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, 2009
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ____________________ to
____________________
Commission file number:
000-31203
NET 1 UEPS TECHNOLOGIES,
INC.
(Exact name of registrant as specified in its
charter)
Florida
|
98-0171860
|
(State or other jurisdiction
|
(IRS Employer
|
of incorporation or organization)
|
Identification No.)
|
President Place, 4
th
Floor, Cnr. Jan
Smuts Avenue and Bolton Road
Rosebank, Johannesburg 2196 , South
Africa
(Address of principal executive offices, including zip
code)
Registrants telephone number, including area code:
27-11-343-2000
Not Applicable
(Former Name, Former
Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d)
of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. YES
[X] NO [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site,
if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was
required to submit and
post such files). YES [ ] NO [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer or a
smaller reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller
reporting company in Rule 12b-2 of the
Exchange Act (check one):
[X] Large accelerated filer
|
[ ] Accelerated filer
|
|
|
[ ] Non-accelerated filer
|
[ ] Smaller reporting company
|
(do not check if a smaller reporting company)
|
|
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). YES [
] NO [X]
As of October 31, 2009 (the latest practicable date), 45,378,397
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,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
(In thousands, except share data)
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
139,312
|
|
$
|
220,786
|
|
Pre-funded
social welfare grants receivable (Note 2)
|
|
3,624
|
|
|
4,930
|
|
Accounts receivable, net of allowances of September: $355;
June: $395
|
|
43,766
|
|
|
42,475
|
|
Finance
loans receivable, net of allowances of September: $243; June: $226
|
|
2,588
|
|
|
2,563
|
|
Deferred expenditure on smart cards
|
|
40
|
|
|
8
|
|
Inventory
(Note 3)
|
|
6,617
|
|
|
7,250
|
|
Deferred income taxes
|
|
13,597
|
|
|
12,282
|
|
Total current assets
|
|
209,544
|
|
|
290,294
|
|
OTHER LONG-TERM ASSETS, including available
for sale securities (Note 4)
|
|
7,567
|
|
|
7,147
|
|
PROPERTY, PLANT AND EQUIPMENT, NET OF ACCUMULATED
|
|
|
|
|
|
|
DEPRECIATION OF September: $30,637;
June: $28,169
|
|
7,342
|
|
|
7,376
|
|
EQUITY-ACCOUNTED INVESTMENTS (Note 4)
|
|
2,471
|
|
|
2,583
|
|
GOODWILL (Note 5)
|
|
121,935
|
|
|
116,197
|
|
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF
|
|
|
|
|
|
|
September: $36,350; June: $31,150 (Note 5)
|
|
75,447
|
|
|
75,890
|
|
TOTAL ASSETS
|
|
424,306
|
|
|
499,487
|
|
LIABILITIES
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
Accounts payable
|
|
4,230
|
|
|
5,481
|
|
Other
payables
|
|
68,563
|
|
|
61,454
|
|
Income taxes payable
|
|
17,799
|
|
|
10,874
|
|
Total current liabilities
|
|
90,592
|
|
|
77,809
|
|
DEFERRED INCOME TAXES
|
|
45,543
|
|
|
41,737
|
|
OTHER LONG-TERM LIABILITIES, including noncontrolling interest
loans
|
|
4,125
|
|
|
4,185
|
|
COMMITMENTS AND CONTINGENCIES
|
|
-
|
|
|
-
|
|
TOTAL LIABILITIES
|
|
140,260
|
|
|
123,731
|
|
EQUITY
|
|
|
|
|
|
|
NET1
EQUITY:
|
|
|
|
|
|
|
COMMON STOCK (Note 7)
|
|
|
|
|
|
|
Authorized: 200,000,000
with $0.001 par value;
|
|
|
|
|
|
|
Issued and
outstanding shares, net of treasury - September: 45,378,397;
|
|
|
|
|
|
|
June: 54,506,487
|
|
59
|
|
|
59
|
|
ADDITIONAL PAID-IN-CAPITAL
|
|
129,056
|
|
|
126,914
|
|
TREASURY SHARES, AT COST: September: 13,149,042; June:
3,927,516
|
|
(173,671
|
)
|
|
(48,637
|
)
|
ACCUMULATED OTHER COMPREHENSIVE LOSS
|
|
(44,985
|
)
|
|
(58,472
|
)
|
RETAINED EARNINGS
|
|
371,294
|
|
|
353,353
|
|
TOTAL NET1
EQUITY
|
|
281,753
|
|
|
373,217
|
|
NON-CONTROLLING
INTEREST
|
|
2,293
|
|
|
2,539
|
|
TOTAL EQUITY
|
|
284,046
|
|
|
375,756
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
$
|
424,306
|
|
$
|
499,487
|
|
(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,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
REVENUE
|
$
|
65,514
|
|
$
|
67,935
|
|
|
|
|
|
|
|
|
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods
sold, IT processing, servicing and support
|
|
16,827
|
|
|
19,236
|
|
|
|
|
|
|
|
|
Selling, general and administration
|
|
17,740
|
|
|
17,998
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
4,579
|
|
|
3,423
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
26,368
|
|
|
27,278
|
|
|
|
|
|
|
|
|
UNREALIZED FOREIGN EXCHANGE GAIN
|
|
|
|
|
|
|
RELATED TO SHORT-TERM INVESTMENT
|
|
-
|
|
|
6,076
|
|
|
|
|
|
|
|
|
INTEREST INCOME, net
|
|
2,371
|
|
|
3,162
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
28,739
|
|
|
36,516
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE (Note 11)
|
|
11,031
|
|
|
9,902
|
|
|
|
|
|
|
|
|
NET INCOME FROM CONTINUING OPERATIONS
|
|
|
|
|
|
|
BEFORE LOSS FROM EQUITY-ACCOUNTED
|
|
|
|
|
|
|
INVESTMENTS
|
|
17,708
|
|
|
26,614
|
|
|
|
|
|
|
|
|
LOSS FROM EQUITY-ACCOUNTED
|
|
|
|
|
|
|
INVESTMENTS (Note 4)
|
|
(111
|
)
|
|
(310
|
)
|
|
|
|
|
|
|
|
NET INCOME
|
|
17,597
|
|
|
26,304
|
|
|
|
|
|
|
|
|
(ADD) LESS: NET (LOSS) INCOME
|
|
|
|
|
|
|
ATTRIBUTABLE TO NON-CONTROLLING
|
|
|
|
|
|
|
INTEREST
|
|
(344
|
)
|
|
60
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO NET1
|
$
|
17,941
|
|
$
|
26,244
|
|
|
|
|
|
|
|
|
Net income per share, in cents (
Note
8)
|
|
|
|
|
|
|
Basic earnings attributable to Net1 shareholders
|
|
36.8
|
|
|
45.2
|
|
Diluted earnings attributable
to Net1 shareholders
|
|
36.7
|
|
|
45.0
|
|
See Notes to Unaudited Condensed
Consolidated Financial Statements
3
NET 1 UEPS
TECHNOLOGIES,
INC.
Unaudited
Condensed
Consolidated
Statement
of
Changes
in Equity (in
thousands)
Net 1 UEPS
Technologies,
Inc.
Shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Non-
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
controlling
|
|
|
|
|
|
Comprehensive
|
|
|
of
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Earnings
|
|
|
(Loss) Income
|
|
|
Interests
|
|
|
Total
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2009
|
58,434,003
|
|
$
|
59
|
|
|
(3,927,516
|
)
|
$
|
(48,637
|
)
|
$
|
126,914
|
|
$
|
353,353
|
|
$
|
(58,472
|
)
|
|
|
|
$
|
373,217
|
|
|
|
|
Adjustment resulting from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
adoption of new accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
standards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,539
|
|
|
2,539
|
|
|
|
|
Exercise of options by holders
|
83,338
|
|
|
-
|
|
|
|
|
|
|
|
|
303
|
|
|
|
|
|
|
|
|
|
|
|
303
|
|
|
|
|
Restricted stock granted
|
10,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
Settlement of loan note
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consideration for stock issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in accordance with 2004 Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
417
|
|
|
|
|
|
|
|
|
|
|
|
417
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charge
|
|
|
|
|
|
|
|
|
|
|
|
|
1,422
|
|
|
|
|
|
|
|
|
|
|
|
1,422
|
|
|
|
|
Acquisition of treasury shares
|
|
|
|
|
|
|
(9,221,526
|
)
|
|
(125,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125,034
|
)
|
|
|
|
Comprehensive income (loss),
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,941
|
|
|
|
|
|
(344
|
)
|
|
17,597
|
|
$
|
17,941
|
|
Other comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in
foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,487
|
|
|
98
|
|
|
13,585
|
|
|
13,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2009
|
58,527,439
|
|
$
|
59
|
|
|
(13,149,042
|
)
|
$
|
(173,671
|
)
|
$
|
129,056
|
|
$
|
371,294
|
|
$
|
(44,985
|
)
|
$
|
2,293
|
|
$
|
284,046
|
|
$
|
31,428
|
|
4
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Statements of Comprehensive Income (Loss)
|
|
Three
months ended
|
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Net income
|
$
|
17,597
|
|
$
|
26,304
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
Movement in foreign currency translation
reserve
|
|
13,585
|
|
|
(11,270
|
)
|
Total other comprehensive income
|
|
13,585
|
|
|
(11,270
|
)
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
31,182
|
|
|
15,034
|
|
Less
comprehensive (loss) income attributable to
|
|
|
|
|
|
|
non-controlling interest
|
|
(246
|
)
|
|
60
|
|
Comprehensive income (loss) attributable to
|
|
|
|
|
|
|
Net1
|
$
|
31,428
|
|
$
|
14,974
|
|
5
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Statements of Cash Flows
|
|
Three
months ended
|
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income
|
$
|
17,597
|
|
$
|
26,304
|
|
Depreciation and amortization
|
|
4,579
|
|
|
3,423
|
|
Loss from equity-accounted investments
|
|
111
|
|
|
310
|
|
Fair value adjustments
|
|
(142
|
)
|
|
(6,048
|
)
|
Interest payable
|
|
78
|
|
|
639
|
|
(Profit) Loss on disposal of property, plant
and equipment
|
|
(1
|
)
|
|
1
|
|
Stock-based compensation charge
|
|
1,422
|
|
|
1,205
|
|
Facility fee amortized
|
|
-
|
|
|
748
|
|
Decrease (Increase) in accounts receivable, pre-funded
|
|
|
|
|
|
|
social welfare grants receivable and finance
loans receivable
|
|
5,529
|
|
|
(46,141
|
)
|
Increase in deferred expenditure on smart cards
|
|
(30
|
)
|
|
(23
|
)
|
Decrease (Increase) in inventory
|
|
1,015
|
|
|
(217
|
)
|
Increase (Decrease) in accounts payable and other payables
|
|
25
|
|
|
(14,415
|
)
|
Increase in taxes payable
|
|
6,211
|
|
|
3,409
|
|
Increase (Decrease) in deferred taxes
|
|
575
|
|
|
(2,170
|
)
|
Net cash provided
by (used in) operating activities
|
|
36,969
|
|
|
(32,975
|
)
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Capital expenditures
|
|
(641
|
)
|
|
(2,844
|
)
|
Proceeds from disposal of property, plant and
equipment
|
|
49
|
|
|
1
|
|
Acquisition of BGS, net of cash acquired
|
|
-
|
|
|
(95,328
|
)
|
Acquisition of shares in equity-accounted investments
|
|
-
|
|
|
(550
|
)
|
Net cash used in investing activities
|
|
(592
|
)
|
|
(98,721
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Proceeds from issue of share capital, net of
share issue
|
|
|
|
|
|
|
expenses
|
|
720
|
|
|
155
|
|
Treasury stock acquired
|
|
(126,304
|
)
|
|
-
|
|
Proceeds from short-term loan facility
|
|
-
|
|
|
110,000
|
|
Payment of facility fee
|
|
-
|
|
|
(1,100
|
)
|
Repayment of noncontrolling interest loan
|
|
-
|
|
|
2
|
|
Proceeds from bank overdrafts
|
|
-
|
|
|
(1
|
)
|
Repayment of loans
|
|
(137
|
)
|
|
-
|
|
Net cash provided by
financing activities
|
|
(125,721
|
)
|
|
109,056
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
7,870
|
|
|
(3,911
|
)
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
(81,474
|
)
|
|
(26,551
|
)
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning
of period
|
|
220,786
|
|
|
272,475
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of
period
|
$
|
139,312
|
|
$
|
245,924
|
|
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, 2009 and 2008
(All amounts stated in thousands of United
States Dollars, unless otherwise stated)
1. Basis of Presentation and Summary of Significant
Accounting Policies
Unaudited Interim Financial
Information
The accompanying unaudited
condensed consolidated financial statements include all majority-owned
subsidiaries over which the Company exercises control and have been prepared in
accordance with US generally accepted accounting principles (GAAP) and the
rules and regulations of the Securities and Exchange Commission for quarterly
reports on Form 10-Q and include all of the information and disclosures required
for interim financial reporting. The results of operations for the three months
ended September 30, 2009 and 2008 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, 2009. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments), which are
necessary for a fair representation of financial results for the interim periods
presented.
References to the Company refer
to Net1 and its consolidated subsidiaries, unless the context otherwise
requires. References to Net1 are references solely to Net 1 UEPS Technologies,
Inc.
Translation of foreign
currencies
The primary functional currency
of the Company is the South African Rand (ZAR) and its reporting currency is
the US dollar. The Company also has consolidated entities which have the euro,
Russian ruble or Indian rupee as their functional currency. The current rate
method is used to translate the financial statements of the Company to US
dollar. Under the current rate method, assets and liabilities are translated at
the exchange rates in effect at the balance sheet date. Revenues and expenses
are translated at average rates for the period. Translation gains and losses are
reported in accumulated other comprehensive income in shareholders equity.
Foreign exchange transactions are
translated at the spot rate ruling at the date of the transaction. Monetary
items are translated at the closing spot rate at the balance sheet date.
Transactional gains and losses are recognized in income for the period.
Subsequent Events
The Company has evaluated events
occurring between the end of its fiscal quarter, September 30, 2009 and November
5, 2009, when these financial statements were issued.
Recent accounting
pronouncements adopted
On July 1, 2009, the Company
adopted authoritative guidance issued by the Financial Accounting Standards
Board (FASB) regarding business combinations. This guidance retains the
fundamental requirements on business combinations that the acquisition method of
accounting (defined as the purchase method) be used for all business
combinations and for an acquirer to be identified for each business combination.
The adopted guidance requires the acquiring entity in a business combination to
recognize the assets acquired and liabilities assumed at the acquisition date.
In addition, it also requires acquisition-related costs to be recognized
separately from the business combination. The adopted guidance applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The adoption of this authoritative guidance on business
combinations has not had a material effect on the Companys results of
operations or financial position.
7
1. Basis of Presentation and Summary of Significant
Accounting Policies (continued)
Recent accounting
pronouncements adopted
(continued)
On July 1, 2009, the Company
adopted authoritative guidance issued by the FASB regarding noncontrolling
interests. This guidance establishes a single method of accounting for changes
in a parents ownership interest in a subsidiary that does not result in
deconsolidation. It clarifies that all of those transactions are equity
transactions if the parent retains its controlling financial interest in the
subsidiary. The adopted guidance is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
Earlier adoption is prohibited. However, the adopted guidance shall be applied
prospectively as of the beginning of the fiscal year in which it is initially
applied, except for the presentation and disclosure requirements. The
presentation and disclosure requirements shall be applied retrospectively for
all periods presented. Accordingly, the Companys consolidated balance sheet as
of June 30, 2009 and unaudited condensed consolidated statement of operations
and unaudited condensed consolidated statement of cash flows for the three
months ended September 30, 2008, has been revised to conform to the new
presentation requirements.
On July 1, 2009, the Company
adopted Statement of Financial Accounting Standards No. 168,
The FASB
Accounting Standards Codification
TM
and the Hierarchy
of Generally Accepted Accounting Principles
, (FAS 168). FAS 168
establishes the FASB Accounting Standards Codification
TM
(Codification) as the single source of authoritative US GAAP recognized
by the FASB to be applied by nongovernmental entities. FAS 168 is effective
prospectively from July 1, 2009 and has superseded all existing non-SEC
accounting and reporting standards. Following FAS 168, the FASB has issued new
guidance in the form of Accounting Standards Updates (Update).
On July 1, 2009, the Company
adopted Update 2009-01,
Topic 105-Generally Accepted Accounting Principles
amendments based on Statement of Financial Accounting Standards No. 168, The
FASB Accounting Standards Codification
TM
and the
Hierarchy of Generally Accepted Accounting Principles,
(Update 2009-01).
Update 2009-01 amends the Codification for the issuance of FAS 168. Update
2009-01 is effective prospectively from July 1, 2009.
On July 1, 2009, the Company
adopted authoritative guidance issued by the FASB which delays the effective
date of guidance for all nonrecurring fair value measurements of nonfinancial
assets and nonfinancial liabilities until fiscal years beginning after November
15, 2008. In addition, the Company adopted guidance which requires disclosure
about fair value of financial instruments for interim reporting periods. The
adoption of this authoritative guidance has not had a material effect on the
Companys results of operations or financial position.
On July 1, 2009, the Company
adopted authoritative guidance issued by the FASB which amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under current
guidance. The intent of the new guidance is to improve the consistency between
the useful life of an intangible asset determined and the period of expected
cash flows used to measure the fair value of the asset under. The adopted
guidance is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. Early
adoption is prohibited. The adoption of this authoritative guidance has not had
a material effect on the Companys results of operations or financial position.
On July 1, 2009, the Company
adopted authoritative guidance issued by the FASB regarding unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend
equivalents are participating securities and, therefore, are included in
computing earnings per share pursuant to the two-class method. The two-class
method determines earnings per share for each class of common stock and
participating securities according to dividends or dividend equivalents and
their respective participation rights in undistributed earnings. The Company
issued restricted stock during fiscal 2010, 2009 and 2007 and these instruments
are considered participating securities as they are eligible to receive
non-forfeitable dividend equivalents at the same rate as common stock. The
adopted guidance is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. Prior period basic earnings per share have been retrospectively adjusted
to reflect the impact of the adoption.
8
1. Basis of Presentation and Summary of Significant
Accounting Policies (continued)
Recent accounting
pronouncements adopted
(continued)
On July 1, 2009, the Company
adopted guidance issued by the FASB which requires an acquirer in a business
combination to recognize, at fair value, an asset acquired or liability assumed
in a business combination that arises from a contingency if the acquisition-date
fair value of that asset or liability can be determined during the measurement
period. The adopted guidance is effective for business combinations whose
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The adoption of this
authoritative guidance has not had a material effect on the Companys results of
operations or financial position.
Recent accounting
pronouncements not yet adopted as of September 30, 2009
In June 2009, the FASB issued
guidance which changes how a reporting entity determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a reporting entity
is required to consolidate another entity is based on, among other things, the
other entitys purpose and design and the reporting entitys ability to direct
the activities of the other entity that most significantly impact the other
entitys economic performance. This new guidance also requires a reporting
entity to provide additional disclosures about its involvement with variable
interest entities and any significant changes in risk exposure due to that
involvement. This new guidance is effective for financial statements issued for
fiscal years and interim periods within those fiscal years beginning after
November 15, 2009. Early adoption is not permitted. The Company is currently
evaluating the impact of the adoption of this new guidance.
Update 2009-13,
Revenue
Recognition (Topic 605) Multiple Deliverable Revenue Arrangements
, (Update
2009-13), provides amendments to the criteria in subtopic 605-25 of the
Codification for allocating the consideration between the elements in a
multiple-deliverable arrangement. The amendments establish a selling price
hierarchy for determining the selling price of a deliverable. The selling price
used for each deliverable will be based on vendor specific objective evidence
(VSOE) if available, third party evidence if VSOE is not available, or
estimated selling price if neither VSOE or third party evidence is available. It
replaces the term fair value in the revenue allocation with selling price to
clarify that the allocation of revenue is based on entity specific assumptions
rather then the assumptions of a market place participant. This amendment will
eliminate the residual method of allocation and require that arrangement
consideration be allocated using relative selling price method. It will also
significantly expand the disclosures related to vendors multiple-deliverable
revenue arrangements. The amendment will be effective prospectively for revenue
arrangements entered into or materially modified in fiscal year beginning on or
after June 15, 2010. Early adoption is permitted. The Company is currently
evaluating the impact of the adoption of Update 2009-13.
2. Pre-funded social welfare grants receivable
Pre-funded social welfare grants
receivable represents amounts pre-funded by the Company to certain merchants
participating in the merchant acquiring system. The October 2009 payment service
commenced during the last three days of September 2009 and was offered at
merchant locations only.
3. Inventory
The Companys inventory comprised
the following categories as of September 30, 2009 and June 30, 2009.
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
$
|
46
|
|
$
|
153
|
|
|
Finished goods
|
|
6,571
|
|
|
7,097
|
|
|
|
$
|
6,617
|
|
$
|
7,250
|
|
9
4. Fair value of financial instruments and
equity-accounted investments
Fair value of financial
instruments
Risk
managemen
t
The Company seeks to reduce its
exposure to currencies other than the ZAR 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 our
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 has
used forward contracts in order to limit its exposure in these transactions to
fluctuations in exchange rates between the ZAR, on the one hand, and the US
dollar and the euro, on the other hand.
The Companys outstanding
foreign exchange contracts are as follows:
As of September 30, 2009
None
As of September 30, 2008
|
|
|
|
|
|
Fair market
|
|
|
Notional amount
|
|
Strike price
|
|
value price
|
|
Maturity
|
EUR
|
140,000
|
|
ZAR
|
11.5630
|
|
ZAR
|
11.8030
|
|
October 3, 2008
|
USD
|
24,600
|
|
ZAR
|
8.0090
|
|
ZAR
|
8.3003
|
|
October 10, 2008
|
EUR
|
3,891
|
|
ZAR
|
11.9409
|
|
ZAR
|
11.8561
|
|
October 15, 2008
|
EUR
|
5,880
|
|
ZAR
|
11.6292
|
|
ZAR
|
11.8643
|
|
October 17, 2008
|
EUR
|
85,210
|
|
ZAR
|
11.9685
|
|
ZAR
|
11.9216
|
|
October 31, 2008
|
EUR
|
8,608
|
|
ZAR
|
11.9685
|
|
ZAR
|
11.9216
|
|
October 31, 2008
|
EUR
|
82,400
|
|
ZAR
|
12.2199
|
|
ZAR
|
11.9216
|
|
October 31, 2008
|
EUR
|
-82,400
|
|
ZAR
|
12.5773
|
|
ZAR
|
11.8619
|
|
October 31, 2008
|
EUR
|
82,400
|
|
ZAR
|
12.7820
|
|
ZAR
|
12.0035
|
|
November 28, 2008
|
Equity
Price and Liquidity Risk
Equity price risk relates to the
risk of loss that the Company would incur as a result of the volatility in the
exchange-traded price of equity securities that it holds and the risk that it
may not be able to liquidate these securities. On March 1, 2009, the Company
acquired approximately 22% of the issued share capital of Finbond Group Limited
(Finbond), which are exchange-traded equity securities. The fair value of
these securities as of September 30, 2009, represented approximately 2% of the
Companys total assets, including these securities. The Company expects to hold
these securities for an extended period of time and it is not concerned with
short-term equity price volatility with respect to these securities provided
that the underlying business, economic and management characteristics of the
company remain sound.
The market price of these
securities may fluctuate for a variety of reasons, consequently, the amount the
Company may obtain in a subsequent sale of these securities may significantly
differ from the reported market value.
Liquidity risk relates to the
risk of loss that the Company would incur as a result of the lack of liquidity
on the exchange on which these securities are listed. The Company may not be
able to sell some or all of these securities at one time, or over an extended
period of time without influencing the exchange traded price, or at all.
Financial instruments
The following section describes
the valuation methodologies the Company uses to measure financial assets and
liabilities at fair value.
10
4. Fair value of financial instruments and equity-accounted
investments (continued)
Financial instruments
(continued
)
Investments
in common stock
In general, and where applicable,
the Company uses quoted prices in active markets for identical assets or
liabilities to determine fair value. This pricing methodology would apply to
Level 1 investments. If quoted prices in active markets for identical assets or
liabilities are not available to determine fair value, then the Company uses
quoted prices for similar assets and liabilities or inputs other than the quoted
prices that are observable either directly or indirectly. These investments
would be included in Level 2 investments. In circumstances in which inputs are
generally unobservable, values typically reflect managements estimates of
assumptions that market participants would use in pricing the asset or
liability. The fair values are therefore determined using model-based techniques
that include option pricing models, discounted cash flow models, and similar
techniques. Investments valued using such techniques are included in Level 3
investments.
The Company's Level 3 asset
represents an investment of 84,632,525 shares of common stock of Finbond. The
Companys ownership interest in Finbond, as of September 30, 2009 is
approximately 22%. The Company has no rights to participate in the financial,
operating, or governance decisions made by Finbond. The Company also has no
participation on Finbonds board of directors whether through contractual
agreement or otherwise. Consequently, the Company has concluded that it does not
have significant influence over Finbond and therefore equity accounting is not
appropriate.
Finbonds shares are traded on
the JSE, and consequently are within the scope of FAS No. 115,
Accounting for
Certain Investments in Debt and Equity Securities (Topic 320)
; the Company
has designated such shares as available for sale investments. Pursuant to FSP
157-3, however, the Company has concluded that the market for Finbond shares is
not active and consequently has employed alternative valuation techniques in
order to determine the fair value of such stock. Currently, the operations of
Finbond include primarily mortgage brokering services and microlending. In
determining the fair value of Finbond, the Company has considered amongst other
things Finbonds historical financial information (including its most recent
public accounts), press releases issued by Finbond and its published net asset
value. The Company believes that the best indicator of fair value of Finbond is
its published net asset value and has used this value to determine the fair
value.
Derivative
transactions - Foreign exchange contracts
The Company had no outstanding
foreign exchange contracts as of September 30, 2009. As part of the Companys
risk management strategy, the Company enters into derivative transactions to
mitigate exposures to foreign currencies using foreign exchange contracts. These
foreign exchange contracts are over-the-counter customized derivative
transactions. Substantially all of the Companys derivative exposures are with
counterparties that have long-term credit ratings of BBB or better. The Company
uses quoted prices in active markets for identical assets and liabilities to
determine fair value. The Company has no derivatives that require fair value
measurement under level 1 and 3 of the fair value hierarchy.
The following table presents the
Companys assets measured at fair value on a recurring basis as of September 30,
2009 according to the fair value hierarchy:
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
Price in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
(available for sale assets
included in
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER LONG-TERM ASSETS)
|
|
-
|
|
|
-
|
|
$
|
7,401
|
|
$
|
7,401
|
|
Total assets at fair value
|
|
-
|
|
|
-
|
|
$
|
7,401
|
|
$
|
7,401
|
|
11
4. Fair value of financial instruments and equity-accounted
investments (continued)
Financial instruments
(continued
)
Assets
and liabilities measured at fair value on a nonrecurring basis
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.
In accordance with the provisions
of APB No. 18,
The Equity Method of Accounting for Investments in Common
Stock
, 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 based on valuation techniques 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 determined that there was
not a decline in the fair value below cost of the equity-accounted investments
during the reporting periods presented herein, and therefore has not recorded an
impairment charge during three months ended September 30, 2009.
The Company has sold hardware,
software and/or licenses to SmartSwitch Namibia, SmartSwitch Botswana and VTU
Colombia and defers recognition of 50% of the net income after tax related to
these sales until SmartSwitch Namibia, SmartSwitch Botswana and VTU Colombia has
used the purchased asset or has sold it to a third party. The deferral of the
net income after tax is shown in the Elimination column in the table below.
The functional currency of the
Companys equity-accounted investments is not the US dollar and thus the
investments are restated at the period end US dollar/foreign currency exchange
rate with an entry against accumulated other comprehensive loss. The functional
currency of SmartSwitch Namibia is the Namibian dollar, the functional currency
of SmartSwitch Botswana is the Botswana pula, the functional currency of VTU
Colombia is the Colombian peso and the functional currency of Vinapay is the
Vietnamese dong.
Summarized below is the Companys
interest in equity-accounted investments as of June 30, 2009 and September 30,
2009:
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Loans
|
|
|
(Loss)
|
|
|
Elimination
|
|
|
|
Total
|
|
Balance as of June 30, 2009
|
$
|
3,467
|
|
$
|
2,468
|
|
$
|
(3,451
|
)
|
$
|
99
|
|
|
$
|
2,583
|
|
(Loss) Earnings from equity-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounted investments
|
|
-
|
|
|
-
|
|
|
(201
|
)
|
|
90
|
|
|
|
(111
|
)
|
SmartSwitch
Namibia
(1)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
30
|
|
|
|
30
|
|
SmartSwitch
Botswana
(1)
|
|
-
|
|
|
-
|
|
|
(10
|
)
|
|
60
|
|
|
|
50
|
|
VTU Colombia
(1)
|
|
-
|
|
|
-
|
|
|
(148
|
)
|
|
-
|
|
|
|
(148
|
)
|
VinaPay
(1)
|
|
-
|
|
|
-
|
|
|
(43
|
)
|
|
-
|
|
|
|
(43
|
)
|
Foreign currency adjustment
(2)
|
|
186
|
|
|
87
|
|
|
(235
|
)
|
|
(39
|
)
|
|
|
(1
|
)
|
Balance as of September 30,
2009
|
$
|
3,653
|
|
$
|
2,555
|
|
$
|
(3,887
|
)
|
$
|
150
|
|
|
$
|
2,471
|
|
(1) includes the recognition of
realized net income as described
below.
(2) the foreign currency
adjustment represents the effects of the combined net fluctuations between the
functional currency of the equity-accounted investments and the US dollar.
There were no significant sales
to these investees that require elimination during the three months ended September
30, 2009 and 2008. During the year ended June 30, 2007, the Company sold a license
to VTU Colombia and sold hardware and software to SmartSwitch Botswana. The
Company recognizes this net income from these hardware and software sales during
the period in which the hardware and software it has sold to SmartSwitch Namibia,
SmartSwitch Botswana and VTU Colombia are utilized in its operations, or has
been sold to third party customers, as the case may be.
12
5. Goodwill and intangible assets
Goodwill
Summarized below is the movement
in carrying value of goodwill for the three months ended September 30, 2009.
|
|
Carrying
|
|
|
|
value
|
|
|
|
|
|
Balance as of June 30, 2009
|
$
|
116,197
|
|
Foreign currency adjustment
(1)
|
|
5,738
|
|
Balance as of September 30, 2009
|
$
|
121,935
|
|
(1) the foreign currency
adjustment represents the effects of the fluctuations between the ZAR and the
euro against the US dollar on the carrying value of goodwill.
Goodwill has been allocated to
the Companys reportable segments as follows:
|
|
As of
|
|
|
As of
|
|
|
|
September
|
|
|
June 30,
|
|
|
|
30, 2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
$
|
37,500
|
|
$
|
35,362
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
Hardware, software and related technology sales
|
|
84,435
|
|
|
80,835
|
|
Total
|
$
|
121,935
|
|
$
|
116,197
|
|
Intangible assets
Summarized below is the carrying
value and accumulated amortization of the intangible assets as of September 30,
2009 and June 30, 2009:
|
|
As
of September 30, 2009
|
|
|
As
of June 30, 2009
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
87,456
|
|
$
|
(16,211
|
)
|
$
|
71,245
|
|
$
|
83,824
|
|
$
|
(12,306
|
)
|
$
|
71,518
|
|
Software and unpatented
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
technology
|
|
10,688
|
|
|
(10,688
|
)
|
|
-
|
|
|
10,079
|
|
|
(10,079
|
)
|
|
-
|
|
FTS patent
|
|
5,156
|
|
|
(4,703
|
)
|
|
453
|
|
|
4,861
|
|
|
(4,333
|
)
|
|
528
|
|
Exclusive licenses
|
|
4,506
|
|
|
(3,455
|
)
|
|
1,051
|
|
|
4,506
|
|
|
(3,293
|
)
|
|
1,213
|
|
Trademarks
|
|
3,877
|
|
|
(1,179
|
)
|
|
2,698
|
|
|
3,656
|
|
|
(1,025
|
)
|
|
2,631
|
|
Customer contracts
|
|
114
|
|
|
(114
|
)
|
|
-
|
|
|
114
|
|
|
(114
|
)
|
|
-
|
|
Total finite-lived intangible assets
|
$
|
111,797
|
|
$
|
(36,350
|
)
|
$
|
75,447
|
|
$
|
107,040
|
|
$
|
(31,150
|
)
|
$
|
75,890
|
|
Aggregate amortization expense on
the finite-lived intangible assets for the three months ended September 30,
2009, was approximately $3.6 million (three months ended September 30, 2008, was
approximately $2.4 million). Future annual amortization expense is estimated at
approximately $14.3 million, however, this amount could differ from the actual
amortization as a result of changes in useful lives, exchange rate fluctuations
and other relevant factors.
6. Short-term facilities
As of September 30, 2009, the
Company had short-term facilities in ZAR of approximately $67.3 million,
translated at exchange rates applicable as of September 30, 2009. As of
September 30, 2009 the overdraft rate on these facilities was 9.35% . In
addition, BGS has short-term facilities of approximately $1.5 million,
translated at exchange rates applicable as of September 30, 2009, with each of
two of Austrias largest banks. These facilities are available to the Company.
The interest rate applicable to these short-term facilities is negotiated when
the facilities are utilized. As of September 30, 2009, the Company had utilized
none of its South African short-term facilities. The Companys management
believes its current short-term facilities are sufficient in order to meet its
future obligations as they arise.
13
7. Capital structure
The Companys capital structure
is described in Note 12 to the Companys audited consolidated financial
statements included within the Companys Annual Report on Form 10-K for the
fiscal year ended June 30, 2009.
Common stock repurchases
On July 28, 2009, the Company
repurchased an aggregate of 9,221,526 shares of its common stock from two
shareholders, who originally acquired their shares in connection with the
Aplitec transaction. The purchase price was $13.50 (ZAR 105.98) per share and
was paid from the Companys cash reserves in ZAR for an aggregate purchase price
of $124.5 million (ZAR 977.3 million).
8. Earnings per share
The entire consolidated net
income of the Company was attributable to the shareholders of the Company
comprising both the holders of Net1 common stock and the holders of linked units
prior to the Companys listing on the JSE Limited (JSE). As discussed in Note
12 to the Companys audited consolidated financial statements included within
the Companys Annual Report on Form 10-K for the fiscal year ended June 30,
2009, all of the remaining linked unit holders converted their linked units to
common stock in October 2008 as a result of listing of all of the Companys
common stock on the JSE. As a result of the conversion of all the linked units,
the entire consolidated net income of the Company is attributable to the holders
of Net1 common stock.
Basic earnings per share includes
restricted stock awards that meet the definition of a participating security
as described in FSP EITF 03-6-1 (Topic 260). 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,
2009 and 2008, reflects only undistributed earnings. Basic earnings per shares
for the three months ended September 30, 2008, have been retrospectively
adjusted, as required by FSP EITF 03-6-1 (Topic 260), to include participating
securities in the weighted average number of outstanding shares of common stock.
Diluted earnings per share have
been calculated to give effect to the number of additional shares of common
stock that would have been outstanding if the potential dilutive instruments had
been issued in each period. The calculation of diluted earnings per share for
the three months ended September 30, 2009 and 2008, includes the dilutive effect
of a portion of the restricted stock awards granted to employees in August 2007
as these restricted stock awards are considered contingently issuable shares for
the purposes of the diluted earnings per share calculation and as of September
30, 2009 and 2008, the vesting conditions in respect of a portion of the awards
had been satisfied.
The basic earnings per share for
the three months ended September 30, 2008, for the common stock and linked units
are the same and is calculated by dividing the net income by the combined
retrospectively adjusted weighted average number (58.0 million) of common stock
(53.2 million) and special convertible preferred stock (4.8 million) in
issue.
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, 2009 and 2008.
|
|
Three months ended
|
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
(1)
|
|
|
|
000
|
|
|
000
|
|
Weighted average number of outstanding shares of
|
|
|
|
|
|
|
common stock basic
|
|
48,815
|
|
|
58,032
|
(2)
|
Weighted average effect of dilutive securities:
|
|
|
|
|
|
|
employee stock options
|
|
103
|
|
|
330
|
(3)
|
Weighted average number of outstanding shares of
|
|
|
|
|
|
|
common stock diluted
|
|
48,918
|
|
|
58,362
|
(4)
|
(1) the weighted average number of outstanding shares have been
retrospectively adjusted to conform with the requirements of FSP EITF 03-6-1
(Topic 260).
(2) includes 53,231 and 4,801 shares attributable to common
stock holders and linked unit holders, respectively.
(3) includes 302 and 28
shares attributable to common stock holders and linked unit holders,
respectively.
(4) includes 53,533 and 4,829 shares attributable to common
stock holders and linked unit holders, respectively.
14
9. Stock-based compensation
Stock option and
restricted stock activity
Options
The following table summarizes
stock option activity for the three months ended September 30, 2009, and 2008:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
Grant
|
|
|
|
|
Number
|
|
|
exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
Date Fair
|
|
|
|
|
of shares
|
|
|
price
|
|
|
(in years)
|
|
|
Value
|
|
|
Value
|
|
|
Outstanding July 1, 2009
|
|
1,896,994
|
|
$
|
19.03
|
|
|
8.30
|
|
$
|
1,576
|
|
|
|
|
|
Exercised
|
|
(83,338
|
)
|
|
-
|
|
|
-
|
|
|
1,667
|
|
|
|
|
|
Outstanding September 30,
2009
|
|
1,813,656
|
|
$
|
19.76
|
|
|
8.20
|
|
|
5,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding July 1, 2008
|
|
953,378
|
|
$
|
18.20
|
|
|
7.40
|
|
|
5,813
|
|
|
|
|
|
Granted under plan
|
|
560,000
|
|
$
|
24.46
|
|
|
10.00
|
|
|
-
|
|
$
|
4,017
|
|
|
Exercised
|
|
(50,006
|
)
|
|
-
|
|
|
-
|
|
|
1,270
|
|
|
|
|
|
Outstanding September 30, 2008
|
|
1,463,372
|
|
$
|
21.12
|
|
|
8.27
|
|
$
|
3,102
|
|
|
|
|
No stock options became
exercisable during the three months ended September 30, 2009 and 2008.
During the three months ended
September 30, 2009 and 2008, the Company received approximately $0.3 million and
$0.2 million, respectively from stock options exercised and approximately $0.4
million and $0 million from repayment of stock option-related loans. The Company
issues new shares to satisfy stock option exercises.
Restricted
stock
The following table summarizes
restricted stock activity for the three months ended September 30, 2009, and
2008:
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
|
Shares of
|
|
|
Grant
|
|
|
|
|
Restricted
|
|
|
Date Fair
|
|
|
|
|
Stock
|
|
|
Value
|
|
|
Non-vested July 1, 2009
|
|
597,162
|
|
|
-
|
|
|
Granted August
2009
|
|
10,098
|
|
$
|
185
|
|
|
Vested
|
|
(198,338
|
)
|
|
-
|
|
|
Non-vested September 30, 2009
|
|
408,922
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-vested July 1, 2008
|
|
594,782
|
|
|
-
|
|
|
Granted August 2008
|
|
3,474
|
|
$
|
85
|
|
|
Non-vested September 30, 2008
|
|
598,256
|
|
|
-
|
|
The fair value of restricted
stock vested during the three months ended September 30, 2009, was $3.8 million
(2008: Nil).
15
9. Stock-based compensation (continued)
Stock-based compensation
charge and unrecognized compensation cost
The Company has recorded a stock
compensation charge of $1.4 million and $1.2 million for the three months ended
September 30, 2009 and 2008, respectively, which comprised:
|
|
|
|
|
Allocated to
|
|
|
|
|
|
|
|
|
|
cost of goods
|
|
|
|
|
|
|
|
|
|
sold, IT
|
|
|
Allocated to
|
|
|
|
|
|
|
processing,
|
|
|
selling,
|
|
|
|
Total
|
|
|
servicing
|
|
|
general and
|
|
|
|
charge
|
|
|
and support
|
|
|
administration
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
1,422
|
|
$
|
51
|
|
$
|
1,371
|
|
Total Three months ended September 30, 2009
|
$
|
1,422
|
|
$
|
51
|
|
$
|
1,371
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
1,205
|
|
$
|
61
|
|
$
|
1,144
|
|
Total Three months ended September 30, 2008
|
$
|
1,205
|
|
$
|
61
|
|
$
|
1,144
|
|
The stock-based compensation
charges have been allocated to cost of goods sold, IT processing, servicing and
support and selling, general and administration based on the allocation of the
cash compensation paid to the employees.
As of September 30, 2009, the
total unrecognized compensation cost related to stock options was approximately
$6.2 million, which the Company expects to recognize over approximately five
years. As of September 30, 2009, the total unrecognized compensation cost
related to restricted stock awards was approximately $6.7 million, which the
Company expects to recognize over approximately three years.
As of September 30, 2009, the
Company has recorded a deferred tax asset of approximately $0.8 million related
to the stock-based compensation charge recognized related to employees of Net1
as it is able to deduct the grant date fair value for taxation purposes in the
United States.
10. Operating segments
The Company discloses segment
information in accordance with FASB SFAS 131,
Disclosures about Segments of
an Enterprise and Related Information (Topic 280)
, which requires companies
to determine and review their segments as reflected in the management
information systems reports that their managers use in making decisions and to
report certain entity-wide disclosures about products and services, major
customers, and the material countries in which the entity holds assets and
reports revenues.
The Company currently has four
reportable segments: Transaction-based activities, Smart card accounts,
Financial services and Hardware, software and related technology sales. Each
segment, other than the Hardware, software and related technology sales segment,
operates mainly within South Africa. The Companys reportable segments offer
different products and services and require different resources and marketing
strategies and share the Companys assets.
The Transaction-based activities
segment currently consists mainly of a state pension and welfare benefit
distribution service provided to provincial governments in South Africa and
transaction processing for retailers, utilities and banks. Fee income is earned
based on the number of beneficiaries included in the government pay-file as well
as from merchants and card holders using the Companys merchant retail
application. In addition, utility providers and banks are charged a fee for
transaction processing services performed on their behalf at retailers. This
segment has individually significant customers that each provides more than 10%
of the total revenue of the Company. For the three months ended September 30,
2009, there were three such customers, providing 31%, 18% and 12%, of total
revenue (the three months ended September 30, 2008: two such customers,
providing 30% and 15%, respectively, of total revenue).
The Smart card accounts segment
derives revenue from the provision of smart card accounts, as a fixed monthly
fee per card is charged for the maintenance of these accounts.
16
10. Operating segments (continued)
The Financial services segment
provides short-term loans as a principal and life insurance products on an
agency basis and generates interest income and initiation and services fees.
Interest income is recognized in the consolidated statement of operations as it
falls due, using the interest method by reference to the constant interest rate
stated in each loan agreement. The Company sold its traditional microlending
business included in this segment on March 1, 2009, and therefore the Financial
services segment for the three months ended September 30, 2009, comprised only
the Companys UEPS-based microlending business.
The Hardware, software-related
and technology sales segment markets, sells and implements the UEPS as well as
develops and provides Prism secure transaction technology, solutions and
services. From September 1, 2008, the segment includes the operations of BGS,
which comprise mainly hardware sales and licenses of the DUET system. The
segment undertakes smart card system implementation projects, delivering
hardware, software and business solutions in the form of customized systems.
Sales of hardware, SIM cards, cryptography services, SIM card licenses and other
software licenses are recorded within this segment. This segment also generates
rental income from hardware provided to merchants enrolled in the Companys
merchant retail application. Sales to SmartSwitch Nigeria Limited and the
related taxation implications are not reflected in revenue to external
customers, operating income, income taxation expense or net income after
taxation presented in the tables below.
Corporate/Eliminations includes
the Companys head office cost centers in addition to the elimination of
inter-segment transactions.
The Company evaluates segment
performance based on operating income. The following tables summarize segment
information which is prepared in accordance with GAAP:
|
|
|
Three months ended
|
|
|
|
|
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Revenues to external customers
|
|
|
|
|
|
|
|
Transaction-based activities
|
$
|
44,978
|
|
$
|
40,344
|
|
|
Smart card accounts
|
|
8,074
|
|
|
8,570
|
|
|
Financial services
|
|
792
|
|
|
1,784
|
|
|
Hardware, software and
related technology sales
|
|
11,670
|
|
|
17,237
|
|
|
Total
|
|
65,514
|
|
|
67,935
|
|
|
Inter-company revenues
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
1,031
|
|
|
1,010
|
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
Financial services
|
|
-
|
|
|
-
|
|
|
Hardware, software and
related technology sales
|
|
518
|
|
|
702
|
|
|
Total
|
|
1,549
|
|
|
1,712
|
|
|
Operating income
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
26,668
|
|
|
21,638
|
|
|
Smart card accounts
|
|
3,670
|
|
|
3,895
|
|
|
Financial services
|
|
531
|
|
|
327
|
|
|
Hardware, software and
related technology sales
|
|
(1,713
|
)
|
|
4,134
|
|
|
Corporate/Eliminations
|
|
(2,788
|
)
|
|
(2,716
|
)
|
|
Total
|
|
26,368
|
|
|
27,278
|
|
|
Interest earned
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
-
|
|
|
-
|
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
Financial services
|
|
-
|
|
|
-
|
|
|
Hardware, software and related technology
sales
|
|
-
|
|
|
-
|
|
|
Corporate/Eliminations
|
|
2,647
|
|
|
6,730
|
|
|
Total
|
|
2,647
|
|
|
6,730
|
|
|
Interest expense
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
265
|
|
|
2,196
|
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
Financial services
|
|
1
|
|
|
-
|
|
|
Hardware, software and
related technology sales
|
|
2
|
|
|
112
|
|
|
Corporate/Eliminations
|
|
8
|
|
|
1,260
|
|
|
Total
|
$
|
276
|
|
$
|
3,568
|
|
17
10. Operating segments (continued)
|
|
|
Three months ended
|
|
|
|
|
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
Transaction-based activities
|
$
|
1,481
|
|
$
|
1,114
|
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
Financial services
|
|
123
|
|
|
113
|
|
|
Hardware, software and related technology
sales
|
|
2,686
|
|
|
1,875
|
|
|
Corporate/Eliminations
|
|
289
|
|
|
321
|
|
|
Total
|
$
|
4,579
|
|
$
|
3,423
|
|
|
Income taxation expense
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
7,512
|
|
|
5,578
|
|
|
Smart card accounts
|
|
1,027
|
|
|
1,090
|
|
|
Financial services
|
|
149
|
|
|
92
|
|
|
Hardware, software and
related technology sales
|
|
34
|
|
|
1,575
|
|
|
Corporate/Eliminations
|
|
2,309
|
|
|
1,567
|
|
|
Total
|
|
11,031
|
|
|
9,902
|
|
|
Net income after taxation
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
18,966
|
|
|
13,866
|
|
|
Smart card accounts
|
|
2,643
|
|
|
2,805
|
|
|
Financial services
|
|
381
|
|
|
235
|
|
|
Hardware, software and related technology
sales
|
|
(1,733
|
)
|
|
2,881
|
|
|
Corporate/Eliminations
|
|
(2,316
|
)
|
|
6,457
|
|
|
Total
|
|
17,941
|
|
|
26,244
|
|
|
Segment assets
|
|
|
|
|
|
|
|
Total
|
|
424,306
|
|
|
588,082
|
|
|
Expenditures for long-lived assets
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
416
|
|
|
2,083
|
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
Financial services
|
|
60
|
|
|
591
|
|
|
Hardware, software and
related technology sales
|
|
165
|
|
|
170
|
|
|
Corporate/Eliminations
|
|
-
|
|
|
-
|
|
|
Total
|
$
|
641
|
|
$
|
2,844
|
|
The segment information as
reviewed by the chief operating decision maker does not include a measure of
segment assets per segment as all of the significant assets are used in the
operations of all, rather than any one, of the segments. The Company does not
have dedicated assets assigned to a particular operating segment. Accordingly,
it is not meaningful to attempt an arbitrary allocation and segment asset
allocation is therefore not presented.
It is impractical to disclose
revenues from external customers for each product and service or each group of
similar products and services.
11. Income tax in interim periods
For the purposes of interim
financial reporting, the Company determines the appropriate income tax provision
in accordance with the guidance in APB Opinion 28,
Interim Reporting (Topic
740)
, and FASB Interpretation No. 18,
Accounting for Income Taxes in
Interim Periods (Topic 740)
. Accordingly, the tax charge is calculated by
first applying the effective tax rate expected to be applicable for the full
fiscal year to ordinary income. This amount is then adjusted for the tax effect
of significant unusual or extraordinary items that are reported separately, and
have an impact on the tax charge. The cumulative effect of any change in the
enacted tax rate, 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, 2009, the tax charge was calculated using the expected effective
tax rate for the year (34.55%) . Our effective tax rate for the three months
ended September 30, 2009, was 38.4% .
18
11. Income tax in interim periods (continued)
The Company increased its
unrecognized tax benefits by $0.1 million during the three months ended
September 30, 2009. As of September 30, 2009, the Company had accrued interest
related to uncertain tax positions of approximately $0.1 million on its balance
sheet.
The Company does not expect the
change related to unrecognized tax benefits will have a significant impact on
its results of operations or financial position in the next 12 months.
The Company files income tax
returns mainly in South Africa, Austria, Russian Federation and in the US
federal jurisdiction. As of September 30, 2009, the Company is no longer subject
to income tax examination by the South African Revenue Service for years before
September 30, 2005. The Company is subject to income tax in other jurisdictions
outside South Africa, none of which are individually material to its financial
position, statement of cash flows, or results of operations.
19
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and
analysis of our financial condition and results of operations should be read in
conjunction with our unaudited condensed consolidated financial statements and
the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.
Forward-looking statements
Some of the statements in this
Quarterly Report on Form 10-Q constitute forward-looking statements. These
statements relate to future events or our future financial performance and
involve known and unknown risks, uncertainties and other factors that may cause
our or our industrys actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed, implied or inferred by these
forward-looking statements. Such factors include, among other things, those
listed under Risk Factors and elsewhere in our Annual Report on Form 10-K for
the year ended June 30, 2009. In some cases, you can identify forward-looking
statements by terminology such as may, will, should, could, would,
expects, plans, intends, anticipates, believes, estimates,
predicts, potential or continue or the negative of such terms and other
comparable terminology.
Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we do
not know whether we can achieve positive future results, levels of activity,
performance, or goals. Actual events or results may differ materially. We
undertake no obligation to update any of the forward-looking statements after
the date of this Quarterly Report on Form 10-Q to conform those statements to
reflect the occurrence of unanticipated events, except as required by applicable
law.
You should read this Quarterly
Report on Form 10-Q and the documents that we reference herein and the documents
we have filed as exhibits hereto and which we have filed with the Securities and
Exchange Commission completely and with the understanding that our actual future
results, levels of activity, performance and achievements may be materially
different from what we expect. We qualify all of our forward-looking statements
by these cautionary statements.
Business Developments During Fiscal 2010
South
Africa
SASSA update
The South Africa Social Security
Agency, or SASSA, has not yet released a request for tender and accordingly we
continue to provide our service under the one year extension which expires on
March 31, 2010. We continue to believe it likely that SASSA will provide current
service providers with an extension, however, we can not accurately predict the
period of such extension, if any.
Progress of wage payment
implementation
Under our wage payment
initiative, we continue to enroll employees at our existing corporate customers
as well as pursue business development activities with additional prospects. To
support future growth, we are adding and training management and business
development staff dedicated to wage payment.
Outside
South Africa
The African Continent and
Iraq
During the first quarter of
fiscal 2010, we recorded revenue from transaction fees and the delivery of
smartcards under our Iraqi contract. We have entered the second phase of our
initiative in Ghana and now generate recurring income in the form of hardware
and software maintenance fees. We expect to generate revenues from the sale of
smartcards and transaction fees under our Iraqi contract and hardware and
software maintenance revenues from Ghana during the second quarter of fiscal
2010.
We continue to service our
current customers on the African continent and in Iraq. Our UETS business unit
made further progress on its business development efforts in multiple new
countries on the African continent during the quarter.
20
During the first quarter of
fiscal 2010, SmartSwitch Namibia generated incremental transaction fees from
prepaid airtime and electricity transactions and transactions conducted between
merchants and UEPS-enabled smartcards in Namibia. SmartSwitch Botswana generated
transaction fees during the first quarter of fiscal 2010 from the payment of
food voucher grants and sold hardware to merchants participating in the food
voucher program. We expect SmartSwitch Namibia and Botswana to continue
generating transaction fees during the second quarter of fiscal 2010.
BGS
BGS operations are seasonal
and the first quarter and third quarters are historically its weakest. Growth
at BGS during the first quarter of fiscal 2010 was adversely impacted by our
transitioning of its business model from a hardware and software sale oriented
company to one which generates recurring transaction fees, as well as by challenging
economic conditions in Eastern Europe. We expect revenue from BGS to improve
sequentially during the second quarter of fiscal 2010, but below year ago levels
as we continue migrating its revenue stream toward a transaction-oriented model.
Net1 Virtual Card
We continue to market our Virtual
Card offering in the continental United States and surrounding territories and
successfully demonstrated, in a live environment, this product to a number of
prospective partners, including mobile operators, banks and card
associations.
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, 2009.
-
Deferred taxation;
-
Stock-based compensation;
-
Intangible assets acquired through the acquisition of Prism and BGS;
-
Accounts receivable and provision for doubtful debts;
-
Research and development; and
-
Revenue Recognition System Implementation Projects.
Recent accounting
pronouncements adopted
Refer to Note 1 of the unaudited
condensed consolidated financial statements for a full description of recent
accounting pronouncements adopted as of September 30, 2009, including the
expected dates of adoption and effects on financial condition, results of
operations and cash flows.
Recent accounting
pronouncements not yet adopted as of September 30, 2009
Refer to Note 1 of the unaudited
condensed consolidated financial statements for a full description of recent
accounting pronouncements not yet adopted as of September 30, 2009, including
the expected dates of adoption and effects on financial condition, results of
operations and cash flows.
21
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,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
ZAR : $ average exchange rate
|
|
7.8270
|
|
|
7.7860
|
|
|
9.0484
|
|
Highest ZAR : $ rate during period
|
|
8.3187
|
|
|
8.3835
|
|
|
11.8506
|
|
Lowest ZAR : $ rate during period
|
|
7.2838
|
|
|
7.1557
|
|
|
7.1556
|
|
Rate at end of period
|
|
7.4327
|
|
|
8.1976
|
|
|
7.8821
|
|
Translation exchange
rates
We are required to translate our
results of operations from ZAR to US dollars on a monthly basis. Thus, the
average rates used to translate this data for the first quarter of fiscal 2010
and 2009, vary slightly from the averages shown in the table above. The
translation rates we use in presenting our results of operations are the rates
shown in the following table:
Table 2
|
|
Three months ended
|
|
|
Year ended
|
|
|
|
September
30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
Income and expense items: $1 = ZAR.
|
|
7.8153
|
|
|
7.8045
|
|
|
8.9397
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items: $1 = ZAR
|
|
7.4327
|
|
|
8.1976
|
|
|
7.8821
|
|
Results of operations
The discussion of our
consolidated overall results of operations is based on amounts as reflected in
Item 1 Financial Statements which are reported in US dollars and are
prepared in accordance with US GAAP. Our discussion analyzes our results of
operations both in US dollars and ZAR, because ZAR is the functional currency of
the entities which contribute the majority of our profits and is the currency in
which the majority of our transactions are initially incurred and measured. Due
to the significant impact of currency fluctuations between the US dollar and ZAR
on our reported results and because we use the US dollar as our reporting
currency, we believe that the supplemental presentation of our results of
operations in ZAR is useful to investors to understand the changes in the
underlying trends of our business. Our results of operations for the first
quarter of fiscal 2009 include the operations of BGS from September 1, 2008.
BGSs operations are included in our consolidated financial statements for the
entire first quarter of fiscal 2010.
22
We analyze our business and
operations in terms of four inter-related but independent operating segments:
(1) transaction-based activities, (2) smart card accounts, (3) financial
services, and (4) hardware, software and related technology sales. In addition,
corporate and corporate office activities that are impracticable to ascribe
directly to any of the other operating segments, as well as any inter-segment
eliminations, are included in corporate/eliminations.
First quarter fiscal 2010
compared to the first quarter of fiscal 2009
The following factors had a
significant influence on our results of operations during the first quarter of
fiscal 2010 as compared with the same period in the prior year:
-
increased revenues and operating income resulting from an
inflation-adjusted fixed fee for the distribution of a minimum number of
social welfare grants;
-
increased revenues and operating income resulting from higher transaction
volumes at EasyPay;
-
increased revenues and operating income from the continued adoption of our
merchant acquiring system by cardholders;
-
decrease in revenue and operating income from our hardware, software and
related technology sales operating segment resulting from $6.2 million in
sales to Ghana and Nedbank during fiscal 2009 and cyclical pressure on certain
commodity hardware products;
-
decrease in operating income as a result of amortization of intangible
assets related to the BGS and RMT acquisitions;
-
increased net income during fiscal 2009 resulting from an unrealized
foreign exchange rate gain related to the asset swap we entered into during
the period; and
-
increased net income as a result of the change in our fully distributed
tax rate from 35.45% to 34.55% during fiscal 2009.
Consolidated
overall results of operations
This discussion is based on the
amounts which were prepared in accordance with US GAAP.
The following tables show the
changes in the items comprising our statements of operations, both in US dollars
and in ZAR:
|
|
In United States Dollars
|
|
Table 3
|
|
(US
GAAP)
|
|
|
|
Three
months ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
$ %
|
|
|
|
$ 000
|
|
|
$ 000
|
|
|
change
|
|
Revenue
|
|
65,514
|
|
|
67,935
|
|
|
(4
|
)%
|
Cost of goods sold, IT processing, servicing and support
|
|
16,827
|
|
|
19,236
|
|
|
(13
|
)%
|
Selling, general and administration
|
|
17,740
|
|
|
17,998
|
|
|
(1
|
)%
|
Depreciation and amortization
|
|
4,579
|
|
|
3,423
|
|
|
34%
|
|
Operating income
|
|
26,368
|
|
|
27,278
|
|
|
(3
|
)%
|
Unrealized foreign exchange gain related to short-term
|
|
|
|
|
|
|
|
|
|
investment
|
|
-
|
|
|
6,076
|
|
|
|
|
Interest income, net
|
|
2,371
|
|
|
3,162
|
|
|
(25
|
)%
|
Income before income taxes
|
|
28,739
|
|
|
36,516
|
|
|
(21
|
)%
|
Income tax expense
|
|
11,031
|
|
|
9,902
|
|
|
11%
|
|
Net income before loss from equity-accounted
investments
|
|
17,708
|
|
|
26,614
|
|
|
(33
|
)%
|
Loss from equity-accounted investments
|
|
(111
|
)
|
|
(310
|
)
|
|
(64
|
)%
|
Net income
|
|
17,597
|
|
|
26,304
|
|
|
(33
|
)%
|
(Add) Less: net (loss) income attributable to non-controlling
|
|
|
|
|
|
|
|
|
|
interest
|
|
(344
|
)
|
|
60
|
|
|
|
|
Net income attributable to us
|
|
17,941
|
|
|
26,244
|
|
|
(32
|
)%
|
23
|
|
In South African Rand
|
|
Table 4
|
|
(US
GAAP)
|
|
|
|
Three
months ended September 30,
|
|
|
|
|
|
|
2008
|
|
|
ZAR
|
|
|
|
2009
|
|
|
ZAR
|
|
|
%
|
|
|
|
ZAR 000
|
|
|
000
|
|
|
change
|
|
Revenue
|
|
512,011
|
|
|
530,197
|
|
|
(3
|
)%
|
Cost of goods sold, IT processing, servicing and support
|
|
131,508
|
|
|
150,127
|
|
|
(12
|
)%
|
Selling, general and administration
|
|
138,644
|
|
|
141,845
|
|
|
(2
|
)%
|
Depreciation and amortization
|
|
35,786
|
|
|
26,714
|
|
|
34%
|
|
Operating income
|
|
206,073
|
|
|
211,511
|
|
|
(3
|
)%
|
Unrealized foreign exchange gain related to short-term
|
|
|
|
|
|
|
|
|
|
investment
|
|
-
|
|
|
48,800
|
|
|
|
|
Interest income, net
|
|
18,530
|
|
|
24,678
|
|
|
(25
|
)%
|
Income before income taxes
|
|
224,603
|
|
|
284,989
|
|
|
(21
|
)%
|
Income tax expense
|
|
86,210
|
|
|
77,280
|
|
|
12%
|
|
Net income before loss from equity-accounted
investments
|
|
138,393
|
|
|
207,709
|
|
|
(33
|
)%
|
Loss from equity-accounted investments
|
|
(867
|
)
|
|
(2,419
|
)
|
|
(64
|
)%
|
Net income
|
|
137,526
|
|
|
205,290
|
|
|
(33
|
)%
|
(Add) Less: net (loss) income attributable to non-controlling
|
|
|
|
|
|
|
|
|
|
interest
|
|
(2,688
|
)
|
|
468
|
|
|
|
|
Net income attributable to us
|
|
140,214
|
|
|
204,822
|
|
|
(32
|
)%
|
Analyzed in ZAR the decrease in
revenue and cost of goods sold, IT processing, servicing and support for the
first quarter of fiscal 2010, was primarily due to fewer sales of hardware,
which was partially offset by higher revenues in our transaction-based
activities operating segment.
Operating income margin for the
first quarter of each of fiscal 2010 and 2009 was 40%. We discuss the components
of the operating income margin under Results of operations by operating
segment.
Selling, general and
administration expenses decreased during the first quarter of fiscal 2010
primarily due to JSE Limited listing costs of approximately $0.4 million (ZAR
3.4 million) incurred during fiscal 2009. Selling, general and administration
expenses include the stock-based compensation charge related to the stock
options awarded in the May 2009 and restricted stock granted in August 2009.
Our direct costs of maintaining a
listing on Nasdaq and obtaining a listing on the JSE, as well as compliance with
the Sarbanes-Oxley Act of 2002, or Sarbanes, particularly Section 404 of
Sarbanes, includes independent directors fees, legal fees, fees paid to Nasdaq
and the JSE, our compliance officers salary, fees paid to consultants who
assist with Sarbanes compliance, fees paid to our independent accountants
related to the audit and review process and, during fiscal 2009, fees paid to
our consultants and advisors assisting with the JSE listing. This has resulted
in expenditures of $0.7 million (ZAR 5.1 million) and $0.9 million (ZAR 7.1
million) during the first quarter of fiscal 2010 and 2009, respectively.
Depreciation and amortization and
deferred tax expenses increased during fiscal 2010 primarily as a result of the
BGS and RMT acquisitions, as summarized in the tables below:
|
|
Three months ended
|
|
Table 5
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
$ 000
|
|
|
$ 000
|
|
Amortization included in depreciation and amortization
expense:
|
|
3,324
|
|
|
2,141
|
|
Prism acquisition
|
|
413
|
|
|
1,275
|
|
RMT acquisition
|
|
515
|
|
|
-
|
|
BGS acquisition
|
|
2,396
|
|
|
866
|
|
|
|
|
|
|
|
|
Deferred tax included in income tax expense:
|
|
883
|
|
|
651
|
|
Prism acquisition
|
|
138
|
|
|
434
|
|
RMT acquisition
|
|
144
|
|
|
-
|
|
BGS acquisition
|
|
601
|
|
|
217
|
|
24
|
|
Three months ended
|
|
Table 6
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
ZAR 000
|
|
|
ZAR 000
|
|
Amortization included in depreciation and amortization
expense:
|
|
25,978
|
|
|
16,710
|
|
Prism acquisition
|
|
3,229
|
|
|
9,951
|
|
RMT acquisition
|
|
4,024
|
|
|
-
|
|
BGS acquisition
|
|
18,725
|
|
|
6,759
|
|
|
|
|
|
|
|
|
Deferred tax included in income tax expense:
|
|
6,905
|
|
|
5,079
|
|
Prism acquisition
|
|
1,081
|
|
|
3,385
|
|
RMT acquisition
|
|
1,127
|
|
|
-
|
|
BGS acquisition
|
|
4,697
|
|
|
1,694
|
|
Property, plant and equipment
acquired to provide administration and distribution services to our customers is
depreciated over the shorter of expected useful life and the contract period
with the provincial government. Through September 30, 2009, we were in an
extension phase with all our contracts thus and the majority of our property,
plant and equipment related to the administration and distribution of social
welfare grants had been written off in prior periods. Accordingly, depreciation
expense related to these activities decreased during the first quarter of fiscal
2010 compared with the first quarter of fiscal 2009. This reduction in
depreciation was partially offset by the increase in depreciation related to new
back-end processing computers and our participating merchant POS terminals.
Our results for the first quarter
of fiscal 2009 include the unrealized foreign exchange gain resulting from an
asset swap arrangement (in the form of a 32-day call account instrument) that we
entered into in connection with the short-term bank financing we obtained to
fund the BGS acquisition. We were required to mark to market the instrument as
of September 30, 2008, and recorded an unrealized gain of approximately $6.1
million (ZAR 48.8 million) for the first quarter of fiscal 2009.
Interest on surplus cash for the
first quarter of fiscal 2010 decreased to $2.6 million (ZAR 20.3 million) from
$6.7 million (ZAR 52.3 million) for the first quarter of fiscal 2009. The
decrease in interest on surplus cash held in South Africa was due to a lower
average daily ZAR cash balance during the first quarter of fiscal 2010 compared
with the first quarter of fiscal 2009 and lower deposit rates resulting from the
adjustment in the South African prime interest rate from an average of
approximately 15.50% per annum for the first quarter of fiscal 2009 to 10.74%
per annum for the first quarter of fiscal 2010. The lower cash balances resulted
primarily from our repurchase of our shares from Brait S.As investment
affiliates.
Included in interest expense for
the first quarter of fiscal 2009 is the facility fee of approximately $0.7
million (ZAR 5.8 million) that we paid to the lender under the short-term loan
facility we obtained to fund the BGS acquisition and approximately $0.5 million
(ZAR 3.9 million) interest on the short-term loan facility. Excluding the impact
of this facility fee and the interest on the short-term loan facility, interest
expense decreased during the first quarter of fiscal 2010 due to a decrease in
the average rates of interest on our short-term facilities and the elimination
of our obligation to provide prefunded social welfare grants to provincial
governments. In ZAR, excluding the impact of the facility fee, finance costs
decreased to $0.3 million (ZAR 2.2 million) for the first quarter of fiscal 2010
from $2.9 million (ZAR 22.6 million) for the first quarter of fiscal 2009.
Total tax expense for the first
quarter of fiscal 2010 was $11.0 million (ZAR 86.2 million) compared with $9.9
million (ZAR 77.3 million) during the same period in the prior fiscal year.
Deferred tax assets and liabilities are measured utilizing the enacted fully
distributed tax rate. Accordingly, the reduction in the fully distributed tax
rate from 35.45% to 34.55% during the first quarter of fiscal 2009 resulted in
lower deferred tax assets and liabilities and the net change of $3.5 million
(ZAR 26.5 million) was included in our income tax expense in our unaudited
condensed consolidated statement of operations. In ZAR, without giving effect to
the change in our fully-distributed tax rate, our total tax expense decreased
primarily due to lower net income before taxation from our operating activities.
Our effective tax rate for the first quarter of fiscal 2010 was 38.4%, compared
to 27.1% for the first quarter of fiscal 2009. The change in our effective tax
rate was primarily due to reduction in our fully distributed tax rate to 34.55%
during fiscal 2009, offset by an increase in non-deductible expenses, including
stock-based compensation charges and legal fees, during the first quarter of
fiscal 2010 compared to the first quarter of fiscal 2009.
Loss from equity-accounted
investments for the first quarter of fiscal 2010 and 2009 was $0.1 million (ZAR
0.9 million) and $0.3 million (ZAR 2.4 million), respectively.
25
Results
of operations by operating segment
The composition of revenue and
the contributions of our business activities to operating income are illustrated
below.
Table 7
|
|
In United States Dollars (US GAAP)
|
|
|
|
Three months ended September 30,
|
|
|
|
2009
|
|
|
% of
|
|
|
2008
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
$000
|
|
|
total
|
|
|
$ 000
|
|
|
total
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
44,978
|
|
|
69%
|
|
|
40,344
|
|
|
59%
|
|
|
11
|
%
|
Smart card accounts
|
|
8,074
|
|
|
12%
|
|
|
8,570
|
|
|
13%
|
|
|
(6
|
)%
|
Financial services
|
|
792
|
|
|
1%
|
|
|
1,784
|
|
|
3%
|
|
|
(56
|
)%
|
Hardware, software and related technology
sales
|
|
11,670
|
|
|
18%
|
|
|
17,237
|
|
|
25%
|
|
|
(32
|
)%
|
Total consolidated revenue
|
|
65,514
|
|
|
100%
|
|
|
67,935
|
|
|
100%
|
|
|
(4
|
)%
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
26,668
|
|
|
101%
|
|
|
21,638
|
|
|
79%
|
|
|
23
|
%
|
Operating income before
amortization
|
|
27,450
|
|
|
|
|
|
22,052
|
|
|
|
|
|
24
|
%
|
Amortization of intangible assets
|
|
(782
|
)
|
|
|
|
|
(414
|
)
|
|
|
|
|
89
|
%
|
Smart card accounts
|
|
3,670
|
|
|
14%
|
|
|
3,895
|
|
|
14%
|
|
|
(6
|
)%
|
Financial services
|
|
531
|
|
|
2%
|
|
|
327
|
|
|
1%
|
|
|
62
|
%
|
Hardware, software and related technology
sales
|
|
(1,713
|
)
|
|
(6
|
)%
|
|
4,134
|
|
|
15%
|
|
|
(141
|
)%
|
Operating income before amortization
|
|
829
|
|
|
|
|
|
5,861
|
|
|
|
|
|
(86
|
)%
|
Amortization of intangible
assets
|
|
(2,542
|
)
|
|
|
|
|
(1,727
|
)
|
|
|
|
|
47
|
%
|
Corporate/eliminations
|
|
(2,788
|
)
|
|
(11
|
)%
|
|
(2,716
|
)
|
|
(9
|
)%
|
|
3
|
%
|
Total consolidated
operating income
|
|
26,368
|
|
|
100%
|
|
|
27,278
|
|
|
100%
|
|
|
(3
|
)%
|
Table 8
|
|
In South African Rand (US GAAP)
|
|
|
|
Three months ended September 30,
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
% of
|
|
|
ZAR
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
000
|
|
|
total
|
|
|
000
|
|
|
total
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
351,516
|
|
|
69%
|
|
|
314,864
|
|
|
59%
|
|
|
12
|
%
|
Smart card accounts
|
|
63,101
|
|
|
12%
|
|
|
66,884
|
|
|
13%
|
|
|
(6
|
)%
|
Financial services
|
|
6,190
|
|
|
1%
|
|
|
13,923
|
|
|
3%
|
|
|
(56
|
)%
|
Hardware, software and related technology sales
|
|
91,204
|
|
|
18%
|
|
|
134,526
|
|
|
25%
|
|
|
(32
|
)%
|
Total consolidated
revenue
|
|
512,011
|
|
|
100%
|
|
|
530,197
|
|
|
100%
|
|
|
(3
|
)%
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
208,418
|
|
|
101%
|
|
|
168,874
|
|
|
79%
|
|
|
23
|
%
|
Operating income before amortization
|
|
214,529
|
|
|
|
|
|
172,103
|
|
|
|
|
|
25
|
%
|
Amortization of intangible
assets
|
|
(6,111
|
)
|
|
|
|
|
(3,229
|
)
|
|
|
|
|
89
|
%
|
Smart card accounts
|
|
28,682
|
|
|
14%
|
|
|
30,398
|
|
|
14%
|
|
|
(6
|
)%
|
Financial services
|
|
4,150
|
|
|
2%
|
|
|
2,552
|
|
|
1%
|
|
|
63
|
%
|
Hardware, software and related technology sales
|
|
(13,388
|
)
|
|
(6
|
)%
|
|
32,264
|
|
|
15%
|
|
|
(141
|
)%
|
Operating income before
amortization
|
|
6,479
|
|
|
|
|
|
45,745
|
|
|
|
|
|
(86
|
)%
|
Amortization of intangible assets
|
|
(19,867
|
)
|
|
|
|
|
(13,481
|
)
|
|
|
|
|
47
|
%
|
Corporate/eliminations
|
|
(21,789
|
)
|
|
(11
|
)%
|
|
(22,577
|
)
|
|
(9
|
)%
|
|
(3
|
)%
|
Total consolidated operating income
|
|
206,073
|
|
|
100%
|
|
|
211,511
|
|
|
100%
|
|
|
(3
|
)%
|
Transaction-based
activities
In ZAR, the increases in revenue
and operating income were primarily due to higher average revenue per grant paid
in all provinces where we provide a welfare distribution service, increased
revenue resulting from the opening of the October 2009 pay file in all five
provinces in the last three days of September 2009, continued adoption of our
merchant acquiring system in the provinces where we distribute welfare grants,
increased transacting ability at participating retailers POS devices in these
provinces, and increased transaction volumes at EasyPay. We discuss these
factors in more detail below.
Revenues for transaction-based
activities include the transaction fees we earn through our merchant acquiring
system and reflect the elimination of inter-company transactions.
26
Operating income margin of our
transaction-based activities increased to 59% from 54%. The increase was due
primarily to the early opening of the October 2009 pay file, higher average
revenue per grant paid due to the standard pricing formula for all provinces and
improved margins at EasyPay.
Higher
average revenue per grant paid resulting from one year
extension
:
Our new interim contract with
SASSA became effective on April 1, 2009 and expires on March 31, 2010. The new
contract, contains a standard pricing formula for all provinces based on a
transaction fee per beneficiary paid regardless of the number or amount of
grants paid per beneficiary, calculated on a guaranteed minimum number of
beneficiaries per month. Under our previous contracts, depending on the
province, we received either a fee per grant distributed, or per beneficiary
paid, or as a percentage of the total grant amount distributed. The new standard
pricing formula has resulted in higher average revenue per grant paid in all
provinces during the first quarter of fiscal 2010 compared with fiscal 2009 due
to the decrease in the number of grants paid during fiscal 2010 compared with
fiscal 2009.
During the first quarter of
fiscal 2010, we experienced lower volumes in all the provinces where we
administer payments of social welfare grants mainly due to SASSA suspending
certain grant types and removing fraudulent beneficiaries. In total, the volume
of payments processed during the first quarter of fiscal 2010 decreased 5% to
11,476,776 from the first quarter of fiscal 2009.
Contract volumes during the first
quarter of fiscal 2010 and 2009, as well as average revenue per grant paid are
detailed below:
Table 9
|
|
Three
months ended September 30,
|
|
|
|
Number of
|
|
|
Average
Revenue per Grant Paid
|
|
|
|
Grants
Paid
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Province
|
|
2009
|
|
|
2008
|
|
|
$(1)
|
|
|
$(2)
|
|
|
ZAR(1)
|
|
|
ZAR(2)
|
|
KwaZulu-Natal
|
|
4,858,445
|
|
|
5,230,041
|
|
|
3.21
|
|
|
3.07
|
|
|
25.13
|
|
|
23.89
|
|
Limpopo
|
|
2,921,632
|
|
|
2,958,456
|
|
|
3.19
|
|
|
2.33
|
|
|
24.96
|
|
|
18.15
|
|
North West
|
|
1,161,218
|
|
|
1,385,537
|
|
|
3.44
|
|
|
3.30
|
|
|
26.94
|
|
|
25.68
|
|
Northern Cape
|
|
481,157
|
|
|
497,726
|
|
|
3.21
|
|
|
3.09
|
|
|
25.12
|
|
|
24.03
|
|
Eastern Cape
|
|
2,054,324
|
|
|
2,058,236
|
|
|
2.94
|
|
|
2.12
|
|
|
22.99
|
|
|
16.52
|
|
Total
|
|
11,476,776
|
|
|
12,129,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Average Revenue per Grant
Paid excludes $ 0.78 (ZAR 5.50) related to the provision of smart card accounts.
(2) Average Revenue per Grant
Paid excludes $ 0. 71 (ZAR 5.50) related to the provision of smart card
accounts.
Continued
adoption of our merchant acquiring system:
The increase in the number of POS
devices and number of participating UEPS retail locations since September 30,
2008, is due to increased rental or purchase of POS devices by current merchants
requesting additional equipment and new merchants joining our UEPS merchant
acquiring system.
27
The key statistics and indicators
of our merchant acquiring system during the first quarter of fiscal 2010 and
2009, in each of the South African provinces where we distribute social welfare
grants are summarized in the table below:
Table 10
|
|
Three months ended
|
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
NC, EC,
|
|
|
NC, EC,
|
|
|
|
KZN, L
|
|
|
KZN, L
|
|
Province included (1)
|
|
and NW
|
|
|
and NW
|
|
Total POS devices installed
|
|
4,528
|
|
|
4,170
|
|
Number of participating UEPS retail locations
|
|
2,506
|
|
|
2,382
|
|
Value of transactions processed through POS devices during
the quarter
|
|
|
|
|
|
|
(2) (in $ 000)
|
|
380,782
|
|
|
319,410
|
|
Value of transactions processed through POS devices during
the
|
|
|
|
|
|
|
completed pay cycles for the quarter (3)
(in $ 000)
|
|
366,786
|
|
|
293,899
|
|
Value of transactions processed through POS devices during
the quarter
|
|
|
|
|
|
|
(2) (in ZAR 000)
|
|
2,980,378
|
|
|
2,486,912
|
|
Value of transactions processed through POS devices during
the
|
|
|
|
|
|
|
completed pay cycles for the quarter (3)
(in ZAR 000)
|
|
2,870,837
|
|
|
2,288,288
|
|
Number of grants paid through POS devices during the quarter
(2)
|
|
4,846,515
|
|
|
4,543,147
|
|
Number of grants paid through POS devices
during the completed pay
|
|
|
|
|
|
|
cycles for the quarter (3)
|
|
4,675,128
|
|
|
4,208,634
|
|
Average number of grants processed per terminal
during the quarter (2) .
|
|
1,082
|
|
|
1,061
|
|
Average number of grants processed per terminal during the
completed
|
|
|
|
|
|
|
pay cycles for the quarter (3)
|
|
1,044
|
|
|
983
|
|
(1) NC = Northern Cape, EC = Eastern
Cape, KZN = KwaZulu-Natal, L = Limpopo, NW = North West.
(2) Refers to events occurring during the quarter
(i.e., based on three calendar months).
(3) Refers to events occurring during the completed
pay cycle.
The following chart presents the
number of POS devices installed and the average spend per POS device,
per pay
cycle and calendar month
, during the 18 month period ended September 30,
2009:
28
The following chart presents the
growth in the value of loads at merchant locations processed through our
installed base of POS devices,
per pay cycle and calendar month
, during
the 18 month period ended September 30, 2009:
The following graph presents the
number of social welfare grants loaded at merchant locations,
per pay cycle
and calendar month
, for the 18 month period ended September 30, 2009:
29
EasyPay
transaction fees:
During the first quarter of
fiscal 2010 and 2009, EasyPay processed 153 million and 135 million transactions
with an approximate value of $4.3 billion (ZAR 33.4 billion) and $4.1 billion
(ZAR 31.7 billion), respectively. The increase in transaction volumes results
from more value-added services processed by EasyPay during the first quarter of
fiscal 2010 compared with 2009.The average fee per transaction during each of
the first quarter of fiscal 2010 and 2009, was $0.03 (ZAR 0.22) . We expect
transaction volumes to increase as a result of higher value added services
processed by EasyPay during the second quarter of fiscal 2010 compared with
fiscal 2009. In ZAR, we do not expect a significant fluctuation in the average
fee per transaction during the second quarter of fiscal 2010.
Operating income margins
generated by EasyPay during the first quarter of fiscal 2010 and 2009, were 47%
and 42%, respectively, which is lower than those generated by our pension and
welfare business and reduced the operating income margins within our
transaction-based activities segment. Certain EasyPay intangible assets were
fully amortized at the end of fiscal 2009. Accordingly, our results for the
first quarter of fiscal 2010 includes less EasyPay intangible asset amortization
compared with fiscal 2009 which has resulted in a higher operating income margin
at EasyPay.
Amortization of EasyPay
intangible assets during the first quarter of fiscal 2010 and 2009, of $0.3
million (ZAR 2.1 million) and $0.4 million (ZAR 3.2 million), respectively, is
included in the calculation of EasyPay operating margins. Operating income
margin before amortization of EasyPay intangible assets during each of the first
quarter of fiscal 2010 and 2009 was 53%.
Smart card accounts
In ZAR, revenue from the
provision of smart card-based accounts decreased in proportion to the lower
number of beneficiaries serviced through our SASSA contract. A total number of
3,794,827 smart card-based accounts were active at September 30, 2009, compared
to 4,039,359 active accounts as at September 30, 2008. The decrease in the
number of active accounts resulted from the suspension and removal of invalid or
fraudulent grants by SASSA.
Operating income margin from
providing smart card accounts was constant at 45% for the first quarter of
fiscal 2010 and 2009.
Financial services
On March 1, 2009, we sold our
traditional microlending business to Finbond, and therefore our segment results
for the first quarter of fiscal 2010 do not include any revenue or loss from
this business.
Revenue from UEPS-based lending
decreased primarily due to the lower number of loans granted. In addition, on
average, the return on these UEPS-based loans was lower. Our current UEPS-based
lending portfolio comprises loans made to elderly pensioners in some of the
provinces where we distribute social welfare grants. We insure the UEPS-based
lending book against default and thus no allowance is required.
Operating income margin for the
financial services segment increased to 67% for the first quarter of fiscal 2010
from 18% for the first quarter of fiscal 2009 primarily due to sale of the
traditional microlending business, which had an overall lower operating income
margin compared with UEPS-based lending.
30
Hardware, software and
related technology sales
Operating results include BGS for
the entire first quarter of fiscal 2010 and from September 1, 2008, for the fist
quarter of fiscal 2009. The table below presents the contribution of BGS to our
revenue and operating income during the first quarter of fiscal 2010 and 2009:
|
|
Three months ended
|
|
Table 11
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
$ 000
|
|
|
$ 000
|
|
Revenue
|
|
11,670
|
|
|
17,237
|
|
Hardware, software and related technology
sales excluding BGS
|
|
10,622
|
|
|
16,172
|
|
BGS
|
|
1,048
|
|
|
1,065
|
|
|
|
|
|
|
|
|
Operating income before amortization of intangible
assets
|
|
829
|
|
|
5,861
|
|
|
|
|
|
|
|
|
Operating income
|
|
(1,713
|
)
|
|
4,134
|
|
Hardware, software and related technology
sales excluding BGS
|
|
1,993
|
|
|
4,588
|
|
BGS
|
|
(3,706
|
)
|
|
(454
|
)
|
BGS excluding amortization
of acquisition related intangible assets
|
|
(1,310
|
)
|
|
412
|
|
Amortization
of acquisition related intangible assets
|
|
(2,396
|
)
|
|
(866
|
)
|
|
|
Three months ended
|
|
Table 12
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
ZAR 000
|
|
|
ZAR 000
|
|
Revenue
|
|
91,204
|
|
|
134,526
|
|
Hardware, software and related technology
sales excluding BGS
|
|
83,014
|
|
|
126,214
|
|
BGS
|
|
8,190
|
|
|
8,312
|
|
|
|
|
|
|
|
|
Operating income before amortization of intangible
assets
|
|
6,479
|
|
|
45,745
|
|
|
|
|
|
|
|
|
Operating income
|
|
(13,388
|
)
|
|
32,264
|
|
Hardware, software and related technology
sales excluding BGS
|
|
15,575
|
|
|
35,808
|
|
BGS
|
|
(28,963
|
)
|
|
(3,544
|
)
|
BGS excluding amortization
of acquisition related intangible assets
|
|
(10,238
|
)
|
|
3,215
|
|
Amortization
of acquisition related intangible assets
|
|
(18,725
|
)
|
|
(6,759
|
)
|
In ZAR, the decrease in revenue
was primarily due to lower revenues at BGS due to seasonality and lower ad hoc
hardware and software development sales in 2010 as compared with the prior year
when we recorded revenue from sales under our Ghana contract. In ZAR, the
decrease in operating income was primarily due to amortization of BGS intangible
assets and lower sales activity.
During the first quarter of
fiscal 2009 we recognized revenue of $2.3 million (ZAR 18.2 million) from sales
of hardware to Nedbank. Sales to Nedbank occur on an ad hoc basis and there were
no significant sales during the first quarter of fiscal 2010.
Amortization of Prism intangible
assets during the first quarter of fiscal 2010 and 2009, respectively, was
approximately $0.1 million (ZAR 1.1 million) and $0.9 million (ZAR 6.7 million),
respectively, and reduced our operating income.
As we expand internationally,
whether through traditional selling arrangements to provide products and
services (such as in Ghana and Iraq) or through joint ventures (such as with
SmartSwitch Namibia and SmartSwitch Botswana), we expect to receive revenues
from sales of hardware and from software customization and licensing to
establish the infrastructure of POS terminals and smart cards necessary to
enable utilization of the UEPS and DUET technology in a particular country. To
the extent that we enter into joint ventures and account for the investment as
an equity investment, we are required to eliminate the sale of hardware,
software and licenses to the investees. The sale of hardware, software and
licenses under these arrangements occur on an ad hoc basis as new arrangements
are established, which can materially affect our revenues and operating income
in this segment from period to period.
31
Corporate/eliminations
The increase in our losses in
this segment resulted from increases in corporate head office-related
expenditure, including the effects of the increase in inflation in South Africa,
stock-based compensation charges and the JSE listing costs.
Our operating loss includes
expenditure related to compliance with Sarbanes; non-executive directors fees;
employee and executive salaries and bonuses; stock-based compensation; legal and
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, 2009,
our cash balances were $139.3 million, which comprised mainly ZAR-denominated
balances of ZAR 866.0 million ($116.5 million), US dollar-denominated balances
of $12.3 million and other currency deposits, primarily euro, of $10.5 million.
Our cash balances decreased from June 30, 2009, levels mainly as a result of the
repurchase of our common stock from Brait S.A. and its investment entities
affiliates, which decrease was offset by cash generated by operating
activities.
We generally invest the surplus
cash held by our South African operations in overnight call accounts that we
maintain at South African banking institutions, and surplus cash held by our
non-South African companies in the US and European money markets.
Historically, we have financed
most of our operations, research and development, working capital, capital
expenditures and acquisitions through our internally generated cash. We take the
following factors into account when considering whether to borrow under our
financing facilities:
-
cost of capital;
-
cost of financing;
-
opportunity cost of utilizing surplus cash; and
-
availability of tax efficient structures to moderate financing costs.
We have historically had a unique
cash flow cycle due to our obligation to pre-fund the payments of social welfare
grants in two provinces, although under our new SASSA contract, we are no longer
required to pre-fund. Under the new contract, we receive the grant funds 48
hours prior to the provision of the service and any interest we earn on these
amounts is for the benefit of SASSA. We will continue to pre-fund certain
merchants who facilitate the distribution of grants through our merchant
acquiring system. When grants are paid at merchant locations before the start of
the payment service at pay points, we pre-fund these payments to the merchants
distributing the grants on our behalf. We typically reimburse these merchants
within 48 hours after they distribute the grants to the social welfare
beneficiaries.
We currently believe that our
cash and credit facilities are sufficient to fund our current operations for at
least the next four quarters.
Cash flows from
operating activities
Three months ended September
30, 2009
Net cash provided by operating
activities for the first quarter of fiscal 2010 was $37.0 million (ZAR 289.1
million) compared to net cash outflows from operating activities of $33.0
million (ZAR 257.8 million) for the first quarter of fiscal 2009. The difference
was due mainly to the elimination of our obligation to provide prefunded social
welfare grant payments on behalf of provincial governments.
During the first quarter of
fiscal 2010 we made an additional second provisional tax payment of $3.9 million
(ZAR 29.6 million) related to our 2009 tax year in South Africa. See the table
below for a summary of all taxes paid (refunded).
32
Taxes paid during the first
quarter of fiscal 2010 and 2009 were as follows:
Table 13
|
|
Three
months ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
$
|
|
|
$
|
|
|
ZAR
|
|
|
ZAR
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxation paid related to prior years
|
|
3,929
|
|
|
8,602
|
|
|
29,611
|
|
|
66,886
|
|
Taxation refunds received
|
|
(238
|
)
|
|
(61
|
)
|
|
(1,900
|
)
|
|
(471
|
)
|
Total tax paid
|
|
3,691
|
|
|
8,541
|
|
|
27,711
|
|
|
66,415
|
|
We expect to pay our third
provisional tax payment related to our 2009 tax year and our first provisional
payment related to our 2010 tax year during the second quarter of fiscal 2010.
Cash flows from
investing activities
Three months ended September
30, 2009
Cash used in investing activities
for the first quarter of fiscal 2010 includes capital expenditure of $0.6
million (ZAR 5.0 million), primarily for the acquisition of POS devices to
service our merchant acquiring system, improvements to leasehold property and
the acquisition of computer equipment.
Cash used in investing activities
for the first quarter of fiscal 2009 includes capital expenditure of $2.8
million (ZAR 21.98 million), primarily for the acquisition of six backend
processing machines to maintain and expand current operations and modifications
to vehicles acquired to distribute social welfare grants.
During the first quarter of
fiscal 2009 we paid $95.3 million (ZAR 743.3 million), net of cash received, for
80.1% of the outstanding ordinary capital of BGS. In addition, we acquired
additional shares of VinaPay for approximately $0.3 million. Our current
shareholding in VinaPay remains at 30%. Finally, during the first quarter of
fiscal 2009, we acquired additional shares of VTU Colombia for approximately
$0.3 million. Our shareholding in VTU Colombia remains at 50%.
Cash flows from
financing activities
Three months ended September
30, 2009
During the first quarter of
fiscal 2010 we repurchased, using our ZAR reserves, 9,221,526 shares of our
common stock from Brait S.A. and its investment entities affiliates for $13.50
(ZAR 105.98) per share, for an aggregate repurchase price of $124.5 million (ZAR
977.3 million). In addition, we incurred costs of approximately $0.5 million
(ZAR 3.9 million) related to the repurchase of these shares. During the first
quarter of fiscal 2010, we also paid $1.3 million on account of shares we
repurchased on June 30, 2009, under our share buy-back program.
During the first quarter of
fiscal 2010 and 2009 we received $0.7 (ZAR 5.5 million) and $0.2 (ZAR 1.2
million), respectively, from employees exercising stock options and repaying
loans.
During the first quarter of
fiscal 2009 we received $110 million under a short-term loan facility, the
proceeds of which we used to fund the BGS acquisition and to pay a $1.1 million
facility fee. We repaid the facility in full during the second quarter of fiscal
2009.
Off-Balance Sheet Arrangements
We have no off-balance sheet
arrangements.
Capital Expenditures
All of our capital expenditures
for the past three fiscal years have been funded through internally generated
funds. We had outstanding capital commitments of $0.1 million as of September
30, 2009. We anticipate that capital spending for the second quarter of fiscal
2010 will relate primarily to on-going replacement of equipment used to
administer and distribute social welfare grants and provide a switching service
through EasyPay. We expect to fund these expenditures through internally
generated funds.
We discuss our capital
expenditures during the first quarter of fiscal 2010 under Liquidity and
capital resources Cash flows from investing activities.
33
Contingent Liabilities, Commitments and Contractual
Obligations
We lease various premises under
operating leases. Our minimum future commitments for leased premises as well as
other commitments are as follows:
Table 14
|
|
Payments
due by Period, as at September 30, 2009(in $ 000s)
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
than 1
|
|
|
1-3
|
|
|
3-5
|
|
|
than 5
|
|
|
|
Total
|
|
|
year
|
|
|
years
|
|
|
years
|
|
|
years
|
|
Interest-bearing liabilities
|
$
|
4,125
|
|
$
|
4,125
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Operating lease obligations
|
|
4,517
|
|
|
2,148
|
|
$
|
2,190
|
|
$
|
179
|
|
|
-
|
|
Purchase obligations
|
|
3,717
|
|
|
3,717
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Capital commitments
|
|
18
|
|
|
18
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
12,377
|
|
$
|
10,008
|
|
$
|
2,190
|
|
$
|
179
|
|
|
-
|
|
Item 3. Quantitative and
Qualitative Disclosures About Market Risk
We seek to reduce our exposure to
currencies other than the South African rand, or ZAR, through a policy of
matching, to the extent possible, assets and liabilities denominated in those
currencies. In addition, we use financial instruments to economically hedge our
exposure to exchange rate and interest rate fluctuations arising from our
operations. We are also exposed to equity price and liquidity risks as well as
credit risks.
Currency Exchange Risk
We are subject to currency
exchange risk because we purchase inventories that we are required to settle in
other currencies, primarily the euro and US dollar. We have used forward
contracts to limit our exposure in these transactions to fluctuations in
exchange rates between the ZAR, on the one hand, and the US dollar and the euro,
on the other hand. As of September 30, 2009 and 2008, our outstanding foreign
exchange contracts were as follows:
As of September 30, 2009
None.
As of September 30, 2008
|
|
|
|
|
|
Fair market
|
|
|
Notional amount
|
|
Strike price
|
|
value price
|
|
Maturity
|
EUR
|
140,000
|
|
ZAR
|
11.5630
|
|
ZAR
|
11.8030
|
|
October 3, 2008
|
USD
|
24,600
|
|
ZAR
|
8.0090
|
|
ZAR
|
8.3003
|
|
October 10, 2008
|
EUR
|
3,891
|
|
ZAR
|
11.9409
|
|
ZAR
|
11.8561
|
|
October 15, 2008
|
EUR
|
5,880
|
|
ZAR
|
11.6292
|
|
ZAR
|
11.8643
|
|
October 17, 2008
|
EUR
|
85,210
|
|
ZAR
|
11.9685
|
|
ZAR
|
11.9216
|
|
October 31, 2008
|
EUR
|
8,608
|
|
ZAR
|
11.9685
|
|
ZAR
|
11.9216
|
|
October 31, 2008
|
EUR
|
82,400
|
|
ZAR
|
12.2199
|
|
ZAR
|
11.9216
|
|
October 31, 2008
|
EUR
|
-82,400
|
|
ZAR
|
12.5773
|
|
ZAR
|
11.8619
|
|
October 31, 2008
|
EUR
|
82,400
|
|
ZAR
|
12.7820
|
|
ZAR
|
12.0035
|
|
November 28, 2008
|
Translation Risk
Translation risk relates to the
risk that our results of operations will vary significantly as the US dollar is
our reporting currency, but we earn most of our revenues and incur most of our
expenses in ZAR. The US dollar to ZAR exchange rate has fluctuated significantly
over the past three years. As exchange rates are outside our control, there can
be no assurance that future fluctuations will not adversely affect our results
of operations and financial condition.
Interest Rate Risk
As a result of our normal
borrowing and leasing activities, our operating results are exposed to
fluctuations in interest rates, which we manage primarily through our regular
financing activities. We generally maintain limited investment in cash
equivalents and have occasionally invested in marketable securities. The
interest earned on our bank balances and short term cash investments is
dependent on the prevailing interest rates in the jurisdictions where our cash
reserves are invested.
34
Credit Risk
Credit risk relates to the risk
of loss that we would incur as a result of non-performance by counterparties. We
maintain credit risk policies with regard to our counterparties to minimize
overall credit risk. These policies include an evaluation of a potential
counterpartys financial condition, credit rating, and other credit criteria and
risk mitigation tools as our management deems appropriate.
With respect to credit risk on
financial instruments, we maintain a policy of entering into such transactions
only with South African and European financial institutions that have a credit
rating of BBB or better, as determined by credit rating agencies such as
Standard & Poors, Moodys and Fitch Ratings.
Equity Price and
Liquidity Risk
Equity price risk relates to the
risk of loss that we would incur as a result of the volatility in the
exchange-traded price of equity securities that we hold and the risk that we may
not be able to liquidate these securities. We have invested in approximately 22%
of the issued share capital of Finbond Group Limited, or Finbond, which are
exchange-traded equity securities. The fair value of these securities as of
September 30, 2009, represented approximately 2% of our total assets, including
these securities. We expect to hold these securities for an extended period of
time and we are not concerned with short-term equity price volatility with
respect to these securities provided that the underlying business, economic and
management characteristics of the company remain sound.
The market price of these
securities may fluctuate for a variety of reasons, consequently, the amount we
may obtain in a subsequent sale of these securities may significantly differ
from the reported market value.
Liquidity risk relates to the
risk of loss that we would incur as a result of the lack of liquidity on the
exchange on which these securities are listed. We may not be able to sell some
or all of these securities at one time, or over an extended period of time
without influencing the exchange traded price, or at all.
The following table summarizes
our exchange traded equity securities with equity price risk as of September 30,
2009. The effects of a hypothetical 10% increase and a 10% decrease in market
prices as of September 30, 2009 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, 2009
|
|
Table 15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hypothetical
|
|
|
|
|
|
|
|
|
|
Estimated fair
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
value after
|
|
|
Increase
|
|
|
|
Fair
|
|
|
|
|
|
hypothetical
|
|
|
(Decrease) in
|
|
|
|
value
|
|
|
Hypothetical
|
|
|
change in price
|
|
|
Shareholders
|
|
|
|
($ 000)
|
|
|
price change
|
|
|
($ 000)
|
|
|
Equity
|
|
Exchange-traded equity securities
|
|
7,401
|
|
|
10
|
%
|
|
8,141
|
|
|
0.26
|
%
|
|
|
|
|
|
(10
|
)%
|
|
6,661
|
|
|
(0.26
|
)%
|
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, 2009. 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, 2009.
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, 2009, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
35
Part II. Other Information
Item 1A. Risk Factors
See Item 1A RISK FACTORS in Part
I of the Companys Annual Report on Form 10-K for the fiscal year ended June 30,
2009, for a discussion of the Companys risk factors. We do not believe that
there have been any material changes to these risk factors.
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 5, 2009.
NET 1 UEPS TECHNOLOGIES, INC.
By: /s/ Dr. Serge C.P. Belamant
Dr. Serge C.P. Belamant
Chief
Executive Officer, Chairman of the Board and Director
By: /s/ Herman Gideon Kotzé
Herman Gideon Kotzé
Chief
Financial Officer, Treasurer and Secretary, Director
36
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