UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2010
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES 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
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98-0171860
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(State or other jurisdiction
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(I.R.S. Employer
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of incorporation or organization)
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Identification No.)
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President Place, 4
th
Floor, Cnr. Jan
Smuts Avenue and Bolton Road
Rosebank, Johannesburg 2196, South
Africa
(Address of principal executive offices)
Registrants telephone number, including area code:
27-11-343-2000
Securities registered pursuant to section 12(b) of the Act:
Title of Each Class
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Name of Each Exchange on
Which Registered
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Common Stock,
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par value $0.001 per share
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NASDAQ Global Select Market
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Securities registered pursuant to section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No
[X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No
[X]
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
filings 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 if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
[X]
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]
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Large accelerated filer
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[ ]
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Accelerated filer
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|
|
|
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[ ]
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Non-accelerated filer
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[ ]
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Smaller reporting company
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(Do not check if a smaller reporting company)
|
|
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The aggregate market value of the registrant's common stock held
by non-affiliates of the registrant as of December 31, 2009 (the last business
day of the registrants most recently completed second fiscal quarter), based
upon the closing price of the common stock as reported by The Nasdaq Global
Select Market on such date, was $ 734,410,823. This calculation does not reflect
a determination that persons are affiliates for any other purposes.
As of August 27, 2009, 45,378,397 shares of the registrants
common stock, par value $0.001 per share were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement to be
delivered to shareholders in connection with the 2010 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-K.
NET 1 UEPS TECHNOLOGIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
Year Ended June 30,
2010
1
PART I
FORWARD LOOKING STATEMENTS
In addition to historical
information, this Annual Report on Form 10-K contains forward-looking statements
that involve risks and uncertainties that could cause our actual results to
differ materially from those projected, anticipated or implied in the
forward-looking statements. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed in Item 1A. Risk
Factors. 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. You should not place undue reliance on these forward-looking
statements, which reflect our opinions only as of the date of this Annual
Report. We undertake no obligation to release publicly any revisions to the
forward-looking statements after the date of this Annual Report. You should
carefully review the risk factors described in other documents we file from time
to time with the Securities and Exchange Commission, including the Quarterly
Reports on Form 10-Q to be filed by us in our 2011 fiscal year, which runs from
July 1, 2010 to June 30, 2011.
ITEM 1. BUSINESS
Overview
We provide a smart-card based
alternative payment system for the unbanked and underbanked populations of
developing economies. Our market-leading system enables the estimated four
billion people who generally have limited or no access to a bank account to
enter affordably into electronic transactions with each other, government
agencies, employers, merchants and other financial service providers. Our
universal electronic payment system, or UEPS, uses biometrically secure smart
cards that operate in real-time but offline, unlike traditional payment systems
offered by major banking institutions that require immediate access through a
communications network to a centralized computer. This offline capability means
that users of our system can conduct transactions at any time with other card
holders in even the most remote areas so long as a smart card reader, which is
often portable and battery powered, is available. Our off-line systems also
offer the highest level of availability and affordability by removing any
elements that are costly and are prone to outages. In addition to effecting
purchases, cash-backs and any form of payment, our system can be used for
banking, health care management, international money transfers, voting and
identification.
We also focus on the development
and provision of secure transaction technology, solutions and services, and
offer transaction processing, financial and clinical risk management solutions
to both funders and providers of healthcare. Our core competencies around secure
online transaction processing, cryptography and integrated circuit card
(chip/smart card) technologies are principally applied to electronic commerce
transactions in the telecommunications, banking, payroll, retail, health care,
petroleum and utility industries.
Our technology is widely used in
South Africa today, where we distribute pension and welfare payments to over 3.2
million recipients in five of South Africas nine provinces, process debit and
credit card payment transactions on behalf of retailers that we believe
represent nearly 65% of retailers within the formal retail sector in South
Africa through our EasyPay (Proprietary) Limited, or EasyPay system, process
value added service such as bill payments and prepaid electricity for the major
bill issuers and local councils in South Africa and provide mobile telephone
top-up transactions for two of South Africas three mobile carriers. We are the
largest provider of third party payroll payments in South Africa through our
Net1 FIHRST Holdings (Proprietary) Limited, trading as FIHRST Management
Services, or FIHRST, service that processes monthly payments for approximately
700 employers representing over 750,000 employees. Our MediKredit Integrated
Healthcare Solutions (Proprietary) Limited, or MediKredit, service provides the
majority of funders and providers of healthcare in South Africa with an on-line
real-time management system for healthcare transactions.
We generate revenue primarily by
charging transaction fees to governmental agencies, employers, merchants and
other financial services providers and by selling hardware, software and related
technology. During fiscal 2010, 2009 and 2008, we had revenue of $280.4 million,
$246.8 million and $254.1 million, respectively and operating income of $69.8
million, $93.4 million and $110.4 million, respectively. Revenues derived from
our South African operations were $267.5 million, $220.4 million and $238.9
million in fiscal 2010, 2009 and 2008, respectively. Revenues derived from our
operations in Europe were $12.3 million, $19.6 million and nil, in fiscal 2010,
2009 and 2008, respectively and revenues derived from our operations in the rest
of the world were $0.6 million, $6.9 million and $15.2 million in fiscal 2010,
2009 and 2008, respectively.
2
We analyze our business in terms
of four inter-related independent operating segments: (1) transaction-based
activities, (2) smart card accounts, (3) financial services, and (4) hardware,
software and related technology sales. We discuss these segments in detail under
Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations. In addition, note 17 to our consolidated financial statements
included in this annual report contains detailed financial information about
these operating segments for fiscal 2010, 2009 and 2008.
All references to Net1, the
Company, we, us, or our are references to Net 1 UEPS Technologies, Inc.
and its consolidated subsidiaries, collectively, except as otherwise indicated
or where the context indicates otherwise.
Market Opportunity
Services for the Under-banked:
According to the United States Census Bureau, the worlds population
currently exceeds 6.9 billion people. Yet of this total, it has been reported
that over four billion people earn less than the purchasing parity equivalent of
two dollars per day. In general, these people either have no bank account or
very limited access to formal financial services. This situation arises when
either banking fees are too high relative to an individuals income, a bank
account provides little or no meaningful benefit or there is insufficient
infrastructure to provide financial services economically in the individuals
geographic location. We refer to these people as the unbanked and the
under-banked. These individuals typically receive wages, welfare benefits, money
transfers or loans in the form of cash, and conduct commercial transactions,
including the purchase of food and clothing, in cash.
The use of cash, however, does
present significant risks. In the case of recipients, they generally have no
secure way of protecting their cash other than by converting it immediately into
goods, carrying it with them or hiding it. In cases where an individual has
access to a bank account, the typical deposit, withdrawal and account fees
meaningfully reduce the money available to meet basic needs. For government
agencies and employers, using cash to pay welfare benefits or wages results in
significant expense due to the logistics of obtaining that cash, moving it to
distribution points and protecting it from theft.
With over 25 million cardholders
in more than 20 developing countries around the world, our track record and
scale uniquely positions us to continue further geographical penetration of our
technology in additional emerging countries.
Online transaction processing
services:
The rapid global growth of retail credit and debit card
transactions is reflected in the May 2009 Nilson Report, according to which
worldwide annual general purpose card purchase volume increased 10% to $6.7
trillion in 2008. General purpose cards include the major card network brands
such as MasterCard, Visa and American Express. We operate the largest
bank-independent transaction processing service in South Africa through EasyPay,
where we have developed a suite of value-added services such as bill payment,
airtime top-up, gift card, money transfer and pre-paid utility purchases that we
offer as a complete solution to merchants and retailers. Our expertise in
on-line transaction processing and value-added services provides us with the
opportunity to participate globally in this rapidly growing market segment.
Mobile Payments:
In
February 2010, the United Nations International Telecommunications Union
estimated that there are now approximately 4.6 billion mobile phone subscribers
deployed globally, and we believe that this includes subscribers in the majority
of our targeted emerging economies. Despite lacking access to formal financial
services, large proportions of the under-banked customer segment own and utilize
mobile phones. As a result, mobile phones are increasingly being viewed as a
channel through which this underserved population can gain access to formal
financial and other services. Today, most mobile payment solutions offered by
various participants in the industry largely provide access to information and
basic services, such as allowing consumers to check account balances or transfer
funds between existing accounts with the financial institution, but they offer
limited functionality and ability to use the mobile device as an actual payments
and banking instrument.
Our proprietary Mobile Virtual
Card technology, when used on a mobile device, is ideally suited to
significantly reducing fraud in card-not-present transactions typically
performed in developed countries such as the United States and Western Europe
and is also a comprehensive banking and payment solution for the under-banked
population in developing economies.
Healthcare:
Given lack of
broad-based healthcare services in many emerging countries, governments are
increasingly focused on driving initiatives to provide affordable and accessible
healthcare services to their populations. Similarly, countries such as the
United States are embarking on expansive overhauls of their existing healthcare
systems.
By combining Net1s payment
expertise with MediKredits real-time claims processing technology, we are able
to offer governments, funders and providers of healthcare with a comprehensive
solution that offers a completely automated system, reducing both cost and
time.
3
Our Off-line Transacting Solution
We believe that we are the first
company to enable the affordable delivery of financial products and services to
the worlds unbanked and under-banked people. Our approach takes full advantage
of moving processing away from a centralized point to the computer chip embedded
on a smart card. A smart card reader, a point of service or POS device, is used
to enable communication between smart cards in real-time during a transaction
and indirectly with our mainframe computer at a later time. This architecture
has significant implications in terms of the products and services that we can
deliver compared to those offered by banking institutions or other card
providers.
First, our system enables offline
transactions, which is essential in serving the unbanked and under-banked.
Second, while offline, the smart card can engage in sophisticated transaction
processing, using data encryption and biometric fingerprint protection to ensure
security. In fact, our smart cards can calculate the interest owed to the card
holder for having funds recorded onto our system without ever coming online.
Third, with all of the software and transaction records on the smart card, the
POS device itself requires far fewer components, circuitry and memory,
substantially reducing costs. Fourth, each transaction is recorded on both
participating smart cards, copied in subsequent transactions to additional smart
cards, and ultimately reported to our mainframe computer. This creates a full
audit trail that significantly reduces the potential for corruption, theft and
fraud. Lastly, instead of having to build the overall system to handle peak
loads, our system further reduces costs by smoothing the transaction flow over
time.
We believe that our solution delivers benefits to each of the
users of our system, including:
Individuals.
There is no
minimum income requirement for individuals to use our smart card, making our
solution universally accessible. It is also inexpensive since the overall cost
of the system is much less than widely available solutions, including cash, bank
accounts and bank cards that require online access. Our solution additionally
has the advantage of working everywhere, including remote areas where many
unbanked and under-banked people live. Equally important, our solution is secure
and smart cards are replaceable. This means that individuals do not have to fear
that their money will be stolen or that they will be charged for fraudulent
transactions as all transactions are verified biometrically through
fingerprints. Since the smart card performs all of the required computing
processing and contains all of the different service features, the smart card
can be tailored to meet the needs of the individual. Card holders can also
receive interest on their card balances, a benefit not available to them when
transacting solely in cash. We believe our solution has the potential to enhance
significantly the living standards of the unbanked and under-banked by reducing
transaction costs and providing them with new and additional financial products
and services, which are otherwise largely procured from the informal sector.
Merchants and Financial
Service Providers
. Merchants derive multiple benefits from our system. Our
system decreases the amount of cash they must hold, improving security and
reducing expenses, such as cash deposit fees and cash losses. By providing
financial services through our POS devices, merchants also benefit from new
income streams at no additional incremental cost. In addition, our system
provides a record of transactions that is useful for administrative purposes.
For formal financial service providers, the use of smart cards provides
opportunities to directly sell products and services to a market that was
previously difficult to reach. For instance, insurance companies can offer their
products with the premium deducted directly from the individuals smart card. In
the case of lending, administrative costs are decreased along with the expense
of holding cash. Again, the collection of payments can occur directly from the
smart card, reducing credit risk and helping to establish credit history.
Employers
. Our system
enables employers to eliminate cash from the wage payment process. This reduces
expenses by avoiding cash handling and management, the need to insure, secure
and transport that cash and the bank transaction fees associated with obtaining
cash in the first place. The process of paying employees using cash is also time
consuming, taking up to half a day per pay period in some instances. The use of
our system eliminates this process and thereby increases productivity. In
addition, because cash payments are distributed in packets to employees,
disputes can arise as to the amount of cash in the packet. Our system also
addresses this issue as the amount reflected on the card holders accounts are
recorded on the back-end system and then distributed on the smart cards.
Finally, employers frequently provide additional services to their employees out
of necessity, particularly loans. Our system enables other service providers to
deliver these products.
Government Agencies.
A
fundamental policy goal for almost any government is to enhance the welfare of
the poorest citizens in the country. Yet the use of cash is a poor method for
delivering social welfare grants since it is difficult to track, and the
recipients endure a range of expenses and dangers that reduce their options. By
using our system, government agencies enjoy reduced costs in the delivery of
benefits to recipients by eliminating the use of cash while increasing the
options available to the recipient. This use of our system intrinsically
increases the welfare that government agencies can provide from the same amount
of taxes collected. Our system also has the potential to increase the amount of
taxes collected by bringing informal businesses into the formal economy. The
presence of a full audit trail also means that government agencies can combat
corruption. Moreover, the use of smart cards for the delivery of additional
services, including insurance products, means that regulatory bodies can expand
their oversight of transactions for individuals who are frequently least able to
protect themselves. In regard to medical benefits, our system provides
comprehensive inventory management and has the potential to improve the
treatment of patients significantly.
4
The UEPS Technology
We developed our core UEPS and
DUET technology to enable the affordable delivery of financial products and
services to the worlds unbanked and under-banked populations. Our proprietary
technology is designed to provide the secure delivery of these products and
services in the most under-developed or rural environments, even in those that
have little or no communications infrastructure. Unlike a traditional credit or
debit card where the operation of the account occurs on a centralized computer,
each of our smart cards effectively operates as an individual bank account for
all types of transactions. All transactions that take place through our system
occur between two smart cards at the POS as all of the relevant information
necessary to perform and record transactions reside on the smart cards.
The transfer of money or other
information can take place without any communication with a centralized computer
since all validation, creation of audit records, encryption, decryption and
authorization take place on, or are generated between, the smart cards
themselves. Importantly, the cards are protected through the use of biometric
fingerprint identification, which is designed to ensure the security of funds
and card holder information. Transactions are generally settled by merchants and
other commercial participants in the system by sending transaction data to a
mainframe computer on a batch basis. Settlements can be performed online or
offline. The mainframe computer provides a central database of transactions,
creating a complete audit trail that enables us to replace lost smart cards
while preserving the notional account balance, and to identify fraud.
System Components
Our platform consists of three
fundamental components: (1) our funds transfer system, or FTS, intellectual
property (2) our UEPS/DUET software and (3) our security protocol.
FTS
. Our FTS intellectual
property allows funds to be transferred from one smart card to another in a
secure and offline manner. The term offline refers to transactions that are
effected without the need to contact or communicate with the issuer when the
transactions occur, as the smart cards themselves perform the authorizations
required. The FTS also describes how smart cards can be loaded or re-loaded with
funds and how these can be redeemed for value in either banking or non-banking
environments.
UEPS / DUET
. Our UEPS is a
suite of software programs that make use of the FTS methodology to deliver an
integrated information, payment, switching and settlement environment that
underpins our transaction processing system. Our software principally runs on
three devices: the smart card, the POS device and the back-end system mainframe.
When we sell a complete system to a customer or license our technology, we
provide all of the software required to operate the UEPS, including the smart
card functionality, the POS devices that allow our smart cards to transact with
each other in an offline manner and our back-end system that primarily stores an
audit trail of all transactions effected.
The primary strengths of the UEPS
are its affordability, security and flexibility. The system is affordable
because the computer chips on the smart cards contain all the software necessary
to process UEPS transactions, thereby allowing the POS devices required to
conduct these transactions to contain far fewer components and less circuitry
than traditional POS devices. There is also a reduced need for processing power
and on-board memory given that online communication is not necessary. This
eliminates the need for an internal or external modem and its associated
hardware, maintenance and call costs. As a result, the UEPS terminals are
relatively inexpensive and do not require specialized technical expertise for
installation. The UEPS also reduces or eliminates the need for national
infrastructures, including electricity, telephone or data transmission. The UEPS
is secure because the funds in each smart card are protected from illegal access
through biometric fingerprint technology. In addition, every transaction is
verified by the two smart cards involved in the transaction using
state-of-the-art cryptographic systems in conjunction with protocols and
techniques that we have developed. Finally, our UEPS is flexible because
transactions are completed offline, eliminating virtually all restrictions where
verified transactions can occur.
Security Protocol.
Our
security protocol was designed to prevent opportunistic fraud and enforce the
correct transaction flow. The symmetric triple data encryption standard, or DES,
is used extensively in association with a native random number generator that
ensures that all transactions are performed by using a random session key pair.
The DES encryption algorithm can be easily modified to use alternative symmetric
or asymmetric encryption algorithms such as the Rivest, Shamir and Adleman or
elliptic curves. Each message exchanged during a transaction names both
transacting parties, includes unique information to guarantee freshness and
depends explicitly on all the messages that occur before it.
5
Our Payment System Platform
The following diagram depicts how our UEPS platform is
constructed.
UEPS / DUET PLATFORM
|
Fully-functional and integrated payment and settlement
system, capable of operating all UEPS and DUET products and systems.
|
COMPLETE SYSTEMS
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Combination of products meeting a clients particular
requirements.
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STAND-ALONE
PRODUCTS
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Financial
transaction applications (S2S products).
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FUNCTIONALITY
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Combination of Hardware and Operating Systems on smart
cards enable the creation of UEPS applications which can be customized for
the particular needs of a client.
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OPERATING SYSTEMS
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Third-party software.
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UEPS / DUET software programmed by us.
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SMART CARDS / SIM CARDS
(Hardware)
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Cards sourced from third-party vendors.
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HARDWARE
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POS devices, ATMs, mobile phones, back-end computer systems
sourced from third-party vendors.
|
6
The UEPS we sell to clients is a
platform with the potential to provide all of the products we develop which,
when grouped together, form complete systems serving the specific needs of
various business segments. Depending on the requirements of a particular
customer, we assist the customer in the setup of its application which is
tailored to provide only the products and services initially required, although
the UEPS can later be updated to provide additional products. We outsource the
manufacturing of the hardware components of our system, including smart cards,
POS devices, automated teller machines, or ATMs, PCs and back-end mainframes.
However, we have developed all of our application software modules so that they
will run on different hardware platforms which allow us to be
hardware-independent and to provide our customers with the latest and most
economical hardware solutions.
Scalability.
Our UEPS can
be implemented in different environments, from small closed systems to national
implementations. In closed-system environments, the UEPS front-end equipment is
personal computer-based and can therefore be implemented at relatively low cost.
In these instances, we provide the back-end system on a transaction fee basis,
thus limiting the overall set up cost. This approach can also be used whenever
larger implementations are required but where the customer prefers to focus on
marketing and selling its products rather than initially concentrating on
operating the back-end system. The cost to entry can thus be greatly reduced as
the operations can first become profitable before expending large amounts of
capital. On the other hand, large governmental institutions, financial
institutions or medical insurers typically prefer to maintain control over the
entire payment system and therefore invest in a full system implementation. The
time to launch these projects tends to be longer due to the time that is
required to train the end-user to operate the system.
Once a UEPS is installed on
behalf of a customer, we believe that we are well-positioned to benefit from the
scalability of the system as minimal changes are required to be made to the
application base for the system to manage significantly greater numbers of
users. We can therefore provide additional smart cards while leveraging the
existing cost base in a market. In addition, we have a dedicated team of
technicians and developers and an infrastructure capable of supporting a
significant volume of customers and their transactions. As a result, we expect
to benefit from economies of scale that pertain to increases in the number of
products and services using the infrastructures we sell and/or implement.
Our Business Strengths
We believe our business strengths
include:
Technology Leadership
. We
believe that we are the leader in developing, implementing and operating
affordable, flexible and secure electronic payment systems for the unbanked and
under-banked that work offline. Of equal importance, our smart cards are secured
through biometric fingerprint authentication and have a broad range of
additional functionality through the use of wallets that can be turned on as
needed or as services become available. We can deliver these services to the
unbanked population at a fraction of the cost of traditional systems. Our
ability to implement an HIV/AIDS administrative system on the same smart card as
financial services demonstrates the flexibility of our approach. In addition, we
have validated the security of our smart cards along with our overall system,
forming the foundation for a trusted solution. Independent third parties have
reviewed and published our security protocols and we have refined our system in
a way to provide system integrity over the life of the smart cards. From our
inception in 1989 to date, we have not suffered any security breaches or losses
of transactions or funds on our system. In addition, we have well-established
core cryptography, software, hardware, embedded chip, wireless and payment
expertise.
Proven Solution.
Our
system is proven and is widely used by over 25 million of cardholders in more
than 20 countries.
Versatile Application.
Once an individual begins using our smart card, we become a logical provider
of a broad range of additional products and services. For instance, a card
holder using our system for the administration of medical treatment can also use
the same smart card for receiving welfare payments or wages as well as making
purchases. Because use of each smart card is secured biometrically, the smart
card can also be used for identification and voting. The additional uses mean
that once we have enrolled and delivered a smart card to an individual, our
revenue potential increases significantly beyond the initial service for which
that individual has signed up.
Broad Appeal that Drives
Opportunities.
Because our system provides economic benefits to all
participants, we believe there are strong incentives for government agencies and
private sector companies to adopt our system in many developing countries. Our
solution is also appealing because a single deployment enables the delivery of a
broad array of new services to those who are potentially most in need of them,
often at a lower cost than alternative distribution methods.
Increasing Returns to
Scale
. The initial establishment of our system in a province or country
requires upfront expenditures for computers, distribution infrastructure and
card holder registration. Once in place, though, the cost to us of supplying
additional products to users is low. For instance, if a customer receives
welfare payments on one of our smart cards and then chooses to purchase
insurance through our system, there is almost no additional expense for us to
deduct the insurance premium regularly. As a result, the operating margin for
that customer increases significantly, offset only by any marketing or
administrative costs associated with that product.
7
Our Strategy
We intend to provide the leading
transacting system for the worlds estimated four billion unbanked and
under-banked people to engage in electronic transactions, as well as to provide
our transaction processing, value-added services processing, new secure mobile
payment technologies and health care processing services globally. To achieve
these goals, we are pursuing the following strategies:
Using our first wave/second
wave approach to expand into new markets
We use what we refer to as a
first wave/second wave approach to market expansion. In the first wave, we
seek to identify an application for which there is a demonstrated and immediate
need in a particular territory and then sell and implement our technology to
fulfill this initial need. As a result, we achieve the deployment of the
required technological infrastructure as well as the registration of a critical
mass of cardholders. During this phase, we generate revenues from the sale of
our software and hardware devices, as well as ongoing revenues from transaction
fees, maintenance services and the use of our biometric verification engine.
Once the infrastructure has been deployed and we achieve a critical mass of
customers, we focus on the second wave, which allows us to use this
infrastructure to provide users, at a low incremental cost to us, with a wide
array of financial products and services for which we can charge fees based on
the value of the transactions performed.
Realigning management
responsibilities and internal systems on a geographic basis to maximize our
ability to target more markets simultaneously
The new UEPS systems that we
have launched outside South Africa have received a high level of attention from
governments and central banks, among others, and we are continually being
presented with opportunities to discuss the implementation of new systems in
countries around the world. In addition, as a result of our August 2008
acquisition of Net1 Universal Technologies (Austria) AG, or Net1 UTA, we now
provide smart card-based payment systems in Russia and other members of the
Commonwealth of Independent States, or CIS, as well as several other countries.
We believe that we can accelerate our expansion into new markets while making
the most efficient use of our senior management, marketing and information
technology personnel by creating separate clusters and within those clusters,
business units, each of which is devoted to a particular geographic area and/or
specific technologies, products and services, and we have recently completed the
process of defining and creating those groups.
Leveraging our new payment
technologies to gain access to developed economies
While our business has
traditionally focused on marketing products and services to the worlds unbanked
and under-banked population, we have developed and acquired proprietary
technology, such as our Virtual Card application for mobile telephones that is
designed to eliminate fraud associated with card not present credit card
transactions, which are those effected by telephone or over the internet. We
plan to introduce this technology in the United States, Western Europe and other
developed economies.
Our Business in South
Africa
In South Africa, we are one of
the leading independent transaction processors, as the leading provider of
social welfare payment distribution services to the countrys large unbanked and
under-banked population, the largest third-party processor of retail merchant
transactions and the leading processor of third-party payroll payments. We
believe that our large cardholder base, proprietary technology and payment
infrastructure, together with our strong government and business relationships,
position us at the epicenter of commerce in the country.
We believe that we are
well-positioned to continue to gain market share and build upon the critical
mass that we have developed in South Africa and have identified the following
opportunities to continue to drive growth in our South African business:
Government focus on expansion
of social benefits
As a result of the South African governments focus on
the provision of social grants as a core element of its social assistance and
poverty alleviation policies, we believe that we remain well-positioned to
continue to provide our payment services to the government and beneficiaries. We
believe that there is a compelling argument for the South African Social
Security Agency, or SASSA, and other government agencies to utilize our
innovative, off-line, secure, efficient and low-cost payment solution to reach
beneficiaries across the country, even in the most remote and deep rural areas
where the communication and electricity infrastructure is sparse or
non-existent. On August 24, 2010, we signed a new service level agreement with
SASSA that expires on March 31, 2011. We discuss this new agreement in more
detail elsewhere in this Annual Report, including under Item 9B. Other
Information.
Increasing adoption of
existing services
Our technology supports a variety of other products and
smart card to smart card, or S2S, services that expand the use of our technology
and provide us with new sources of transaction-based revenues. During the last
several years, we have introduced these new products and services in South
Africa for existing and newly-enrolled cardholders. We have installed our POS
terminals in thousands of mostly rural merchant locations throughout the country
which allows beneficiaries to receive their grants at these locations and
transact business with the retailers using our smart card. During fiscal 2010,
we processed 18.4 million transactions with a total value of ZAR 11.7 billion at
these merchant locations. In addition, during fiscal 2010, we began implementing
our wage payment solution which provides for secure payroll distribution through
our smart card.
8
Introduction of new
services
We are also poised to benefit from the introduction and
adoption of new services across our various platforms, which we believe will
generate significant incremental transaction fee revenue from current and new
users at a relatively low cost to us. Some of these services include:
Acceptance of UEPS cards in
traditional POS terminals
We are currently enabling our cards to be
compliant with international EMV standards, which will allow our cardholder base
to purchase goods and services at merchant POS locations that currently accept
MasterCard-branded cards. This additional functionality will allow us to expand
significantly the number of terminals that use our smart card, capturing fees
from new transactions and positioning our cards to be used by a larger share of
the banked population.
Merchant processing through
EasyPay
EasyPay is the largest independent financial switch and merchant
processor in South Africa for credit and debit card transactions. EasyPay
processed 655.2 million transactions with a total value of ZAR 143.8 billion
during fiscal 2010. Our technology also allows us to provide a variety of
additional, value-added payment services, such as bill payment, prepaid mobile
top-up, prepaid utility services and gift cards, that we can sell into our
existing card holder base as well as to new customers. We have integrated our
propriety UEPS software with these services to create a larger, seamless,
value-added payments eco-system.
Third party payments from
payroll processing through FIHRST
Through our FIHRST service, we offer
employers an easy and flexible method of making payments to employees and
payroll-related creditors. During the three months ended June 30, 2010, FIHRST
processed 5.3 million transactions with a total value of ZAR 14.1 billion. The
FIHRST system enables human resources departments to achieve greater levels of
efficiency and employee service. FIHRST is recognized by and works in
partnership with the majority of third-party payroll organizations, including
pension fund and medical aid administrators.
On-line real-time
management of healthcare transactions processing through
MediKredit
Through our MediKredit service we provide both funders and
providers of healthcare on-line real-time management of healthcare transactions.
During the six months ended June 30, 2010, MediKredit processed 14.8 million
transactions. Our dynamic healthcare claims processing and managed care services
are designed to accommodate our clients unique benefit designs and processing
needs.
The African Continent
and Iraq
During the last five years, we
have embarked on an international expansion program to provide a UEPS-based
solution in developing economies outside South Africa where we see significant
growth opportunities, typically in those countries that have a significant
unbanked or under-banked population. Consistent with our first wave/second
wave approach, in each market, we seek to identify one or more specific
applications for our technology and then determine how best to create a card
holder base to whom we can then provide, at a low incremental cost to us,
additional products and services for which we can charge transaction fees. We
are currently targeting services such as payment schemes for welfare
distribution, healthcare services, banking services, transportation services,
bill payments, mobile communication services, payroll, remittances and
e-commerce.
We are in varying stages of
implementing this expansion and employ a variety of business models, depending
on the market, including providing outsourced transaction processing services,
licensing our UEPS system or creating joint ventures with local partners and
service providers.
Some examples of our current and future expansion activities
across the African continent include:
Ghana
We were awarded a
contract by the Central Bank of Ghana to create the Ghanaian National Switch and
Smart Card Payment System, which was officially launched in April 2008. All
Ghanaian banks are required to participate in the system and issue our smart
cards to their customers. The system creates interoperability between ATMs, POS
and teller terminals owned by the individual banks.
Iraq
We have implemented a
customized UEPS banking and payment system that enables offline and online
retail payment transactions in Iraq. This system provides interoperability
between ATMs, POS devices and bank branches and facilitates the distribution of
cash disbursements in Iraq (including the payment of social grants to war
victims, employee salary/wage payments, banking products and other financial
services).
9
Joint ventures in Botswana,
Namibia and Nigeria
We own 50% of SmartSwitch Botswana and SmartSwitch
Namibia, which license our UEPS software and buy cards and terminals from us.
These entities contract to provide our technology to various users, such as to
the Botswana Department of Social Services, which distributes government grants
and NamPost, a Namibian governmental entity which provides post office and
banking services. In Nigeria, SmartSwitch Nigeria, of which we own 80%, has
provided 50,000 smart cards to one of Nigerias largest banking institutions for
its initial deployment into village community banks. Expected applications for
the UEPS technology in Nigeria include banking, health care, money transfers,
pre-paid utilities and telephony and voting.
Other African
countries
We are currently exploring opportunities with
governments, as well as banks and merchants in other African countries, to
establish alternate payment systems in these countries using our UEPS
technology.
Russia and Other CIS
Members
Through our majority-owned
subsidiary, Net1 UTA, which we acquired in August 2008, we provide smart
card-based payment systems under the DUET name to banks, enterprises and
government authorities in Russia, Ukraine, Uzbekistan, Mongolia, Vietnam, India
and Oman. The DUET system was developed by Net1 UTA as a derivative of the first
version of our UEPS technology that we licensed to Net1 UTA in 1993. Net1 UTA
provides the DUET system to Sberbank, the largest financial institution in
Russia, which owns the remaining minority interest in Net1 UTA. One of our
primary reasons for acquiring Net1 UTA was to obtain immediate access to the
large Sberbank cardholder base. While Net1 UTAs business model has historically
been based primarily on the sale of cards and hardware, we intend to transition
the business into more of a transaction processing services provider over time
by leveraging Net1 UTAs management, sales force and customer base to sell the
UEPS platform and its suite of processing services.
Emerging Growth
Opportunities
We believe that an area for
significant potential growth is the opportunity to introduce some of our new
technologies, such as our MediKredit, Net1 Virtual Card and mobile payment
applications, in the more developed economies of the United States and Western
Europe and to leverage the flexibility and multi-application capabilities of our
UEPS technology to capture extensive, country-specific applications in less
developed countries.
New
technologies
Our Net1 Virtual Card application is designed to
reduce the higher levels of fraud associated with card-not-present credit card
transactions without the need for additional infrastructure or any changes to
existing infrastructures. This application creates a one time-use digital card
generated on demand (off-line) from a mobile phone. As opposed to a physical
credit card, our virtual card is only valid for a specific value and cannot be
used more than once. It contains no personal user information such as a bank
account or telephone number. We believe that strong growth trends in e-commerce
and the rapidly increasing adoption of mobile commerce, such as downloaded ring
tones, mobile applications and mobile payment services, will present significant
opportunities for our Net1 Virtual Card technology.
Mobile payment applications in
Latin America and Asia
We have entered the Latin American
market by offering our VTU system and services through VTU Colombia, of which we
own 37.50% . The joint venture provides virtual prepaid mobile top-up services
for two of Colombias three largest mobile operators. We plan to expand this
service into new areas of Colombia and other markets in Latin America. In
addition, through our 30% equity stake in VinaPay, we are providing our VTU
system and services in Vietnam.
Country-specific
applications
We are also pursuing discrete opportunities to
create unique country-specific applications, such as a national identification
card with multiple applications like a contactless transport card.
Our Business Units and Technologies
Our group is organized into the
following clusters and within each cluster, separate business units.
Transactional
Solutions Cluster
Cash
Paymaster Services (CPS)
Our CPS business unit deploys our
UEPS Social Grant Distribution technology to distribute social welfare grants
on a monthly basis to roughly 3.2 million beneficiaries in five provinces out of
the nine South African provinces. These social welfare grants are distributed on
behalf of SASSA. During our 2010, 2009 and 2008 fiscal years, we derived 66%,
65% and 67% of our revenues respectively, from CPS social welfare grant
distribution business. As discussed above, on August 24, 2010, we signed a new
service level agreement with SASSA.
10
CPS provides a secure and
affordable transacting channel between social welfare grant beneficiaries, SASSA
and formal businesses. CPS enrolls social welfare grant beneficiaries by issuing
them a UEPS smart card that digitally stores their biometric fingerprint
templates on the smart card, enabling them to access their social welfare grants
securely at any time or place. The smart card is issued to the beneficiary on
site and utilizes optical fingerprint sensor technology to identify and verify a
beneficiary. The beneficiary simply inserts a smart card into the POS device and
is prompted to present his fingerprint. If the fingerprint matches the one
stored on the smart card, the smart card is loaded with the value created for
that particular smart card.
The smart card provides the
holder with access to all of the UEPS functionality, which includes the ability
to have the smart card funded with pension or welfare payments, make retail
purchases, enjoy the convenience of pre-paid facilities and qualify for a range
of affordable financial services, including insurance and short-term loans. The
smart card also offers the card holder the ability to make debit order payments
to a variety of third parties, including utility companies, schools and retail
merchants, with which the holder maintains an account. The card holder can also
use the smart card as a savings account.
Our UEPS - Social Grant
Distribution technology provides numerous benefits to government agencies and
beneficiaries. The system offers provincial governments a reliable service at a
reasonable price. For beneficiaries, our smart card offers convenience,
security, affordability and flexibility. They can avoid long waiting lines at
payment locations and do not have to get to payment locations on scheduled
payment dates to receive cash. They do not lose money if they lose their smart
cards, since a lost smart card is replaceable and the biometric fingerprint
identification technology helps prevent fraud. Their personal security risks are
reduced since they do not have to safeguard their cash. Beneficiaries have
access to affordable financial services, can save and earn interest on their
smart cards and can perform money transfers to friends and relatives living in
other provinces. Finally, beneficiaries pay no transaction charges to load their
smart cards, perform balance inquiries, make purchases or downloads or effect
monthly debit orders. For us, the system allows us to reduce our operating costs
by reducing the amount of cash we have to transport.
The business unit has been allocated to our transaction-based
activities and smart card accounts reporting segments.
EasyPay
Our EasyPay business unit
operates the largest bank-independent financial switch in Southern Africa and is
based in Cape Town, South Africa. EasyPay focuses on the provision of
high-volume, secure and convenient payment, prepayment and value-added services
to the South African market. EasyPays infrastructure connects into all major
South African banks and switches both debit and credit card electronic funds
transfer, or EFT, transactions for some of South Africas leading retailers and
petroleum companies. It is a South African Reserve Bank, or SARB, approved
third-party payment processor.
In addition to its core
transaction processing and switching operations, EasyPay provides a complete
end-to-end reconciliation and settlement service to its customers. This service
includes dynamic reconciliation as well as easy-to-use report and screen-query
tools for down-to-store-level, management and control purposes.
The EasyPay suite of services
includes:
-
EFT - EasyPay switches credit, debit and fleet card transactions for
leading South African retailers and petroleum companies;
-
EasyPay Bill Payment - As part of its value-added services offering,
EasyPay has developed and operates a consumer bill payment service introduced
at retail point-of sale over 11 years ago. Known and marketed as EasyPay,
the service is integrated into a large number of national retailers and mobile
channels and is available over the internet at www.easypay.co.za. EasyPay
processes monthly account payment transactions for over 300 different bill
issuers including major local authorities, telephone companies, utilities,
medical service providers, traffic departments, mail order companies, banks
and insurance companies;
-
EasyPay Prepaid Electricity - This service enables local utility companies
such as Eskom Holdings Limited and a growing number of local authorities on a
national basis to sell prepaid electricity to their customers;
-
Prepaid Airtime - EasyPay vends airtime at retail POS terminals for all
the South African network operators;
-
Electronic Gift Voucher - EasyPay supports the electronic generation,
issuance and redemption of paper or card- based gift vouchers;
-
EasyPay Licenses - EasyPay enables the issuance of new South African
Broadcasting television licenses and the capturing of existing license details
within retail environments via a web-based user interface;
-
Third Party Switching and Processing Support EasyPay switches
transactions from retail POS systems to the relevant back-end systems; and
-
Hosting Services - EasyPays infrastructure supports the hosting of
payment servers and applications on behalf of third parties, including
financial institutions.
EasyPay provides 24x7 monitoring
and support services, reconciliation, automated clearing bureau, or ACB,
settlement, reporting, full disaster recovery and redundancy services.
11
The business unit has been
allocated to our transaction-based activities reporting segment.
Net1
Austria
Our Net1 Applied Technologies
Austria GmbH, or Net1 Austria, incorporating Net1 UTA, business unit provides
smart card-based payment systems to banks, enterprises and government
authorities in Russia, Ukraine, Uzbekistan, India and Oman. Net1 UTA is
headquartered in Vienna, Austria, and has subsidiaries in India and Russia.
Net1 UTA is a market leader in
smart card-based payment systems in the CIS with the national interbank payment
system in Uzbekistan and a nationwide smart card payment system in Russia. Net1
UTA has historically employed a business model which focused on selling its
product offering into various countries. In contrast, our service-based business
model focuses on generating recurring revenues from our cardholder base through
transaction-based fees, financial services and value-added products. We believe
that the geographical footprint of Net1 Austria is now large enough to allow us
to overlay our service-based model onto the various DUET systems operating in
Russia and other countries, thereby creating new revenue streams for Net1 UTA
and system operators.
Since we acquired Net1 Austria in
August 2008, it has enhanced its product offering by leveraging our group
technology platforms and information technology development resources. We
believe that our technological leadership in fields such as biometric
identification and in the integration of our UEPS technology with global systems
for mobile communications, or GSM, will allow us to create new business
opportunities for Net1 UTA such as national identification, voting and welfare
distribution systems and mobile payment solutions. We expect that the addition
of Net1 UTAs skilled human resources in the information technology area will
greatly assist us in the ongoing development of our technologies and maintenance
of our existing systems. Net1 Austria focuses its marketing efforts on markets
in Central and Eastern Europe, Russia and other CIS members, the Middle East
(excluding Iraq), India and Asia.
Net1 UTAs revenue has declined unexpectedly as a result of the difficult market and trading conditions in its traditional markets. These recent difficulties resulted in indefinite delays in the conclusion of certain expected significant business development opportunities.
The business unit has been allocated to our hardware, software
and related technology sales reporting segment.
MediKredit
MediKredit is an independent
technology company that offers financial and clinical risk management solutions
to both funders and providers of healthcare, through online real-time, or OLRT,
management of healthcare transactions. Our adaptable healthcare claims
processing and managed care services are designed to accommodate the complex
benefit design as well as other processing requirements of our clients.
MediKredits healthcare claims processing functionality extends to all
healthcare claim types, including pharmacy, doctor, public and private hospital
claims. This is enabled by MediKredits innovative proprietary claims processing
and managed care systems which lie at its core.
The business unit has been allocated to our transaction-based
activities reporting segment.
FIHRST
FIHRST offers South African
employers an easy and flexible method of making payments to creditors, arising
from payroll processing. We currently process payments utilizing FIHRSTs system
on behalf of our clients, enabling salaries departments to achieve greater
levels of efficiency and employee service. FIHRST is recognized by and works in
partnership with the majority of third party payroll organizations including
pension fund and medical aid administrators.
We believe that FIHRSTs cost
effective technology enhances the electronic movement of money in the business
and financial community, assisting our clients to manage nett paid to employees,
third party deductions, garnishee orders and creditor payments correctly,
promptly and securely. We believe that the true value of the FIHRST service
offering is not only to cost effectively move employer funds, but to provide the
relevant information to the recipient organization via predefined schedules or
payment remittance advices, thus reducing the reconciliation process from days
to hours.
The business unit has been
allocated to our transaction-based activities reporting segment.
12
Universal
Electronic Technological Solutions (UETS)
Our UETS business unit is based
in Johannesburg, South Africa and focuses on the sale, implementation and
support of our UEPS technology, ranging from large scale, national projects to
smaller, product specific regional projects. UETS focuses on identifying,
defining and activating an entry point to commence operations in Africa
(excluding South Africa), Iraq.
The UETS sales and marketing
approach is to sell the following solutions and products:
-
The UEPS national switching, settlement, clearing and smart card solutions
offering interoperability with existing banking infrastructure. We have sold
such systems to the Central Bank of Ghana and the Reserve Bank of Malawi in
the past;
-
Wave 2 opportunities such as financial services sold via the existing
UEPS infrastructure, such as loans and insurance to UEPS cardholders in
Botswana;
-
Individual stand-alone UEPS applications, with processing outsourced to
Net1 regional offices, similar to the model deployed for the payment of
welfare grants in Iraq;
-
UEPS mobile banking solutions targeted at banks and/or mobile operators;
-
E-Government applications such as multi-purpose national identity cards;
-
Health care applications for countries seeking an electronic solution for
the identification, benefit contribution monitoring and access control of
patients in government hospitals,; and
-
Secure verification of existing EMV Debit / credit card transactions using
Net1s biometric identification technology.
Our UETS team also provides
business development support in territories where UEPS systems have been sold
and implemented, such as Ghana, Malawi, Namibia, Botswana and Nigeria.
The business unit has been
allocated to our hardware, software and related technology sales reporting
segment.
Virtual
Card
Our Virtual Card business unit is
responsible for the commercialization of our latest invention the Net1 Virtual
Card. This business unit operates from Johannesburg, South Africa and from
Dallas, Texas. Net1 Virtual Card is a solution designed for bank card issuers to
protect and grow their share of the remote transactions or card not present
payment market.
The Net1 Virtual Card solution
utilizes existing and traditional payment methods but enhances them by replacing
plastic card data with a one-time-use virtual card data, hence eliminating the
risk of theft, phishing, skimming, spoofing, etc. The virtual card data replaces
digit-for-digit the credit (or debit) card number, the expiration date and the
card verification value, or CVV, with only the Issuer Bank Identification Number
(first 6-digit) remaining constant.
The Net1 Virtual Card solution
uses the mobile phone to generate virtual cards. The mobile phone is the most
available, cost-effective, secure and portable platform for generating virtual
cards for remote payments (online, phone and catalogue orders). Following a
simple registration process, the virtual card application is activated
over-the-air, enabling the phone to generate virtual card numbers completely
off-line.
Consumers can easily generate a
new card on their mobile phone to shop on the internet, to fill-up a catalogue
order, or to place a telephone order. Virtual cards are completely secure and
can also be sent in a single click to family, friends, and service providers.
Once the authorization request reaches the issuing bank processor, our servers
decrypt the virtual card data, authenticate the consumer and pass the
transaction request to the Card Issuer for authorization.
The benefits of the Net1 Virtual
Card include, for:
-
Card issuers
- increased transactional revenues from existing
accounts, driving more transactional revenues. Elimination of fraudulent card
use.
-
Mobile network operators
- revenues from payments, reduced churn,
opportunities for powerful co-branding schemes.
-
Consumers
- peace of mind, ease of use, rewards.
-
Merchants
- elimination of charge-backs and fraud at no extra cost.
The business unit has been
allocated to our hardware, software and related technology sales reporting
segment.
13
Hardware and Software
Sales Cluster
Cryptographic
Solutions
Our Triple Data Encryption
Standard, or TDES, and EMV security initiatives are conducted by a specialized
business unit through close collaboration with suppliers of payment processing
devices to help their technologies meet the stringent security standards
required by the card associations.
Our self-developed range of PIN
encryption devices, card acceptance modules and hardware security modules are
primarily aimed at the financial, retail, telecommunication, utilities and
petroleum sectors. These devices and modules are suited for high-speed
transaction processing requirements, acceptance of multiple payment tokens,
value-added services at point of transaction, and adherence to stringent
transaction security and payment association standards such as TDES and EMV.
The business unit has been allocated to our hardware, software
and related technology sales reporting segment.
Chip
and GSM Licensing
Our Chip and GSM Licensing
business unit is a supplier of chip cards into the South African and other
international markets. We work with mobile network operators, card manufacturers
and semiconductor manufacturers to provide card technology, solutions and
software that enable mobile telephony, mobile transactions and value-added
services to take place in a trusted, secure and convenient manner. These chip
products and technology include operating system and application development,
card manufacture and production, from concept and design through, printing,
packaging and distribution. At the core of our chip business is the strategy of
licensing chip software to a wide spectrum of other industry participants.
The business unit has been allocated to our hardware, software
and related technology sales reporting segment.
POS
Solutions
Our POS Solutions business unit
is responsible for marketing in South Africa our secure, integrated POS payment
products and systems, including:
-
FlexiLANE An in-store controller ideally suited to multi-lane retail and
petroleum station environments. The in- store controller forms an interfacing
and concentration layer between a group of distributed terminal devices and a
centralized payment and value added service, or VAS, aggregator. This helps
large retailers and petroleum companies to overcome the challenges associated
with processing multiple transactions from multiple access devices using
multiple tender types;
-
FlexiGATE A terminal and payment gateway that manages the routing of all
FlexiLANE traffic and enables retailers to supply VAS such as airtime top-up,
electricity payment and bill payment;
-
FlexiPOS An innovative retail solution that allows the retailer's
various payment and VAS solution requirements to be streamlined into a single
payment terminal. FlexiPOS transforms the POS terminal into a convenient and
consumer friendly place of purchase, place of payment and place of service;
and
-
EMV Net1s payment expertise helps ensure that retailers together with
their acquirers meet the requirements of upgrading software, terminals and
security for conformity with the latest international chip card standards.
-
Ingenico POS equipment
The business unit has been
allocated to our hardware, software and related technology sales reporting
segment.
VTU
Our VTU business unit is
responsible for marketing our VTU solution, which facilitates mobile phone-based
prepaid airtime vending. The VTU technology enables prepaid cell phone users to
purchase additional airtime simply, securely and conveniently. The vendor uses
its GSM handset to purchase bulk airtime from a mobile network operator. Airtime
value, as opposed to a virtual voucher, is then transferred directly from the
vendors cellular handset to that of the customer. When the vendor runs out of
airtime value, it is a simple task to purchase more to resell to customers.
The business unit has been
allocated to our hardware, software and related technology sales reporting
segment.
14
Financial Services
Cluster
Finance
Holdings
Our Finance Holdings business
unit is responsible for identifying financial services products that can be
provided to our UEPS cardholders in South Africa and then marketing and
implementing the provision of those products. We currently provide micro-loans
to our UEPS cardholders who receive social welfare grants through our system in
the KwaZulu-Natal and Northern Cape provinces. We provide the loans ourselves
and generate revenue from the service fees charged on these loans. We also sell
life insurance products on behalf of registered underwriters and earn revenue
through the commissions we receive on the sale of policies.
Our wage payment system offers
wage earners a UEPS card that allows them to receive payment, transact and
access other financial services in a secure, cost-effective way. The target
markets for our wage payment system are the unbanked and underbanked wage
earners in South Africa, estimated at five million people. These wage earners
are typically paid in cash and thus have all the risks associated with carrying
cash but none of the benefits associated with having a formal bank account. In
January 2007, we signed a co-operation agreement with Grindrod Bank, a fully
registered bank in South Africa, for the establishment of a retail banking
division within Grindrod Bank that will focus on deploying our wage payment
solution in South Africa.
The business unit has been
allocated to our financial services reporting segment.
Corporate
Cluster
The Corporate Cluster provides
global support services to the Net1 business units, joint ventures and
investments for the following activities:
The Group Executive is
responsible for the overall group management, defining the groups global
strategy, investor relations and corporate finance activities.
The Finance and administration
unit provides group support in the areas of accounting, treasury, human
resources, administration, legal, secretarial, taxation, compliance and internal
audit.
The Group Information Technology
unit defines the group IT strategy and the overall systems architecture and is
responsible for the identification and management of the groups research and
development activities.
The Joint Ventures and
Investments unit provides governance support to our joint ventures and assists
with the evaluation of new investment opportunities.
Competition
In addition to competition that
we face from the use of cash, checks, credit and debit cards, existing payment
systems and the providers of financial services, there are a number of other
products that use smart card technology in connection with a funds transfer
system. While it is impossible for us to estimate the total number of
competitors in the global payments marketplace, we believe that the most
competitive product in this marketplace is EMV, a system that is promoted by
Visa Inc., MasterCard International and EuroPay International. In addition, the
JCB International Credit Card Co. Ltd, Diners Club International and American
Express Compare are currently among the largest global processors of payment
transactions. The competitive advantage of our UEPS offering is that our
technology can operate real-time, but in an off-line environment, using
biometric identification instead of the standard personal identification number,
or PIN, methodology employed by our competitors. We estimate that we process
less than 1% of all global payment transactions in the international
marketplace.
In South Africa, and specifically
in the payment of social welfare grants, our competitors include AllPay
Consolidated Investment Holdings (Pty) Ltd, or AllPay, which is responsible for
social welfare payments in the Free State, Gauteng and Western Cape provinces
and a small portion of the Eastern Cape province, and Empilweni Payout Services,
or Empilweni, which is responsible for payments in the Mpumalanga province. The
South African banks and the South African Post Office, or SAPO, also offer
beneficiaries the option to open bank accounts that enable the beneficiaries to
receive their welfare grants through the formal banking payment networks.
15
We compete primarily on the basis
of the innovative nature and security of our technology. We are able to load
social welfare grants on behalf of the South African government directly onto a
biometrically secured UEPS smart card in rural areas where there is little or no
infrastructure or in semi-urban areas through our merchant acquiring system. Our
UEPS-enabled smart cards are therefore used as a means of identification,
security and as a transacting instrument. Grants loaded onto our UEPS-enabled
smart cards can be used both online and offline and beneficiaries pay no monthly
account or transaction fees. The usefulness of a traditional bank card to its
holder is dependent on the availability of a branch network, automatic teller
machine, or ATM, infrastructure and merchants accepting the card. Access to bank
branches, ATMs and merchants accepting traditional bank cards are limited or
non-existent in the rural areas of South Africa. We believe the security,
functionality and simplicity of our smart card provides us with a unique ability
to service these rural areas of South Africa. Our technology eliminates the risk
associated with receiving social welfare grants in cash as well as the costs
associated with transaction fees charged by banks when beneficiaries exceed the
minimum number of free transactions per month.
We believe that SASSA considers
the technology utilized, pricing of the payment service rendered and other
factors such as Black Economic Empowerment, or BEE, rating as the most important
factors when considering potential service providers. We compete with other
service providers on these aspects through SASSAs tender processes, when
applicable, or through contract extension negotiations.
We own EasyPay, the largest
bank-independent switch in South Africa. EasyPays competitors include
BankservAfrica, eCentric and EFT POS. BankservAfrica is the largest transaction
processor in South Africa which processes all transactions on behalf of the
South African banks and claims to process in excess of 2.5 billion transactions
valued at ZAR 8.0 trillion annually. During fiscal 2010, EasyPay processed 655.2
million transactions with an approximate value of ZAR143.8 billion, or
approximately 26% of the transaction volume processed by BankservAfrica.
We also may face competition from
companies to which we have licensed rights to our technology. Moreover, as our
product offerings increase and gain market acceptance, banks in South Africa and
other jurisdictions in which we operate may seek governmental or other
regulatory intervention if they view us as disrupting their EFT transacting
businesses.
Research and Development
During fiscal 2010, 2009 and
2008, we incurred research and development expenditures of $7.6 million, $8.9
million and $5.7 million, respectively. These expenditures consist primarily of
the salaries of our software engineers and developers. Our research and
development activities relate primarily to the continual revision and
improvement of our core UEPS software and its functionality and the design and
development of our Mobile Virtual Card, or MVC, concept. For example, we
continually advance our security protocols and algorithms as well as develop new
UEPS features that we believe will enhance the attractiveness of our product and
service offerings. Our research and development efforts also focus on taking
advantage of improvements in the hardware platforms that are not proprietary to
us but which form part of our system.
Intellectual Property
Our success depends in part on
our ability to develop, maintain and protect our intellectual property. We rely
on a combination of patents, copyrights, trademarks and trade secret laws, as
well as non-disclosure agreements to protect our intellectual property.
Our FTS patents, which include
aspects of the UEPS technology, are in effect in the United States, Hong Kong,
South Africa, Botswana and Swaziland. The FTS patent in the United States was
granted as US Patent No. 5,175,416 on December 29, 1992. The patent was reissued
as US Patent No. RE36,788 on July 25, 2000, and will expire on May 17, 2011. The
FTS patent in Hong Kong was granted on December 11, 1998, and expired in 2010.
The FTS patents in South Africa, Botswana, and Swaziland were granted on
September 25, 1991, March 9, 1993, and December 9, 1992, respectively. Our FTS
patents expire in September 2010 in South Africa and Swaziland and in March 2011
in Botswana.
During fiscal 2010, we continued
the filing of the following three new patents on a world-wide basis:
PCT Patent Application No:
|
PCT Filing Date
|
Title
|
|
|
|
PCT/IB2007/054659
|
November 15, 2007
|
Verification of a transactors
identity
|
PCT/IB2007/054676
|
November 16, 2007
|
Designation of electronic financial
transactions
|
PCT/IB2007/054678
|
November 16, 2007
|
Virtual Card
|
We hold a number of trademarks in
various countries.
16
Financial Information about Geographical Areas and Operating
Segments
During the last three fiscal
years, we derived substantially all of our revenue from customers located in
South Africa and substantially all of our assets were located in South Africa,
except that in fiscal 2009 and 2008, respectively, we derived material revenues
from a customer in Ghana and in 2009 from a customer in the Russian Federation
and in fiscal 2010 and 2009, a material portion of our assets were located in
Austria. See Note 17 to our consolidated financial statements for financial
information about our operating segments.
Employees
As of June 30, 2010, we had 2,192
employees. On a segmental basis, 232 employees were part of our management,
1,551 were employed in transaction-based activities, 2 were employed in
financial services and 407 were employed in smart card, hardware, software and
related technology sales and corporate activities.
On a functional basis, three of
our employees were part of executive management, 84 were employed in sales and
marketing, 139 were employed in finance and administration, 276 were employed in
information technology and 1,690 were employed in operations.
As of June 30, 2010,
approximately 114 of the 265 employees we have in the Limpopo Province who were
performing transaction-based activities were members of the South African
Commercial Catering and Allied Workers Union. We believe we have a good
relationship with our employees and these unions.
Corporate history
Net1 was incorporated in Florida
in May 1997. Until June 2004, Net1 was a development stage company and its
business consisted only of acquiring a license to the US FTS patent and
obtaining an exclusive marketing agreement for the UEPS technology outside South
Africa, Namibia, Botswana and Swaziland. In June 2004, Net1 acquired Net1
Applied Technologies Holdings Limited, or Aplitec, a public company listed on
the JSE Limited, or JSE. Aplitec owned the FTS patent in South Africa, Namibia,
Botswana and Swaziland and one of its subsidiaries was the other party to the
marketing agreement described above. The primary purpose of the Aplitec
transaction was to consolidate into one group the intellectual property rights
relating to the FTS patent and the UEPS technology, to establish a first-mover
advantage in developing economies for the commercialization of the UEPS
technology, and to exploit market opportunities for growth through strategic
alliances and acquisitions. The transaction permitted Aplitecs shareholders to
reinvest the sale proceeds in Net1, but under South African exchange control
regulations, those shareholders were not permitted to hold Net1s securities
directly. In October 2008, Net1 listed on the JSE, in a secondary listing, which
enabled the former Aplitec shareholders (as well as South African residents
generally) to hold Net1 common stock directly. See Note 11 to our consolidated
financial statements for information regarding the equity instruments held by
Aplitec shareholders from June 2004 to October 2008.
Available information
We maintain an Internet website
at www.net1.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports are available free
of charge through the SEC filings portion of our website, as soon as
reasonably practicable after they are filed with the Securities and Exchange
Commission. The information posted on our website is not incorporated into this
Annual Report on Form 10-K.
Executive Officers and Significant Employees of the
Registrant
Executive
officers
The table below presents our
executive officers, their ages and their titles:
Name
|
Age
|
Title
|
Dr. Serge C.P. Belamant
|
56
|
Chief executive officer,
chairman and director
|
Mr. Herman G. Kotze
|
40
|
Chief financial officer, treasurer, secretary
and director
|
Mr. Nitin Soma
|
42
|
Senior vice president
information technology
|
17
Dr. Belamant
has been our
chief executive officer since October 2000 and the chairman of our board since
February 2003. From June 1997 until June 2004, Dr. Belamant served as chief
executive officer and a director of Net 1 Applied Technology Holdings, or
Aplitec, whose business was acquired by Net1 in June 2004. From 1996 to 1997,
Dr. Belamant served as a consultant in the development of Chip Off-Line
Pre-Authorized Card, which is a Visa product. From October 1989 to September
1995, Dr. Belamant served as the managing director of Net 1 (Pty) Limited, a
privately owned South African company specializing in the development of
advanced technologies in the field of transaction processing and payment
systems. Dr. Belamant also serves on the boards of a number of other companies
that perform welfare distribution services and the provision of microfinance to
customers. Dr. Belamant spent ten years working as a computer scientist for
Control Data Corporation where he won a number of international awards. Later,
he was responsible for the design, development, implementation and operation of
the Saswitch ATM network in South Africa that rates today as the third largest
ATM switching system in the world. Dr. Belamant has patented a number of
inventions besides the FTS patent ranging from biometrics to gaming-related
inventions. Dr. Belamant has more than 29 years of experience in the fields of
operations research, security, biometrics, artificial intelligence and online
and offline transaction processing systems. Dr. Belamant holds a PhD in
Information Technology and Management.
Mr. Kotze
has been our
chief financial officer, secretary and treasurer since June 2004. From January
2000 until June 2004, he served on the board of Aplitec as group financial
director. In mid-1997 until October 1998, Mr. Kotzé worked for the Industrial
Development Corporation of South Africa Limited as a business analyst. Mr. Kotzé
served his articles from 1994 to 1996 at KPMG in Pretoria, South Africa, and in
1997 he became the audit manager for several major corporations in the
manufacturing, mining, retail and financial services industries. Mr. Kotzé
joined Aplitec in November 1998 as a strategic financial analyst. Mr. Kotzé is a
member of the South African Institute of Chartered Accountants.
Mr. Soma
has served as our
Senior Vice President of Information Technology since June 2004. Mr. Soma joined
Aplitec in 1997. He specializes in transaction switching and interbank
settlements. Mr. Soma represented Nedcor Bank in assisting with the technical
specifications for the South African Interbank Standards. He is also responsible
for the ATM settlement process to balance ATMs with the host as well as balance
the host with different card users. Mr. Soma designed the Stratus Back-End
System for Aplitec, and is responsible for the Nedbank Settlement System for the
Point of Sales Devices. Mr. Soma has over 14 years of experience in the
development and design of smart card payment systems.
Significant
employees
Business
Functions:
Dr. Gerhard Claassen
(51):
General Manager Cryptographic Solutions Dr. Claasen joined us in August 2000
and is responsible for the marketing and business development of our
cryptographic solutions consisting of the internally developed Incognitorange of
security solutions, as well as ToDos authenticators and the Cybertrust PKI
products.
Leonid Delberg
(64):
Managing director: Net1 UTA Mr. Delberg has been the CEO of Net1 UTA since
1997. Net1 UTA is responsible for the marketing and business development of our
payment solutions in Russia, the CIS, Oman, India and Asia.
Wimpie du Plessis
(58):
Managing director: MediKredit Mrs. du Plessis joined us in January 2010 and is
responsible for the marketing and business development of our MediKredit
offering worldwide.
Anton Kok
(49): Business
Unit Leader: Business Unit Leader: Financial Services Cluster Mr. Kok joined
us in January 2010 and is responsible for the deployment of our wage payment
solution and other financial services, such as insurance products and our
UEPS-based microlending book.
Eric Meniere
(44):
Managing director: Virtual Card Mr. Meniere joined us in March 2008 and is
responsible for the marketing and business development of our new Virtual Card
product. Mr. Meniere was previously the chief executive officer of Gemplus South
Africa.
Nanda Pillay
(39): General
Manager: CPS and EasyPay Mr. Pillay joined us in May 2000 and is responsible
for our South African operations, consisting of CPS and EasyPay.
Richard Schweger
(48):
Financial & operations director: Net1 UTA Mr. Schweger has been the CFO
and COO of Net1 UTA since 1997. Net1 UTA is responsible for the marketing and
business development of our payment solutions in Russia, the CIS, Oman, India
and Asia.
James Sneedon
(42):
Business Unit Leader: VTU Mr. Sneedon joined us January 2001 and is
responsible for the marketing and business development of our Virtual Top UP
products.
18
Brenda Stewart
(52):
Managing director: Net1 Universal Electronic Technological Solutions Mrs.
Stewart joined us in 1997 and is responsible for the marketing and business
development of our UEPS solutions in Africa (excluding South Africa), Iraq and
the Philippines.
Mark Stuckenberg
(48):
Managing director: FIHRST Mr. Stuckenberg joined us in March 2010 and is
responsible for the marketing and business development of our FIHRST
offering.
Deon Visser
(43): General
Manager: Chip and GSM licensing Mr. Visser joined us in March 1997 and is
responsible for the marketing and business development of our SIM card products
and the licensing of our internally developed GSM masks.
Support
functions:
Chris Britz
(49): Vice
President - Group production, repairs & maintenance Mr. Britz joined us in
April 2001 and is responsible for the groups production facilities, as well as
all internal and external repairs and maintenance of terminals and other
hardware.
Lawrie Chalmers
(49): Vice
President - Group Human Resources Mr. Chalmers joined us in April 1998 and is
responsible for the groups South African human resources activities, including
recruitment, payroll, training and industrial relations.
Dhruv Chopra
(36): Vice
President: Investor Relations Mr. Chopra joined us in June 2009 and was
previously an analyst at Morgan Stanley, specializing in the payment processing
and IT services sectors.
Paul Encarnacao
(34): Vice
President Finance Mr. Encarnacao joined us in June 2004 and is responsible
for the preparation of the groups generally accepted accounting principles in
the United States of America, or US GAAP, consolidated accounts and statutory
reports.
Warren Segall
(45): Vice President: Compliance Mr.
Segall joined us in July 2006 and is our compliance officer.
Trevor Smit
(53): Vice
President: Joint Ventures and Investments Mr. Smit joined us in May 2007 and
provides governance support to our joint ventures as our representative on the
various boards of directors.
Cara van Straaten
(49):
Group Financial Controller Ms. Van Straaten joined us in July 2004 and is
responsible for the groups South African financial function, including
financial accounting, taxation and statutory reporting.
19
ITEM 1A. RISK FACTORS
OUR OPERATIONS AND FINANCIAL
RESULTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE
DESCRIBED BELOW, THAT COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION,
RESULTS OF OPERATIONS, CASH FLOWS, AND THE TRADING PRICE OF OUR COMMON
STOCK.
Risks Relating to Our Business
We currently derive
approximately 65% of our revenues from the social welfare grants distribution
service that we perform for SASSA. Our latest contract with SASSA, dated August
24, 2010, expires on March 31, 2011, and we may be required to bid with
competitors for a new contract which may not be awarded to us. If we were to
discontinue providing our distribution service to SASSA, we would lose all of
these revenues.
We currently derive a substantial
majority of our revenues from the social welfare grants distribution service
that we perform for SASSA, whereby we distribute these grants in five of the
nine provinces of South Africa. For the foreseeable future, our revenues,
results of operations and cash flows will depend on this activity. During the
years ended June 30, 2010, 2009 and 2008, we derived approximately 66%, 65% and
67%, respectively, of our revenues from our contract with SASSA to distribute
social welfare grants. On August 24, 2010, we entered into a new service level
agreement with SASSA which expires on March 31, 2011, and we expect that we may
be required to bid with competitors for a new contract. If we are unsuccessful
in obtaining a new contract and were to discontinue providing our distribution
service to SASSA, we would lose all of these revenues.
In early 2007, SASSA commenced a
national tender for the award of contracts to distribute social welfare grants
throughout South Africa. We participated in the tender process and timely
submitted proposals for each of South Africas nine provinces, as well as a
proposal for the entire country. There were a series of extensive delays during
the tender process which resulted in numerous extensions of our bid proposals as
well as an extension of our existing contracts. On November 3, 2008, SASSA
notified bidders that it had terminated the tender process without awarding new
contracts, citing a number of defects in the original request for proposal
published by SASSA and in the bid evaluation process. In late March 2009, we
signed a new one-year contract with SASSA which expired on March 31, 2010 and
which was subsequently extended to June 30, 2010. We signed a new agreement with
SASSA on August 24, 2010. SASSA has stated that it may commence a new tender
process at any time.
SASSAs decision to terminate the
original tender process and the ensuing short-term agreements have created
substantial uncertainty about the timing and ultimate outcome of the future
contract award process. Once SASSA initiates a new tender process, we cannot
assure you that the tender will result in our receiving a contract to continue
to distribute social welfare grants in each of the five South African provinces
where we currently distribute them. If we do not receive a new contract or if we
were to discontinue providing our payment service to SASSA, we could lose a
substantial majority of our revenues. Even if we do receive a new contract, or
one or more extensions of the existing contract, we cannot predict the terms
that such contracts will contain. Any new contract or extension we receive may
contain pricing or other terms, such as provisions relating to early
termination, that could be unfavorable to us. It is also possible that any new
tender specification would include a requirement for the successful bidder to
pre-fund the social welfare grants in the relevant province for a one month
period, as we were required to do under certain of our previous provincial
contracts, which would result in significant cash flow funding requirements for
the contractor.
The previous tender process and
the negotiation of the new contract and subsequent extensions have consumed a
substantial amount of our managements time and attention during the past three
years. Any future tender initiated by SASSA would require our management to
devote further resources to the tender process which could adversely affect
their ability to focus on other matters, including potential international
business development activities. In addition, we have sued SASSA challenging,
among other things, the cancellation of the previous tender process. We cannot
predict the outcome of this litigation, or whether or how such litigation will
affect the outcome of any future tender process.
Moreover, even if we were to
receive a new contract or contract extensions containing similar economic terms
to those of our current contract, our profit margin could be adversely affected
to the extent that any such contracts would require us to incur significant
capital expenditures during the initial implementation phase. Historically, we
have incurred a significant portion of the expenses associated with these
contracts during the initial implementation phase, which averages approximately
18 months, and have historically enjoyed higher profit margins on these
contracts after the completion of the implementation period. Therefore, to the
extent that we were to be awarded a new contract that required significant
capital expenditures, our profit margins would be adversely affected if the
contract were to be terminated for any reason during the implementation
period.
20
Finally, if we were to be awarded
one or more contracts by SASSA, an unsuccessful tenderor could seek to challenge
the award, which could result in the contract being set aside or could require
us to expend time and resources in an attempt to defeat any such challenge.
Our new contract with SASSA
is less favorable to us than our previous contract which we expect to adversely
affect our results of operations and cash flow for fiscal 2011. Furthermore, the
terms of any further renewals or extensions or a contract awarded under a future
tender process may be even less favorable to us than the current contract. To
the extent that we are unsuccessful in diversifying our business and reducing
our dependence on SASSA, our business and profitability will likely
suffer.
On August 24, 2010, we entered
into a new service level agreement with SASSA which replaces our previous SASSA
contract that expired on June 30, 2010. The new agreement is retroactively
effective from July 1, 2010, and expires on March 31, 2011. The new contract
contains a standard pricing formula for all provinces based on a transaction fee
per beneficiary paid, regardless of the number or amount of grants paid per
beneficiary, calculated on a guaranteed minimum number of beneficiaries per
month. However, the new contract provides for a reduction in both the level of
the transaction fee per beneficiary paid and the guaranteed minimum number of
beneficiaries. Because we continue to derive a substantial percentage of our
revenues from our SASSA contract, we expect that the terms of the new contract
will materially reduce our revenues, operating income, net income and cash flow
for fiscal 2011. Further, as described in the preceding risk factor, it is
possible that any further extension or renewal of the current contract or even a
contract which we may be awarded under a future tender process may be even less
favorable to us. While we are making significant efforts to reduce our
dependence on our SASSA contract by diversifying our business in South Africa
and expanding internationally, to the extent that these efforts are not
successful, we may not be able to offset the effects of the current and possible
future less favorable terms from SASSA which would have a material adverse
effect on our results of operations, financial position and cash flows.
We may undertake
acquisitions that could increase our costs or liabilities or be disruptive to
our business.
Acquisitions are a significant
part of our long-term growth strategy as we seek to grow our business
internationally and to deploy our technologies in new markets both inside and
outside South Africa. However, we may not be able to locate suitable acquisition
candidates at prices that we consider appropriate. If we do identify an
appropriate acquisition candidate, we may not be able to successfully negotiate
the terms of an acquisition, finance the acquisition or, if the acquisition
occurs, integrate the acquired business into our existing business. These
transactions may require debt financing or additional equity financing,
resulting in additional leverage or dilution of ownership.
Acquisitions of businesses or
other material operations and the integration of these acquisitions will require
significant attention from our senior management which may divert their
attention from our day to day business. The difficulties of integration may be
increased by the necessity of coordinating geographically dispersed
organizations, integrating personnel with disparate business backgrounds and
combining different corporate cultures. We also may not be able to maintain key
employees or customers of an acquired business or realize cost efficiencies or
synergies or other benefits that we anticipated when selecting our acquisition
candidates. In addition, we may need to record write downs from future
impairments of intangible assets, which could reduce our future reported
earnings. As an example, we have determined to record a goodwill impairment
charge of approximately $37.4 million related to our August 2008 acquisition of
Net 1 UTA. Finally, acquisition candidates may have liabilities or adverse
operating issues that we fail to discover through due diligence prior to the
acquisition.
We have recorded and may
need to record additional impairment charges relating to our businesses.
We assess the carrying value of
goodwill for impairment annually, or more frequently, whenever events occur and
circumstances change indicating potential impairment. We perform our annual
impairment test as of June 30 of each year. For the fourth quarter of fiscal
2010, we recognized an impairment loss of approximately $37.4 million on
goodwill allocated to the Hardware, software and related technology sales
segment as a result of deteriorating trading conditions of this segment,
particularly at Net1 UTA, and uncertainty surrounding contract finalization
dates which will impact future cash flows. A further deterioration in the
Hardware, software and related technology sales segment, or in any other of our
businesses, may lead to additional impairments in future periods.
21
It may be difficult for us
to implement our acquisition strategy in light of global market and economic
conditions.
We believe that it is frequently
desirable to issue equity or equity-linked securities, as full or partial
consideration for strategic acquisitions. However, our stock price suffered a
substantial decline during the second quarter of fiscal 2009 and continues to
trade well below its historic trading levels. The decline in our stock price has
reduced the feasibility of our pursuing acquisitions in which we would issue our
stock, at least in the near term. In addition, the conditions in the global
credit markets and other related trends affecting the banking industry have
caused significant operating losses and bankruptcies throughout the banking
industry which has made acquisition financing more difficult to obtain. If our
stock price remains too low to serve as acquisition currency or if we are unable
to obtain acquisition financing, we may be unable to take advantage of potential
acquisitions or to otherwise expand our business as planned.
A prolonged economic
slowdown or lengthy or severe recession in South Africa or elsewhere could harm
our operations.
A prolonged economic downturn or
recession could materially impact our results from operations. A recessionary
economic environment could have a negative impact on mobile phone operators, our
cardholders and retailers and could reduce the level of transactions we process
and the take-up of financial services we offer, which would, in turn, negatively
impact our financial results. If financial institutions and retailers experience
decreased demand for their products and services our hardware, software and
related technology sales will reduce, resulting in lower revenue.
The loss of the services of
Dr. Belamant or any of our other executive officers would adversely affect our
business.
Our future financial and
operational performance depends, in large part, on the continued contributions
of our senior management, in particular, Dr. Serge Belamant, our Chief Executive
Officer and Chairman and Herman Kotze, our Chief Financial Officer. Many of our
key responsibilities are performed by these two individuals, and the loss of the
services of either of them could disrupt our development efforts or business
relationships and our ability to continue to innovate and to meet customers
needs, which could have a material adverse effect on our business and financial
performance. We do not have employment agreements with our executive officers
and they may terminate their employment at any time. We do not maintain any key
person life insurance policies.
We face a highly
competitive employment market and may not be successful in attracting and
retaining a sufficient number of skilled employees, particularly in the
technical and sales areas and senior management.
Our future success depends on our
ability to continue to develop new products and to market these products to our
target users. In order to succeed in our product development and marketing
efforts, we need to identify, attract, motivate and retain sufficient numbers of
qualified technical and sales personnel. An inability to hire and retain such
technical personnel would adversely affect our ability to enhance our existing
intellectual property, to introduce new generations of technology and to keep
abreast of current developments in technology. Demand for personnel with the
range of capabilities and experience we require is high and there is no
assurance that we will be successful in attracting and retaining these
employees. The risk exists that our technical skills and sales base may be
depleted over time because of natural attrition. Furthermore, social and
economic factors in South Africa have led, and continue to lead, numerous
qualified individuals to leave the country, thus depleting the availability of
qualified personnel in South Africa. In addition, our multi-country strategy
will also require us to hire and retain highly qualified managerial personnel in
each of these markets. If we cannot recruit and retain people with the
appropriate capabilities and experience and effectively integrate these people
into our business, it could negatively affect our product development and
marketing activities.
22
We face competition from
the incumbent retail banks in South Africa in the unbanked market segment, which
could limit growth in our transaction-based activities segment.
The incumbent South African
retail banks have created a common banking product, generally referred to as a
Mzansi account, for unbanked South Africans, which offers limited
transactional capabilities at reduced charges, when compared to the accounts
traditionally offered by these banks. According to the FinScope survey, which is
an annual survey conducted by the FinMark Trust, a non-profit independent trust,
approximately 4.4 million and 3.5 million people in South Africa claimed to use
a Mzansi account in 2009 and 2008, respectively. In addition, the 2009 survey
indicated that 22% of those surveyed opened a Mzansi account in order to receive
a social welfare grant.
It is possible for a social
welfare beneficiary to receive grants through a Mzansi or other low-cost banking
account. SASSA does not pay us a fee for the disbursement of grants through
Mzansi or other low cost bank accounts and to the extent that beneficiaries use
these accounts, rather than our smart card, to receive their grants, we will not
be able to generate additional revenues from retail spending by these
beneficiaries. In contrast, when a beneficiary receives grants through our smart
card, we are able to generate incremental revenues from the use of our card in
our merchant acquiring system because merchants participating in our merchant
acquiring systems are also able to accept UEPS-based smart cards. Thus, our
ability to increase our revenues and operating margins will be adversely
affected to the extent that there is an increase in the number or percentage of
South Africans using Mzansi or other low cost bank accounts to receive their
social welfare grants.
The period between our
initial contact with a potential customer and the sale of our products or
services to that customer tends to be long and may be subject to delays which
may have an impact on our revenues.
The period between our initial
contact with a potential customer and the purchase of our products and services
is often long and subject to delays associated with the budgeting, approval and
competitive evaluation processes that frequently accompany significant capital
expenditures. A lengthy sales cycle may have an impact on the timing of our
revenues, which may cause our quarterly operating results to fall below investor
expectations. A customers decision to purchase our products and services is
often discretionary, involves a significant commitment of resources, and is
influenced by customer budgetary cycles. To sell our products and services
successfully we generally must educate our potential customers regarding the
uses and benefits of our products and services, which can require the
expenditure of significant time and resources; however, there can be no
assurance that this significant expenditure of time and resources will result in
actual sales of our products and services.
We may face competition
from other companies that offer smart card technology and other innovative
payment technologies, which could result in loss of our existing business and
adversely impact our ability to successfully market additional products and
services.
In addition to competition that
we face from the use of cash, checks, credit and debit cards, existing payment
systems and the providers of financial services and low cost bank accounts such
as Mzansi, there are a number of other products that use smart card technology
in connection with a funds transfer system. During the past several years, smart
card technology has become increasingly prevalent. We believe that the most
competitive product in this marketplace is EMV, a system that is promoted by
Visa Inc., MasterCard International and EuroPay International. Our ability to
maintain our existing South African government contracts could be adversely
affected to the extent that, in the future, the promoters of any of these
systems would choose to compete directly in the South African pension and
welfare business.
We also may face competition from
companies to which we have licensed our technology. In 1997, we entered into a
technology license agreement with Visa. Under that agreement, Visa purchased a
non-exclusive, perpetual, worldwide license to our technology rights, as defined
in the agreement, relating to our UEPS technology and an exclusive, perpetual,
worldwide license under our patents, as defined in the agreement, licensed to
Visa that is exclusive to the financial services industry, as defined in the
agreement. Our Visa agreement grants back to us the non-exclusive right under
our Visa-licensed patents to make, use and sell our payment systems and other
products in the financial services industry as discussed in the agreement. In
our Visa agreement, Visa agrees not to grant a sublicense to any payment system
to any entities in the financial services industry who are not members of Visa
already if such entity already has a right to use such payment systems from us.
The agreement permits Visa to sublicense our licensed technology rights to any
of its members, any entity in the financial services industry or any entity
outside of the financial services industry that provides products to Visa or its
sublicensees. The agreement prohibits us from licensing our technology rights,
not just our licensed patents, to any of Visas competitors, including
MasterCard, Europay, American Express Company, Discover Financial Services,
Diners Club International Credit Card Co., Carte Blanche Card or JCB
International Credit Card Co. or any of their parents, subsidiaries or
affiliates. We may need Visas consent, not to be unreasonably withheld, in
order to transfer or assign our rights and obligations under the agreement. As
this agreement does not contain a termination date and contains restrictions on
our ability to license our technology rights in the financial services industry
and to competitors of Visa, we may not be able to realize the full value of our
technology rights.
23
Moreover, as our product
offerings increase and gain market acceptance, banks in South Africa and other
jurisdictions in which we operate may seek governmental or other regulatory
intervention if they view us as disrupting their funds transfer or other
businesses.
System failures,
including breaches in the security of our system, could harm our
business.
We may experience system failures
from time to time, and any lengthy interruption in the availability of our
back-end system computer could harm our revenues and profits, and could subject
us to the scrutiny of our government customers.
Frequent or persistent
interruptions in our services could cause current or potential customers and
users to believe that our systems are unreliable, leading them to avoid our
technology altogether, and could permanently harm our reputation and brands.
These interruptions would increase the burden on our engineering staff, which,
in turn, could delay our introduction of new applications and services. Finally,
because our customers may use our products for critical transactions, any system
failures could result in damage to our customers businesses. These customers
could seek significant compensation from us for their losses. Even if
unsuccessful, this type of claim could be time consuming and costly for us to
address.
Although our systems have been
designed to reduce downtime in the event of outages or catastrophic occurrences,
they remain vulnerable to damage or interruption from earthquakes, floods,
fires, power loss, telecommunication failures, terrorist attacks, computer
viruses, computer denial-of-service attacks and similar events. Some of our
systems are not fully redundant, and our disaster recovery planning may not be
sufficient for all eventualities.
Protection against fraud is of
key importance to the purchasers and end users of our solutions. We incorporate
security features, including encryption software, biometric identification and
secure hardware, into our solutions to protect against fraud in electronic
transactions and to provide for the privacy and integrity of card holder data.
Our solutions may be vulnerable to breaches in security due to defects in the
security mechanisms, the operating system and applications or the hardware
platform. Security vulnerabilities could jeopardize the security of information
transmitted using our solutions. If the security of our solutions is
compromised, our reputation and marketplace acceptance of our solutions will be
adversely affected, which would cause our business to suffer, and we may become
subject to damage claims. We have not yet experienced any security breaches
affecting our business.
Despite any precautions we may
take, the occurrence of a natural disaster or other unanticipated problems with
our system could result in lengthy interruptions in our services. Our current
business interruption insurance may not be sufficient to compensate us for
losses that may result from interruptions in our service as a result of system
failures.
The failure of any bank or
financial institution in which we keep our cash and cash equivalents may prevent
us from funding our business or may lead to substantial losses of
assets.
We maintain a significant amount
of cash and cash equivalents to fund our business operations at several major
South African and European banks and financial institutions. As of June 30,
2010, we maintained an aggregate of $153.7 million in cash and cash equivalents
which were deposited with such banks and financial institutions. Although we
maintain a policy of entering into transactions only with South African and
European banks and financial institutions that have ratings acceptable to our
board, as determined by credit rating agencies such as Standard & Poors,
Moodys and Fitch Ratings, due to the recent credit crisis and global economic
conditions, it is possible that despite such ratings, one or more of these banks
or financial institutions may fail. The failure of one or more of these
institutions may cause us to lose a significant amount of cash and cash
equivalents. In addition to the actual value of our company which would be
reduced due to the loss of cash and cash equivalents, our business could be
materially and adversely affected by the failure of any institution where we
maintain our cash and cash equivalents. Although to date we have not experienced
any such losses or been prevented from funding our business operations, in light
of recent global economic conditions such losses may occur in the future.
24
Our strategy of
partnering with companies outside South Africa may not be
successful.
In order for us to expand our
operations into foreign markets, it may be necessary for us to establish
partnering arrangements with companies outside South Africa, such as the ones we
have established in Namibia, Botswana, Nigeria, Colombia and Vietnam. The
success of these endeavors is, however, subject to a number of factors over
which we have little or no control, such as finding suitable partners with the
appropriate financial, business and technical backing and continued governmental
support for planned implementations. In some countries, finding suitable
partners and obtaining the appropriate support from the government involved may
take a number of years before we can commence implementation. Some of these
partnering arrangements may take the form of joint ventures in which we receive
a minority interest. Minority ownership carries with it numerous risks,
including dependence on partners to provide knowledge of local market conditions
and to facilitate the acquisition of any necessary licenses and permits, as well
as the inability to control the joint venture vehicle and to direct its policies
and strategies. Such a lack of control could result in the loss of all or part
of our investment in such entities. In addition, our foreign partners may have
different business methods and customs which may be unfamiliar to us and with
which we disagree. Our joint venture partners may not be able to implement our
business model in new areas as efficiently and quickly as we have been able to
do in South Africa. Furthermore, limitations imposed on Net1 Applied
Technologies South Africa Limited, or New Aplitec, by South African exchange
control regulations, as well as limitations imposed on us by the Investment
Company Act of 1940, may limit our ability to establish partnerships or entities
in which we do not obtain a controlling interest. In addition, certain of our
licensees, including Visa, have become our competitors and this could occur with
our joint venture partners in the future.
We may have difficulty
managing our growth, especially as we expand our business
internationally.
We continue to experience growth,
both in the scope of our operations and size of our organization. This growth is
placing significant demands on our management, especially as we expand our
business internationally. Continued growth would increase the challenges
involved in implementing appropriate operational and financial systems,
expanding our technical and sales and marketing infrastructure and capabilities,
providing adequate training and supervision to maintain high quality standards,
and preserving our culture and values. International growth, in particular,
means that we must become familiar and comply with complex laws and regulations
in other countries, especially laws relating to taxation.
Additionally, continued growth
will place significant additional demands on our management and our financial
and operational resources, and will require that we continue to develop and
improve our operational, financial and other internal controls. If we cannot
scale and manage our business appropriately, we will not experience our
projected growth and our financial results may suffer.
We pre-fund the payment of
social welfare grants through our merchant acquiring system and a significant
level of payment defaults by these merchants would adversely affect
us.
We pre-fund social welfare grants
through the merchants who participate in our merchant acquiring system in the
provinces where we operate. These pre-funding obligations expose us to the risk
of default by these merchants. Although we have not experienced any material
defaults by merchants in the return of pre-funded amounts to us, we cannot
guarantee that material defaults will not occur in the future. A material level
of merchant defaults could have a material adverse effect on us, our financial
position and results of operations.
We may incur material
losses in connection with our distribution of cash to recipients of social
welfare grants.
Many social welfare recipients
use our services to access cash using their smart cards. We use armored vehicles
to deliver large amounts of cash to rural areas across South Africa to enable
these welfare recipients to receive this cash. In some cases, we also store the
cash that will be delivered by the armored vehicles in depots overnight or over
the weekend to facilitate delivery to these rural areas. We cannot insure
against the risk of loss or theft of cash from our delivery vehicles as we have
not identified any insurance underwriters willing to accept this risk on
reasonable terms. Therefore, we will bear the full cost of any loss or theft in
connection with the delivery process, and such loss could materially and
adversely affect our financial condition, cash flows and results of operations.
The Company did not incur any material losses resulting from cash distribution
during fiscal 2010, 2009 or 2008, but there is no assurance that we will not
incur material losses in the future.
25
We depend upon third-party
suppliers, making us vulnerable to supply shortages and price fluctuations,
which could harm our business.
We obtain our smart cards, POS
devices and the other hardware we use in our business from a limited number of
suppliers, and do not manufacture this equipment ourselves. We generally do not
have long-term agreements with our manufacturers or component suppliers. If our
suppliers become unwilling or unable to provide us with adequate supplies of
parts or products when we need them, or if they increase their prices, we may
not be able to find alternative sources in a timely manner and could be faced
with a critical shortage. This could harm our ability to implement new systems
and cause our revenues to decline. Even if we are able to secure alternative
sources in a timely manner, our costs could increase. A supply interruption or
an increase in demand beyond current suppliers capabilities could harm our
ability to distribute our equipment and thus, to acquire a new source of
customers who use our UEPS technology. Any interruption in the supply of the
hardware necessary to operate our technology, or our inability to obtain
substitute equipment at acceptable prices in a timely manner, could impair our
ability to meet the demand of our customers, which would have an adverse effect
on our business.
Shipments of our electronic
payment systems may be delayed by factors outside of our control, which can harm
our reputation and our relationships with our customers.
The shipment of payment systems
requires us or our manufacturers, distributors or other agents to obtain customs
or other government certifications and approvals and, on occasion, to submit to
physical inspection of our systems in transit. Failure to satisfy these
requirements, and the very process of trying to satisfy them, can lead to
lengthy delays in the delivery of our solutions to our direct or indirect
customers. Delays and unreliable delivery by us may harm our reputation and our
relationships with our customers.
Risks Relating to Operating in South Africa and Other
Emerging Markets
Fluctuations in the value
of the South African rand have had, and will continue to have, a significant
impact on our reported results of operations, which may make it difficult to
evaluate our business performance between reporting periods and may also
adversely affect our stock price.
The South African rand, or ZAR,
is the primary operating currency for our business operations while our
financial results are reported in US dollars. This means that as long as the ZAR
remains our primary operating currency, depreciation in the ZAR against the US
dollar, and to a lesser extent, the euro, would negatively impact our reported
revenue and net income, while a strengthening of the ZAR would have the opposite
effect. Depreciation in the ZAR may negatively impact the prices at which our
stock trades. The US dollar/ZAR exchange rate has historically been volatile and
we expect this volatility to continue. The ZAR was significantly weaker overall
during 2009 than during 2010 and 2008, which negatively affected our reported
2009 results of operations when compared to 2010 and 2008. We provide detailed
information about historical exchange rates in Managements Discussion and
Analysis of Financial Condition and Results of Operations--Currency Exchange
Rate Information.
Due to the significant
fluctuation in the value of the ZAR and its impact on our reported results, you
may find it difficult to compare our results of operations between financial
reporting periods even though we provide supplemental information about our
results of operations determined on a ZAR basis. This difficulty may increase as
we expand our business internationally and record additional revenue and
expenses in the euro and other currencies. It may also have a negative impact on
our stock price.
We generally do not engage in any
currency hedging transactions intended to reduce the effect of fluctuations in
foreign currency exchange rates on our results of operations, other than
economic hedging relating to our inventory purchases which are settled in US
dollars or euros. We have used forward contracts in order to hedge our economic
exposure to the ZAR/US dollar and ZAR/euro exchange rate fluctuations from these
foreign currency transactions. We cannot guarantee that we will enter into
hedging transactions in the future or, if we do, that these transactions will
successfully protect us against currency fluctuations.
26
South Africas high levels
of poverty, unemployment and crime may increase our costs and impair our ability
to maintain a qualified workforce.
While South Africa has a highly
developed financial and legal infrastructure, it also has high levels of crime
and unemployment and there are significant differences in the level of economic
and social development among its people, with large parts of the population,
particularly in the rural areas, having limited access to adequate education,
healthcare, housing and other basic services, including water and electricity.
Government policies aimed at alleviating and redressing the disadvantages
suffered by the majority of citizens under previous governments may increase our
costs and reduce our profitability, all of which could negatively affect our
business. These problems may prompt emigration of skilled workers, hinder
investment into South Africa and impede economic growth. As a result, we may
have difficulties attracting and retaining qualified employees.
The economy of South Africa
is exposed to high inflation and interest rates which could increase our
operating costs and thereby reduce our profitability.
The economy of South Africa in
the past has been, and in the future may continue to be, characterized by rates
of inflation and interest rates that are substantially higher than those
prevailing in the United States and other highly developed economies. High rates
of inflation could increase our South African-based costs and decrease our
operating margins. Although higher interest rates would increase the amount of
income we earn on our cash balances, they would also adversely affect our
ability to obtain cost-effective debt financing in South Africa.
If we do not achieve
applicable black economic empowerment objectives in our South African
businesses, we risk losing our government and private contracts. In addition, it
is possible that we may be required to achieve black shareholding of our company
in a manner that could dilute your ownership.
The South African government,
through the Broad-Based Black Economic Empowerment Act, 2003, established a
legislative framework for the promotion of BEE. The law recognizes two distinct
mechanisms for the achievement of BEE objectivescompliance with codes of good
practice, which have already been issued, and compliance with industry-specific
transformation charters. Although the charter that will likely apply to our
company has not yet been finalized, we believe it is likely that the charter
will not differ substantially from the codes of good practice. Achievement of
BEE objectives is measured by a scorecard which establishes a weighting to
various components of BEE. One component of BEE is achieving a certain
percentage of shareholdings by black South Africans in South African businesses
over a period of years. This shareholding component carries the highest BEE
scorecard weighting. Other components include procuring goods and services from
black-owned businesses or from businesses that have earned good BEE scores and
achieving certain levels of black South African employment. Compliance with the
codes and applicable charters are not enforced through civil or criminal
sanction, but compliance does affect the ability of a company to secure
contracts in the public and private sectors. Thus, it will be important for us
to achieve applicable BEE objectives. Failing to do so could jeopardize our
ability to maintain existing business, including our South African pension and
welfare business, or to secure future business.
We have taken a number of actions
as a company to increase empowerment of black South Africans. However, it is
possible that these actions may not be sufficient to enable us to achieve
applicable BEE objectives. In that event, in order to avoid risking the loss of
our government and private contracts, we may have to seek to comply through
other means, including by selling shares of Net1 or of our South African
subsidiaries to black South Africans. Such sales of shares could have a dilutive
impact of your ownership interest, which could cause the market price of our
stock to decline.
South African exchange
control regulations could hinder our ability to make foreign investments and
obtain foreign-denominated financing.
South Africas exchange control
regulations restrict the export of capital from South Africa, the Republic of
Namibia and the Kingdoms of Lesotho and Swaziland, known collectively as the
Common Monetary Area without the prior approval of SARB. While the South African
government has relaxed exchange controls in recent years, it is difficult to
predict whether or how it will further relax or abolish exchange control
measures in the foreseeable future.
27
Although Net1 is a US corporation
and is not itself subject to South African exchange control regulations, these
regulations do restrict the ability of our South African subsidiaries to raise
and deploy capital outside the Common Monetary Area, to borrow money in
currencies other than the South African rand and to hold foreign currency.
Exchange control restrictions may also affect the ability of these subsidiaries
ability to pay dividends to Net1 unless the affected subsidiary can show that
any payment of such dividend will not place it in an over borrowed position. As
of June 30, 2010, approximately 91% of our cash and cash equivalents were held
by our South African subsidiaries. Exchange control regulations could make it
difficult for our South African subsidiaries to: (i) export capital from South
Africa; (ii) hold foreign currency or incur indebtedness denominated in foreign
currencies without the approval of SARB; (iii) acquire an interest in a foreign
venture without the approval of SARB and first having complied with the
investment criteria of SARB; (iv) repatriate to South Africa profits of foreign
operations; and (v) limit our business to utilize profits of one foreign
business to finance operations of a different foreign business.
Under current exchange control
regulations, SARB approval would be required for any acquisition of our company
which would involve payment to our South African shareholders of any
consideration other than South African rand. This restriction could limit our
management in its ability to consider strategic options and thus, our
shareholders may not be able to realize the premium over the current trading
price of our shares.
HIV/AIDS and tuberculosis
are major healthcare challenges in South Africa and other sub-Saharan countries.
The prevalence of these diseases may force us to incur costs relating to the
loss of personnel, reduction in the productivity of our workforce and recruiting
and training of new personnel.
HIV/AIDS and tuberculosis, which
is exacerbated in the presence of HIV/AIDS, are major healthcare challenges in
South Africa and other sub-Saharan countries. We cannot estimate how much of our
South African workforce may be infected with HIV/AIDS, due to the high
prevalence of HIV/AIDS in South Africa, we may incur costs relating to the loss
of personnel and the related loss of productivity as well as medical costs and
costs relating to recruiting and training of new personnel. In addition, the
potential for increased mortality rates due to HIV/AIDS deaths to reduce or slow
the growth of the South African population could adversely impact our growth.
Most of these factors are beyond our control. We are not able to quantify the
impact of HIV/AIDS on our growth or costs and cannot assure you that the costs
we will incur in connection with this epidemic will not have a material adverse
effect on us, our financial condition and our operations.
Most of South Africas
major industries are unionized, and the majority of employees belong to trade
unions. We face the risk of disruption from labor disputes and new South African
labor laws.
In the past, trade unions have
had a significant impact on the collective bargaining process as well as on
social and political reform in South Africa in general. Although only
approximately five percent of our workforce is unionized and we have not
experienced any labor disruptions in recent years, such labor disruptions may
occur in the future. In addition, developments in South African labor laws may
increase our costs or alter our relationship with our employees and trade
unions, which may have an adverse effect on us, our financial condition and our
operations.
Operating in South Africa
and other emerging markets subjects us to greater risks than those we would face
if we operated in more developed markets.
Emerging markets such as South
Africa, as well as some of the other markets into which we have recently begun
to expand, including African countries outside South Africa, South America,
Southeast Asia and Central and Eastern Europe, are subject to greater risks than
more developed markets. While we focus our business primarily on emerging
markets because that is where we perceive there to be the greatest opportunities
to market our products and services successfully, the political, economic and
market conditions in many of these markets present risks that could make it more
difficult to operate our business successfully.
28
Some of these risks include:
-
political and economic instability, including higher rates of inflation
and currency fluctuations;
-
high levels of corruption, including bribery of public officials;
-
loss due to civil strife, acts of war or terrorism, guerrilla activities
and insurrection;
-
a lack of well-developed legal systems which could make it difficult for
us to enforce our intellectual property and contractual rights;
-
logistical and communications challenges;
-
potential adverse changes in laws and regulatory practices, including
import and export license requirements and restrictions, tariffs, legal
structures and tax laws;
-
difficulties in staffing and managing operations and ensuring the safety
of our employees;
-
restrictions on the right to convert or repatriate currency or export
assets;
-
greater risk of uncollectible accounts and longer collection cycles;
-
indigenization and empowerment programs; and
-
exposure to liability under US securities and foreign trade laws,
including the Foreign Corrupt Practices Act, or FCPA, and regulations
established by the US Department of Treasurys Office of Foreign Assets
Control, or OFAC.
Many of these countries and
regions are in various stages of developing institutions and political, legal
and regulatory systems that are characteristic of democracies. However,
institutions in these countries and regions may not yet be as firmly established
as they are in democracies in the developed world. Many of these countries and
regions are also in the process of transitioning to a market economy and, as a
result, are experiencing changes in their economies and their government
policies that can affect our investments in these countries and regions.
Moreover, the procedural safeguards of the new legal and regulatory regimes in
these countries and regions are still being developed and, therefore, existing
laws and regulations may be applied inconsistently. In some circumstances, it
may not be possible to obtain the legal remedies provided under those laws and
regulations in a timely manner.
As the political, economic and
legal environments remain subject to continuous development, investors in these
countries and regions face uncertainty as to the security of their investments.
Any unexpected changes in the political or economic conditions in these or
neighboring countries or others in the region may have a material adverse effect
on the international investments that we have made or may make in the future,
which may in turn have a material adverse effect on our business, operating
results, cash flows and financial condition.
Risks Relating to Government Regulation
We are required to comply
with certain US laws and regulations, including the Foreign Corrupt Practices
Act as well as economic and trade sanctions, which could adversely impact our
future growth.
We must comply with the FCPA,
which prohibits US companies or their agents and employees from providing
anything of value to a foreign official for the purposes of influencing any act
or decision of these individuals in their official capacity to help obtain or
retain business, direct business to any person or corporate entity or obtain any
unfair advantage. In addition, OFAC administers and enforces economic and trade
sanctions against targeted foreign countries, entities and individuals based on
US foreign policy and national security goals.
Any failure by us to adopt
appropriate compliance procedures and ensure that our employees, agents and
business partners comply with the FCPA could subject us to substantial
penalties. In addition, the requirement that we comply with the FCPA could put
us at a competitive disadvantage with companies that are not required to comply
with the FCPA or could otherwise harm our business. For example, in many
emerging markets, there may be significant levels of official corruption, and
thus, bribery of public officials may be a commonly accepted cost of doing
business. Our refusal to engage in illegal behavior, such as paying bribes, may
result in us not being able to obtain business that we might otherwise have been
able to secure or possibly even result in unlawful, selective or arbitrary
action being taken against us by foreign officials. Furthermore, the trade
sanctions administered and enforced by OFAC target countries which are typically
less developed countries. Since less developed countries present some of the
best opportunities for us to expand our business internationally, restrictions
against entering into transactions with those foreign countries, as well as with
certain entities and individuals in those countries, can adversely affect our
ability to grow our business.
29
Changes in current South
African government regulations relating to social welfare grants could adversely
affect our revenues and cash flows.
We derive a substantial portion
of our current business from the distribution of social welfare grants onto
smart cards in South Africa and the transaction fees resulting from use of these
smart cards. Because social welfare eligibility and grant amounts are regulated
by the South African government, any changes to or reinterpretations of the
government regulations relating to social welfare may result in the non-renewal
or reduction of grants for certain individuals, or a determination that
currently eligible social welfare grant recipients are no longer eligible. If
any of these changes were to occur, the number of smart cards in use could
decrease, the amount of money on any particular smart card could decrease or the
amount of transactions effected on any particular smart card may decrease, all
of which could result in a reduction of our revenues and cash flows.
We do not have a South
African banking license and therefore we provide our wage payment solution
through an arrangement with a third party bank, which limits our control over
this business and the economic benefit we derive from it. If this arrangement
were to terminate, we would not be able to operate our wage payment business
without alternate means of access to a banking license
The South African retail banking
market is highly regulated, but the South African government has identified the
need to service the unbanked market through the liberalization of the regulatory
environment in order for retailers and non-banking service providers to innovate
products and delivery channels for the unbanked market. However, under current
law and regulations, a portion of our South African wage payment business
activities in the unbanked market requires us to be registered as a bank in
South Africa or to have access to an existing banking license. We are not
currently so registered, but we have entered into a co-operation agreement with
Grindrod Bank through which our wage payment solution is being implemented by
Grindrod Banks retail division. As a result of this arrangement, we do not have
complete control over the marketing and implementation of our wage payment
system and we have to share the economic benefits with Grindrod Bank. If the
co-operation agreement were to be terminated, we would not be able to operate
our wage payment business unless we were able to obtain access to a banking
license through alternate means.
In addition, the South African
Financial Advisory and Intermediary Services Act, 2002, requires persons who
give advice regarding the purchase of financial products or who act as
intermediaries between financial product suppliers and consumers in South Africa
to register as financial service providers. We have applied for a license under
this Act in order to continue to provide advice and intermediary services in
respect of the financial products on which we advise and the payment processing
services we provide in South Africa on behalf of insurers and other financial
product suppliers. If we fail to obtain this license, we may be stopped from
continuing this part of our business in South Africa.
Our payment processing
businesses in South Africa are subject to substantial governmental regulation
and may be adversely affected by liability under, or any future inability to
comply with, existing or future regulations or requirements.
Our payment processing activities
are subject to extensive regulation. Compliance with the requirements under
these various regulatory regimes may cause us to incur significant additional
costs and failure to comply with such requirements could result in the shutdown
of the non-complying facility, the imposition of liens, fines and/or civil or
criminal liability.
We may be subject to
privacy laws in South Africa and other jurisdictions in which we operate.
Compliance with these laws may adversely affect our ability to operate our
business most effectively. Moreover, we could face liability for damages if we
are found to have violated any of these privacy laws.
Our collection, storage and
processing, and any disclosure of, customer and employee personal information
must comply with South Africas privacy laws, which are at various stages of
legislative and judicial development. However, South African common law and the
Constitution of the Republic of South Africa, 1996, do recognize an individuals
right to privacy, and there are some statutes and other regulations which have
been enacted that apply to us and the way we operate our business. For example,
one statute sets out a framework for the electronic collection, processing,
storage and disclosure of personal information. Although compliance with this
statute is voluntary, a South African court could determine that we would be
violating an individuals right to privacy if we do not operate in compliance
with this framework. In addition, South African law requires that we must keep
confidential the HIV status of the people that participate in any HIV/AIDS
program.
New privacy laws may be enacted
in the future which could adversely affect the way we do business, and we could
be required to devote substantial management time and resources to comply with
these new laws. In addition, if we violate, or are judged to have violated, the
privacy rights of people whose information we collect, store and process, we
could become liable for damages, which could have a material adverse effect on
our financial condition, cash flows or results of operations.
30
Risks Relating to Intellectual Property
Patent competition may
adversely affect our products or processes, and limited patent protection, a
lack of proprietary protection and the potential to incur costly litigation
could be harmful to our operations.
Our products and technology have
unique characteristics and structures and, as a result, are subject to patent
protection, the extent of which varies from country to country. During the life
of a patent, a product is only subject to competition by non-infringing
products. However, aggressive patenting by our competitors and potential patent
piracy may threaten protected products and processes and may result in an
increased patent infringement risk, especially in emerging economies such as
those where we currently operate. The expiration of a patent may also result in
increased competition in the market for the previously patented products and
processes. The patents for our FTS will expire at various dates ending in 2011.
Lack of patent protection could have a material adverse effect on our business,
operating results, cash flows and financial condition. In addition, to date, we
have relied not only on patent protections, but also on trade secret, trademark
and copyright laws, as well as nondisclosure, licensing and other contractual
arrangements to protect the proprietary aspects of our solutions. Other than the
patents discussed above, we do not own any other patents that protect important
aspects of our current solutions. We will, however, prepare patent applications
where possible for technology related to our smart cards and UEPS system when we
believe it is appropriate to do so. These applications and contractual
arrangements and our reliance on these laws may not be successful.
Litigation to enforce our
intellectual property rights or protect our trade secrets could result in
substantial costs and may not be successful. Any loss of, or inability to
protect, intellectual property in our technology could diminish our competitive
advantage and also seriously harm our business. In addition, the laws of certain
foreign countries may not protect our intellectual property rights to the same
extent as do the laws in countries where we currently have patent protection.
Our means of protecting our intellectual property rights in countries where we
currently have patent protection or any other country in which we operate, may
not be adequate to fully protect our intellectual property rights. Similarly, if
third parties claim that we infringe their intellectual property rights, we may
be required to incur significant costs and devote substantial resources to the
defense of such claims. We may be required to discontinue using and selling any
infringing technology and services, to expend resources to develop
non-infringing technology or to purchase licenses or pay royalties for other
technology. In addition, if we are unsuccessful in defending any such
third-party claims, we could suffer costly judgments and injunctions that could
materially adversely affect our business, results of operations or financial
condition.
The copyrights and certain
related intellectual property rights in earlier versions of our UEPS software
are jointly owned and potentially subject to non-exclusive rights, which may
reduce our future revenues.
While we own the exclusive
copyrights in the current version of the UEPS software, these copyrights are
subject to the preexisting copyrights in the earlier versions of our software
that are owned jointly by us and Nedbank Limited, or Nedbank. As joint owners of
the copyrights in these earlier versions of our software that existed prior to
July 2000, there is a risk that Nedbank could license these works to others and
otherwise commercially exploit these earlier works. Under our Nedbank
agreements, Nedbank also acquired the right to request a license of our South
African and US FTS patents and of all technology and know-how relating to the
UEPS described in those earlier patents from us for entities partly owned by
Nedbank that are located anywhere within South Africa and neighboring countries.
Under these licenses, Nedbank would pay us a license fee, with us supplying
smart cards or being paid a royalty if the cards are obtained from a third
party. If Nedbank licenses our works to others or otherwise commercially
exploits our technology and know-how related to UEPS, our future revenues may be
reduced.
Our current license
agreement with Visa imposes long-term restrictions on our ability to license
rights in our technology and could inhibit our ability to realize additional
revenue from these rights in our technology.
In 1997, we entered into a
technology license agreement with Visa. Under that agreement, Visa purchased a
non-exclusive, perpetual, worldwide license to our technology rights, as defined
in the agreement, relating to our UEPS technology and an exclusive, perpetual,
worldwide license under our patents, as defined in the agreement, licensed to
Visa that is exclusive to the financial services industry, as defined in the
agreement. Our Visa agreement grants back to us the non-exclusive right under
our Visa-licensed patents to make, use and sell our payment systems and other
products in the financial services industry as discussed in the agreement. In
our Visa agreement, Visa agrees not to grant a sublicense to any payment system
to any entities in the financial services industry who are not members of Visa
already if such entity already has a right to use such payment systems from us.
31
The agreement permits Visa to
sublicense our licensed technology rights to any of its members, any entity in
the financial services industry or any entity outside of the financial services
industry that provides products to Visa or its sublicensees. The agreement
prohibits us from licensing our technology rights, not just our licensed
patents, to any of Visas competitors, including MasterCard, Europay, American
Express Company, Discover Financial Services, Diners Club International Credit
Card Co., Carte Blanche Card or JCB International Credit Card Co. or any of
their parents, subsidiaries or affiliates. We may need Visas consent, not to be
unreasonably withheld, in order to transfer or assign our rights and obligations
under the agreement. As this agreement does not contain a termination date and
contains restrictions on our ability to license our technology rights in the
financial services industry and to competitors of Visa, we may not be able to
realize the full value of our technology rights.
Our license agreement with
Visa substantially impacts our ability to defend and enforce our patents
licensed to Visa and could substantially inhibit our ability to protect the
rights in our technology.
Under our license agreement with
Visa, we are restricted from suing Visa, its members and any third-party vendors
or customers of Visa or its members for infringement of our technology rights
licensed to Visa in connection with their manufacture, use or sale of any
product or service offered by Visa. The license also grants Visa sole discretion
with regard to enforcement of any of the licensed technology rights against
third parties in the financial services industry. Under the agreement, Visa has
the right to control the prosecution and maintenance of the patents and related
patent applications we have licensed to Visa in all jurisdictions, and we are
obligated to cooperate and support any of Visas actions in this regard. This
arrangement could substantially impact our ability to defend these patents, and
could make enforcement actions against our competitors more difficult.
Risks Relating to our Common Stock
Our stock price has
been and may continue to be volatile.
Our stock price has experienced
recent significant volatility. During the 2010 fiscal year, our stock price
ranged from a low of $12.36 to a high of $22.47. We expect that the trading
price of our common stock may continue to be volatile as a result of a number of
factors, including, but not limited to the following:
-
developments or the absence of developments in obtaining a new tender or
contract from SASSA;
-
fluctuations in currency exchange rates, particularly the US dollar/ZAR
exchange rate;
-
quarterly variations in our operating results, especially if our operating
results fall below the expectations of securities analysts and investors;
-
announcements of acquisitions or disposals;
-
the timing of or delays in the commencement, implementation or completion
of major projects;
-
large purchases or sales of our common stock;
-
general conditions in the markets in which we operate; and
-
economic and financial conditions.
In particular, differences in
relative growth rates between our businesses in our established markets for
certain products and unestablished markets may have a significant effect on our
operating results, particularly our reported operating profit margin, in any
individual quarter, with unestablished market sales typically carrying lower
margins in the initial phases of our operations in a new area or the
introduction of a new product to an area in which we already operate. Certain
transactions are difficult to predict and may have a significant effect on our
operating results. Sales of this nature include hardware sales to customers and
to our SmartSwitch investments and cause fluctuations in revenue and operating
income when they occur.
We may seek to raise
additional financing by issuing new securities with terms or rights superior to
those of our shares of common stock, which could adversely affect the market
price of our shares of common stock.
We may require additional
financing to fund future operations, including expansion in current and new
markets, programming development and acquisition, capital costs and the costs of
any necessary implementation of technological innovations or alternative
technologies, or to fund acquisitions. Because of the exposure to market risks
associated with economies in emerging markets, we may not be able to obtain
financing on favorable terms or at all. If we raise additional funds by issuing
equity securities, the percentage ownership of our current shareholders will be
reduced, and the holders of the new equity securities may have rights superior
to those of the holders of shares of common stock, which could adversely affect
the market price and voting power of shares of common stock. If we raise
additional funds by issuing debt securities, the holders of these debt
securities would similarly have some rights senior to those of the holders of
shares of common stock, and the terms of these debt securities could impose
restrictions on operations and create a significant interest expense for us.
32
We may have difficulty
raising necessary capital to fund operations or acquisitions as a result of
market price volatility for our shares of common stock.
In recent years, the securities
markets in the United States have experienced a high level of price and volume
volatility, and the market price of securities of many companies have
experienced wide fluctuations that have not necessarily been related to the
operations, performances, underlying asset values or prospects of such
companies. For these reasons, our shares of common stock can also be expected to
be subject to volatility resulting from purely market forces over which we will
have no control. If our business development plans are successful, we may
require additional financing to continue to develop and exploit existing and new
technologies, to expand into new markets and to make acquisitions, all of which
may be dependent upon our ability to obtain financing through debt and equity or
other means.
Issuances of significant
amounts of stock in the future could potentially dilute your equity ownership
and adversely affect the price of our common stock.
We believe that it is necessary
to maintain a sufficient number of available authorized shares of our common
stock in order to provide us with the flexibility to issue shares for business
purposes that may arise from time to time. For example, we could sell additional
shares to raise capital to fund our operations or to acquire other businesses,
issue additional shares under our stock incentive plan or declare a stock
dividend. Our board may authorize the issuance of additional shares of common
stock without notice to, or further action by, our shareholders, unless
shareholder approval is required by law or the rules of the NASDAQ Stock Market.
The issuance of additional shares could dilute the equity ownership of our
current shareholders. In addition, additional shares that we issue would likely
be freely tradable which could adversely affect the trading price of our common
stock.
Failure to maintain
effective internal control over financial reporting in accordance with Section
404 of the Sarbanes-Oxley Act, especially over companies that we may acquire,
could have a material adverse effect on our business and stock price. Our
management certification and auditor attestation regarding the effectiveness of
our internal control over financial reporting as of June 30, 2010, excluded the
operations of MediKredit and FIHRST. If we are not able to integrate MediKredit
and FIHRSTs operations into our internal control over financial reporting, our
internal control over financial reporting may not be effective.
Under Section 404 of the
Sarbanes-Oxley Act of 2002, or Sarbanes, we are required to furnish a management
certification and auditor attestation regarding the effectiveness of our
internal control over financial reporting. We are required to report, among
other things, control deficiencies that constitute a material weakness or
changes in internal control that materially affect, or are reasonably likely to
materially affect, internal control over financial reporting. A material
weakness is a deficiency, or a combination of deficiencies, in internal control
over financial reporting such that there is a reasonable possibility that a
material misstatement of annual or interim financial statements will not be
prevented or detected on a timely basis.
The requirement to evaluate and
report on our internal controls also applies to companies that we acquire. As
private companies, MediKredit and FIHRST were not required to comply with
Sarbanes prior to the acquisitions by us. The integration of these operations
into our internal control over financial reporting has required significant time
and resources from our management and other personnel and may increase our
compliance costs. As permitted by SEC rules, our management certification and
auditor attestation regarding the effectiveness of our internal control over
financial reporting as of June 30, 2010, excluded the operations of MediKredit
and FIHRST. If we fail to successfully integrate these operations into our
internal control over financial reporting, our internal control over financial
reporting may not be effective.
While we continue to dedicate
resources and management time to ensuring that we have effective controls over
financial reporting, including with respect to the MediKredit and FIHRST
operations, failure to achieve and maintain an effective internal control
environment could have a material adverse effect on the markets perception of
our business and our stock price.
You may experience
difficulties in effecting service of legal process, enforcing foreign judgments
or bringing original actions based upon U.S. laws, including the federal
securities laws or other foreign laws, against us or our directors and officers
and experts.
While Net1 is incorporated in the
state of Florida, United States, the company is headquartered in Johannesburg,
South Africa and substantially all of the companys assets are located outside
the United States.
33
In addition, the majority of
Net1s directors and officers reside outside of the United States and our
experts, including our independent registered public accountants, are based in
South Africa. As a result, even though you could effect service of legal process
upon Net1, as a Florida corporation, in the United States, you may not be able
to collect any judgment obtained against Net1 in the United States, including
any judgment based on the civil liability provisions of the U.S. federal
securities laws, because substantially all of our assets are located outside the
United States. Moreover, it may not be possible for you to effect service of
legal process upon the majority of our directors and officers or upon our
experts within the United States or elsewhere outside South Africa and any
judgment obtained against any of our foreign directors, officers and experts in
the United States, including one based on the civil liability provisions of the
U.S. federal securities laws, may not be collectible in the United States and
may not be enforced by a South African court. A foreign judgment is not directly
enforceable in South Africa, but constitutes a cause of action which will be
enforced by South African courts provided that:
-
the court or arbitral body which pronounced the judgment had international
jurisdiction and competence to entertain the case according to the principles
recognized by South African law with reference to the jurisdiction of foreign
courts;
-
the judgment is final and conclusive (that is, it cannot be altered by the
court which pronounced it);
-
the judgment has not lapsed;
-
the recognition and enforcement of the judgment by South African courts
would not be contrary to public policy in South Africa, including observance
of the rules of natural justice which require that no award is enforceable
unless the defendant was duly served with documents initiating proceedings,
that he was given a fair opportunity to be heard and that he enjoyed the right
to be legally represented in a free and fair trial before an impartial
tribunal;
-
the judgment was not obtained by improper or fraudulent means;
-
the judgment does not involve the enforcement of a penal or foreign
revenue law or any award of multiple or punitive damages; and
-
the enforcement of the judgment is not otherwise precluded by the
provisions of the Protection of Business Act 99 of 1978 (as amended), of the
Republic of South Africa.
It has been the policy of South
African courts to award compensation for the loss or damage actually sustained
by the person to whom the compensation is awarded. South African courts have
awarded compensation to shareholders who have suffered damages as a result of a
diminution in the value of their shares based on various actions by the
corporation and its management. Although the award of punitive damages is
generally unknown to the South African legal system, that does not mean that
such awards are necessarily contrary to public policy. Whether a judgment was
contrary to public policy depends on the facts of each case. Exorbitant,
unconscionable, or excessive awards will generally be contrary to public policy.
South African courts cannot enter into the merits of a foreign judgment and
cannot act as a court of appeal or review over the foreign court. Further, if a
foreign judgment is enforced by a South African court, it will be payable in
South African currency. Also, under South Africas exchange control laws, the
approval of SARB is required before a defendant resident in South Africa may pay
money to a non-resident plaintiff in satisfaction of a foreign judgment enforced
by a court in South Africa.
It is doubtful whether an
original action based on United States federal securities laws may be brought
before South African courts. A plaintiff who is not resident in South Africa may
be required to provide security for costs in the event of proceedings being
initiated in South Africa. Furthermore, the Rules of the High Court of South
Africa require that documents executed outside South Africa must be
authenticated for the purpose of use in South African courts.
In reaching the foregoing conclusions, we consulted with our
South African legal counsel, Cliffe Dekker Hofmeyr Inc.
We may become subject to a
US tax liability for failing to withhold on certain distributions on instruments
issued in connection with the Aplitec transaction.
There is no statutory, judicial
or administrative authority that directly addresses the tax treatment of non-US
holders that elected to receive units in a trust representing beneficial
interests in B class preference shares and B class loan accounts issued by New
Aplitec pursuant to the reinvestment option in connection with our acquisition
of Aplitec. We believe these interests should be treated for United States
federal income tax purposes as, and we did treat them as, separate and distinct
interests in New Aplitec. As such, we and our affiliates did not withhold any
amounts for US federal taxes in respect of any distributions paid on such
interests. There is a risk, however, that these interests, together with the
special convertible preferred stock, may be treated as representing a single
direct equity interest in us for US federal income tax purposes. In such case,
distributions received with respect to the B class preference shares and B class
loan accounts could be subject to US federal withholding tax, and we could be
liable for failure to withhold such taxes in our capacity as withholding agent.
In addition, our failure to collect and remit US federal withholding tax may
also subject us to penalties.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
34
ITEM 2. PROPERTIES
We lease our corporate
headquarters facility which consists of 84,193 square feet in Johannesburg,
South Africa. We also lease properties throughout South Africa, a 12,088 square
foot manufacturing facility in Lazer Park, a 14,230 square foot manufacturing
facility in Brakpan and 75 depot facilities. We also lease additional office
space in Johannesburg, Pretoria, Cape Town and Durban, South Africa; Vienna,
Austria; Moscow, Russia; Dallas, Texas; Fredrick, Maryland; and New Delhi,
India. These leases expire at various dates through the year 2010 and 2014,
respectively. We believe we have adequate facilities for our current business
operations.
ITEM 3. LEGAL PROCEEDINGS
We sued SASSA in the South
African High Court, or the Court, alleging that it unlawfully moved
beneficiaries to SAPO in violation of our contract and the Public Finance
Management Act, seeking injunctive relief. On January 26, 2010, the Court ruled
in our favor and directed SASSA to discontinue the registration of any
beneficiaries with SAPO until a proper procurement process has been completed.
SASSA has appealed the Courts ruling and the parties currently await allocation
of a hearing date for the appeal.
Additionally, we sued SASSA in
the Court alleging that it unlawfully moved beneficiaries to certain banks, in
violation of our contract and the Public Finance Management Act, seeking
injunctive relief. On June 24, 2010, the Court ruled in our favor and directed
SASSA to discontinue the registration of any beneficiaries with these banks
until a proper procurement process has been completed. To date, SASSA has not
appealed the Court's ruling.
Finally, we have launched a Court
application for the review and setting aside of the decision to withdraw the
most recent SASSA tender and we are currently responding to SASSAs answering
affidavit, where after the parties will apply for a hearing date.
There are no other material
pending legal proceedings, other than ordinary routine litigation incidental to
our business, to which we are a party or of which any of our property is the
subject.
ITEM 4. RESERVED
35
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is listed on The
Nasdaq Global Select Market, or Nasdaq, in the United States under the symbol
UEPS and on the JSE Limited, or JSE, in South Africa under the symbol NT1.
The Nasdaq is our principal market for the trading of our common stock.
The following table sets forth,
for the periods indicated, the high and low sales prices of our common stock as
reported by Nasdaq.
Period
|
|
High
|
|
|
Low
|
|
Quarter ended September 30, 2008
|
$
|
27.99
|
|
$
|
18.58
|
|
Quarter ended December 31, 2008
|
$
|
22.93
|
|
$
|
8.21
|
|
Quarter ended March 31, 2009
|
$
|
15.76
|
|
$
|
10.93
|
|
Quarter ended June 30, 2009
|
$
|
18.01
|
|
$
|
11.93
|
|
Quarter ended September 30, 2009
|
$
|
22.47
|
|
$
|
12.36
|
|
Quarter ended December 31, 2009
|
$
|
21.77
|
|
$
|
17.11
|
|
Quarter ended March 31, 2010
|
$
|
20.22
|
|
$
|
16.50
|
|
Quarter ended June 30, 2010
|
$
|
18.50
|
|
$
|
13.14
|
|
Our transfer agent in the United
States is The Bank of New York Mellon, One Wall Street, New York, New York,
10286. According to the records of our transfer agent, as of August 6, 2010,
there were 21 shareholders of record of our common stock. A substantially
greater number of holders of our common stock are street name or beneficial
holders, whose shares are held of record by banks, brokers, and other financial
institutions. Our transfer agent in South Africa is Link Market Services South
Africa (Pty) Ltd, 16th Floor, 11 Diagonal Street, Johannesburg, 2001, South
Africa.
Dividends
We have not paid any dividends on
our shares of common stock during our last two fiscal years and presently intend
to retain future earnings to finance the expansion of the business. We do not
anticipate paying any cash dividends in the foreseeable future. The future
dividend policy will depend on our earnings, capital requirements, expansion
plans, financial condition and other relevant factors.
Issuer Purchases of Equity
Securities
The table below presents information relating to purchases of
our common stock during the fourth quarter of fiscal 2010:
|
|
|
|
|
|
|
|
(c)
|
|
|
(d)
|
|
|
|
|
|
|
|
|
|
Total number
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
of shares
|
|
|
dollar value
|
|
|
|
|
|
|
|
|
|
purchased as
|
|
|
of shares that
|
|
|
|
|
|
|
(b)
|
|
|
part of
|
|
|
may yet be
|
|
|
|
(a)
|
|
|
Average price
|
|
|
publicly
|
|
|
purchased
|
|
|
|
Total number
|
|
|
paid per
|
|
|
announced
|
|
|
under the
|
|
|
|
of shares
|
|
|
share
|
|
|
plans or
|
|
|
plans or
|
|
Period
|
|
purchased
|
|
|
(US dollars)
|
|
|
programs
|
|
|
programs
(1)
|
|
April 2010
|
|
0
|
|
|
|
|
|
0
|
|
|
|
|
May 2010
|
|
0
|
|
|
-
|
|
|
0
|
|
|
|
|
June 2010
|
|
0
|
|
|
-
|
|
|
0
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
100,000,000
|
|
(1) On February 5, 2010, we
announced that our Board of Directors had authorized the repurchase of up to $50
million of our common stock from time to time in open market transactions. On
May 5, 2010, we announced that our Board of Directors had increased this
authorization to an aggregate of up to $100 million. During the fourth quarter
of fiscal 2010, we did not purchase any shares of our common stock under this
authorization.
36
Share performance
graph
The chart below compares the
five-year cumulative return, assuming the reinvestment of dividends, where
applicable, on our common stock with that of the S&P 500 Index and the
NASDAQ Industrial Index. This graph assumes $100 was invested on June 30, 2005,
in each of our common stock, the S&P 500 companies, and the companies in the
NASDAQ Industrial Index.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
(AMONG NET 1, THES&P 500 INDEX AND THENASDAQ INDUSTRIAL
INDEX)
37
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial
data should be read together with Item 7 - Managements Discussion and Analysis
of Financial Condition and Results of Operations and Item 8 - Financial
Statements and Supplementary Data.
Consolidated Statements of Operations Data
(in thousands, except per share data)
|
|
|
|
|
Year Ended June 30
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenue
|
$
|
280,364
|
|
$
|
246,822
|
|
$
|
254,056
|
|
$
|
223,968
|
|
$
|
196,098
|
|
Cost of goods sold, IT processing, servicing and support
|
|
72,973
|
|
|
70,091
|
|
|
67,486
|
|
|
54,417
|
|
|
50,619
|
|
Selling, general and administrative(1)
|
|
80,854
|
|
|
64,833
|
|
|
65,362
|
|
|
61,625
|
|
|
48,627
|
|
Depreciation and amortization
|
|
19,348
|
|
|
17,082
|
|
|
10,822
|
|
|
11,050
|
|
|
5,710
|
|
Costs related to public offering and Nasdaq
listing
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,529
|
|
Profit on sale of microlending business
|
|
-
|
|
|
455
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Impairment of goodwill(2)
|
|
37,378
|
|
|
1,836
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Operating income
|
|
69,811
|
|
|
93,435
|
|
|
110,386
|
|
|
96,876
|
|
|
89,613
|
|
Foreign exchange gain related to short-term
investment(3)
|
|
-
|
|
|
26,657
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Interest income, net
|
|
9,069
|
|
|
10,828
|
|
|
15,722
|
|
|
4,401
|
|
|
5,889
|
|
Income before income taxes
|
|
78,880
|
|
|
130,920
|
|
|
126,108
|
|
|
101,277
|
|
|
95,502
|
|
Income tax expense(4)
|
|
40,822
|
|
|
42,744
|
|
|
39,192
|
|
|
37,574
|
|
|
36,653
|
|
Income from continuing operations
|
|
38,990
|
|
|
86,601
|
|
|
86,695
|
|
|
63,679
|
|
|
59,232
|
|
Net income attributable to shareholders
|
|
38,990
|
|
|
86,601
|
|
|
86,695
|
|
|
63,679
|
|
|
59,232
|
|
Income from continuing operations per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.84
|
|
$
|
1.53
|
|
$
|
1.50
|
|
$
|
1.12
|
|
$
|
1.05
|
|
Diluted
|
$
|
0.84
|
|
$
|
1.53
|
|
$
|
1.49
|
|
$
|
1.11
|
|
$
|
1.03
|
|
(1) Selling, general and administrative expense includes a
charge of $5.5 million, $4.9 million, $3.8 million and $0.6 million,
respectively, in respect of stock-based compensation.
(2) Goodwill related
to the hardware, software and related technology sales segment was impaired
during fiscal 2010, and goodwill related to the financial services segment was
impaired during fiscal 2009.
(3) The foreign exchange gain related to a
short-term investment in the form of an asset swap arrangement which matured
during fiscal 2009.
(4) The fully distributed tax rate for fiscal 2010 and
fiscal 2009 was 34.55%, for fiscal 2008 it was 35.45% and for fiscal 2007 and
fiscal 2006 it was 36.89% . Our income tax expense for fiscal 2009, 2008 and
2006 includes the impact of the change in the fully distributed rate during
those fiscal years of approximately $3.5 million, $5.4 million and $0.2 million,
respectively.
Additional Operating Data:
(in thousands, except
percentages)
|
|
Year ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash flows provided by operating activities
|
$
|
68,683
|
|
$
|
106,768
|
|
$
|
118,760
|
|
$
|
65,466
|
|
$
|
75,777
|
|
Cash flows used in investing activities
|
|
90,186
|
|
|
107,856
|
|
|
3,903
|
|
|
91,540
|
|
|
5,505
|
|
Cash flows provided by (used in) financing
activities .
|
$
|
(48,478
|
)
|
$
|
(40,248
|
)
|
$
|
2,864
|
|
$
|
3,225
|
|
$
|
29,723
|
|
Operating income margin
|
|
25%
|
|
|
38%
|
|
|
43%
|
|
|
43%
|
|
|
46%
|
|
38
Consolidated Balance Sheet Data:
(in
thousands)
|
|
As
of June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash and cash equivalents
|
$
|
153,742
|
|
$
|
220,786
|
|
$
|
272,475
|
|
$
|
171,727
|
|
$
|
189,735
|
|
Total current assets before settlement assets
|
|
226,429
|
|
|
290,294
|
|
|
345,734
|
|
|
247,982
|
|
|
240,718
|
|
Goodwill
|
|
76,346
|
|
|
116,197
|
|
|
76,938
|
|
|
85,871
|
|
|
13,923
|
|
Intangible assets
|
|
68,347
|
|
|
75,890
|
|
|
22,216
|
|
|
31,609
|
|
|
5,649
|
|
Total assets
|
|
472,090
|
|
|
499,487
|
|
|
454,071
|
|
|
376,090
|
|
|
269,979
|
|
Total current liabilities before settlement obligations
|
|
57,927
|
|
|
77,809
|
|
|
76,503
|
|
|
54,698
|
|
|
43,123
|
|
Total debt
|
|
4,343
|
|
|
4,185
|
|
|
3,766
|
|
|
4,100
|
|
|
-
|
|
Total Net1 equity
|
$
|
285,878
|
|
$
|
373,217
|
|
$
|
340,328
|
|
$
|
281,073
|
|
$
|
209,010
|
|
39
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and
analysis should be read in conjunction with Item 6 Selected Financial Data
and Item 8 Financial Statements and Supplementary Data. In addition to
historical consolidated financial information, the following discussion and
analysis contains forward-looking statements that involve risks, uncertainties
and assumptions. See Item 1A. Risk Factors and Forward Looking
Statements.
Overview
We provide a smartcard-based
alternative payment system for the unbanked and underbanked populations of
developing economies. We believe that we are the first company worldwide to
implement a system that can enable the estimated four billion people who
generally have limited or no access to a bank account to enter affordably into
electronic transactions with each other, government agencies, employers,
merchants and other financial service providers. Our UEPS uses secure smart
cards that operate in real-time but offline, unlike traditional payment systems
offered by major banking institutions that require immediate access through a
communications network to a centralized computer. This offline capability means
that users of our system can enter into transactions at any time with other card
holders in even the most remote areas so long as a smart card reader, which is
often portable and battery-powered, is available. Our off-line systems also
offer the highest level of availability and affordability by removing any
elements that are costly and are prone to outages. In addition to effecting
purchases, cash-backs and any form of payment, our system can be used for
banking, health care management, international money transfers, voting and
identification.
We also develop and provide
secure transaction solutions and services for first world markets. Our core
competencies around mobile payment applications, secure online transaction
processing, switching, cryptography and integrated circuit card technologies
provide us with the building blocks to develop secure end-to-end payment
solutions for a wide range of electronic commerce and financial transactions
through which we generate fees.
Our technology is widely used in
South Africa today, where we distribute pension and welfare payments to over 3.2
million beneficiaries in five of South Africas nine provinces, process debit
and credit card payment transactions on behalf of retailers that we believe
represent nearly 65% of retailers within the formal retail sector in South
Africa through our EasyPay system, offer claims processing to more than 60% of
healthcare plans and administrators, process payroll for over 700,000 employees
through our FIHRST system, and provide mobile telephone top-up transactions for
the major South African mobile carriers. During the past several years, we have
expanded our business to a number of markets outside South Africa, including
other countries on the African continent, Russia and other members of the CIS,
the Middle East, Asia and Latin America. We describe development of this
international expansion in detail under Business.
Sources of Revenue
We generate our revenues by
charging transaction fees to government agencies, merchants, financial service
providers, employers and healthcare providers; by providing loans and insurance
products and by selling hardware, licensing software and providing related
technology services.
We have structured our business
and our business development efforts around four related but separate approaches
to deploying our technology. In our most basic approach, we act as a supplier,
selling our equipment, software, and related technology to a customer. As an
example, in Ghana, we sold a complete UEPS to the Central Bank, which owns and
operates the resulting transaction settlement system. The revenue and costs
associated with this approach are reflected in our Hardware, software and
related technology sales segment.
We have found that we have
greater revenue and profit opportunities, however, by acting as a service
provider instead of a supplier. In this approach we own and operate the UEPS
ourselves, charging one-time and on-going fees for the use of the system either
on a fixed or ad valorem basis. This is the case in South Africa, where we
distribute welfare grants on behalf of the South African government and wages on
behalf of employers on a fixed fee basis, but charge a fee on an ad valorem
basis for goods and services purchased using our smart card. The revenue and
costs associated with this approach are reflected in our Smart card accounts,
Transaction-based activities and Financial services segments. We have adopted a
variation of this approach in Iraq, where we operate a UEPS system on an
outsourced basis on behalf of a consortium consisting of the Iraqi government
and local Iraqi banks, in return for transaction fees based on the volume and
value of transactions processed through the system. Most significantly, we are
focusing on migrating Net1 UTAs business model from a product-based model which
relies on selling systems to customers to a services-based model which focuses
on generating recurring revenue from the cardholder base through
transaction-based fees and provision of other products and services.
40
Because our smart cards are
designed to enable the delivery of more advanced services and products, we are
also willing to supply those services and products directly where the business
case is compelling. For instance, we provide short-term UEPS-based loans to our
smart card holders. This is an example of the third approach that we have taken.
Here we can act as the principal in operating a business that can be better
delivered through our UEPS. We can also act as an agent, for instance, in the
provision of insurance policies. In both cases, the revenue and costs associated
with this approach are reflected in our Financial services segment.
We also generated fees from
transaction processing to both funders and providers of healthcare in South
Africa and from providing a third party payroll payments solution to South
African companies. In both cases, the revenue and costs associated with these
services are reflected in our Transaction-based activities segment.
Finally, we have entered into
business partnerships or joint ventures to introduce our UEPS and VTU solutions
to new markets such as Botswana, Namibia, Nigeria, Colombia and Vietnam. In
these situations, we take an equity position in the business while also acting
as a supplier of technology. In evaluating these types of opportunities, we seek
to maintain a highly disciplined approach, carefully selecting partners,
participating closely in the development of the business plan and remaining
actively engaged in the management of the new business. In most instances, the
joint venture or partnership has a license to use the UEPS in the specific
territory, including the back-end system. We account for our equity investments
using the equity method. When we equity-account these investments, we are
required under US GAAP to eliminate our share of the net income generated from
sales of hardware and software to the investee. We recognize this net income
from these during the period in which the hardware and software is utilized in
the investees operations, or has been sold to third party customers, as the
case may be.
We believe that this flexible
approach enables us to drive adoption of our solution while capturing the value
created by the implementation of our technology.
Business Developments during Fiscal 2010
South
Africa
SASSA contract
Our one-year contract with SASSA
for the payment of social welfare grants in the five provinces where we
currently provide a grant payment service commenced on April 1, 2009 and expired
on March 31, 2010. SASSA received special approval from the South African
National Treasury Department to enter into new agreements with us and the other
current service providers for a twelve month period without conducting a tender
process. SASSA extended the contract for a further three months until June 30,
2010. On August 24, 2010, we signed a new agreement with SASSA which was
effective from July 1, 2010. The new contract expires on March 31, 2011.
As was the case with our previous
contact, the new contract contains a standard pricing formula for all provinces
based on a transaction fee per beneficiary paid, regardless of the number or
amount of grants paid per beneficiary, calculated on a guaranteed minimum number
of beneficiaries per month. However, the new contract provides for a reduction
in both the level of the transaction fee per beneficiary paid and the guaranteed
minimum number of beneficiaries. Because we continue to derive a substantial
percentage of our revenues from our SASSA contract, we expect that the terms of
the new contract will materially reduce our revenues, operating income, net
income and cash flow for fiscal 2011, unless we are able to offset reduced fees
from SASSA by increasing our revenues from our other business activities,
reducing expenses, or both. For more information regarding our contract with
SASSA, refer to discussion contained in the first captioned section under Item
1A. Risk Factors and Item 9B. Other Information.
Progress of wage payment
implementation and UEPS-based lending
Our recently appointed Financial
Services Cluster general manager is pursuing a number of projects in order to
further expand our wage payment initiative in South Africa. In addition, through
our recent acquisition of FIHRST Management Services (Pty) Limiteds business
and related software, described in more detail below, we will be able to promote
our wage payment initiative by offering the employees of FIHRST customers
banking solutions through our relationship with Grindrod Bank Limited.
During fiscal 2010 we grew our
UEPS-based lending book through coordinated marketing of our products to our
customer base.
41
Merger and Acquisition
Activities in South Africa
In January 2010, we acquired 100%
of MediKredit for a purchase price of ZAR 74 million (approximately $10
million). MediKredit offers transaction processing, financial and clinical risk
management solutions to both funders and providers of healthcare. MediKredit
currently operates its core business in South Africa and this business is
currently cash sustainable. In addition, MediKredit is currently exploring
various opportunities, primarily in the United States and we expect that
development and set up costs, taken together with the core South Africa
business, will result in net operating losses in the short-term. We do not
expect the operating loss at MediKredit to be material to our overall
profitability. We are also actively pursuing new customers and business
opportunities in South Africas rapidly consolidating private health care
industry and will focus on realizing cost savings and synergies identified
during the acquisition process to minimize, and ultimately reverse, the
anticipated operating losses.
We view the main drivers of the
business as (1) processing fee per scheme card holders (the main member in the
scheme), (2) scheme lives (the individuals linked to the main member in the
scheme) and (3) fee per line (the number of products within a claim)
processed.
We believe that MediKredit will
provide us the opportunity to expand our technology to another adjacent market
and to cross-sell our payment technologies. Together with the FIHRST acquisition
described below, MediKredit has expanded our position as one of the leading
independent transaction processors in South Africa, as we have added leadership
in the healthcare transaction processing space to our existing leadership
position in the merchant processing space (through EasyPay). The acquisition has
also provided us with a small, strategic entry point for the US healthcare
administration market. The rapidly changing US healthcare and administration
industry provides a significant opportunity for the introduction of MediKredits
real-time claims adjudication technology. MediKredits U.S. wholly-owned
subsidiary, XeoHealth Corporation, recently launched its proven Real Time
Adjudication rules engine for the health care industry in the US. Finally, like
FIHRST, the MediKredit acquisition has also enhanced our technology platforms
and IT development resources and added depth and diversity to our management
team.
At the end of March 2010, we
acquired FIHRST, a South African business, for ZAR 70 million (approximately $9
million) in cash. FIHRST offers a third party payroll payments solution to South
African companies, representing in excess of 700,000 employees, with a
transaction volume of approximately ZAR 52.6 billion per annum. FIHRST gives us
access to the 700,000 employees of its customers to whom we can market our range
of transaction processing products and financial services, including bill
payments, insurance products, prepaid utilities and third party payments and
promote our wage payment initiative. FIHRSTs technology platforms and IT
development resources enhance our existing platforms and resources.
Outside
South Africa
The African Continent and
Iraq
During fiscal 2010, we recorded
revenue from transaction fees and the delivery of UEPS-enabled smartcards under
our contract with the government of Iraq. During early January 2010, we received
additional orders for 800,000 smart cards and 1,500 point of sale devices and
more recently, in July 2010, we received a further order for 1.5 million smart
cards. We expect to generate ongoing revenues from transaction fees under our
Iraqi contract and from smart card sales during the first quarter of fiscal
2011. We have entered the second phase of our initiative in Ghana and now
generate recurring income in the form of hardware and software maintenance
fees.
We continue to service our
current customers on the African continent and in Iraq. Our UETS business unit
continued its business development efforts in multiple new countries on the
African continent during the quarter.
During fiscal 2010, SmartSwitch
Namibia generated incremental transaction fees from prepaid airtime and
electricity transactions and transactions conducted between Namibian merchants
and UEPS-enabled smartcards. SmartSwitch Botswana generated transaction fees
during the fiscal 2010 from the payment of food voucher grants. We expect
SmartSwitch Namibia and Botswana to continue generating transaction fees during
the first quarter of fiscal 2011.
Net1 UTA
Net1 UTAs operations are
seasonal and the first quarter and third quarters are historically its weakest.
Growth at Net1 UTA during fiscal 2010 continued to be adversely impacted by our
transitioning of its business model from a hardware and software sale-oriented
model to one which generates recurring transaction fees, as well as by
challenging economic conditions in Eastern Europe. We expected to sign our first
agreement that reflects the transformed business model for Net1 UTA during the
fourth quarter of fiscal 2010, however, this project has been delayed due to key
executive management changes at our target customer.
For the first quarter of fiscal
2011, we expect revenue from Net1 UTA to be lower than a year ago due to the
business transformation and weak economic conditions.
42
Net1 Virtual Card
During fiscal 2010, we increased
our business development efforts of 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. The majority of fiscal 2010 was
spent building the Virtual Card operations team in Dallas, Texas, and assessing
the technical, regulatory and compliance environment in the United States. We
signed our first agreement with a customer in July 2010 and the customer has
advised us that it anticipates rolling out the Virtual Card offering on its
products during the first quarter of fiscal 2011.
Operating Segments
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. Corporate and
corporate office activities as well as any inter-segment eliminations are
included in corporate/ eliminations. See Note 17 to our consolidated financial
statements for further information about our operating segments.
Transaction-Based
Activities
The transaction-based activities
operating segment consists primarily of (1) our South African social welfare
payments distribution operations which we conduct through our subsidiary Cash
Paymaster Services (Proprietary) Limited, or CPS, and (2) our transaction
processing operations, which consist of EasyPay, Iraq, MediKredit and FIHRST
(collectively, transaction processors). CPS utilizes the UEPS technology to
administer and distribute social welfare grants in five of South Africas nine
provinces. Segment revenues include all fees that we earn from SASSA and
participating retail merchants from recurring UEPS transactions that we process
through our back-end system, such as the payment of social welfare grants, debit
orders, payment of wages, point of sale spending, distribution of medicine,
money transfers and prepayment of utility bills, prepayment of mobile phone
airtime and transaction fees from customers of our transaction processors. The
expenses associated with our social welfare payments activities are primarily
variable expenses such as security and guarding expenses we incur to help insure
the security of the cash we transport and the safety of our employees who
transport the cash, banking fees we incur when we withdraw and redeposit cash,
insurance and fixed expenses such as salaries and property rental. The expenses
associated with our transaction processors operations are primarily variable
expenses such as data communication and bank charges for switching transactions
and fixed expenses such as salaries, depreciation of switch fixed assets and
property rental.
Smart Card
Accounts
Our smart card accounts operating
segment derives revenue from the provision of smart card accounts to our card
holders, which currently primarily consist of social welfare grant
beneficiaries. We provide a smart card account to all social welfare
beneficiaries to whom we distribute payments. A portion of the fee we earn for
the delivery of the service is for the provision of the smart card account and
is therefore included in the smart card accounts operating segment. The fixed
costs included in this operating segment are primarily computer
equipment-related and personnel costs associated with the operation of the smart
card accounts.
Financial
Services
Our financial services operating
segment derives revenues from providing financial services to card holders
through our smart card delivery channel. These financial services consist
primarily of short-term loans and life insurance products. We provide the loans
ourselves and generate revenue from the service fees charged on these loans. We
sell life insurance products on behalf of registered underwriters and earn
revenue through the commissions we receive on the sale of policies. The fees we
earn for the collection of insurance policy premiums through our debit order
system is included in the transaction-based activities operating segment. The
fixed expenses associated with the financial services operating segment consist
primarily of costs of administrative personnel and depreciation of computer
equipment.
We operated a traditional
microlending business in South Africa which we sold during the third quarter of
fiscal 2009. The business extended short-term loans for periods ranging from 30
days up to four months, with the majority of loans being 30-day loans.
43
Hardware, Software
and Related Technology Sales
We have developed a range of
technological competencies to service our own internal needs and to provide
links with our client enterprises. We derive revenues from the hardware,
software and related technology sales operating segment by providing to
customers the hardware and software required to implement our UEPS or DUET
systems. Typical components for a UEPS/ DUET system installation are:
-
hardware for the back-end switching and settlement system;
-
customization of the UEPS/ DUET software to suit local conditions,
including UEPS management system, automated teller machine, or ATM,
integration and POS device integration;
-
customization of an applications suite to clients specific requirements,
such as banking, retail or wage payments;
-
ongoing software and hardware support/maintenance; and
-
license fees.
Three of our largest customers in
this segment are the International Smart Card LLC, of the Iraqi Consortium, the
Central Bank of Ghana and Nedbank, one of South Africas largest banks by asset
size. In Ghana, we created a national payment system in which all Ghanaian banks
are required to participate. We have an arrangement with Nedbank relating to the
outsourcing of its entire POS device management system, front-end switching
Stratus computer platform, development of their software systems, smart cards
and POS device maintenance. We also supply hardware to Nedbank in the form of
POS devices and card readers on an ad hoc basis.
Included in our hardware,
software and related technology sales segment are Net1 UTA, Net1 UETS,
cryptographic solutions, chip and GSM licensing, and POS Solutions.
We experience seasonality in this
segment, as Net1 UTAs operations are typically most profitable in second and
fourth quarters.
Critical Accounting Policies
Our 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. Management believes that the following
accounting policies are critical due to the degree of estimation required and
the impact of these policies on the understanding of the results of our
operations.
Deferred
Taxation
We estimate our tax liability
through the calculations done for the determination of our current tax liability
when tax returns are filed, together with assessing temporary differences
resulting from the different treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities which are
disclosed on our balance sheet. Management then has to assess the likelihood
that deferred tax assets will be recovered from future taxable income. To the
extent that we believe recovery is unlikely, we create a valuation allowance.
The carrying value of our net deferred tax assets assumes that we will be able
to generate sufficient future taxable income, based on estimates and
assumptions. Management has considered future taxable income over a five year
forecasting period and ongoing feasible tax strategies in determining the need
for the valuation allowance, but in the event that we were to determine that we
would be able to realize deferred tax assets in the future, a valuation
allowance may not be required which would increase net income in the period that
such determination is made.
Stock-based
Compensation
Management is required to make
estimates and assumptions related to our valuation and recording of stock-based
compensation charges under current accounting standards. These standards require
all share-based compensation to employees to be recognized in the statement of
operations based on their respective grant date fair values over the requisite
service periods and also requires an estimation of forfeitures when calculating
compensation expense. We utilize the Cox Ross Rubinstein binomial model to
measure the fair value of stock options granted to employees and directors and
recognizes compensation cost on a straight line basis. Option-pricing models
require estimates of a number of key valuation inputs including expected
volatility, expected dividend yield, expected term and risk-free interest rate.
Our management has estimated forfeitures based on historic employee behavior
under similar compensation plans. No stock options were granted during fiscal
2010. During fiscal 2009, our assumptions regarding volatility changed
significantly as a result of general economic conditions and trading prices of
our customers and suppliers. Accordingly, the fair value of stock options is
affected by the assumptions selected. Stock-based compensation expense from
continuing operations was $5.7 million, $5.0 million and $4.0 million for the
years ended June 30, 2010, 2009 and 2008, respectively.
44
Intangible Assets
Acquired Through Acquisitions
The fair values of the
identifiable intangible assets acquired through acquisitions were determined by
management using guidance provided in accounting literature. We completed
acquisitions during fiscal 2010 and 2009, where we identified and recognized
intangible assets. We have used the relief from royalty method, the multi-period
excess earnings, the income approach and the cost approach method to value
acquisition-related intangible assets. In so doing, we made assumptions
regarding revenue and cost of sales forecasts, applied contributory asset
charges, discount rates, exchange rates, cash tax charges and useful lives.
The valuations were based on
information at the time of the acquisition and the expectations and assumptions
that have been deemed reasonable by us. No assurance can be given, however, that
the underlying assumptions or events associated with such assets will occur as
projected. For these reasons, among others, the actual cash flows may vary from
forecasts of future cash flows. To the extent actual cash flows vary, revisions
to the useful life or impairment of intangible assets may be necessary.
Business Combinations
and the Recoverability of Goodwill
A component of our growth
strategy has been to acquire and integrate businesses that complement our
existing operations. The purchase price of an acquired business is allocated to
the tangible and intangible assets acquired and liabilities assumed based upon
their estimated fair value at the date of purchase. The difference between the
purchase price and the fair value of the net assets acquired is recorded as
goodwill. In determining the fair value of assets acquired and liabilities
assumed in a business combination, we use various recognized valuation methods,
including present value modeling. Further, we make assumptions using certain
valuation techniques, including discount rates and timing of future cash flows.
We review the carrying value of
goodwill annually or more frequently if circumstances indicate impairment may
have occurred. In performing this review, we are required to estimate the fair
value of goodwill that is implied from a valuation of the reporting unit to
which the goodwill has been allocated after deducting the fair values of all the
identifiable assets and liabilities that form part of the reporting unit.
The determination of the fair
value of a reporting unit requires us to make significant judgments and
estimates. In determining the fair value of reporting units, we consider the
value of our business as whole and allocate this value across our reporting
units based on the weighted average of the returns of the reporting units.
We base our estimates on
assumptions we believe to be reasonable but that are unpredictable and
inherently uncertain. In addition, we make judgments and assumptions in
allocating assets and liabilities to each of our reporting units.
During the fourth quarter of
2010, as part of our annual impairment test, we tested our goodwill of the
hardware, software and related technology sales segment for impairment. As a
result of this impairment review we concluded that the carrying value of
goodwill of the hardware, software and related technology sales segment
reporting unit exceeded the fair value and, as a result, recorded an impairment
loss of $37.4 million.
Accounts Receivable
and Provision for Doubtful Debts
We maintain a provision for
doubtful debts related to our hardware, software and related technology sales
segment as a result of sales or rental of hardware, support and maintenance
services provided or sale of licenses to customers. Our policy is to regularly
review the aging of outstanding amounts due from customers and adjust the
provision based on managements estimate of the recoverability of the amounts
outstanding. Management considers factors including period outstanding,
creditworthiness of the customers, past payment history and the results of
discussions by our credit department with the customer. We consider this policy
to be appropriate taking into account factors such as historical bad debts,
current economic trends and changes in our customer payment patterns. Additional
provisions may be required should the ability of our customers to make payments
when due deteriorate in the future. A significant amount of judgment is required
to assess the ultimate recoverability of these receivables, including on-going
evaluation of the creditworthiness of each customer.
Research and
Development
Accounting standard require
product development costs to be charged to expenses as incurred until
technological feasibility is attained. Technological feasibility is attained
when our software has completed system testing and has been determined viable
for its intended use. The time between the attainment of technological
feasibility and completion of software development has been short. Accordingly,
we did not capitalize any development costs during the years ended June 30,
2010, 2009 or 2008, particularly because the main part of our development is the
enhancement and upgrading of existing products.
Costs to develop software for our
internal use is expensed as incurred, except to the extent that these costs are
incurred during the application development stage. All other costs including
those incurred in the project development and post-implementation stages are
expensed as incurred.
45
A significant amount of judgment
is required to separate research costs, new development costs and ongoing
development costs based as the transition between these stages. A multitude of
factors need to be considered by management, including an assessment of the
state of readiness of the software and the existence of markets for the
software. The possibility of capitalizing development costs in the future may
have a material impact on the groups profitability in the period when the costs
are capitalized, and in subsequent periods when the capitalized costs are
amortized.
Recent Accounting
Pronouncements
Recent accounting
pronouncements adopted
Refer to Note 2 of our
consolidated financial statements for a full description of recent accounting
pronouncements, including the expected dates of adoption and effects on
financial condition, results of operations and cash flows.
Recent accounting
pronouncements not yet adopted as of June 30, 2010
Refer to Note 2 of our
consolidated financial statements for a full description of recent accounting
pronouncements not yet adopted as of June 30, 2010, including the expected dates
of adoption and effects on financial condition, results of operations and cash
flows.
Currency Exchange Rate Information
Actual exchange
rates
The actual exchange rates for and
at the end of the periods presented were as follows:
Table 1
|
|
Year ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
ZAR : $ average exchange rate
|
|
7.6117
|
|
|
9.0484
|
|
|
7.3123
|
|
Highest ZAR : $ rate during period
|
|
8.3187
|
|
|
11.8506
|
|
|
8.2440
|
|
Lowest ZAR : $ rate during period
|
|
7.1731
|
|
|
7.1556
|
|
|
6.4262
|
|
Rate at end of period
|
|
7.6529
|
|
|
7.8821
|
|
|
7.9645
|
|
ZAR: US $ Exchange Rates
46
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 years ended June 30, 2010,
2009 and 2008, 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:
|
|
Year ended
|
|
Table 2
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Income and expense items: $1 = ZAR .
|
|
7.6092
|
|
|
8.9397
|
|
|
7.2905
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items: $1 = ZAR
|
|
7.6529
|
|
|
7.8821
|
|
|
7.9645
|
|
Results of Operations
The discussion of our
consolidated overall results of operations is based on amounts as reflected in
our audited consolidated financial statements which are prepared in accordance
with US GAAP. Our discussion analyzes our results of operations both in US
dollars, as presented in the consolidated financial statements, and
supplementally in ZAR, because ZAR is the functional currency of the entities
which contribute the majority of our profits and is the currency in which the
majority of our transactions are initially incurred and measured. Due to the
significant impact of currency fluctuations between the US dollar and ZAR on our
reported results and because we use the US dollar as our reporting currency, we
believe that the supplemental presentation of our results of operations in ZAR
is useful to investors to understand the changes in the underlying trends of our
business. Our results of operations for fiscal 2009 and 2008 do not reflect the
operations of MediKredit and FIHRST as we completed these acquisitions in
January 1, 2010 and March 31, 2010, respectively, and their operations are
included in our 2010 consolidated financial statements from those dates. Our
results of operations for fiscal 2008 do not reflect the operations of Net1 UTA
as we completed that acquisition on September 1, 2008 and Net 1 UTAs operations
are included in our 2009 consolidated financial statements from that date.
Finally, on March 1, 2009, we sold our traditional microlending business to
Finbond Group Limited and therefore, our fiscal 2009 results include revenue and
operating loss from this business for the first eight months of that year.
Fiscal 2010 Compared
to Fiscal 2009
The following factors had an
influence on our results of operations during fiscal 2010 as compared with the
same period in the prior year:
|
|
Favorable impact from the weakness of the US
dollar:
The US dollar depreciated by 15% compared to the ZAR
during fiscal 2010 which has had a positive impact on our reported
results;
|
|
|
|
|
|
|
Increased transaction volumes at EasyPay:
Our reported results were positively impacted by increased
transaction volumes at EasyPay resulting from growth in value-added
services and higher than expected activity at retailers during the
Christmas season;
|
|
|
|
|
|
|
Increased user adoption in Iraq:
Our
reported results were favorably impacted by increased transaction revenues
from the adoption of our UEPS technology in Iraq;
|
|
|
|
|
|
|
Lower revenues and margins from hardware, software
and related technology sales segment:
Our hardware, software and
related technology sales segment was adversely impacted by fewer ad hoc
sales to the Bank of Ghana, lower revenues and overall margin generated by
Net1 UTA and weaker demand for our products as well as pricing pressures
resulting from the global recession in calendar 2009, all of which was
partially offset by hardware sales to Iraq;
|
|
|
|
|
|
|
Lower net interest income:
Our interest
income, net, was adversely impacted by lower average daily ZAR cash
balance and a lower average deposit rate during fiscal 2010 compared to
fiscal 2009;
|
|
|
|
|
|
|
Lower intangible asset amortization:
In
ZAR, our reported results for fiscal 2010 were positively impacted by
lower intangible asset amortization as the majority of Prism and EasyPay
acquisition-related intangible assets were fully amortized in fiscal
2009;
|
|
|
|
|
|
|
Goodwill impairment losses:
During fiscal
2010, we recognized a goodwill impairment loss of $37.4 million (ZAR 284.4
million); and
|
|
|
|
|
|
|
Non-recurring fiscal 2009 items:
During
fiscal 2009, we recognized a foreign exchange gain of $26.7 million (ZAR
238.3 million) resulting from an asset swap arrangement and recognized a
profit on the sale of our traditional microlending business of $0.5
million (ZAR 4.1 million).
|
47
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)
|
|
|
|
Year ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
$
|
%
|
|
|
$
|
000
|
|
$
|
000
|
|
|
change
|
|
Revenue
|
|
280,364
|
|
|
246,822
|
|
|
14%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
72,973
|
|
|
70,091
|
|
|
4%
|
|
Selling, general and administration
|
|
80,854
|
|
|
64,833
|
|
|
25%
|
|
Depreciation and amortization
|
|
19,348
|
|
|
17,082
|
|
|
13%
|
|
Profit on sale of microlending business
|
|
-
|
|
|
(455
|
)
|
|
nm
|
|
Impairment of goodwill
|
|
37,378
|
|
|
1,836
|
|
|
nm
|
|
Operating income
|
|
69,811
|
|
|
93,435
|
|
|
(25)%
|
|
Foreign exchange gain related to short-term
investment
|
|
-
|
|
|
26,657
|
|
|
nm
|
|
Interest income, net
|
|
9,069
|
|
|
10,828
|
|
|
(16)%
|
|
Income before income taxes
|
|
78,880
|
|
|
130,920
|
|
|
(40)%
|
|
Income tax expense
|
|
40,822
|
|
|
42,744
|
|
|
(5)%
|
|
Net income before earnings (loss) from equity-accounted
investments.
|
|
38,058
|
|
|
88,176
|
|
|
(57)%
|
|
Earnings (Loss) from equity-accounted
investments
|
|
93
|
|
|
(874
|
)
|
|
nm
|
|
Net income
|
|
38,151
|
|
|
87,302
|
|
|
(56)%
|
|
(Add) Less: net (loss) income attributable
to non-controlling interest
|
|
(839
|
)
|
|
701
|
|
|
nm
|
|
Net income attributable to us
|
|
38,990
|
|
|
86,601
|
|
|
(55)%
|
|
|
|
In South African Rand
|
|
Table 4
|
|
(US GAAP)
|
|
|
|
Year ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
ZAR
|
|
|
|
ZAR
|
|
|
ZAR
|
|
|
%
|
|
|
|
000
|
|
|
000
|
|
|
change
|
|
Revenue
|
|
2,133,374
|
|
|
2,206,512
|
|
|
(3)%
|
|
Cost of goods sold, IT processing,
servicing and support
|
|
555,274
|
|
|
626,592
|
|
|
(11)%
|
|
Selling, general and administration
|
|
615,243
|
|
|
579,587
|
|
|
6%
|
|
Depreciation and amortization
|
|
147,225
|
|
|
152,708
|
|
|
(4)%
|
|
Profit on sale of microlending business
|
|
-
|
|
|
(4,068
|
)
|
|
nm
|
|
Impairment of goodwill
|
|
284,420
|
|
|
16,413
|
|
|
nm
|
|
Operating income
|
|
531,212
|
|
|
835,280
|
|
|
(36)%
|
|
Foreign exchange gain related to
short-term investment
|
|
-
|
|
|
238,306
|
|
|
nm
|
|
Interest income, net
|
|
69,009
|
|
|
96,799
|
|
|
(29)%
|
|
Income before income taxes
|
|
600,221
|
|
|
1,170,385
|
|
|
(49)%
|
|
Income tax expense
|
|
310,627
|
|
|
382,118
|
|
|
(19)%
|
|
Net income before earnings (loss) from
equity-accounted investments.
|
|
289,594
|
|
|
788,267
|
|
|
(63)%
|
|
Earnings (Loss) from equity-accounted investments
|
|
708
|
|
|
(7,813
|
)
|
|
nm
|
|
Net income
|
|
290,302
|
|
|
780,454
|
|
|
(63)%
|
|
(Add) Less: net (loss) income attributable to
non-controlling interest
|
|
(6,384
|
)
|
|
6,267
|
|
|
nm
|
|
Net income attributable to us
|
|
296,686
|
|
|
774,187
|
|
|
(62)%
|
|
Analyzed in ZAR, the decrease in
revenue and cost of goods sold, IT processing, servicing and support for fiscal
2010 was primarily due to lower revenues in our hardware, software and related
technology sales segment. This decrease was offset by an increase in
transaction-based activities which resulted primarily from increased volumes at
EasyPay and the inclusion of MediKredit and FIHRST operations for a portion of
the year.
Our operating income margin
decreased to 25% from 38% resulting primarily from the impairment of goodwill.
The other contributors to operating income varied from fiscal 2010 compared with
fiscal 2009 as presented in tables 7 and 8 below. Operating income
contributions, based on operating margin, from our transaction-based activities
and smart card accounts segments were comparable; however, our financial
services segment contributed more and our hardware, software and related
technology sales segment contributed less during fiscal 2010 compared with
fiscal 2009. We discuss the components of the operating income margin in more
detail under Results of operations by operating segment.
48
Analyzed in ZAR, selling, general
and administration expenses were higher in fiscal 2010 primarily due to
increases in goods and services purchased from third parties and the inclusion
of MediKredits and FIHRSTs operations. Fiscal 2010 selling, general and
administration expenses include acquisition-related costs of $0.6 million (ZAR
4.7 million) and the stock-based compensation charge related to stock options
awarded in 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 $2.4 million (ZAR 17.9 million) and $2.1 million (ZAR 18.7
million) during fiscal 2010 and 2009, respectively.
In ZAR, depreciation and
amortization decreased during fiscal 2010 primarily as a result of lower Prism
intangible asset amortization, offset by the intangible asset amortization
related to the Net1 UTA, RMT, MediKredit and FIHRST acquisitions. The intangible
asset amortization and deferred tax effects related to our various acquisitions
are summarized in the tables below:
Table 5
|
|
Year ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
$
|
000
|
|
$
|
000
|
|
Amortization included in depreciation and
amortization expense:
|
|
14,138
|
|
|
12,387
|
|
Prism acquisition (1)
|
|
1,697
|
|
|
4,453
|
|
RMT acquisition (2)
|
|
1,579
|
|
|
450
|
|
MediKredit acquisition
|
|
984
|
|
|
-
|
|
FIHRST acquisition
|
|
544
|
|
|
-
|
|
Net1 UTA acquisition
|
|
9,334
|
|
|
7,484
|
|
|
|
|
|
|
|
|
Deferred tax included in income tax expense:
|
|
3,877
|
|
|
3,515
|
|
Prism acquisition (1)
|
|
568
|
|
|
1,515
|
|
RMT acquisition (2)
|
|
442
|
|
|
126
|
|
MediKredit acquisition
|
|
340
|
|
|
-
|
|
FIHRST acquisition
|
|
188
|
|
|
-
|
|
Net1 UTA acquisition
|
|
2,339
|
|
|
1,874
|
|
(1) the majority of these intangible assets were amortized in
fiscal 2009. (2) the RMT intangibles were fully amortized in fiscal 2010.
Table 6
|
|
Year ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
ZAR 000
|
|
|
ZAR 000
|
|
Amortization included in depreciation and
amortization expense:
|
|
107,588
|
|
|
110,734
|
|
Prism acquisition (1)
|
|
12,915
|
|
|
39,805
|
|
RMT acquisition (2)
|
|
12,018
|
|
|
4,024
|
|
MediKredit acquisition
|
|
7,490
|
|
|
-
|
|
FIHRST acquisition
|
|
4,140
|
|
|
-
|
|
Net1 UTA acquisition
|
|
71,025
|
|
|
66,905
|
|
|
|
|
|
|
|
|
Deferred tax included in income tax expense:
|
|
29,506
|
|
|
31,420
|
|
Prism acquisition (1)
|
|
4,325
|
|
|
13,540
|
|
RMT acquisition (2)
|
|
3,365
|
|
|
1,127
|
|
MediKredit acquisition
|
|
2,588
|
|
|
-
|
|
FIHRST acquisition
|
|
1,430
|
|
|
-
|
|
Net1 UTA acquisition
|
|
17,798
|
|
|
16,753
|
|
(1) the majority of these intangible assets were amortized in
fiscal 2009.
(2) the RMT intangibles were fully amortized in fiscal
2010.
During the fourth quarter of
fiscal 2010, we recognized an impairment loss of approximately $37.4 million on
goodwill allocated to the hardware, software and related technology sales
segment as a result of deteriorating trading conditions of this segment,
particularly at Net1 UTA, and uncertainty surrounding contract finalization
dates which will impact future cash flows. With regards to the latter, through
the end of the third quarter of fiscal 2010 we expected to sign our first
agreement that reflects the transformed business model for Net1 UTA during the
fourth quarter of fiscal 2010. However, it subsequently became clear to us that
this project has now been delayed due to key executive management changes at our
target customer. A further deterioration in the hardware, software and related
technology sales segment or in any other of our businesses, may lead to
additional impairments in future periods.
49
During fiscal 2009 we sold our
traditional microlending business and recognized a profit of approximately $0.5
million (ZAR 4.1 million) and impaired goodwill of $1.8 million (ZAR 16.4
million).
We recognized a foreign exchange
gain of $26.7 million (ZAR 238.3 million) during fiscal 2009 resulting from an
asset swap arrangement we entered into in August 2008.
Interest on surplus cash for
fiscal 2010 decreased to $10.1 million (ZAR 77.0 million) from $20.3 million
(ZAR 181.4 million) for fiscal 2009. The decrease in interest on surplus cash
held in South Africa was due to a lower average daily ZAR cash balance during
fiscal 2010 compared with fiscal 2009 and lower deposit rates resulting from the
adjustment in the South African prime interest rate from an average of
approximately 14.32% per annum for fiscal 2009 to 10.43% per annum for fiscal
2010. The lower cash balances resulted primarily from our repurchase of
approximately 9.2 million of our shares from Brait S.As investment affiliates
in August 2009 for $124.5 million.
Included in interest expense for
fiscal 2009 is the facility fee of approximately $1.1 million (ZAR 9.7 million)
that we paid to the lender under the short-term loan facility we obtained to
fund the Net1 UTA acquisition and approximately $0.8 million (ZAR 7.3 million)
interest on the short-term loan facility. Excluding the impact of this facility
fee and the interest on the short-term loan facility, interest expense decreased
during fiscal 2010 due to a decrease in the average rates of interest on our
short-term facilities and the elimination of our obligation to prefund social
welfare grants under our SASSA contract. In ZAR, excluding the impact of the
facility fee, finance costs decreased to $1.0 million (ZAR 8.0 million) for
fiscal 2010 from $7.6 million (ZAR 67.6 million) for fiscal 2009.
Total tax expense for fiscal 2010
was $40.8 million (ZAR 310.6 million) compared with $42.7 million (ZAR 382.1
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, a reduction in the fully distributed tax rate from 35.45% to 34.55%
results in lower deferred tax assets and liabilities and the net change of $3.5
million (ZAR 26.5 million) is included in our income tax expense for fiscal
2009. Our total tax expense decreased primarily due to the foreign exchange gain
discussed above. Our effective tax rate for fiscal 2010 was 51.8%, compared to
32.7% for fiscal 2009. The change in our effective tax rate was primarily due to
an increase in non-deductible expenses, including the goodwill impairment
described above, stock-based compensation charges and non-deductible
acquisition-related expenses during fiscal 2010.
Earnings from equity-accounted
investments for fiscal 2010 were $0.1 million (ZAR 0.7 million) compared with a
net loss of $0.9 million (ZAR 7.8 million) during fiscal 2009. SmartSwitch
Namibia generated net income during the year ended June 30, 2010, and we no
longer account for the equity accounted losses in VTU Colombia as the
accumulated losses have exceeded our initial investments.
50
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)
|
|
|
|
Year ended June 30,
|
|
|
|
2010
|
|
|
% of
|
|
|
2009
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
$ 000
|
|
|
total
|
|
|
$ 000
|
|
|
total
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
191,362
|
|
|
68%
|
|
|
148,399
|
|
|
60%
|
|
|
29%
|
|
Smart card accounts
|
|
31,971
|
|
|
11%
|
|
|
29,576
|
|
|
12%
|
|
|
8%
|
|
Financial services
|
|
4,023
|
|
|
1%
|
|
|
5,430
|
|
|
2%
|
|
|
(26)%
|
|
Hardware, software and related technology sales
|
|
53,008
|
|
|
20%
|
|
|
63,417
|
|
|
26%
|
|
|
(16)%
|
|
Total consolidated
revenue
|
|
280,364
|
|
|
100%
|
|
|
246,822
|
|
|
100%
|
|
|
14%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
106,036
|
|
|
152%
|
|
|
83,509
|
|
|
89%
|
|
|
27%
|
|
Operating income before amortization
|
|
110,241
|
|
|
|
|
|
85,404
|
|
|
|
|
|
29%
|
|
Amortization
|
|
(4,205
|
)
|
|
|
|
|
(1,895
|
)
|
|
|
|
|
122%
|
|
Smart card accounts
|
|
14,532
|
|
|
21%
|
|
|
13,442
|
|
|
14%
|
|
|
8%
|
|
Financial services
|
|
2,881
|
|
|
4%
|
|
|
(34
|
)
|
|
-%
|
|
|
nm
|
|
Operating income before profit on
sale of microlending business and impairment of goodwill
|
|
2,881
|
|
|
|
|
|
1,347
|
|
|
|
|
|
nm
|
|
Profit on sale of
microlending business and impairment of goodwill
|
|
-
|
|
|
|
|
|
(1,381
|
)
|
|
|
|
|
nm
|
|
Hardware, software and related technology sales
|
|
(42,524
|
)
|
|
(61)%
|
|
|
5,498
|
|
|
6%
|
|
|
nm
|
|
Operating income before
amortization and impairment of goodwill
|
|
4,787
|
|
|
|
|
|
15,990
|
|
|
|
|
|
(70)%
|
|
Amortization and
impairment of goodwill
|
|
(47,311
|
)
|
|
|
|
|
(10,492
|
)
|
|
|
|
|
nm
|
|
Corporate/eliminations
|
|
(11,114
|
)
|
|
(16)%
|
|
|
(8,980
|
)
|
|
(9)%
|
|
|
24%
|
|
Total consolidated
operating income
|
|
69,811
|
|
|
100%
|
|
|
93,435
|
|
|
100%
|
|
|
(25)%
|
|
Table 8
|
|
In South African Rand (US GAAP)
|
|
|
|
Year ended June 30,
|
|
|
|
2010
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
% of
|
|
|
ZAR
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
000
|
|
|
total
|
|
|
000
|
|
|
total
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
1,456,131
|
|
|
68%
|
|
|
1,326,641
|
|
|
60%
|
|
|
10%
|
|
Smart card accounts
|
|
243,277
|
|
|
11%
|
|
|
264,400
|
|
|
12%
|
|
|
(8)%
|
|
Financial services
|
|
30,612
|
|
|
1%
|
|
|
48,543
|
|
|
2%
|
|
|
(37)%
|
|
Hardware, software and related technology sales
|
|
403,354
|
|
|
20%
|
|
|
566,928
|
|
|
26%
|
|
|
(29)%
|
|
Total consolidated
revenue
|
|
2,133,374
|
|
|
100%
|
|
|
2,206,512
|
|
|
100%
|
|
|
(3)%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
806,860
|
|
|
152%
|
|
|
746,545
|
|
|
89%
|
|
|
8%
|
|
Operating income before amortization
|
|
838,859
|
|
|
|
|
|
763,483
|
|
|
|
|
|
10%
|
|
Amortization
|
|
(31,999
|
)
|
|
|
|
|
(16,938
|
)
|
|
|
|
|
89%
|
|
Smart card accounts
|
|
110,578
|
|
|
21%
|
|
|
120,167
|
|
|
14%
|
|
|
(8)%
|
|
Financial services
|
|
21,922
|
|
|
4%
|
|
|
(304
|
)
|
|
-%
|
|
|
Nm
|
|
Operating income before profit on
sale of microlending business and impairment of goodwill
|
|
21,922
|
|
|
|
|
|
12,041
|
|
|
|
|
|
Nm
|
|
Profit on sale of
microlending business and impairment of goodwill
|
|
-
|
|
|
|
|
|
(12,345
|
)
|
|
|
|
|
Nm
|
|
Hardware, software and related technology sales
|
|
(323,578
|
)
|
|
(61)%
|
|
|
49,150
|
|
|
6%
|
|
|
Nm
|
|
Operating income
before amortization and impairment of goodwill
|
|
36,431
|
|
|
|
|
|
142,946
|
|
|
|
|
|
(75)%
|
|
Amortization and impairment of goodwill
|
|
(360,009
|
)
|
|
|
|
|
(93,796
|
)
|
|
|
|
|
Nm
|
|
Corporate/eliminations
|
|
(84,570
|
)
|
|
(16)%
|
|
|
(80,278
|
)
|
|
(9)%
|
|
|
5%
|
|
Total consolidated operating
income
|
|
531,212
|
|
|
100%
|
|
|
835,280
|
|
|
100%
|
|
|
(36)%
|
|
51
Transaction-based
activities
In ZAR, the increases in revenue
were primarily due to our MediKredit and FIHRST acquisitions and increased
transaction volumes at EasyPay and Iraq. 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.
Segment operating income margin
decreased to 55% from 56%, mainly as a result of lower margins from our
MediKredit and FIHRST operations and at EasyPay as compared with our pension and
welfare operations. This decrease was partially offset by cost management
controls in our pension and welfare operations and increased transaction fees
from the utilization of our UEPS system in Iraq.
Pension
and welfare operations
:
Effective April 1, 2009, we
signed a one-year contract with SASSA which expired on March 31, 2010, and which
was subsequently extended on its existing terms by three months to June 30,
2010. See Business Developments during Fiscal 2010South AfricaSASSA
contract for a further discussion of our new SASSA contract.
The SASSA contract described
above contained 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 provincial 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. In addition,
commencing with the May 2009 pay cycle, SASSA assumed responsibility for the
pre-funding of all social welfare grants. Our average revenue per beneficiary
paid therefore remains unchanged during the term of the contract, including the
current extension. From time to time, we are requested to assist with the
payment of ad-hoc special grants or benefits (such as disaster relief payments),
which may be at a different rate than the standard welfare distribution price.
We also receive a once-off registration fee for every new beneficiary we enroll
on our system.
Continued
adoption of our merchant acquiring system:
The increase in the number of POS
devices and number of participating UEPS retail locations since June 30, 2009,
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.
52
The key statistics and indicators
of our merchant acquiring system on a quarterly basis during the last 18 months
in each of the South African provinces where we distribute social welfare grants
are summarized in the table below:
Table 9
|
|
Three months ended
|
|
|
|
Mar 31,
|
|
|
Jun 30,
|
|
|
Sep 30,
|
|
|
Dec 31,
|
|
|
Mar 31,
|
|
|
Jun 30,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total POS devices installed
|
|
4,263
|
|
|
4,427
|
|
|
4,528
|
|
|
4,670
|
|
|
4,700
|
|
|
4,794
|
|
Number of participating UEPS retail locations
|
|
2,391
|
|
|
2,422
|
|
|
2,506
|
|
|
2,547
|
|
|
2,552
|
|
|
2,513
|
|
Value of transactions processed through POS
devices during the quarter (1) (in $ 000)
|
|
276,947
|
|
|
341,270
|
|
|
380,782
|
|
|
372,041
|
|
|
397,141
|
|
|
388,277
|
|
Value of transactions processed through POS devices during
the completed pay cycles for the quarter (2) (in $ 000)
|
|
278,685
|
|
|
345,511
|
|
|
366,786
|
|
|
367,998
|
|
|
381,993
|
|
|
402,294
|
|
Value of transactions processed through POS
devices during the quarter (1) (in ZAR 000)
|
|
2,758,391
|
|
|
2,818,276
|
|
|
2,980,378
|
|
|
2,798,201
|
|
|
2,992,828
|
|
|
2,935,543
|
|
Value of transactions processed through POS devices during
the completed pay cycles for the quarter (2) (in ZAR 000)
|
|
2,775,707
|
|
|
2,853,303
|
|
|
2,870,837
|
|
|
2,767,792
|
|
|
2,878,675
|
|
|
3,041,514
|
|
Number of grants paid through POS devices
during the quarter (1)
|
|
4,690,822
|
|
|
4,623,666
|
|
|
4,846,515
|
|
|
4,569,316
|
|
|
4,370,553
|
|
|
4,618,013
|
|
Number of grants paid through POS devices during the
completed pay cycles for the quarter (2)
|
|
4,769,010
|
|
|
4,676,460
|
|
|
4,675,128
|
|
|
4,506,829
|
|
|
4,699,620
|
|
|
4,741,737
|
|
Average number of grants processed per
terminal during the quarter (1)
|
|
1,111
|
|
|
1,064
|
|
|
1,082
|
|
|
994
|
|
|
933
|
|
|
973
|
|
Average number of grants processed per terminal during the
completed pay cycles for the quarter (2)
|
|
1,129
|
|
|
1,076
|
|
|
1,044
|
|
|
980
|
|
|
1,003
|
|
|
999
|
|
(1) Refers to events occurring during
the quarter (i.e., based on three calendar months).
(2) Refers to events
occurring during the completed pay cycle.
Transaction
processors:
We acquired MediKredit and FIHRST
on January 1 and March 31, 2010, respectively, and their operations are included
in our results from those dates. MediKredits results include claims processing
support fees received from a customer it lost in late calendar 2009 and which
contractually continued to pay fees through the end of April 2010. After
intangible asset amortization MediKredit generated nominal operating income and
FIHRST generated a nominal operating loss, although it was cash flow positive.
During fiscal 2011, we expect that MediKredit will be cash flow negative and
that FIHRST will continue to be cash flow positive. These cash flows are not
expected to be significant to our operations during fiscal 2011.
The table below presents the
total volume and value processed during fiscal 2010 and 2009 by our transaction
processors:
Transaction
|
|
Total volume
|
|
|
Total value $ (000)
|
|
|
Total value ZAR (000)
|
|
processor
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
EasyPay
|
|
655,175,671
|
|
|
580,738,580
|
|
|
18,904,176
|
|
|
14,671,863
|
|
|
143,847,549
|
|
|
131,161,910
|
|
MediKredit
|
|
5,410,984
|
|
|
-
|
|
|
227,881
|
|
|
-
|
|
|
1,734,015
|
|
|
-
|
|
FIHRST
|
|
5,259,808
|
|
|
-
|
|
|
1,858,590
|
|
|
-
|
|
|
14,142,572
|
|
|
-
|
|
Transaction processing related to
our Iraqi contract continued to grow sequentially through fiscal 2010 and we
expect this trend to continue into fiscal 2011.
Certain EasyPay intangible assets
were fully amortized at the end of fiscal 2009, however, savings related to the
reduction in amortization of EasyPay intangible assets was offset by intangible
asset amortization related to the MediKredit and FIHRST acquisitions.
Smart card
accounts
Operating income margin from
providing smart card accounts was constant at 45% for each of the fiscal 2010
and 2009.
53
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
3,532,620 smart card-based accounts were active at June 30, 2010, compared to
3,875,463 active accounts as at June 30, 2009. The decrease in the number of
active accounts resulted largely from the suspension and removal of invalid or
fraudulent grants by SASSA.
Financial
services
Revenue from UEPS-based lending
increased primarily due to an increase in the number of loans granted. In
addition, on average, the return on these UEPS-based loans was higher. Our
current UEPS-based lending portfolio comprises loans made to elderly pensioners
in some of the provinces where we distribute social welfare grants. We insure
the UEPS-based lending book against default and thus no allowance is
required.
The operating loss for fiscal
2009 includes a profit of $0.5 million (ZAR 4.1 million) on the sale of our
traditional microlending business and goodwill impairment of $1.8 million (ZAR
16.4 million).
Excluding the effects of the
goodwill impairment and profit on the sale of our traditional microlending
business, operating income margin for the Financial services segment increased
to 72% from 25%.
Hardware,
software and related technology sales
Operating results include Net1
UTA for fiscal 2010 and from September 1, 2008, for fiscal 2009. The following
table presents our revenue and operating income during fiscal 2010 and 2009:
Table 10
|
|
Year ended June 30,
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
$ 000
|
|
|
|
$ 000
|
|
Revenue
|
|
53,008
|
|
|
|
63,417
|
|
Hardware, software and related
technology sales excluding Net1 UTA
|
|
40,707
|
|
|
|
43,857
|
|
Net1 UTA
|
|
12,301
|
|
|
|
19,560
|
|
|
|
|
|
|
|
|
|
Operating income before amortization of
intangible assets and goodwill impairment
|
|
4,787
|
|
|
|
15,990
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
(42,524
|
)
|
|
|
5,498
|
|
Hardware, software and related
technology sales excluding Net1 UTA
|
|
6,332
|
|
|
|
8,474
|
|
Net1 UTA
|
|
(48,856
|
)
|
|
|
(2,976
|
)
|
Net1 UTA excluding
impairment of goodwill and amortization of acquisition
related intangible assets
|
|
(2,144
|
)
|
|
|
4,508
|
|
Impairment of
goodwill
|
|
(37,378
|
)
|
|
|
-
|
|
Amortization of acquisition related intangible assets
|
|
(9,334
|
)
|
|
|
(7,484
|
)
|
Table 11
|
|
Year ended June 30,
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
ZAR 000
|
|
|
|
ZAR 000
|
|
Revenue
|
|
403,354
|
|
|
|
566,928
|
|
Hardware, software and
related technology sales excluding Net1 UTA
|
|
309,752
|
|
|
|
392,068
|
|
Net1 UTA
|
|
93,602
|
|
|
|
174,860
|
|
|
|
|
|
|
|
|
|
Operating income before
amortization of intangible assets and goodwill impairment
|
|
36,431
|
|
|
|
142,946
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
(323,578
|
)
|
|
|
49,150
|
|
Hardware, software and
related technology sales excluding Net1 UTA
|
|
48,181
|
|
|
|
75,755
|
|
Net1 UTA
|
|
(371,759
|
)
|
|
|
(26,605
|
)
|
Net1
UTA excluding impairment of goodwill and amortization of acquisition
related intangible assets
|
|
(16,314
|
)
|
|
|
40,300
|
|
Impairment of goodwill
|
|
(284,420
|
)
|
|
|
-
|
|
Amortization of acquisition related intangible assets
|
|
(71,025
|
)
|
|
|
(66,905
|
)
|
In ZAR, the decrease in revenue
was primarily due to lower revenues at Net1 UTA and software development sales
in 2009 under our Ghana contract that were not repeated in 2010, which was
offset marginally by increased hardware sales to Iraq in 2010. In addition, our
revenues in ZAR were negatively impacted by the depreciation of the USD against
the ZAR as sales to customers in Europe, Ghana and Iraq are primarily
denominated in USD. In ZAR, the decrease in operating income was primarily due
to amortization of Net1 UTA intangible assets, impairment of goodwill and lower
sales activity.
54
Revenue and operating income for
fiscal 2010 comprised:
-
software development and customization, sales of terminals and smart cards
related to our Ghana contract;
-
sales of licenses, smart cards and terminals to Net1 UTA clients , mainly
in Russia and Uzbekistan;
-
sales of SIM cards to customers;
-
sales of cryptographic solutions to customers;
-
rental of terminals to merchants participating in our merchant acquiring
system; and
-
repairs and maintenance services to customers.
Amortization of Prism intangible
assets during fiscal 2010 and 2009, respectively, was approximately $0.6 million
(ZAR 4.6 million) and $3.0 million (ZAR 26.9 million) and reduced our operating
income. During fiscal 2010, we recognized an impairment loss of approximately
$37.4 million (ZAR 284.4 million) as a result of deteriorating trading
conditions of this segment, particularly at Net1 UTA, and uncertainty
surrounding contract finalization dates which will impact future cash flows.
As we expand internationally,
whether through traditional selling arrangements to provide products and
services (such as in Ghana and Iraq) or through joint ventures (such as with
SmartSwitch Namibia and SmartSwitch Botswana), we expect to receive revenues
from sales of hardware and from software customization and licensing to
establish the infrastructure of POS terminals and smart cards necessary to
enable utilization of the UEPS and DUET technology in a particular country. To
the extent that we enter into joint ventures and account for the investment as
an equity investment, we are required to eliminate our portion of the sale of
hardware, software and licenses to the investees. The sale of hardware, software
and licenses under these arrangements occur on an ad hoc basis as new
arrangements are established, which can materially affect our revenues and
operating income in this segment from period to period.
Corporate/
Eliminations
The increase in our losses
resulted from increases in corporate head office-related expenditure, including
the effects of the increase in inflation in South Africa and stock-based
compensation charges.
Our 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.
Fiscal 2009 Compared
to Fiscal 2008
The following factors contributed
significantly to the comparability of our results of operations for the 2009 and
2008 fiscal years:
-
Strengthening of the US dollar during fiscal 2009:
The US
dollar appreciated by 23% compared to the ZAR during fiscal 2009 compared to
fiscal 2008 which has had a negative impact on our reported results;
-
Non-recurring 2009 items:
During fiscal 2009 we recognized a
foreign exchange gain of $26.7 million (ZAR 238.3 million) resulting from an
asset swap arrangement and recognized a profit on the sale of our traditional
microlending business of $0.5 million (ZAR 4.1 million);
-
Impact of Net1 UTA acquisition:
Our reported revenue and
intangible asset amortization increased during fiscal 2009 as a result of our
acquisition of Net1 UTA during the first quarter of fiscal 2009;
-
Lower revenue and operating income under our Ghana contract:
Revenues and operating income under our Ghana contact decreased during
fiscal 2009 compared with fiscal 2008 as we delivered the bulk of the software
and hardware required during fiscal 2008; and
-
Increased stock-based compensation charges:
We recorded
higher stock-based compensation charges during fiscal 2009 resulting from
stock options granted in August 2008 and May 2009.
55
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 12
|
|
(US GAAP)
|
|
|
|
Year ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
$
|
%
|
|
|
$
|
000
|
|
$
|
000
|
|
|
change
|
|
Revenue
|
|
246,822
|
|
|
254,056
|
|
|
(3)%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
70,091
|
|
|
67,486
|
|
|
4%
|
|
Selling, general and administration
|
|
64,833
|
|
|
65,362
|
|
|
(1)%
|
|
Depreciation and amortization
|
|
17,082
|
|
|
10,822
|
|
|
58%
|
|
Profit on sale of microlending business
|
|
455
|
|
|
-
|
|
|
|
|
Impairment of goodwill
|
|
1,836
|
|
|
-
|
|
|
|
|
Operating income
|
|
93,435
|
|
|
110,386
|
|
|
(15)%
|
|
Foreign exchange gain related to short-term
investment
|
|
26,657
|
|
|
-
|
|
|
|
|
Interest income, net
|
|
10,828
|
|
|
15,722
|
|
|
(31)%
|
|
Income before income taxes
|
|
130,920
|
|
|
126,108
|
|
|
4%
|
|
Income tax expense
|
|
42,744
|
|
|
39,192
|
|
|
9%
|
|
Net income before loss from equity-accounted investments
|
|
88,176
|
|
|
86,916
|
|
|
1%
|
|
Loss from equity-accounted investments
|
|
(874
|
)
|
|
(1,036
|
)
|
|
(16)%
|
|
Net income
|
|
87,302
|
|
|
85,880
|
|
|
2%
|
|
Less (Add): net income (loss) attributable
to non-controlling interest
|
|
701
|
|
|
(815
|
)
|
|
(186)%
|
|
Net income attributable to us
|
|
86,601
|
|
|
86,695
|
|
|
0%
|
|
|
|
In South African Rand
|
|
Table 13
|
|
(US GAAP)
|
|
|
|
Year ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
ZAR
|
|
|
|
ZAR
|
|
|
ZAR
|
|
|
%
|
|
|
|
000
|
|
|
000
|
|
|
change
|
|
Revenue
|
|
2,206,512
|
|
|
1,852,188
|
|
|
19%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
626,592
|
|
|
492,005
|
|
|
27%
|
|
Selling, general and administration
|
|
579,587
|
|
|
476,520
|
|
|
22%
|
|
Depreciation and amortization
|
|
152,708
|
|
|
78,897
|
|
|
94%
|
|
Profit on sale of microlending business
|
|
4,068
|
|
|
-
|
|
|
|
|
Impairment of goodwill
|
|
16,413
|
|
|
-
|
|
|
|
|
Operating income
|
|
835,280
|
|
|
804,766
|
|
|
4%
|
|
Foreign exchange gain related to short-term
investment
|
|
238,306
|
|
|
-
|
|
|
|
|
Interest income, net
|
|
96,799
|
|
|
114,621
|
|
|
(16)%
|
|
Income before income taxes
|
|
1,170,385
|
|
|
919,387
|
|
|
27%
|
|
Income tax expense
|
|
382,118
|
|
|
285,728
|
|
|
34%
|
|
Net income before loss from equity-accounted investments
|
|
788,267
|
|
|
633,659
|
|
|
24%
|
|
Loss from equity-accounted investments
|
|
(7,813
|
)
|
|
(7,553
|
)
|
|
3%
|
|
Net income
|
|
780,454
|
|
|
626,106
|
|
|
25%
|
|
Less (Add): net income (loss) attributable
to non-controlling interest
|
|
6,267
|
|
|
(5,942
|
)
|
|
|
|
Net income attributable to us
|
|
774,187
|
|
|
632,048
|
|
|
22%
|
|
Analyzed in ZAR, the increase in
revenue and cost of goods sold, IT processing, servicing and support for fiscal
2009 was primarily due to the higher volumes in our transaction-based activities
and a greater number of UEPS-based smart card holders and the acquisition of
Net1 UTA.
56
Our operating income margin
decreased to 38% from 43% mainly as a result of the decrease in contribution
from our hardware, software and related technology sales segment, which
generates a lower margin than our transaction-based activities segment;
increased intangible asset amortization related to the Net1 UTA and RMT
acquisitions and increases in goods and services purchased from third parties,
including the effects of the increase in inflation in South Africa, and
stock-based compensation charges.
During fiscal 2009 we sold our
traditional microlending business and recognized a profit of approximately $0.5
million (ZAR 4.1 million).
Selling, general and
administration expenses increased primarily due to the stock-based compensation
charge related to the options and restricted stock awarded in the first and
fourth quarters of fiscal 2009, increases in goods and services purchased from
third parties, including the effects of the increase in inflation in South
Africa and expenses of $0.5 million related to our JSE listing.
Our direct costs of maintaining a
listing on Nasdaq and obtaining a listing on the JSE, as well as compliance with
the Sarbanes-Oxley Act of 2002, or Sarbanes, particularly Section 404 of
Sarbanes, includes independent directors fees, legal fees, fees paid to Nasdaq,
our compliance officers salary, fees paid to consultants who assist with
Sarbanes compliance, fees paid to the JSE and consultants and advisors assisting
with the JSE listing, and fees paid to our independent accountants related to
the audit and review process. This has resulted in expenditures of $2.1 million
(ZAR 18.7 million) and $1.9 million (ZAR 13.8 million) during fiscal 2009 and
2008, respectively.
Depreciation and amortization and
deferred tax expenses increased during fiscal 2009 primarily as a result of the
Net1 UTA and RMT acquisitions, as summarized in the tables below:
Table 14
|
|
Year ended June 30,
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
$ 000
|
|
|
|
$ 000
|
|
Amortization included in depreciation and
amortization expense:
|
|
12,387
|
|
|
|
5,460
|
|
Prism acquisition
|
|
4,453
|
|
|
|
5,460
|
|
RMT acquisition
|
|
450
|
|
|
|
-
|
|
Net1 UTA acquisition
|
|
7,484
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Deferred tax included in income tax expense:
|
|
3,515
|
|
|
|
1,907
|
|
Prism acquisition
|
|
1,515
|
|
|
|
1,907
|
|
RMT acquisition
|
|
126
|
|
|
|
-
|
|
Net1 UTA acquisition
|
|
1,874
|
|
|
|
-
|
|
Table 15
|
|
Year ended June 30,
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
ZAR 000
|
|
|
|
ZAR 000
|
|
Amortization included in depreciation and
amortization expense:
|
|
110,734
|
|
|
|
39,805
|
|
Prism acquisition
|
|
39,805
|
|
|
|
39,805
|
|
RMT acquisition
|
|
4,024
|
|
|
|
-
|
|
Net1 UTA acquisition
|
|
66,905
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Deferred tax included in income tax expense:
|
|
31,420
|
|
|
|
13,902
|
|
Prism acquisition
|
|
13,540
|
|
|
|
13,902
|
|
RMT acquisition
|
|
1,127
|
|
|
|
-
|
|
Net1 UTA acquisition
|
|
16,753
|
|
|
|
-
|
|
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 June 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 fiscal 2009 compared with fiscal
2008. This reduction in depreciation was partially offset by the increase in
depreciation related to new back-end processing computers and our participating
merchant POS terminals.
We recognized a one-time foreign
exchange gain of $26.7 million (ZAR 238.3 million) during fiscal 2009 resulting
from an asset swap arrangement we entered into in August 2008.
57
Interest on surplus cash
decreased to $20.3 million (ZAR 181.4 million) from $27.4 million (ZAR 199.7
million). The decrease in interest on surplus cash held in South Africa was due
to a lower average daily ZAR cash balance resulting from the Net1 UTA
acquisition, offset by higher deposit rates resulting from the adjustment in the
South African prime interest rate from an average of approximately 14.21% per
annum for fiscal 2008 to 14.32% per annum for fiscal 2009.
Included in interest expense is
the facility fee of approximately $1.1 million (ZAR 9.7 million) that we paid to
the lender under the short-term loan we obtained to fund the Net1 UTA
acquisition and approximately $0.8 million (ZAR 7.3 million) interest on the
loan. Excluding the impact of the facility fee and interest, finance costs
decreased to $7.6 million (ZAR 67.6 million) from $11.7 million (ZAR 85.3
million) due to the elimination of our pre-funding requirements in April
2009.
Total tax expense increased to
$42.7 million (ZAR 382.1 million) from $39.2 million (ZAR 285.7 million).
Deferred tax assets and liabilities are measured utilizing the enacted fully
distributed tax rate. Accordingly, a reduction in the fully distributed tax rate
from 35.45% to 34.55% during fiscal 2009 resulted in lower deferred tax assets
and liabilities and the net change of $3.5 million (ZAR 26.5 million) is
included in income tax expense. In ZAR, without giving effect to the change in
our fully-distributed tax rate, our total tax expense increased, primarily due
to the foreign exchange gain discussed above. Our effective tax rate increased
to 32.7% from 31.0%, primarily due to an increase in non-deductible expenses,
including stock-based compensation charges, and taxable deemed dividends in the
United States offset by non-taxable gains on the sale of our traditional
microlending business and foreign tax credits generated during fiscal 2009.
Loss from equity-accounted
investments for fiscal 2009 and 2008 was $0.9 million (ZAR 7.8 million) and $1.0
million (ZAR 7.6 million), respectively.
Results of operations by
operating segment
The composition of revenue and the contributions of our
business activities to operating income are illustrated below.
Table 16
|
|
|
|
|
In United States Dollars (US GAAP)
|
|
|
|
|
|
|
|
|
|
Year ended June 30,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
% of
|
|
|
2008
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
$ 000
|
|
|
total
|
|
|
$ 000
|
|
|
total
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
148,399
|
|
|
60%
|
|
|
153,444
|
|
|
60%
|
|
|
(3)%
|
|
Smart card accounts
|
|
29,576
|
|
|
12%
|
|
|
35,914
|
|
|
14%
|
|
|
(18)%
|
|
Financial services
|
|
5,430
|
|
|
2%
|
|
|
8,251
|
|
|
3%
|
|
|
(34)%
|
|
Hardware, software and related technology sales
|
|
63,417
|
|
|
26%
|
|
|
56,447
|
|
|
23%
|
|
|
12%
|
|
Total consolidated
revenue
|
|
246,822
|
|
|
100%
|
|
|
254,056
|
|
|
100%
|
|
|
(3)%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
83,509
|
|
|
89%
|
|
|
84,229
|
|
|
76%
|
|
|
(1)%
|
|
Operating income before amortization
|
|
85,404
|
|
|
|
|
|
86,000
|
|
|
|
|
|
(1)%
|
|
Amortization
|
|
(1,895
|
)
|
|
|
|
|
(1,771
|
)
|
|
|
|
|
7%
|
|
Smart card accounts
|
|
13,442
|
|
|
14%
|
|
|
16,325
|
|
|
15%
|
|
|
(18)%
|
|
Financial services
|
|
(34
|
)
|
|
-%
|
|
|
1,935
|
|
|
2%
|
|
|
(102)%
|
|
Operating income before profit on
sale of microlending business and impairment of goodwill
|
|
1,347
|
|
|
|
|
|
1,935
|
|
|
|
|
|
(30)%
|
|
Profit on sale of
microlending business and impairment of goodwill
|
|
(1,381
|
)
|
|
|
|
|
-
|
|
|
|
|
|
|
|
Hardware, software and related technology sales
|
|
5,498
|
|
|
6%
|
|
|
11,708
|
|
|
11%
|
|
|
(53)%
|
|
Operating income before
amortization
|
|
15,990
|
|
|
|
|
|
15,397
|
|
|
|
|
|
4%
|
|
Amortization
|
|
(10,492
|
)
|
|
|
|
|
(3,689
|
)
|
|
|
|
|
184%
|
|
Corporate/eliminations
|
|
(8,980
|
)
|
|
(9)%
|
|
|
(3,811
|
)
|
|
(4)%
|
|
|
136%
|
|
Total consolidated operating
income
|
|
93,435
|
|
|
100%
|
|
|
110,386
|
|
|
100%
|
|
|
(15)%
|
|
58
Table 17
|
|
In South African Rand (US GAAP)
|
|
|
|
Year ended June 30,
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
% of
|
|
|
ZAR
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
000
|
|
|
total
|
|
|
000
|
|
|
total
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
1,326,641
|
|
|
60%
|
|
|
1,118,679
|
|
|
60%
|
|
|
19%
|
|
Smart card accounts
|
|
264,400
|
|
|
12%
|
|
|
261,830
|
|
|
14%
|
|
|
1%
|
|
Financial services
|
|
48,543
|
|
|
2%
|
|
|
60,154
|
|
|
3%
|
|
|
-19%
|
|
Hardware, software and related technology sales
|
|
566,928
|
|
|
26%
|
|
|
411,525
|
|
|
23%
|
|
|
38%
|
|
Total consolidated
revenue
|
|
2,206,512
|
|
|
100%
|
|
|
1,852,188
|
|
|
100%
|
|
|
19%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
746,545
|
|
|
89%
|
|
|
614,069
|
|
|
76%
|
|
|
22%
|
|
Operating income before amortization
|
|
763,483
|
|
|
|
|
|
626,984
|
|
|
|
|
|
22%
|
|
Amortization of
intangible assets
|
|
(16,938
|
)
|
|
|
|
|
(12,915
|
)
|
|
|
|
|
31%
|
|
Smart card accounts
|
|
120,167
|
|
|
14%
|
|
|
119,017
|
|
|
15%
|
|
|
1%
|
|
Financial services
|
|
(304
|
)
|
|
-%
|
|
|
14,107
|
|
|
2%
|
|
|
(102)%
|
|
Operating income before profit on
sale of microlending business
|
|
12,041
|
|
|
|
|
|
14,107
|
|
|
|
|
|
(15)%
|
|
Loss of sale of
microlending business
|
|
(12,345
|
)
|
|
|
|
|
-
|
|
|
|
|
|
|
|
Hardware, software and related technology sales
|
|
49,150
|
|
|
6%
|
|
|
85,357
|
|
|
11%
|
|
|
(42)%
|
|
Operating income before
amortization
|
|
142,946
|
|
|
|
|
|
112,247
|
|
|
|
|
|
27%
|
|
Amortization of intangible assets
|
|
(93,796
|
)
|
|
|
|
|
(26,890
|
)
|
|
|
|
|
249%
|
|
Corporate/eliminations
|
|
(80,278
|
)
|
|
(9)%
|
|
|
(27,784
|
)
|
|
(4)%
|
|
|
189%
|
|
Total consolidated operating
income
|
|
835,280
|
|
|
100%
|
|
|
804,766
|
|
|
100%
|
|
|
4%
|
|
Transaction-based
activities
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, higher volumes from
four of our provincial contracts, continued adoption of our merchant acquiring
system in the provinces where we distribute welfare grants and increased
transacting ability at participating retailers POS devices in these provinces.
We discuss these factors in more detail below.
Revenues for transaction-based
activities include the transaction fees we earn through our merchant acquiring
system and reflect the elimination of inter-company transactions.
The revenue and operating loss,
inclusive of intangible asset amortization of $0.5 million, of RMT is included
in our fiscal 2009 results.
Segment operating income margin
increased to 56% from 55% mainly as a result of the price increases described
above, partially offset by continued inflationary increases in our cost
components.
Pension
and welfare operations
:
Refer to discussion under
Fiscal 2010 compared to fiscal 2009Results of operations by operating
segmentTransaction-based activities Pension and welfare operations.
Continued
adoption of our merchant acquiring system:
Refer to discussion under
Fiscal 2010 compared to fiscal 2009Results of operations by operating
segmentTransaction-based activitiesContinued adoption of our merchant
acquiring system.
EasyPay
transaction fees:
During fiscal 2009 and 2008,
EasyPay processed 580.7 million and 516.8 million transactions with an
approximate value of $14.7 billion (ZAR 131.2 billion) and $15.9 billion (ZAR
115.6 billion), respectively. The average fee per transaction during fiscal 2009
and 2008, was $0.02 (ZAR 0.21) and $0.03 (ZAR 0.21), respectively.
59
Operating income margins
generated by EasyPay during fiscal 2009 increased compared with fiscal 2008
primarily due to an increase in the number of transactions processed in fiscal
2009 and costs incurred in fiscal 2008 related to the implementation of a new
integrated switch and restructuring costs. The new switch became operational
during fiscal 2009 and we believe it has improved operating efficiencies and
reduced costs at EasyPay and has enhanced our offering and enable us to take
advantage of new business opportunities.
Amortization of EasyPay
intangible assets during fiscal 2009 and 2008, of approximately $1.4 million
(ZAR 12.9 million) and $1.8 million (ZAR 12.9 million), respectively, is
included in the calculation of EasyPay operating margins.
Smart
card accounts
Operating income margin from
providing smart card accounts was constant at 45% for each of the fiscal 2009
and 2008.
In ZAR, revenue from the
provision of smart card-based accounts grew in proportion to the higher number
of beneficiaries serviced through our social welfare payment contracts. A total
number of 3,875,463 smart card-based accounts were active at June 30, 2009,
compared to 4,022,193 active accounts as at June 30, 2008. The decrease in the
number of active accounts resulted from the removal of invalid or fraudulent
grants by SASSA and the prejudicial transfer of beneficiaries to SAPO and
certain banks.
Financial
services
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. We consider
UEPS-based lending less risky than traditional microfinance loans because the
grants are distributed to these lenders by us and these loans are insured.
Operating loss for fiscal 2009
includes a profit of $0.5 million (ZAR 4.1 million) on the sale of our
traditional microlending business and goodwill impairment of $1.8 million (ZAR
16.4 million).
Revenues from our traditional
microlending business decreased during fiscal 2009 due to the sale of our
traditional microlending business on March 1, 2009, increased competition, our
strategic decision not to grow this business, and an overall lower return on
traditional microlending loans as a result of compliance with the National
Credit Act, or NCA.
Under the Finbond agreement, we
were responsible for the collection of loans granted prior to March 1, 2009.
Finbond notified us that certain of these loans sold to them had not been
settled by the borrower and we were responsible for recovery. The overall
recovery of loans sold was better than initially anticipated at the time of the
sale which resulted in a profit compared to the loss on sale of the traditional
microlending business during the third quarter of fiscal 2009.
Excluding the effects of the
goodwill impairment and profit on the sale of our traditional microlending
business, operating income margin for the Financial services segment increased
to 25% from 23%.
Hardware,
software and related technology sales
Operating results for this
segment include Net1 UTA only for fiscal 2009. The following table presents our
revenue and operating income during fiscal 2009 and 2008:
Table 18
|
|
Year ended June 30,
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
$ 000
|
|
|
|
$ 000
|
|
Revenue
|
|
63,417
|
|
|
|
56,447
|
|
Hardware, software and related
technology sales excluding Net1 UTA
|
|
43,857
|
|
|
|
56,447
|
|
Net1 UTA
|
|
19,560
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Operating income before amortization of
intangible assets
|
|
15,990
|
|
|
|
15,397
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
5,498
|
|
|
|
11,708
|
|
Hardware, software and related
technology sales excluding Net1 UTA
|
|
8,474
|
|
|
|
11,708
|
|
Net1 UTA
|
|
(2,976
|
)
|
|
|
-
|
|
Net1 UTA excluding
amortization of acquisition related intangible assets
|
|
4,508
|
|
|
|
-
|
|
Amortization of acquisition related intangible assets
|
|
(7,484
|
)
|
|
|
-
|
|
60
Table 19
|
|
Year ended June 30,
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
ZAR 000
|
|
|
|
ZAR 000
|
|
Revenue
|
|
566,928
|
|
|
|
411,525
|
|
Hardware, software and related
technology sales excluding Net1 UTA
|
|
392,068
|
|
|
|
411,525
|
|
Net1 UTA
|
|
174,860
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Operating income before amortization of
intangible assets
|
|
142,946
|
|
|
|
112,247
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
49,150
|
|
|
|
85,357
|
|
Hardware, software and related
technology sales excluding Net1 UTA
|
|
75,755
|
|
|
|
85,357
|
|
Net1 UTA
|
|
(26,605
|
)
|
|
|
-
|
|
Net1 UTA excluding
amortization of acquisition related intangible assets
|
|
40,300
|
|
|
|
-
|
|
Amortization of acquisition related intangible assets
|
|
(66,905
|
)
|
|
|
-
|
|
In ZAR, the increase in revenue
was primarily due to the inclusion of Net1 UTA and hardware and software
development sales under our Iraqi contract, offset by lower sales to the Bank of
Ghana. In ZAR, the decrease in operating income was primarily due to
amortization of Net1 UTA intangible assets and fewer sales to the Bank of Ghana,
offset by the inclusion of operating income generated by Net1 UTA .
Revenue and operating income for
fiscal 2009 comprised:
-
software development and customization, sales of terminals and smart cards
related to our Ghana contract;
-
sales of DUET licenses, smart cards and terminals to Net1 UTA clients ,
mainly in Russia and Uzbekistan;
-
sales of SIM cards to customers;
-
sales of cryptographic solutions to customers;
-
rental of terminals to merchants participating in our merchant acquiring
system; and
-
repairs and maintenance services to customers.
Amortization of Prism intangible
assets during fiscal 2009 and 2008, respectively, was approximately $3.0 million
(ZAR 26.9 million) and $3.7 million (ZAR 26.9 million) and reduced our operating
income.
Corporate/
Eliminations
The increase in our loss resulted
from increases in corporate head office-related expenditure, including the
effects of the increase in inflation in South Africa and stock-based
compensation charges.
Our 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 June 30, 2010, our
cash balances were $153.7 million, which comprised mainly ZAR-denominated
balances of ZAR 1.0 billion ($131.8 million), US dollar-denominated balances of
$14.9 million and other currency deposits, primarily euro, of $7.1 million. Our
cash balances decreased from June 30, 2009 levels mainly as a result of the
$124.5 million repurchase of our common stock from Brait S.A.s investment
affiliates, which decrease was offset by cash generated by operating
activities.
During fiscal 2010, our Board of
Directors authorized the repurchase of up to $100 million of our common stock.
The authorization does not have an expiration date. The authorization may be
suspended, terminated or modified at any time for any reason, including market
conditions, the cost of repurchasing shares, liquidity and other factors that
management deems appropriate. During fiscal 2010, we did not repurchase any
shares under this authorization.
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.
61
We have short-term facilities in
South Africa of approximately ZAR 250 million ($32.7 million). We recently
reduced these facilities from approximately ZAR 500 million in order to reduce
the charge on unutilized credit facilities charged by our bankers. We also have
a €1 million facility with each of Austrias two largest banks. These facilities
are available to us when required.
Historically, we have financed
most of our operations, research and development, working capital, capital
expenditures and acquisitions through our internally generated cash. We take the
following factors into account when considering whether to borrow under our
financing facilities:
We have a unique cash flow cycle
due to the funding mechanism in our pension and welfare business and our
pre-funding of merchants. We receive grant funds from SASSA 48 hours prior to
the provision of the service and any interest we earn on these amounts is for
the benefit of SASSA. In addition, we pre-fund certain merchants who facilitate
the distribution of grants through our merchant acquiring system. When grants
are paid at merchant locations before the start of the payment service at pay
points, we pre-fund these payments to the merchants distributing the grants on
our behalf. We typically reimburse these merchants within 48 hours after they
distribute the grants to the social welfare beneficiaries.
We currently believe that our
cash and credit facilities are sufficient to fund our current operations for at
least the next four quarters.
We receive cash from health care
plans which we disburse to health care service providers once we have
adjudicated claims and from customers on whose behalf we processes payroll
payments that we will disburse to customer employees, payroll-related payees and
other payees designated by the customer. These funds do not represent cash that
is available to us and we present these funds, and the associated liability,
outside of our current assets and liabilities on our consolidated balance sheet.
Movements in these cash balances are presented in investing activities and
movements in the obligations are presented in financing activities in our
consolidated statement of cash flows.
Cash flows from
operating activities
Cash flows from operating
activities for fiscal 2010 decreased to $68.7 million (ZAR 522.1 million) from
$106.8 million (ZAR 954.5 million) for fiscal 2009, largely due to the factors
that contributed to decreases in revenues and operating income in our hardware,
software and related technology sales segments, offset by increases in revenue
and operating income in our transaction-based activities.
In ZAR, cash flows from operating
activities for fiscal 2009 increased to $106.8 million (ZAR 954.5 million) from
$118.8 million (ZAR 865.9 million) for fiscal 2008, largely due to the factors
that contributed to increases in revenues and operating income in our
transaction-based activities and hardware, software and related technology sales
segments, as well as the elimination of our pre-funding obligation.
During fiscal 2010 we made an
additional second provisional tax payment of $4.0 million (ZAR 30.1 million)
related to our 2009 tax year in South Africa. In addition, we made a first
provisional payment of $17.8 million (ZAR 133.5 million), a second provisional
payment of $20.3 million (ZAR 155.8 million) related to our 2010 tax year in
South Africa and paid STC of $12.1 million (ZAR 92.2 million) related to
cross-border intercompany dividends paid. During fiscal 2009 we paid provisional
taxes of approximately $10.3 million (ZAR 86.0 million) related to the tax year
ended June 30, 2008 and provisional taxes of approximately $40.1 million (ZAR
361.2 million) related to the tax year ended June 30, 2009.
62
Taxes paid during fiscal 2010 and 2009 were as follows:
Table 20
|
|
|
|
|
Year ended June 30,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
$
|
|
|
$
|
|
|
ZAR
|
|
|
ZAR
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First provisional payments
|
|
17,788
|
|
|
18,845
|
|
|
133,522
|
|
|
187,986
|
|
Second provisional payments
|
|
20,309
|
|
|
21,226
|
|
|
155,769
|
|
|
173,201
|
|
Third provisional payments
|
|
239
|
|
|
2,868
|
|
|
1,789
|
|
|
28,704
|
|
Taxation paid related to prior years
|
|
3,996
|
|
|
7,412
|
|
|
30,119
|
|
|
57,284
|
|
Taxation refunds received
|
|
(241
|
)
|
|
(61
|
)
|
|
(1,913
|
)
|
|
(471
|
)
|
Secondary taxation on companies
|
|
12,052
|
|
|
2,230
|
|
|
92,215
|
|
|
22,318
|
|
Total tax paid
|
|
54,143
|
|
|
52,520
|
|
|
411,501
|
|
|
469,022
|
|
Cash flows from investing activities
Cash used in investing activities
for fiscal 2010 includes capital expenditure of $2.7 million (ZAR 20.7 million),
primarily for the acquisition of POS devices to service our merchant acquiring
system, improvements to leasehold property and the acquisition of computer
equipment.
During fiscal 2010, we paid $1.0
million (ZAR 7.3 million), net of cash received, for 100% of the outstanding
ordinary capital of MediKredit and all claims outstanding and $9.4 million (ZAR
69.0 million), net of cash received for the FIHRST business and software.
Cash used in investing activities
for fiscal 2009 includes capital expenditure of $4.8 million (ZAR 42.6 million),
which relates primarily to the purchase of back-end processing machines to
maintain and expand current operations, equipment acquired for our card
manufacturing facility, modifications to vehicles acquired to distribute social
welfare grants, acquisition of POS terminals for our merchant acquiring system
and computer hardware acquired to upgrade our EasyPay switch and service
potential customers.
During fiscal 2009, we paid $97.9
million (ZAR 767.3 million), net of cash received, for 80.1% of Net1 UTA, which
includes approximately $0.5 million paid to consultants. In addition, we paid
$3.4 million (ZAR 34.8 million) in cash to acquire a further interest in Finbond
and $1.4 million (ZAR 12 million) in cash to purchase RMT. We also made
additional equity investments in VinaPay and VTU Colombia for a total of
approximately $0.6 million and a loan to VTU Colombia of approximately $0.2
million, all of which were used to fund operating activities.
Cash used in investing activities
for fiscal 2008 includes capital expenditures of $3.6 million (ZAR 26.0
million), which relates primarily to the renovations of the transaction-based
activities segment head office and data room, the hardware and software
acquired, including hardware to perform switching activities and software to
interface with customers and perform database management, vehicles acquired to
distribute social welfare grants, the capital expenditure to maintain and expand
our EasyPay operations, and the acquisition of POS terminals for our merchant
acquiring system.
Cash flows from
financing activities
During fiscal 2010 we
repurchased, using our ZAR reserves, 9,221,526 shares of our common stock from
Brait S.A.s investment 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. We also paid $1.3 million on account of shares we
repurchased on June 30, 2009, under our 2009 share buy-back program and received
$0.7 (ZAR 5.5 million) from employees exercising stock options and repaying
loans.
During fiscal 2009, we received
and repaid a $110 million short-term loan facility and we paid the $1.1 million
related facility fee. We also acquired 3,621,247 shares of our common stock for
$40.7 million, and received $0.3 million (ZAR2.7 million) from stock option
exercises.
During fiscal 2008 we received
approximately $0.6 million (ZAR 4.0 million) from employees to repay loans
associated with stock options granted to them as well as the interest thereon.
In addition, we received approximately $2.9 million (ZAR 21.3 million) from the
proceeds of stock options exercises.
Off-Balance Sheet Arrangements
We have no off-balance sheet
arrangements.
63
Capital Expenditures
Capital expenditures for the
years ended June 30, 2010, 2009 and 2008 were as follows:
Table 21
|
|
|
|
|
|
|
|
Year ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
ZAR
|
|
|
ZAR
|
|
|
ZAR
|
|
Operating Segment
|
$
|
000
|
|
|
$000
|
|
|
$000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
2,177
|
|
|
3,161
|
|
|
2,774
|
|
|
16,565
|
|
|
28,258
|
|
|
20,222
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Financial services
|
|
302
|
|
|
751
|
|
|
562
|
|
|
2,298
|
|
|
6,714
|
|
|
4,097
|
|
Hardware, software and related
technology sales
|
|
251
|
|
|
858
|
|
|
227
|
|
|
1,910
|
|
|
7,670
|
|
|
1,655
|
|
Corporate / Eliminations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Consolidated total
|
|
2,730
|
|
|
4,770
|
|
|
3,563
|
|
|
20,773
|
|
|
42,642
|
|
|
25,974
|
|
We operate in an environment
where the payment of social welfare grants requires substantial capital
investment to establish an operational infrastructure when a contract commences.
Further capital investment is required when the number of beneficiaries
increases to the point where the maximum capacity of the original infrastructure
is exceeded.
Our capital expenditures for
fiscal 2010, 2009 and 2008, are discussed under Liquidity and Capital
ResourcesCash flows from investing activities.
All of our capital expenditures
for the past three fiscal years were funded through internally generated funds.
We had outstanding capital commitments as of June 30, 2010, of $0.02 million
related mainly to computer equipment ordered in order to maintain and expand
activities. We anticipate that capital spending for the first quarter of fiscal
2011 will relate primarily to ongoing replacement of equipment used to
administer and distribute social welfare grants, establish a backend processing
centre related to our Virtual Card offering and provide transaction processing
services. We expect to fund these expenditures through internally generated
funds.
Contingent Liabilities, Commitments and Contractual
Obligations
We lease various premises under
operating leases. Our minimum future commitments for lease premises as well as
other commitments are as follows:
Table 22
|
|
Payments due by Period, as of June 30, 2010 (in $
000s)
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
than 1
|
|
|
1-3
|
|
|
3-5
|
|
|
than 5
|
|
|
|
Total
|
|
|
year
|
|
|
years
|
|
|
years
|
|
|
years
|
|
Interest bearing liabilities
|
$
|
4,343
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,343
|
|
Operating lease obligations
|
|
7,495
|
|
|
3,349
|
|
|
3,256
|
|
|
890
|
|
|
-
|
|
Purchase obligations
|
|
3,139
|
|
|
3,139
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Capital commitments
|
|
21
|
|
|
21
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
14,998
|
|
$
|
6,509
|
|
$
|
3,256
|
|
$
|
890
|
|
$
|
4,343
|
|
64
ITEM 7A. 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 June 30, 2010, and 2009, our outstanding foreign
exchange contracts were as follows:
As of June 30,
2010
|
|
|
|
Fair market
|
|
|
Notional amount
|
|
Strike price
|
|
value price
|
|
Maturity
|
EUR
|
|
207,000
|
|
ZAR
|
|
10.1107
|
|
ZAR
|
|
9.4802
|
|
July 30, 2010
|
EUR
|
|
31,200
|
|
ZAR
|
|
9.5976
|
|
ZAR
|
|
9.5080
|
|
October 9, 2010
|
As of June 30,
2009
|
|
|
|
|
|
|
|
Fair market
|
|
|
Notional amount
|
|
Strike price
|
|
value price
|
|
Maturity
|
EUR
|
|
241,500
|
|
ZAR
|
|
13.1515
|
|
ZAR
|
|
10.9967
|
|
August 14, 2009
|
EUR
|
|
(241,500)
|
|
ZAR
|
|
11.3691
|
|
ZAR
|
|
10.9341
|
|
July 17, 2009
|
Translation
Risk
Translation risk relates to the
risk that our results of operations will vary significantly as the US dollar is
our reporting currency, but we earn most of our revenues and incur most of our
expenses in ZAR. The US dollar to ZAR exchange rate has fluctuated significantly
over the past three years. As exchange rates are outside our control, there can
be no assurance that future fluctuations will not adversely affect our results
of operations and financial condition.
Interest Rate
Risk
As a result of our normal
borrowing and leasing activities, our operating results are exposed to
fluctuations in interest rates, which we manage primarily through our regular
financing activities. We generally maintain limited investment in cash
equivalents and have occasionally invested in marketable securities. The
interest earned on our bank balances and short term cash investments is
dependent on the prevailing interest rates in the jurisdictions where our cash
reserves are invested.
Credit Risk
Credit risk relates to the risk
of loss that we would incur as a result of non-performance by counterparties. We
maintain credit risk policies with regard to our counterparties to minimize
overall credit risk. These policies include an evaluation of a potential
counterpartys financial condition, credit rating, and other credit criteria and
risk mitigation tools as our management deems appropriate.
With respect to credit risk on
financial instruments, we maintain a policy of entering into such transactions
only with South African and European financial institutions that have a credit
rating of BBB or better, as determined by credit rating agencies such as
Standard & Poors, Moodys and Fitch Ratings.
65
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 June
30, 2010, 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 June 30,
2010. The effects of a hypothetical 10% increase and a 10% decrease in market
prices as of June 30, 2010 is also shown. The selected 10% hypothetical change
does not reflect what could be considered the best or worst case scenarios.
Indeed, results could be far worse due both to the nature of equity markets and
the aforementioned liquidity risk.
|
|
|
|
|
As of June 30, 2010
|
|
|
|
|
Table 23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
7,299
|
|
|
10%
|
|
|
8,029
|
|
|
0.25%
|
|
|
|
|
|
|
(10)%
|
|
|
6,569
|
|
|
(0.25)%
|
|
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial
statements, together with the report of our independent registered public
accounting firm, appear on pages F-1 through F-51 of this Annual Report on Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
66
ITEM 9A. 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) under the
Securities Exchange Act of 1934. Based on this evaluation, the chief executive
officer and the chief financial officer concluded that our disclosure controls
and procedures were effective as of June 30, 2010.
Internal Control over
Financial Reporting
Internal control over financial
reporting is a process designed by, or under the supervision, of the companys
chief executive officer (CEO) and chief financial officer (CFO), or persons
performing similar functions, and effected by the companys board of directors,
management, and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with GAAP.
Internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the companys assets that could have a
material effect on the consolidated financial statements.
Inherent Limitations in
Internal Control over Financial Reporting
Internal control over financial
reporting cannot provide absolute assurance of achieving financial reporting
objectives because of its inherent limitations. Internal control over financial
reporting is a process that involves human diligence and compliance and is
subject to lapses in judgment and breakdowns resulting from human failures.
Internal control over financial reporting also can be circumvented by collusion
or improper management override. Because of such limitations, there is a risk
that material misstatements may not be prevented or detected on a timely basis
by internal control over financial reporting. However, these inherent
limitations are known features of the financial reporting process. Therefore, it
is possible to design into the process safeguards to reduce, though not
eliminate, this risk.
Managements Report on
Internal Control Over Financial Reporting
Management, including our chief
executive officer and our chief financial officer, is responsible for
establishing and maintaining adequate internal control over our financial
reporting. Management conducted an evaluation of the effectiveness of internal
control over financial reporting based on the Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, management concluded that our internal
control over financial reporting was effective as of June 30, 2010. Deloitte
& Touche (South Africa), an independent registered public accounting firm,
has issued an audit report on the Companys internal control over financial
reporting. As permitted by the rules of the SEC, we have excluded MediKredit and
FIHRST from our annual assessment of the effectiveness of internal control over
financial reporting for the year ended June 30, 2010, the year of acquisition.
As of June 30, 2010, MediKredits and FIHRSTs total combined assets represented
approximately 11% of our consolidated total assets and approximately 12% of
consolidated total current assets. Their total combined revenues constituted
approximately 3% of our consolidated revenue and their net income constituted
approximately 0.3% of our consolidated net income for the year ended June 30,
2010.
Changes in Internal Control
over Financial Reporting
There were no changes in our
internal control over financial reporting during the most recent fiscal quarter
ended June 30, 2010, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting. As permitted
by the rules of the SEC, we have excluded MediKredit and FIHRST from our annual
assessment of the effectiveness of internal control over financial reporting for
the year ended June 30, 2010, the year of acquisition. Management continues to
evaluate MediKredit and FIHRSTs internal controls over financial reporting. See
Item 1A. Risk Factors Failure to maintain effective internal control over
financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act,
especially over companies that we may acquire, could have a material adverse
effect on our business and stock price. Our management certification and auditor
attestation regarding the effectiveness of our internal control over financial
reporting as of June 30, 2010, excluded the operations of MediKredit and FIHRST.
If we are not able to integrate MediKredit and FIHRST operations into our
internal control over financial reporting, our internal control over financial
reporting may not be effective in Part I, Item 1A of this Annual Report on Form
10-K for additional information.
67
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To The Shareholders of Net 1 UEPS Technologies, Inc.
We have audited the internal
controls over financial reporting of Net 1 UEPS Technologies, Inc. and
subsidiaries (the Company) as of June 30, 2010, based on criteria established
in
Internal ControlIntegrated Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission. As described in
Managements report on Internal Control Over Financial Reporting, management
excluded from its assessment the internal control over financial reporting at
MediKredit Integrated Healthcare Solutions (Proprietary) Limited (MediKredit)
and Net 1 FIHRST Holdings (Proprietary) Limited (FIHRST), which was acquired
on January 1, 2010 and March 31, 2010 respectively. As of June 30, 2010,
MediKredits and FIHRSTs combined total assets represented approximately 11% of
consolidated total assets, approximately 12% of consolidated total current
assets and the total revenues constituted approximately 3% of consolidated
revenue and the net income constituted approximately 0.3% of consolidated net
income for the year ended June 30, 2010. Accordingly, our audit did not include
the internal control over financial reporting at MediKredit and FIHRST. The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in Managements report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on
the Companys internal control over financial reporting based on our audit.
We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on the assessed
risk and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over
financial reporting is a process designed by, or under the supervision of, the
company's principal executive and principal financial officers or persons
performing similar functions, and effected by the company's board of directors,
management and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company's assets that could have a
material effect on the financial statements.
Because of the inherent
limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely
basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that
the controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of June 30, 2010, based on the criteria established in
Internal
ControlIntegrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements as of and for the year
ended June 30, 2010 of the Company and our report dated August 26, 2010,
expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche (South Africa)
Per PJ Smit
Partner
August 26, 2010
National Executive: GG Gelink Chief Executive AE Swiegers Chief
Operating Officer GM Pinnock Audit
DL Kennedy Tax & Legal and Risk
Advisory L Geeringh Consulting L Bam Corporate Finance CR Beukman Finance
TJ
Brown Clients & Markets NT Mtoba Chairman of the Board MJ Comber Deputy
Chairman of the Board
A full list of partners and directors is available on
request
68
ITEM 9B. OTHER INFORMATION
On August 24, 2010, we entered
into a new service level agreement with SASSA which replaces our previous SASSA
contract that expired on June 30, 2010. The new agreement is retroactively
effective from July 1, 2010 and expires on March 31, 2011. Under the contract,
we continue to provide our social welfare grants distribution service to SASSA
in five of South Africas nine provinces (KwaZulu-Natal, Limpopo, North West,
Northern Cape and Eastern Cape). As was the case with our previous contact, the
new contract contains a standard pricing formula for all provinces based on a
transaction fee per beneficiary paid, regardless of the number or amount of
grants paid per beneficiary, calculated on a guaranteed minimum number of
beneficiaries per month. However, the new contract provides for a reduction in
both the level of the transaction fee per beneficiary paid and the guaranteed
minimum number of beneficiaries. We expect that our future revenues, operating
income, net income and cash flow will be negatively impacted by these reductions
unless we are able to offset the reductions by increasing our revenues from our
other business activities, reducing expenses, or both. See the first captioned
section under Item 1A. Risk Factors and Item 7. Managements Discussion and
Analysis of Financial Condition and Results of OperationsBusiness Developments
during Fiscal 2010South AfricaSASSA contract.
Under the new contract, SASSA
will continue to pre-fund all social welfare grants. We continue to pre-fund
merchants who facilitate the distribution of grants through our merchant
acquiring system.
We will file our new SASSA
service level agreement with our Form 10-Q for the quarter ending September 30,
2010. However, consistent with our prior practice, we will redact certain
portions of the agreement that specify the amount of the transaction fee per
beneficiary paid and the guaranteed minimum number of beneficiaries per month
and will seek confidential treatment under the Exchange Act for such
portions.
69
PART III
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information about our executive
officers is set out in Part I, Item 1 under the caption Executive Officers and
Significant Employees of the Registrant. The other information required by this
Item is incorporated by reference to the sections of our definitive proxy
statement for our annual meeting of shareholders to be held in 2010, entitled
Board of Directors and Corporate Governance and Additional Information, to
be filed with the SEC within 120 days after the end of the fiscal year covered
by this Form 10-K.
ITEM 11. EXECUTIVE
COMPENSATION
The information required by this
Item is incorporated by reference to the sections of our definitive proxy
statement for our annual meeting of shareholders to be held in 2010, entitled
Compensation Discussion and Analysis, Summary Compensation Table, Grants of
Plan-Based Awards, Outstanding Equity Awards at 2010 Fiscal Year-End,
Options Exercised and Stock Vested, Compensation of Directors, Potential
Payments Upon Termination or Changein-Control and Remuneration Committee
Report to be filed with the SEC within 120 days after the end of the fiscal
year covered by this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this
Item is incorporated by reference to the sections of our definitive proxy
statement for our annual meeting of shareholders to be held in 2010, entitled
Outstanding Equity Awards at 2010 Fiscal Year-End and Security Ownership of
Certain Beneficial Owners, to be filed with the SEC within 120 days after the
end of the fiscal year covered by this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this
Item is incorporated by reference to the sections of our definitive proxy
statement for our annual meeting of shareholders to be held in 2010, entitled
Certain Relationships and Related Transactions and Board of Directors and
Corporate Governance, to be filed with the SEC within 120 days after the end of
the fiscal year covered by this Form 10-K.
ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
The information required by this
Item is incorporated by reference to the sections of our definitive proxy
statement for our annual meeting of shareholders to be held in 2010, entitled
Audit and Non-Audit Fees, to be filed with the SEC within 120 days after the
end of the fiscal year covered by this Form 10-K.
70
PART IV
ITEM 15. EXHIBITS and FINANCIAL STATEMENT SCHEDULES
a) The following documents are filed as part of
this report
1. Financial Statements
The following financial
statements are included on pages F-1 through F-51.
2. Financial Statement Schedules
Financial statement schedules have been
omitted since they are either not required, not applicable, or the information
is otherwise included.
(b) Exhibits
Exhibit
|
Description
|
Number
|
|
3.1
|
Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 3.1 to our Form 8-K filed on
December 1, 2008)
|
|
|
3.2
|
Amended and Restated By-Laws of Net 1 UEPS Technologies,
Inc. (incorporated by reference to Exhibit 3.2 to our Form 8-K filed on
November 5, 2009).
|
|
|
4.1
|
Form of common stock certificate (incorporated by
reference to Exhibit 4.1 to our Registration Statement on Form S-1 filed
June 20, 2005 (SEC File No. 333-125273))
|
|
|
10.1
|
Distribution Agreement, dated July 1, 2002, between Net 1
UEPS Technologies, Inc. and Net 1 Investment Holdings (Pty) Limited
(incorporated by reference to Exhibit 10.1 to our Registration Statement
on Form S-4filed February 3, 2004 (Commission File No. 333-112463))
|
|
|
10.2
|
Patent and Technology Agreement, dated June 19, 2000, by
and between Net 1 Holdings S.a.r.l. and Net 1 UEPS Technologies, Inc.
(incorporated by reference to Exhibit 10.2 to our Registration Statement
on Form S-4 filed February 3, 2004 (Commission File No. 333-112463))
|
|
|
10.3
|
Technology License Agreement between Net 1 Investment
Holdings (Proprietary) Limited and Visa International Service Association
(incorporated by reference to Exhibit 10.12 to our Registration Statement
on Form S-1 filed May 26, 2005 (Commission File No. 333-125273))
|
|
|
10.4
|
Product License Agreement between Net 1 Holdings S.a.r.l.
and Net 1 Operations S.a.r.l. (incorporated by reference to Exhibit 10.8
to Amendment No. 2 to our Registration Statement on Form S-4/A, filed on
April 21, 2004 (Commission File No. 333-112463))
|
|
|
10.5
|
Non Exclusive UEPS License Agreement between Net 1
Investment Holdings (Proprietary) Limited and SIA Netcards (incorporated
by reference to Exhibit 10.10 to Amendment No. 2 to our Registration
Statement on Form S-4/A, filed on April 21, 2004 (Commission File No.
333-112463))
|
|
|
10.6
|
Assignment of Copyright and License of Patents and Trade
Marks between MetroLink (Proprietary) Limited and Net 1 Products
(Proprietary) Limited (incorporated by reference to Exhibit 10.18 to our
Registration Statement on Form S-1 filed May 26, 2005 (Commission File No.
333-125273))
|
|
|
10.7
|
Agreement between Nedcor Bank Limited and Net 1 Products
(Proprietary) Limited (incorporated by reference to Exhibit 10.16 to our
Registration Statement on Form S-1/A filed July 19, 2005 (Commission File
No. 333- 125273))
|
|
|
10.8
|
Patent and Technology Agreement by and among Net 1
Investment Holdings (Proprietary) Limited, Net 1 Applied Technology
Holding Limited and Nedcor Bank Limited (incorporated by reference to
Exhibit 10.19 to our Registration Statement on Form S-1 filed May 26, 2005
(Commission File No. 333-125273))
|
|
|
10.9
|
Patent and Technology Agreement by and among Net 1
Holdings S.a.r.l., Net 1 Applied Technology Holdings Limited and Nedcor
Bank Limited (incorporated by reference to Exhibit 10.19 to our
Registration Statement on Form S-1/A filed July 19, 2005 (Commission File
No. 333-125273))
|
71
10.10
|
Agreement by and among Nedbank Limited, Net 1 UEPS
Technologies, Inc., and Net 1 Applied Technologies South Africa Limited
(incorporated by reference to Exhibit 10.20 to our Registration Statement
on Form S-1/A filed July 19, 2005 (Commission File No. 333-125273))
|
|
|
10.11
|
Stock Purchase Agreement dated July 18, 2005, by and
among CI Law Trustees Limited for the San Roque Trust, Dr. Serge C.P.
Belamant, South African Private Equity Fund III, L.P., South African
Private Equity Trust III, Brenthurst Private Equity II Limited, Brenthurst
Private Equity South Africa I Limited, General Atlantic Partners 80, L.P.,
GapStar, LLC, GAP Coinvestments III, Brait International Limited, LLC, GAP
Coinvestments IV, LLC, GAPCO GmbH & Co. KG and Net 1 UEPS
Technologies, Inc. (incorporated by reference to Exhibit 10.21 to our
Registration Statement on Form S-1/A filed July 19, 2005 (Commission File
No. 333-125273))
|
|
|
10.12
|
Amendment No. 1 to the Stock Purchase Agreement dated as
of August 11, 2005 (incorporated by reference to Exhibit 10.23 to our Form
10-K filed on September 13, 2005)
|
|
|
10.13**
|
Banking Facility between Nedbank Limited and Net1 Applied
Technologies South Africa Limited dated as of April 30, 2010
|
|
|
10.14
|
Facility between Cash Paymaster Services Eastern Cape
(Proprietary) Limited and Nedbank Limited (incorporated by reference to
Exhibit 10.15 to our Registration Statement on Form S-1 filed May 26,
2005(Commission File No. 333-125273))
|
|
|
10.15
|
Addendum to Facility Letter Approval of Increase
Bridging Loan Facilities between Nedbank Limited and Net 1 Applied
Technology Holdings Limited (incorporated by reference to Exhibit 10.16 to
our Registration Statement on Form S-1 filed May 26, 2005 (Commission File
No. 333-125273))
|
|
|
10.16
|
Service Level Agreement between the Department of Social
Welfare and Population Development Kwa-Zulu Natal and Cash Paymaster
Services KwaZulu-Natal (Pty) Limited (incorporated by reference to Exhibit
10.4 to our Registration Statement on Form S-4 filed February 3, 2004
(Commission File No. 333-112463))
|
|
10.17
|
Addendum to service level agreement dated as of April 14,
2006, entered into by and between the Kwa-Zulu Natal Provincial
Government, in its Department of Welfare and Population Development and
Cash Paymaster Services (KwaZulu-Natal) (Pty) (Ltd) (incorporated by
reference to Exhibit 10.26 to our Annual Report on Form 10-K filed August
29, 2006 (Commission File No. 000-31203))
|
|
|
10.18
|
Letter agreement effective January 31, 2007 between Net 1
UEPS Technologies, Inc. and the South African Social Security Agency
extending Net1s service level agreement in the Kwa-Zulu Natal province
(incorporated by reference to Exhibit 10.31 to our Form 10-Q filed on
February 7, 2007)
|
|
|
10.19
|
Letter agreement effective March 7, 2008 between Net 1
UEPS Technologies, Inc. and the South African Social Security Agency
extending Net1s service level agreement in the Kwa-Zulu Natal province
(incorporated by reference to Exhibit 10.20 to our Form 10-K filed on
August 28, 2008)
|
|
|
10.20
|
Service Level Agreement between the Province of Eastern
Cape Department of Social Development and CPS Eastern Cape (Proprietary)
Limited (incorporated by reference to Exhibit 10.13 to our Registration
Statement on Form S-1 filed May 26, 2005 (Commission File No. 333-125273))
|
|
|
10.21
|
Letter agreement effective January 31, 2007 between Net 1
UEPS Technologies, Inc. and the South African Social Security Agency
extending Net1s service level agreement in the Eastern Cape province
(incorporated by reference to Exhibit 10.33 to our Form 10-Q filed on
February 7, 2007)
|
|
|
10.22
|
Letter agreement effective March 7, 2008 between Net 1
UEPS Technologies, Inc. and the South African Social Security Agency
extending Net1s service level agreement in the Eastern Cape province
(incorporated by reference to Exhibit 10.23 to our Form 10-K filed on
August 28, 2008)
|
|
|
10.23
|
Service level agreement dated March 31, 2006, between the
Limpopo Provincial Government in its Department of Health and Social
Development and Cash Paymaster Services (Northern) (Pty) Ltd (incorporated
by reference to Exhibit 10.26 to our Quarterly Report on Form 10-Q filed
May 9, 2006 (Commission File No. 000-31203))
|
|
|
10.24
|
Letter agreement effective January 31, 2007 between Net 1
UEPS Technologies, Inc. and the South African Social Security Agency
extending Net1s service level agreement in the Limpopo (formerly
Northern) province (incorporated by reference to Exhibit 10.32 to our Form
10-Q filed on February 7, 2007)
|
|
|
10.25
|
Letter agreement effective March 7, 2008 between Net 1
UEPS Technologies, Inc. and the South African Social Security Agency
extending Net1s service level agreement in the Limpopo province
(incorporated by reference to Exhibit 10.26 to our Form 10-K filed on
August 28, 2008)
|
|
|
10.26
|
Letter agreement effective January 31, 2007 between Net 1
UEPS Technologies, Inc. and the South African Social Security Agency
extending Net1s service level agreement in the North West province
(incorporated by reference to Exhibit 10.34 to our Form 10-Q filed on
February 7, 2007)
|
|
|
10.27
|
Letter agreement effective March 7, 2008 between Net 1
UEPS Technologies, Inc. and the South African Social Security Agency
extending Net1s service level agreement in the North West province
(incorporated by reference to Exhibit 10.28 to our Form 10-K filed on
August 28, 2008)
|
72
10.28
|
Letter agreement effective January 31, 2007 between Net 1
UEPS Technologies, Inc. and the South African Social Security Agency
extending Net1s service level agreement in the Northern Cape province
(incorporated by reference to Exhibit 10.35 to our Form 10-Q filed on
February 7, 2007)
|
|
|
10.29
|
Letter agreement effective March 7, 2008 between Net 1
UEPS Technologies, Inc. and the South African Social Security Agency
extending Net1s service level agreement in the Northern Cape province
(incorporated by reference to Exhibit 10.30 to our Form 10-K filed on
August 28, 2008)
|
|
|
10.30*
|
Amended and Restated Stock Incentive Plan of Net 1 UEPS
Technologies, Inc. (incorporated by reference to Exhibit A to Proxy
Statement filed on October 28, 2009)
|
|
|
10.31*
|
Form of Stock Option Agreement dated as of August 24,
2006, by and between Net 1 UEPS Technologies, Inc. and employees of Prism
Holdings Limited (incorporated by reference to Exhibit 10.27 to our Form
10-Q filed on November 8, 2006)
|
|
|
10.32*
|
Restricted Stock Agreement by and between Net 1 UEPS
Technologies, Inc. and Serge Christian Pierre Belamant
(incorporated by reference to Exhibit 10.36 to our Form 10-K filed on
August 29, 2007)
|
|
10.33*
|
Restricted Stock Agreement by and between Net 1 UEPS
Technologies, Inc. and Herman Gideon Kotze (incorporated by reference to
Exhibit 10.37 to our Form 10-K filed on August 29, 2007)
|
|
|
10.34*
|
Restricted Stock Agreement by and between Net 1 UEPS
Technologies, Inc. and Nitin Soma (incorporated by reference to Exhibit
10.39 to our Form 10-K filed on August 29, 2007)
|
|
|
10.35*
|
Form of Restricted Stock Agreement by and between Net 1
UEPS Technologies, Inc. and employees of Net 1 UEPS Technologies, Inc.
(incorporated by reference to Exhibit 10.40 to our Form 10-K filed on
August 29, 2007)
|
|
|
10.36*
|
Restricted Stock Agreement by and between Net 1 UEPS
Technologies, Inc. and Christopher Stefan Seabrooke dated February 11,
2008 (incorporated by reference to Exhibit 10.41 to our Form 10-Q filed on
May 8, 2008)
|
|
|
10.37*
|
Restricted Stock Agreement by and between Net 1 UEPS
Technologies, Inc. and Paul Edwards dated February 12, 2008 (incorporated
by reference to Exhibit 10.42 to our Form 10-Q filed on May 8, 2008)
|
|
|
10.38
|
Facility Agreement, dated August 27, 2008, by and among
Smartswitch Netherlands C.V., Net1 Applied Technologies Netherlands B.V.
and Investec Bank (UK) Limited (incorporated by reference to Exhibit 10.41
to our Form 10-Q filed on November 6, 2008)
|
|
|
10.39
|
Deed of Guarantee, dated August 27, 2008, by and between
Net 1 UEPS Technologies, Inc. and Investec Bank (UK) Limited (incorporated
by reference to Exhibit 10.42 to our Form 10-Q filed on November 6, 2008)
|
|
|
10.40
|
Charge Over Deposits, dated August 27, 2008, by and
between Net 1 UEPS Technologies, Inc. and Investec Bank (UK) Limited
(incorporated by reference to Exhibit 10.43 to our Form 10-Q filed on
November 6, 2008)
|
|
|
10.41
|
Cession and Pledge in Security, dated August 27, 2008, by
and between Net 1 UEPS Technologies, Inc. and Investec Bank (UK) Limited
(incorporated by reference to Exhibit 10.44 to our Form 10-Q filed on
November 6, 2008)
|
|
|
10.42
|
Deed of Subordination, dated August 27, 2008, by and
among Smartswitch Netherlands C.V., Net 1 UEPS Technologies, Inc. and
Investec Bank (UK) Limited (incorporated by reference to Exhibit 10.45 to
our Form 10-Q filed on November 6, 2008)
|
|
|
10.43*
|
Restricted Stock Agreement by and between Net 1 UEPS
Technologies, Inc. and Christopher Stefan Seabrooke dated August 27, 2008*
(incorporated by reference to Exhibit 10.46 to our Form 10-Q filed on
November 6, 2008)
|
|
|
10.44*
|
Restricted Stock Agreement by and between Net 1 UEPS
Technologies, Inc. and Paul Edwards dated August 27, 2008* (incorporated
by reference to Exhibit 10.47 to our Form 10-Q filed on November 6, 2008)
|
|
|
10.45*
|
Form of Stock Option Agreement, by and between Net 1 UEPS
Technologies, Inc. and recipients of stock options under the Amended and
Restated 2004 Stock Option Incentive Plan of Net 1 UEPS Technologies, Inc.
(incorporated by reference to Exhibit 10.48 to our Form 10-Q filed on
November 6, 2008)
|
|
|
10.46
|
Interim agreement entered into between SASSA and Cash
Paymaster Services (Proprietary) Limited dated March 25, 2009
(incorporated by reference to Exhibit 10.49 to our Form 10-Q filed on May
7, 2009)
|
|
|
10.47
|
Stock Repurchase Agreement by and between Net 1 UEPS
Technologies, Inc., South African Private Equity Fund III, L.P. and Brait
International Limited (incorporated by reference to Exhibit 10.48 to our
Form 10-K filed on August 27, 2009)
|
|
|
10.48*
|
Amendment to Restricted Stock Agreement for Non-U.S.
Employees by and between Net 1 UEPS Technologies, Inc. and Serge C. P.
Belamant dated March 18, 2010 (incorporated by reference to Exhibit 10.49
to our Form 10-Q filed on May 6, 2010)
|
|
|
10.49*
|
Amendment to Restricted Stock Agreement for Non-U.S.
Employees by and between Net 1 UEPS Technologies, Inc. and Herman G. Kotze
dated March 18, 2010 (incorporated by reference to Exhibit 10.50 to our
Form 10-Q filed on May 6, 2010)
|
|
|
12**
|
Statement of Ratio of Earnings to Fixed Charges
|
73
Confidential treatment has
been granted for certain portions of this Exhibit pursuant to Rule 24b-2 of the
Exchange Act, and thus, such portions have been omitted. A request to extend the
period for which confidential treatment has been granted is pending.
*
Indicates a management contract or compensatory plan or arrangement.
**
Filed herewith
74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
NET 1 UEPS TECHNOLOGIES, INC.
By: /s/ Serge C.P. Belamant
Serge C.P. Belamant
Chief Executive Officer, Chairman of
the Board and Director
Date: August 26, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
NAME
|
TITLE
|
|
DATE
|
|
|
|
|
/s/ Serge C.P. Belamant
Serge C.P. Belamant
|
Chief Executive Officer and Chairman of the
Board and
Director (Principal Executive Officer)
|
|
August 26, 2010
|
|
|
|
|
/s/ Herman Gideon Kotzé
Herman Gideon Kotzé
|
Chief Financial Officer, Treasurer and
Secretary and
Director (Principal Financial and Accounting Officer)
|
|
August 26, 2010
|
|
|
|
|
/s/ Antony Charles Ball
Antony Charles Ball
|
Director
|
|
August 26, 2010
|
|
|
|
|
/s/ Christopher Stefan Seabrooke
Christopher
Stefan Seabrooke
|
Director
|
|
August 26, 2010
|
|
|
|
|
/s/ Alasdair Jonathan Kemsley Pein
Alasdair
Jonathan Kemsley Pein
|
Director
|
|
August 26, 2010
|
|
|
|
|
/s/ Paul Edwards
Paul Edwards
|
Director
|
|
August 26, 2010
|
|
|
|
|
/s/ Tom Tinsley
Tom Tinsley
|
Director
|
|
August 26, 2010
|
FORM 10-K ITEM 8
NET 1 UEPS TECHNOLOGIES, INC.
LIST OF CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To The Shareholders of Net 1 UEPS Technologies, Inc.
We have audited the accompanying
consolidated balance sheets of Net 1 UEPS Technologies, Inc. and subsidiaries
(the Company) as of June 30, 2010 and 2009 and the related consolidated
statements of operations, changes in equity, comprehensive income and cash flows
for each of the three years in the period ended June 30, 2010. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in
accordance with standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated
financial statements, referred to above, present fairly, in all material
respects, the financial position of Net 1 UEPS Technologies, Inc. and
subsidiaries at June 30, 2010 and 2009, the results of their operations and
their cash flows for each of the three years in the period ended June 30, 2010
in conformity with accounting principles generally accepted in the United States
of America.
We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company's internal control over financial reporting as of
June 30, 2010, based on the criteria established in
Internal
ControlIntegrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated August 26, 2010,
expressed an unqualified opinion on the Company's internal control over
financial reporting.
/s/ Deloitte & Touche (South Africa)
Per PJ Smit
Partner
August 26, 2010
National Executive: GG Gelink Chief Executive AE Swiegers Chief
Operating Officer GM Pinnock Audit
DL Kennedy Tax & Legal and Risk
Advisory L Geeringh Consulting L Bam Corporate Finance CR Beukman Finance
TJ
Brown Clients & Markets NT Mtoba Chairman of the Board MJ Comber Deputy
Chairman of the Board
A full list of partners and directors is available on request
F-2
NET 1 UEPS TECHNOLOGIES, INC.
|
CONSOLIDATED BALANCE SHEETS
|
as of June 30, 2010 and 2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except share data)
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
153,742
|
|
$
|
220,786
|
|
Pre-funded social welfare grants receivable (Note 4)
|
|
6,660
|
|
|
4,930
|
|
Accounts receivable, net (Note 5)
|
|
41,854
|
|
|
42,475
|
|
Finance loans receivable, net (Note 5)
|
|
4,221
|
|
|
2,563
|
|
Deferred expenditure on smart cards
|
|
-
|
|
|
8
|
|
Inventory (Note 6)
|
|
3,622
|
|
|
7,250
|
|
Deferred income taxes (Note 14)
|
|
16,330
|
|
|
12,282
|
|
Total current assets before settlement assets
|
|
226,429
|
|
|
290,294
|
|
Settlement assets
|
|
83,661
|
|
|
-
|
|
Total current assets
|
|
310,090
|
|
|
290,294
|
|
OTHER LONG-TERM ASSETS, including available
for sale securities (Note 7)
|
|
7,423
|
|
|
7,147
|
|
PROPERTY, PLANT AND EQUIPMENT, net (Note 8)
|
|
7,286
|
|
|
7,376
|
|
EQUITY-ACCOUNTED INVESTMENTS (Note 7)
|
|
2,598
|
|
|
2,583
|
|
GOODWILL (Note 9)
|
|
76,346
|
|
|
116,197
|
|
INTANGIBLE ASSETS, net (Note 9)
|
|
68,347
|
|
|
75,890
|
|
TOTAL ASSETS
|
|
472,090
|
|
|
499,487
|
|
LIABILITIES
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
Accounts payable
|
|
3,596
|
|
|
5,481
|
|
Other payables (Note 10)
|
|
50,855
|
|
|
61,454
|
|
Income taxes payable
|
|
3,476
|
|
|
10,874
|
|
Total current liabilities before settlement obligations
|
|
57,927
|
|
|
77,809
|
|
Settlement obligations
|
|
83,661
|
|
|
-
|
|
Total current liabilities
|
|
141,588
|
|
|
77,809
|
|
DEFERRED INCOME TAXES (Note 14)
|
|
38,858
|
|
|
41,737
|
|
INTEREST BEARING LIABILITIES non-controlling interest
loans
|
|
4,343
|
|
|
4,185
|
|
COMMITMENTS AND CONTINGENCIES
|
|
-
|
|
|
-
|
|
TOTAL LIABILITIES
|
|
184,789
|
|
|
123,731
|
|
EQUITY
|
|
|
|
|
|
|
COMMON STOCK (Note
11)
Authorized
shares: 200,000,000 with $0.001 par
value;
Issued
and outstanding shares, net of treasury: 2010:
45,378,397;
2009:
54,506,487
|
|
59
|
|
|
59
|
|
PREFERRED
STOCK
Authorized
shares: 50,000,000 with $0.001 par
value;
Issued
and outstanding shares, net of treasury: 2010: -; 2009: -
|
|
-
|
|
|
-
|
|
ADDITIONAL PAID-IN CAPITAL
|
|
133,543
|
|
|
126,914
|
|
TREASURY SHARES, AT COST: 2010: 13,149,042;
2009: 3,927,516 (Note 11)
|
|
(173,671
|
)
|
|
(48,637
|
)
|
ACCUMULATED OTHER COMPREHENSIVE LOSS
|
|
(66,396
|
)
|
|
(58,472
|
)
|
RETAINED EARNINGS
|
|
392,343
|
|
|
353,353
|
|
TOTAL NET1 EQUITY
|
|
285,878
|
|
|
373,217
|
|
NON-CONTROLLING INTEREST
|
|
1,423
|
|
|
2,539
|
|
TOTAL EQUITY
|
|
287,301
|
|
|
375,756
|
|
TOTAL LIABILITIES AND EQUITY
|
$
|
472,090
|
|
$
|
499,487
|
|
See accompanying notes to consolidated financial statements.
F-3
NET 1 UEPS TECHNOLOGIES, INC.
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
for the years ended June 30, 2010, 2009 and 2008
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
(In thousands, except per share
data)
|
|
REVENUE (Note 12)
|
$
|
280,364
|
|
|
$
|
246,822
|
|
|
$
|
254,056
|
|
Sale of goods
|
|
36,228
|
|
|
|
47,003
|
|
|
|
39,021
|
|
Loan-based interest and
fees received
|
|
4,214
|
|
|
|
5,659
|
|
|
|
8,585
|
|
Services rendered
|
|
239,922
|
|
|
|
194,160
|
|
|
|
206,450
|
|
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, IT processing,
servicing and support
|
|
72,973
|
|
|
|
70,091
|
|
|
|
67,486
|
|
Selling, general and
administration
|
|
80,854
|
|
|
|
64,833
|
|
|
|
65,362
|
|
Depreciation and amortization
|
|
19,348
|
|
|
|
17,082
|
|
|
|
10,822
|
|
PROFIT ON SALE OF MICROLENDING BUSINESS
|
|
-
|
|
|
|
455
|
|
|
|
-
|
|
IMPAIRMENT OF GOODWILL (Note 9)
|
|
37,378
|
|
|
|
1,836
|
|
|
|
-
|
|
OPERATING INCOME
|
|
69,811
|
|
|
|
93,435
|
|
|
|
110,386
|
|
FOREIGN EXCHANGE GAIN RELATED TO SHORT-TERM
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENT
|
|
-
|
|
|
|
26,657
|
|
|
|
-
|
|
INTEREST INCOME, net
|
|
9,069
|
|
|
|
10,828
|
|
|
|
15,722
|
|
INCOME BEFORE INCOME TAXES
|
|
78,880
|
|
|
|
130,920
|
|
|
|
126,108
|
|
INCOME TAX EXPENSE (Note 14)
|
|
40,822
|
|
|
|
42,744
|
|
|
|
39,192
|
|
NET INCOME BEFORE EARNINGS (LOSS) FROM
EQUITY-
|
|
|
|
|
|
|
|
|
|
|
|
ACCOUNTED INVESTMENTS
|
|
38,058
|
|
|
|
88,176
|
|
|
|
86,916
|
|
EARNINGS (LOSS) FROM EQUITY-ACCOUNTED
INVESTMENTS (Note 7)
|
|
93
|
|
|
|
(874
|
)
|
|
|
(1,036
|
)
|
NET INCOME
|
|
38,151
|
|
|
|
87,302
|
|
|
|
85,880
|
|
(ADD) LESS: NET (LOSS) INCOME ATTRIBUTABLE
TO NON- CONTROLLING INTEREST
|
|
(839
|
)
|
|
|
701
|
|
|
|
(815
|
)
|
NET INCOME ATTRIBUTABLE TO NET1
|
$
|
38,990
|
|
|
$
|
86,601
|
|
|
$
|
86,695
|
|
Net income per share
(Note 15)
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings attributable to Net1
shareholders in $
|
|
0.84
|
|
|
|
1.53
|
|
|
|
1.50
|
|
Diluted earnings
attributable to Net1 shareholders in $
|
|
0.84
|
|
|
|
1.53
|
|
|
|
1.49
|
|
See accompanying notes to consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
F-4
NET 1 UEPS TECHNOLOGIES, INC.
|
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in
thousands)
|
Net 1 UEPS
Technologies, Inc. Shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special
convertible
|
|
|
B Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
preferred stock
|
|
|
Preference Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
of
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
control-
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Paid-In
|
|
|
Number
|
|
|
|
|
|
Number
|
|
|
|
|
|
Retained
|
|
|
AOC(L)I
|
|
|
Net1
|
|
|
ling
|
|
|
|
|
|
|
of Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
of Shares
|
|
|
Amount
|
|
|
of Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
(1)
|
|
|
Equity
|
|
|
Interests
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2007
|
|
51,730,547
|
|
$
|
52
|
|
|
(299,821
|
)
|
$
|
(7,795
|
)
|
$
|
112,167
|
|
|
5,656,110
|
|
$
|
5
|
|
|
41,676,625
|
|
$
|
7
|
|
$
|
180,552
|
|
$
|
(3,915
|
)
|
$
|
281,073
|
|
$
|
-
|
|
$
|
281,073
|
|
Adoption of new standard - adjustment to
opening retained earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(495
|
)
|
|
|
|
|
(495
|
)
|
|
|
|
|
(495
|
)
|
Options exercised
|
|
324,542
|
|
|
|
|
|
|
|
|
|
|
|
2,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,919
|
|
|
|
|
|
2,919
|
|
Restricted stock granted
|
|
594,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
-
|
|
Shares withheld by the
Company on automatic exercise of employee stock options
|
|
|
|
|
|
|
|
(6,448
|
)
|
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(155
|
)
|
|
|
|
|
(155
|
)
|
Settlement of loan note consideration for
stock issued in accordance with Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
544
|
|
|
|
|
|
544
|
|
Loan note consideration for
stock issued in accordance with Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(463
|
)
|
|
|
|
|
(463
|
)
|
Conversion from special convertible preferred
stock to common stock and cession of B class preference shares and B class
loans to Net 1 as a result of trigger events
|
|
773,681
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
(773,681
|
)
|
|
|
|
|
(5,700,807
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
-
|
|
Stock-based compensation
charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,257
|
|
|
|
|
|
4,257
|
|
Reversal of stock-based compensation charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(286
|
)
|
|
|
|
|
(286
|
)
|
Income tax benefits from
stock awards sold by employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144
|
|
|
|
|
|
144
|
|
Comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,695
|
|
|
|
|
|
86,695
|
|
|
|
|
|
86,695
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement
in foreign currency translation reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,905
|
)
|
|
(33,905
|
)
|
|
|
|
|
(33,905
|
)
|
Balance June 30, 2008
|
|
53,423,552
|
|
$
|
52
|
|
|
(306,269
|
)
|
$
|
(7,950
|
)
|
$
|
119,283
|
|
|
4,882,429
|
|
$
|
5
|
|
|
35,975,818
|
|
$
|
6
|
|
$
|
266,752
|
|
$
|
(37,820
|
)
|
$
|
340,328
|
|
$
|
-
|
|
$
|
340,328
|
|
(1) - Accumulated Other Comprehensive (Loss) Income
F-5
NET 1 UEPS TECHNOLOGIES, INC.
|
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in
thousands)
|
Net 1 UEPS
Technologies, Inc. Shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special convertible
|
|
|
B Class
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
preferred
stock
|
|
|
Preference
Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
of
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
control-
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Paid-In
|
|
|
Number
|
|
|
|
|
|
Number
|
|
|
|
|
|
Retained
|
|
|
|
|
|
Net1
|
|
|
ling
|
|
|
|
|
|
|
of
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
of
Shares
|
|
|
Amount
|
|
|
of
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
AOC(L)I
|
|
|
Equity
|
|
|
Interests
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2008
|
|
53,423,552
|
|
$
|
52
|
|
|
(306,269
|
)
|
$
|
(7,950
|
)
|
$
|
119,283
|
|
|
4,882,429
|
|
$
|
5
|
|
|
35,975,818
|
|
$
|
6
|
|
$
|
266,752
|
|
$
|
(37,820
|
)
|
$
|
340,328
|
|
$
|
-
|
|
$
|
340,328
|
|
Options exercised
|
|
84,414
|
|
|
1
|
|
|
|
|
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
254
|
|
|
|
|
|
254
|
|
Restricted stock granted
|
|
3,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
Stock granted pursuant to Net1 UTA
acquisition
|
|
40,134
|
|
|
-
|
|
|
|
|
|
|
|
|
981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
981
|
|
|
|
|
|
981
|
|
Settlement of loan note
consideration for stock issued in accordance with Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
20
|
|
Loan note consideration for stock issued in
accordance with Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
(3
|
)
|
Conversion from special
convertible preferred stock to common stock and cession of B class
preference shares and B class loans to Net 1 as a result of trigger events
|
|
4,882,429
|
|
|
6
|
|
|
|
|
|
|
|
|
4
|
|
|
(4,882,429
|
)
|
|
(5
|
)
|
|
(35,975,818
|
)
|
|
(6
|
)
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
(1
|
)
|
Stock-based compensation charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,239
|
|
|
|
|
|
5,239
|
|
Reversal of stock-based
compensation charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(213
|
)
|
|
|
|
|
(213
|
)
|
Treasury shares acquired
|
|
|
|
|
|
|
|
(3,621,247
|
)
|
|
(40,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,687
|
)
|
|
|
|
|
(40,687
|
)
|
Income tax benefits from
stock awards sold by
employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,350
|
|
|
|
|
|
1,350
|
|
Net1 UTA non- controlling interest acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,838
|
|
|
1,838
|
|
Comprehensive income (loss),
net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,601
|
|
|
|
|
|
86,601
|
|
|
701
|
|
|
87,302
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized
loss on available for sale investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,611
|
)
|
|
(1,611
|
)
|
|
|
|
|
(1,611
|
)
|
Movement in foreign
currency translation reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,041
|
)
|
|
(19,041
|
)
|
|
|
|
|
(19,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2009
|
|
58,434,003
|
|
$
|
59
|
|
|
(3,927,516
|
)
|
$
|
(48,637
|
)
|
$
|
126,914
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
$
|
353,353
|
|
$
|
(58,472
|
)
|
$
|
373,217
|
|
$
|
2,539
|
|
$
|
375,756
|
|
F-6
NET 1 UEPS TECHNOLOGIES, INC.
|
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in
thousands)
|
|
Net 1 UEPS
Technologies, Inc. Shareholder
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Paid-In
|
|
|
Retained
|
|
|
|
|
|
Total Net1
|
|
|
controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Earnings
|
|
|
AOC(L)I
|
|
|
Equity
|
|
|
Interests
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2009
|
|
58,434,003
|
|
$
|
59
|
|
|
(3,927,516
|
)
|
$
|
(48,637
|
)
|
$
|
126,914
|
|
$
|
353,353
|
|
$
|
(58,472
|
)
|
$
|
373,217
|
|
$
|
2,539
|
|
$
|
375,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
83,338
|
|
|
-
|
|
|
|
|
|
|
|
|
303
|
|
|
|
|
|
|
|
|
303
|
|
|
|
|
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
|
|
10,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of loan note
consideration for stock issued in accordance with 2004 Stock Incentive
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
417
|
|
|
|
|
|
|
|
|
417
|
|
|
|
|
|
417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,670
|
|
|
|
|
|
|
|
|
5,670
|
|
|
|
|
|
5,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury shares acquired
(Note 11)
|
|
|
|
|
|
|
|
(9,221,526
|
)
|
|
(125,034
|
)
|
|
|
|
|
|
|
|
|
|
|
(125,034
|
)
|
|
|
|
|
(125,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefits from
stock awards sold by employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
239
|
|
|
|
|
|
|
|
|
239
|
|
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss),
net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,990
|
|
|
|
|
|
38,990
|
|
|
(839
|
)
|
|
38,151
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss on available for sale investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(684
|
)
|
|
(684
|
)
|
|
|
|
|
(684
|
)
|
Movement in
foreign currency translation reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,240
|
)
|
|
(7,240
|
)
|
|
(277
|
)
|
|
(7,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2010
|
|
58,527,439
|
|
$
|
59
|
|
|
(13,149,042
|
)
|
$
|
(173,671
|
)
|
$
|
133,543
|
|
$
|
392,343
|
|
$
|
(66,396
|
)
|
$
|
285,878
|
|
$
|
1,423
|
|
$
|
287,301
|
|
See accompanying notes to consolidated financial
statements.
F-7
NET 1 UEPS TECHNOLOGIES, INC.
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
for the years ended June 30, 2010, 2009 and 2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
38,990
|
|
$
|
86,601
|
|
$
|
86,695
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
Net
unrealized loss on asset available for sale
|
|
(684
|
)
|
|
(19,041
|
)
|
|
(33,905
|
)
|
Movement in foreign currency translation reserve
|
|
(7,240
|
)
|
|
(1,611
|
)
|
|
-
|
|
Total other comprehensive loss
|
|
(7,924
|
)
|
|
(20,652
|
)
|
|
(33,905
|
)
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
31,066
|
|
|
65,949
|
|
|
52,790
|
|
Less (Add) comprehensive income (loss) attributable to non- controlling
interest
|
|
1,116
|
|
|
(701
|
)
|
|
-
|
|
Comprehensive income
attributable to Net1
|
$
|
29,950
|
|
$
|
66,650
|
|
$
|
52,790
|
|
See accompanying notes to consolidated financial statements.
F-8
NET 1 UEPS TECHNOLOGIES, INC.
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
for the years ended June 30, 2010, 2009 and 2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
38,151
|
|
$
|
87,302
|
|
$
|
85,880
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
19,348
|
|
|
17,082
|
|
|
10,822
|
|
(Earnings)
Loss from equity-accounted investments
|
|
(93
|
)
|
|
874
|
|
|
1,036
|
|
Fair value
adjustment
|
|
78
|
|
|
(4,402
|
)
|
|
(269
|
)
|
Interest
payable
|
|
301
|
|
|
425
|
|
|
434
|
|
Facility
fee amortized
|
|
-
|
|
|
1,100
|
|
|
-
|
|
Loss (Profit)
on disposal of property, plant and equipment
|
|
69
|
|
|
85
|
|
|
(110
|
)
|
Profit
on disposal of business
|
|
-
|
|
|
(455
|
)
|
|
-
|
|
Stock compensation
charge, net of forfeitures
|
|
5,670
|
|
|
5,026
|
|
|
3,971
|
|
Impairment
of goodwill
|
|
37,378
|
|
|
1,836
|
|
|
-
|
|
Decrease (Increase) in
accounts receivable, pre-funded social welfare
grants receivable and finance loans receivable
|
|
4,666
|
|
|
14,639
|
|
|
(9,983
|
)
|
Decrease
in deferred expenditure on smart cards
|
|
8
|
|
|
50
|
|
|
416
|
|
Decrease (Increase) in
inventory
|
|
3,867
|
|
|
(81
|
)
|
|
(1,138
|
)
|
(Decrease)
Increase in accounts payable and other payables
|
|
(27,138
|
)
|
|
(8,788
|
)
|
|
24,353
|
|
(Decrease) Increase in
taxes payable
|
|
(7,582
|
)
|
|
(3,339
|
)
|
|
1,369
|
|
(Decrease)
Increase in deferred taxes
|
|
(6,040
|
)
|
|
(4,586
|
)
|
|
1,979
|
|
Net cash provided by operating activities
|
|
68,683
|
|
|
106,768
|
|
|
118,760
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(2,730
|
)
|
|
(4,770
|
)
|
|
(3,563
|
)
|
Proceeds from disposal of property,
plant and equipment
|
|
106
|
|
|
159
|
|
|
160
|
|
Acquisition of available-for-sale securities
|
|
-
|
|
|
(3,422
|
)
|
|
-
|
|
Acquisition of MediKredit and FIHRST, net of
cash acquired (Note 3)
|
|
(10,319
|
)
|
|
-
|
|
|
-
|
|
Acquisition of Net1 UTA, net of cash acquired
(Note 3)
|
|
-
|
|
|
(97,992
|
)
|
|
-
|
|
Acquisition of RMT, net of
cash acquired (Note 3)
|
|
-
|
|
|
(1,381
|
)
|
|
-
|
|
Acquisition of and advance of loans to equity-accounted
investments
|
|
-
|
|
|
(450
|
)
|
|
(500
|
)
|
Net change in settlement assets
|
|
(77,243
|
)
|
|
-
|
|
|
-
|
|
Net cash used in investing
activities
|
|
(90,186
|
)
|
|
(107,856
|
)
|
|
(3,903
|
)
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
|
|
Proceeds from issue of common stock
|
|
720
|
|
|
271
|
|
|
2,845
|
|
Acquisition of treasury stock
(Note 11)
|
|
(126,304
|
)
|
|
(39,412
|
)
|
|
-
|
|
Proceeds from short-term loan facility (Note
19)
|
|
-
|
|
|
110,000
|
|
|
-
|
|
Repayment of short-term loan
facility (Note 19)
|
|
-
|
|
|
(110,000
|
)
|
|
-
|
|
Payment of facility fee (Note 19)
|
|
-
|
|
|
(1,100
|
)
|
|
-
|
|
Repayment of non-controlling
interest loan
|
|
-
|
|
|
-
|
|
|
-
|
|
Net change in settlement obligations
|
|
77,243
|
|
|
-
|
|
|
-
|
|
Proceeds from bank overdraft
|
|
-
|
|
|
2,843
|
|
|
1,462
|
|
Repayment of bank overdraft
|
|
(137
|
)
|
|
(2,850
|
)
|
|
(1,443
|
)
|
Net cash (used in) provided
by financing activities
|
|
(48,478
|
)
|
|
(40,248
|
)
|
|
2,864
|
|
Effect of exchange rate changes on cash
|
|
2,937
|
|
|
(10,353
|
)
|
|
(16,973
|
)
|
Net (decrease) increase in cash and cash
equivalents
|
|
(67,044
|
)
|
|
(51,689
|
)
|
|
100,748
|
|
Cash and cash equivalents beginning
of year
|
|
220,786
|
|
|
272,475
|
|
|
171,727
|
|
Cash and cash equivalents at end of year
|
$
|
153,742
|
|
$
|
220,786
|
|
$
|
272,475
|
|
See accompanying notes to consolidated financial statements.
F-9
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of
Business
Net 1 UEPS Technologies, Inc.
(Net1 and collectively with its consolidated subsidiaries, the Company) was
incorporated in the State of Florida on May 8, 1997. The Company provides a
smart-card based alternative payment system for the unbanked and underbanked
populations of developing economies. Its universal electronic payment system
(UEPS), uses secure smart cards that operate in real-time but offline, which
allows users to enter into transactions at any time with other card holders in
even the most remote areas so long as a smart card reader, which is often
portable and battery-powered, is available. The Company also develops and
provides secure transaction solutions and services for first world markets. The
Companys technology is widely used in South Africa today, where it distributes
pension and welfare payments to over 3.2 million beneficiaries in five of South
Africas nine provinces, processes debit and credit card payment transactions on
behalf of retailers that the Company believes represents nearly 65% of retailers
within the formal retail sector in South Africa through the Companys EasyPay
system, offers claims processing to more than 60% of South Africas funders and
providers of healthcare, processes payroll for over 700,000 employees through
its FIHRST system, and provides mobile telephone top-up transactions for the
major South African mobile carriers. During the past several years, the Company
has expanded its business to a number of markets outside South Africa, including
other countries on the African continent, Russia and other members of the
Commonwealth of Independent States (CIS), the Middle East, Asia and Latin
America.
Basis of
presentation
The accompanying consolidated
financial statements include subsidiaries over which Net1 exercises control and
have been prepared in accordance with accounting principles generally accepted
in the United States of America (GAAP).
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of
consolidation
The financial statements of
entities which are controlled by Net1, referred to as subsidiaries, are
consolidated. Inter-company accounts and transactions are eliminated upon
consolidation.
The Company, if it is the primary
beneficiary, consolidates entities which are considered to be Variable Interest
Entities (VIE). The primary beneficiary is considered to be the entity that
will absorb a majority of the entity's expected losses, receive a majority of
the entity's expected residual returns, or both. No entities were required to be
consolidated in terms of these requirements during the years ended June 30, 2010
and 2009.
Use of
estimates
The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Property, plant and
equipment
Property, plant and equipment are
shown at cost less accumulated depreciation. Property, plant and equipment are
depreciated on the straight-line basis at rates which are estimated to amortize
the assets to their anticipated residual values over their useful lives. Within
the following asset classifications, the expected economic lives are
approximately:
|
Computer equipment
|
3 to 5 years
|
|
Office equipment
|
2 to 10 years
|
|
Vehicles
|
4 to 8 years
|
|
Furniture and fittings
|
5 to 10 years
|
|
Plant and equipment
|
5 to 10 years
|
F-10
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Property, plant
and equipment (continued)
The gain or loss arising on the
disposal or retirement of an asset is determined as the difference between the
sales proceeds and the carrying amount of the asset and is recognized in
income.
Leasehold improvement
costs
Costs incurred in the adaptation
of leased properties to serve the requirements of the Company are capitalized
and amortized over the shorter of the term of the lease and the contract for
which the lease has been entered into.
Sales taxes
Revenue and expenses are
presented net of sales, use and value added taxes, as the case may be.
Income taxes
The Company provides for income
taxes using the asset and liability method. This approach recognizes the amount
of taxes payable or refundable for the current year, as well as deferred tax
assets and liabilities for the future tax consequence of events recognized in
the financial statements and tax returns. Deferred income taxes are adjusted to
reflect the effects of changes in tax laws or enacted tax rates.
The tax rate in South Africa
varies depending on whether income is distributed. During the years ended June
30, 2010 and 2009, the income tax rate was 28%, but upon distribution an
additional tax (STC) of 10% was due based on the amount of dividends declared
net of dividends received during a dividend cycle. The Company therefore
measures its income taxes and deferred income taxes for the year ended June 30,
2010 and 2009 using a combined rate of 34.55% . The income tax rate during the
year ended June 30, 2008, was 29%, and the STC rate was 10.0%, which resulted in
a combined rate of 35.45% .
In establishing the appropriate
income tax valuation allowances, the Company assesses the realizability of its
net deferred tax assets, and based on all available evidence, both positive and
negative, determines whether it is more likely than not that the net deferred
tax assets or a portion thereof will be realized.
Uncertain tax positions are
recognized in the financial statements for positions which are considered more
likely than not of being sustained based on the technical merits of the position
on audit by the tax authorities. The measurement of the tax benefit recognized
in the financial statements is based upon the largest amount of tax benefit
that, in managements judgement, is greater than 50% likely of being realized
based on a cumulative probability assessment of the possible outcomes.
The Companys policy is to
include interest related to unrecognized tax benefits in interest income, net
and penalties in selling, general and administration in the consolidated
statements of operations.
Goodwill
Goodwill represents the excess of
the purchase price of an acquired enterprise over the fair values of the
identifiable assets acquired and liabilities assumed. The Company tests for
impairment of goodwill on an annual basis and at any other time if events or
circumstances change that would more likely than not reduce the fair value of
the reporting unit goodwill below its carrying amount.
Circumstances that could trigger
an impairment test include but are not limited to: a significant adverse change
in the business climate or legal factors; an adverse action or assessment by a
regulator; unanticipated competition; loss of key personnel; the likelihood that
a reporting unit or significant portion of a reporting unit will be sold or
otherwise disposed; and results of testing for recoverability of a significant
asset group within a reporting unit.
F-11
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Goodwill
(continued)
If the carrying amount of the
reporting unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recorded in the statement of operations. Measurement of the
fair value of a reporting unit is based on one or more of the following fair
value measures: the amount at which the unit as a whole could be bought or sold
in a current transaction between willing parties; present value techniques of
estimated future cash flows; or valuation techniques based on multiples of
earnings or revenue, or a similar performance measure.
Intangible
assets
Intangible assets are shown at
cost less accumulated amortization. Intangible assets are amortized over the
following useful lives:
|
Customer relationships
|
1 to 15 years
|
|
Software and unpatented technology
|
3 years
|
|
FTS patent
|
10 years
|
|
Exclusive licenses
|
7 years
|
|
Trademarks
|
3 to 20 years
|
|
Customer databases
|
3 years
|
Intangible assets are
periodically evaluated for recoverability, and those evaluations take into
account events or circumstances that warrant revised estimates of useful lives
or that indicate that impairment exists.
Equity-accounted
investments
The Company uses the equity
method to account for investments in companies when it has significant influence
but not control over the operations of the equity-accounted company. Under the
equity method, the Company initially records the investment at cost and then
adjusts the carrying value of the investment to recognize the proportional share
of the equity-accounted companys net income (loss). In addition, dividends
received from the equity-accounted company reduce the carrying value of the
Companys investment.
Inventory
Inventory is valued at the lower
of cost and market value. Cost is determined on a first-in, first-out basis and
includes transport and handling costs.
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 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 the statement of operations for
the period.
F-12
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue
recognition
The Company recognizes revenue
when:
-
there is persuasive evidence of an agreement or arrangement;
-
delivery of products has occurred or services have been rendered;
-
the sellers price to the buyer is fixed or determinable; and
-
collectability is reasonably assured.
The Companys principal revenue
streams and their respective accounting treatments are discussed below:
Fees
The Company provides a state
welfare benefit distribution service to provincial governments in South Africa.
Fees are computed based on the number of beneficiaries included in the
government payfile. Fee income received for these services is recognized in the
statement of operations when distributions have been made to the
beneficiaries.
Beneficiaries are able to load
their welfare grants at merchants enrolled in the Companys participating
retailer program in certain provinces. There is no charge to the beneficiary to
load the grant onto a smart card at the merchant location, however, a fee is
charged to the merchant for purchases made at the merchant using the smart card.
A fee is also charged to the merchant when the beneficiary makes a cash
withdrawal. Fee income received for these services is recognized in the
statement of operations when the transaction occurs.
The Company provides an automated
payment collection service to third parties, for which it charges monthly fees.
These fees are recognized in the statement of operations as the underlying
services are performed.
The Company provides
medical-related claims adjudication, reconciliation and settlement services
(medical-related claim service) to customers, for which it charges fees. These
fees are recognized in the statement of operations as the underlying services
are performed.
Contract
variations fees
The Company records additional
revenue from variations to contracts for the provision of state welfare
benefits, if:
-
there is persuasive evidence of an agreement; and
-
collectability is reasonably assumed; and
-
all material terms and conditions of the agreement have been adhered to.
Hardware
sales
Revenue from hardware sales is
recognized when risk of loss has transferred to the customer and there are no
unfulfilled Company obligations that affect the customers final acceptance of
the arrangement. Any cost of warranties and remaining obligations that are
inconsequential or perfunctory are accrued when the corresponding revenue is
recognized.
To the extent that sales of
hardware are made in an arrangement that includes software that is more than
incidental, the Company considers post-contract maintenance and technical
support or other future obligations which could impact the timing and amount of
revenue recognized.
Software
Revenue from licensed software is
recognized on a subscription basis over the period that the client is entitled
to use the license. Revenue from the sale of software is recognized if all
revenue recognition criteria have been met. Post-contract maintenance and
technical support in respect of software is generally negotiated and sold as a
separate service and is recognized over the period such items are delivered.
F-13
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition
(continued)
Interest
income
Interest income earned from
micro-lending activities is recognized in the statement of operations as it
falls due, using the effective interest rate method by reference to the constant
interest rate stated in each loan agreement. Fees earned for establishing loans
are recognized over the period of the loan as interest income.
Capital and interest that is in
arrears and determined to be doubtful is provided for in full if the capital
outstanding has not been insured. The Company insures against losses of capital
related to certain loans. For these loans, provision is made for the amount of
interest previously recognized in the statement of operations if it is
determined that the interest outstanding will not be collected.
Systems
implementation projects
The Company undertakes smart card
system implementation projects. The hardware and software installed in these
projects are in the form of customized systems, which ordinarily involve
modification to meet the customers specifications. Software delivered under
such arrangements is available to the customer permanently, subject to the
payment of annual license fees. Revenue for such arrangements is recognized
under the percentage of completion method, save for annual license fees, which
are recognized in the period to which they relate. Up-front and interim payments
received are recorded as client deposits until customer acceptance.
The Companys customer
arrangements may have multiple deliverables. Generally, the Companys multiple
element arrangements fall within the scope of specific accounting standards that
provide guidance regarding the separation of elements in multiple-deliverable
arrangements and the allocation of consideration among those elements. If not,
the Company unbundles multiple element arrangements into separate units of
accounting when the delivered element(s) has stand-alone value and fair value of
the undelivered element(s) exists.
Terminal
rental income
The Company leases terminals to
merchants participating in its merchant acquiring system. Operating rental
income is recognized monthly on a straight-line basis in accordance with the
lease agreement.
Other
income
Revenue from service and
maintenance activities is charged to customers on a time-and-materials basis and
is recognized in the statement of operations as services are delivered to
customers.
Research
and development expenditure
Research and development
expenditures is charged to net income in the period in which it is incurred.
During the years ended June 30, 2010, 2009 and 2008, the Company incurred
research and development expenditures of $7.6 million, $8.9 million and $5.7
million, respectively.
Computer
software development
Product development costs in
respect of software intended for sale to licensees are expensed as incurred
until technological feasibility is attained. Technological feasibility is
attained when the Companys software has completed system testing and has been
determined to be viable for its intended use. The time between the attainment of
technological feasibility and completion of software development is generally
short with immaterial amounts of development costs incurred during this period.
F-14
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Computer software
development (continued)
Costs in respect of the
development of software for the Companys internal use are expensed as incurred,
except to the extent that these costs are incurred during the application
development stage. All other costs including those incurred in the project
development and post-implementation stages are expensed as incurred.
Settlement assets and
settlement obligations
Settlement assets comprise (1)
cash received from the South African government that the Company holds pending
disbursement to beneficiaries of social welfare grants, (2) cash received from
health care plans which the Company disburses to health care service providers
once it adjudicates claims and (3) cash received from customers on whose behalf
the Company processes payroll payments that the Company will disburse to
customer employees, payroll-related payees and other payees designated by the
customer.
Settlement obligations comprise
(1) amounts that the Company is obligated to disburse to beneficiaries of social
welfare grants, (2) amounts which are due to health care service providers after
claims have been adjudicated and reconciled, provided that the Company shall
have previously received such funds from health care plan customers and (3)
amounts that the Company is obligated to pay to customer employees,
payroll-related payees and other payees designated by the customer.
Loan provisions and
allowance for doubtful debts
UEPS-based
lending
No provision is required for
UEPS-based lending. The principal amount of the loan is insured and the amount
due to be recovered from the insurer is recorded as a receivable once the amount
is deemed unrecoverable. Default is considered when the beneficiary dies or can
not be found. Once the loan is deemed unrecoverable, service fees related to the
unrecoverable insured loan is not recognized.
Traditional
microlending
The Company sold its traditional
microlending business during fiscal 2009. Prior to disposition of this business,
a specific provision was established for all traditional microlending loans
where it was considered likely that all or a portion of the principal amount of
the loan or interest thereon would not be repaid by the borrower. Default was
considered likely after a specified period of repayment default, which was
generally not more than 150 days. The provision was assessed based on a review
by management of the ageing of outstanding amounts, the payment history in
relation to those specific accounts and the overall default history.
Allowance
for doubtful debts
A specific provision is
established where it is considered likely that all or a portion of the amount
due from customers renting point of sale (POS) equipment, receiving support
and maintenance or transaction services or purchasing licenses from the Company
will not be recovered. Non-recoverability is assessed based on a review by
management of the ageing of outstanding amounts, the location of the customer
and the payment history in relation to those specific amounts.
Stock-based
compensation
Stock-based compensation
represents the cost related to stock-based awards granted. The Company measures
stock-based compensation cost at the grant date, based on the estimated fair
value of the award, and recognizes the cost as an expense on a straight-line
basis (net of estimated forfeitures) over the requisite service period. In
respect of awards with only service conditions that have a graded vesting
schedule, the Company recognizes compensation cost on a straight-line basis over
the requisite service period for the entire award. The forfeiture rate is
estimated using historical trends of the number of awards forfeited prior to
vesting. The expense is recorded in the statement of operations based on the
recipients respective functions.
F-15
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-based
compensation (continued)
The Company records deferred tax
assets for awards that result in deductions on the Companys income tax returns,
based on the amount of compensation cost recognized and the Companys statutory
tax rate in the jurisdiction in which it will receive a deduction. Differences
between the deferred tax assets recognized for financial reporting purposes and
the actual tax deduction reported on the Companys income tax return are
recorded in additional paid-in capital (if the tax deduction exceeds the
deferred tax asset) or in the statement of operations (if the deferred tax asset
exceeds the tax deduction and no additional paid-in capital exists from previous
awards).
Recent accounting
pronouncements adopted
The following summary of recent
accounting pronouncements reflects only the new authoritative accounting
guidance issued that is relevant and applicable to the Company.
On July 1, 2009, the Financial
Accounting Standards Board (FASB) issued the FASB Accounting Standards
Codification (the Codification) as the single source of authoritative GAAP
recognized by the FASB to be applied by non-governmental entities. The
Codification supersedes all existing non-SEC accounting and reporting standards.
Following the issue of the Codification, the FASB has issued new guidance in the
form of Accounting Standards Updates. The Codification was effective for the
Company from July 1, 2009. The Codification did not impact the Companys
financial position or results of operations. The following summary of recent
accounting pronouncements reflects only the new authoritative accounting
guidance issued by FASB that is relevant and applicable to the Company.
On July 1, 2009, the Company
adopted guidance issued by FASB regarding business combinations. This guidance
retains the fundamental requirements on business combinations that the
acquisition method of accounting (previously referred to 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.
On July 1, 2009, the Company
adopted guidance issued by the FASB regarding non-controlling interests. This
guidance establishes a single method of accounting for changes in a parents
ownership interest in a subsidiary that does not result in de-consolidation. It
clarifies that all of those transactions are equity transactions if the parent
retains its controlling financial interest in the subsidiary. The adopted
guidance was effective for the Company, prospectively, beginning July 1, 2009,
except for the presentation and disclosure requirements which were applied
retrospectively for all periods presented. Accordingly, the Companys
consolidated balance sheet as of June 30, 2009, and consolidated statement of
operations and cash flows for the years ended June 30, 2009 and 2008 have been
revised to conform to the new presentation requirements.
On July 1, 2009, the Company
adopted guidance issued by the FASB regarding unvested share-based payment
awards. The guidance provides 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. The impact of adoption decreased
previously reported basic earnings per share by $0.02 for each of the years
ended June 30, 2009 and 2008, and previously reported diluted earnings per share
by $0.01 for each of the years ended June 30, 2009 and 2008.
F-16
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting
pronouncements adopted (continued)
On July 1, 2009, the Company
adopted guidance issued by FASB on fair value measurements for non-financial
assets and non-financial liabilities. 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 guidance issued by FASB on the determination of the useful life of
intangible assets. This guidance amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset. The adoption of this guidance has not had a
material effect on the Companys results of operations or financial
position.
On October 1, 2009, the Company
adopted guidance issued by the FASB which clarifies the treatment of certain
distributions to shareholders that have both stock and cash components. The
stock portion of such distributions is considered a share issuance that is
reflected in earnings per share prospectively and is not a stock dividend. The
adoption of this guidance did not have a material effect on the Companys
results of operations or financial position; however, it may affect any future
stock distributions.
In January 2010, the FASB issued
guidance on fair value measurement and disclosures which amends existing
guidance to add new requirements for disclosures about transfers into and out of
Levels 1 and 2 and separate disclosures about purchases, sales, issuance, and
settlements relating to Level 3 measurements. The guidance also clarifies
existing fair value disclosures about the level of disaggregation and about
inputs and valuation techniques used to measure fair value. However, the final
guidance does not require entities to provide sensitivity disclosures. The FASB
has indicated that it will consider whether to require sensitivity disclosures
jointly with the International Accounting Standards Board as part of the new
convergence project on fair value measurements and disclosures. The guidance was
effective for the Company for the year ended June 30, 2010. The adoption of the
guidance did not impact the Companys consolidated financial position, results
of operations or cash flows.
Recent accounting
pronouncements not yet adopted as of June 30, 2010
In September 2009, the FASB
issued guidance on revenue recognition in multiple-deliverable revenue
arrangements. The guidance amends the existing guidance on allocating
consideration received between the elements in a multiple-deliverable
arrangement and establishes a selling price hierarchy for determining the
selling price of a deliverable. The selling price used for each deliverable will
be based on vendor-specific objective evidence (VSOE) if available,
third-party evidence if VSOE is not available, or estimated selling price if
neither VSOE nor third-party evidence is available. The guidance 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 than
the assumptions of a market place participant. The guidance eliminates the
residual method of allocation and requires that arrangement consideration be
allocated using the relative selling price method. It also significantly expands
the disclosures related to a vendors multiple-deliverable revenue arrangements.
It will be effective prospectively for revenue arrangements entered into or
materially modified for fiscal years beginning on or after June 15, 2010, and
will therefore be adopted by the Company, effective July 1, 2010. The Company is
currently evaluating the impact of adopting this guidance.
In October 2009, the FASB issued
guidance which amends the scope of existing software revenue recognition
accounting. Tangible products containing software components and non-software
components that function together to deliver the products essential
functionality would be scoped out of the accounting guidance on software and
accounted for based on other appropriate revenue recognition guidance. This
guidance must be adopted in the same period that the Company adopts the amended
accounting for arrangements with multiple deliverables described in the
preceding paragraph and therefore will become effective for the Company for
revenue arrangements entered into or materially modified on or after July 1,
2010. Earlier application is permitted with required transition disclosures
based on the period of adoption. The Company is currently evaluating the impact
of the adoption of this guidance.
F-17
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting
pronouncements not yet adopted as of June 30, 2010 (continued)
In December 2009, the FASB issued
new guidance on the consolidation of variable interest entities. This guidance
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. The guidance also requires a reporting entity to provide additional
disclosures about its involvement with variable interest entities and any
significant changes in risk exposure due to such involvement. This guidance is
effective from the first annual reporting period beginning on or after November
15, 2009, and will therefore be adopted by the Company, effective July 1, 2010.
The Company is currently evaluating the impact of adopting this guidance.
In December 2009, the FASB issued
new guidance issued on the accounting for transfers of financial assets. This
guidance requires more information about transfers of financial assets,
including securitization transactions, and where entities have continuing
exposure to the risks related to transferred financial assets. It eliminates the
concept of a qualifying special-purpose entity, changes the requirements for
de-recognizing financial assets, and requires additional disclosures. This
guidance is effective from the first annual reporting period beginning on or
after November 15, 2009, and will therefore be adopted by the Company, effective
July 1, 2010. The Company is currently evaluating the impact of adopting this
guidance.
In July 2010, the FASB issued
amendments to the disclosure requirements about the credit quality of financing
receivables and the allowance for credit losses. The purpose of the additional
disclosures is to enable users of financial statements to better understand the
nature of credit risk inherent in an entitys portfolio of financing receivables
and how that risk is analyzed. For end of period balances, the new disclosures
are required to be made in all interim and annual periods ending on or after
December 15, 2010. For activity during a reporting period, the disclosures are
required to be made in all interim and annual periods after January 1, 2011.
These changes will not have an impact on the Companys consolidated financial
results as this guidance only relates to additional disclosures.
3. ACQUISITIONS
2010
Acquisitions
MediKredit
Integrated Healthcare Solutions (Proprietary) Limited
(MediKredit)
On January 1, 2010, the Company
acquired 100% of MediKredit, a South African private company, for ZAR 74 million
(approximately $10 million) in cash. MediKredit offers transaction processing,
financial and clinical risk management solutions to both health care plans and
health care service providers, primarily in South Africa. The Company believes
that the acquisition of MediKredit has increased the depth and diversity of the
management team with the addition of experienced executives, and provides the
potential to strengthen its position as the leading independent transaction
processor in South Africa and expand its offering in some of its existing
markets like Ghana and Nigeria, where national health insurance schemes have
been introduced and where the UEPS platform and installed card base could offer
a complete national solution when combined with the MediKredit system. In
addition, MediKredit provides the Company with a small, strategic entry point
for the US healthcare administration market. The rapidly changing US healthcare
and administration industry provides a significant opportunity for the
introduction of MediKredits technology. Finally, the Company and MediKredit
both operate similar back-end systems, which require skilled developers and
technicians and the addition of MediKredit would significantly broaden the
Companys base of qualified development employees.
FIHRST
Management Services (Proprietary) Limited business and related software
(collectively FIHRST)
On March 31, 2010, the Company
acquired FIHRST, a South African business, for ZAR 70 million (approximately $9
million). The purchase consideration was paid in cash in the first week of April
2010. FIHRST offers a third-party payroll payments solution to companies in
South Africa.
F-18
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
3. ACQUISITIONS (continued)
2010 Acquisitions
(continued)
FIHRST
Management Services (Proprietary) Limited business and related software
(collectively FIHRST) (continued)
The FIHRST acquisition provides
the Company with access to employees of FIHRSTs customers which the Company
believes will provide it with the opportunity to market its range of transaction
processing products and financial services, including bill payments, insurance
products, prepaid utilities and third party payments to these employees. The
Company will have the potential to promote its wage payment initiative by
offering the employees of FIHRST customers its banking solutions through the
Companys relationship with Grindrod Bank Limited. Finally, the Company and
FIHRST operate on different IT platforms, which will result in additional
resources with complementary IT skills. The Company may also realize IT-related
cost synergies in areas such as disaster recovery and computer maintenance and
support.
The preliminary purchase price
allocation of the MediKredit and FIHRST acquisitions, translated at the foreign
exchange rates applicable on the date of acquisition, are provided in the table
below:
|
|
MediKredit
|
|
|
FIHRST
|
|
|
Total
|
|
Cash and cash equivalents
|
$
|
9,005
|
|
$
|
77
|
|
$
|
9,082
|
|
Accounts receivable, net
|
|
2,940
|
|
|
640
|
|
|
3,580
|
|
Property, plant and equipment
|
|
1,290
|
|
|
106
|
|
|
1,396
|
|
Intangible assets (see Note 9)
|
|
6,070
|
|
|
7,983
|
|
|
14,053
|
|
Trade and other payables
|
|
(9,931
|
)
|
|
(337
|
)
|
|
(10,268
|
)
|
Deferred tax assets
|
|
2,718
|
|
|
436
|
|
|
3,154
|
|
Deferred tax liabilities (see Note 14)
|
|
(2,097
|
)
|
|
(623
|
)
|
|
(2,720
|
)
|
Goodwill (see Note 9)
|
|
-
|
|
|
1,187
|
|
|
1,187
|
|
Total purchase price
|
$
|
9,995
|
|
$
|
9,469
|
|
$
|
19,464
|
|
Pro forma results of operations
have not been presented because the effect of the MediKredit and FIHRST
acquisitions, individually and in the aggregate, were not material to the
Companys consolidated results of operations. During the year ended June 30,
2010, the Company incurred transaction-related expenditures of $0.4 million
related to these acquisitions. Such expenditures were recognized in the
Companys consolidated statements of operations.
2009
Acquisitions
Net1
Universal Electronic Technologies (Austria) AG, formerly BGS Smartcard Systems
AG (Net1 UTA)
On August 27, 2008, the Company
acquired 80.1% of the issued share capital of Net1 UTA for a total consideration
of $101.6 million in cash and the issuance of an aggregate of 40,134 shares of
Net1 common stock to certain former Net1 UTA shareholders. As described in note
19, the Company financed the cash portion of the purchase price with the
proceeds of a short-term bank loan which was repaid in full on October 16, 2008.
For practical purposes the acquisition date was set as August 31, 2008.
The following table sets forth
the components of the purchase price for the Net1 UTA acquisition using exchange
rates applicable as of August 31, 2008:
Cash paid to former Net1 UTA shareholders
|
$
|
103,517
|
|
40,134 shares of Net1 common stock valued at $24.46 per share
issued to certain former Net1 UTA shareholders
|
|
982
|
|
Costs directly related to the acquisition
|
|
2,915
|
|
Total purchase price
|
$
|
107,414
|
|
F-19
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
3. ACQUISITIONS (continued)
2009 Acquisitions
(continued)
Net1
Universal Electronic Technologies (Austria) AG, formerly BGS Smartcard Systems
AG (Net1 UTA) (continued)
The following table sets
forth the allocation of the purchase price:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
6,283
|
|
Accounts receivable, net
|
|
3,218
|
|
Inventory
|
|
740
|
|
Property, plant and equipment
|
|
350
|
|
Intangible assets (see Note 9)
|
|
68,859
|
|
Trade and other payables
|
|
(7,181
|
)
|
Other long-term liabilities
|
|
(631
|
)
|
Deferred tax assets
|
|
10,657
|
|
Deferred tax liabilities (see Note 14)
|
|
(17,214
|
)
|
Minority interests
|
|
(1,838
|
)
|
Goodwill (see Note 9)
|
|
44,171
|
|
Total purchase price
|
$
|
107,414
|
|
RMT
Systems (Pty) Limited (RMT)
During the fourth quarter of
fiscal 2009, the Company acquired all the stock of RMT, a South African private
company, for a total consideration of $1.4 million in cash. RMT Systems sells
prepaid electricity in the greater Cape Town area in South Africa. The Company
intends to integrate this offering into its EasyPay switching offering. The
balance sheet, statement of operations and cash flows of RMT are not significant
to the Company.
2008
Acquisitions
None
4. 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 July 2010 payment service
commenced during the last three days of June 2010 and was offered at merchant
locations only.
F-20
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
5. ACCOUNTS RECEIVABLE AND FINANCE LOANS RECEIVABLE,
net
|
|
|
2010
|
|
|
|
|
|
2009
|
|
|
Accounts receivable, trade, net
|
$
|
|
31,593
|
|
|
|
$
|
|
31,286
|
|
|
Accounts receivable, trade, gross
|
|
|
32,400
|
|
|
|
|
|
31,681
|
|
|
Allowance for doubtful accounts
receivable, end of year
|
|
|
807
|
|
|
|
|
|
395
|
|
|
Allowance for doubtful accounts
receivable, beginning of year re-measured at
year end rates
|
|
|
407
|
|
|
|
|
|
262
|
|
|
Allowance
acquired in acquisitions, re-measured at year end rates
|
|
|
75
|
|
|
|
|
|
-
|
|
|
Allowance charged to statement
of operations, re-measured at year end rates
|
|
|
640
|
|
|
|
|
|
209
|
|
|
Amount
utilized, re-measured at year end rates
|
|
|
(315
|
)
|
|
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid establishment costs related to Grindrod
opportunity
|
|
|
385
|
|
|
|
|
|
501
|
|
|
Other receivables
|
|
|
9,876
|
|
|
|
|
|
10,688
|
|
|
Total accounts receivable, net
|
$
|
|
41,854
|
|
|
|
$
|
|
42,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance loans receivable, net
|
|
|
|
|
|
|
|
|
|
|
|
UEPS-based lending
|
$
|
|
4,221
|
|
|
|
$
|
|
2,560
|
|
|
Traditional microlending
net
|
|
|
-
|
|
|
|
|
|
3
|
|
|
Traditional microlending
gross
|
|
|
-
|
|
|
|
|
|
229
|
|
|
Allowance
for doubtful microlending loans, end of year
|
|
|
-
|
|
|
|
|
|
226
|
|
|
Allowance for
doubtful microlending loans, beginning of year re-measured
at year end rates
|
|
|
234
|
|
|
|
|
|
1,017
|
|
|
Sale
of traditional microlending business, re-measured at year end rates
|
|
|
4
|
|
|
|
|
|
(1,259
|
)
|
|
Allowances
charged to the statement of operations, re-measured at year end
rates
|
|
|
(238
|
)
|
|
|
|
|
468
|
|
|
Amounts utilized, re-measured at year end rates
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finance loans receivable, net
|
$
|
|
4,221
|
|
|
|
$
|
|
2,563
|
|
|
Receivables from customers
renting POS equipment from the Company are included in accounts receivable,
trade, and are stated net of an allowance for certain amounts that the Companys
management has identified may be unrecoverable. Accounts receivable, trade, also
includes amounts due by customers from the sale of hardware, software licenses
and SIM cards and provision of transaction processing services. The allowances
for credit losses acquired in the MediKredit and FIHRST transactions are
presented in the tables above, stated at exchange rates prevailing at June 30,
2010.
The Company has a co-operation
agreement with Grindrod Bank Limited (Grindrod) for the establishment of a
retail banking division within Grindrod that will focus on deploying its wage
payment solution in South Africa. Under the co-operation agreement, the Company
was required to initially deposited $0.7 million to facilitate the establishment
of this retail banking decision. The Company opened a bank account with Grindrod
and transferred the funds and these funds are drawn down as and when required by
the retail banking division. A portion of these funds have been utilized as of
June 30, 2010 and 2009, and the remaining portion of these funds is $0.4 million
and $0.5 million, respectively.
In March 2009, the Company sold
its traditional microlending business, recognizing a loss on sale of
approximately $0.7 million. Pursuant to the agreement with the purchaser the
Company is responsible for the collection of loans granted prior to the sale
date, and any monies collected in excess of the Finance loans receivable, net
balance as of the effective sale date, accrue to the Company. In the quarter
ended June 30, 2009, the Company collected $1.2 million which had previously
been provided against. Consequently, the loss on sale was revised to a profit on
sale of $0.5 million.
F-21
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
6. INVENTORY
The Companys inventory comprised
the following categories as of June 30, 2010 and 2009.
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Raw materials
|
$
|
75
|
|
$
|
153
|
|
Finished goods
|
|
3,547
|
|
|
7,097
|
|
|
$
|
3,622
|
|
$
|
7,250
|
|
7. FAIR VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED
INVESTMENTS
Fair value of financial
instruments
Initial
recognition and measurement
Financial instruments are
recognized when the Company becomes a party to the transaction. Initial
measurements are at cost, which includes transaction costs subsequent to initial
recognition. These instruments are measured as set out below:
Risk
managemen
t
The Company seeks to reduce its
exposure to currencies other than the South African rand through a policy of
matching, to the extent possible, assets and liabilities denominated in those
currencies. In addition, the Company uses financial instruments in order to
economically hedge its exposure to exchange rate and interest rate fluctuations
arising from its operations. The Company is also exposed to equity price and
liquidity risks as well as credit risks.
Currency
exchange risk
The Company is subject to
currency exchange risk because it purchases inventories that it is required to
settle in other currencies, primarily the euro and US dollar. The Company has
used forward contracts in order to limit its exposure in these transactions to
fluctuations in exchange rates between the South African rand, on the one hand,
and the US dollar and the euro, on the other hand.
The Companys outstanding
foreign exchange contracts are as follows:
As of June 30, 2010
|
|
|
|
|
|
|
|
Fair market
|
|
|
Notional amount
|
|
Strike price
|
|
value price
|
|
Maturity
|
EUR
|
|
207,000
|
|
ZAR
|
|
10.1107
|
|
ZAR
|
|
9.4802
|
|
July 30, 2010
|
EUR
|
|
31,200
|
|
ZAR
|
|
9.5976
|
|
ZAR
|
|
9.5080
|
|
October 9, 2010
|
As of June 30, 2009
|
|
|
|
|
|
|
|
Fair market
|
|
|
Notional amount
|
|
Strike price
|
|
value price
|
|
Maturity
|
EUR
|
|
241,500
|
|
ZAR
|
|
13.1515
|
|
ZAR
|
|
10.9967
|
|
August 14, 2009
|
EUR
|
|
(241,500)
|
|
ZAR
|
|
11.3691
|
|
ZAR
|
|
10.9341
|
|
July 17, 2009
|
F-22
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
7. FAIR VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED
INVESTMENTS (continued)
Fair value of financial
instruments (continued)
Risk
management (continued)
Translation
risk
Translation risk relates to the
risk that the Companys results of operations will vary significantly as the US
dollar is its reporting currency, but it earns most of its revenues and incurs
most of its expenses in ZAR. The US dollar to ZAR exchange rate has fluctuated
significantly over the past two years. As exchange rates are outside the
Companys control, there can be no assurance that future fluctuations will not
adversely affect the Companys results of operations and financial
condition.
Interest
rate risk
As a result of its normal
borrowing and leasing activities, the Companys operating results are exposed to
fluctuations in interest rates, which it manages primarily through regular
financing activities. The Company generally maintains limited investment in cash
equivalents and has occasionally invested in marketable securities.
Credit
risk
Credit risk relates to the risk
of loss that the Company would incur as a result of non-performance by
counterparties. The Company maintains credit risk policies with regard to its
counterparties to minimize overall credit risk. These policies include an
evaluation of a potential counterpartys financial condition, credit rating, and
other credit criteria and risk mitigation tools as the Companys management
deems appropriate.
With respect to credit risk on
financial instruments, the Company maintains a policy of entering into such
transactions only with South African and European financial institutions that
have a credit rating of BBB or better, as determined by credit rating agencies
such as Standard & Poors, Moodys and Fitch Ratings.
Microlending
credit risk
The Company was exposed to credit
risk in its microlending activities, which provides unsecured short-term loans
to qualifying customers. The Company manages this risk by assigning each
prospective customer a creditworthiness score, which takes into account a
variety of factors such as employment status, salary earned, other debts and
total expenditures on normal household and lifestyle expenses.
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 June 30, 2010, 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.
F-23
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
7. FAIR VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED
INVESTMENTS (continued)
Financial
instruments
Fair value is defined as the
price that would be received upon sale of an asset or paid upon transfer of a
liability in an orderly transaction between market participants at the
measurement date and in the principal or most advantageous market for that asset
or liability. The fair value should be calculated based on assumptions that
market participants would use in pricing the asset or liability, not on
assumptions specific to the entity. In addition, the fair value of liabilities
should include consideration of non-performance risk including the Companys own
credit risk.
Fair value measurements and
inputs are categorized into a fair value hierarchy which prioritizes the inputs
into three levels based on the extent to which inputs used in measuring fair
value are observable in the market. Each fair value measurement is reported in
one of the three levels which is determined by the lowest level input that is
significant to the fair value measurement in its entirety.
These levels are:
-
Level 1 inputs are based upon unadjusted quoted prices for identical
instruments traded in active markets.
-
Level 2 inputs are based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments in markets
that are not active, and model-based valuation techniques for which all
significant assumptions are observable in the market or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities.
-
Level 3 inputs are generally unobservable and 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.
The following section describes
the valuation methodologies the Company uses to measure financial assets and
liabilities at fair value.
Investments
in common stock
In general, and where applicable,
the Company uses quoted prices in active markets for identical assets or
liabilities to determine fair value. This pricing methodology would apply to
Level 1 investments. If quoted prices in active markets for identical assets or
liabilities are not available to determine fair value, then the Company uses
quoted prices for similar assets and liabilities or inputs other than the quoted
prices that are observable either directly or indirectly. These investments
would be included in Level 2 investments. In circumstances in which inputs are
generally unobservable, values typically reflect managements estimates of
assumptions that market participants would use in pricing the asset or
liability. The fair values are therefore determined using model-based techniques
that include option pricing models, discounted cash flow models, and similar
techniques. Investments valued using such techniques are included in Level 3
investments.
The Company's Level 3 asset
represents an investment of 84,632,525 shares of common stock of Finbond. The
Companys ownership interest in Finbond as of June 30, 2010, is approximately
22%. The Company has no rights to participate in the financial, operating, or
governance decisions made by Finbond. The Company also has no participation on
Finbonds board of directors whether through contractual agreement or otherwise.
Consequently, the Company has concluded that it does not have significant
influence over Finbond and therefore equity accounting is not appropriate.
Finbonds shares are traded on
the JSE Limited (JSE) and the Company has designated such shares as available
for sale investments. The Company has concluded that the market for Finbond
shares is not active and consequently has employed alternative valuation
techniques in order to determine the fair value of such stock. Currently, the
operations of Finbond include primarily mortgage brokering services, property
investment and microlending. In determining the fair value of Finbond, the
Company has considered amongst other things Finbonds historical financial
information (including its most recent public accounts), press releases issued
by Finbond and its published net asset value. The Company believes that the best
indicator of fair value of Finbond is its published net asset value and has used
this value to determine the fair value.
F-24
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
7. FAIR VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED
INVESTMENTS (continued)
Financial instruments
(continued
)
Derivative
transactions - Foreign exchange contracts
As part of the Companys risk
management strategy, the Company enters into derivative transactions to mitigate
exposures to foreign currencies using foreign exchange contracts. These foreign
exchange contracts are over-the-counter customized derivative transactions.
Substantially all of the Companys derivative exposures are with counterparties
that have long-term credit ratings of BBB or better. The Company uses quoted
prices in active markets for similar assets and liabilities to determine fair
value. The Company has no derivatives that require fair value measurement under
level 1 or 3 of the fair value hierarchy.
The following table presents the
Companys assets and liabilities measured at fair value on a recurring basis as
of June 30, 2010:
|
|
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)
|
|
-
|
|
|
-
|
|
$
|
7,299
|
|
$
|
7,299
|
|
Total assets at fair value
|
|
-
|
|
|
-
|
|
$
|
7,299
|
|
$
|
7,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
-
|
|
$
|
17
|
|
|
-
|
|
$
|
17
|
|
Total liabilities at fair
value
|
|
-
|
|
$
|
17
|
|
|
-
|
|
$
|
17
|
|
The following table presents the
Companys assets and liabilities measured at fair value on a recurring basis as
of June 30, 2009:
|
|
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)
|
|
-
|
|
|
-
|
|
$
|
6,979
|
|
$
|
6,979
|
|
Total assets at fair value
|
|
-
|
|
|
-
|
|
$
|
6,979
|
|
$
|
6,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
-
|
|
$
|
2
|
|
|
-
|
|
$
|
2
|
|
Total liabilities at fair
value
|
|
-
|
|
$
|
2
|
|
|
-
|
|
$
|
2
|
|
F-25
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
7. FAIR VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED
INVESTMENTS (continued)
Financial instruments
(continued
)
Trade
and other receivables
Trade and other receivables
originated by the Company are stated at cost less allowance for doubtful debts.
The fair value of trade and other receivables approximate their carrying value
due to their short-term nature.
Trade
and other payables
The fair values of trade and other payables approximates their
carrying amounts, due to their short-term nature.
Assets
and liabilities measured at fair value on a nonrecurring basis
The Company measures its
equity-accounted investments at fair value on a nonrecurring basis. The Company
has no liabilities that are measured at fair value on a nonrecurring basis.
These equity-accounted investments are recognized at fair value when they are
deemed to be other-than-temporarily impaired.
The Company reviews the carrying
values of its investments when events and circumstances warrant and considers
all available evidence in evaluating when declines in fair value are
other-than-temporary. The fair values of the Companys investments are
determined using the best information available, and may include quoted market
prices, market comparables, and discounted cash flow projections. An impairment
charge is recorded when the cost of the investment exceeds its fair value and
the excess is determined to be other-than-temporary. The Company has not
recorded any impairment charges during the reporting periods presented herein.
The Company owns 50% of the
ordinary shares in, and loans extended to, each of SmartSwitch Namibia
(Proprietary) Limited (SmartSwitch Namibia) and SmartSwitch Botswana
(Proprietary) Limited (SmartSwitch Botswana). The Company has determined that
each of these entities is a VIE, as the loan to the entity represents a variable
interest but that in each case, the Company is not the primary beneficiary.
Therefore, the Company has not consolidated these entities and has accounted for
these investments using the equity method. The interest earned by the Company on
the loans to each of the entities has been eliminated. The Company also owns a
30% interest in the issued and outstanding ordinary share capital of Vietnam
Payment Technologies Joint Stock Company (VinaPay) and a 37.50% interest in
the issued and outstanding ordinary share capital of VTU De Colombia S.A. (VTU
Colombia). In February 2010, the Companys investment in VTU Colombia was
diluted from 50% to 37.50% due to the admission of a new independent
shareholder. The funds received from this shareholder by VTU Colombia were used
to fund its continuing operations.
The Company has sold hardware,
software and/or licenses to SmartSwitch Namibia and SmartSwitch Botswana and
defers recognition of 50% of the net income after tax related to these sales
until SmartSwitch Namibia and SmartSwitch Botswana has used the purchased asset
or has sold it to a third party. The deferral of the net income after tax is
shown in the Elimination column in the table below.
The functional currency of the
Companys equity-accounted investments is not the US dollar and thus the
investments are restated at the period end US dollar/foreign currency exchange
rate with an entry against accumulated other comprehensive loss. The functional
currency of SmartSwitch Namibia is the Namibian dollar, the functional currency
of SmartSwitch Botswana is the Botswana pula, the functional currency of VTU
Colombia is the Colombian peso and the functional currency of VinaPay is the
Vietnamese dong.
F-26
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
7. FAIR VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED
INVESTMENTS (continued)
Financial instruments
(continued
)
Assets
and liabilities measured at fair value on a nonrecurring basis
Summarized below is the Companys
interest in equity-accounted investments as of June 30, 2010 and 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
|
|
-
|
|
|
-
|
|
|
(271
|
)
|
|
364
|
|
|
|
93
|
|
SmartSwitch Namibia
(1)
|
|
-
|
|
|
-
|
|
|
40
|
|
|
120
|
|
|
|
160
|
|
SmartSwitch Botswana
(1)
|
|
-
|
|
|
-
|
|
|
(194
|
)
|
|
244
|
|
|
|
50
|
|
VTU Colombia
(1)
|
|
-
|
|
|
-
|
|
|
24
|
|
|
-
|
|
|
|
24
|
|
VinaPay
(1)
|
|
-
|
|
|
-
|
|
|
(141
|
)
|
|
-
|
|
|
|
(141
|
)
|
Foreign currency adjustment
(2)
|
|
82
|
|
|
44
|
|
|
(183
|
)
|
|
(21
|
)
|
|
|
(78
|
)
|
Balance as of June 30, 2010
|
$
|
3,549
|
|
$
|
2,512
|
|
$
|
(3,905
|
)
|
$
|
442
|
|
|
$
|
2,598
|
|
(1) includes the recognition of realized net income.
(2)
the foreign currency adjustment represents the effects of the combined net
currency fluctuations between the functional currency of the equity-accounted
investments and the US dollar.
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Loans
|
|
|
(Loss)
|
|
|
Elimination
|
|
|
|
Total
|
|
Balance as of June 30, 2008
|
$
|
1,984
|
|
$
|
3,312
|
|
$
|
(2,295
|
)
|
$
|
(316
|
)
|
|
$
|
2,685
|
|
Share capital acquired/ loans extended
|
|
1,423
|
|
|
(673
|
)
|
|
-
|
|
|
-
|
|
|
|
750
|
|
Share capital acquired
VinaPay
|
|
300
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
300
|
|
Share capital acquired and loans
extended VTU Colombia
|
|
300
|
|
|
150
|
|
|
-
|
|
|
-
|
|
|
|
450
|
|
Loan converted to equity
SmartSwitch Namibia
|
|
823
|
|
|
(823
|
)
|
|
-
|
|
|
-
|
|
|
|
-
|
|
(Loss) Earnings from equity- accounted investments
|
|
-
|
|
|
-
|
|
|
(1,267
|
)
|
|
393
|
|
|
|
(874
|
)
|
SmartSwitch Namibia
(1)
|
|
-
|
|
|
-
|
|
|
(155
|
)
|
|
160
|
|
|
|
5
|
|
SmartSwitch Botswana
(1)
|
|
-
|
|
|
-
|
|
|
(342
|
)
|
|
233
|
|
|
|
(109
|
)
|
VTU Colombia
(1)
|
|
-
|
|
|
-
|
|
|
(634
|
)
|
|
-
|
|
|
|
(634
|
)
|
VinaPay
(1)
|
|
-
|
|
|
-
|
|
|
(136
|
)
|
|
-
|
|
|
|
(136
|
)
|
Foreign currency adjustment
(2)
|
|
60
|
|
|
(171
|
)
|
|
111
|
|
|
22
|
|
|
|
22
|
|
Balance as of June 30, 2009
|
$
|
3,467
|
|
$
|
2,468
|
|
$
|
(3,451
|
)
|
$
|
99
|
|
|
$
|
2,583
|
|
(1) includes the recognition of realized net income.
(2)
the foreign currency adjustment represents the effects of the combined net
currency fluctuations between the functional currency of the equity-accounted
investments and the US dollar.
F-27
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
8. PROPERTY, PLANT AND EQUIPMENT, net
|
|
2010
|
|
|
2009
|
|
Cost:
|
|
|
|
|
|
|
Computer equipment
|
$
|
25,528
|
|
$
|
19,495
|
|
Furniture and office equipment
|
|
6,822
|
|
|
5,912
|
|
Motor vehicles
|
|
7,541
|
|
|
7,943
|
|
Plant and equipment
|
|
2,666
|
|
|
2,195
|
|
|
|
42,557
|
|
|
35,545
|
|
Accumulated depreciation:
|
|
|
|
|
|
|
Computer equipment
|
|
21,482
|
|
|
15,473
|
|
Furniture and office equipment
|
|
5013
|
|
|
3,651
|
|
Motor vehicles
|
|
6,632
|
|
|
7,070
|
|
Plant and equipment
|
|
2,144
|
|
|
1,975
|
|
|
|
35,271
|
|
|
28,169
|
|
Carrying amount:
|
|
|
|
|
|
|
Computer equipment
|
|
4,046
|
|
|
4,022
|
|
Furniture and office equipment
|
|
1,809
|
|
|
2,261
|
|
Motor vehicles
|
|
909
|
|
|
873
|
|
Plant and equipment
|
|
522
|
|
|
220
|
|
|
$
|
7,286
|
|
$
|
7,376
|
|
9. GOODWILL AND INTANGIBLE
ASSETS, net
Goodwill
Summarized below is the movement
in the carrying value of goodwill for the years ended June 30, 2010 and 2009:
|
|
Carrying
|
|
|
|
value
|
|
Balance as of July 1, 2008
|
$
|
76,938
|
|
Acquisition of Net1 UTA as of August 31, 2008
|
|
44,171
|
|
Net1 UTA deferred tax assets
recognized on acquisition not used during the year
|
|
720
|
|
Impairment of goodwill
|
|
(1,836
|
)
|
Financial services segment -
sale of traditional microlending business
|
|
(1,759
|
)
|
Foreign currency adjustment
(1)
|
|
(2,037
|
)
|
Balance as of June 30, 2009
|
|
116,197
|
|
Acquisitions
(2)
|
|
1,187
|
|
Impairment of goodwill
|
|
(37,378
|
)
|
Foreign currency adjustment
(1)
|
|
(3,660
|
)
|
Balance as of June 30, 2010
|
$
|
76,346
|
|
(1) the foreign currency
adjustment represents the effects of the fluctuations between the South African
rand and the euro, and the US dollar on the carrying
value.
(2) represents goodwill arising from
the acquisition of FIHRST and has been translated at the foreign exchange rates
applicable on the date the transactions became effective.
Goodwill associated with the
acquisitions of Net1 UTA and FIHRST represents the excess of cost over the fair
value of acquired net assets. A portion of the goodwill related to the
acquisition of Net1 UTA is tax deductible. See note 3 for the allocation of the
purchase price to the fair value of acquired net assets. The goodwill associated
with the acquisition of FIHRST was allocated to the transaction-based activities
segment on March 31, 2010 and the goodwill associated with the acquisition of
Net1 UTA was allocated to the Companys hardware, software and related
technology sales segment on August 31, 2008 (see note 3).
F-28
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
9. GOODWILL AND INTANGIBLE ASSETS, net (continued)
Goodwill (continued)
As part of the acquisition of
Net1 UTA the Company recorded a deferred tax asset related to a license right
for Austrian tax purposes (see note 14). Subsequent to completion of the
allocation of the purchase price, the Company determined that approximately $0.7
million of this deferred tax asset would not be realized and recorded an
adjustment against goodwill.
The Company assesses the carrying
value of goodwill for impairment annually, or more frequently, whenever events
occur and circumstances change indicating potential impairment. The Company
performs its annual impairment test as at June 30 of each year. During the year
ended June 30, 2010, the Company recognized an impairment loss of approximately
$37.4 million related to goodwill allocated to its Hardware, software and
related technology sales segment as a result of deteriorating trading conditions
of this segment, particularly at Net1 UTA, and uncertainty surrounding contract
finalization dates which will impact future cash flows. With regards to the
latter, through the end of the third quarter of the year ended June 30, 2010,
the Company expected to sign its first agreement that reflects the transformed
business model for Net1 UTA during the fourth quarter of the year ended June 30,
2010. However towards the end of the year, it became clear to the Company that
this project had been delayed due to key executive management changes at the
Companys target customer.
In order to determine the amount
of goodwill impairment, the estimated fair value of the Hardware, software and
related technology sales segment was allocated to the individual fair value of
the assets and liabilities of the segment as if the segment had been acquired in
a business combination, which resulted in the implied fair value of the
goodwill. The allocation of the fair value required the Company to make a number
of assumptions and estimates about the fair value of assets and liabilities
where the fair values were not readily available or observable.
A further deterioration in the
Hardware, software and related technology sales segment, or in any other of the
Companys businesses, may lead to additional impairments in future periods.
During the year ended June 30,
2009, the Company recognized an impairment loss of approximately $1.8 million
on goodwill allocated to the Financial services segment as a result of the deteriorating
trading conditions of this segment, the Companys managements strategic
decision not to grow this business and the offer received for the traditional
microlending business in January 2009. On March 1, 2009, the Company sold all
traditional microfinance loans receivables and goodwill and received shares
in Finbond as consideration.
Goodwill has been allocated to
the Companys reportable segments as follows:
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
$
|
37,568
|
|
$
|
35,362
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
Hardware, software and related technology sales
|
|
38,778
|
|
|
80,835
|
|
Total
|
$
|
76,346
|
|
$
|
116,197
|
|
F-29
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
9. GOODWILL AND INTANGIBLE ASSETS, net (continued)
Intangible assets,
net
Summarized below is the fair
value of intangible assets acquired, translated at the exchange rate applicable
as of the relevant acquisition dates, and the weighted-average amortization
period:
|
|
|
|
|
Weighted-
|
|
|
|
Fair value
|
|
|
Average
|
|
|
|
as of
|
|
|
Amortization
|
|
|
|
acquisition
|
|
|
period (in
|
|
|
|
date
|
|
|
years)
|
|
Finite-lived intangible asset:
|
|
|
|
|
|
|
FIHRST customer relationships
|
$
|
1,804
|
|
|
10
|
|
Net1 UTA customer relationships
|
|
68,859
|
|
|
7
|
|
FIHRST software and unpatented
technology
|
|
6,179
|
|
|
3
|
|
MediKredit software and unpatented technology
|
|
5,249
|
|
|
3
|
|
MediKredit customer database
|
$
|
821
|
|
|
3
|
|
The Company recognized a deferred
tax asset of approximately $0.4 million related to the acquisition of the FIHRST
software and a deferred tax liability of approximately $2.7 million related to
the MediKredit and the remaining FIHRST intangible assets.
Summarized below is the carrying value and accumulated
amortization of intangible assets as of June 30, 2010 and 2009:
|
|
As of June 30, 2010
|
|
|
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(1)
|
$
|
77,452
|
|
$
|
(22,519
|
)
|
$
|
54,933
|
|
$
|
83,824
|
|
$
|
(12,306
|
)
|
$
|
71,518
|
|
Software and unpatented
technology(1)
|
|
11,047
|
|
|
(1,343
|
)
|
|
9,704
|
|
|
10,079
|
|
|
(10,079
|
)
|
|
-
|
|
FTS patent
|
|
5,007
|
|
|
(4,880
|
)
|
|
127
|
|
|
4,861
|
|
|
(4,333
|
)
|
|
528
|
|
Exclusive licenses
|
|
4,506
|
|
|
(3,941
|
)
|
|
565
|
|
|
4,506
|
|
|
(3,293
|
)
|
|
1,213
|
|
Trademarks
|
|
3,766
|
|
|
(1,411
|
)
|
|
2,355
|
|
|
3,656
|
|
|
(1,025
|
)
|
|
2,631
|
|
Customer database
|
|
795
|
|
|
(132
|
)
|
|
663
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total finite-lived intangible assets
|
$
|
102,573
|
|
$
|
(34,226
|
)
|
$
|
68,347
|
|
$
|
106,926
|
|
$
|
(31,036
|
)
|
$
|
75,890
|
|
(1) Includes the customer relationships and software and
unpatented technology acquired as part of the MediKredit and FIHRST
acquisitions.
Amortization expense charged for
the years to June 30, 2010, 2009 and 2008 was $15.2 million, $13.4 million, and
$6.7 million, respectively.
Future estimated annual
amortization expense for the next five fiscal years, assuming exchange rates
prevailing on June 30, 2010, is presented in the table below. Actual
amortization expense in future periods could differ from this estimate as a
result of acquisitions, changes in useful lives, exchange rate fluctuations and
other relevant factors.
2011
|
$
|
14,335
|
|
2012
|
|
13,772
|
|
2013
|
|
12,296
|
|
2014
|
|
9,825
|
|
2015
|
$
|
9,825
|
|
F-30
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
10.
OTHER PAYABLES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Participating merchants settlement
obligation
|
$
|
19,200
|
|
$
|
23,368
|
|
Payroll-related payables
|
|
1,446
|
|
|
1,300
|
|
Accruals
|
|
7,378
|
|
|
4,985
|
|
Value-added tax payable
|
|
2,160
|
|
|
2,027
|
|
Other
|
|
8,772
|
|
|
17,958
|
|
Provisions
|
|
11,899
|
|
|
11,816
|
|
|
$
|
50,855
|
|
$
|
61,454
|
|
11. CAPITAL STRUCTURE AND CREDITOR RIGHTS ATTACHED TO THE B
CLASS LOANS
The Companys balance sheet as of
June 30, 2010 and 2009, respectively, reflects one class of equity, namely
common stock. From fiscal 2004 to fiscal 2008 the Companys balance sheet
reflected two classes of equity - common stock and linked units. The linked
units were created in June 2004 in connection with the acquisition of Net 1
Applied Technology Holdings Limited (Aplitec). Effective October 2008, the
linked units (which included a right to Net1 special convertible preferred stock
as well as B Class preference shares and B Class loans of a Net1 subsidiary)
were all converted to common stock as a result of the listing of Net1s common
stock on the JSE and the linked units no longer exist.
Common stock
Holders of shares of Net1s
common stock are entitled to receive dividends and other distributions when
declared by Net1s board of directors out of funds available. Payment of
dividends and distributions is subject to certain restrictions under the Florida
Business Corporation Act, including the requirement that after making any
distribution Net1 must be able to meet its debts as they become due in the usual
course of its business.
Upon voluntary or involuntary
liquidation, dissolution or winding up of Net1, holders of common stock share
ratably in the assets remaining after payments to creditors and provision for
the preference of any preferred stock according to its terms. There are no
pre-emptive or other subscription rights, conversion rights or redemption or
scheduled installment payment provisions relating to shares of common stock. All
of the outstanding shares of common stock are fully paid and non-assessable.
Each holder of common stock is
entitled to one vote per share for the election of directors and for all other
matters to be voted on by shareholders. Holders of common stock may not cumulate
their votes in the election of directors, and are entitled to share equally and
ratably in the dividends that may be declared by the board of directors, but
only after payment of dividends required to be paid on outstanding shares of
preferred stock according to its terms. The shares of Net1 common stock are not
subject to redemption.
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).
In February 2010 and in May 2010,
the Companys Board of Directors authorized the repurchase of up to $50 million
of the Company's common stock, for a total of $100 million. The authorization
does not have an expiration date.
The share repurchase
authorization will be used at managements discretion, subject to limitations
imposed by SEC Rule 10b-18 and other legal requirements and subject to price and
other internal limitations established by the Board. Repurchases will be funded
from the Companys available cash. Share repurchases may be made through open
market purchases, privately negotiated transactions, or both. There can be no
assurance that the Company will purchase any shares or any particular number of
shares.
F-31
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
11. CAPITAL STRUCTURE AND CREDITOR RIGHTS ATTACHED TO THE B
CLASS LOANS (continued)
Common stock repurchases
(continued)
The authorization may be
suspended, terminated or modified at any time for any reason, including market
conditions, the cost of repurchasing shares, liquidity and other factors that
management deems appropriate. The Company did not repurchase any of its shares
during the year ended June 30, 2010 under this authorization.
In November 2008, the Companys
board approved the repurchase of up to $50 million of common stock. The Company
repurchased 3,621,247 shares during the year ended June 30, 2009, for
approximately $40.7 million.
In May 2007, the Companys board
approved the repurchase of up to $50 million of common stock at any time and
from time to time through June 30, 2008. The Company did not repurchase any of
its shares during the year ended June 30, 2008.
Linked units
The equity instruments described
below relate to the linked units which were converted to common stock in October
2008. The linked units comprised the following instruments which were linked and
could not be traded separately:
-
a right to special convertible preferred stock,
-
B Class preference shares in Net1 Applied Technologies South Africa Limited
(New Aplitec), and
-
B Class loans issued by New Aplitec.
Although the linked units
included certain instruments (the B Class preference shares and the B Class
loans) that were legally equity of a subsidiary of Net1, they were treated as
equity of Net1 until October 2008 and recorded as part of shareholders equity
in the Companys consolidated financial statements, in recognition of their
substance, which was economically equivalent to that of common stock.
The B Class loans referred to
above were not considered to be a liability as New Aplitec did not have an
obligation to transfer assets to its shareholders in respect of the loans. In
addition, any distributions relating to the loans were solely at the discretion
of New Aplitec.
Voting rights
Holders of shares of special convertible preferred stock had the same voting
rights as holders of common stock. Therefore, a linked unit-holder was able to
vote on the same matters as a holder of common stock, including the selection of
directors, corporate decisions submitted to shareholder vote, and decisions
regarding distribution of earnings. In addition, the special convertible
preferred stock did not provide any additional rights with respect to control of
Net1 not shared by holders of common stock.
Dividend rights
Holders of common stock and linked units had similar rights to
the distribution of Net1s earnings.
Liquidation rights
In the event of a liquidation of Net1 or New Aplitec, the
linked units would have been automatically convertible into common stock of
Net1, thereby allowing a linked unit holder to have identical liquidation rights
to a holder of common stock in the event of liquidation.
Sale rights
A linked unit holder could only dispose of its interest in Net1 by 1)
converting the linked units into common stock and 2) selling the common stock on
the open market. Therefore, a holder of the linked units received the same risk
and rewards in market price fluctuation as a common stockholder of Net1.
F-32
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
11. CAPITAL STRUCTURE AND CREDITOR RIGHTS ATTACHED TO THE B
CLASS LOANS (continued)
Linked units
(continued)
Special
convertible preferred stock
The special convertible preferred
stock ranked, on parity, without preference and priority, with Net1s common
stock with respect to dividend rights (except as described below) or rights upon
liquidation, dissolution or winding-up of Net1. The special convertible
preferred stock was junior in preference and priority to each other class or
series of preferred stock or other equity security of Net1 under terms which may
have been determined by the board of directors to expressly provide that such
other security rank senior in preference or priority to the special convertible
preferred stock with respect to dividend rights or rights upon liquidation,
dissolution or winding-up of Net1.
So long as any shares of special
convertible preferred stock were outstanding, Net1s board was required to
determine immediately prior to the declaration of any dividend or distribution
(i) the portion, if any, of Net1s assets available for such dividend of
distribution that was attributable to funds or assets from New Aplitec,
regardless of the manner received (the South African Amount) and (ii) the
portion of such funds or assets that was not from New Aplitec (the Non-South
African Amount). The South African Amount would not include amounts received
from New Aplitec due to its liquidation, distribution or dividend after
insolvency or winding up.
So long as any shares of special
convertible preferred stock were outstanding, (i) any dividends or distributions
by Net1s board of Non-South African Amounts would have to be paid
pro rata
to all holders of common stock and special convertible preferred stock and
(ii) and dividends or distributions by Net1s board of South African Amounts
could be paid only to holders of common stock. Net1s board had complete
discretion to declare a dividend or distribution with respect to South African
Amounts or Non-South African Amounts.
So long as any shares of special
convertible preferred stock were outstanding, (i) any dividends or distributions
by Net1s board of Non-South African Amounts would have to be paid
pro rata
to all holders of common stock and special convertible preferred stock and
(ii) and dividends or distributions by Net1s board of South African Amounts
could be paid only to holders of common stock. Net1s board had complete
discretion to declare a dividend or distribution with respect to South African
Amounts or Non-South African Amounts.
In the event of the voluntary or
involuntary liquidation, dissolution, distribution of assets or winding-up of
Net1, all outstanding shares of special convertible preferred stock would
automatically convert and holders of such stock will be entitled to receive
pari passu
with holders of common stock, any assets of Net1 distributed
for the benefit of its shareholders.
Holders of special convertible
preferred stock had the right to receive notice of, attend, speak and vote at
meetings of Net1s shareholders, and were entitled to vote on all matters on
which holders of common stock are entitled to vote. Each holder of special
convertible preferred stock present in person, or the person representing such
holder, was entitled to a number of votes equal to the number of shares of
common stock that would be have been issued upon conversion of the special
convertible preferred stock held by such holder on the record date.
B
class preference shares
Net1 owns 100% of the A class
common stock in issue of New Aplitec. In addition, until October 2008, Net1
owned 100% of the A class loans in issue of New Aplitec. The B class preference
shares and A class loans were repaid in October 2008. The B class preference
shares ranked
pari passu
with the New Aplitec A class stock in respect of
participation in dividends and return of capital prior to winding-up of New
Aplitec. The B class preference shares would not, however, participate in
dividends or a return of capital on a winding-up of New Aplitec for any reason.
However, the unit holders would have participated, as the B class preference
stock would have automatically converted into Company common stock on a
winding-up of New Aplitec. The B class preference shares could not be sold or
transferred other than to Net1 pursuant to the occurrence of a trigger event.
Therefore, the B class preference shares, the B class loans and the rights to
receive Company special convertible preferred stock are linked together and
cannot be traded separately.
F-33
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
11. CAPITAL STRUCTURE AND CREDITOR RIGHTS ATTACHED TO THE B
CLASS LOANS (continued)
Linked units
(continued)
B
class preference shares (continued)
The holders of B class preference
shares would have only been entitled to vote on matters which directly affect
the rights attaching to the B class preference shares. At every general meeting
of New Aplitec at which more than one class of shareholders were present and
entitled to vote, unit holders of the South African Trust which in turn held the
B class preference shares, would have been entitled, upon a poll, to that
proportion of the total votes in New Aplitec which the aggregate number of B
class preference shares held bore to the aggregate number of all shares entitled
to be voted at such meeting (provided that no resolution for the declaration of
a dividend or for the disposal of any intellectual property of New Aplitec would
be passed unless unit holders representing 50.1% of the B class preference
shares present at the meeting in person or represented by proxy vote in favor of
such resolution).
B
class loans
The B class loans were unsecured
and repayable as and when directed by the board of directors of New Aplitec
provided that no capital may be repaid until at least 30 days have lapsed from
the date of drawdown of the loans, and subject to South African Exchange Control
approval. The B class loans were repaid in October 2008. The loans bore interest
at such rates as may have been determined by the board of directors of New
Aplitec at the beginning of each year, but could not be more than the prime rate
as quoted by Standard Bank of South Africa Limited from time to time. Interest,
if so declared by the board of directors of New Aplitec, would be payable by New
Aplitec semi-annually in arrears.
Conversion
of special convertible preferred stock to common stock
Special convertible preferred
stock were convertible into shares of common stock on a one-for-one basis upon
the occurrence of a trigger event. With each converted share of special
convertible preferred stock that is converted, Net1 received:
Upon conversion, all rights with
respect to shares for special convertible preferred stock ceased. Converted
shares were cancelled and had the status of authorized but unissued preferred
stock, without designation as to series until such shares are once more
designated as part of a particular series by the board of directors.
During the year ended June 30,
2009, 4,882,429 shares of special convertible preferred stock were converted to
common stock. The trigger event that gave rise to these conversions was the
listing on the JSE Limited and requests by linked unit-holders to sell and/or
convert 35,975,818 linked units during the year ended June 30, 2009. The net
result of these conversions was that 35,975,818 B class preference shares and B
class loans were ceded to Net1 during the year ended June 30, 2009, which
converted 4,882,429 shares of special convertible preferred stock to 4,882,429
shares of common stock in return for the ownership of 35,975,818 B class
preference shares and B class loans. As a result of the conversion, the number
of outstanding shares of common stock has increased by 4,882,429 and the number
of outstanding shares of special convertible preferred stock has decreased by
4,882,429. In addition, as a result of the conversion, Net1 owned all of the
236,977,187 B class preference shares and B class loans.
On October 16, 2008, New Aplitec
repaid the A and B class loans to Net1 and acquired the B class preference
shares from Net1 for a total of approximately $84.7 million (ZAR 847.4 million
at the negotiated $:ZAR exchange rate on October 16, 2008). As a result, as of
October 16, 2008, the only class of shares that New Aplitec has in issue are the
A class ordinary shares, all of which are owned by Net1.
F-34
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
11. CAPITAL STRUCTURE AND CREDITOR RIGHTS ATTACHED TO THE B
CLASS LOANS (continued)
Linked units
(continued)
Conversion of special
convertible preferred stock to common stock (continued)
During the year ended June 30,
2008, 773,681 shares of special convertible preferred stock were converted to
common stock. The trigger events that gave rise to these conversions were
requests by linked unit-holders to sell and/or convert 5,700,807 linked units
during year ended June 30, 2008. The net result of these conversions was that
5,700,807 B class preference shares and B class loans were ceded to Net1 during
the year ended June 30, 2008, which converted 773,681 shares of special
convertible preferred stock to 773,681 common stock in return for the ownership
of the 5,700,807 B class preferred shares and B class loans. As a result of the
conversion, the number of outstanding shares of common stock has increased by
773,681 and the number of outstanding shares of special convertible preferred
stock has decreased by 773,681. In addition, as a consequence of the conversion,
at June 30, 2008, Net1 owned 201,001,369 B class preferred shares and B class
loans. The reduction in the B class preference shares from $0.007 million to
$0.006 million is due to the cession to Net1 of the B class preference shares as
a result of the trigger events.
12. REVENUE
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Sale of goods comprising mainly hardware
and software sales
|
$
|
36,228
|
|
$
|
47,003
|
|
$
|
39,021
|
|
Loan-based interest and fees received
|
|
4,214
|
|
|
5,659
|
|
|
8,585
|
|
Services rendered comprising mainly fees
and commissions and contract variation fees
|
|
239,922
|
|
|
194,160
|
|
|
206,450
|
|
|
$
|
280,364
|
|
$
|
246,822
|
|
$
|
254,056
|
|
During the years ended June 30,
2010 and 2009, the Company did not recognize any revenue using the percentage of
completion method.
System implementation revenue,
arising from the contract with the Central Bank of Ghana, amounted to $14.2
million for the year ended June 30, 2008. System implementation revenue is
recognized using the percentage of completion method. Sale of goods comprising
mainly hardware and software sales for the year ended June 30, 2008, includes
approximately $7.2 million related to hardware sales. Services rendered
comprising mainly fees and commissions and contract variation fees for the year
ended June 30, 2008, includes approximately $7.0 million related to services
rendered which is primarily software customization services performed.
13. STOCK-BASED COMPENSATION
Amended and Restated 2004
Stock Incentive Plan
The Companys Amended and
Restated 2004 Stock Incentive Plan (the Plan) has been approved by its
shareholders. No evergreen provisions are included in the Plan. This means that
the maximum number of shares issuable under the Plan is fixed and cannot be
increased without shareholder approval, the plan expires by its terms upon a
specified date, and no new stock options are awarded automatically upon exercise
of an outstanding stock option. Shareholder approval is required for the
repricing of awards or the implementation of any award exchange program. The
Plan permits Net1 to grant to its employees, directors and consultants incentive
stock options, nonqualified stock options, stock appreciation rights, restricted
stock, performance-based awards and other awards based on its common stock. The
Remuneration Committee of the Companys board of directors administers the
Plan.
F-35
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
13. STOCK-BASED COMPENSATION (continued)
Amended and Restated 2004
Stock Incentive Plan (continued)
On November 25, 2009, the
Companys shareholders approved an increase in the number of shares of common
stock that may be issued under the plan by 2,800,000 shares. The adjusted total
number of shares of common stock issuable under the Plan is 8,552,580. The
maximum number of shares for which awards, other than performance-based awards,
may be granted in any combination during a calendar year to any participant is
569,120. The maximum limits on performance-based awards that any participant may
be granted during a calendar year are 569,120 shares subject to stock option
awards and $20 million with respect to awards other than stock options. Shares
that are subject to awards which terminate or lapse without the payment of
consideration may be granted again under the Plan. Shares delivered to the
Company as part or full payment for the exercise of an option or to satisfy
withholding obligations upon the exercise of an option may be granted again
under the Plan in the Remuneration Committees discretion. No awards may be
granted under the Plan after June 7, 2019, but awards granted on or before such
date may extend to later dates.
Options
General
Terms of Awards
Option awards are generally
granted with an exercise price equal to the market price of the Company's stock
at the date of grant, with vesting conditioned upon the recipients continuous
service through the applicable vesting date and expire 10 years after the date
of grant. The options generally become exercisable in accordance with a vesting
schedule ratably over a period of five years from the date of grant. The Company
issues new shares to satisfy stock option award exercises but may also use
treasury shares.
Valuation
Assumptions
The fair value of each option is
estimated on the date of grant using the Cox Ross Rubinstein binomial model that
uses the assumptions noted in the following table. The estimated expected
volatility is calculated based on the volatilities of similar listed companies
within the payment processing industry. The Company has estimated an annual
forfeiture rate of 7.50% based on historic employee behavior under similar
awards granted pursuant to the Plan. No stock options were granted during the
years ended June 30, 2010 and 2008. The table below presents the range of
assumptions used to value options granted during the years ended June 30,
2009:
|
|
|
2009
|
|
|
Expected volatility
|
|
30 45%
|
|
|
Expected dividends
|
|
0%
|
|
|
Expected life (in years)
|
|
2 6
|
|
|
Risk-free rate
|
|
2.0 4.5%
|
|
Restricted
Stock
General
Terms of Awards
Shares of restricted stock are
considered to be non-vested equity shares. Restricted stock generally vests
ratably over a three year period, with vesting conditioned upon the recipients
continuous service through the applicable vesting date and under certain
circumstances, the achievement of certain performance targets, as described
below.
Restricted stock awarded to
non-employee directors of the Company vests ratably over a three year period. In
addition, until 11 months after the restricted stock become vested and
nonforfeitable, the shares may not be sold, assigned, transferred, pledged,
hypothecated, exchanged, or disposed of in any way (whether by operation of law
or otherwise). If a recipient ceases to be a member of the Board of Directors
for any reason, all shares of his restricted stock that are not then vested and
nonforfeitable will be immediately forfeited and transferred to the Company for
no consideration.
The Company issues new shares to
satisfy restricted stock awards.
F-36
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
13. STOCK-BASED COMPENSATION (continued)
Restricted
Stock (continued)
Valuation
Assumptions
The fair value of restricted
stock is based on the closing price of the Companys stock quoted on The Nasdaq
Global Select Market on the date of grant.
Performance
Conditions - Restricted Stock Granted in August 2007
In August 2007, the Remuneration
Committee of the Board of Directors of the Company approved an award of 591,500
shares of restricted stock to executive officers and other employees of the
Company.
The awards provide for vesting of
one-third of the award shares on each of September 1, 2009, 2010 and 2011,
conditioned upon each recipients continuous service through the applicable
vesting date and the Company achieving the financial performance target for that
vesting date. Specifically, the financial performance targets were a 20%
increase, compounded annually, in fundamental diluted earnings per share
(expressed in South African rand) (Fundamental EPS) above Fundamental EPS for
the fiscal year ended June 30, 2007. For award shares vesting prior to September
1, 2009, the annual required increase in the case of Dr. Belamant and Mr. Kotze
was 25% rather than 20%. On November 5, 2009, the Companys board of directors,
on the recommendation of the Remuneration Committee, determined that the annual
required target for Dr. Belamant and Mr. Kotze be 20%, effective immediately, to
be consistent with the terms of the restricted stock awards granted to other
employees. There were no other amendments to the terms of the restricted stock
awards. For the purpose of the restricted stock granted in August 2007,
Fundamental EPS is calculated by adjusting GAAP diluted earnings per share (as
reflected in the Companys audited consolidated financial statements) to exclude
the effects related to the amortization of intangible assets, stock-based
compensation charges, one-time, large, unusual expenses as determined at the
discretion of the Remuneration Committee, and assuming a constant tax rate of
30%. If Fundamental EPS for the specified fiscal year does not equal or exceed
the Fundamental EPS target for such year, no award shares will become vested or
nonforfeitable on the corresponding vesting date but are available to become
vested and nonforfeitable as of a subsequent vesting date if the Fundamental EPS
target for a subsequent fiscal year is met; provided that the recipients
service continues through such subsequent vesting date. Any outstanding award
shares that have not become vested and nonforfeitable as of September 1, 2011,
will be forfeited by the recipient on September 1, 2011 and transferred to the
Company for no consideration.
Stock
Appreciation Rights
The Remuneration Committee also
may grant stock appreciation rights, either singly or in tandem with underlying
stock options. Stock appreciation rights entitle the holder upon exercise to
receive an amount in any combination of cash or shares of common stock (as
determined by the Remuneration Committee) equal in value to the excess of the
fair market value of the shares covered by the right over the grant price. No
stock appreciation rights have been granted.
F-37
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
13. STOCK-BASED COMPENSATION (continued)
Stock option and
restricted stock activity
Options
The following table summarizes stock option activity for the
years ended June 30, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
Grant
|
|
|
|
|
|
|
average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
Date Fair
|
|
|
|
Number of
|
|
|
exercise
|
|
|
Term
|
|
|
Value
|
|
|
Value
|
|
|
|
shares
|
|
|
price
|
|
|
(in years)
|
|
|
($000)
|
|
|
($000)
|
|
Outstanding July 1, 2007
|
|
1,374,543
|
|
$
|
16.30
|
|
|
8.20
|
|
|
10,840
|
|
|
-
|
|
Exercised
|
|
(324,542
|
)
|
|
-
|
|
|
-
|
|
|
7,320
|
|
|
-
|
|
Forfeitures
|
|
(96,623
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Outstanding June 30, 2008
|
|
953,378
|
|
$
|
18.20
|
|
|
7.40
|
|
|
5,813
|
|
|
-
|
|
Options granted
under Plan
|
|
1,120,000
|
|
$
|
18.81
|
|
|
10.00
|
|
|
-
|
|
$
|
5,786
|
|
Exercised
|
|
(84,414
|
)
|
|
-
|
|
|
-
|
|
|
1,731
|
|
|
-
|
|
Forfeitures
|
|
(91,970
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Outstanding June 30, 2009
|
|
1,896,994
|
|
$
|
19.03
|
|
|
8.30
|
|
|
1,576
|
|
|
-
|
|
Exercised
|
|
(83,338
|
)
|
|
-
|
|
|
-
|
|
|
1,667
|
|
|
-
|
|
Outstanding June 30, 2010
|
|
1,813,656
|
|
$
|
19.76
|
|
|
7.41
|
|
|
585
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
873,613
|
|
$
|
20.86
|
|
|
6.7
|
|
|
473
|
|
|
|
|
During each of the years ended
June 30, 2010, 2009 and 2008, approximately 374,000, 264,000 and 430,000, stock
options became exercisable, respectively.
Options granted to certain
employees on August 24, 2006, were automatically exercised on May 8, 2008, as
the employees did not provide the Company with an automatic exercise waiver
notice. In accordance with the terms of the option agreements, 6,448 shares were
withheld from these employees to settle the exercise price. These 6,448 shares
are reflected as treasury shares and 1,951 of these shares are available for
future grants under the Plan.
During the years ended June 30,
2010, 2009 and 2008, respectively, the Company received approximately $0.7
million, $0.3 million and $2.3 million from stock option exercises and
approximately $0, $0.003 million and $0.5 million from repayment of stock
option-related loans.
F-38
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
13. STOCK-BASED COMPENSATION (continued)
Stock option and
restricted stock activity (continued)
Restricted
stock
The following table summarizes restricted stock activity for
the years ended June 30, 2010, 2009 and 2008:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant
|
|
|
|
Shares of
|
|
|
Date Fair
|
|
|
|
Restricted
|
|
|
Value
|
|
|
|
Stock
|
|
|
($000)
|
|
Non-vested July 1, 2007
|
|
-
|
|
|
-
|
|
Granted August 2007
|
|
591,500
|
|
|
13,569
|
|
Granted
February 2008
|
|
3,282
|
|
|
85
|
|
Non-vested June 30, 2008
|
|
594,782
|
|
|
-
|
|
Granted August
2008
|
|
3,474
|
|
|
85
|
|
Vested
|
|
(1,094
|
)
|
|
-
|
|
Non-vested June 30, 2009
|
|
597,162
|
|
|
-
|
|
Granted August 2009
|
|
10,098
|
|
|
185
|
|
Vested
|
|
(199,432
|
)
|
|
3,800
|
|
Non-vested June 30, 2010
|
|
407,828
|
|
|
-
|
|
Stock-based compensation
charge and unrecognized compensation cost
The Company has recorded a net
stock compensation charge of $5.7 million, $5.0 million and $4.0 million for the
year ended June, 2010, 2009 and 2008, respectively, which comprised:
|
|
Total
charge
(reversal)
|
|
|
Allocated
to
cost of goods
sold,
IT
processing,
servicing
and support
|
|
|
Allocated
to
selling,
general and
administration
|
|
Year ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
charge
|
$
|
5,670
|
|
$
|
202
|
|
$
|
5,468
|
|
Total year ended June 30, 2010
|
$
|
5,670
|
|
$
|
202
|
|
$
|
5,468
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
charge
|
$
|
5,239
|
|
$
|
240
|
|
$
|
4,999
|
|
Benefit of stock compensation charge related
to options forfeited
|
|
(213
|
)
|
|
(109
|
)
|
|
(104
|
)
|
Total year ended June 30,
2009
|
$
|
5,026
|
|
$
|
131
|
|
$
|
4,895
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
4,257
|
|
$
|
319
|
|
$
|
3,938
|
|
Benefit of stock compensation
charge related to options forfeited
|
|
(286
|
)
|
|
(147
|
)
|
|
(139
|
)
|
Total year ended June 30, 2008
|
$
|
3,971
|
|
$
|
172
|
|
$
|
3,799
|
|
The stock compensation charge and
benefit 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.
F-39
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
13. STOCK-BASED COMPENSATION (continued)
Stock-based compensation
charge and unrecognized compensation cost (continued)
As of June 30, 2010, the total
unrecognized compensation cost related to stock options was approximately $4.6
million, which the Company expects to recognize over approximately four years.
As of June 30, 2010, the total unrecognized compensation cost related to
restricted stock awards was approximately $4.1 million, which the Company
expects to recognize over approximately two years. As of June 30, 2010, interest
due from employees related to loans extended to fund stock option exercises was
approximately $0.01 million.
Tax
consequences
There are no tax consequences
related to options and restricted stock granted to employees of Company
subsidiaries incorporated in South Africa, Austria and Russia. The Company has
recorded a deferred tax asset of approximately $0.7 million and $0.6 million,
respectively, for the years ended June 30, 2010 and 2009, related to the
stock-based compensation charge recognized related to employees of Net1 as it is
able to deduct the difference between the market value on date of exercise by
the option recipient and the exercise price from income subject to taxation in
the United States.
14. INCOME TAXES
Income tax
provision
The table below presents the
components of income before income taxes as of June 30, 2010, 2009 and 2008:
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
South Africa
|
$
|
136,197
|
|
$
|
143,680
|
|
$
|
126,439
|
|
United States
|
|
(6,909
|
)
|
|
(31,048
|
)
|
|
1,459
|
|
Other
|
|
(50,408
|
)
|
|
18,288
|
|
|
(1,790
|
)
|
Income before income taxes
|
$
|
78,880
|
|
$
|
130,920
|
|
$
|
126,108
|
|
Presented below is the provision
for income taxes by location of the taxing jurisdiction for each of the years
ended June 30:
|
|
2010
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax
|
$
|
109,669
|
|
|
$
|
83,756
|
|
|
$
|
45,520
|
|
South Africa
|
|
47,225
|
|
|
|
50,092
|
|
|
|
44,330
|
|
United States (1)
|
|
62,443
|
|
|
|
33,009
|
|
|
|
1,190
|
|
Other
|
|
1
|
|
|
|
655
|
|
|
|
-
|
|
Deferred taxation charge (benefit)
|
|
(2,770
|
)
|
|
|
(1,460
|
)
|
|
|
(931
|
)
|
South Africa
|
|
(441
|
)
|
|
|
(916
|
)
|
|
|
(1,056
|
)
|
United States
|
|
(1,236
|
)
|
|
|
928
|
|
|
|
(61
|
)
|
Other
|
|
(1,093
|
)
|
|
|
(1,472
|
)
|
|
|
186
|
|
Change in tax rate
|
|
-
|
|
|
|
(3,003
|
)
|
|
|
(5,397
|
)
|
Foreign tax credits generated United States (1)
|
|
(66,077
|
)
|
|
|
(36,549
|
)
|
|
|
-
|
|
Income tax provision
|
$
|
40,822
|
|
|
$
|
42,744
|
|
|
$
|
39,192
|
|
(1) Balances for the year ended
June 30, 2009, have been re-presented, with a reduction in both Current income
tax United States and Foreign tax credits generated United States of
$16,533. This re-presentation has no impact on the income tax expense or on net
income for the Company.
F-40
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
14. INCOME TAXES (continued)
Income tax provision
(continued)
A reconciliation of income taxes,
calculated at the fully distributed South African income tax rate to the
Companys effective tax rate, for the years ended June 30, 2010, 2009 and 2008
is as follows:
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Income tax rate reconciliation
|
|
|
|
|
|
|
|
|
|
Income taxes at fully distributed South
African tax rates
|
|
34.55%
|
|
|
34.55%
|
|
|
35.45%
|
|
Permanent items
|
|
21.69%
|
|
|
1.60%
|
|
|
0.02%
|
|
Foreign tax credits
|
|
(82.70)%
|
|
|
(40.09)%
|
|
|
-%
|
|
Taxation on deemed dividends in the United States
|
|
85.60%
|
|
|
41.58%
|
|
|
-%
|
|
Movement in valuation allowance
|
|
(5.02)%
|
|
|
(0.41)%
|
|
|
(0.11)%
|
|
Prior year adjustments
|
|
(2.37)%
|
|
|
(2.28)%
|
|
|
-%
|
|
Change in tax rate
|
|
-%
|
|
|
(2.29)%
|
|
|
(4.28)%
|
|
Income tax provision
|
|
51.75%
|
|
|
32.66%
|
|
|
31.08%
|
|
There were no changes to the
enacted tax rate in the year ended June 30, 2010. On July 22, 2008 a change in
the corporate rate of taxation for South African companies was promulgated
reducing the enacted tax rate to 34.55% for the year ended June 30, 2009. On
January 8, 2008, the Revenue Laws Second Amendment Act (Act 36 of 2007)
(Revenue Laws Act), was promulgated in South Africa. The Revenue Laws Act
included legislation to reduce the rate of STC from 12.50% to 10.00%, effective
October 1, 2007 which resulted in an enacted tax rate of 35.45% for the year
ended June 30, 2008.
The permanent item relates principally to impairment of
goodwill which is not deductible for tax purposes.
Net1 included actual and deemed
dividends received from New Aplitec in its year ended June 30, 2010, taxation
computation. Net1 applied net operating losses against this income. Net1
generated foreign tax credits as a result of the inclusion of the dividends in
its taxable income. Net1 has applied certain of these foreign tax credits
against its current income tax provision for the year ended June 30, 2010.
Deferred tax assets and
liabilities
Deferred income taxes reflect the
temporary differences between the amounts at which assets and liabilities are
recorded for financial reporting purposes and the amounts utilized for tax
purposes. The primary components of the temporary differences that gave rise to
the Companys deferred tax assets and liabilities as at June 30, and their
classification, were as follows:
|
|
2010
|
|
|
2009
|
|
Total deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
$
|
7,376
|
|
$
|
2,837
|
|
Provisions and accruals
|
|
2,340
|
|
|
1,941
|
|
FTS
patent
|
|
1,764
|
|
|
1,834
|
|
Intangible assets
|
|
20,728
|
|
|
25,825
|
|
Foreign
tax credits (1)
|
|
16,278
|
|
|
21,308
|
|
Other
|
|
2,297
|
|
|
3,136
|
|
Total deferred tax assets before valuation allowance
|
|
50,783
|
|
|
56,881
|
|
Valuation allowances (1)
|
|
(26,412
|
)
|
|
(34,309
|
)
|
Total deferred tax
assets, net of valuation allowance
|
$
|
24,371
|
|
$
|
22,572
|
|
(1) Balances as at June 30, 2009,
have been re-presented, with an increase of $16,553 in both Foreign tax credits
and Valuation allowance. This re-presentation has no impact on the Total
deferred tax assets, net of valuation allowance.
F-41
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
14. INCOME TAXES (continued)
Deferred tax assets and
liabilities (continued)
|
|
2010
|
|
|
2009
|
|
Total deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
$
|
17,614
|
|
$
|
20,518
|
|
STC liability, net of STC
credits
|
|
28,998
|
|
|
31,381
|
|
Other
|
|
287
|
|
|
128
|
|
Total deferred tax
liabilities
|
|
46,899
|
|
|
52,027
|
|
|
|
|
|
|
|
|
Reported as
|
|
|
|
|
|
|
Current
deferred tax assets
|
|
16,330
|
|
|
12,282
|
|
Long term deferred tax
liabilities
|
|
38,858
|
|
|
41,737
|
|
Net deferred income
tax liabilities
|
$
|
22,528
|
|
$
|
29,455
|
|
Increase
in total deferred tax assets net operating loss
carryforwards
Included in total deferred tax
assets net operating loss carryforwards are net operating losses generated by
MediKredit prior to acquisition. The MediKredit net deferred tax asset
recognized on acquisition was $2.6 million, at exchange rates prevailing at year
end. During the year ended June 30, 2010, the Company utilized approximately
$0.9 million, at exchange rates prevailing at year end, of this deferred tax
asset. Net operating loss carryforwards also includes $2.3 million related to
Net1 UTA, refer discussion below under Decrease in total deferred tax assets
intangible assets.
Decrease
in total deferred tax assets intangible assets
Included in total deferred tax
assets intangible assets as of June 30, 2010, is an intangible asset related
to license rights in Net1 UTA. These license rights are termed software for
Austrian tax purposes and were valued for Austrian tax purposes based on
previous license payments at €50.76 million in June 2006. The Company expects to
amortize the license rights in its tax returns over a period of 15 years. Any
unused amounts are not carried forward to the subsequent year of assessment.
During the years ended June 30, 2010 and 2009, Net1 UTA utilized approximately
$0.8 million and $0.7 million, respectively, of these license rights against its
taxable income and in 2010 expensed $0.8 million of the unutilized deferred tax
asset and in 2009 reversed $0.7 million of the deferred tax asset against
goodwill. In addition, during the year ended June 30, 2010, the Company provided
an additional valuation allowance of $0.5 million against this deferred tax
asset. As of June 30, 2010, the gross carrying value of this deferred tax asset
is approximately $11.4 million and the net amount is $2.6 million.
Net1 Applied Technologies Austria
GmbH (Net1Austria) generated tax deductible goodwill related to the
acquisition of Net1 UTA in August 2008 of $4.2 million, net of a valuation
allowance of $8.4 million, at exchange rates prevailing as of August 31, 2008.
Under Austrian tax law Net1Austria can deduct up to 50% of the goodwill
recognized, as defined under Austrian tax law, over a period of 15 years. Unused
amounts are carried forward to subsequent years of assessment and are included
in net operating loss carryforwards. During the year ended June 30, 2010,
approximately $5.6 million was available for deduction against Net1 Austria
taxable income. This amount was not used during the year ended June 30, 2010 and
has been included in net operating loss carryforwards. As of June 30, 2009, the
gross value of this goodwill deferred tax asset was approximately $9.1 million
and the net amount was $2.1 million.
Decrease
in total deferred tax liabilities intangible assets
Deferred tax liabilities
intangible assets have decreased during the year ended June 30, 2010 primarily
as a result of the amortization of the underlying assets during the year.
F-42
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
14. INCOME TAXES (continued)
Deferred tax assets and
liabilities (continued)
Decrease
in total deferred tax liabilities STC liability, net of STC
credits
Deferred tax liabilities STC
liability, net of STC credits have decreased during the year ended June 30,
2010, primarily as a result of payments of STC during the year resulting from
the distribution of dividends by New Aplitec exceeding the STC liability
recognized during the year resulting from net income generated by the Companys
South African subsidiaries.
Valuation
allowance
At June 30, 2010, the Company had
deferred tax assets of $24.4 million (2009: $22.6 million), net of the valuation
allowance. Management believes, based on the weight of available positive and
negative evidence it is more likely than not that the Company will realize the
benefits of these deductible differences, net of the valuation allowance.
However, the amount of the deferred tax asset considered realizable could be
adjusted in the future if estimates of taxable income are revised.
At June 30, 2010, the Company had
a valuation allowance of $31.9 million (2009: $21.4 million) to reduce its
deferred tax assets to estimated realizable value. The valuation allowances at
June 30, 2010 and 2009, relate to net operating loss carryforwards (2010: $3.2
million, 2009: $1.7 million), the FTS patent (2010: $0.4 million, 2009: $0.8
million), intangible assets including tax deductible goodwill (2010: $15.8
million, 2009: $17.5 million), foreign tax credits (2010: $7.0 million, 2009: $0
million) and other (2010: $0 million, 2009: $1.4 million).
Net
operating loss carryforwards and foreign tax credits
United
States
As of June 30, 2010, Net1 had net
operating loss carryforwards that will expire, if unused, as follows:
Year of expiration
|
|
US net
|
|
|
|
operating loss
|
|
|
|
carry
|
|
|
|
forwards
|
|
2023
|
$
|
272
|
|
2024
|
|
4,532
|
|
|
$
|
4,804
|
|
During the years ended June 30,
2010 and 2009, Net1 generated additional foreign tax credits related to the cash
dividends received and deemed dividend for tax reporting purposes. Net1 has
unused net foreign tax credits of $9.2 million as of June 30, 2010, which its
management believes will be utilized in future periods. The unused foreign tax
credits generated expire after ten years in 2020 and 2019.
South
Africa and Austria
Net operating losses incurred in
South Africa generally expire if a company does not trade during the year. In
South Africa, the subsidiary companies that incurred the losses are currently
trading and will continue to trade for the foreseeable future. Net operating
losses incurred in Austria generally do not expire.
F-43
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
14. INCOME TAXES (continued)
Uncertain tax
positions
As of June 30, 2010 and 2009,
respectively the Company has unrecognized tax benefits of $1.5 million and $1.1
million, all of which would impact the Companys effective tax rate. The Company
files income tax returns mainly in South Africa, Austria, the Russian Federation
and in the US federal jurisdiction. As of June 30, 2010, the Companys South
African subsidiaries are no longer subject to income tax examination by the
South African Revenue Service for periods before June 30, 2006. 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. 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 increased its
unrecognized tax benefits by $0.4 million during the year ended June 30, 2010.
The following is a reconciliation of the total amounts of unrecognized tax
benefits for the year ended June 30, 2010 and 2009:
|
|
2010
|
|
|
2009
|
|
Unrecognized tax benefits - opening balance
|
$
|
1,060
|
|
$
|
813
|
|
Gross increases - tax positions in current period
|
|
368
|
|
|
510
|
|
Lapse of statute limitations
|
|
-
|
|
|
(272
|
)
|
Foreign currency adjustment
|
|
32
|
|
|
9
|
|
Unrecognized tax benefits - closing balance
|
$
|
1,460
|
|
$
|
1,060
|
|
As of each of June 30, 2010 and
2009, the Company had accrued interest related to uncertain tax positions of
approximately $0.1 million on its balance sheet.
15. 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 in October 2008. As discussed in note
11, all of the remaining linked unit holders converted their linked units to
common stock as a result of listing of all of the Companys common stock on the
JSE and the linked units had the same rights and entitlements as those attached
to common stock. As a result of the conversion of all the linked units, the
entire consolidated net income of the Company is attributable to the holders of
Net1 common stock.
As the linked units owned by
holders were exchangeable for special convertible preferred stock at the ratio
of 7.37:1, which was then converted to common stock at the ratio of 1:1, the
basic earnings per share for the year ended June 30, 2008, for the common stock
and linked units are the same and is calculated by dividing the net income by
the combined number (2008: 57.2 million) of weighted average common stock (2008:
52.3 million) and special convertible preferred stock (2008: 4.9 million) in
issue.
Basic earnings per share include
restricted stock awards that meet the definition of a participating security.
Restricted stock awards are eligible to receive non-forfeitable dividend
equivalents at the same rate as common stock. Basic earnings per share have been
calculated using the two-class method and basic earnings per share for the years
ended June 30, 2010, 2009 and 2008, reflects only undistributed earnings. Basic
earnings per shares for the years ended June 30, 2009 and 2008, respectively,
have been retrospectively adjusted to include participating securities in the
weighted average number of outstanding shares of common stock as their rights to
participate in undistributed earnings are identical to those of common
stock.
Diluted earnings per share has
been calculated to give effect to the number of additional common stock/ linked
units that would have been outstanding if the potential dilutive instruments had
been issued in each period. The calculation of diluted earnings per share
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 the vesting conditions in respect of a portion of the awards had
been satisfied. The vesting conditions are discussed in note 13 Stock-based
compensation.
F-44
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
15. EARNINGS PER SHARE (continued)
The weighted average number of
outstanding shares presented below includes the common stock as well as the
special convertible preferred stock, as the holders of special convertible
preferred stock had the same rights and entitlements as those attached to the
common stock.
The following tables detail the
weighted average number of outstanding shares used for the calculation of
earnings per share as of June 30, 2010, 2009 and 2008:
|
|
2010
|
|
|
2009
(1)
|
|
|
2008
(1)
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
Weighted average number of outstanding shares
of common stock and linked units basic
|
|
46,245
|
|
|
56,552
|
|
|
57,698
|
|
Weighted average effect of dilutive securities: employee stock
options
|
|
190
|
|
|
187
|
|
|
480
|
|
Weighted average number of outstanding shares
of common stock and linked units diluted
|
|
46,435
|
|
|
56,739
|
|
|
58,178
|
|
(1) the weighted average number
of outstanding shares have been retrospectively adjusted as discussed above.
|
|
|
|
|
|
|
|
|
|
|
16. SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow
information:
|
|
|
|
|
|
|
|
|
|
The following table presents the
supplemental cash flow disclosures for the years ended June 30, 2010, 2009 and
2008:
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Cash received from interest
|
$
|
10,294
|
|
$
|
20,375
|
|
$
|
27,366
|
|
Cash paid for interest
|
$
|
747
|
|
$
|
7,982
|
|
$
|
11,255
|
|
Cash paid for income taxes
|
$
|
54,143
|
|
$
|
52,520
|
|
$
|
35,384
|
|
Financing
activities
Treasury shares, at cost
presented on the Companys consolidated balance sheet as of June 30, 2009,
includes 93,372 shares of the Companys common stock acquired for approximately
$1.3 million which were paid for on July 1, 2009. The liability for this payment
was included in accounts payable on the Companys consolidated balance sheet as
of June 30, 2009.
As discussed in Note 13, during
the year ended June 30, 2008, the Company acquired 6,448 of the Companys common
stock at $24.00 from employees exercising stock options as a result of net share
exercises under the terms of the option agreements. These shares are included in
the share count and amount reflected as treasury shares issued on the
consolidated balance sheet as of June 30, 2008.
17. OPERATING SEGMENTS
The Company discloses segment
information as reflected in the management information systems reports that its
chief operating decision makers use in making decisions and to report certain
entity-wide disclosures about products and services, major customers, and the
countries in which the entity holds material assets or reports material
revenues.
The Company currently has four
reportable segments: Transaction-based activities, Smart card accounts,
Financial services and Hardware, software and related technology sales. Each
segment, other than the Hardware, software and related technology sales segment,
operates mainly within South Africa. The Companys reportable segments offer
different products and services and require different resources and marketing
strategies and share the Companys assets.
F-45
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
17. OPERATING SEGMENTS (continued)
The Transaction-based activities
segment currently consists mainly of a state pension and welfare benefit
distribution service provided to the South African government, transaction
processing for retailers, utilities, medical-related claim service customers and
banks and transaction fees generated from UEPS-enabled smartcards used in Iraq.
Fee income is earned based on the number of beneficiaries included in the
government pay-file as well as from merchants and card holders using the
Companys merchant retail application. In addition, utility providers and banks
are charged a fee for transaction processing services performed on their behalf
at retailers. This segment has individually significant customers that each
provides more than 10% of the total revenue of the Company. For the year ended
June 30, 2010, there were three such customers, providing 29%, 17% and 11% of
total revenue (2009: two such customers, providing 31% and 15% of total revenue;
2008: three such customers, providing 31%, 16% and 10% of total revenue). The
MediKredit and FIHRST businesses have been allocated to the Transaction-based
activities segment and are more fully described in note 3.
The Smart card accounts segment
derives revenue from the provision of smart card accounts, as a fixed monthly
fee per card is charged for the maintenance of these accounts.
The Financial services segment
provides short-term loans as a principal and life insurance products on an
agency basis and generates 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. In addition, the Company
recorded a goodwill impairment of $1.8 million which was allocated to the
Financial services segment during the year ended June 30, 2009. From March 1,
2009, the Financial services segment comprised only the Companys UEPS-based
microlending business.
The Hardware, software and
related technology sales segment markets, sells and implements the UEPS as well
as develops and provides Prism secure transaction technology, solutions and
services. From September 1, 2008, the segment includes the operations of Net1
UTA, which comprise mainly hardware sales and licenses of the DUET system. The
segment undertakes smart card system implementation projects, delivering
hardware, software and business solutions in the form of customized systems.
Sales of hardware, SIM cards, cryptography services, SIM card licenses and other
software licenses are recorded within this segment. This segment also generates
rental income from hardware provided to merchants enrolled in the Companys
merchant retail application. Sales to SmartSwitch Nigeria Limited and the
related taxation implications are not reflected in revenue to external
customers, operating income, income taxation expense or net income after
taxation presented in the tables below. The impairment loss of approximately
$37.4 million discussed in note 9 is included in the results of this operating
segment during the year ended June 30, 2010.
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:
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Transaction-based
activities
|
$
|
191,362
|
|
$
|
148,399
|
|
$
|
153,444
|
|
Smart card accounts
|
|
31,971
|
|
|
29,576
|
|
|
35,914
|
|
Financial services
|
|
4,023
|
|
|
5,430
|
|
|
8,251
|
|
Hardware, software and related
technology sales
|
|
53,008
|
|
|
63,417
|
|
|
56,447
|
|
Total
|
|
280,364
|
|
|
246,822
|
|
|
254,056
|
|
Inter-company Revenues
|
|
|
|
|
|
|
|
|
|
Transaction-based
activities
|
|
3,837
|
|
|
3,499
|
|
|
4,243
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
|
-
|
|
Hardware, software and related
technology sales
|
|
1,892
|
|
|
2,557
|
|
|
1,107
|
|
Total
|
$
|
5,729
|
|
$
|
6,056
|
|
$
|
5,350
|
|
F-46
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
17. OPERATING SEGMENTS (continued)
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
$
|
106,036
|
|
$
|
83,509
|
|
$
|
84,229
|
|
Smart card accounts
|
|
14,532
|
|
|
13,442
|
|
|
16,325
|
|
Financial services
|
|
2,881
|
|
|
(34
|
)
|
|
1,935
|
|
Hardware, software and related technology
sales
|
|
(42,524
|
)
|
|
5,498
|
|
|
11,708
|
|
Corporate/ Eliminations
|
|
(11,114
|
)
|
|
(8,980
|
)
|
|
(3,811
|
)
|
Total
|
|
69,811
|
|
|
93,435
|
|
|
110,386
|
|
Interest earned
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
-
|
|
|
-
|
|
|
-
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
|
-
|
|
Hardware, software and related
technology sales
|
|
-
|
|
|
-
|
|
|
-
|
|
Corporate/ Eliminations
|
|
10,116
|
|
|
20,290
|
|
|
27,411
|
|
Total
|
|
10,116
|
|
|
20,290
|
|
|
27,411
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
981
|
|
|
7,368
|
|
|
11,590
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
Financial services
|
|
1
|
|
|
-
|
|
|
-
|
|
Hardware, software and related technology
sales
|
|
5
|
|
|
197
|
|
|
79
|
|
Corporate/ Eliminations
|
|
60
|
|
|
1,897
|
|
|
20
|
|
Total
|
|
1,047
|
|
|
9,462
|
|
|
11,689
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
6,714
|
|
|
4,461
|
|
|
4,755
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
Financial services
|
|
510
|
|
|
434
|
|
|
434
|
|
Hardware, software and related
technology sales
|
|
10,978
|
|
|
11,020
|
|
|
4,312
|
|
Corporate/ Eliminations
|
|
1,146
|
|
|
1,167
|
|
|
1,321
|
|
Total
|
|
19,348
|
|
|
17,082
|
|
|
10,822
|
|
Income taxation expense
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
29,713
|
|
|
21,966
|
|
|
21,512
|
|
Smart card accounts
|
|
4,068
|
|
|
3,764
|
|
|
4,735
|
|
Financial services
|
|
806
|
|
|
702
|
|
|
559
|
|
Hardware, software and related technology
sales
|
|
684
|
|
|
1,547
|
|
|
3,809
|
|
Corporate/ Eliminations
|
|
5,551
|
|
|
14,765
|
|
|
8,577
|
|
Total
|
|
40,822
|
|
|
42,744
|
|
|
39,192
|
|
Net income
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
|
75,536
|
|
|
54,179
|
|
|
51,942
|
|
Smart card accounts
|
|
10,465
|
|
|
9,678
|
|
|
11,592
|
|
Financial services
|
|
2,073
|
|
|
(711
|
)
|
|
1,371
|
|
Hardware, software and related
technology sales
|
|
(43,405
|
)
|
|
3,905
|
|
|
7,797
|
|
Corporate/ Eliminations
|
|
(5,679
|
)
|
|
19,550
|
|
|
13,993
|
|
Total
|
$
|
38,990
|
|
$
|
86,601
|
|
$
|
86,695
|
|
F-47
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
17.
OPERATING SEGMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for long-lived assets
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
$
|
2,177
|
|
$
|
3,161
|
|
$
|
2,774
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
Financial services
|
|
302
|
|
|
751
|
|
|
562
|
|
Hardware, software and related technology sales
|
|
251
|
|
|
858
|
|
|
227
|
|
Corporate/ Eliminations
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
2,730
|
|
$
|
4,770
|
|
$
|
3,563
|
|
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.
Geographic
Information
Revenues based on the geographic
location from which the sale originated for the years ended June 30, are
presented in the table below:
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
South Africa
|
$
|
267,478
|
|
$
|
220,408
|
|
$
|
238,905
|
|
Europe
|
|
12,301
|
|
|
19,560
|
|
|
-
|
|
Rest of world
|
|
585
|
|
|
6,854
|
|
|
15,151
|
|
Total
|
$
|
280,364
|
|
$
|
246,822
|
|
$
|
254,056
|
|
18. COMMITMENTS AND CONTINGENCIES
Operating lease
commitments
The Company leases certain
premises. At June 30, 2010, the future minimum payments under operating leases
consist of:
Due within 1 year
|
$
|
3,349
|
|
Due within 2 years
|
|
2,083
|
|
Due within 3 years
|
|
1,173
|
|
Due within 4 years
|
|
890
|
|
Due within 5 years
|
$
|
-
|
|
Operating lease payments related
to the premises and equipment were $5.2 million, $4.1 million and $4.2 million,
respectively, for the years ended June 2010, 2009 and 2008, respectively.
Capital
commitments
As of June 30, 2010 and 2009, the
Company had outstanding capital commitments of approximately $0.02 million and
$0.04 million, respectively.
F-48
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
18. COMMITMENTS AND CONTINGENCIES (continued)
Purchase
obligations
As of June 30, 2010 and 2009, the
Company had purchase obligations totaling $3.1 million and $1.1 million,
respectively.
Contingencies
The Company is subject to a
variety of insignificant claims and suits that arise from time to time in the
ordinary course of business.
Management currently believes
that the resolution of these matters, individually or in the aggregate, will not
have a material adverse impact on the Companys financial position, results of
operations and cash flows.
19. SHORT-TERM FACILITIES
As of June 30, 2010, the Company
had a short-term facility in South African Rand of approximately $32.7 million,
translated at exchange rates applicable as of June 30, 2010, with Nedbank
Limited (Nedbank). As of June 30, 2010 the overdraft rate on this facility was
8.85% . Certain of the Companys South African subsidiaries have provided a
cross deed of suretyship whereby each of these companies has bound itself as
surety and co-principal debtor with each other for the fulfillment of each
other's obligations under the facility. These South African subsidiaries have
agreed that any debit and credit bank account balances with Nedbank may be set
off against each other. Certain South African subsidiaries have ceded trade
receivables with an aggregate value of approximately $20.5 million, translated
at exchange rates applicable as of June 30, 2010, as security for the facility
as well as the Companys investment in Cash Paymaster Services (Proprietary)
Limited, a wholly owned South African subsidiary. As of June 30, 2010, the
Company had utilized none of its South African short-term facility.
In addition, Net1 UTA had
short-term facilities of approximately $1.2 million, translated at exchange
rates applicable as of June 30, 2010, with each of two of Austrias largest
banks. These facilities are available to the Company. The interest rate
applicable to these short-term facilities is negotiated when the facilities are
utilized. As of June 30, 2010, the Company had utilized none of its Austrian
short-term facilities.
Management believes that the
Companys current short-term facilities are sufficient in order to meet its
future obligations as they arise.
Short-term loan facility
obtained to fund the Net1 UTA acquisition
In 2009, the Company obtained a
$110 million six month bank loan facility to fund the cash portion of the
purchase price for the Net1 UTA acquisition. The Company was entitled to settle
the full facility at any time during the six month period without incurring a
prepayment penalty. During the year ended June 30, 2009, the Company utilized
approximately $103 million of this facility to pay the cash portion of the
purchase price, the $1.1 million facility fee and transaction-related costs. The
interest rate charged on this facility was LIBOR plus 2.50% .
In 2009, the Company pledged $25
million of its US dollar-denominated cash reserves and the A class shares and B
class shares it owned in New Aplitec, as collateral security for the bank loan.
The Company paid the lender an upfront facility fee of $1.1 million which was
amortized over the period that the loan was outstanding. Included in interest
income, net for year ended June 30, 2009, is $1.1 million related to the
facility fee. On October 16, 2008, the Company used internally generated funds
to repay the loan in full and all collateral security arrangements were
terminated.
F-49
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
20. RELATED PARTY TRANSACTIONS
During the year end June 30,
2010, the Company engaged the services of PBel (Pty) Ltd (PBEL) to perform
software development services, primarily software utilized on mobile phones and
by cash-accepting kiosks. All software developed is the Companys property. PBEL
is jointly owned by Dr. Belamant and his son. The PBEL transaction was approved
by the Companys Audit Committee and thus Dr. Belamant did not participate in
the Boards decision to engage PBEL. During the year ended June 30, 2010, the
Company paid PBEL approximately $0.2 million for software development
services
A South African trust was created
in connection with the Aplitec transaction to hold the linked units. As
described in note 11, as of October 16, 2008, the linked units ceased to exist.
The Company did not have any interests in the trust nor did it have any
involvement in the day-to-day operations of the trust. The Company paid the
expenses of the trust which comprised mainly the administrative costs related to
the conversion by linked unit holders to Net1 common stock. During the years
ended June 30, 2009 and 2008, these expenses were approximately $0.03 million
and $0.1 million, respectively. In August 2009, the trustee of the trust
received written confirmation from the Master of the Court that the trust had
been deregistered.
21. FOREIGN EXCHANGE GAIN RELATED TO SHORT-TERM
INVESTMENT
The Company entered into an asset
swap arrangement (in the form of a $110 million 32-day call account instrument)
in order to facilitate the short-term loan facility described in note 19,
however this asset swap arrangement was not linked to the loan facility and did
not require redemption on the same date as the repayment of the loan facility.
The Company earned interest at a rate of one month US dollar London Interbank
Offered Rate (LIBOR) plus 0.25% on this instrument. The Company gave a call
notice to the obligor on September 10, 2008, and the capital of $110 million (or
ZAR 1,100.7 million) and interest on this instrument was repaid on October 16,
2008. The Company has realized a foreign exchange gain of approximately $26.7
million for the year ended June 30, 2009. No hedge accounting was applied.
22. COSTS RELATED TO JSE LISTING
The Company completed its inward
listing, a secondary listing, on the JSE in South Africa on October 8, 2008. The
Company did not issue any additional shares in connection with the listing,
however, the listing did result in a trigger event which converted all of the
Companys special convertible preferred stock to common stock (see note 11). The
Companys selling, general and administration expense includes the costs
incurred related to the listing on the JSE.
The table below presents the costs incurred in connection with
JSE listing during the year ended June 30, 2009:
|
|
June 30,
|
|
|
|
2009
|
|
Advisory fee to sponsor
|
$
|
122
|
|
Legal fees
|
|
174
|
|
Regulatory and filing fees
|
|
93
|
|
Printing
|
|
47
|
|
Accounting fees
|
|
27
|
|
Other
|
|
32
|
|
Total
costs related to JSE listing
|
$
|
495
|
|
F-50
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2010, 2009 and 2008
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
23. UNAUDITED QUARTERLY RESULTS
The following tables contain
selected unaudited consolidated statements of (loss) income for each quarter of
fiscal 2010 and 2009:
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jun 30,
|
|
|
Mar 31,
|
|
|
Dec 31,
|
|
|
Sep 30,
|
|
|
Total
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
YTD
|
|
|
|
(In thousands except per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
68,695
|
|
$
|
72,291
|
|
$
|
73,864
|
|
$
|
65,514
|
|
$
|
280,364
|
|
Operating (loss) income
|
|
(12,835
|
)
|
|
26,859
|
|
|
29,419
|
|
|
26,368
|
|
|
69,811
|
|
Net (loss) income attributable to Net1
|
$
|
(17,007
|
)
|
$
|
18,772
|
|
$
|
19,284
|
|
$
|
17,941
|
|
$
|
38,990
|
|
(Loss) Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share, in $
|
|
(0.37
|
)
|
|
0.41
|
|
|
0.43
|
|
|
0.37
|
|
|
0.84
|
|
Diluted (loss) earnings per share, in $
|
|
(0.37
|
)
|
|
0.41
|
|
|
0.42
|
|
|
0.37
|
|
|
0.84
|
|
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jun 30,
|
|
|
Mar 31,
|
|
|
Dec 31,
|
|
|
Sep 30,
|
|
|
Total
|
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
YTD
|
|
|
|
(In thousands except per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
61,621
|
|
$
|
55,878
|
|
$
|
61,388
|
|
$
|
67,935
|
|
$
|
246,822
|
|
Operating income
|
|
22,479
|
|
|
20,873
|
|
|
22,805
|
|
|
27,278
|
|
|
93,435
|
|
Net income attributable to Net1
|
$
|
18,216
|
|
$
|
14,379
|
|
$
|
27,762
|
|
$
|
26,244
|
|
$
|
86,601
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share, in $
|
|
0.33
|
|
|
0.26
|
|
|
0.49
|
|
|
0.45
|
|
|
1.53
|
|
Diluted earnings per share, in $
|
|
0.33
|
|
|
0.26
|
|
|
0.49
|
|
|
0.45
|
|
|
1.53
|
|
24. SUBSEQUENT EVENTS
On August 24, 2010, the Company
entered into a new service level agreement with the South African Social
Security Agency (SASSA) which replaces its previous SASSA contract that
expired on June 30, 2010. The new agreement is retroactively effective from July
1, 2010 and expires on March 31, 2011. Under the new contract, the Company will
continue to provide its social welfare grants distribution service to SASSA in
five of South Africas nine provinces. As was the case with the Company's
previous contact with SASSA the new contract contains a standard pricing formula
for all provinces based on a transaction fee per beneficiary paid, regardless of
the number or amount of grants paid per beneficiary, calculated on a guaranteed
minimum number of beneficiaries per month. However, the new contract provides
for a reduction in both the level of the transaction fee per beneficiary paid
and the guaranteed minimum number of beneficiaries. Because the Company
continues to derive a substantial percentage of its revenues from the SASSA
contract, it expects that the terms of the new contract will materially reduce
its revenues, operating income, net income and cash flow for the year ended June
30, 2011.
*********************
F-51
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