UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 2011
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ________________ To
________________
Commission file number:
000-31203
NET 1 UEPS TECHNOLOGIES,
INC.
(Exact name of registrant as specified in its
charter)
Florida
|
98-0171860
|
(State or other jurisdiction
|
(IRS Employer
|
of incorporation or organization)
|
Identification No.)
|
President Place, 4
th
Floor, Cnr. Jan
Smuts Avenue and Bolton Road
Rosebank, Johannesburg 2196, South
Africa
(Address of principal executive offices, including zip
code)
Registrants telephone number, including area code:
27-11-343-2000
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO
[ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
YES [X] NO [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act (check one):
[X]
|
Large accelerated filer
|
[ ]
|
Accelerated filer
|
|
|
|
|
[ ]
|
Non-accelerated filer
|
[ ]
|
Smaller reporting company
|
|
(do not check if a smaller
reporting company)
|
|
|
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
YES [
] NO [X ]
As of May 3, 2011 (the latest practicable date), 45,535,353
shares of the registrants common stock, par value $0.001 per share, net of
treasury shares, were outstanding.
Form 10-Q
NET 1 UEPS TECHNOLOGIES, INC.
Table of Contents
1
Part I. Financial Information
Item 1. Financial Statements
NET 1 UEPS TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
|
|
Unaudited
|
|
|
(A)
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands, except share data)
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
88,890
|
|
$
|
153,742
|
|
Pre-funded
social welfare grants receivable (Note 3)
|
|
3,199
|
|
|
6,660
|
|
Accounts receivable, net of allowances of March: $398; June:
$807
|
|
75,125
|
|
|
41,854
|
|
Finance
loans receivable
|
|
8,514
|
|
|
4,221
|
|
Inventory (Note 4)
|
|
7,113
|
|
|
3,622
|
|
Deferred
income taxes
|
|
18,748
|
|
|
16,330
|
|
Total current assets before settlement assets
|
|
201,589
|
|
|
226,429
|
|
Settlement assets
|
|
146,441
|
|
|
83,661
|
|
Total current assets
|
|
348,030
|
|
|
310,090
|
|
PROPERTY, PLANT AND EQUIPMENT, NET OF ACCUMULATED
|
|
|
|
|
|
|
DEPRECIATION OF March: $46,189; June:
$35,271
|
|
33,861
|
|
|
7,286
|
|
EQUITY-ACCOUNTED INVESTMENTS (Note 5)
|
|
1,893
|
|
|
2,598
|
|
GOODWILL (Note 6)
|
|
187,026
|
|
|
76,346
|
|
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF
March: $31,764; June: $34,226 (Note 6)
|
|
147,922
|
|
|
68,347
|
|
OTHER LONG-TERM ASSETS, including available
for sale securities (Note 5)
|
|
21,640
|
|
|
7,423
|
|
TOTAL ASSETS
|
|
740,372
|
|
|
472,090
|
|
LIABILITIES
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
Bank overdraft
|
|
454
|
|
|
-
|
|
Accounts
payable
|
|
16,101
|
|
|
3,596
|
|
Other payables
|
|
62,471
|
|
|
50,855
|
|
Current
portion of long-term borrowings (note 8)
|
|
7,347
|
|
|
-
|
|
Income taxes payable
|
|
12,771
|
|
|
3,476
|
|
Total current liabilities before settlement obligations
|
|
99,144
|
|
|
57,927
|
|
Settlement obligations
|
|
146,441
|
|
|
83,661
|
|
Total current liabilities
|
|
245,585
|
|
|
141,588
|
|
DEFERRED INCOME TAXES
|
|
58,698
|
|
|
38,858
|
|
LONG-TERM BORROWINGS (note 8)
|
|
115,205
|
|
|
-
|
|
OTHER LONG-TERM LIABILITIES, including non-controlling
interest loans
|
|
1,029
|
|
|
4,343
|
|
TOTAL LIABILITIES
|
|
420,517
|
|
|
184,789
|
|
COMMITMENTS AND CONTINGENCIES
|
|
-
|
|
|
-
|
|
EQUITY
|
|
|
|
|
|
|
NET1 EQUITY:
|
|
|
|
|
|
|
COMMON STOCK (Note
9)
Authorized:
200,000,000 with $0.001 par value;
Issued
and outstanding shares, net of treasury - March: 45,535,353; June:
45,378,397
|
|
59
|
|
|
59
|
|
PREFERRED STOCK
Authorized
shares: 50,000,000 with $0.001 par value;
Issued
and outstanding shares, net of treasury: 2011: -; 2010: -
|
|
-
|
|
|
-
|
|
ADDITIONAL PAID-IN-CAPITAL
|
|
139,211
|
|
|
133,543
|
|
TREASURY SHARES,
AT COST: March: 13,149,042; June: 13,149,042
|
|
(173,671
|
)
|
|
(173,671
|
)
|
ACCUMULATED OTHER COMPREHENSIVE
LOSS
|
|
(36,900
|
)
|
|
(66,396
|
)
|
RETAINED EARNINGS
|
|
388,158
|
|
|
392,343
|
|
TOTAL NET1 EQUITY
|
|
316,857
|
|
|
285,878
|
|
NON-CONTROLLING INTEREST
|
|
2,998
|
|
|
1,423
|
|
TOTAL EQUITY
|
|
319,855
|
|
|
287,301
|
|
TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY
|
$
|
740,372
|
|
$
|
472,090
|
|
(A) Derived from audited financial
statements
See Notes to Unaudited Condensed Consolidated Financial Statements
2
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Operations
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
$
|
92,758
|
|
$
|
72,291
|
|
$
|
246,052
|
|
$
|
211,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold,
IT processing, servicing and support
|
|
29,302
|
|
|
17,910
|
|
|
76,551
|
|
|
55,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administration
|
|
32,618
|
|
|
22,381
|
|
|
91,707
|
|
|
58,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
11,192
|
|
|
5,141
|
|
|
25,188
|
|
|
14,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment loss (note 6)
|
|
41,771
|
|
|
-
|
|
|
41,771
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING (LOSS) INCOME
|
|
(22,125
|
)
|
|
26,859
|
|
|
10,835
|
|
|
82,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST (EXPENSE) INCOME, net
|
|
(955
|
)
|
|
2,206
|
|
|
(199
|
)
|
|
6,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME BEFORE INCOME TAXES
|
|
(23,080
|
)
|
|
29,065
|
|
|
10,636
|
|
|
89,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX (BENEFIT) EXPENSE (Note 13)
|
|
(1,603
|
)
|
|
10,441
|
|
|
14,440
|
|
|
32,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME FROM CONTINUING OPERATIONS
BEFORE LOSS FROM EQUITY- ACCOUNTED INVESTMENTS
|
|
(21,477
|
)
|
|
18,624
|
|
|
(3,804
|
)
|
|
56,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM EQUITY-ACCOUNTED INVESTMENTS (Note
5)
|
|
(127
|
)
|
|
(44
|
)
|
|
(509
|
)
|
|
(425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME
|
|
(21,604
|
)
|
|
18,580
|
|
|
(4,313
|
)
|
|
55,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADD NET LOSS ATTRIBUTABLE TO NON- CONTROLLING
INTEREST
|
|
(42
|
)
|
|
(192
|
)
|
|
(128
|
)
|
|
(270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME ATTRIBUTABLE TO NET1
|
$
|
(21,562
|
)
|
$
|
18,772
|
|
$
|
(4,185
|
)
|
$
|
55,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share, in United States
dollars (
Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings attributable
to Net1 shareholders
|
|
($0.47
|
)
|
$
|
0.41
|
|
|
($0.09
|
)
|
$
|
1.20
|
|
Diluted (loss) earnings
attributable to Net1 shareholders
|
|
($0.47
|
)
|
$
|
0.41
|
|
|
($0.09
|
)
|
$
|
1.20
|
|
See Notes to Unaudited Condensed
Consolidated Financial Statements
3
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated
Statement of Changes in Equity (in thousands)
Net 1 UEPS Technologies, Inc. Shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Additional
|
|
|
|
|
|
comprehensive
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Paid-In
|
|
|
Retained
|
|
|
(loss)
|
|
|
Total Net1
|
|
|
controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Earnings
|
|
|
income
|
|
|
Equity
|
|
|
Interests
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2010
|
|
58,527,439
|
|
$
|
59
|
|
|
(13,149,042
|
)
|
$
|
(173,671
|
)
|
$
|
133,543
|
|
$
|
392,343
|
|
$
|
(66,396
|
)
|
$
|
285,878
|
|
$
|
1,423
|
|
$
|
287,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
|
|
156,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan portion related to options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,593
|
|
|
|
|
|
|
|
|
4,593
|
|
|
|
|
|
4,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilization of APIC pool related to vested
restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
(160
|
)
|
|
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of KSNET (note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
3,097
|
|
|
3,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of 19.90% non- controlling
interest (note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,215
|
|
|
|
|
|
(290
|
)
|
|
925
|
|
|
(1,809
|
)
|
|
(884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss, net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,185
|
)
|
|
|
|
|
(4,185
|
)
|
|
(128
|
)
|
|
(4,313
|
)
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in foreign
currency
translation reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,786
|
|
|
29,786
|
|
|
415
|
|
|
30,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2011
|
|
58,684,395
|
|
$
|
59
|
|
|
(13,149,042
|
)
|
$
|
(173,671
|
)
|
$
|
139,211
|
|
$
|
388,158
|
|
$
|
(36,900
|
)
|
$
|
316,857
|
|
$
|
2,998
|
|
$
|
319,855
|
|
See Notes to Unaudited Condensed
Consolidated Financial Statements
4
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Comprehensive Income
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(21,562
|
)
|
$
|
18,772
|
|
$
|
(4,185
|
)
|
$
|
55,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized
loss on asset available for sale, net of tax
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(684
|
)
|
Movement in foreign currency translation reserve
|
|
1,481
|
|
|
(4,830
|
)
|
|
29,786
|
|
|
7,660
|
|
Total other comprehensive income (loss), net of taxes
|
|
1,481
|
|
|
(4,830
|
)
|
|
29,786
|
|
|
6,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
(20,081
|
)
|
|
13,942
|
|
|
25,601
|
|
|
62,973
|
|
(Add) Less comprehensive loss (gain)
attributable to non-controlling interest
|
|
24
|
|
|
333
|
|
|
(287
|
)
|
|
352
|
|
Comprehensive (loss) income
attributable to Net1
|
$
|
(20,105
|
)
|
$
|
13,609
|
|
$
|
25,888
|
|
$
|
62,621
|
|
See Notes to Unaudited Condensed
Consolidated Financial Statements
5
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Statements of Cash Flows
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(21,604
|
)
|
$
|
18,580
|
|
$
|
(4,313
|
)
|
$
|
55,727
|
|
Depreciation and amortization
|
|
11,192
|
|
|
5,141
|
|
|
25,188
|
|
|
14,384
|
|
Impairment loss
|
|
41,771
|
|
|
-
|
|
|
41,771
|
|
|
-
|
|
Loss from equity-accounted investments
|
|
127
|
|
|
44
|
|
|
509
|
|
|
425
|
|
Fair value adjustments
|
|
417
|
|
|
183
|
|
|
655
|
|
|
12
|
|
Interest payable
|
|
1,406
|
|
|
74
|
|
|
1,546
|
|
|
229
|
|
(Loss) Profit on disposal of property, plant and equipment
|
|
(2
|
)
|
|
29
|
|
|
(10
|
)
|
|
31
|
|
Stock-based compensation charge
|
|
1,597
|
|
|
1,400
|
|
|
4,593
|
|
|
4,254
|
|
Facility fee amortized
|
|
113
|
|
|
-
|
|
|
1,841
|
|
|
-
|
|
Decrease (Increase) in accounts receivable,
pre- funded social welfare grants receivable and finance loans receivable
|
|
3,896
|
|
|
(3,314
|
)
|
|
2,648
|
|
|
2,736
|
|
Decrease (Increase) in deferred expenditure on smart cards
|
|
-
|
|
|
55
|
|
|
-
|
|
|
(5
|
)
|
(Increase) Decrease in inventory
|
|
(229
|
)
|
|
(221
|
)
|
|
(163
|
)
|
|
2,465
|
|
(Decrease) Increase in accounts payable and other payables
|
|
(6,060
|
)
|
|
1,325
|
|
|
(2,283
|
)
|
|
(8,017
|
)
|
Increase (Decrease) in taxes payable
|
|
7,140
|
|
|
7,343
|
|
|
5,910
|
|
|
7,027
|
|
(Decrease) Increase in deferred taxes
|
|
(11,500
|
)
|
|
1,070
|
|
|
(24,438
|
)
|
|
3,181
|
|
Net cash provided by
operating activities
|
|
28,264
|
|
|
31,709
|
|
|
53,454
|
|
|
82,449
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(4,679
|
)
|
|
(984
|
)
|
|
(9,458
|
)
|
|
(2,310
|
)
|
Proceeds from disposal of property, plant and equipment
|
|
10
|
|
|
62
|
|
|
28
|
|
|
124
|
|
Advance of loans to equity-accounted investment
|
|
-
|
|
|
-
|
|
|
(375
|
)
|
|
-
|
|
Repayment of loan by equity-accounted investment
|
|
33
|
|
|
-
|
|
|
440
|
|
|
-
|
|
Acquisition of KSNET, net of cash acquired
|
|
-
|
|
|
-
|
|
|
(230,225
|
)
|
|
-
|
|
Acquisition of MediKredit, net of cash acquired
|
|
-
|
|
|
(981
|
)
|
|
-
|
|
|
(981
|
)
|
Net change in settlement assets
|
|
7,397
|
|
|
280
|
|
|
(39,788
|
)
|
|
280
|
|
Net cash provided by
(used in) investing
activities
|
|
2,761
|
|
|
(1,623
|
)
|
|
(279,378
|
)
|
|
(2,887
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan portion related to options
|
|
-
|
|
|
-
|
|
|
20
|
|
|
720
|
|
Treasury stock acquired
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(126,304
|
)
|
Long-term borrowings obtained (Note 8)
|
|
-
|
|
|
-
|
|
|
116,353
|
|
|
-
|
|
Facilities fees paid
|
|
-
|
|
|
-
|
|
|
(3,088
|
)
|
|
-
|
|
Acquisition of remaining 19.9% of Net1 UTA
|
|
-
|
|
|
-
|
|
|
(594
|
)
|
|
-
|
|
Repayment of short-term borrowings
|
|
(7,124
|
)
|
|
-
|
|
|
(6,705
|
)
|
|
(137
|
)
|
Net change in settlement obligations
|
|
(7,397
|
)
|
|
(280
|
)
|
|
39,788
|
|
|
(280
|
)
|
Net cash (used
in) generated from financing
activities
|
|
(14,521
|
)
|
|
(280
|
)
|
|
145,774
|
|
|
(126,001
|
)
|
Effect of exchange rate changes on cash
|
|
1,003
|
|
|
1,664
|
|
|
15,298
|
|
|
9,994
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
17,507
|
|
|
31,470
|
|
|
(64,852
|
)
|
|
(36,445
|
)
|
Cash and cash equivalents beginning of
period
|
|
71,383
|
|
|
152,871
|
|
|
153,742
|
|
|
220,786
|
|
Cash and cash equivalents end of
period
|
$
|
88,890
|
|
$
|
184,341
|
|
$
|
88,890
|
|
$
|
184,341
|
|
See Notes to Unaudited Condensed
Consolidated Financial Statements
6
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the
Unaudited Condensed Consolidated Financial Statements
for the three
and nine months ended March 31, 2011 and 2010
(All amounts stated in thousands of United States Dollars, unless otherwise
stated)
1.
Basis
of Presentation and Summary of Significant Accounting Policies
Unaudited
Interim Financial Information
The
accompanying unaudited condensed consolidated financial statements include all
majority-owned subsidiaries over which the Company exercises control and have
been prepared in accordance with US generally accepted accounting principles
(GAAP) and the rules and regulations of the Securities and Exchange Commission
for quarterly reports on Form 10-Q and include all of the information and
disclosures required for interim financial reporting. The results of operations
for the three and nine months ended March 31, 2011 and 2010 are not necessarily
indicative of the results for the full year. The Company believes that the
disclosures are adequate to make the information presented not misleading.
These
financial statements should be read in conjunction with the financial
statements, accounting policies and financial notes thereto included in the
Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2010 and
the financial statements, accounting policies and financial notes thereto of
KSNET, Inc. (KSNET) included in the Companys Current Report on Form 8-K/A
filed on January 12, 2011. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments), which are necessary for a
fair representation of financial results for the interim periods presented.
References
to the Company refer to Net1 and its consolidated subsidiaries, unless the
context otherwise requires. References to Net1 are references solely to Net 1
UEPS Technologies, Inc.
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, Korean won (KRW) or Indian rupee
as their functional currency. The current rate method is used to translate the
financial statements of the Company to US dollar. Under the current rate method,
assets and liabilities are translated at the exchange rates in effect at the
balance sheet date. Revenues and expenses are translated at average rates for
the period. Translation gains and losses are reported in accumulated other
comprehensive income in total equity.
Foreign
exchange transactions are translated at the spot rate ruling at the date of the
transaction. Monetary items are translated at the closing spot rate at the
balance sheet date. Transactional gains and losses are recognized in income for
the period.
Recent
accounting pronouncements adopted
On
July 1, 2010, the Company adopted the new Financial Accounting Standards Board
(FASB) guidance on the consolidation of variable interest entities. This
guidance changed how a reporting entity determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a reporting entity
is required to consolidate another entity is based on, among other things, the
other entitys purpose and design and the reporting entitys ability to direct
the activities of the other entity that most significantly impact the other
entitys economic performance. The guidance also requires a reporting entity to
provide additional disclosures about its involvement with variable interest
entities and any significant changes in risk exposure due to such involvement.
The adoption of this guidance did not have an impact on the Companys condensed
consolidated financial statements.
On
July 1, 2010, the Company adopted the new FASB guidance issued on the accounting
for transfers of financial assets. This guidance requires more information about
transfers of financial assets, including securitization transactions, and where
entities have continuing exposure to the risks related to transferred financial
assets. It eliminates the concept of a qualifying special-purpose entity,
changes the requirements for de-recognizing financial assets, and requires
additional disclosures. The adoption of this guidance did not have an impact on
the Companys condensed consolidated financial statements.
7
1.
Basis
of Presentation and Summary of Significant Accounting Policies
Recent
accounting pronouncements adopted (continued)
On
July 1, 2010, the Company adopted the new FASB guidance on revenue recognition
in multiple-deliverable revenue arrangements. The guidance amended the existing
guidance on allocating consideration received between the elements in a
multiple-deliverable arrangement and established a selling price hierarchy for
determining the selling price of a deliverable. The selling price used for each
deliverable will be based on VSOE if available, third-party evidence if VSOE is
not available, or estimated selling price if neither VSOE nor third-party
evidence is available. The guidance replaced the term fair value in the
revenue allocation with selling price to clarify that the allocation of
revenue is based on entity specific assumptions rather than the assumptions of a
market place participant. The guidance eliminates the residual method of
allocation and requires that arrangement consideration be allocated using the
relative selling price method. It also significantly expands the disclosures
related to a vendors multiple-deliverable revenue arrangements. The adoption of
this guidance did not have an impact on the Companys condensed consolidated
financial statements for the periods presented.
On
July 1, 2010, the Company adopted the new FASB guidance which amended the scope
of existing software revenue recognition accounting. Tangible products
containing software components and non-software components that function
together to deliver the products essential functionality would be scoped out of
the accounting guidance on software and accounted for based on other appropriate
revenue recognition guidance. This guidance must be adopted in the same period
that the company adopts the amended guidance for arrangements with multiple
deliverables described in the preceding paragraph. The adoption of this guidance
did not have an impact on the Companys condensed consolidated financial
statements for the periods presented.
On
July 1, 2010, the Company adopted new FASB guidance on the effect of
denominating the exercise price of a share-based payment award in the currency
of the market in which the underlying equity security trades. This guidance
clarifies that an employee share-based payment award with an exercise price
denominated in the currency of a market in which a substantial portion of the
entitys equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The adoption of this guidance did not have an impact on the Companys
condensed consolidated financial statements for the periods presented.
On
January 1, 2011, the Company adopted new FASB guidance related to disclosure of
supplementary pro forma information for business combinations. The guidance
specifies that if a public entity presents comparative financial statements, the
entity should disclose revenue and earnings of the combined entity as though the
business combination(s) that occurred during the current year had occurred as of
the beginning of the comparable prior annual reporting period only. The guidance
is effective prospectively for 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, 2010. The adoption of this guidance has impacted the
presentation of the Companys pro forma information for business combination
disclosed in note 2 to the Companys unaudited condensed consolidated financial
statements for the three and nine months ended March 31, 2011.
Recent
accounting pronouncements not yet adopted as of March 31, 2011
In
December 2010, the FASB issued guidance regarding
Step 2 of the goodwill
impairment test for reporting units with zero or negative carrying amounts
.
The guidance modifies Step 1 of the goodwill impairment test for reporting units
with zero or negative carrying amounts and requires the company to perform Step
2 if it is more likely than not that a goodwill impairment may exist. The
guidance is effective for fiscal years and interim periods within those years,
beginning after December 15, 2010. Early adoption is not permitted. The Company
will adopt the authoritative guidance on July 1, 2011 and is currently assessing
the impact on its condensed consolidated financial statements.
2.
Acquisitions
2011
acquisitions
98.73%
of KSNET
On
October 29, 2010, the Company acquired KSNET for KRW 270 billion (approximately
$240 million based on exchange rates on October 29, 2010), subject to
post-closing working capital adjustment which is still being determined between
the Company and the former shareholders of KSNET. The acquisition of KSNET
expands the Companys international footprint as well as diversifies the
Companys revenue, earnings and product portfolio. Over time, the combination is
expected to capitalize on multiple revenue synergies and provide an established
base in Asia for further business development activities in the region.
8
2.
Acquisitions (continued)
2011
acquisitions (continued)
98.73%
of KSNET (continued)
Most
of KSNETs revenue is derived from the provision of payment processing services
to approximately 200,000 merchants and to card issuers in Korea through its
value added network, or VAN. KSNET has a diverse product offering and the
Company believes it is the only total payments solutions provider offering card
VAN, payment gateway and banking VAN services in Korea, which differentiates
KSNET from other Korean payment solution providers and allows it to cross-sell
its products across its customer base.
The
following table sets forth the preliminary allocation of the purchase price:
Cash and cash equivalents
|
$
|
10,507
|
|
Accounts receivable, net
|
|
28,748
|
|
Inventory
|
|
2,788
|
|
Settlement assets
|
|
13,164
|
|
Long-term receivable,
|
|
288
|
|
Property, plant and equipment, net
|
|
24,052
|
|
Goodwill (note 6)
|
|
100,922
|
|
Intangible assets, net (note 6)
|
|
127,796
|
|
Other long-term assets
|
|
6,263
|
|
Trade payables
|
|
(9,643
|
)
|
Other payables
|
|
(13,202
|
)
|
Income taxes payable
|
|
(2,428
|
)
|
Settlement obligations
|
|
(13,164
|
)
|
Long-term deferred income tax liabilities
|
|
(31,063
|
)
|
Other long-term liabilities
|
|
(1,199
|
)
|
Total net assets of KSNET
attributable to shareholders, including goodwill
|
|
243,829
|
|
Less attributable to non-controlling interest
|
|
(3,097
|
)
|
Total purchase price
|
$
|
240,732
|
|
The
preliminary purchase price allocation is based on management estimates as of
March 31, 2011, and may be adjusted up to one year following the closing of the
acquisition. The purchase price allocation has not been finalized, as management
has not yet analyzed in detail the assets acquired and liabilities assumed. The
Company expects to finalize the purchase price allocation on or before June 30,
2011.
The
Company incurred transaction-related expenditures of $0.5 million and $5.6
million, respectively, during the three and nine months ended March 31, 2011,
related to this acquisition and expects to incur some additional expenses during
the three months ending June 30, 2011. The Company is currently unable to
quantify the amount of these additional expenditures.
The
results of KSNETs operations are reflected in the Companys financial
statements from November 1, 2010. The following pro forma revenue, net income
and per share information has been prepared as if the acquisition of KSNET had
occurred on July 1, 2009:
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
92,758
|
|
$
|
94,940
|
|
$
|
278,157
|
|
$
|
274,463
|
|
|
Net (loss) income
|
|
(21,064
|
)
|
|
13,636
|
|
|
(3,890
|
)
|
|
39,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Earnings per share basic in United States dollars
|
|
(0.46
|
)
|
|
0.30
|
|
|
(0.09
|
)
|
|
0.85
|
|
|
(Loss) Earnings per share diluted in
United States dollars
|
$
|
(0.46
|
)
|
$
|
0.30
|
|
$
|
(0.09
|
)
|
$
|
0.85
|
|
9
2.
Acquisitions
(continued)
2011
acquisitions (continued)
98.73%
of KSNET (continued)
The
pro forma financial information presented above includes the business
combination accounting and other effects from the acquisition including (1)
intangibles asset amortization expense related to acquired intangibles and the
related deferred tax effects for the three and nine months ended March 31, 2011
and 2010; (2) the loss of interest income, net of taxation, as a result of
funding a portion of the purchase price in cash for the three and nine months
ended March 31, 2011 and 2010; (3) an increase in interest expense resulting
from the long-term borrowing obtained to fund a portion of the purchase price
for the three and nine months ended March 31, 2011 and 2010 and (4) an
adjustment to exclude all applicable transaction-related costs recognized in our
condensed consolidated statements of operations for the three and nine months
ended March 31, 2010. The pro forma net income and per share information
presented above does not include any cost savings or other synergies that may
result from the acquisition.
The
pro forma information as presented above is for informational purposes only and
is not indicative of the results of operations that would have been achieved if
the acquisition had occurred on these dates.
Since
the closing of the acquisition, KSNET has contributed revenue of $41.0 million
and a net loss, including transaction-related interest and intangible assets
amortization related to assets acquired, net of deferred taxes, of $4.3 million.
19.9%
of Net1 UTA
On
December 23, 2010, the Company acquired the remaining 19.9% of the issued share
capital of Net 1 Universal Technologies (Austria) AG (Net1 UTA) for $0.6
million in cash. The Company now owns 100% of Net1 UTA.
3.
Pre-funded
social welfare grants receivable
Pre-funded
social welfare grants receivable represents amounts pre-funded by the Company to
certain merchants participating in the merchant acquiring system. The April 2011
payment service commenced during the last four days of March 2011 and was
offered at merchant locations only.
4.
Inventory
The
Companys inventory comprised the following categories as of March 31, 2011 and
June 30, 2010.
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
$
|
226
|
|
$
|
75
|
|
|
Finished goods
|
|
6,887
|
|
|
3,547
|
|
|
|
$
|
7,113
|
|
$
|
3,622
|
|
5.
Fair
value of financial instruments and equity-accounted investments
Fair
value of financial instruments
Risk
managemen
t
The
Company seeks to reduce its exposure to currencies other than the South African
rand through a policy of matching, to the extent possible, assets and
liabilities denominated in those currencies. In addition, the Company uses
financial instruments in order to economically hedge its exposure to exchange
rate and interest rate fluctuations arising from its operations. The Company is
also exposed to equity price and liquidity risks as well as credit risks.
Currency
exchange risk
The
Company is subject to currency exchange risk because it purchases inventories
that it is required to settle in other currencies, primarily the euro and US
dollar. The Company uses foreign exchange forward contracts in order to limit
its exposure in these transactions to fluctuations in exchange rates between the
South African rand, on the one hand, and the US dollar and the euro, on the
other hand.
10
5.
Fair
value of financial instruments and equity-accounted investments
(continued)
Fair
value of financial instruments (continued)
Risk
management (continued)
Currency
exchange risk (continued)
The
Companys outstanding foreign exchange contracts are as follows:
As of March 31,
2011
None
As of March 31, 2010
|
|
|
|
|
|
Fair market
|
|
|
Notional amount
|
|
Strike price
|
|
value price
|
|
Maturity
|
EUR
|
30,800
|
|
ZAR
|
10.4690
|
|
ZAR
|
9.9254
|
|
May 11, 2010
|
EUR
|
207,000
|
|
ZAR
|
10.1107
|
|
ZAR
|
10.0644
|
|
July 30, 2010
|
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.
Equity
price and liquidity risk
Equity
price risk relates to the risk of loss that the Company would incur as a result
of the volatility in the exchange-traded price of equity securities that it
holds and the risk that it may not be able to liquidate these securities.
Liquidity risk relates to the risk of loss that the Company would incur as a
result of the lack of liquidity on the exchange on which these securities are
listed. The Company may not be able to sell some or all of these securities at
one time, or over an extended period of time without influencing the exchange
traded price, or at all.
11
5.
Fair
value of financial instruments and equity-accounted investments
(continued)
Financial
instruments
The
following section describes the valuation methodologies the Company uses to
measure is significant financial asset 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 applies to Level 1 investments. If quoted prices in active markets
for identical assets or liabilities are not available to determine fair value,
then the Company uses quoted prices for similar assets and liabilities or inputs
other than the quoted prices that are observable either directly or indirectly.
These investments are included in Level 2 investments. In circumstances in which
inputs are generally unobservable, values typically reflect managements
estimates of assumptions that market participants would use in pricing the asset
or liability. The fair values are therefore determined using model-based
techniques that include option pricing models, discounted cash flow models, and
similar techniques. Investments valued using such techniques are included in
Level 3 investments.
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 March 31,
2011, is approximately 22%. The Company has no rights to participate in the
financial, operating, or governance decisions made by Finbond. The Company also
has no participation on Finbonds board of directors whether through contractual
agreement or otherwise. Consequently, the Company has concluded that it does not
have significant influence over Finbond and therefore equity accounting is not
appropriate.
Finbonds
shares are traded on the JSE Limited (JSE) and the Company has designated such
shares as available for sale investments. The Company has concluded that the
market for Finbond shares is not active and consequently has employed
alternative valuation techniques in order to determine the fair value of such
stock. Currently, the operations of Finbond include property investment and
microlending. In determining the fair value of Finbond, the Company has
considered amongst other things Finbonds historical financial information
(including its most recent public accounts), press releases issued by Finbond
and its published net asset value. The Company believes that the best indicator
of fair value of Finbond is its published net asset value and has used this
value to determine the fair value.
The
following table presents the Companys assets and liabilities measured at fair
value on a recurring basis as of March 31, 2011 according to the fair value
hierarchy:
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in common stock
(available for sale assets included in
OTHER LONG-TERM ASSETS)
|
|
-
|
|
$
|
90
|
|
$
|
8,404
|
|
$
|
8,494
|
|
|
Total assets
at fair value
|
|
-
|
|
$
|
90
|
|
$
|
8,404
|
|
$
|
8,494
|
|
12
5.
Fair
value of financial instruments and equity-accounted investments
(continued)
Financial
instruments (continued)
The
following table presents the Companys assets measured at fair value on a
recurring basis as of March 31, 2010 according to the fair value hierarchy:
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in common stock
(available for sale assets included in
OTHER LONG-TERM ASSETS)
|
|
-
|
|
|
-
|
|
$
|
6,754
|
|
$
|
6,754
|
|
|
Total assets at fair value
|
|
-
|
|
|
-
|
|
$
|
6,754
|
|
$
|
6,754
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
-
|
|
$
|
4
|
|
|
-
|
|
$
|
4
|
|
|
Total
liabilities at fair value
|
|
-
|
|
$
|
4
|
|
|
-
|
|
$
|
4
|
|
Assets
and liabilities measured at fair value on a nonrecurring basis
The
Company measures its equity-accounted investments at fair value on a
nonrecurring basis. The Company has no liabilities that are measured at fair
value on a nonrecurring basis. These equity-accounted investments are recognized
at fair value when they are deemed to be other-than-temporarily impaired.
The
Company reviews the carrying values of its investments when events and
circumstances warrant and considers all available evidence in evaluating when
declines in fair value are other-than-temporary. The fair values of the
Companys investments are determined using the best information available, and
may include quoted market prices, market comparables, and discounted cash flow
projections. An impairment charge is recorded when the cost of the investment
exceeds its fair value and the excess is determined to be other-than-temporary.
The Company has not recorded any impairment charges during the reporting periods
presented herein.
During
the three and nine months ended March 31, 2011, SmartSwitch Namibia repaid
outstanding loans, including outstanding interest. The repayments received have
been allocated to the equity-accounted investments presented in our condensed
consolidated balance sheet as of March 31, 2011, and reduce this balance. The
cash inflow from principal repayments have been allocated to cash flows from
investing activities and the cash inflow from the interest repayments have been
included in cash flow from operating activities in our condensed consolidated
statement of cash flows for the three and nine months ended March 31, 2011.
During
the three months ended March 31, 2011, SmartSwitch Botswana capitalized all
shareholder loan funding provided and shareholders agreed to waive all interest
on these loans. The net effect of the reversal of the interest and related
foreign exchange effects are included in the Companys condensed consolidated
statements of operations for the three and nine months ended March 31, 2011.
In
July 2010, the Company provided additional loan funding of $375,000 for a
specific growth initiative at VTU Colombia. As of March 31, 2011, the Companys
share in VTU Colombias accumulated losses continued to exceed its investment.
VTU Colombias other shareholders are providing short-term funding for continued
operations and the Company has no obligation to provide any additional funding
at this stage.
The
Company has sold hardware, software and/or licenses to SmartSwitch Namibia and
SmartSwitch Botswana and defers recognition of 50% of the net income after tax
related to these sales until SmartSwitch Namibia and SmartSwitch Botswana has
used the purchased asset or has sold it to a third party. The deferral of the
net income after tax is shown in the Elimination column in the table below.
The
functional currency of the Companys equity-accounted investments is not the US
dollar and thus the investments are restated at the period end US dollar/foreign
currency exchange rate with an entry against accumulated other comprehensive
loss. The functional currency of SmartSwitch Namibia is the Namibian dollar, the
functional currency of SmartSwitch Botswana is the Botswana pula, the functional
currency of VTU Colombia is the Colombian peso and the functional currency of
Vinapay is the Vietnamese dong.
13
5.
Fair
value of financial instruments and equity-accounted investments
(continued)
Financial
instruments (continued)
Assets
and liabilities measured at fair value on a nonrecurring basis
(continued)
Summarized
below is the Companys interest in equity-accounted investments as of June 30,
2010 and March 31, 2011:
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Loans
|
|
|
(Loss)
|
|
|
Elimination
|
|
|
|
Total
|
|
|
Balance as of June 30, 2010
|
$
|
3,549
|
|
$
|
2,512
|
|
$
|
(3,905
|
)
|
$
|
442
|
|
|
$
|
2,598
|
|
|
Loans provided
|
|
-
|
|
|
375
|
|
|
-
|
|
|
-
|
|
|
|
375
|
|
|
Loan repaid
|
|
-
|
|
|
(510
|
)
|
|
-
|
|
|
-
|
|
|
|
(510
|
)
|
|
Interest repaid
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(186
|
)
|
|
|
(186
|
)
|
|
Loans converted to equity
|
|
1,015
|
|
|
(1,015
|
)
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
(Loss) Earnings from equity- accounted investments
|
|
-
|
|
|
-
|
|
|
(122
|
)
|
|
(387
|
)
|
|
|
(509
|
)
|
|
SmartSwitch
Namibia
(1)
|
|
-
|
|
|
-
|
|
|
71
|
|
|
60
|
|
|
|
131
|
|
|
SmartSwitch
Botswana
(1)
|
|
-
|
|
|
-
|
|
|
329
|
|
|
(447
|
)
|
|
|
(118
|
)
|
|
VTU Colombia
|
|
-
|
|
|
-
|
|
|
(449
|
)
|
|
-
|
|
|
|
(449
|
)
|
|
VinaPay
|
|
-
|
|
|
-
|
|
|
(73
|
)
|
|
-
|
|
|
|
(73
|
)
|
|
Foreign currency adjustment
(2)
|
|
39
|
|
|
231
|
|
|
(74
|
)
|
|
(71
|
)
|
|
|
125
|
|
|
Balance as of March 31, 2011
|
$
|
4,603
|
|
$
|
1,593
|
|
$
|
(4,101
|
)
|
$
|
(202
|
)
|
|
$
|
1,893
|
|
|
(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.
|
Summarized
below is the Companys equity-accounted (loss) earnings for the three months
ended March 31, 2011:
|
|
|
Loss
|
|
|
Elimination
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Earnings from equity- accounted
investments
|
$
|
432
|
|
$
|
(559
|
)
|
|
$
|
(127
|
)
|
|
SmartSwitch Namibia
|
|
29
|
|
|
16
|
|
|
|
45
|
|
|
SmartSwitch Botswana
|
|
423
|
|
$
|
(575
|
)
|
|
|
(152
|
)
|
|
VTU Colombia
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
VinaPay
|
$
|
(20
|
)
|
|
-
|
|
|
$
|
(20
|
)
|
There
were no significant sales to these investees that require elimination during
the three and nine months ended March 31, 2011 and 2010.
6.
Goodwill
and intangible assets
Goodwill
Summarized
below is the movement in the carrying value of goodwill for the nine months
ended March 31, 2011.
|
|
Carrying
|
|
|
|
value
|
|
|
|
|
|
Balance as of June 30, 2010
|
$
|
76,346
|
|
Acquisitions
(1)
|
|
100,922
|
|
Foreign currency
adjustment
(2)
|
|
9,758
|
|
Balance as
of March 31, 2011
|
$
|
187,026
|
|
(1)
represents goodwill arising from the acquisition of KSNET and translated at
the foreign exchange rate applicable on the date the transactions became
effective. This goodwill has been allocated to the International
transaction-based activities operating
segment.
(2)
the foreign currency adjustment represents the effects of the fluctuations
between the ZAR against the US dollar and the KRW against the US dollar.
Goodwill
associated with the acquisition of KSNET represents the excess of cost over the
fair value of acquired net assets and is not tax deductible.
14
6.
Goodwill
and intangible assets (continued)
Goodwill
(continued)
Goodwill
has been allocated to the Companys reportable segments as follows:
|
|
As of
|
|
|
As of
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
SA transaction-based
activities
|
$
|
42,001
|
|
$
|
37,568
|
|
International transaction-based activities
|
|
102,359
|
|
|
-
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
Hardware, software and
related technology sales
|
|
42,666
|
|
|
38,778
|
|
Total
|
$
|
187,026
|
|
$
|
76,346
|
|
Intangible
assets
Impairment
loss
The
Company assesses the carrying value of intangible assets for impairment whenever
events occur or circumstances change indicating that the carrying amount of the
intangible asset may not be recoverable. During the three months ended March,
2011, one of Net1 UTAs largest customers advised the Company of its intention
to transition to an alternative payment platform which will negatively impact
the Companys revenue, net income and cash flow in the medium term. As a
consequence of this development, as well as deteriorating trading conditions and
uncertainty surrounding the timing and quantum of future net cash inflows, the
Company reviewed customer relationships acquired as part of the Net1 UTA
acquisition for impairment. As a result of this review, the Company recognized
an impairment loss of approximately $41.8 million related to the entire carrying
value of customer relationships acquired in the Net1 UTA acquisition in August
2008. In addition, the Company reversed the deferred tax liability of $10.4
million associated with this intangible asset.
The
expected undiscounted future cash flows related to the Net1 UTA customer
relationships was compared to the carrying value of the asset and management
determined that the carrying value exceeded the undiscounted future cash flows.
Accordingly, management performed the second step in the asset impairment
analysis to determine the impairment loss. The second step requires a comparison
of the carrying value of the customer relationships with its fair value. The
fair value of the customer relationships was determined using an income approach
valuation technique. The calculation 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.
The
impairment loss has been allocated to the Companys Hardware, software and
related technology sales operating segment.
KSNET
intangible assets acquired
Summarized
below is the fair value of the KSNET intangible assets acquired, translated at
the exchange rate applicable as of October 31, 2010, and the weighted-average
amortization period of the intangible assets:
|
|
|
|
|
Weighted-
|
|
|
|
Fair value
|
|
|
Average
|
|
|
|
as of
|
|
|
Amortization
|
|
|
|
October 31,
|
|
|
period (in
|
|
|
|
2010
|
|
|
years)
|
|
Finite-lived intangible asset:
|
|
|
|
|
|
|
Customer relationships
|
$
|
95,066
|
|
|
10
|
|
Software and unpatented technology
|
|
28,397
|
|
|
5
|
|
Trademarks
|
$
|
4,333
|
|
|
9
|
|
On
acquisition, the Company recognized a deferred tax liability of approximately
$31.0 million related to the acquisition of the intangible assets.
15
6.
Goodwill
and intangible assets (continued)
Intangible
assets (continued)
Carrying
value and amortization of intangible assets
Summarized
below is the carrying value and accumulated amortization of the intangible
assets as of March 31, 2011 and June 30, 2010:
|
|
|
As
of March 31, 2011
|
|
|
As
of June 30, 2010
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships (1)(2)
|
$
|
118,953
|
|
$
|
(12,364
|
)
|
$
|
106,589
|
|
$
|
77,452
|
|
$
|
(22,519
|
)
|
$
|
54,933
|
|
|
Software and unpatented
technology (1)
|
|
41,151
|
|
|
(6,989
|
)
|
|
34,162
|
|
|
11,047
|
|
|
(1,343
|
)
|
|
9,704
|
|
|
FTS patent
|
|
5,598
|
|
|
(5,550
|
)
|
|
48
|
|
|
5,007
|
|
|
(4,880
|
)
|
|
127
|
|
|
Exclusive licenses
|
|
4,506
|
|
|
(4,427
|
)
|
|
79
|
|
|
4,506
|
|
|
(3,941
|
)
|
|
565
|
|
|
Trademarks (1)
|
|
8,590
|
|
|
(2,064
|
)
|
|
6,526
|
|
|
3,766
|
|
|
(1,411
|
)
|
|
2,355
|
|
|
Customer database
|
|
888
|
|
|
(370
|
)
|
|
518
|
|
|
795
|
|
|
(132
|
)
|
|
663
|
|
|
Total finite-lived intangible assets
|
$
|
179,686
|
|
$
|
(31,764
|
)
|
$
|
147,922
|
|
$
|
102,573
|
|
$
|
(34,226
|
)
|
$
|
68,347
|
|
(1) Includes the customer
relationships, software and unpatented technology and trademarks acquired as
part of the KSNET acquisition in October 2010.
(2) The Net1 UTA customer
relationships that have been impaired are excluded from the March 31, 2011,
balances but included in the June 30, 2010, balances.
Aggregate
amortization expense on the finite-lived intangible assets for the three and
nine months ended March 31, 2011, was approximately $7.3 million and $17.3
million, respectively (three and nine months ended March 31, 2010, was
approximately $4.0 million and $11.3 million, respectively).
Future
estimated annual amortization expense for the next five fiscal years, assuming
exchange rates prevailing on March 31, 2011, is presented in the table below.
Actual amortization expense in future periods could differ from this estimate as
a result of acquisitions, changes in useful lives, exchange rate fluctuations
and other relevant factors.
2011
|
$15,259
|
2012
|
18,921
|
2013
|
17,271
|
2014
|
14,509
|
2015
|
$14,509
|
7.
Short-term facilities
As
of March 31, 2011, the Company had a short-term facility in South African rand
of approximately $36.5 million, translated at exchange rates applicable as of
March 31, 2011, with Nedbank Limited (Nedbank). As of March 31, 2011, the
overdraft rate on this facility was 7.85% . 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 $19.7 million, translated at exchange rates applicable as of March
31, 2011, as security for the facility as well as the Companys investment in
Cash Paymaster Services (Proprietary) Limited, a wholly owned South African
subsidiary. As of March 31, 2011, the Company had utilized none of its South
African short-term facility.
In
addition, Net1 UTA had short-term facilities of approximately $1.4 million,
translated at exchange rates applicable as of March 31, 2011, 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 March 31, 2011, 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.
16
8.
Long-term
borrowings
The
Company financed a portion of the KSNET acquisition price and related
transaction expenses with the proceeds of a KRW 130.5 billion (approximately
$115.9 million based on October 29, 2010 exchange rates) five-year senior
secured loan facility provided by a consortium of banks under a facilities
agreement (the Facilities Agreement). The Facilities Agreement provides for
three separate facilities: a Facility A loan to the Companys wholly owned
subsidiary, Net1 Applied Technologies Korea (Net1 Korea), of up to KRW 130.5
billion (divided into Facility A1 (KRW 65.5 billion) and Facility A2 (KRW 65.0
billion)) and a Facility B loan to KSNET of up to KRW 65.0 billion. The Facility
B loan, if drawn, must be used to repay the Facility A2 loan and may be borrowed
only if Net1 Korea and KSNET complete a merger transaction with each other.
Interest on the loans is payable quarterly and is based on the Korean CD rate in
effect from time to time plus a margin of 4.10% for Facility A loans and 3.90%
for the Facility B loan. The CD rate was 3.0% on March 31, 2011. Total interest
expense for the three and nine months ended March 31, 2011, was $2.0 million and
$3.4 million, respectively. Interest of approximately $1.4 million, translated
at exchange rates applicable as of March 31, 2011, has been accrued as of March
31, 2011.
The
Facility A1 loan matures on the fifth anniversary of the initial drawdown with
no required principal prepayments. Principal on the Facility A2 loan and
Facility B loan is repayable in scheduled installments, beginning twelve months
after initial drawdown and thereafter, semi-annually with final maturity
scheduled for 54 months after initial drawdown. The first scheduled installment
of $7.3 million, translated at exchange rates applicable as of March 31, 2011,
is due on October 29, 2011, and has been classified as current in our condensed
consolidated balance sheet.
The
loans are secured by substantially all of KSNETs assets, a pledge by Net1 Korea
of its entire equity interest in KSNET and a pledge by the immediate parent of
Net1 Korea (also one of the Companys subsidiaries) of its entire equity
interest in Net1 Korea. The Facilities Agreement contains customary covenants
that require Net1 Korea and its consolidated subsidiaries to maintain certain
specified financial ratios (including a leverage ratio and a debt service
coverage ratio) and restrict their ability to make certain distributions with
respect to their capital stock, prepay other debt, encumber their assets, incur
additional indebtedness, make capital expenditures above specified levels,
engage in certain business combinations and engage in other corporate
activities. The loans under the Facilities Agreement are without recourse to,
and the covenants and other agreements contained therein do not apply to, the
Company or any of our subsidiaries (other than Net1 Korea and its subsidiaries,
including KSNET).
9.
Capital
structure
The
Companys capital structure is described in Note 11 to the Companys audited
consolidated financial statements included within the Companys Annual Report on
Form 10-K for the fiscal year ended June 30, 2010.
Common
stock repurchases
During
the three and nine months ended March 31, 2011, the Company did not repurchase
any shares. On July 28, 2009, the Company repurchased an aggregate of 9,221,526
shares of its common stock from two shareholders, who originally acquired their
shares in connection with the Aplitec transaction. The purchase price was $13.50
(ZAR 105.98) per share and was paid from the Companys cash reserves in ZAR for
an aggregate purchase price of $124.5 million (ZAR 977.3 million).
10. Earnings per share
Basic
earnings per share includes restricted stock awards that meet the definition of
a participating security. Restricted stock awards are eligible to receive
non-forfeitable dividend equivalents at the same rate as common stock. Basic
earnings per share have been calculated using the two-class method and basic
earnings per share for the three and nine months ended March 31, 2011 and 2010,
reflects only undistributed earnings.
Diluted
earnings per share have been calculated to give effect to the number of
additional shares of common stock that would have been outstanding if the
potential dilutive instruments had been issued in each period. The calculation
of diluted earnings per share for the three and nine months ended March 31, 2011
and 2010, includes the dilutive effect of a portion of the restricted stock
awards granted to employees as these restricted stock awards are considered
contingently issuable shares for the purposes of the diluted earnings per share
calculation and as of March 31, 2011 and 2010, the vesting conditions in respect
of a portion of the awards had not been satisfied.
17
10. Earnings per share (continued)
The
following table details the weighted average number of outstanding shares used
for the calculation of earnings per share for the three and nine months ended
March 31, 2011 and 2010.
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
Weighted average number of outstanding shares
of
common stock basic
|
|
45,452
|
|
|
45,378
|
|
|
45,423
|
|
|
46,532
|
|
|
Weighted average effect of dilutive securities:
employee stock options
|
|
107
|
|
|
265
|
|
|
66
|
|
|
193
|
|
|
Weighted average number of outstanding shares
of
common stock diluted
|
|
45,559
|
|
|
45,643
|
|
|
45,489
|
|
|
46,725
|
|
11. Stock-based compensation
Stock
option and restricted stock activity
Options
The
following table summarizes stock option activity for the three and nine months
ended March 31, 2011, and 2010:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
Grant
|
|
|
|
|
Number
|
|
|
exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
Date Fair
|
|
|
|
|
of shares
|
|
|
price
|
|
|
(in years)
|
|
|
Value
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding July 1, 2010
|
|
1,813,656
|
|
$
|
19.76
|
|
|
7.41
|
|
$
|
585
|
|
|
|
|
|
Granted under Plan
|
|
307,000
|
|
|
10.59
|
|
|
10.00
|
|
|
|
|
$
|
801
|
|
|
Outstanding March 31, 2011
|
|
2,120,656
|
|
$
|
18.44
|
|
|
7.08
|
|
$
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding July 1, 2009
|
|
1,896,994
|
|
$
|
19.03
|
|
|
8.30
|
|
$
|
1,576
|
|
|
|
|
|
Exercised
|
|
(83,338
|
)
|
|
-
|
|
|
-
|
|
$
|
1,667
|
|
|
|
|
|
Outstanding March 31, 2010
|
|
1,813,656
|
|
$
|
19.76
|
|
|
7.66
|
|
$
|
3,586
|
|
|
|
|
No
stock options became exercisable during the three and nine months ended March
31, 2011 and 2010.
No
stock options were exercised during the three and nine months ended March 31,
2011. During the nine months ended March 31, 2010, the Company received
approximately $0.3 million from stock options exercised and approximately $0.4
million from repayment of stock option-related loans. The Company issues new
shares to satisfy stock option exercises.
18
11. Stock-based compensation (continued)
Stock
option and restricted stock activity (continued)
Restricted
stock
The
following table summarizes restricted stock activity for the three and nine
months ended March 31, 2011, and 2010:
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
Average
|
|
|
|
Shares of
|
|
Grant
|
|
|
|
Restricted
|
|
Date Fair
|
|
|
|
Stock
|
|
Value
|
|
Non-vested July 1, 2010
|
|
407,828
|
|
-
|
|
Granted August
2010
|
|
13,956
|
|
$185
|
|
Granted October 2010
|
|
60,000
|
|
$740
|
|
Granted November
2010
|
|
83,000
|
|
$879
|
|
Vested September 2010
|
|
(201,704
|
)
|
-
|
|
Non-vested December 31, 2010
|
|
363,080
|
|
-
|
|
Vested February 2011
|
|
(1,094
|
)
|
-
|
|
Non-vested March 31, 2011
|
|
361,986
|
|
-
|
|
|
|
|
|
|
|
Non-vested July 1, 2009
|
|
597,162
|
|
-
|
|
Granted August 2009
|
|
10,098
|
|
$185
|
|
Vested September
2009
|
|
(198,338
|
)
|
-
|
|
Non-vested December 31,
2009
|
|
408,922
|
|
-
|
|
Vested February
2010
|
|
(1,094
|
)
|
-
|
|
Non-vested March 31, 2010
|
|
407,828
|
|
-
|
|
The
fair value of restricted stock vested during the three and nine months ended
March 31, 2011 was $0.01 million and $2.3 million, respectively and during the
nine months ended March 31, 2010, was $3.8 million.
Stock-based
compensation charge and unrecognized compensation cost
The
Company has recorded a stock compensation charge of $1.6 million and $1.4
million for the three months ended March 31, 2011 and 2010, respectively, which
comprised:
|
|
|
|
|
Allocated to
|
|
|
|
|
|
|
|
|
|
cost of goods
|
|
|
|
|
|
|
|
|
|
sold, IT
|
|
|
Allocated to
|
|
|
|
|
|
|
processing,
|
|
|
selling,
|
|
|
|
Total
|
|
|
servicing
|
|
|
general and
|
|
|
|
charge
|
|
|
and support
|
|
|
administration
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
2011
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation charge
|
$
|
1,595
|
|
$
|
50
|
|
$
|
1,545
|
|
Total three
months ended March 31, 2011
|
$
|
1,595
|
|
$
|
50
|
|
$
|
1,545
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
2010
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation charge
|
$
|
1,400
|
|
$
|
50
|
|
$
|
1,350
|
|
Total three
months ended March 31, 2010
|
$
|
1,400
|
|
$
|
50
|
|
$
|
1,350
|
|
19
11. Stock-based compensation (continued)
Stock-based
compensation charge and unrecognized compensation cost (continued)
The
Company has recorded a stock compensation charge of $4.6 million and $4.3
million for the nine months ended March 31, 2011 and 2010, respectively, which
comprised:
|
|
|
|
|
|
Allocated to
|
|
|
|
|
|
|
|
|
|
|
cost of goods
|
|
|
|
|
|
|
|
|
|
|
sold, IT
|
|
|
Allocated to
|
|
|
|
|
|
|
|
processing,
|
|
|
selling,
|
|
|
|
|
Total
|
|
|
servicing
|
|
|
general and
|
|
|
|
|
charge
|
|
|
and support
|
|
|
administration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended March 31,
2011
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation charge
|
$
|
4,592
|
|
$
|
152
|
|
$
|
4,440
|
|
|
Total Nine
months ended March 31, 2011
|
$
|
4,592
|
|
$
|
152
|
|
$
|
4,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended March 31,
2010
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation charge
|
$
|
4,254
|
|
$
|
152
|
|
$
|
4,102
|
|
|
Total Nine
months ended March 31, 2010
|
$
|
4,254
|
|
$
|
152
|
|
$
|
4,102
|
|
The
stock-based compensation charges have been allocated to cost of goods sold, IT
processing, servicing and support and selling, general and administration based
on the allocation of the cash compensation paid to the employees.
As
of March 31, 2011, the total unrecognized compensation cost related to stock
options was approximately $3.6 million, which the Company expects to recognize
over approximately three years. As of March 31, 2011, the total unrecognized
compensation cost related to restricted stock awards was approximately $3.0
million, which the Company expects to recognize over approximately four years.
As
of March 31, 2011, the Company has recorded a deferred tax asset of
approximately $1.1 million related to the stock-based compensation charge
recognized related to employees of Net1 as it is able to deduct the grant date
fair value for taxation purposes in the United States.
12. Operating segments
The
Company discloses segment information as reflected in the management information
systems reports that its chief operating decision maker uses in making decisions
and to report certain entity-wide disclosures about products and services, major
customers, and the countries in which the entity holds material assets or
reports material revenues.
The
Company allocated its international transaction-based activities to a new
operating segment, namely International transaction-based activities. This
operating segment comprises the transaction processing activities of KSNET, Net1
Virtual Card, and NUETS transaction processing activities in Iraq. Segment
results for fiscal 2010 have not been restated due to the insignificance of the
transaction processing activities of Net1 Virtual Card, and NUETS transaction
processing activities in Iraq. However, for comparative purposes in future
periods, the Companys reported results for the nine months ended March 31,
2011, include all legacy international transaction-processing activities from
July 1, 2010 and include KSNET from November 1, 2010.
The
Company currently has five reportable segments: SA transaction-based activities,
International transaction-based activities, Smart card accounts, Financial
services and Hardware, software and related technology sales. Each segment,
other than International transaction-based activities and the Hardware, software
and related technology sales segment, operates mainly within South Africa. The
Companys reportable segments offer different products and services and require
different resources and marketing strategies and share the Companys assets.
The
SA transaction-based activities segment currently consists mainly of a state
pension and welfare benefit distribution service provided to the South African
government and transaction processing for retailers, utilities, medical-related
claim service customers and banks. Fee income is earned based on the number of
beneficiaries included in the government pay-file as well as from merchants and
card holders using the Companys merchant retail application. In addition,
utility providers and banks are charged a fee for transaction processing
services performed on their behalf at retailers. This segment has individually
significant customers that each provides more than 10% of the total revenue of
the Company. For the three and nine months ended March 31, 2011, there was one
such customer providing 44% and 48%, respectively, of total revenue (the three
and nine months ended March 31, 2010: there was one such customer providing 65%
and 67%, respectively, of total revenue).
20
12. Operating segments (continued)
The
International transaction-based activities segment currently consists mainly of
KSNET which generates revenue from the provision of payment processing services
to merchants and card issuers through its VAN. This segment generates fee
revenue from the provision of payment processing services and to a lesser extent
from the sale of goods, primarily point of sale terminals, to customers in
Korea. The segment also generates transaction fee revenue from transaction
processing of UEPS-enabled smartcards through NUETS initiative in Iraq.
The
Smart card accounts segment derives revenue from the provision of smart card
accounts, as a fixed monthly fee per card is charged for the maintenance of
these accounts.
The
Financial services segment provides short-term loans as a principal and life
insurance products on an agency basis and generates initiation and services
fees.
The
Hardware, software and related technology sales segment markets, sells and
implements the UEPS as well as develops and provides Prism secure transaction
technology, solutions and services. The segment also includes the operations of
Net1 UTA, which comprise mainly hardware sales 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.
Corporate/Eliminations
includes the Companys head office cost centers in addition to the elimination
of inter-segment transactions.
The
Company evaluates segment performance based on operating income. The following
tables summarize segment information which is prepared in accordance with GAAP:
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues to external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
$
|
47,313
|
|
$
|
50,854
|
|
$
|
138,323
|
|
$
|
141,247
|
|
|
International transaction-based activities
|
|
24,627
|
|
|
-
|
|
|
42,047
|
|
|
-
|
|
|
Smart card accounts
|
|
8,288
|
|
|
7,956
|
|
|
24,692
|
|
|
24,167
|
|
|
Financial services
|
|
2,168
|
|
|
1,149
|
|
|
5,039
|
|
|
2,799
|
|
|
Hardware, software and
related technology sales
|
|
10,362
|
|
|
12,332
|
|
|
35,951
|
|
|
43,456
|
|
|
Total
|
|
92,758
|
|
|
72,291
|
|
|
246,052
|
|
|
211,669
|
|
|
Inter-company revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
985
|
|
|
1,013
|
|
|
2,923
|
|
|
3,064
|
|
|
International transaction-based
activities
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Financial services
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Hardware, software and related technology
sales
|
|
517
|
|
|
664
|
|
|
1,509
|
|
|
1,548
|
|
|
Total
|
|
1,502
|
|
|
1,677
|
|
|
4,432
|
|
|
4,612
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
18,309
|
|
|
26,837
|
|
|
54,295
|
|
|
80,238
|
|
|
International transaction-based activities
|
|
780
|
|
|
-
|
|
|
896
|
|
|
-
|
|
|
Smart card accounts
|
|
3,767
|
|
|
3,616
|
|
|
11,221
|
|
|
10,985
|
|
|
Financial services
|
|
1,701
|
|
|
831
|
|
|
3,861
|
|
|
1,908
|
|
|
Hardware, software and
related technology sales
|
|
(44,584
|
)
|
|
(1,798
|
)
|
|
(47,563
|
)
|
|
(1,851
|
)
|
|
Corporate/Eliminations
|
|
(2,098
|
)
|
|
(2,627
|
)
|
|
(11,875
|
)
|
|
(8,634
|
)
|
|
Total
|
|
(22,125
|
)
|
|
26,859
|
|
|
10,835
|
|
|
82,646
|
|
|
Interest earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
International transaction-based activities
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Financial services
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Hardware, software and
related technology sales
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Corporate/Eliminations
|
|
1,516
|
|
|
2,450
|
|
|
5,950
|
|
|
7,257
|
|
|
Total
|
$
|
1,516
|
|
$
|
2,450
|
|
$
|
5,950
|
|
$
|
7,257
|
|
21
12. Operating segments (continued)
|
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
$
|
178
|
|
$
|
222
|
|
$
|
526
|
|
$
|
744
|
|
|
International transaction-based
activities
|
|
156
|
|
|
-
|
|
|
335
|
|
|
-
|
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Financial services
|
|
15
|
|
|
-
|
|
|
15
|
|
|
1
|
|
|
Hardware, software and related technology sales
|
|
15
|
|
|
-
|
|
|
43
|
|
|
4
|
|
|
Corporate/Eliminations
|
|
2,107
|
|
|
22
|
|
|
5,230
|
|
|
38
|
|
|
Total
|
|
2,471
|
|
|
244
|
|
|
6,149
|
|
|
787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
2,237
|
|
|
2,108
|
|
|
6,708
|
|
|
4,552
|
|
|
International transaction-based activities
|
|
6,047
|
|
|
-
|
|
|
9,946
|
|
|
-
|
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Financial services
|
|
131
|
|
|
129
|
|
|
402
|
|
|
380
|
|
|
Hardware, software and related
technology sales
|
|
2,568
|
|
|
2,611
|
|
|
7,550
|
|
|
8,575
|
|
|
Corporate/Eliminations
|
|
209
|
|
|
293
|
|
|
582
|
|
|
877
|
|
|
Total
|
|
11,192
|
|
|
5,141
|
|
|
25,188
|
|
|
14,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
5,077
|
|
|
7,511
|
|
|
15,056
|
|
|
22,517
|
|
|
International transaction-based
activities
|
|
(55
|
)
|
|
-
|
|
|
248
|
|
|
-
|
|
|
Smart card accounts
|
|
1,055
|
|
|
1,012
|
|
|
3,142
|
|
|
3,074
|
|
|
Financial services
|
|
473
|
|
|
233
|
|
|
1,077
|
|
|
534
|
|
|
Hardware, software and related technology sales
|
|
(11,041
|
)
|
|
(389
|
)
|
|
(11,618
|
)
|
|
124
|
|
|
Corporate/Eliminations
|
|
2,888
|
|
|
2,074
|
|
|
6,535
|
|
|
6,715
|
|
|
Total
|
|
(1,603
|
)
|
|
10,441
|
|
|
14,440
|
|
|
32,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
13,054
|
|
|
19,140
|
|
|
38,714
|
|
|
57,145
|
|
|
International transaction-based activities
|
|
899
|
|
|
-
|
|
|
532
|
|
|
-
|
|
|
Smart card accounts
|
|
2,712
|
|
|
2,605
|
|
|
8,081
|
|
|
7,911
|
|
|
Financial services
|
|
1,214
|
|
|
599
|
|
|
2,768
|
|
|
1,373
|
|
|
Hardware, software and related
technology sales
|
|
(36,561
|
)
|
|
(1,491
|
)
|
|
(39,057
|
)
|
|
(2,085
|
)
|
|
Corporate/Eliminations
|
|
(2,880
|
)
|
|
(2,081
|
)
|
|
(15,223
|
)
|
|
(8,347
|
)
|
|
Total
|
|
(21,562
|
)
|
|
18,772
|
|
|
(4,185
|
)
|
|
55,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
740,372
|
|
|
476,512
|
|
|
740,372
|
|
|
476,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
649
|
|
|
831
|
|
|
1,933
|
|
|
1,845
|
|
|
International transaction-based activities
|
|
3,848
|
|
|
-
|
|
|
7,086
|
|
|
-
|
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Financial services
|
|
124
|
|
|
122
|
|
|
340
|
|
|
240
|
|
|
Hardware, software and related
technology sales
|
|
58
|
|
|
31
|
|
|
99
|
|
|
225
|
|
|
Corporate/Eliminations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total
|
$
|
4,679
|
|
$
|
984
|
|
$
|
9,458
|
|
$
|
2,310
|
|
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.
22
13. Income tax in interim periods
For
the purposes of interim financial reporting, the Company determines the
appropriate income tax provision by first applying the effective tax rate
expected to be applicable for the full fiscal year to ordinary income. This
amount is then adjusted for the tax effect of significant unusual or
extraordinary items, for instance non-deductible transaction-related expenses,
that are reported separately, and have an impact on the tax charge. The
cumulative effect of any change in the enacted tax rate, if and when applicable,
on the opening balance of deferred tax assets and liabilities is also included
in the tax charge as a discrete event in the interim period in which the
enactment date occurs.
For
the three and nine months ended March 31, 2011, the tax charge was calculated
using the expected effective tax rate for the year. The Companys effective tax
rate for the three and nine months ended March 31, 2011, was 7.0% and 135.8%,
respectively, as a result of non-deductible expenses, the impairment loss (see
note 6) including transaction-related expenses and interest expense related to
the acquisition of KSNET.
The
Company increased its unrecognized tax benefits by $0.1 million and $0.3
million, respectively, during the three and nine months ended March 31, 2011. As
of March 31, 2011, the Company had accrued interest related to uncertain tax
positions of approximately $0.2 million on its balance sheet.
The
Company does not expect the change related to unrecognized tax benefits will
have a significant impact on its results of operations or financial position in
the next 12 months.
The
Company files income tax returns mainly in South Africa, Korea, Austria, the
Russian Federation and in the US federal jurisdiction. As of March 31, 2011, the
Company is no longer subject to income tax examination by the South African
Revenue Service for years before March 31, 2008. In 2007, the Korea National Tax
Service had effectively completed the examination of the Companys returns in
Korea related to years 2002 through 2006. The Company is subject to income tax
in other jurisdictions outside South Africa and Korea, none of which are
individually material to its financial position, statement of cash flows, or
results of operations.
14. Subsequent events
Under
the Companys SASSA contract, it provides its social welfare grants distribution
service to SASSA in five of South Africas nine provinces (KwaZulu-Natal,
Limpopo, North West, Northern Cape and Eastern Cape). The contract contains a
standard pricing formula for all provinces based on a transaction fee per
beneficiary paid, regardless of the number or amount of grants paid per
beneficiary, calculated on a guaranteed minimum number of beneficiaries per
month. As it has previously disclosed, the Companys SASSA contract has been
extended and now runs through September 30, 2011, unless it is further extended.
On April 15, 2011, SASSA publicly issued an invitation to bid, inviting service
providers to submit proposals for the provision of payment services for social
grants in any one or more of the nine provinces of South Africa by May 27, 2011.
The Company will participate in the bid process.
23
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and the notes thereto appearing elsewhere in
this Quarterly Report on Form 10-Q.
Forward-looking statements
Some
of the statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements. These statements relate to future events or our
future financial performance and involve known and unknown risks, uncertainties
and other factors that may cause our or our industrys actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed, implied or
inferred by these forward-looking statements. Such factors include, among other
things, those listed under Risk Factors in Item 1A. below and Risk Factors
and elsewhere in our Annual Report on Form 10-K for the year ended June 30, 2010
and our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010.
In some cases, you can identify forward-looking statements by terminology such
as may, will, should, could, would, expects, plans, intends,
anticipates, believes, estimates, predicts, potential or continue or
the negative of such terms and other comparable terminology.
Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we do not know whether we can achieve positive future results,
levels of activity, performance, or goals. Actual events or results may differ
materially. We undertake no obligation to update any of the forward-looking
statements after the date of this Quarterly Report on Form 10-Q to conform those
statements to reflect the occurrence of unanticipated events, except as required
by applicable law.
You
should read this Quarterly Report on Form 10-Q and the documents that we
reference herein and the documents we have filed as exhibits hereto and which we
have filed with the Securities and Exchange Commission completely and with the
understanding that our actual future results, levels of activity, performance
and achievements may be materially different from what we expect. We qualify all
of our forward-looking statements by these cautionary statements.
Business Developments During the Third Quarter of Fiscal
2011
South
Africa
SASSA
update
Under
our SASSA contract, we provide our social welfare grants distribution service to
SASSA in five of South Africas nine provinces (KwaZulu-Natal, Limpopo, North
West, Northern Cape and Eastern Cape). The contract contains a standard pricing
formula for all provinces based on a transaction fee per beneficiary paid,
regardless of the number or amount of grants paid per beneficiary, calculated on
a guaranteed minimum number of beneficiaries per month. As we have previously
disclosed, our SASSA contract has been extended and now runs through September
30, 2011, unless it is further extended. On April 15, 2011, SASSA publicly
issued an invitation to bid, inviting service providers to submit proposals for
the provision of payment services for social grants in any one or more of the
nine provinces of South Africa by May 27, 2011. We will participate in the bid
process.
See
1. Legal Proceedings and Item 1A. Risk Factors for more information and the
risks associated with our SASSA contract, the recently initiated new tender
process and for an update on litigation between us and SASSA.
EasyPay
Kiosk pilot project extended to end of fiscal 2011
In
September 2010, we launched our EasyPay Kiosk, or EP Kiosk, pilot project at
select locations in the Gauteng province of South Africa. The EP Kiosk enables
users to purchase prepaid electricity and airtime and perform any post paid bill
payment service requirements using the interactive user-friendly touch screen
kiosk interface. The user will also be able to transfer prepaid voucher value to
other mobile phone users. Users can register their own prepaid voucher wallet on
the EP Kiosk, with access to the wallet guaranteed via biometric identification
of the user at time of registration. A five digit personal identification
number, or PIN, is also required by the user so as to facilitate transactions
done via their own mobile phones or via the website.
24
South
African transaction processors
During
the third quarter of fiscal 2011 our South African transaction processors were
awarded various new business contracts to perform transaction processing
including, for a top five petroleum company and a medium-size retailer, as well
as perform distribution of prepaid electricity for a large metropolitan area
(near Johannesburg) in the Gauteng province. In addition, FIHRST continues to
expand its client base and number and value of transactions processed.
Outside
South Africa
Republic
of Korea
KSNETS
operating performance during fiscal 2011 has been largely in-line with our
expectations and the integration of KSNET has progressed well since the
acquisition closed at the end of October 2010. We have commenced a number of
strategic initiatives in the Republic of Korea to maintain our current market
share and to expand into adjacent markets. Specifically, we have embarked on a
number of medium-term initiatives which will be funded from our existing Korean
cash reserves. We do not expect to use funds generated by our other operations
to fund these initiatives in Korea. Our management teams are actively engaged in
identifying and evaluating opportunities in the Korean market place.
The
African Continent and Iraq
During
the third quarter of fiscal 2011, Net1 Universal Electronic Technological
Solutions (Proprietary) Limited, or NUETS, recorded revenue from transaction
fees and the delivery of UEPS-enabled smartcards under its contract with the
government of Iraq. NUETS expects to generate ongoing revenues from transaction
fees under the Iraqi contract during the fourth quarter of fiscal 2011. NUETS
has entered the second phase of its initiative in Ghana and now generates
recurring income in the form of hardware and software maintenance fees.
NUETS
continued to service its current customers on the African continent and in Iraq
and continued its business development efforts, including responding to a number
of tenders, in multiple new countries on the African continent during the
quarter.
During
the third quarter of fiscal 2011, SmartSwitch Namibia generated incremental
transaction fees from transactions conducted between Namibian merchants and
UEPS-enabled smartcards. SmartSwitch Botswana generated transaction fees during
the third quarter of fiscal 2011 from the payment of food voucher grants. We
expect SmartSwitch Namibia and Botswana to continue generating transaction fees
during the fourth quarter of fiscal 2011. During the third quarter of fiscal the
shareholders of SmartSwitch Botswana agreed to convert their loan funding to
equity funding and waive all interest due. The net effect of the reversal of the
interest and related foreign exchange effects are included in our results for
the third quarter of fiscal 2011.
Net
1 Universal Technologies (Austria) AG, or Net1 UTA
During
the third quarter of fiscal 2011, one of Net1 UTAs largest customers advised us
of its intention to transition to an alternative payment platform which will
negatively impact our revenue, net income and cash flow in the medium term. As a
consequence of this development, as well as deteriorating trading conditions and
uncertainty surrounding the timing and quantum of future net cash inflows, we
reviewed customer relationships acquired as part of the Net1 UTA acquisition for
impairment. As a result of this review, we recognized an impairment loss of
approximately $41.8 million related to the entire carrying value of customer
relationships acquired in the Net1 UTA acquisition in August 2008. In addition,
we reversed the deferred tax liability of $10.4 million associated with this
intangible asset.
The
impairment loss has been allocated to our hardware, software and related
technology sales operating segment.
Net1
Virtual Card
We
launched our VCPay
TM
, offering in the United States during the second
quarter of fiscal 2011. Our mobile phone-based virtual payment card application
is designed to eliminate fraud in Card-Not-Present (CNP) transactions. We have
teamed up with MetroPCS Communications, Inc., or MetroPCS, The Bancorp Bank, a
wholly-owned subsidiary of The Bancorp, Inc., FSV Payment Systems and MoneyGram
International to offer a comprehensive card issuing, processing and distribution
network to wireless subscribers in the United States.
25
MetroPCS
offers our VCPay
TM
to its prepaid customers as an application that is
pre-loaded on new Smartphones or can be downloaded on select existing devices.
VCPay
TM
allows a subscriber to generate a unique, one-time use
prepaid virtual card number to securely purchase goods and services or perform
bill payments in any CNP environment. We believe that the VCPay
TM
application is the first mobile phone-based prepaid program with no requirement
for the user to have a physical card or a bank account. Subscribers can load
their prepaid virtual accounts with cash at any of MoneyGrams 40,000 U.S. agent
locations, which are located in most communities including many grocery,
pharmacy and convenience store chains, or electronically via their bank accounts
or via direct deposit.
Medikredit
/ XeoHealth
During
the third quarter of fiscal 2011, our wholly owned subsidiary XeoHealth
Corporation, Inc., or XeoHealth, intensified its marketing efforts in the United
States of its Real Time Adjudication, or RTA, solutions for the end-to-end
electronic processing of medical claims information. There has been significant
interest from various participants in the United States healthcare industry in
the solutions offered by XeoHealth for the current and newly mandated Health
Insurance Portability and Accountability Act, or HIPAA, Electronic Data
Interchange, or EDI, transactions and we will intensify our marketing and
business development activities in the United States.
Critical Accounting Policies
Our
unaudited condensed consolidated financial statements have been prepared in
accordance with US GAAP, which requires management to make estimates and
assumptions about future events that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities. As future
events and their effects cannot be determined with absolute certainty, the
determination of estimates requires managements judgment based on a variety of
assumptions and other determinants such as historical experience, current and
expected market conditions and certain scientific evaluation techniques.
Critical
accounting policies are those that reflect significant judgments or
uncertainties, and potentially may result in materially different results under
different assumptions and conditions. Management has identified the following
critical accounting policies that are described in more detail in our Annual
Report on Form 10-K for the year ended June 30, 2010.
-
Deferred taxation;
-
Stock-based compensation;
-
Intangible assets acquired through acquisitions;
-
Accounts receivable and provision for doubtful debts; and
-
Research and development.
Recent
accounting pronouncements adopted
Refer
to Note 1 of the unaudited condensed consolidated financial statements for a
full description of recent accounting pronouncements adopted as of March 31,
2011, including the expected dates of adoption and effects on financial
condition, results of operations and cash flows.
Recent
accounting pronouncements not yet adopted as of March 31, 2011
Refer
to Note 1 of the unaudited condensed consolidated financial statements for a
full description of recent accounting pronouncements not yet adopted as of March
31, 2011, including the expected dates of adoption and effects on financial
condition, results of operations and cash flows.
Currency Exchange Rate Information
Actual
exchange rates
The
actual exchange rates for and at the end of the periods presented were as
follows:
Table 1
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
Year ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
ZAR : $ average exchange rate
|
|
7.0160
|
|
|
7.5359
|
|
|
7.1017
|
|
|
7.6287
|
|
|
7.6117
|
|
Highest ZAR : $ rate during period
|
|
7.3457
|
|
|
7.8939
|
|
|
7.7809
|
|
|
8.3187
|
|
|
8.3187
|
|
Lowest ZAR : $ rate during period
|
|
6.4925
|
|
|
7.2129
|
|
|
6.4925
|
|
|
7.2120
|
|
|
7.1731
|
|
Rate at end of period
|
|
6.8456
|
|
|
7.3926
|
|
|
6.8456
|
|
|
7.3926
|
|
|
7.6529
|
|
26
Translation
exchange rates
We
are required to translate our results of operations from ZAR to US dollars on a
monthly basis. Thus, the average rates used to translate this data for the three
and nine months ended March 31, 2011 and 2010, vary slightly from the averages
shown in the table above. The translation rates we use in presenting our results
of operations are the rates shown in the following table:
Table 2
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
Year ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
June 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
Income and expense items: $1 = ZAR .
|
|
6.9853
|
|
|
7.5341
|
|
|
7.0891
|
|
|
7.6247
|
|
|
7.6092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items: $1 = ZAR
|
|
6.8456
|
|
|
7.3926
|
|
|
6.8456
|
|
|
7.3926
|
|
|
7.6529
|
|
Results of operations
The
discussion of our consolidated overall results of operations is based on amounts
as reflected in Item 1 Financial Statements which are reported in US dollars
and are prepared in accordance with US GAAP. Our discussion analyzes our results
of operations both in US dollars and ZAR, because ZAR is the functional currency
of the entities which contribute the majority of our profits and is the currency
in which the majority of our transactions are initially incurred and measured.
Due to the significant impact of currency fluctuations between the US dollar and
ZAR on our reported results and because we use the US dollar as our reporting
currency, we believe that the supplemental presentation of our results of
operations in ZAR is useful to investors to understand the changes in the
underlying trends of our business. The results of operations for the three and
nine months ended March 31, 2011, include:
-
KSNET from November 1, 2010, (allocated to our International
transaction-based activities operating segment);
-
FIHRST for the entire period (allocated to our SA transaction-based
activities operating segment); and
-
MediKredit for the entire period as well as for the three months ended
March 31, 2010 as the transaction closed in January 2010 (allocated to our SA
transaction-based activities operating segment.)
27
We
analyze our business and operations in terms of five inter-related but
independent operating segments: (1) SA transaction-based activities, (2)
International transaction-based activities, (3) smart card accounts, (4)
financial services, and (5) hardware, software and related technology sales. In
addition, corporate and corporate office activities that are impracticable to
ascribe directly to any of the other operating segments, as well as any
inter-segment eliminations, are included in corporate/eliminations.
Third
quarter fiscal 2011 compared to third quarter of fiscal 2010
The
following factors had an influence on our results of operations during the third
quarter of fiscal 2011 as compared with the same period in the prior year:
-
Impairment loss related to Net1 UTA customer relationships:
We recorded an impairment loss of $41.8 million related to Net1 UTAs
customer relationships, which resulted in an operating loss for the quarter;
-
SASSA price and volume reductions:
Our contract with SASSA
has reduced our revenue and operating income, before impairment loss, as a
result of the previously announced price and volume reductions;
-
Favorable impact from the weakness of the US dollar:
The US
dollar depreciated by 7% compared to the ZAR during the third quarter of
fiscal 2011 compared to fiscal 2010 which positively impacted our reported
results;
-
Increased revenue from KSNET at lower operating margins than our
legacy businesses, before acquired
intangible asset
amortization:
Our KSNET acquisition increased our revenue during the
entire third quarter of fiscal 2011, however, because KSNET has an operating
margin that is lower than our legacy businesses, before acquired intangible
asset amortization, it reduced our consolidated operating margin. The
inclusion of KSNET in our results has also contributed to the increase in
selling, general and administration and depreciation and amortization
expenses;
-
Increased transaction volumes at EasyPay:
Our reported
results were favorably impacted by increased transaction volumes at EasyPay
resulting from growth in value-added services;
-
Lower revenue and operating loss generated by MediKredit:
MediKredits revenue for the third quarter of fiscal 2011 was lower
than the comparable period due to the inclusion in the third quarter of fiscal
2010 of 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. MediKredit generated an operating loss during the third
quarter of fiscal 2011, in line with our expectations;
-
Increased revenue from FIHRST at lower operating margins than other
SA transaction-based activity business:
FIHRST increased our
revenue during the third quarter of fiscal 2011, however, because FIHRST has
an operating margin that is lower than our other SA transaction-based activity
businesses, it negatively impacted our consolidated operating margin. The
inclusion of FIHRST in our results has also contributed to the increase in
selling, general and administration expense;
-
Increased user adoption in Iraq:
We recorded increased
transaction revenues at NUETS 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 lower revenues at NUETS,
partially offset by increased sales by Net1 UTA;
-
Intangible asset amortization related to acquisitions:
Our
reported results were adversely impacted by additional intangible asset
amortization of approximately $3.1 million related to the acquisition of KSNET
in the second quarter of fiscal 2011, as well as FIHRST during the third
quarter of fiscal 2010;
-
Lower interest income and increased interest expense resulting from
KSNET acquisition:
Our reported results were adversely impacted by
lower interest income due to the payment of a portion of the KSNET purchase
price in cash and increased interest expense due to the payment of a portion
of the KSNET purchase price utilizing long- term debt; and
-
Non-recurring items included in selling, general and administration
expense:
During the third quarter of fiscal 2011, we incurred
transaction-related expenses of $0.5 million, primarily for the acquisition of
KSNET.
Consolidated overall results of operations
This
discussion is based on the amounts which were prepared in accordance with US
GAAP.
28
The
following tables show the changes in the items comprising our statements of
operations, both in US dollars and in ZAR:
|
|
In
United States Dollars
|
|
Table 3
|
|
(US
GAAP)
|
|
|
|
Three
months ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
$ %
|
|
|
|
$000
|
|
|
$000
|
|
|
change
|
|
Revenue
|
|
92,758
|
|
|
72,291
|
|
|
28%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
29,302
|
|
|
17,910
|
|
|
64%
|
|
Selling, general and administration
|
|
32,618
|
|
|
22,381
|
|
|
46%
|
|
Depreciation and amortization
|
|
11,192
|
|
|
5,141
|
|
|
118%
|
|
Impairment loss
|
|
41,771
|
|
|
-
|
|
|
nm
|
|
Operating (loss) income
|
|
(22,125
|
)
|
|
26,859
|
|
|
(182)%
|
|
Interest income, net
|
|
(955
|
)
|
|
2,206
|
|
|
(143)%
|
|
(Loss) Income before income taxes
|
|
(23,080
|
)
|
|
29,065
|
|
|
(179)%
|
|
Income tax expense
|
|
(1,603
|
)
|
|
10,441
|
|
|
(115)%
|
|
Net (loss) income before loss from equity-accounted investments
|
|
(21,477
|
)
|
|
18,624
|
|
|
(215)%
|
|
Loss from equity-accounted investments
|
|
(127
|
)
|
|
(44
|
)
|
|
189%
|
|
Net income
|
|
(21,604
|
)
|
|
18,580
|
|
|
(216)%
|
|
Add net loss attributable to non-controlling
interest
|
|
(42
|
)
|
|
(192
|
)
|
|
(78)%
|
|
Net (loss) income attributable to us
|
|
(21,562
|
)
|
|
18,772
|
|
|
(215)%
|
|
|
|
In South African Rand
|
|
Table 4
|
|
|
|
|
(US GAAP)
|
|
|
|
|
|
|
Three
months ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
ZAR
|
|
|
|
ZAR
|
|
|
ZAR
|
|
|
%
|
|
|
|
000
|
|
|
000
|
|
|
change
|
|
Revenue
|
|
647,942
|
|
|
544,651
|
|
|
19%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
204,683
|
|
|
134,937
|
|
|
52%
|
|
Selling, general and administration
|
|
227,846
|
|
|
168,622
|
|
|
35%
|
|
Depreciation and amortization
|
|
78,179
|
|
|
38,732
|
|
|
102%
|
|
Impairment loss
|
|
291,783
|
|
|
-
|
|
|
nm
|
|
Operating (loss) income
|
|
(154,549
|
)
|
|
202,360
|
|
|
(176)%
|
|
Interest income, net
|
|
(6,671
|
)
|
|
16,620
|
|
|
(140)%
|
|
(Loss) Income before income taxes
|
|
(161,220
|
)
|
|
218,980
|
|
|
(174)%
|
|
Income tax expense
|
|
(11,197
|
)
|
|
78,664
|
|
|
(114)%
|
|
Net (loss) income before loss from equity-accounted investments
|
|
(150,023
|
)
|
|
140,316
|
|
|
(207)%
|
|
Loss from equity-accounted investments
|
|
(887
|
)
|
|
(332
|
)
|
|
167%
|
|
Net income
|
|
(150,910
|
)
|
|
139,984
|
|
|
(208)%
|
|
Add net loss attributable to non-controlling
interest
|
|
(293
|
)
|
|
(1,447
|
)
|
|
(80)%
|
|
Net (loss) income attributable to us
|
|
(150,617
|
)
|
|
141,431
|
|
|
(207)%
|
|
Analyzed
in ZAR, the increase in revenue for the third quarter of fiscal 2011, was
primarily due to higher revenues from the inclusion of KSNET and FIHRST, an
increase in the number of UEPS-based loans made, increased transaction volumes
at EasyPay and higher utilization of our UEPS system in Iraq, which was
partially offset by lower revenues under our new SASSA contract, discussed under
Business Developments during the Third Quarter of Fiscal 2011South
AfricaSASSA update and fewer sales of hardware, software and related
technology. Analyzed in ZAR, cost of goods sold, IT processing, servicing and
support for the third quarter of fiscal 2011 was higher primarily due to the
inclusion of KSNET and FIHRST.
Analyzed
in ZAR, selling, general and administration expense increased during the third
quarter of fiscal 2011 primarily due to increases in goods and services
purchased from third parties and the inclusion of KSNET and FIHRSTs operations.
During the third quarter of fiscal 2011, selling, general and administration
expense also included transaction-related costs of $0.5 million (ZAR 3.7
million), primarily for the KSNET acquisition.
29
Our
operating income margin, before the impairment loss discussed below, for the
third quarter of fiscal 2011 and 2010 was 21% and 37%, respectively. We discuss
the components of the operating income margin under Results of operations by
operating segment, however the significant decrease from the prior period is
attributable to the price and volume reductions under our SASSA contract, lower
margin contribution from KSNET and transaction-related costs.
Our
direct costs of maintaining a listing on Nasdaq and the JSE, as well as
compliance with the Sarbanes-Oxley Act of 2002, or Sarbanes, particularly
Section 404 of Sarbanes, primarily includes independent directors fees, legal
fees, fees paid to Nasdaq and the JSE, investor relations expenses, our
compliance officers salary, fees paid to consultants who assist with Sarbanes
compliance and fees paid to our independent accountants related to the audit and
review process. This has resulted in expenditures of $0.9 million (ZAR 6.1
million) and $0.6 million (ZAR 4.5 million) during the third quarter of fiscal
2011 and 2010, respectively.
In
ZAR, depreciation and amortization increased during fiscal 2011 primarily as a
result of intangible asset amortization related to the KSNET and FIHRST
acquisitions. The intangible asset amortization related to our various
acquisitions has been allocated to our operating segments as presented in the
tables below:
|
|
Three months ended
|
|
Table 5
|
|
March
31,
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
$ 000
|
|
|
|
$000
|
|
Amortization included in depreciation and
amortization expense:
|
|
7,007
|
|
|
|
3,780
|
|
SA transaction-based activities
|
|
1,428
|
|
|
|
1,306
|
|
International transaction-based
activities
|
|
3,124
|
|
|
|
-
|
|
Hardware, software and related technology
|
|
2,455
|
|
|
|
2,474
|
|
|
|
Three months ended
|
|
Table 6
|
|
March
31,
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
ZAR 000
|
|
|
|
ZAR 000
|
|
Amortization included in depreciation and
amortization expense:
|
|
48,946
|
|
|
|
28,478
|
|
SA transaction-based activities
|
|
9,973
|
|
|
|
9,843
|
|
International transaction-based
activities
|
|
21,822
|
|
|
|
-
|
|
Hardware, software and related technology
|
|
17,151
|
|
|
|
18,635
|
|
During
the third quarter of fiscal 2011, customer relationships acquired as part of the
Net1 UTA acquisition were reviewed for impairment following deteriorating
trading conditions and uncertainty surrounding the timing and quantum of future
net cash inflows. As a consequence of this review, we recognized an impairment
loss of approximately $41.8 million related to the entire carrying value of
customer relationships acquired in the Net1 UTA acquisition in August 2008. In
addition, we reversed the deferred tax liability of $10.4 million associated
with this intangible asset.
The
expected undiscounted future cash flows related to the Net1 UTA customer
relationships was compared to the carrying value of the asset and management
determined that the carrying value exceeded the undiscounted future cash flows.
Accordingly, management performed the second step in the asset impairment
analysis in order to determine the impairment loss. The second step requires a
comparison of the carrying value of the customer relationships with its fair
value. The fair value of the customer relationships was determined using an
income approach valuation technique. The calculation 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.
Interest
on surplus cash for the third quarter of fiscal 2011 decreased to $1.5 million
(ZAR 10.6 million) from $2.5 million (ZAR 18.8 million) for the third quarter of
fiscal 2010. The decrease in interest on surplus cash held in South Africa was
due to a lower average daily ZAR cash balance during the third quarter of fiscal
2011 compared with the third quarter of fiscal 2010 as a result of the payment
of a portion of the KSNET purchase price in cash as well as lower deposit rates
resulting from the adjustment in the South African prime interest rate from an
average of approximately 10.47% per annum for the third quarter of fiscal 2010
to 9.00% per annum for the third quarter of fiscal 2011.
Finance
costs increased to $2.5 million (ZAR 17.3 million) for the third quarter of
fiscal 2011 from $0.2 million (ZAR 1.5 million for the third quarter of fiscal
2010. Interest expense increased during the third quarter of fiscal 2011 due to
the incurrence of long-term debt.
30
Total
tax benefit for the third quarter of fiscal 2011 was $1.6 million (ZAR 11.2
million) compared with an income tax expense of $10.4 million (ZAR 78.7 million)
during the same period in the prior fiscal year. Our total tax expense decreased
primarily due to the reversal of deferred tax liabilities associated with the
intangible assets impaired and lower taxable income resulting from the SASSA
price and volume reductions and a decrease in overall profitability. Our
effective tax rate for the third quarter of fiscal 2011 was 7.0%, compared to
35.9% for the third quarter of fiscal 2010. The change in our effective tax rate
was primarily due to an increase in non-deductible expenses, the impairment loss
and the interest expense related to the acquisition of KSNET, during the third
quarter of fiscal 2011 compared to the third quarter of fiscal 2010.
Net
loss from equity-accounted investments for the third quarter of fiscal 2011
increased from the prior year primarily due to waiver of interest and related
currency effects at SmartSwitch Botswana offset by an increase in transaction
fees generated by SmartSwitch Namibia and SmartSwitch Botswana.
Results
of operations by operating segment
The
composition of revenue and the contributions of our business activities to
operating (loss) income are illustrated below.
Table 7
|
|
In
United States Dollars (US GAAP)
|
|
|
|
Three
months ended March 31,
|
|
|
|
2011
|
|
|
|
% of
|
|
|
2010
|
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
$000
|
|
|
|
total
|
|
|
$000
|
|
|
|
total
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
47,313
|
|
|
|
51%
|
|
|
50,854
|
|
|
|
70%
|
|
|
(7)%
|
|
International transaction-based activities
|
|
24,627
|
|
|
|
27%
|
|
|
|
|
|
|
|
|
|
nm
|
|
Smart card accounts
|
|
8,288
|
|
|
|
9%
|
|
|
7,956
|
|
|
|
11%
|
|
|
4%
|
|
Financial services
|
|
2,168
|
|
|
|
2%
|
|
|
1,149
|
|
|
|
2%
|
|
|
89%
|
|
Hardware, software and related technology sales
|
|
10,362
|
|
|
|
11%
|
|
|
12,332
|
|
|
|
17%
|
|
|
(16)%
|
|
Total consolidated revenue
|
|
92,758
|
|
|
|
100%
|
|
|
72,291
|
|
|
|
100%
|
|
|
28%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
18,309
|
|
|
|
(83)%
|
|
|
26,837
|
|
|
|
100%
|
|
|
(32)%
|
|
Operating income before
amortization
|
|
19,737
|
|
|
|
|
|
|
28,143
|
|
|
|
|
|
|
(30)%
|
|
Amortization of intangible assets
|
|
(1,428
|
)
|
|
|
|
|
|
(1,306
|
)
|
|
|
|
|
|
9%
|
|
International transaction-based activities
|
|
780
|
|
|
|
(4)%
|
|
|
-
|
|
|
|
|
|
|
nm
|
|
Operating income before amortization
|
|
3,904
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
nm
|
|
Amortization of intangible
assets
|
|
(3,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
nm
|
|
Smart card accounts
|
|
3,767
|
|
|
|
(17)%
|
|
|
3,616
|
|
|
|
13%
|
|
|
4%
|
|
Financial services
|
|
1,701
|
|
|
|
(8)%
|
|
|
831
|
|
|
|
3%
|
|
|
105%
|
|
Hardware, software and related technology sales
|
|
(44,584
|
)
|
|
|
202%
|
|
|
(1,798
|
)
|
|
|
(7)%
|
|
|
nm
|
|
Operating (loss) income
before amortization .
|
|
(358
|
)
|
|
|
|
|
|
676
|
|
|
|
|
|
|
(153)%
|
|
Impairment loss
|
|
(41,771
|
)
|
|
|
|
|
|
-
|
|
|
|
|
|
|
nm
|
|
Amortization of intangible
assets
|
|
(2,455
|
)
|
|
|
|
|
|
(2,474
|
)
|
|
|
|
|
|
(1)%
|
|
Corporate/eliminations
|
|
(2,098
|
)
|
|
|
10%
|
|
|
(2,627
|
)
|
|
|
(9)%
|
|
|
(20)%
|
|
Total consolidated operating
(loss) income
|
|
(22,125
|
)
|
|
|
100%
|
|
|
26,859
|
|
|
|
100%
|
|
|
(182)%
|
|
31
Table 8
|
|
In
South African Rand (US GAAP)
|
|
|
|
Three
months ended March 31,
|
|
|
|
2011
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
|
% of
|
|
|
ZAR
|
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
000
|
|
|
|
total
|
|
|
000
|
|
|
|
total
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
330,495
|
|
|
|
51%
|
|
|
383,141
|
|
|
|
70%
|
|
|
(14)%
|
|
International transaction-based activities
|
|
172,027
|
|
|
|
27%
|
|
|
|
|
|
|
|
|
|
|
|
Smart card accounts
|
|
57,894
|
|
|
|
9%
|
|
|
59,942
|
|
|
|
11%
|
|
|
(3)%
|
|
Financial services
|
|
15,144
|
|
|
|
2%
|
|
|
8,657
|
|
|
|
2%
|
|
|
75%
|
|
Hardware, software and related technology sales
|
|
72,382
|
|
|
|
11%
|
|
|
92,911
|
|
|
|
17%
|
|
|
(22)%
|
|
Total consolidated revenue
|
|
647,942
|
|
|
|
100%
|
|
|
544,651
|
|
|
|
100%
|
|
|
19%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
127,894
|
|
|
|
(83)%
|
|
|
202,194
|
|
|
|
99%
|
|
|
(37)%
|
|
Operating income before amortization
|
|
137,867
|
|
|
|
|
|
|
212,037
|
|
|
|
|
|
|
(35)%
|
|
Amortization of intangible
assets
|
|
(9,973
|
)
|
|
|
|
|
|
(9,843
|
)
|
|
|
|
|
|
1%
|
|
International transaction-based activities
|
|
5,449
|
|
|
|
(4)%
|
|
|
|
|
|
|
nm
|
|
|
nm
|
|
Operating income before
amortization
|
|
27,271
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
nm
|
|
Amortization of intangible assets
|
|
(21,822
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
nm
|
|
Smart card accounts
|
|
26,314
|
|
|
|
(17)%
|
|
|
27,243
|
|
|
|
13%
|
|
|
(3)%
|
|
Financial services
|
|
11,882
|
|
|
|
(8)%
|
|
|
6,261
|
|
|
|
3%
|
|
|
90%
|
|
Hardware, software and related technology sales
|
|
(311,433
|
)
|
|
|
202%
|
|
|
(13,546
|
)
|
|
|
(7)%
|
|
|
nm
|
|
Operating (loss) income before amortization
.
|
|
(2,499
|
)
|
|
|
|
|
|
5,089
|
|
|
|
|
|
|
(149)%
|
|
Impairment loss
|
|
(291,783
|
)
|
|
|
|
|
|
-
|
|
|
|
|
|
|
nm
|
|
Amortization of intangible assets
|
|
(17,151
|
)
|
|
|
|
|
|
(18,635
|
)
|
|
|
|
|
|
(8)%
|
|
Corporate/eliminations
|
|
(14,655
|
)
|
|
|
10%
|
|
|
(19,792
|
)
|
|
|
(8)%
|
|
|
(26)%
|
|
Total consolidated operating (loss)
income
|
|
(154,549
|
)
|
|
|
100%
|
|
|
202,360
|
|
|
|
100%
|
|
|
(176)%
|
|
SA
transaction-based activities
In
ZAR, the decreases in revenue were primarily due to lower revenue generated
under our SASSA contract and by MediKredit, which was partially offset by
increased transaction volumes at EasyPay and the inclusion of FIHRST.
Revenues
for SA transaction-based activities include the transaction fees we earn through
our merchant acquiring system and reflect the elimination of inter-company
transactions.
Operating
income margin of our SA transaction-based activities decreased to 39% from 53% a
year ago. The decrease was primarily due to the lower revenues generated under
our SASSA contract, additional intangible asset amortization related to the
acquisition of FIHRST and lower margins at FIHRST and MediKredit compared with
legacy SA transaction-based activities.
Pension
and welfare operations
:
Our
revenue and operating income related to our pension and welfare operations were
impacted by our SASSA contract. Our pension and welfare operations continue to
generate the majority of our revenues and operating income in this operating
segment and for us as a whole.
South
African transaction processors:
The
table below presents the total volume and value processed during the third
quarter of fiscal 2011 and 2010 by our transaction processors:
Table 9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
|
|
Total
volume (000s)
|
|
|
Total
value $ (000)
|
|
|
Total
value ZAR (000)
|
|
processor
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
EasyPay
|
|
170,818
|
|
|
161,636
|
|
|
5,784,228
|
|
|
4,693,139
|
|
|
40,404,565
|
|
|
35,358,746
|
|
MediKredit
|
|
2,507
|
|
|
2,738
|
|
|
132,370
|
|
|
115,532
|
|
|
924,647
|
|
|
870,432
|
|
FIHRST
|
|
5,281
|
|
|
-
|
|
|
2,387,363
|
|
|
-
|
|
|
16,676,447
|
|
|
-
|
|
Our
results for the third quarter of fiscal 2011 include the intangible asset
amortization related to our FIHRST acquisition but excludes RMTs intangible
assets which were fully amortized in the third quarter of fiscal 2010. Our
results for the third quarter of fiscal 2010 include amortization related to the
RMT intangible assets.
32
Key
statistics of our merchant acquiring system:
The
key statistics and indicators of our merchant acquiring system during the third
quarter of fiscal 2011 and 2010, in each of the South African provinces where we
distribute social welfare grants are summarized in the table below:
Table 10
|
|
Three months ended
|
|
|
|
March
31,
|
|
|
|
2011
|
|
|
2010
|
|
Province included (1)
|
|
NC, EC, KZN, L and NW
|
|
|
NC, EC, KZN, L and NW
|
|
Total POS devices installed
|
|
4,835
|
|
|
4,700
|
|
Number of participating UEPS retail locations
|
|
2,541
|
|
|
2,552
|
|
Value of transactions processed through POS
devices during the quarter (2) (in $ 000)
|
|
411,233
|
|
|
397,141
|
|
Value of transactions processed through POS
devices during the completed pay cycles for the quarter (3) (in $ 000)
|
|
401,723
|
|
|
381,993
|
|
Value of transactions processed through POS
devices during the quarter (2) (in ZAR 000)
|
|
2,920,454
|
|
|
2,992,828
|
|
Value of transactions processed through POS
devices during the completed pay cycles for the quarter (3) (in ZAR 000)
|
|
2,852,913
|
|
|
2,878,675
|
|
Number of grants paid through POS devices during
the quarter (2)
|
|
4,804,540
|
|
|
4,370,553
|
|
Number of grants paid through POS devices during
the completed pay cycles for the quarter (3)
|
|
4,739,062
|
|
|
4,699,620
|
|
Average number of grants processed per terminal
during the quarter (2) .
|
|
995
|
|
|
933
|
|
Average number of grants processed per terminal
during the completed pay cycles for the quarter (3)
|
|
981
|
|
|
1,003
|
|
|
(1)
|
NC = Northern Cape, EC = Eastern Cape, KZN =
KwaZulu-Natal, L = Limpopo, NW = North West.
|
|
(2)
|
Refers to events occurring during the quarter (i.e.,
based on three calendar months).
|
|
(3)
|
Refers to events occurring during the completed pay
cycle.
|
International
transaction-based activities
KSNET currently contributes the majority of our revenues in this operating
segment. Operating margin for the segment is lower than our legacy South African
transaction-based businesses and was negatively impacted by start-up
expenditures related to our Virtual Card launch in the United States, but was
partially offset by improving profitability of NUETS initiative in Iraq.
Our
results for the third quarter of fiscal 2011 include the intangible asset
amortization related to our KSNET acquisition.
Smart
card accounts
In
ZAR, revenue from the provision of smart card-based accounts decreased in
proportion to the lower number of beneficiaries serviced through our SASSA
contract. A total number of 3,537,126 smart card-based accounts were active at
March 31, 2011, compared to 3,609,652 active accounts as at March 31, 2010. The
year over year decrease in the number of active accounts resulted largely from
the suspension and removal of invalid or fraudulent grants by SASSA, however
active accounts were flat on a sequential basis.
Operating
income margin from providing smart card accounts was constant at 45% for the
third quarter of fiscal 2011 and 2010.
Financial
services
Revenue
from UEPS-based lending increased primarily due to an increase in the number of
loans granted. In addition, on average, the return on these UEPS-based loans was
higher. Our current UEPS-based lending portfolio comprises loans made to elderly
pensioners in some of the provinces where we distribute social welfare grants.
We insure the UEPS-based lending book against default and thus no allowance is
required.
Operating
income margin for the financial services segment increased to 78% for the third
quarter of fiscal 2011 from 72% for the third quarter of fiscal 2010 primarily
due to an increase in lending activity.
33
Hardware,
software and related technology sales
The
following table presents our revenue and operating income during the third
quarter of fiscal 2011 and 2010:
|
|
Three months ended
|
|
Table 11
|
|
March
31,
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
$000
|
|
|
|
$000
|
|
Revenue
|
|
10,362
|
|
|
|
12,332
|
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
7,775
|
|
|
|
10,408
|
|
Net1 UTA
|
|
2,587
|
|
|
|
1,924
|
|
|
|
|
|
|
|
|
|
Operating (loss) income before amortization
of intangible assets
|
|
(358
|
)
|
|
|
676
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
(44,584
|
)
|
|
|
(1,798
|
)
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
(360
|
)
|
|
|
1,587
|
|
Net1 UTA
|
|
(44,224
|
)
|
|
|
(3,385
|
)
|
Net1 UTA excluding amortization
of acquisition related intangible assets
|
|
(161
|
)
|
|
|
(1,063
|
)
|
Impairment
loss
|
|
(41,771
|
)
|
|
|
-
|
|
Amortization of acquisition
related intangible assets
|
|
(2,292
|
)
|
|
|
(2,322
|
)
|
|
|
Three months ended
|
|
Table 12
|
|
March
31,
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
ZAR 000
|
|
|
|
ZAR 000
|
|
Revenue
|
|
72,382
|
|
|
|
92,911
|
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
54,311
|
|
|
|
78,415
|
|
Net1 UTA
|
|
18,071
|
|
|
|
14,496
|
|
|
|
|
|
|
|
|
|
Operating (loss) income before amortization
of intangible assets
|
|
(2,499
|
)
|
|
|
5,089
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
(311,433
|
)
|
|
|
(13,546
|
)
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
(2,515
|
)
|
|
|
11,957
|
|
Net1 UTA
|
|
(308,918
|
)
|
|
|
(25,503
|
)
|
Net1 UTA excluding amortization
of acquisition related intangible assets
|
|
(1,125
|
)
|
|
|
(8,009
|
)
|
Impairment
loss
|
|
(291,783
|
)
|
|
|
-
|
|
Amortization of acquisition
related intangible assets
|
|
(16,010
|
)
|
|
|
(17,494
|
)
|
The
decrease in revenue and operating loss incurred, before amortization of
intangible assets and the impairment loss, was primarily due to lower revenues
generated by NUETS and other South African-based hardware, software and related
technology sales business units, partially offset by an increase in sales at
Net1 UTA.
As
we expand internationally, whether through traditional selling arrangements to
provide products and services (such as in Ghana and Iraq) or through joint
ventures (such as with SmartSwitch Namibia and SmartSwitch Botswana), we expect
to receive revenues from sales of hardware and from software customization and
licensing to establish the infrastructure of POS terminals and smart cards
necessary to enable utilization of the UEPS technology in a particular country.
To the extent that we enter into joint ventures and account for the investment
as an equity investment, we are required to eliminate our portion of the sale of
hardware, software and licenses to the investees. The sale of hardware, software
and licenses under these arrangements occur on an ad hoc basis as new
arrangements are established, which can materially affect our revenues and
operating income in this segment from period to period.
Corporate/eliminations
The
decrease in our corporate expenses resulted primarily from higher foreign
exchange losses in the comparable period, partially offset by higher corporate
head office-related expenditure, including the effects of inflation in South
Africa, stock-based compensation charges and transaction-related expenditures of
$0.5 million (ZAR 3.7 million).
34
Our
corporate expenses also include expenditure related to compliance with Sarbanes;
non-executive directors fees; employee and executive salaries and bonuses;
legal and audit fees; directors and officers insurance premiums;
telecommunications expenses; property-related expenditures including utilities,
rental, security and maintenance; and elimination entries.
Year
to date fiscal 2011 compared to year to date fiscal 2010
The
following factors had an influence on our results of operations during the year
to date fiscal 2011 as compared with the same period in the prior year (confirm
with above):
-
Impairment loss related to Net1 UTA customer relationships:
We recorded an impairment loss of $41.8 million related to Net1 UTAs
customer relationships, which resulted in an operating loss for year to date
fiscal 2011;
-
SASSA price and volume reductions:
Our new contract with
SASSA has reduced our revenue and operating income as a result of the
previously announced price and volume reductions;
-
Favorable impact from the weakness of the US dollar:
The US
dollar depreciated by 7% compared to the ZAR during the year to date fiscal
2011 compared to fiscal 2010 which positively impacted our reported results;
-
Increased revenue from KSNET at lower operating margins than our
legacy businesses, before acquired
intangible asset
amortization:
Our KSNET acquisition increased our revenue during year
to date fiscal 2011, however, because KSNET has an operating margin that is
lower than our legacy businesses, before acquired intangible asset
amortization, it reduced our consolidated operating margin. The inclusion of
KSNET in our results has also contributed to the increase in selling, general
and administration and depreciation and amortization expenses;
-
Increased transaction volumes at EasyPay:
Our reported
results were favorably impacted by increased transaction volumes at EasyPay
resulting from growth in value-added services;
-
Lower revenue and operating loss generated by MediKredit:
MediKredits revenue for the year to date fiscal 2011 was lower than
the comparable period due to the inclusion in the year to date fiscal 2010 of
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;
-
Increased revenue from FIHRST at lower operating margins than other
SA transaction-based activity business:
FIHRST increased our
revenue during the year to date fiscal 2011, however, because FIHRST has an
operating margin that is lower than our other SA transaction-based activity
businesses, it negatively impacted our consolidated operating margin. The
inclusion of FIHRST in our results has also contributed to the increase in
selling, general and administration expense;
-
Increased user adoption in Iraq:
We recorded increased
transaction revenues at NUETS from the adoption of our UEPS technology in
Iraq;
-
Lower revenues and margins from hardware, software and related
technology sales segment:
Our hardware, software and related
technology sales segment continues to be adversely impacted by lower revenues
from NUETS and Net1 UTA;
-
Intangible asset amortization related to acquisitions:
Our
reported results were adversely impacted by additional intangible asset
amortization of approximately $5.2 million related to the acquisitions of
KSNET in the year to date fiscal 2011, as well as MediKredit and FIHRST during
the third quarter of fiscal 2010;
-
Lower interest income and increased interest expense resulting from
KSNET acquisition:
Our reported results were adversely impacted by
lower interest income due to the payment of a portion of the KSNET purchase
price in cash and increased interest expense due to the payment of a portion
of the KSNET purchase price utilizing long- term debt and facility fees of
approximately $1.8 million; and
-
Non-recurring items included in selling, general and administration
expense:
During the year to date fiscal 2011, we recognized
transaction-related expenses of $5.7 million, primarily for the acquisition of
KSNET.
Consolidated
overall results of operations
This
discussion is based on the amounts which were prepared in accordance with US
GAAP.
35
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 13
|
|
(US
GAAP)
|
|
|
|
Nine
months ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
$%
|
|
|
|
$ 000
|
|
|
$ 000
|
|
|
change
|
|
Revenue
|
|
246,052
|
|
|
211,669
|
|
|
16%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
76,551
|
|
|
55,652
|
|
|
38%
|
|
Selling, general and administration
|
|
91,707
|
|
|
58,987
|
|
|
55%
|
|
Depreciation and amortization
|
|
25,188
|
|
|
14,384
|
|
|
75%
|
|
Impairment loss
|
|
41,771
|
|
|
-
|
|
|
nm
|
|
Operating (loss) income
|
|
10,835
|
|
|
82,646
|
|
|
(87)%
|
|
Interest income, net
|
|
(199
|
)
|
|
6,470
|
|
|
(103)%
|
|
(Loss) Income before income taxes
|
|
10,636
|
|
|
89,116
|
|
|
(88)%
|
|
Income tax expense
|
|
14,440
|
|
|
32,964
|
|
|
(56)%
|
|
Net (loss) income before loss from equity-accounted investments
|
|
(3,804
|
)
|
|
56,152
|
|
|
(107)%
|
|
Loss from equity-accounted investments
|
|
(509
|
)
|
|
(425
|
)
|
|
20%
|
|
Net income
|
|
(4,313
|
)
|
|
55,727
|
|
|
(108)%
|
|
Add net loss attributable to non-controlling
interest
|
|
(128
|
)
|
|
(270
|
)
|
|
(53)%
|
|
Net (loss) income attributable to us
|
|
(4,185
|
)
|
|
55,997
|
|
|
(107)%
|
|
|
|
In South African Rand
|
|
Table 14
|
|
(US
GAAP)
|
|
|
|
Nine
months ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
ZAR
|
|
|
|
ZAR
|
|
|
ZAR
|
|
|
%
|
|
|
|
000
|
|
|
000
|
|
|
change
|
|
Revenue
|
|
1,744,287
|
|
|
1,613,904
|
|
|
8%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
542,677
|
|
|
424,327
|
|
|
28%
|
|
Selling, general and administration
|
|
650,120
|
|
|
449,755
|
|
|
45%
|
|
Depreciation and amortization
|
|
178,560
|
|
|
109,673
|
|
|
63%
|
|
Impairment loss
|
|
296,119
|
|
|
-
|
|
|
nm
|
|
Operating (loss) income
|
|
76,811
|
|
|
630,149
|
|
|
(88)%
|
|
Interest income, net
|
|
(1,411
|
)
|
|
49,332
|
|
|
(103)%
|
|
(Loss) Income before income taxes
|
|
75,400
|
|
|
679,481
|
|
|
(89)%
|
|
Income tax expense
|
|
102,367
|
|
|
251,339
|
|
|
(59)%
|
|
Net (loss) income before loss from equity-accounted investments
|
|
(26,967
|
)
|
|
428,142
|
|
|
(106)%
|
|
Loss from equity-accounted investments
|
|
(3,608
|
)
|
|
(3,240
|
)
|
|
11%
|
|
Net income
|
|
(30,575
|
)
|
|
424,902
|
|
|
(107)%
|
|
Add net loss attributable to non-controlling
interest
|
|
(907
|
)
|
|
(2,059
|
)
|
|
(56)%
|
|
Net (loss) income attributable to us
|
|
(29,668
|
)
|
|
426,961
|
|
|
(107)%
|
|
Analyzed
in ZAR, the increase in revenue for the year to date fiscal 2011, was primarily
due to higher revenues from the inclusion of KSNET, FIHRST and MediKredit, an
increase in the number of UEPS-based loans made, increased transaction volumes
at EasyPay and higher utilization of our UEPS system in Iraq, which was
partially offset by lower revenues from our SASSA contract, discussed under
Business Developments during the Third Quarter of Fiscal 2011South
AfricaSASSA update and fewer sales of hardware, software and related
technology. Analyzed in ZAR, cost of goods sold, IT processing, servicing and
support for the year to date fiscal 2011 was higher primarily due to the
inclusion of KSNET, FIHRST and MediKredit.
Analyzed
in ZAR, selling, general and administration expense increased during the year to
date fiscal 2011 primarily due to increases in goods and services purchased from
third parties and the inclusion of KSNET, FIHRST and MediKredit operations.
During the year to date fiscal 2011, selling, general and administration expense
was also adversely impacted by transaction-related costs of $5.7 million (ZAR
40.1 million), primarily for the KSNET acquisition.
36
Our
operating income margin, before the impairment loss, for the year to date fiscal
2011 and 2010 was 21% and 39%, respectively. We discuss the components of the
operating income margin under Results of operations by operating segment,
however the significant decrease from the prior period is attributable to the
price and volumes reductions under our SASSA contract and transaction-related
costs.
Our
direct costs of maintaining a listing on Nasdaq and JSE, as well as compliance
with Sarbanes, primarily includes independent directors fees, legal fees, fees
paid to Nasdaq and the JSE, investor relations expenses, our compliance
officers salary, fees paid to consultants who assist with Sarbanes compliance
and fees paid to our independent accountants related to the audit and review
process. This has resulted in expenditures of $2.5 million (ZAR 18.0 million)
and $1.8 million (ZAR 13.3 million) during the year to date fiscal 2011 and
2010, respectively.
In
ZAR, depreciation and amortization increased during fiscal 2011, primarily as a
result of intangible asset amortization related to the KSNET, MediKredit and
FIHRST acquisitions. The intangible asset amortization related to our various
acquisitions has been allocated to our operating segments as presented in the
tables below:
|
|
Nine months ended
|
|
Table 15
|
|
March
31,
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
$ 000
|
|
|
|
$ 000
|
|
Amortization included in depreciation and amortization
expense:
|
|
16,594
|
|
|
|
10,532
|
|
SA transaction-based activities
|
|
4,220
|
|
|
|
2,889
|
|
International transaction-based
activities
|
|
5,156
|
|
|
|
-
|
|
Hardware, software and related technology
|
|
7,218
|
|
|
|
7,643
|
|
|
|
Nine months ended
|
|
Table 16
|
|
March
31,
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
ZAR 000
|
|
|
|
ZAR 000
|
|
Amortization included in depreciation and amortization
expense:
|
|
117,644
|
|
|
|
80,308
|
|
SA transaction-based activities
|
|
29,918
|
|
|
|
22,026
|
|
International transaction-based
activities
|
|
36,551
|
|
|
|
-
|
|
Hardware, software and related technology
|
|
51,175
|
|
|
|
58,282
|
|
During
the third quarter of fiscal 2011, customer relationships acquired as part of the
Net1 UTA acquisition were reviewed for impairment following deteriorating
trading conditions and uncertainty surrounding the timing and quantum of future
net cash inflows. As a consequence of this review, we recognized an impairment
loss of approximately $41.8 million related to the entire carrying value of
customer relationships acquired in the Net1 UTA acquisition in August 2008. In
addition, we reversed the deferred tax liability of $10.4 million associated
with this intangible asset.
Analyzed
in ZAR, interest on surplus cash for the year to date fiscal 2011 decreased to
$6.0 million (ZAR 42.2 million) from $7.4 million (ZAR 56.5 million) for the
year to date fiscal 2010. The decrease in interest on surplus cash held in South
Africa was due to a lower average daily ZAR cash balance during the year to date
fiscal 2011 compared with the year to date fiscal 2010 as a result of the
payment of a portion of the KSNET purchase price in cash as well as lower
deposit rates resulting from the adjustment in the South African prime interest
rate from an average of approximately 10.57% per annum for the year to date
fiscal 2010 to 9.39% per annum for the year to date fiscal 2011.
Finance
costs increased to $6.1 million (ZAR 43.6 million) for the year to date fiscal
2011 from $0.8 million (ZAR 6.1 million) for the year to date fiscal 2010.
Interest expense increased during the year to date fiscal 2011 due to the
incurrence of long-term debt and the amortization of the facility fee related to
this facility.
Total
tax expense for the year to date fiscal 2011 was $14.4 million (ZAR 102.4
million) compared with $33.0 million (ZAR 251.3 million) during the same period
in the prior fiscal year. Our total tax expense decreased primarily due to the
reversal of deferred tax liabilities associated with the intangible assets
impaired and lower taxable income resulting from the SASSA price and volume
reductions and a decrease in overall profitability. Our effective tax rate for
the year to date fiscal 2011 was 135.8%, compared to 37.0% for the year to date
fiscal 2010. The change in our effective tax rate was primarily due to the
impairment loss, higher transaction-related expenses and interest expense
related to the acquisition of KSNET, during the year to date fiscal 2011
compared to the year to date fiscal 2010.
Net
loss from equity-accounted investments for the year to date fiscal 2011
increased from the prior year primarily due to waiver of interest and related
currency effects at SmartSwitch Botswana offset by an increase in transaction
fees generated by SmartSwitch Namibia and SmartSwitch Botswana.
37
Results of operations by operating segment
The
composition of revenue and the contributions of our business activities to
operating income are illustrated below.
Table 17
|
|
In
United States Dollars (US GAAP)
|
|
|
|
Nine
months ended March 31,
|
|
|
|
2011
|
|
|
|
% of
|
|
|
2010
|
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
$000
|
|
|
|
total
|
|
|
$000
|
|
|
|
total
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
138,323
|
|
|
|
56%
|
|
|
141,247
|
|
|
|
67%
|
|
|
(2)%
|
|
International transaction-based activities
|
|
42,047
|
|
|
|
17%
|
|
|
|
|
|
|
|
|
|
nm
|
|
Smart card accounts
|
|
24,692
|
|
|
|
10%
|
|
|
24,167
|
|
|
|
11%
|
|
|
2%
|
|
Financial services
|
|
5,039
|
|
|
|
2%
|
|
|
2,799
|
|
|
|
1%
|
|
|
80%
|
|
Hardware, software and related technology sales
|
|
35,951
|
|
|
|
15%
|
|
|
43,456
|
|
|
|
21%
|
|
|
(17)%
|
|
Total consolidated revenue
|
|
246,052
|
|
|
|
100%
|
|
|
211,669
|
|
|
|
100%
|
|
|
16%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
54,295
|
|
|
|
501%
|
|
|
80,238
|
|
|
|
97%
|
|
|
(32)%
|
|
Operating income before
amortization
|
|
58,515
|
|
|
|
|
|
|
83,127
|
|
|
|
|
|
|
(30)%
|
|
Amortization of intangible assets
|
|
(4,220
|
)
|
|
|
|
|
|
(2,889
|
)
|
|
|
|
|
|
46%
|
|
International transaction-based activities
|
|
896
|
|
|
|
8%
|
|
|
-
|
|
|
|
|
|
|
nm
|
|
Operating income before amortization
|
|
6,052
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
nm
|
|
Amortization of intangible
assets
|
|
(5,156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
nm
|
|
Smart card accounts
|
|
11,221
|
|
|
|
104%
|
|
|
10,985
|
|
|
|
13%
|
|
|
2%
|
|
Financial services
|
|
3,861
|
|
|
|
36%
|
|
|
1,908
|
|
|
|
2%
|
|
|
102%
|
|
Hardware, software and related technology sales
|
|
(47,563
|
)
|
|
|
(439)%
|
|
|
(1,851
|
)
|
|
|
(2)%
|
|
|
nm
|
|
Operating (loss) income
before amortization .
|
|
1,426
|
|
|
|
|
|
|
5,792
|
|
|
|
|
|
|
(75)%
|
|
Impairment loss
|
|
(41,771
|
)
|
|
|
|
|
|
-
|
|
|
|
|
|
|
nm
|
|
Amortization of intangible
assets
|
|
(7,218
|
)
|
|
|
|
|
|
(7,643
|
)
|
|
|
|
|
|
(6)%
|
|
Corporate/eliminations
|
|
(11,875
|
)
|
|
|
(110)%
|
|
|
(8,634
|
)
|
|
|
(10)%
|
|
|
38%
|
|
Total consolidated operating
(loss) income
|
|
10,835
|
|
|
|
100%
|
|
|
82,646
|
|
|
|
100%
|
|
|
(87)%
|
|
Table 18
|
|
In
South African Rand (US GAAP)
|
|
|
|
Nine
months ended March 31,
|
|
|
|
2011
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
|
% of
|
|
|
ZAR
|
|
|
|
% of
|
|
|
%
|
|
Operating Segment
|
|
000
|
|
|
|
total
|
|
|
000
|
|
|
|
total
|
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
980,586
|
|
|
|
56%
|
|
|
1,076,961
|
|
|
|
67%
|
|
|
(9)%
|
|
International transaction-based activities
|
|
298,075
|
|
|
|
17%
|
|
|
|
|
|
|
|
|
|
nm
|
|
Smart card accounts
|
|
175,044
|
|
|
|
10%
|
|
|
184,265
|
|
|
|
11%
|
|
|
(5)%
|
|
Financial services
|
|
35,722
|
|
|
|
2%
|
|
|
21,341
|
|
|
|
1%
|
|
|
67%
|
|
Hardware, software and related technology sales
|
|
254,860
|
|
|
|
15%
|
|
|
331,337
|
|
|
|
21%
|
|
|
(23)%
|
|
Total consolidated revenue
|
|
1,744,287
|
|
|
|
100%
|
|
|
1,613,904
|
|
|
|
100%
|
|
|
8%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
384,903
|
|
|
|
501%
|
|
|
611,788
|
|
|
|
97%
|
|
|
(37)%
|
|
Operating income before amortization
|
|
414,821
|
|
|
|
|
|
|
633,814
|
|
|
|
|
|
|
(35)%
|
|
Amortization of intangible
assets
|
|
(29,918
|
)
|
|
|
|
|
|
(22,026
|
)
|
|
|
|
|
|
36%
|
|
International transaction-based activities
|
|
6,352
|
|
|
|
8%
|
|
|
|
|
|
|
|
|
|
nm
|
|
Operating income before
amortization
|
|
42,903
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
nm
|
|
Amortization of intangible assets
|
|
(36,551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
nm
|
|
Smart card accounts
|
|
79,547
|
|
|
|
104%
|
|
|
83,757
|
|
|
|
13%
|
|
|
(5)%
|
|
Financial services
|
|
27,371
|
|
|
|
36%
|
|
|
14,548
|
|
|
|
2%
|
|
|
88%
|
|
Hardware, software and related technology sales
|
|
(337,179
|
)
|
|
|
(439)%
|
|
|
(14,113
|
)
|
|
|
(2)%
|
|
|
nm
|
|
Operating (loss) income before amortization
.
|
|
10,115
|
|
|
|
|
|
|
44,169
|
|
|
|
|
|
|
(77)%
|
|
Impairment loss
|
|
(296,119
|
)
|
|
|
|
|
|
-
|
|
|
|
|
|
|
nm
|
|
Amortization of intangible assets
|
|
(51,175
|
)
|
|
|
|
|
|
(58,282
|
)
|
|
|
|
|
|
(12)%
|
|
Corporate/eliminations
|
|
(84,183
|
)
|
|
|
(102)%
|
|
|
(65,831
|
)
|
|
|
(10)%
|
|
|
28%
|
|
Total consolidated operating income
|
|
76,811
|
|
|
|
100%
|
|
|
630,149
|
|
|
|
100%
|
|
|
(88)%
|
|
38
SA
transaction-based activities
In
ZAR, the decreases in revenue were primarily due to lower revenue generated
under our SASSA contract, which was partially offset by increased transaction
volumes at EasyPay and the inclusion of MediKredit and FIHRST.
Revenues
for SA transaction-based activities include the transaction fees we earn through
our merchant acquiring system and reflect the elimination of inter-company
transactions.
Operating
income margin of our SA transaction-based activities decreased to 39% from 57% a
year ago. The decrease was primarily due to the lower revenues generated under
our SASSA contract, additional intangible asset amortization related to the
acquisition of MediKredit and FIHRST and lower margins at MediKredit and FIHRST
compared with legacy SA transaction-based activities.
Pension
and welfare operations
:
Our
revenue and operating income related to our pension and welfare operations were
impacted by our new contract discussed under Business Developments during the
Third Quarter of Fiscal 2011South AfricaSASSA update. Our pension and welfare
operations continue to generate the majority of our revenues and operating
income in this operating segment and for us as a whole.
South
African transaction processors:
The
table below presents the total volume and value processed during the year to
date fiscal 2011 and 2010 by our transaction processors:
Table 19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
|
|
Total
volume (000s)
|
|
|
Total value $ (000)
|
|
|
Total
value ZAR (000)
|
|
processor
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
EasyPay
|
|
532,772
|
|
|
487,920
|
|
|
17,093,625
|
|
|
14,097,102
|
|
|
121,178,418
|
|
|
107,485,648
|
|
MediKredit
|
|
7,221
|
|
|
2,738
|
|
|
359,236
|
|
|
114,160
|
|
|
2,546,663
|
|
|
870,432
|
|
FIHRST
|
|
16,349
|
|
|
-
|
|
|
6,981,903
|
|
|
-
|
|
|
49,495,412
|
|
|
-
|
|
Our
results for the year to date fiscal 2011, include the intangible asset
amortization related to our MediKredit and FIHRST acquisitions but excludes
RMTs intangible assets which were fully amortized in the third quarter of
fiscal 2010. Our results for the year to date fiscal 2010 include amortization
related to the RMT intangible assets for nine months and MediKredit for three
months.
International
transaction-based activities
See
discussion under Third quarter of fiscal 2011 compared to the third quarter of
fiscal 2010Results of operations by operating segmentInternational
transaction-based activities.
Smart
card accounts
In
ZAR, revenue from the provision of smart card-based accounts decreased in
proportion to the lower number of beneficiaries serviced through our SASSA
contract. A total number of 3,537,126 smart card-based accounts were active at
March 31, 2011, compared to 3,609,652 active accounts as at March 31, 2010. The
year over year decrease in the number of active accounts resulted largely from
the suspension and removal of invalid or fraudulent grants by SASSA, however
active accounts were flat on a sequential basis.
Operating
income margin from providing smart card accounts was constant at 45% for the
year to date fiscal 2011 and 2010.
Financial
services
Revenue
from UEPS-based lending increased primarily due to an increase in the number of
loans granted. In addition, on average, the return on these UEPS-based loans was
higher. Our current UEPS-based lending portfolio comprises loans made to elderly
pensioners in some of the provinces where we distribute social welfare grants.
We insure the UEPS-based lending book against default and thus no allowance is
required.
Operating
income margin for the financial services segment increased to 77% for the year
to date fiscal 2011 from 68% for the year to date fiscal 2010 primarily due to
an increase in lending activity.
39
Hardware,
software and related technology sales
The
following table presents our revenue and operating income during the year to
date fiscal 2011 and 2010:
|
|
Nine months ended
|
|
Table 20
|
|
March
31,
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
$ 000
|
|
|
|
$ 000
|
|
Revenue
|
|
35,951
|
|
|
|
43,456
|
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
26,446
|
|
|
|
31,792
|
|
Net1 UTA
|
|
9,505
|
|
|
|
11,664
|
|
|
|
|
|
|
|
|
|
Operating income before amortization of intangible
assets
|
|
1,426
|
|
|
|
5,792
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
(47,563
|
)
|
|
|
(1,851
|
)
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
741
|
|
|
|
5,661
|
|
Net1 UTA
|
|
(48,304
|
)
|
|
|
(7,512
|
)
|
Net1 UTA excluding amortization
of acquisition related intangible assets
|
|
203
|
|
|
|
(317
|
)
|
Impairment
loss
|
|
(41,771
|
)
|
|
|
-
|
|
Amortization of acquisition
related intangible assets
|
|
(6,736
|
)
|
|
|
(7,195
|
)
|
|
|
Nine months ended
|
|
Table 21
|
|
March
31,
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
ZAR 000
|
|
|
|
ZAR 000
|
|
Revenue
|
|
254,860
|
|
|
|
331,337
|
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
187,478
|
|
|
|
242,403
|
|
Net1 UTA
|
|
67,382
|
|
|
|
88,934
|
|
|
|
|
|
|
|
|
|
Operating income before amortization of intangible
assets and impairment loss
|
|
10,115
|
|
|
|
44,169
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
(337,179
|
)
|
|
|
(14,113
|
)
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
5,253
|
|
|
|
43,163
|
|
Net1 UTA
|
|
(342,432
|
)
|
|
|
(57,276
|
)
|
Net1 UTA excluding amortization
of acquisition related intangible assets
|
|
1,439
|
|
|
|
(2,417
|
)
|
Impairment
loss
|
|
(296,119
|
)
|
|
|
-
|
|
Amortization of acquisition
related intangible assets
|
|
(47,752
|
)
|
|
|
(54,859
|
)
|
The
decrease in revenue was primarily due to lower revenues generated by NUETS and
Net1 UTA. In ZAR, the decrease in operating income, before the impairment loss,
was primarily due to lower sales activity.
Corporate/eliminations
The
increase in our corporate expenses resulted from higher corporate head
office-related expenditure, including the effects of inflation in South Africa,
stock-based compensation charges and transaction related expenditures of $5.7
million (ZAR 40.1 million).
Our
corporate expenses also includes expenditure related to compliance with
Sarbanes; non-executive directors fees; employee and executive salaries and
bonuses; stock-based compensation; legal and audit fees; directors and officers
insurance premiums; telecommunications expenses; property-related expenditures
including utilities, rental, security and maintenance; and elimination entries.
Liquidity and Capital Resources
Our
business has historically generated and continues to generate high levels of
cash. At March 31, 2011, our cash balances were $88.9 million, which comprised
mainly ZAR-denominated balances of ZAR 402.9 million ($58.9 million),
KRW-denominated balances of KRW 19.8 billion ($17.9 million) and US
dollar-denominated balances of $5.6 million and other currency deposits,
primarily euro, of $6.5 million. The decrease in our cash balances from June 30,
2010, is primarily as a result of the payment of approximately $124.3 million to
fund a portion of the KSNET purchase price and the Secondary Taxation on
Companies, or STC, of $14.7 million incurred related to dividends paid from
South Africa to the United States connected with the KSNET transaction.
40
We
generally invest the surplus cash held by our South African operations in
overnight call accounts that we maintain at South African banking institutions,
and surplus cash held by our non-South African companies in the US and European
money markets. We have invested surplus cash in Korea in short term investment
accounts at Korean banking institutions. In addition, under our Korean
facilities agreement (the Facilities Agreement) we are required to invest the
interest payable on these facilities in the next six months in an interest
reserve account in Korea.
Historically,
we have financed most of our operations, research and development, working
capital, capital expenditures and acquisitions through our internally generated
cash. We take the following factors into account when considering whether to
borrow under our financing facilities:
We
financed a portion of the KSNET acquisition price and related transaction
expenses with the proceeds of a KRW 130.5 billion (approximately $115.9 million
based on October 29, 2010 exchange rates) loan under the Facilities Agreement.
We are required to make the first scheduled installment of approximately $7.3
million (KRW 8.1 billion), translated at exchange rates applicable as of March
31, 2011 on October 29, 2011. We intend to service this installment using cash
generated from operations. In addition, we used cash generated from operating
activities to settle our first interest payment under the Facilities Agreement
on January 29, 2011, of approximately $2.1 million (KRW 2.3 billion) and made
our second scheduled interest payment of approximately $2.0 million (KRW 2.2
billion) on April 29, 2011.
In
February 2011, the Monetary Policy Committee of the Bank of Korea, or BoK,
announced a 25 basis point increase in the Korean base rate to 3.00% .
Adjustments to the base rate in Korea affect us because our Korea-based lending
used to fund a portion of the KSNET purchase price is linked to the base
rate.
We
have a unique cash flow cycle due to the funding mechanism under our SASSA
contact and our pre-funding of certain merchants. Under our SASSA contract, we
receive the grant funds 48 hours prior to the provision of the service and any
interest we earn on these amounts is for the benefit of SASSA. We pre-fund
certain merchants for grants paid through our merchant acquiring system on our
behalf before the start of the payment service at pay points. We typically
reimburse merchants that are not pre-funded within 48 hours after they
distribute the grants to the social welfare beneficiaries.
We
currently believe that our cash and available credit facilities are sufficient
to meet our business requirements for at least the next four quarters, including
working capital requirements, capital expenditures and debt service obligations.
Cash
flows from operating activities
Third
quarter of fiscal 2011
Net
cash provided by operating activities for the third quarter of fiscal 2011 was
$28.3 million (ZAR 197.4 million) compared to $31.7 million (ZAR 238.9 million)
for the third quarter of fiscal 2010. The movement in cash was primarily due to
the SASSA price and volume reductions which were effective July 1, 2010.
During
the third quarter of fiscal 2011, we commenced servicing interest related to the
Facilities Agreement as described above under Liquidity and capital
resources.
We
paid STC of $1.1 million (ZAR 8.0 million) to the South African tax authority
related to intercompany dividends paid from South Africa to the United States.
We paid tax $0.5 million (ZAR 3.2 million) related to our 2010 tax year to the
Korean tax authority. During the third quarter of fiscal 2010 we made additional
first provisional tax payments of $2.0 million (ZAR 14.7 million) related to our
2010 tax year in South Africa.
We
expect to pay our second provisional payments in South Africa related to our
2011 tax year in the fourth quarter of fiscal 2011.
Year
to date fiscal 2011
Net
cash provided by operating activities for the year to date fiscal 2011 was $53.4
million (ZAR 378.9 million) compared to $82.4 million (ZAR 628.6 million) for
the year to date of fiscal 2010. Our net cash from operating activities
decreased primarily due to the SASSA price and volume reductions which were
effective July 1, 2010.
41
During
the year to date fiscal 2011, we commenced servicing interest related to the
Facilities Agreement as described above under Liquidity and capital
resources.
During
the year to date fiscal 2011 we paid the South African tax authority provisional
tax payments related to fiscal 2011 of approximately $16.9 million (ZAR 116.0
million), tax payments related to fiscal 2010 of approximately $1.8 million (ZAR
12.7 million) and STC of approximately $14.7 million (ZAR 103 million) related
to intercompany dividends paid from South Africa to the United States. We paid
tax $1.0 million (ZAR 6.9 million) related to our 2010 tax year to the Korean
tax authority.
During
the year to date fiscal 2010 we paid the South African tax authority provisional
tax payments related to fiscal 2010 of approximately $17.8 million (ZAR 133.5
million) and tax payments related to fiscal 2009 of approximately $3.9 million
(ZAR 29.6 million).
Cash
flows from investing activities
Third
quarter of fiscal 2011
Cash
used in investing activities for the third quarter of fiscal 2011 includes
capital expenditure of $4.7 million (ZAR 32.7 million), primarily for the
acquisition of payment processing terminals in Korea, kiosks to service our
EasyPay Kiosk pilot project and the acquisition of POS devices to service our
merchant acquiring system.
We
received principal loan repayments from SmartSwitch Namibia of $0.1 million
during the third quarter of fiscal 2011.
During
the third quarter of fiscal 2011 we continued to determine the post-closing
working capital adjustment with the former shareholders of KSNET and expect
finalization during the fourth quarter of fiscal 2011.
Cash
used in investing activities for the third quarter of fiscal 2010 includes
capital expenditure of $1.0 million (ZAR 7.4 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
the third quarter of 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.
Year
to date fiscal 2011
During
the year to date of fiscal 2011, we paid approximately $230.2 million (ZAR 1.6
billion), net of cash received for 98.73% of KSNET.
Cash
used in investing activities for the year to date fiscal 2011 includes capital
expenditure of $9.5 million (ZAR 67.0 million), primarily for the acquisition of
payment processing terminals in Korea, kiosks to service our EasyPay Kiosk pilot
project, the acquisition of POS devices to service our merchant acquiring
system, the replacement of computer and electronic hardware and the replacement
of motor vehicles.
SmartSwitch
Namibia commenced repayment of loans provided by its shareholders during the
year to date of fiscal 2010 and cash flows from investing activities for the
year to date fiscal 2011 includes principal repayments of $0.4 million. In July
2010, we provided additional loan funding to VTU Colombia of approximately $0.4
million.
Cash
used in investing activities for the fiscal period to March 2010 includes
capital expenditure of $2.3 million (ZAR 17.6 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
the third quarter of 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.
Cash
flows from financing activities
Third
quarter of fiscal 2011
During
the third quarter of fiscal 2011, we repaid KSNETs outstanding debt of $7.1
million.
There
were no significant cash flows from financing activities during the third
quarter of 2010.
42
Year
to date fiscal 2011
During
the year to date fiscal 2011 we obtained loans under the Facilities Agreement to
fund a portion of the KSNET purchase price. In addition, we paid the facility
fee under the Facilities Agreement of approximately $3.1 million in October
2010. In addition, we paid approximately $0.6 million for the remaining 19.9% of
Net1 UTA during the year to date of fiscal 2011.
During
the year to date fiscal 2011, we repaid KSNETs outstanding debt of $7.1
million.
During
the year to date fiscal 2010 we repurchased, using our ZAR reserves, 9,221,526
shares of our common stock from Brait S.A. and its investment entities
affiliates for $13.50 (ZAR 105.98) per share, for an aggregate repurchase price
of $124.5 million (ZAR 977.3 million). In addition, we incurred costs of
approximately $0.5 million (ZAR 3.9 million) related to the repurchase of these
shares. During the year to date fiscal 2010, we also paid $1.3 million on
account of shares we repurchased on June 30, 2009, under our share buy-back
program. We also received $0.7 (ZAR 5.5 million) from employees exercising stock
options and repaying loans.
Off-Balance Sheet Arrangements
We
have no off-balance sheet arrangements.
Capital Expenditures
We
discuss our capital expenditures during the third quarter of fiscal 2011 under
Liquidity and capital resources Cash flows from investing activities. All of
our capital expenditures for the past three fiscal years have been funded
through internally generated funds. We had outstanding capital commitments of
$0.1 million as of March 31, 2011. We anticipate that capital spending for the
fourth quarter of fiscal 2011 will relate primarily to on-going replacement of
equipment used to administer and distribute social welfare grants, provide a
switching service through EasyPay and expand our operations in Korea. We expect
to fund these expenditures through internally generated funds.
Contingent Liabilities, Commitments and Contractual
Obligations
We
lease various premises under operating leases. Our minimum future commitments
for leased premises as well as other commitments are as follows:
Table 22
|
|
Payments
due by Period, as at March 31, 2011 (in $ 000s)
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
than 1
|
|
|
1-3
|
|
|
3-5
|
|
|
than 5
|
|
|
|
Total
|
|
|
year
|
|
|
years
|
|
|
years
|
|
|
years
|
|
Interest-bearing liabilities (A)
|
|
122,552
|
|
|
7,347
|
|
|
29,389
|
|
|
81,274
|
|
|
4,542
|
|
Operating lease obligations
|
|
5,813
|
|
|
3,026
|
|
|
2,545
|
|
|
242
|
|
|
-
|
|
Purchase obligations
|
|
890
|
|
|
890
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Capital commitments
|
|
93
|
|
|
93
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
129,348
|
|
|
11,356
|
|
|
31,934
|
|
|
81,516
|
|
|
4,542
|
|
|
(A)
|
- Includes $118.0 million of loans under the Facilities
Agreement discussed under Liquidity and capital
resources
|
43
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
We
seek to reduce our exposure to currencies other than the South African rand, or
ZAR, through a policy of matching, to the extent possible, assets and
liabilities denominated in those currencies. In addition, we use financial
instruments to economically hedge our exposure to exchange rate and interest
rate fluctuations arising from our operations. We are also exposed to equity
price and liquidity risks as well as credit risks.
Currency
Exchange Risk
We
are subject to currency exchange risk because we purchase inventories that we
are required to settle in other currencies, primarily the euro and US dollar. We
have used forward contracts to limit our exposure in these transactions to
fluctuations in exchange rates between the ZAR, on the one hand, and the US
dollar and the euro, on the other hand. As of March 31, 2011 and 2010, our
outstanding foreign exchange contracts were as follows:
As
of March 31, 2011
None.
As
of March 31, 2010
|
|
|
|
|
|
Fair market
|
|
|
Notional amount
|
|
Strike price
|
|
value price
|
|
Maturity
|
EUR
|
30,800
|
|
ZAR
|
10.4690
|
|
ZAR
|
9.9254
|
|
May 11, 2010
|
EUR
|
207,000
|
|
ZAR
|
10.1107
|
|
ZAR
|
10.0644
|
|
July 30, 2010
|
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 and generate a significant amount of revenue
and related and operating expenses in KRW. The US dollar fluctuated
significantly over the past three years, including against the ZAR and KRW. 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. Our outstanding long-term debt under the
Facilities Agreement to acquire KSNET currently bears interest at the Korean CD
rate plus 4.10% . As interest rates, and specifically the Korean CD rate, are
outside our control, there can be no assurance that future increases in interest
rates, specifically the Korean CD rate, will not adversely affect our results of
operations and financial condition.
The
following table illustrates the effect on our annual expected interest charge,
translated at exchange rates applicable as of March 31, 2011, of a hypothetical
1% increase and a 1% decrease in the Korean CD rate. This 1% hypothetical change
does not reflect what could be considered the best or worst case scenarios.
|
|
As
of March 31, 2011
|
|
Table 23
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
annual
|
|
|
|
|
|
|
|
|
|
expected
|
|
|
|
Annual
|
|
|
|
|
|
interest charge
|
|
|
|
expected
|
|
|
Hypothetical
|
|
|
after change in
|
|
|
|
interest
|
|
|
change in
|
|
|
Korean CD
|
|
|
|
charge
|
|
|
Korean CD
|
|
|
rate
|
|
|
|
($ 000)
|
|
|
rate
|
|
|
($ 000)
|
|
Interest on Facilities Agreement
|
|
8,379
|
|
|
1%
|
|
|
9,559
|
|
|
|
|
|
|
(1)%
|
|
|
7,199
|
|
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.
44
Credit
Risk
Credit
risk relates to the risk of loss that we would incur as a result of
non-performance by counterparties. We maintain credit risk policies with regard
to our counterparties to minimize overall credit risk. These policies include an
evaluation of a potential counterpartys financial condition, credit rating, and
other credit criteria and risk mitigation tools as our management deems
appropriate.
With
respect to credit risk on financial instruments, we maintain a policy of
entering into such transactions only with South African and European financial
institutions that have a credit rating of BBB or better, as determined by credit
rating agencies such as Standard & Poors, Moodys and Fitch Ratings.
Equity
Price and Liquidity Risk
Equity
price risk relates to the risk of loss that we would incur as a result of the
volatility in the exchange-traded price of equity securities that we hold and
the risk that we may not be able to liquidate these securities. We have invested
in approximately 22% of the issued share capital of Finbond Group Limited, which
are exchange-traded equity securities. The fair value of these securities as of
March 31, 2011, represented approximately 1% of our total assets, including
these securities. We expect to hold these securities for an extended period of
time and we are not concerned with short-term equity price volatility with
respect to these securities provided that the underlying business, economic and
management characteristics of the company remain sound.
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 March 31, 2011. The effects of a hypothetical 10% increase and
a 10% decrease in market prices as of March 31, 2011 is also shown. The selected
10% hypothetical change does not reflect what could be considered the best or
worst case scenarios. Indeed, results could be far worse due both to the nature
of equity markets and the aforementioned liquidity risk.
|
|
As
of March 31, 2011
|
|
Table 24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hypothetical
|
|
|
|
|
|
|
|
|
|
Estimated fair
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
value after
|
|
|
Increase
|
|
|
|
Fair
|
|
|
|
|
|
hypothetical
|
|
|
(Decrease) in
|
|
|
|
value
|
|
|
Hypothetical
|
|
|
change in price
|
|
|
Shareholders
|
|
|
|
($ 000)
|
|
|
price change
|
|
|
($ 000)
|
|
|
Equity
|
|
Exchange-traded equity securities
|
|
8,404
|
|
|
10%
|
|
|
9,244
|
|
|
0.26%
|
|
|
|
|
|
|
(10)%
|
|
|
7,564
|
|
|
(0.26)%
|
|
Item 4. Controls and Procedures
Evaluation
of disclosure controls and procedures
Under
the supervision and with the participation of our management, including our
chief executive officer and our chief financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended, as of March 31, 2011. Management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives and management necessarily
applies its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Based on this evaluation, the chief executive officer
and the chief financial officer concluded that our disclosure controls and
procedures were effective as of March 31, 2011.
Changes
in Internal Control over Financial Reporting
There
have not been any changes in our internal control over financial reporting
during the fiscal quarter ended March 31, 2011, that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
45
Part II. Other Information
Item 1. Legal Proceedings
In
2009, we instituted a lawsuit against SASSA in the North Gauteng High Court of
South Africa, or High Court, in which we challenged SASSAs right to contract
with the South African Post Office, or SAPO, to provide banking or payment
services relating to social grant beneficiaries, without having followed a
proper procurement process in accordance with South African legislation as it
applies to organs of state. In December 2009, the High Court ruled in our favor
and prohibited SASSA from further execution of the contracting with SAPO for
these services, finding that SASSA had not followed a proper procurement process
to comply with the South African Constitution and the Public Finance Management
Act, or PFMA, when the previous executive management team at SASSA contracted
with SAPO for the payment of grants in 2009. SASSA appealed the High Courts
judgment to the South African Supreme Court of Appeal, which overturned the High
Courts judgment on March 11, 2011. We have decided to approach the
Constitutional Court and have applied for leave to appeal the Supreme Court of
Appeals judgment in favor of SASSA as we believe that the final outcome of the
case could have a significant impact on broader interpretation of government
procurement laws in South Africa and in particular the application of section
217 of the South African Constitution and section 51(1)(a)(iii) of the PFMA
which prescribes a fair, equitable, transparent, competitive and cost effective
procurement process. During the appeal process, the High Courts judgment
remains in effect and prohibits SASSA from further execution of the contracting
with SAPO to provide banking or payment services relating to social grant
beneficiaries until SASSA follows a proper procurement process which complies
with the Constitution and the PFMA. Although the High Court prohibited SASSA
from further execution of the contracting with SAPO, it did not prohibit SASSA
from issuing a new tender in which SAPO, as well as others, could participate.
SASSA has recently initiated a new tender process, as discussed below in Item
1A. Risk Factors. We cannot assure you that we will be permitted to appeal the
decision of the Supreme Court of Appeal or that even if we are so permitted,
that the appeal would be decided in our favor.
We
have also instituted multiple claims against SASSA for damages due to breach of
contract in the ordinary course of business and launched an application to
review SASSAs decision to cancel the previous tender process. We cannot assure
you that we will be successful in these claims. We remain one of the incumbent
service providers to SASSA and the litigation does not affect the validity of
our SASSA contract, which remains in effect through its current expiration date
of September 30, 2011.
For
a discussion of the risks associated with the litigation against SASSA, please
refer to Item 1A. Risk Factors and in particular to the risk factor captioned
--The South African Supreme Court of Appeal recently reversed a lower court
judgment in our favor in a lawsuit we instituted against SASSA challenging
SASSAs right to contract with the South African Post Office to provide banking
or payment services relating to social grant beneficiaries, without having
followed a proper procurement process in accordance with South African
legislation as it applies to organs of state. If we are not permitted to appeal
this decision or if our appeal is ultimately denied, the future revenue and
operating income we may derive from any potential SASSA contracts or tenders
could be substantially reduced, which could have a material adverse effect on
us. We are unable to provide any indication of when the decision regarding the
leave to appeal will be made, or how long any appeal process may take as there
are no mandated time guidelines in this regard.
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 1A. Risk Factors
See
Item 1A RISK FACTORS in Part I of our Annual Report on Form 10-K for the year
ended June 30, 2010 and in Part II of our Quarterly Report on Form 10-Q for the
quarter ended September 30, 2010, for a discussion of risk factors relating to
(i) our business, including our KSNET acquisition, (ii) operating in South
Africa and other emerging markets, (iii) governmental regulation, (iv)
intellectual property and (v) our common stock. In addition, we describe below
material changes from the first two risk factors included in our Form 10-K.
We
currently derive a substantial portion of our revenues from the social welfare
grants distribution service that we perform for SASSA. Our contract with SASSA
currently expires on September 30, 2011, and SASSA recently initiated a new
tender process for the award of new contracts for all of South Africas nine
provinces. 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.
46
We
currently derive a substantial portion 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. For the year ended June 30, 2010, and the three and nine months ended
March 31, 2011, we derived approximately 66%, 44% and 48%, respectively, of our
revenues from our contract with SASSA to distribute social welfare grants. We
entered into our current contract with SASSA in late August 2010 for an original
term expiring on March 31, 2011. The contract was subsequently extended to
September 30, 2011, and at the time of the extension, SASSA indicated that it
intended to initiate a new contract tender process shortly. On April 15, 2011,
SASSA recommenced the tender process by issuing an invitation to bid inviting
service providers to submit proposals by May 27, 2011, for the provision of
payment services for social grants in any one or more of the nine provinces of
South Africa. Although we intend to participate in the tender process, we will
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.
Our
current contract with SASSA is the latest in a series of short-term contracts
and extensions that resulted from the conduct of a tender process which began in
early 2007 and was ultimately terminated by SASSA in late November 2008 without
awarding new contracts. 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. When SASSA terminated the tender
process, it cited a number of defects in the original request for proposals
published by SASSA and in the bid evaluation process. In 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, which was originally scheduled to expire on March 31, 2011, but
which was extended to September 30, 2011.
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. We cannot assure you that the
tender process that SASSA recently initiated 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. Even if we do
receive a new contract, or one or more extensions of the existing contract, we
cannot predict the terms that such contract will contain. Any new contract or
extension we receive may contain pricing or other terms, such as provisions
relating to early termination, that would be unfavorable to us.
The
previous tender process and the negotiation of the additional contracts and
extensions have consumed a substantial amount of our managements time and
attention during the past four years. We expect that the current tender process
will also require our management to devote further resources to the process
which could adversely affect their ability to focus on other matters, including
potential international business development activities. In addition, we have
initiated several lawsuits against SASSA, including one which challenged the
cancellation of the previous tender process. We cannot predict the outcome of
our lawsuits against SASSA, or whether or how such litigation will affect the
outcome of the current 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, and
recognized operating losses, 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.
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
current contract with SASSA is less favorable to us than our previous contract
which has adversely affected our results of operations. Furthermore, the terms
of any further renewals or extensions or a contract awarded under the tender
process that has recently been initiated 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.
47
Our
current service level agreement with SASSA, which became effective retroactively
to July 1, 2010, 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. The contract replaced a prior contract which was more
favorable to us. Because we continue to derive a substantial percentage of our
revenues from our SASSA contract, the terms of the current contract have
adversely affected our revenues and operating income. Further, as described in
the immediately preceding risk factor, it is possible that any further extension
or renewal of the current contract or a contract which we may be awarded under
the recently initiated 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.
The
South African Supreme Court of Appeal recently reversed a lower court judgment
in our favor in a lawsuit we instituted against SASSA challenging SASSAs right
to contract with SAPO to provide banking or payment services relating to social
grant beneficiaries, without having followed a proper procurement process in
accordance with South African legislation as it applies to organs of state. If
we are not permitted to appeal this decision or if our appeal is ultimately
denied, the future revenue and operating income we may derive from any potential
SASSA contracts or tenders could be substantially reduced, which could have a
material adverse effect on us. We are unable to provide any indication of when
the decision regarding the leave to appeal will be made, or how long any appeal
process may take as there are no mandated time guidelines in this
regard.
In
2009, we instituted a lawsuit against SASSA in the High Court in which we
challenged SASSAs right to contract with SAPO to provide banking or payment
services relating to social grant beneficiaries, without having followed a
proper procurement process in accordance with South African legislation as it
applies to organs of state. In December 2009, the High Court ruled in our favor
and prohibited SASSA from the further execution of the contracting with SAPO for
these services, finding that SASSA had not followed a proper procurement process
to comply with the South African Constitution and the PFMA when the previous
executive management team at SASSA contracted with SAPO for the payment of
grants in 2009. SASSA appealed the High Courts judgment to the South African
Supreme Court of Appeal, which overturned the High Courts judgment on March 11,
2011. We have decided to approach the Constitutional Court
and have applied for leave to appeal the Supreme Court of Appeals judgment in
favor of SASSA as we believe that the final outcome of the case could have a
significant impact on broader interpretation of government procurement laws in
South Africa and in particular the application of section 217 of the South
African Constitution and section 51(1)(a)(iii) of the PFMA which prescribes a
fair, equitable, transparent, competitive and cost effective procurement
process. During the appeal process, the High Courts judgment remains in effect
and prohibits SASSA from further execution of the contracting with SAPO to
provide banking or payment services relating to social grant beneficiaries until
SASSA follows a proper procurement process which complies with the Constitution
and the PFMA. Our SASSA contract remains in effect through its current
expiration date of September 30, 2011.
We
cannot assure you that we will be permitted to appeal the decision of the
Supreme Court of Appeal or that even if we are so permitted, that the appeal
would be decided in our favor. If SASSA ultimately prevails in this lawsuit,
then it would likely pursue contracts with SAPO to provide banking or payment
services relating to social grant beneficiaries, which would reduce the number
of beneficiaries we serve under our SASSA contract. Although our current SASSA
contract guarantees us a transaction fee per beneficiary based on a guaranteed
minimum number of beneficiaries, our future revenues from the contract could
suffer because we would be unable to serve more than the minimum number of
beneficiaries. Because we continue to derive a substantial portion of our
revenue from our SASSA contract, if this source of revenue were to decline
substantially, our results of operations, financial condition and cash flows
would suffer.
Further,
although the High Court prohibited SASSA from further execution of the
contracting with SAPO, it did not prohibit SASSA from issuing a new tender in
which SAPO, as well as others, could participate. SASSA has recently initiated a
new tender process, as discussed in the two immediately preceding risk factors.
We cannot predict whether or how this lawsuit will affect the outcome of the new
tender process.
48
Item 6. Exhibits
The
following exhibits are filed as part of this Form 10-Q:
*
Filed herewith.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on May 5, 2011.
NET 1 UEPS TECHNOLOGIES, INC.
By: /s/ Dr. Serge C.P. Belamant
Dr. Serge C.P. Belamant
Chief Executive Officer, Chairman of the Board and Director
By: /s/ Herman Gideon Kotzé
Herman Gideon Kotzé
Chief
Financial Officer, Treasurer and Secretary, Director
49
Net 1 Ueps Technologies (NASDAQ:UEPS)
Historical Stock Chart
From Sep 2024 to Oct 2024
Net 1 Ueps Technologies (NASDAQ:UEPS)
Historical Stock Chart
From Oct 2023 to Oct 2024