASSA contract implementation. Our selling, general and administration
expense for the first quarter of fiscal 2012 includes a non-cash profit related
to the liquidation of SmartSwitch Nigeria of $4.0 million.
Our
operating income margin for the first quarter of fiscal 2013 and 2012, was 8.3%
and 30.9%, respectively. We discuss the components of operating income margin
under Results of operations by operating segment. The decrease is primarily
attributable to implementation costs related to the SASSA contract.
25
In
ZAR, depreciation and amortization increased primarily as a result of an
increase in depreciation related to assets used to service our obligations under
our SASSA contract and an increase in KSNET depreciation. 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 5
|
|
September 30,
|
|
|
|
2012
|
|
|
|
2011
|
|
|
|
$ 000
|
|
|
|
$ 000
|
|
Amortization included in depreciation and amortization expense:
|
|
4,689
|
|
|
|
4,814
|
|
South African transaction-based
activities
|
|
1,449
|
|
|
|
1,406
|
|
International transaction-based activities
|
|
3,152
|
|
|
|
3,307
|
|
Hardware, software and
related technology sales
|
|
88
|
|
|
|
101
|
|
|
|
Three months ended
|
|
Table 6
|
|
September 30,
|
|
|
|
2012
|
|
|
|
2011
|
|
|
|
ZAR 000
|
|
|
|
ZAR 000
|
|
Amortization included in depreciation and amortization expense:
|
|
38,732
|
|
|
|
34,150
|
|
South African transaction-based
activities
|
|
11,978
|
|
|
|
9,973
|
|
International transaction-based activities
|
|
26,037
|
|
|
|
23,460
|
|
Hardware, software and
related technology sales
|
|
717
|
|
|
|
717
|
|
Interest
on surplus cash increased to $3.1 million (ZAR 25.5 million) from $2.0 million
(ZAR 14.2 million). The increase resulted primarily from higher average daily ZAR
cash balances.
In
US dollars, interest expense decreased to $2.1 million (ZAR 17.1 million) from
$2.6 million (ZAR 18.6 million) due to a lower average long-term debt balance.
Total
2013 tax expense was $3.7 million (ZAR 30.8 million) compared to $10.6 million
(ZAR 74.8 million) in 2012, and decreased due to lower profitability resulting
directly from the SASSA implementation costs. Our effective tax rate increased
to 36% from 34.9% . The increase in our effective tax rate in fiscal 2013 was
primarily due higher non-deductible expenses, including stock-based compensation
charges and acquisition-related expenses.
26
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 7
|
|
In United States
Dollars (US GAAP)
|
|
|
|
Three months ended September 30,
|
|
|
|
2012
|
|
|
|
% of
|
|
|
2011
|
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
$ 000
|
|
|
|
total
|
|
|
$ 000
|
|
|
|
total
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
61,364
|
|
|
|
55%
|
|
|
49,902
|
|
|
|
50%
|
|
|
23%
|
|
International transaction-based activities
|
|
31,649
|
|
|
|
28%
|
|
|
30,255
|
|
|
|
30%
|
|
|
5%
|
|
Smart card accounts
|
|
8,364
|
|
|
|
7%
|
|
|
8,252
|
|
|
|
8%
|
|
|
1%
|
|
Financial services
|
|
1,384
|
|
|
|
1%
|
|
|
2,111
|
|
|
|
2%
|
|
|
(34%
|
)
|
Hardware, software and related technology sales
|
|
8,921
|
|
|
|
9%
|
|
|
9,406
|
|
|
|
10%
|
|
|
(5%
|
)
|
Total consolidated revenue
|
|
111,682
|
|
|
|
100%
|
|
|
99,926
|
|
|
|
100%
|
|
|
12%
|
|
Consolidated operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
6,400
|
|
|
|
69%
|
|
|
20,183
|
|
|
|
65%
|
|
|
(68%
|
)
|
Operating income before
amortization
|
|
7,849
|
|
|
|
|
|
|
21,589
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
(1,449
|
)
|
|
|
|
|
|
(1,406
|
)
|
|
|
|
|
|
|
|
International transaction-based activities
|
|
(171
|
)
|
|
|
(2%
|
)
|
|
684
|
|
|
|
2%
|
|
|
(125%
|
)
|
Operating income before amortization
|
|
2,981
|
|
|
|
|
|
|
3,991
|
|
|
|
|
|
|
|
|
Amortization of intangible
assets
|
|
(3,152
|
)
|
|
|
|
|
|
(3,307
|
)
|
|
|
|
|
|
|
|
Smart card accounts
|
|
2,385
|
|
|
|
26%
|
|
|
3,750
|
|
|
|
12%
|
|
|
(36%
|
)
|
Financial services
|
|
1,097
|
|
|
|
12%
|
|
|
1,411
|
|
|
|
5%
|
|
|
(22%
|
)
|
Hardware, software and related technology sales
|
|
1,984
|
|
|
|
21%
|
|
|
1,937
|
|
|
|
6%
|
|
|
2%
|
|
Operating (loss) income
before amortization .
|
|
2,072
|
|
|
|
|
|
|
2,038
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
(88
|
)
|
|
|
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
Corporate/eliminations
|
|
(2,370
|
)
|
|
|
(26%
|
)
|
|
2,881
|
|
|
|
10%
|
|
|
(182%
|
)
|
Total consolidated operating income
|
|
9,325
|
|
|
|
100%
|
|
|
30,846
|
|
|
|
100%
|
|
|
(70%
|
)
|
Table 8
|
|
In South African
Rand (US GAAP)
|
|
|
|
Three months ended September 30,
|
|
|
|
2012
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
|
% of
|
|
|
ZAR
|
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
000
|
|
|
|
total
|
|
|
000
|
|
|
|
total
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
506,903
|
|
|
|
55%
|
|
|
354,000
|
|
|
|
50%
|
|
|
43%
|
|
International transaction-based activities
|
|
261,440
|
|
|
|
28%
|
|
|
214,626
|
|
|
|
30%
|
|
|
22%
|
|
Smart card accounts
|
|
69,092
|
|
|
|
7%
|
|
|
58,539
|
|
|
|
8%
|
|
|
18%
|
|
Financial services
|
|
11,433
|
|
|
|
1%
|
|
|
14,975
|
|
|
|
2%
|
|
|
(24%
|
)
|
Hardware, software and related technology sales
|
|
73,692
|
|
|
|
9%
|
|
|
66,725
|
|
|
|
10%
|
|
|
10%
|
|
Total consolidated revenue
|
|
922,560
|
|
|
|
100%
|
|
|
708,865
|
|
|
|
100%
|
|
|
30%
|
|
Consolidated operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
52,868
|
|
|
|
69%
|
|
|
143,176
|
|
|
|
65%
|
|
|
(63%
|
)
|
Operating income before amortization
|
|
64,846
|
|
|
|
|
|
|
153,149
|
|
|
|
|
|
|
|
|
Amortization of intangible
assets
|
|
(11,978
|
)
|
|
|
|
|
|
(9,973
|
)
|
|
|
|
|
|
|
|
International transaction-based activities
|
|
(1,413
|
)
|
|
|
(2%
|
)
|
|
4,852
|
|
|
|
2%
|
|
|
(129%
|
)
|
Operating income before
amortization
|
|
24,624
|
|
|
|
|
|
|
28,312
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
(26,037
|
)
|
|
|
|
|
|
(23,460
|
)
|
|
|
|
|
|
|
|
Smart card accounts
|
|
19,702
|
|
|
|
26%
|
|
|
26,602
|
|
|
|
12%
|
|
|
(26%
|
)
|
Financial services
|
|
9,062
|
|
|
|
12%
|
|
|
10,010
|
|
|
|
5%
|
|
|
(9%
|
)
|
Hardware, software and related technology sales
|
|
16,389
|
|
|
|
21%
|
|
|
13,740
|
|
|
|
6%
|
|
|
19%
|
|
Operating (loss) income before amortization
.
|
|
17,106
|
|
|
|
|
|
|
14,457
|
|
|
|
|
|
|
|
|
Amortization of intangible
assets
|
|
(717
|
)
|
|
|
|
|
|
(717
|
)
|
|
|
|
|
|
|
|
Corporate/eliminations
|
|
(19,578
|
)
|
|
|
(26%
|
)
|
|
20,438
|
|
|
|
10%
|
|
|
(196%
|
)
|
Total consolidated operating
income
|
|
77,030
|
|
|
|
100%
|
|
|
218,818
|
|
|
|
100%
|
|
|
(65%
|
)
|
27
South
African transaction-based activities
In
ZAR, the increases in segment revenue were primarily due to higher revenues
earned under our new SASSA contract and higher prepaid airtime sales, offset by
lower volumes at EasyPay and MediKredit. Segment revenues include the
transaction fees we earn through our merchant acquiring system and reflect the
elimination of inter-company transactions.
Our
operating income margin for 2013 and 2012 was 10% and 40%, respectively, and has
declined primarily due to SASSA implementation costs and higher low-margin
prepaid airtime sales.
Pension
and welfare operations:
Our
pension and welfare operations continue to generate the majority of our revenues
and operating income in this segment. See also discussion under Recent
DevelopmentsSouth AfricaSASSA for a discussion of the implementation status
of our SASSA contract.
Key
statistics related to our pension and welfare operations
The
graph below presents our enrollment progress during the first quarter of fiscal
2013:
There
is a time lag between when a current grant recipient is issued a UEPS/EMV card
and when the recipient receives grants onto the UEPS/EMV smart card. For
instance, recipients enrolled in July 2012 and issued a UEPS/EMV smart card were
only paid onto that card in the August 2012 pay cycle. When a new grant
recipient is approved by SASSA, the recipient is enrolled, issued with a
UEPS/EMV smart card and immediately paid on this card. We are paid by SASSA for
each recipient paid, regardless of type of card or channel and therefore for the
month of September 2012, we earned revenue from SASSA based on the distribution
of grants to 9,482,914 recipients. ACB transfers represent payments directly
into a recipients nominated bank account held at a South African financial
institution.
28
South
African transaction processors:
The
table below presents the total volume and value processed during the first
quarter of fiscal 2013 and 2012:
Table 9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
|
|
Total volume (000s)
|
|
|
Total value $ (000)
|
|
|
Total value ZAR (000)
|
|
processor
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
CPS
|
|
28,373
|
|
|
9,474
|
|
|
3,143,773
|
|
|
1,251,317
|
|
|
25,969,448
|
|
|
8,876,716
|
|
EasyPay(1)
|
|
102,420
|
|
|
143,238
|
|
|
2,710,615
|
|
|
4,439,600
|
|
|
22,391,310
|
|
|
31,494,077
|
|
Remaining core
|
|
102,420
|
|
|
119,286
|
|
|
2,710,615
|
|
|
3,604,618
|
|
|
22,391,310
|
|
|
25,570,798
|
|
Discontinued
|
|
-
|
|
|
23,952
|
|
|
-
|
|
|
834,982
|
|
|
-
|
|
|
5,923,279
|
|
MediKredit
|
|
2,624
|
|
|
2,846
|
|
|
171,478
|
|
|
170,363
|
|
|
1,416,508
|
|
|
1,208,540
|
|
FIHRST
|
|
5,987
|
|
|
5,839
|
|
|
2,373,540
|
|
|
2,545,089
|
|
|
19,606,861
|
|
|
18,054,605
|
|
(1) includes Eason prepaid airtime
and electricity volume and value from October 1, 2011 and reclassified to
reflect the consolidation of value-added services through EasyPay and to reflect
the remaining core processing activities.
During
the first quarter of fiscal 2012, one of EasyPays large customers decided to
perform its EFT/switching activities in-house, which had an adverse impact on
our volumes in the first quarter of fiscal 2013. EasyPay has retained its
value-added services relationship with this customer and therefore the overall
impact to revenue and profitability is modest. EasyPay volumes and values were
impacted by its focus on higher-margin value-added services and termination of
certain inefficient activities such as the hosting of processing servers for
financial institutions. There is ongoing consolidation in the medical scheme
industry in South Africa which has resulted in MediKredit losing adjudication
and processing business as its providers are obligated to outsource these
services to their parents processor. This has resulted in a decline in
MediKredits transaction volumes, with a nominal impact on its revenue and
operating loss. This loss of business was partially offset by MediKredit signing
agreements with new providers, including public hospitals, private hospitals and
specialist doctors, and has commenced adjudication and processing activities for
these providers. FIHRST volumes and values increased due to an increased number
of customers.
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 most of our South African
transaction-based businesses and was negatively impacted by adverse currency
movement between the Korean won and the US dollar, additional 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 increased revenue contributions from KSNET and
NUETS initiative in Iraq.
Smart
card accounts
In
ZAR, our revenue from this operating segment was higher because the number of
smart card-based accounts has increased as a result of the new SASSA contract,
however, our revenue per account has decreased. We have reduced our pricing for
smart card accounts after taking into consideration the lower price and higher
volumes under the new contract. The new pricing, effective from April 1, 2012,
reduced the average revenue from R5.50 to R4.00 and the operating income margin
from 45% to 29%. Operating income margin from providing smart card accounts for
the first quarter of fiscal 2013 and 2012 was 29% and 45%, respectively.
In
ZAR, revenue from the provision of smart card-based accounts increased in
proportion to the increased number of beneficiaries serviced through our SASSA
contract. Approximately 5.8 million smart card-based accounts were active at
September 30, 2012 compared to approximately 3.6 million active accounts as at
September 30, 2011.
Financial
services
UEPS-based
lending contributes the majority of the revenue and operating income in this
operating segment. Revenue decreased primarily due to a decrease in the number
of loans granted. We no longer insure our UEPS-based lending book. Operating
income decreased primarily as a result of on-going start-up expenditure incurred
to establish our Smart Life insurance business and as a result of lower
UEPS-based lending business. 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. During the first quarter of fiscal 2013,
our lending book decreased due to new rules introduced by SASSA regarding the
maximum allowable deduction amount for loans and insurance policies from grants
before transfer to bank accounts. Smart Life did not contribute significantly to
our operating income in the first quarter of fiscal 2013.
29
Operating
income margin for the financial services segment increased to 79% from 67%,
primarily as a result of an improved margin in our UEPS-based lending
book resulting from a better loss experience, offset by start-up expenditures
related to Smart Life and other financial services offerings. We are not able to
accurately quantify the corporate administration and overhead expenses related
to this segment and therefore dont allocate such costs to this segment.
Hardware,
software and related technology sales
In
ZAR, the increase in revenue and operating income resulted primarily from an
increase in royalty fees, offset by a lower contribution from all other
contributors to hardware and software sales. Significant quarter over quarter
fluctuations in revenue, operating income and operating margin are expected due
to ad hoc orders in this operating segment.
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
Our
first quarter of fiscal 2012 includes a non-cash profit related to the
liquidation of SmartSwitch Nigeria of $4.0 million. Excluding this non-cash
profit, the increase in our corporate expenses resulted primarily from higher
stock-based compensation and other corporate head office-related expenses.
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, 2012, our cash balances were $57.5 million, which
comprised mainly ZAR-denominated balances of ZAR 258.8 million ($31.1 million),
KRW-denominated balances of KRW 26.2 billion ($23.3 million) and US
dollar-denominated balances of $1.8 million and other currency deposits,
primarily euro, of $1.4 million. The increase in our cash balances from June 30,
2012 was primarily from cash generated from operations, offset by implementation
costs and capital expenditures incurred to implement our SASSA contract and the
acquisition of Pbel.
We
currently believe that our cash and credit facilities are sufficient to fund our
operations for at least the next four quarters, including completion of the
SASSA contract implementation.
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
($30.1 million) which remained fully undrawn as of September 30, 2012.
As
of September 30, 2012, we had outstanding long-term debt of 108.7 billion KRW
(approximately $96.6 million translated at exchange rates applicable as of
September 30, 2012) under credit facilities with a group of Korean banks. The
loans bear interest at the Korean CD rate in effect from time to time (3.54% as
of September 30, 2012) plus a margin of 4.10% . Semi-annual principal payments
of approximately $7.2 million (translated at exchange rates applicable as of
September 30, 2012) were due starting in October 2011, with final maturity
scheduled for October 2015.
30
Cash
flows from operating activities
First
quarter of fiscal 2013
Net
cash provided by operating activities for the first quarter of fiscal 2013 was
$25.7 million (ZAR 212.5 million) compared to $27.2 million (ZAR 193.1 million)
for the first quarter of fiscal 2012. Excluding the impact of interest received,
interest paid under our Korean debt and taxes presented in the table below, the
decrease in cash provided by operating activities resulted from significant
implementation costs related to our SASSA contract, partially offset by cash
generated from operations.
There
were no significant tax payments during the first quarter of fiscal 2013. During
the first quarter of fiscal 2012 we paid taxes of $3.4 million (ZAR 25.5
million) related to prior periods and STC of $0.3 million (ZAR 1.1 million).
Taxes
paid during the first quarter of fiscal 2013 and 2012 were as follows:
Table 10
|
|
Quarter ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
$
|
|
|
$
|
|
|
ZAR
|
|
|
ZAR
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
Taxation paid related to prior years
|
|
-
|
|
|
3,401
|
|
|
-
|
|
|
25,461
|
|
Taxation refunds received
|
|
(55
|
)
|
|
-
|
|
|
(464
|
)
|
|
-
|
|
Secondary taxation on companies
|
|
-
|
|
|
(157
|
)
|
|
-
|
|
|
(1,065
|
)
|
Total South African taxes paid
|
|
(55
|
)
|
|
3,244
|
|
|
(464
|
)
|
|
24,396
|
|
Foreign taxes paid: Korea
|
|
397
|
|
|
537
|
|
|
3,279
|
|
|
3,810
|
|
Total tax paid
|
|
342
|
|
|
3,781
|
|
|
2,815
|
|
|
28,206
|
|
We
expect to pay taxes in South Africa related to prior period of approximately
$2.8 million (ZAR 23.1 million), translated at exchange rates applicable as of
September 30, 2012, during the second quarter of fiscal 2013. We also expect to
pay our first provisional payments in South Africa related to our 2013 tax year
in the second quarter of fiscal 2013.
Cash
flows from investing activities
First
quarter of fiscal 2013
Cash
used in investing activities for the first quarter of fiscal 2013 includes
capital expenditure of $6.45 million (ZAR 53.67 million), primarily for payment
vehicles and related equipment for our new SASSA contract and acquisition of
payment processing terminals in Korea.
During
the first quarter of fiscal 2013 we paid $1.9 million (ZAR 16.2 million) for
Pbel.
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, kiosks to service our
EasyPay Kiosk pilot project and the acquisition of POS devices to service our
merchant acquiring system.
Cash
flows from financing activities
First
quarter of fiscal 2013
During
the first quarter of fiscal 2013, we received $0.2 million from the exercise of
stock options.
During
the first quarter of fiscal 2012, we acquired 180,656 shares of our common stock
for $1.1 million.
Off-Balance Sheet Arrangements
We
have no off-balance sheet arrangements.
Capital Expenditures
We
expect that capital spending for the second quarter of fiscal 2013 will include
the acquisition of payment vehicles and related equipment for our SASSA contract
and payment terminals for the expansion of our operations in Korea.
31
Our
historical capital expenditures for the first quarter of fiscal 2013 and 2012
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, 2012, of $2.9 million related mainly to
equipment and cards to implement our new SASSA contract. 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,
2012:
Table 11
|
|
Payments due by Period, as of September 30,
2012 (in $ 000s)
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
than 1
|
|
|
1-3
|
|
|
3-5
|
|
|
than 5
|
|
|
|
Total
|
|
|
year
|
|
|
years
|
|
|
years
|
|
|
years
|
|
Long-term debt obligations (A)
|
|
111,509
|
|
|
21,082
|
|
|
90,427
|
|
|
-
|
|
|
-
|
|
Operating lease obligations
|
|
10,169
|
|
|
3,869
|
|
|
5,071
|
|
|
1,229
|
|
|
-
|
|
Purchase obligations
|
|
3,865
|
|
|
3,865
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other long-term obligations (B)
|
|
25,998
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
25,998
|
|
Total
|
|
151,541
|
|
|
28,816
|
|
|
95,498
|
|
|
1,229
|
|
|
25,998
|
|
|
(A)
|
Includes $96.6 million of long-term debt discussed
under Liquidity and capital resources and includes interest payable at
the rate applicable as of September 30, 2012.
|
|
(B)
|
Includes policy holder liabilities of $24.8 million
related to our insurance business.
|
32
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
In
addition to the tables below, see note 6 to the unaudited condensed consolidated
financial statements for a discussion of market risk.
The
following table illustrates the effect on our annual expected interest charge,
translated at exchange rates applicable as of September 30, 2012, as a result of
a change in the Korean CD rate. The effects of a hypothetical 1% increase and a
1% decrease in the Korean CD rate as of September 30, 2012, is shown. The
selected 1% hypothetical change does not reflect what could be considered the
best or worst case scenarios.
|
|
As of September
30, 2012
|
|
|
|
|
Table 12
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
annual
|
|
|
|
|
|
|
|
|
|
|
|
|
expected
|
|
|
|
|
|
|
Annual
|
|
|
|
|
|
interest charge
|
|
|
|
|
|
|
expected
|
|
|
Hypothetical
|
|
|
after change in
|
|
|
|
|
|
|
interest
|
|
|
change in
|
|
|
Korean CD
|
|
|
|
|
|
|
charge
|
|
|
Korean CD
|
|
|
rate
|
|
|
|
|
|
|
($ 000)
|
|
|
rate
|
|
|
($ 000)
|
|
|
|
|
Interest on Korean long-term debt
|
|
7,379
|
|
|
1%
|
|
|
8,345
|
|
|
|
|
|
|
|
|
|
(1)%
|
|
|
6,413
|
|
|
|
|
The
following table summarizes our exchange-traded equity securities with equity
price risk as of September 30, 2012. The effects of a hypothetical 10% increase
and a 10% decrease in market prices as of September 30, 2012, 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, 2012
|
|
Table 13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hypothetical
|
|
|
|
|
|
|
|
|
|
Estimated fair
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
value after
|
|
|
Increase
|
|
|
|
Fair
|
|
|
|
|
|
hypothetical
|
|
|
(Decrease) in
|
|
|
|
value
|
|
|
Hypothetical
|
|
|
change in price
|
|
|
Shareholders
|
|
|
|
($ 000)
|
|
|
price change
|
|
|
($ 000)
|
|
|
Equity
|
|
Exchange-traded equity securities
|
|
8,648
|
|
|
10%
|
|
|
9,513
|
|
|
0.24%
|
|
|
|
|
|
|
(10%
|
)
|
|
7,783
|
|
|
(0.24%
|
)
|
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, 2012. 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, 2012.
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, 2012, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
33
Part II. Other Information
Item 1. Legal Proceedings
On
February 8, 2012, AllPay Consolidated Investment Holdings (Pty) Ltd filed an
application in the North Gauteng High Court of South Africa seeking to set aside
the award of the SASSA tender to us. AllPay was one of the unsuccessful bidders
during the SASSA tender process and was a former contractor to SASSA. We were
included as one of several respondents in this proceeding. We opposed the
application as a respondent. When SASSA publicly announced the award of the
tender to us in January 2012, it stated that it had conducted the tender in
accordance with all relevant legislation. The High Court heard this matter on
May 29 to 31, 2012, and on August 28, 2012, the High Court ruled that our
contract with SASSA remains valid and will not be set aside. Specifically the
High Court ruled that:
1.
the tender process conducted by SASSA was illegal and
invalid;
2.
the award of the tender to us is not set aside;
and
3. the
CEO of SASSA and SASSA, together with us, were ordered to pay the costs, which
costs included the costs of three counsel.
AllPay, SASSA and we appealed the ruling and on September 12, 2012, the High
Court granted leave to appeal the judgment handed down on August 28, 2012.
Specifically the High Court granted us and SASSA leave to appeal the ruling that
the tender process was illegal and invalid as well as the cost order and granted
AllPay leave to appeal the ruling that the award of the tender by SASSA to CPS
should not be set aside.
The matter will now be heard before the South African Supreme Court of Appeal,
as soon as it has scheduled a date for the proceedings. The appeal process could
take several months to be finalized and we cannot predict when the
proceeding will be resolved or its ultimate outcome.
In
addition to the Supreme Court of Appeal action, AllPay also approached the
Constitutional Court of South Africa, the highest court in the country, for
leave to appeal the High Court ruling directly to the Constitutional Court. We
opposed AllPays application for leave to appeal directly to the Constitutional
Court. On November 1, 2012, the Constitutional Court concluded that the AllPay
application should be dismissed as it is not in the interest of justice to hear
the matter at this stage. We believe that this ruling does not preclude any of
the parties to approach the Constitutional Court again, once the outcome of the
Supreme Court of Appeal proceedings is known.
Item 1A. Risk Factors
See
Item 1A RISK FACTORS in Part I of our Annual Report on Form 10-K for the
fiscal year ended June 30, 2012, for a discussion of risk factors relating to
(i) our business, (ii) operating in South Africa and other foreign markets,
(iii) government regulation, and (iv) our common stock. Except as set forth
below, there have been no material changes from the risk factors previously
disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30,
2012.
Our
Smart Life business exposes us to risks typically experienced by life assurance
companies
Smart
Life is a life insurance company and exposes us to risks typically experienced
by life assurance companies. Some of these risks include the extent to which we
are able to continue to reinsure our risks at acceptable costs, reinsurer
counterparty risk, our ability to price our insurance products appropriately,
the risk that actual claims experience may exceed our estimates and the
competitiveness of the South African insurance market. If we are unable to
maintain our desired level of reinsurance at prices that we consider acceptable,
we would have to either accept an increase in our exposure risk or reduce our
insurance writings. If our reinsurers are unable to meet their commitments to us
in a timely manner, or at all, we may be unable to discharge our obligations
under our insurance contracts. As such, we are exposed to counterparty,
including credit, risk of these reinsurers. Our product pricing includes
long-term assumptions regarding investment returns, mortality, morbidity,
persistency and operating costs and expenses of the business. Using the wrong
assumptions to price our insurance products could materially and adversely
affect our financial position, results of operations and cash flows. Further,
even though we currently reinsure the majority of our insurance contract
liabilities, if our actual claims experience is higher than our estimates, our
financial position, results of operations and cash flows could be adversely
affected. Finally, the South African insurance industry is highly competitive.
Many of our competitors are well-established, represented nationally and market
similar products. Because of the competitive nature of the insurance industry,
we may not be able to effectively penetrate the South African insurance market.
34
Item 6. Exhibits
The
following exhibits are filed as part of this Form 10-Q:
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on November 8, 2012.
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
35
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