UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2008
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 is a large
accelerated filer, an accelerated filer, a non-accelerated
filer or a
smaller reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller
reporting company in Rule 12b-2 of the
Exchange Act (check one):
[X] Large accelerated filer
|
[ ] Accelerated filer
|
|
|
[ ] Non-accelerated filer
|
[ ] Smaller reporting company
|
(do not check if a smaller reporting company)
|
|
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). YES [
] NO [X]
As of October 31, 2008 (the latest practicable date), 58,399,595
shares of the registrants common stock, par
value $0.001 per share, were
outstanding.
Form 10-Q
NET 1 UEPS TECHNOLOGIES, INC.
Table of Contents
1
Part I. Financial Information
Item 1. Financial Statements
NET 1 UEPS TECHNOLOGIES, INC.
Condensed Consolidated
Balance Sheets
|
|
Unaudited
|
|
|
(A)
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
(In thousands, except share data)
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
245,924
|
|
$
|
272,475
|
|
Pre-funded
social welfare grants receivable
|
|
64,834
|
|
|
35,434
|
|
Accounts receivable, net of allowances of September: $243;
June: $260
|
|
42,048
|
|
|
21,797
|
|
Finance
loans receivable, net of allowances of September: $1,086; June: $1,007
|
|
4,114
|
|
|
4,301
|
|
Deferred expenditure on smart cards
|
|
98
|
|
|
78
|
|
Inventory
|
|
6,840
|
|
|
6,052
|
|
Deferred income taxes
|
|
6,112
|
|
|
5,597
|
|
Total current assets
|
|
369,970
|
|
|
345,734
|
|
LONG-TERM RECEIVABLE
|
|
192
|
|
|
207
|
|
PROPERTY, PLANT AND EQUIPMENT, NET OF ACCUMULATED
|
|
|
|
|
|
|
DEPRECIATION OF September: $25,759;
June: $24,753
|
|
8,297
|
|
|
6,291
|
|
EQUITY-ACCOUNTED INVESTMENTS
|
|
2,969
|
|
|
2,685
|
|
GOODWILL
|
|
114,310
|
|
|
76,938
|
|
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF
|
|
|
|
|
|
|
September: $18,461; June: $16,486
|
|
92,344
|
|
|
22,216
|
|
TOTAL ASSETS
|
|
588,082
|
|
|
454,071
|
|
LIABILITIES
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
Short-term loan facility
|
|
110,000
|
|
|
-
|
|
Accounts
payable
|
|
8,379
|
|
|
4,909
|
|
Other payables
|
|
49,880
|
|
|
57,432
|
|
Income
taxes payable
|
|
17,058
|
|
|
14,162
|
|
Total current liabilities
|
|
185,317
|
|
|
76,503
|
|
DEFERRED INCOME TAXES
|
|
38,716
|
|
|
33,474
|
|
OTHER LONG-TERM LIABIBILITIES, including minority
interest loans
|
|
4,507
|
|
|
3,766
|
|
COMMITMENTS AND CONTINGENCIES
|
|
-
|
|
|
-
|
|
TOTAL LIABILITIES
|
|
228,540
|
|
|
113,743
|
|
MINORITY INTEREST
|
|
1,898
|
|
|
-
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
COMMON STOCK
|
|
|
|
|
|
|
Authorized: 83,333,333 with $0.001 par value;
|
|
|
|
|
|
|
Issued
shares - September: 53,598,304; June: 53,423,552
|
|
52
|
|
|
52
|
|
SPECIAL CONVERTIBLE PREFERRED STOCK
|
|
|
|
|
|
|
Authorized:
50,000,000 with $0.001 par value;
|
|
|
|
|
|
|
Issued and outstanding shares - September: 4,801,291; June: 4,882,429
|
|
5
|
|
|
5
|
|
B CLASS PREFERENCE SHARES
|
|
|
|
|
|
|
Authorized: 330,000,000 with $0.001 par value;
|
|
|
|
|
|
|
Issued
and outstanding shares (net of shares held by Net1) - September:
|
|
|
|
|
|
|
35,377,959; June: 35,975,818
|
|
6
|
|
|
6
|
|
ADDITIONAL PAID-IN-CAPITAL
|
|
121,625
|
|
|
119,283
|
|
TREASURY SHARES, AT COST: September: 306,269;
June: 306,269
|
|
(7,950
|
)
|
|
(7,950
|
)
|
ACCUMULATED OTHER COMPREHENSIVE LOSS
|
|
(49,090
|
)
|
|
(37,820
|
)
|
RETAINED EARNINGS
|
|
292,996
|
|
|
266,752
|
|
TOTAL SHAREHOLDERS EQUITY
|
|
357,644
|
|
|
340,328
|
|
TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY
|
$
|
588,082
|
|
$
|
454,071
|
|
(A) Derived from audited financial statements
See Notes to Unaudited Condensed Consolidated Financial
Statements
2
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Statements of Operations
|
|
Three
months ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
REVENUE
|
$
|
67,935
|
|
$
|
60,259
|
|
EXPENSE
|
|
|
|
|
|
|
COST OF GOODS SOLD, IT
PROCESSING,
|
|
|
|
|
|
|
SERVICING AND SUPPORT
|
|
19,236
|
|
|
15,143
|
|
SELLING, GENERAL AND ADMINISTRATION
|
|
17,998
|
|
|
16,464
|
|
DEPRECIATION AND AMORTIZATION
|
|
3,423
|
|
|
2,746
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
27,278
|
|
|
25,906
|
|
UNREALIZED FOREIGN EXCHANGE GAIN
|
|
|
|
|
|
|
RELATED TO SHORT-TERM INVESTMENT
|
|
6,076
|
|
|
-
|
|
INTEREST INCOME, net
|
|
3,162
|
|
|
2,982
|
|
INCOME BEFORE INCOME TAXES
|
|
36,516
|
|
|
28,888
|
|
INCOME TAX EXPENSE
|
|
9,902
|
|
|
10,872
|
|
NET INCOME FROM CONTINUING OPERATIONS
|
|
|
|
|
|
|
BEFORE MINORITY INTEREST AND LOSS FROM
|
|
|
|
|
|
|
EQUITY-ACCOUNTED INVESTMENTS
|
|
26,614
|
|
|
18,016
|
|
MINORITY INTEREST
|
|
60
|
|
|
(196
|
)
|
LOSS FROM EQUITY-ACCOUNTED
|
|
|
|
|
|
|
INVESTMENTS
|
|
(310
|
)
|
|
(284
|
)
|
NET INCOME
|
$
|
26,244
|
|
$
|
17,928
|
|
Net income per share
|
|
|
|
|
|
|
Basic earnings, in cents common
stock and linked
|
|
|
|
|
|
|
units
|
|
45.7
|
|
|
31.4
|
|
Diluted earnings, in cents common
stock and
|
|
|
|
|
|
|
linked units
|
|
45.4
|
|
|
31.2
|
|
See Notes to Unaudited Condensed Consolidated Financial
Statements
3
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed
Consolidated Statements of Cash Flows
|
|
Three
months ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income
|
$
|
26,244
|
|
$
|
17,928
|
|
Depreciation and amortization
|
|
3,423
|
|
|
2,746
|
|
Loss from equity-accounted investments
|
|
310
|
|
|
284
|
|
Fair value adjustment related to financial
liabilities
|
|
(36
|
)
|
|
(73
|
)
|
Fair value of FAS 133 derivative adjustments
|
|
64
|
|
|
7
|
|
Unrealized foreign exchange gain related to
short-term
|
|
|
|
|
|
|
investment
|
|
(6,076
|
)
|
|
-
|
|
Interest payable
|
|
639
|
|
|
117
|
|
Loss (Profit) on disposal of property, plant and equipment
|
|
1
|
|
|
(10
|
)
|
Minority interest
|
|
60
|
|
|
(196
|
)
|
Stock-based compensation charge
|
|
1,205
|
|
|
841
|
|
Facility fee amortized
|
|
748
|
|
|
-
|
|
(Increase) Decrease in accounts receivable, pre-funded
|
|
|
|
|
|
|
social welfare grants receivable and finance
loans receivable
|
|
(46,141
|
)
|
|
5,538
|
|
(Increase) Decrease in deferred expenditure on smart cards
|
|
(23
|
)
|
|
94
|
|
Increase in inventory
|
|
(217
|
)
|
|
(1,765
|
)
|
(Decrease) Increase in accounts payable and other payables
|
|
(14,415
|
)
|
|
12,419
|
|
Decrease in taxes payable
|
|
3,409
|
|
|
496
|
|
(Decrease) Increase in deferred taxes
|
|
(2,170
|
)
|
|
1,817
|
|
Net cash
(used in) provided by operating activities
|
|
(32,975
|
)
|
|
40,243
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Capital expenditures
|
|
(2,844
|
)
|
|
(671
|
)
|
Proceeds from disposal of property, plant and
equipment
|
|
1
|
|
|
41
|
|
Acquisition of BGS, net of cash acquired
|
|
(95,328
|
)
|
|
-
|
|
Acquisition of shares in equity-accounted investments
|
|
(550
|
)
|
|
-
|
|
Net cash used in investing activities
|
|
(98,721
|
)
|
|
(630
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Proceeds from issue of share capital, net of
share issue
|
|
|
|
|
|
|
expenses
|
|
155
|
|
|
150
|
|
Proceeds from short-term loan facility
|
|
110,000
|
|
|
-
|
|
Payment of facility fee
|
|
(1,100
|
)
|
|
-
|
|
Proceeds from bank overdrafts
|
|
2
|
|
|
9
|
|
Repayment of bank overdraft
|
|
(1
|
)
|
|
(16
|
)
|
Net cash provided by
financing activities
|
|
109,056
|
|
|
143
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
(3,911
|
)
|
|
4,039
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash
equivalents
|
|
(26,551
|
)
|
|
43,795
|
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning
of period
|
|
272,475
|
|
|
171,727
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of
period
|
$
|
245,924
|
|
$
|
215,522
|
|
See Notes to Unaudited Condensed Consolidated Financial Statements
4
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the
Unaudited Condensed Consolidated Financial Statements
for the Three Months
Ended September 30, 2008 and 2007
(All amounts stated in thousands of United
States Dollars, unless otherwise stated)
1. Basis of Presentation and Summary of Significant
Accounting Policies
Unaudited Interim Financial
Information
The accompanying unaudited
condensed consolidated financial statements include all majority-owned
subsidiaries over which the Company exercises control and have been prepared in
accordance with US generally accepted accounting principles (GAAP) and the
rules and regulations of the Securities and Exchange Commission for quarterly
reports on Form 10-Q and include all of the information and disclosures required
for interim financial reporting. The results of operations for the three months
ended September 30, 2008 and 2007 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, 2008. 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 rouble or Indian rupee as their functional currency. The current rate
method is used to translate the financial statements of the Company to US
dollars. Under the current rate method, assets and liabilities are translated at
the exchange rates in effect at the balance sheet date. Revenues and expenses
are translated at average rates for the period. Translation gains and losses are
reported in accumulated other comprehensive income in shareholders equity.
Foreign exchange transactions are
translated at the spot rate ruling at the date of the transaction. Monetary
items are translated at the closing spot rate at the balance sheet date.
Transactional gains and losses are recognized in income for the period.
Recent accounting
pronouncements adopted
Effective July 1, 2008, the
Company adopted Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standard (SFAS) No. 157,
Fair Value Measurements
(FAS 157) for financial assets and liabilities, which provides a single
definition of fair value, establishes a framework for the measurement of fair
value and expands disclosure about the use of fair value to measure assets and
liabilities;. however, it does not require any new fair value measurements.
In determining the fair value of
our assets and liabilities, the Company uses various valuation approaches,
predominantly the market and income approaches. FAS 157 establishes a hierarchy
for information and valuations used in measuring fair value that is broken down
into three levels based on its reliability. Level 1 valuations are based on
quoted prices in active markets for identical assets or liabilities that we have
the ability to access. Level 2 valuations are based on quoted prices in markets
that are not active or for which all significant inputs are observable, directly
or indirectly. Level 3 valuations are based on information that is unobservable
and significant to the overall fair value measurement.
In October 2008, the FASB issued
FSP FAS 157-3,
Determining the Fair Value of a Financial Asset When the Market
for That Asset Is Not Active
(FAS 157-3) which clarifies the
application of FAS 157 in a market that is not active and provides an example
to illustrate key considerations in determining the fair value of a financial
asset when the market for that financial asset is not active. FSP FAS 157-3
is effective upon issuance.
The adoption of FAS 157 for financial
assets and liabilities has not had a material effect on the Companys results
of operations or financial position.
5
1. Basis of Presentation and Summary of Significant
Accounting Policies (continued)
Recent accounting
pronouncements adopted
(continued)
Effective July 1, 2008, the
Company adopted FASB SFAS No.159,
The Fair Value Option for Financial Assets
and Financial Liabilities (
FAS 159). FAS 159 expands the use of fair value
accounting to eligible financial assets and liabilities. The Company evaluated
its existing financial instruments and elected not to adopt the fair value
option on its financial instruments. However, because the FAS 159 election is
based on an instrument-by-instrument election at the time the Company first
recognizes an eligible item or enters into an eligible firm commitment, the
Company may decide to exercise the option on new items when business reasons
support doing so in future. As a result, the adoption of FAS 159 has not had a
material effect on the Companys results of operations or financial
position.
Recent accounting
pronouncements not yet adopted as of September 30, 2008
In December 2007, the FASB issued
SFAS No. 141(revised 2007), Business Combinations (FAS 141R). FAS 141R
replaces SFAS No. 141, Business Combinations (FAS 141). FAS 141R retains the
fundamental requirements in FAS 141 that the acquisition method of accounting
(defined in FAS 141 as the purchase method) be used for all business
combinations and for an acquirer to be identified for each business combination.
FAS 141R requires the acquiring entity in a business combination to recognize
the assets acquired and liabilities assumed at the acquisition date. FAS 141R
also requires acquisition-related costs to be recognized separately from the
business combination. FAS 141R applies prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The Company is
currently assessing FAS 141R and has not yet determined the impact that the
adoption of this standard will have on its financial position or results of
operations.
In December 2007, the FASB issued
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements
(FAS 160). FAS 160 establishes a single method of accounting for changes in a
parents ownership interest in a subsidiary that does not result in
deconsolidation. FAS 160 clarifies that all of those transactions are equity
transactions if the parent retains its controlling financial interest in the
subsidiary. FAS 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. Earlier adoption is
prohibited. However, FAS 160 shall be applied prospectively as of the beginning
of the fiscal year in which it is initially applied, except for the presentation
and disclosure requirements. The presentation and disclosure requirements shall
be applied retrospectively for all periods presented. The Company is currently
assessing FAS 160 and has not yet determined the impact that the adoption of
this standard will have on its financial position or results of operations.
In February 2008, the FASB issued
FASB Statement of Position (FSP) FAS 157-2 (FSP FAS 157-2) which delays the
effective date of FAS 157 for all nonrecurring fair value measurements of
nonfinancial assets and nonfinancial liabilities until fiscal years beginning
after November 15, 2008. Entities are encouraged to adopt FAS 157 for
measurements of nonfinancial assets and nonfinancial liabilities in its entirety
as long as they have not yet issued financial statements during that year. An
entity that chooses to adopt FAS 157 in its entirety must do so for all
nonfinancial assets and nonfinancial liabilities within its scope. The Company
is currently reviewing the impact of the adoption of SFAS No. 157 for all
non-financial assets and liabilities on its financial statements.
2. Acquisition of BGS
On August 27, 2008, the Company
acquired 80.1% of the issued share capital of BGS Smartcard Systems AG (BGS),
an Austrian private company for a total consideration of $101.6 million in cash
and the issuance of an aggregate of 40,134 shares of Net1 common stock to
certain former BGS shareholders. As described in note 10, the Company financed
the cash portion of the purchase price with the proceeds of short-term bank
financing which was repaid in full on October 16, 2008. For practical purposes
the acquisition date has been set as August 31, 2008.
BGS provides smart card-based
payment systems to banks, enterprises and government authorities in Russia,
Ukraine, Uzbekistan, India and Oman. BGS system, Dual Universal Electronic
Transactions (DUET), was developed by BGS as a derivative of the first version
of our Universal Electronic Payment System (UEPS) technology that the Company
licensed to BGS in 1993. BGS largest customer is Sberbank, the largest
financial institution in Russia, which owns the remaining 19.9% of BGS. The
Company acquired BGS because it fits in well with the Companys strategy to grow
in developing economies.
6
2. Acquisition of BGS (continued)
The following table sets forth
the components of the purchase price for the BGS acquisition using exchange
rates applicable as of August 31, 2008:
Cash paid at closing to former BGS
shareholders
|
$
|
101,611
|
|
Cash payable to former BGS shareholders on March 31, 2009
|
|
2,213
|
|
40,134 shares of Net1 common stock valued
at $24.46 per share issued to certain former BGS
|
|
|
|
shareholders
|
|
982
|
|
Estimated costs directly related to the
acquisition
|
|
2,457
|
|
Total
purchase price
|
$
|
107,263
|
|
The following table sets forth
the preliminary allocation of the purchase price:
Cash and cash equivalents
|
$
|
6,283
|
|
Accounts receivable, net
|
|
3,218
|
|
Inventory
|
|
740
|
|
Property, plant and equipment
|
|
350
|
|
Intangible assets (see Note 9)
|
|
74,209
|
|
Trade and other payables
|
|
(7,181
|
)
|
Income taxes payable
|
|
-
|
|
Other long-term liabilities
|
|
(631
|
)
|
Deferred tax assets
|
|
10,657
|
|
Deferred tax liabilities (see Note 9)
|
|
(18,552
|
)
|
Minority interests
|
|
(1,838
|
)
|
Goodwill (see Note 9)
|
|
40,008
|
|
Total
purchase price
|
$
|
107,263
|
|
The preliminary purchase price
allocation was based on management estimates as of September 30, 2008, and may
be adjusted up to one year following the closing of the transaction. The
purchase price allocation has not been finalized as management is still in the
process of performing its detailed analysis of assets and liabilities and
contingencies acquired. In addition, all costs related to the acquisition have
not been identified and allocated.
The results of BGS operations
are reflected in the Companys financial statements from September 1, 2008. The
following pro forma consolidated results of operations have been prepared as if
the acquisition of BGS had occurred on July 1, 2008 and 2007, respectively:
|
|
Pro forma results for
|
|
|
Pro forma results for
|
|
|
|
the quarter ended
|
|
|
the quarter ended
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
|
|
|
|
|
|
Revenue
|
|
69,293
|
|
|
63,741
|
|
|
|
|
|
|
|
|
Net income before minority
interest and earnings
|
|
|
|
|
|
|
from equity-accounted investments
|
|
21,639
|
|
|
15,463
|
|
|
|
|
|
|
|
|
Net income
|
|
21,332
|
|
|
15,171
|
|
|
|
|
|
|
|
|
Earnings per share basic (in cents)
|
|
37.1
|
|
|
26.5
|
|
|
|
|
|
|
|
|
Earnings per share diluted (in cents)
|
|
36.9
|
|
|
26.4
|
|
|
|
|
|
|
|
|
Weighted-average number of outstanding shares
of
|
|
|
|
|
|
|
common stock and linked units
used to calculate
|
|
|
|
|
|
|
basic earnings per share
|
|
57,460,646
|
|
|
57,149,976
|
|
|
|
|
|
|
|
|
Weighted-average number of outstanding shares
of
|
|
|
|
|
|
|
common stock and linked units
used to calculate
|
|
|
|
|
|
|
diluted earnings per share
|
|
57,790,809
|
|
|
57,492,564
|
|
7
2. Acquisition of BGS (continued)
The unaudited pro forma financial
information above reflects the following pro forma adjustments applied using the
principles of Article 11 of Regulation S-X under the Securities Exchange Act of
1934:
a) An adjustment to reduce
interest income on the Companys cash reserves for the three months ended
September 30, 2008 and 2007, as a result of the payment of the cash portion of
the purchase price of $101.6 million, at an assumed pre-tax South African
interest rate of 10.89% and 10.69% respectively. This adjustment also assumes
that the cash had been paid out 50 days after the beginning of the period
presented, rather than at the beginning of the period, because Net1 financed the
cash portion of the purchase price with the proceeds of a loan facility that was
repaid in full 50 days after closing of the Acquisition, and thus, continued to
earn interest on these cash reserves for the first 50 days of the period until
the loan was repaid in full. The adjustment has been tax-effected using a
fully-distributed rate for the three months ended September 30 2008 and 2007, of
34.55% and 35.45%, respectively;
b) an adjustment to decrease
interest income, net for the three months ended September 30, 2008 and 2007, for
the interest on the short-term facility of $0.3 million and $0.8 million and the
facility fee of $0.4 million and $1.1 million, respectively. The interest and
facility fee are not deductible for taxation purposes;
c) An adjustment to increase
amortization expense based on the estimated fair value of the identifiable
intangible asset from the purchase price allocation, which are being amortized
over its estimated useful life of seven years, of approximately $2.7 million and
$2.5 million for the three months ended September 30, 2008 and 2007, as well as
the related adjustment to deferred tax of $0.7 million and $0.6 million.
3. Costs related to JSE listing
The Company completed its inward
listing, a secondary listing, on the JSE Limited (JSE) in South Africa on
October 8, 2008. The Company did not issue any additional shares in connection
with the listing, however, the listing did result in a trigger event which
converted all of the Companys special convertible preferred stock to common
stock (see note 11). The Companys selling, general and administration expense
includes the costs incurred related to the listing on the JSE. The table below
presents the costs incurred in connection with the Companys listing on the JSE
during the three months ended September 30, 2008:
|
|
Three
|
|
|
|
months
|
|
|
|
ended
|
|
|
|
September
|
|
|
|
30, 2008
|
|
Advisory fee to sponsor
|
$
|
122
|
|
Legal fees
|
|
122
|
|
Regulatory and filing fees
|
|
93
|
|
Printing
|
|
47
|
|
Accounting fees
|
|
27
|
|
Total costs related to JSE
listing
|
$
|
411
|
|
4. Cash and cash equivalents
Included in cash and cash
equivalents is $110 million (or ZAR 852.6 million at the $:ZAR exchange rate on
the date of the transaction) invested in a 32 day call account instrument. The
Company entered into an asset swap arrangement (in the form of a 32-day call
account instrument) in order to facilitate the short-term loan facility
described in note 10, however this asset swap arrangement was not linked to the
loan facility and did not require redemption on the same date as the repayment
of the loan facility. The Company earned interest at a rate of one month US
dollar London Interbank Offered Rate (LIBOR) plus 0.25% on this instrument.
The Company was required to mark to market the instrument as of September 30,
2008 for exchange rate movements, and has recorded an unrealized foreign
exchange gain of approximately $6.1 million for the three months ended September
30, 2008.
The Company gave a call notice
to the obligor on September 10, 2008, and the capital of $110 million (or ZAR
1,100.7 million) and interest on this instrument was repaid on October 16, 2008.
The Company realized a total gain of approximately $24.8 million (or ZAR 248.1
million at the $:ZAR exchange rate on the date of the repayment) on this instrument.
The Company recognized an unrealized gain during the three months ended September
30, 2008, of approximately $6.1 million and expects to recognize an additional
gain of approximately $18.7 million (at the $:ZAR exchange rate on the date
of the repayment) during the three months ended December 31, 2008.
8
5. Pre-funded social welfare grants receivable
The pre-funded social welfare
grants receivable represents the amounts due from provincial governments, as the
Company pre-funds social welfare grant payments on behalf of the government in
these provinces and pre-funding provided to certain merchants participating in
our merchant acquiring system. The pre-funded amounts are typically reimbursed
to the Company within two weeks after the disbursement of the grants. The grant
payment service normally commences during the week before the start of a
calendar month at government pay points and merchant locations. The October 2008
payment service commenced during the last four days of September 2008 and was
offered at merchant locations only.
6. Deferred expenditure on smart cards
The deferred expenditure on smart
cards represents amounts paid for smart cards used in the administration and
distribution of grants to beneficiaries. These expenditures are deferred and
written off over the period of the contract with the provincial government.
7. Inventory
The Companys inventory comprised
the following categories as of September 30, 2008 and June 30, 2008.
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
Raw materials
|
$
|
217
|
|
$
|
111
|
|
Finished goods
|
|
6,623
|
|
|
5,941
|
|
|
$
|
6,840
|
|
$
|
6,052
|
|
8. Equity-accounted investments
The percentage ownership and
functional currency of the Companys equity-accounted investments is presented
in the table below:
|
|
%
|
|
Functional currency of
|
|
|
Owned
|
|
the equity-accounted
|
Equity-accounted investment
|
|
by Net1
|
|
investment
|
SmartSwitch Namibia (Pty) Ltd (SmartSwitch
Namibia)
|
|
50%
|
|
Namibia Dollar
|
SmartSwitch Botswana (Pty) Ltd (SmartSwitch Botswana)
|
|
50%
|
|
Botswana Pula
|
VTU De Colombia S.A. (VTU Colombia)
|
|
50%
|
|
Colombian Peso
|
Vietnam Payment Technologies Joint Stock Company
(VinaPay)
(1)
|
|
30%
|
|
Vietnamese Dong
|
(1) acquired
during the first quarter of fiscal 2008.
|
|
|
|
|
In August 2008, the Company
acquired additional shares in VinaPay for approximately $0.3 million. The
Companys current shareholding remains at 30%. These funds will be used to fund
operating activities.
In September 2008, the Company
acquired additional shares in VTU Colombia for approximately $0.3 million. The
Companys current shareholding remains at 50%. These funds will be used to fund
operating activities.
The functional currency of the
Companys equity-accounted investments is not the US dollar and thus the
equity-accounted investments are restated at the period end US dollar/foreign
currency exchange rate with an entry against accumulated other comprehensive
income.
9
8. Equity-accounted investments (continued)
Summarized below is the Companys
interest in equity-accounted investments as of June 30, 2008 and September 30,
2008:
|
|
|
Equity
|
|
|
Loans
|
|
|
Loss
|
|
|
Elimination
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2008
|
$
|
1,984
|
|
$
|
3,312
|
|
$
|
(2,295
|
)
|
$
|
(316
|
)
|
$
|
2,685
|
|
|
Share capital acquired
|
|
550
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
550
|
|
|
Share capital
acquired VinaPay
|
|
300
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
300
|
|
|
Share capital acquired VTU
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Colombia
|
|
250
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
250
|
|
|
(Loss) Earnings from equity-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounted investments
|
|
-
|
|
|
-
|
|
|
(457
|
)
|
|
147
|
|
|
(310
|
)
|
|
(Loss) Earnings from equity-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounted
investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SmartSwitch
Namibia
(1)
|
|
-
|
|
|
-
|
|
|
(72
|
)
|
|
78
|
|
|
6
|
|
|
(Loss) Earnings
from equity-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounted investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SmartSwitch
Botswana
(1)
|
|
-
|
|
|
-
|
|
|
(104
|
)
|
|
69
|
|
|
(35
|
)
|
|
Loss from equity-accounted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investment VTU
Colombia
|
|
-
|
|
|
-
|
|
|
(246
|
)
|
|
-
|
|
|
(246
|
)
|
|
Loss from equity-accounted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investment
VinaPay
|
|
-
|
|
|
|
|
|
(35
|
)
|
|
-
|
|
|
(35
|
)
|
|
Foreign currency adjustment
(2)
|
|
(105
|
)
|
|
(73
|
)
|
|
190
|
|
|
32
|
|
|
44
|
|
|
Balance as of September 30,
2008
|
$
|
2,429
|
|
$
|
3,239
|
|
$
|
(2,562
|
)
|
$
|
(137
|
)
|
$
|
2,969
|
|
(1) includes the recognition of
realized net income as described
below.
(2) the foreign currency
adjustment represents the effects of the combined net fluctuations between the
functional currency of the equity-accounted investments and the US dollar.
The Company is required to
eliminate its percentage of the net income generated from sales to its
equity-accounted investments. The revenue generated and associated costs related
to these sales are included in the line item captions above net income from
continuing operations before minority interest and earnings (loss) from
equity-accounted investments in the unaudited condensed consolidated statement
of operations for the three months ended September 30, 2008 and 2007. The
realized amount related to the elimination is included in the loss from
equity-accounted investments line in the unaudited condensed consolidated
statement of operations for the three months ended September 30, 2008 and 2007.
The Company will recognize this net income from these sales during the period in
which the hardware and software it has sold to its equity-accounted investments
are utilized in its operations, or has been sold to third party customers, as
the case may be.
9. Goodwill and intangible assets
On August 27, 2008, the Company
acquired 80.1% of the issued share capital of BGS, for a total consideration of
$101.6 million in cash and the issuance of an aggregate of 40,134 shares of Net1
common stock to certain former BGS shareholders. As described in note 10, the
Company financed the cash portion of the purchase price with the proceeds of
short-term bank financing which was repaid in full on October 16, 2008. For
practical purposes the acquisition date has been set as August 31, 2008. The
goodwill associated with the acquisition of BGS represents the excess of cost
over the fair value of acquired net assets. A portion of the goodwill is tax
deductible. See note 2 for the allocation of the purchase price to the fair
value of acquired net assets.
Goodwill
The goodwill associated with the
acquisition of BGS has been allocated to the Companys hardware, software and
related technology sales segment on August 31, 2008 (see note 2).
10
9. Goodwill and intangible assets (continued)
Goodwill (continued)
Summarized below is the movement in carrying value of goodwill
for the three months ended September 30, 2008.
|
|
Carrying
|
|
|
|
value
|
|
|
|
|
|
Balance as of July 1, 2008
|
$
|
76,938
|
|
Acquisition of BGS as of August 31, 2008
|
|
40,008
|
|
Foreign currency adjustment
(1)
|
|
(2,636
|
)
|
Balance as of September 30, 2008
|
$
|
114,310
|
|
(1) the foreign currency
adjustment represents the effects of the fluctuations between the South African
rand and the euro against the US dollar on the carrying value of goodwill.
As required by FAS 141 goodwill has
been allocated to the Companys reportable segments as follows:
|
|
As of
|
|
|
As of
|
|
|
|
September
|
|
|
June 30,
|
|
|
|
30, 2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
$
|
34,002
|
|
$
|
34,997
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
4,328
|
|
|
4,455
|
|
Hardware, software and related technology
sales
|
|
75,980
|
|
|
37,486
|
|
Total
|
$
|
114,310
|
|
$
|
76,938
|
|
Intangible assets
Summarized below is the fair
value of the intangible asset acquired, translated at the exchange rate
applicable as of August 31, 2008, and the weighted-average amortization period
of the intangible asset:
|
|
|
|
|
|
Weighted-
|
|
|
|
|
Fair value
|
|
|
Average
|
|
|
|
|
as of
|
|
|
Amortization
|
|
|
|
|
August 31,
|
|
|
period (in
|
|
|
|
|
2008
|
|
|
years)
|
|
|
Finite-lived intangible asset:
|
|
|
|
|
|
|
|
Customer
relationships
|
$
|
74,206
|
|
|
7
|
|
A deferred tax liability of $18.6
million, at exchange rates applicable as of August 31, 2008, was recognized at
the Austrian statutory tax rate of 25% on August 31, 2008, related to the
intangible asset acquired.
Summarized below is the carrying
value and accumulated amortization of the intangible assets as of September 30,
2008 and June 30, 2008:
|
|
|
As
of September 30, 2008
|
|
|
As
of June 30, 2008
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
(1)
|
$
|
88,305
|
|
$
|
(3,695
|
)
|
$
|
84,610
|
|
$
|
15,679
|
|
$
|
(2,581
|
)
|
|
13,098
|
|
|
Software and unpatented technology
|
|
9,691
|
|
|
(7,260
|
)
|
|
2,431
|
|
|
9,974
|
|
|
(6,638
|
)
|
|
3,336
|
|
|
FTS patent
|
|
4,674
|
|
|
(3,857
|
)
|
|
817
|
|
|
4,811
|
|
|
(3,850
|
)
|
|
961
|
|
|
Exclusive licenses
|
|
4,506
|
|
|
(2,807
|
)
|
|
1,699
|
|
|
4,506
|
|
|
(2,645
|
)
|
|
1,861
|
|
|
Trademarks
|
|
3,515
|
|
|
(738
|
)
|
|
2,777
|
|
|
3,618
|
|
|
(674
|
)
|
|
2,944
|
|
|
Customer contracts
|
|
114
|
|
|
(104
|
)
|
|
10
|
|
|
114
|
|
|
(98
|
)
|
|
16
|
|
|
Total finite-lived intangible
assets
|
$
|
110,805
|
|
$
|
(18,461
|
)
|
$
|
92,344
|
|
$
|
38,702
|
|
$
|
(16,486
|
)
|
$
|
22,216
|
|
(1) The customer relationships
acquired in August 2008 have been combined with the other customer relationships
recognized by the Company.
11
9. Goodwill and intangible assets (continued)
Intangible assets (continued)
Aggregate amortization expense on
the finite-lived intangible assets for the three months ended September 30,
2008, was approximately $2.4 million (three months ended September 30, 2007 was
approximately $1.7 million). Future annual amortization expense is estimated at
approximately $12.0 million, however, this amount could differ from the actual
amortization as a result of changes in useful lives, exchange rate fluctuations
and other relevant factors.
10. Short-term facilities
As of September 30, 2008, the
Company had short-term facilities in South African Rand of approximately $61.0
million, translated at exchange rates applicable as of September 30, 2008. As a
result of the global liquidity crisis the Companys South African banks
increased the overdraft rate on the Companys short-term facilities on October
10, 2008, from 13.25% to 14.35% . In addition, BGS has short-term facilities of
approximately $1.4 million, translated at exchange rates applicable as of
September 30, 2008, with each of two of Austrias largest banks. These
facilities are available to the Company. The interest rate applicable to these
short-term facilities is negotiated when the facilities are utilized. As of
September 30, 2008, the Company had not utilized any of its short-term
facilities. The Companys management believes its current short-term facilities
are sufficient in order to meet its future obligations to distribute social
welfare grants.
Short-term loan facility obtained to fund the BGS
acquisition
The Company obtained a $110
million six month bank loan facility to fund the cash portion of the purchase
price for the BGS acquisition. The Company was entitled to settle the full
facility at any time during the six month period without incurring a prepayment
penalty. During the three months ended September 30, 2008, the Company utilized
approximately $103 million of this facility to pay the cash portion of the
purchase price, the $1.1 million facility fee and transaction-related costs. The
interest rate charged on this facility was LIBOR plus 2.50% .
The Company pledged $25 million
of its US dollar-denominated cash reserves and the A class shares and B class
shares it owned in its South African subsidiary, Net1 Applied Technologies South
Africa Limited (New Aplitec) as collateral security for the bank loan. This
cash has been included in cash and cash equivalents as of September 30, 2008,
because at the time it entered into the facility, the Company expected to repay
the full amount of the facility in less than three months.
The Company paid the lender an
upfront facility fee of $1.1 million and has amortized the facility fee over the
period that the loan was outstanding. Included in interest income, net for the
three months ended September 30, 2008, is $0.7 million related to the facility
fee. The remaining $0.4 million will be expensed during the three months ended
December 31, 2008.
On October 16, 2008, the Company
used internally generated funds to repay the loan in full and all collateral
security arrangements were terminated.
11. Capital structure and creditor rights attached to the B
Class Loans
As 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, 2008,
the Companys balance sheet reflects two classes of equity - common stock and
linked units.
During the three months ended
September 30, 2008, 81,138 shares of special convertible preferred stock were
converted to common stock. The trigger event that gave rise to these conversions
were requests by linked unit-holders to sell and/or convert 597,859 linked units
during the three months ended September 30, 2008. The net result of these
conversions was that 597,859 B class preference shares and B class loans were
ceded to Net1 during the three months ended September 30, 2008, which converted
81,138 shares of special convertible preferred stock to 81,138 shares of common
stock in return for the ownership of 597,859 B class preference shares and B
class loans. As a result of the conversion, the number of outstanding shares of
common stock has increased by 81,138 and the number of outstanding shares of
special convertible preferred stock has decreased by 81,138. In addition, as a
consequence of the conversion, Net1 now owns 201,599,228 B class preference
shares and B class loans.
The listing of all of the
Companys common stock on the JSE Limited on October 8, 2008, was a trigger
event and accordingly all remaining outstanding special convertible preferred
stock converted to Net1 common stock. As a result of the conversion, the number
of outstanding shares of common stock has increased by 4,801,291 and the number
of outstanding shares of special convertible preferred stock has decreased by
4,801,291 to nil. In addition, as a result of the conversion, Net1 owned all of
the 236,977,187 B class preference shares and B class loans.
12
11. Capital structure and creditor rights attached to the B
Class Loans (continued)
On October 16, 2008, New Aplitec
repaid the A and B class loans to Net1 and bought back the B class preference
shares from Net1 for a total of approximately $84.7 million (ZAR 847.4 million
at the negotiated $:ZAR exchange rate on October 16, 2008). As a result, as of
October 16, 2008, the only class of shares that New Aplitec has in issue are its
A class ordinary shares, all of which are owned by Net1.
12. Earnings per share
The entire consolidated net
income of the Company is attributable to the shareholders of the Company
comprising both the holders of Net1 common stock and the holders of linked
units. As 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, 2008, the linked units had the same rights and
entitlements as those attached to common shares. As discussed in note 11, all of
the linked unit holders as of September 30, 2008, converted their linked units
to common stock as a result of listing of all of the Companys common stock on
the JSE.
As the linked units owned by
holders, other than the Company, were exchangeable for special convertible
preferred stock at the ratio of 7.37:1, which were then converted to common
stock at the ratio of 1:1, the basic earnings per share for the three months
ended September 30, 2008, for the common stock and linked units are the same and
is calculated by dividing the net income by the combined weighted average number
(57.4 million) of common stock (52.6 million) and special convertible preferred
stock (4.8 million) in issue. Diluted earnings per share have been calculated to
give effect to the number of additional shares of common stock that would have
been outstanding if the potential dilutive instruments had been issued in each
period. The calculation of diluted earnings per share for the three months ended
September 30, 2008, includes the dilutive effect of a portion of the restricted
stock awards granted to employees in August 2007 as these restricted stock
awards are considered contingently issuable shares for the purposes of the
diluted earnings per share calculation and as of September 30, 2008, the vesting
conditions in respect of a portion of the awards had been satisfied.
The basic earnings per share for
the three months ended September 30, 2007, for the common stock and linked units
are the same and is calculated by dividing the net income by the combined
weighted average number (57.1 million) of common stock (51.4 million) and
special convertible preferred stock (5.7 million) in issue.
The following tables detail the
weighted average number of outstanding shares used for the calculation of
earnings per share for the three months ended September 30, 2008 and 2007.
|
|
Three months ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
000
|
|
|
000
|
|
Weighted average number of outstanding shares
of
|
|
|
|
|
|
|
common stock basic
|
|
52,635
|
|
|
51,454
|
|
Weighted average effect of dilutive securities:
|
|
|
|
|
|
|
employee stock options
|
|
302
|
|
|
309
|
|
Weighted average number of outstanding shares
of
|
|
|
|
|
|
|
common stock diluted
|
|
52,937
|
|
|
51,763
|
|
|
|
Three months ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
000
|
|
|
000
|
|
Weighted average number of outstanding linked
units
|
|
|
|
|
|
|
basic
|
|
4,801
|
|
|
5,656
|
|
Weighted average effect of dilutive securities:
|
|
|
|
|
|
|
employee stock options
|
|
28
|
|
|
34
|
|
Weighted average number of outstanding linked
units
|
|
|
|
|
|
|
diluted
|
|
4,829
|
|
|
5,690
|
|
13
12. Earnings per share (continued)
|
|
Three months ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
000
|
|
|
000
|
|
Total weighted average number of outstanding
shares
|
|
|
|
|
|
|
used to calculate earnings
per share basic
|
|
57,436
|
|
|
57,110
|
|
|
|
|
|
|
|
|
Total weighted average number of outstanding shares
|
|
|
|
|
|
|
used to calculate earnings per share
diluted
|
|
57,766
|
|
|
57,453
|
|
13. Comprehensive income
The Companys comprehensive
income consists of net income and foreign currency translation gains and losses
which, under GAAP, are excluded from net income. Total comprehensive income for
the three months ended September 30, 2008 and 2007 was:
|
|
Three months ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
Net income
|
$
|
26,244
|
|
$
|
17,928
|
|
Foreign currency translation adjustments
|
|
(11,270
|
)
|
|
5,862
|
|
|
$
|
14,974
|
|
$
|
23,790
|
|
14. Stock-based compensation
Options Granted under 2004 Stock
Incentive Plan
On August 27, 2008, the Company
granted options to purchase 560,000 shares of common stock at an exercise price
of $24.46 to employees of the Company. These options become exercisable over a
period of four and three quarter years commencing May 8, 2009. The period during
which the options become exercisable are presented in the table below. The
Company believes that it is reasonably likely that the employees will exercise
the options within two years after they become exercisable. Any unexercised
options expire on August 27, 2018. The options were valued using the Cox Ross
Rubinstein binomial model using the following assumptions:
|
|
Market
|
|
|
|
|
|
|
|
|
|
|
and
|
|
Expected
|
|
|
|
Risk free
|
|
Estimated
|
|
|
Exercise
|
|
life
|
|
Dividend
|
|
rate of
|
|
expected
|
Option exercisable
|
|
Price ($)
|
|
(in days)
|
|
yield
|
|
return
|
|
volatility
|
On or after May 8, 2009 and
prior to May 8, 2010
|
|
24.46
|
|
619
|
|
0%
|
|
2.0%
|
|
35%
|
On or after May 8, 2010 and prior to May 8,
2011
|
|
24.46
|
|
984
|
|
0%
|
|
4.5%
|
|
30%
|
On or after May 8, 2011 and
prior to May 8, 2012
|
|
24.46
|
|
1349
|
|
0%
|
|
4.5%
|
|
30%
|
On or after May 8, 2012 and prior to May 8,
2013
|
|
24.46
|
|
1714
|
|
0%
|
|
3.5%
|
|
33%
|
On or after May 8, 2013
|
|
24.46
|
|
2079
|
|
0%
|
|
3.5%
|
|
35%
|
The estimated expected volatility
was calculated based on the previous experience obtained from grants issued by
the Company as well as the expected volatility of the Companys stock in future
periods. Using the Cox Ross Rubinstein binomial model, the fair value of these
options on the grant date was approximately $4.0 million. There are no tax
consequences related to options granted to employees of the Companys
subsidiaries incorporated in Austria and South Africa, respectively. As of
September 30, 2008, the Company has recorded a deferred tax asset of
approximately $0.1 million related to the stock-based compensation charge
recognized related to employees of Net1 as it is able to deduct the difference
between the market value on date of sale by the option recipient and the
exercise price from income subject to taxation in the United States.
Awards that expire or are
cancelled without delivery of shares generally become available for issuance
under the Plan.
14
14. Stock-based compensation
Other Stock-Based Awards Granted
under 2004 Stock Incentive Plan
On August 27, 2008, the
Remuneration Committee approved an award of 3,474 restricted shares of the
Companys common stock to two directors of the Company. One-third of the
restricted shares will vest on each of August 27, 2009, 2010 and 2011. Vesting
of the restricted shares is conditioned upon each recipients continuous service
with the Company as a member of its Board of Directors through the applicable
vesting dates. If either recipient ceases to be a member of the Board of
Directors for any reason, all of his restricted shares that are not then vested
and nonforfeitable will be immediately forfeited and transferred to the Company
upon such cessation for no consideration. Until 11 months after the restricted
shares becomes vested and nonforfeitable, it may not be sold, assigned,
transferred, pledged, hypothecated, exchanged, or disposed of in any way
(whether by operation of law or otherwise).
The grant date fair value of the
3,474 restricted shares was based on the closing price of the Companys stock
quoted on The Nasdaq Global Select Market on the date of grant. The stock-based
compensation charge for this award is recognized over the service period of
three years. Once vested, a tax deduction for the 3,474 restricted shares
granted is allowed.
15
14. Stock-based compensation (continued)
Summary of Stock Option
Activity
The following table summarizes
stock option activity for the three months ended September 30, 2008, and 2007:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Number of
|
|
|
exercise
|
|
|
Term
|
|
|
Value
|
|
|
|
shares
|
|
|
price
|
|
|
(in years)
|
|
|
($000)
|
|
Balance outstanding July 1, 2007
|
|
1,374,543
|
|
$
|
16.30
|
|
|
8.20
|
|
$
|
10,840
|
|
Exercised
|
|
(49,998
|
)
|
|
-
|
|
|
-
|
|
|
1,172
|
|
Balance outstanding September 30, 2007
|
|
1,324,545
|
|
$
|
16.80
|
|
|
8.00
|
|
$
|
13,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding July 1, 2008
|
|
953,378
|
|
$
|
18.20
|
|
|
7.4
|
|
$
|
5,813
|
|
Granted
|
|
560,000
|
|
$
|
24.46
|
|
|
10
|
|
|
-
|
|
Exercised
|
|
(50,006
|
)
|
|
-
|
|
|
-
|
|
|
1,270
|
|
Balance outstanding September 30, 2008
|
|
1,463,372
|
|
$
|
21.12
|
|
|
8.27
|
|
$
|
3,102
|
|
No stock options became
exercisable during the three months ended September 30, 2008 and 2007.
During each of the three months
ended September 30, 2008 and 2007, the Company received approximately $0.2
million from stock options exercised. The Company issues new shares to satisfy
stock option exercises.
Stock-based compensation
charge and unrecognized compensation cost
The Company has recorded a stock
compensation charge of $1.2 million and $0.8 million for the three months ended
September 30, 2008 and 2007, respectively, which comprised:
|
|
|
|
|
Allocated to
|
|
|
|
|
|
|
|
|
|
cost of goods
|
|
|
|
|
|
|
|
|
|
sold, IT
|
|
|
Allocated to
|
|
|
|
|
|
|
processing,
|
|
|
selling,
|
|
|
|
Total
|
|
|
servicing
|
|
|
general and
|
|
|
|
charge
|
|
|
and support
|
|
|
administration
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
1,205
|
|
$
|
61
|
|
$
|
1,144
|
|
Total Three months ended September 30, 2008
|
$
|
1,205
|
|
$
|
61
|
|
$
|
1,144
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
841
|
|
$
|
100
|
|
$
|
741
|
|
Total Three months ended September 30, 2007
|
$
|
841
|
|
$
|
100
|
|
$
|
741
|
|
The stock-based compensation
charges have been allocated to cost of goods sold, IT processing, servicing and
support and selling, general and administration based on the allocation of the
cash compensation paid to the employees.
As of September 30, 2008, the
total unrecognized compensation cost related to stock options was approximately
$6.8 million, which the Company expects to recognize over approximately four
years. As of September 30, 2008, the total unrecognized compensation cost
related to restricted stock awards was approximately $9.9 million, which the
Company expects to recognize over approximately two years. As of September 30,
2008, interest due from employees related to loans extended to fund stock option
exercises was approximately $0.1 million.
As of September 30, 2008, the
Company has recorded a deferred tax asset of approximately $0.5 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.
16
15. Operating segments
The Company discloses segment
information in accordance with FAS 131,
Disclosures about Segments of an
Enterprise and Related Information
, which requires companies to determine
and review their segments as reflected in the management information systems
reports that their managers use in making decisions and to report certain
entity-wide disclosures about products and services, major customers, and the
material countries in which the entity holds assets and reports revenues.
The Company currently has four
reportable segments each of which operates mainly within South Africa:
Transaction-based activities, Smart card accounts, Financial services and
Hardware, software and related technology sales. The Companys reportable
segments offer different products and services and require different resources
and marketing strategies and share the Companys assets. The operations of BGS
have been allocated to the Hardware, software and related technology sales
operating segment.
The Transaction-based activities
segment currently consists mainly of a state pension and welfare benefit
distribution service provided to provincial governments in South Africa and
transaction processing for retailers, utilities and banks. Fee income is earned
based on the number of beneficiaries included in the government pay-file as well
as from merchants and card holders using the Companys merchant retail
application. In addition, utility providers and bankers 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 each of the three months ended
September 30, 2008, there were two such customers, providing 30% and 15%, of
total revenue (each of the three months ended September 30, 2007: three such
customers, providing 34%, 17% and 10%, respectively, of total revenue).
The Smart card accounts segment
derives revenue from the provision of smart card accounts, as a fixed monthly
fee per card is charged for the maintenance of these accounts.
The Financial services segment
provides short-term loans as a principal and life insurance products on an
agency basis and generates interest income and initiation and services fees.
Interest income is recognized in the consolidated statement of operations as it
falls due, using the interest method by reference to the constant interest rate
stated in each loan agreement.
The Hardware, software-related
and technology sales segment markets, sells and implements the UEPS as well as
develops and provides Prism secure transaction technology, solutions and
services. From September 1, 2008, the segment includes the operations of BGS,
which comprise mainly hardware sales and licenses of the DUET system. The
segment undertakes smart card system implementation projects, delivering
hardware, software and business solutions in the form of customized systems.
Sales of hardware, SIM cards, cryptography services, SIM card licenses and other
software licenses are recorded within this segment. This segment also generates
rental income from hardware provided to merchants enrolled in the Companys
merchant retail application. Sales to SmartSwitch Nigeria Limited and the
related taxation implications are not reflected in revenue to external
customers, operating income, income taxation expense or net income after
taxation presented in the tables below.
Corporate/Eliminations includes the Companys head office cost
centers in addition to the elimination of inter-segment transactions.
17
15. Operating segments (continued)
The Company evaluates segment
performance based on operating income. The following tables summarize segment
information which is prepared in accordance with GAAP:
|
|
Three months ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Revenues to external customers
|
|
|
|
|
|
|
Transaction-based activities
|
$
|
40,344
|
|
$
|
38,164
|
|
Smart card accounts
|
|
8,570
|
|
|
9,136
|
|
Financial services
|
|
1,784
|
|
|
2,183
|
|
Hardware, software and
related technology sales
|
|
17,237
|
|
|
10,776
|
|
Total
|
|
67,935
|
|
|
60,259
|
|
Inter-company revenues
|
|
|
|
|
|
|
Transaction-based activities
|
|
1,010
|
|
|
1,079
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
Hardware, software and
related technology sales
|
|
702
|
|
|
-
|
|
Total
|
|
1,712
|
|
|
1,079
|
|
Operating income
|
|
|
|
|
|
|
Transaction-based activities
|
|
21,638
|
|
|
20,589
|
|
Smart card accounts
|
|
3,895
|
|
|
4,152
|
|
Financial services
|
|
327
|
|
|
446
|
|
Hardware, software and
related technology sales
|
|
4,134
|
|
|
1,940
|
|
Corporate/Eliminations
|
|
(2,716
|
)
|
|
(1,221
|
)
|
Total
|
|
27,278
|
|
|
25,906
|
|
Interest earned
|
|
|
|
|
|
|
Transaction-based activities
|
|
-
|
|
|
-
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
Hardware, software and related technology
sales
|
|
-
|
|
|
-
|
|
Corporate/Eliminations
|
|
6,730
|
|
|
5,288
|
|
Total
|
|
6,730
|
|
|
5,288
|
|
Interest expense
|
|
|
|
|
|
|
Transaction-based activities
|
|
2,196
|
|
|
2,303
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
Hardware, software and
related technology sales
|
|
112
|
|
|
3
|
|
Corporate/Eliminations
|
|
1,260
|
|
|
-
|
|
Total
|
|
3,568
|
|
|
2,306
|
|
Depreciation and amortization
|
|
|
|
|
|
|
Transaction-based activities
|
|
1,114
|
|
|
1,198
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
113
|
|
|
104
|
|
Hardware, software and related technology
sales
|
|
1,875
|
|
|
1,113
|
|
Corporate/Eliminations
|
|
321
|
|
|
331
|
|
Total
|
$
|
3,423
|
|
$
|
2,746
|
|
18
15. Operating segments (continued)
|
|
Three months ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Income taxation expense
|
|
|
|
|
|
|
Transaction-based activities
|
$
|
5,578
|
|
$
|
5,414
|
|
Smart card accounts
|
|
1,090
|
|
|
1,204
|
|
Financial services
|
|
92
|
|
|
129
|
|
Hardware, software and
related technology sales
|
|
1,575
|
|
|
601
|
|
Corporate/Eliminations
|
|
1,567
|
|
|
3,524
|
|
Total
|
|
9,902
|
|
|
10,872
|
|
Net income after taxation
|
|
|
|
|
|
|
Transaction-based activities
|
|
13,866
|
|
|
13,067
|
|
Smart card accounts
|
|
2,805
|
|
|
2,949
|
|
Financial services
|
|
235
|
|
|
315
|
|
Hardware, software and related technology
sales
|
|
2,881
|
|
|
1,337
|
|
Corporate/Eliminations
|
|
6,457
|
|
|
260
|
|
Total
|
|
26,244
|
|
|
17,928
|
|
Segment assets
|
|
|
|
|
|
|
Total
|
|
588,082
|
|
|
417,206
|
|
Expenditures for long-lived assets
|
|
|
|
|
|
|
Transaction-based activities
|
|
2,083
|
|
|
510
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
591
|
|
|
100
|
|
Hardware, software and
related technology sales
|
|
170
|
|
|
61
|
|
Corporate/Eliminations
|
|
-
|
|
|
-
|
|
Total
|
$
|
2,844
|
|
$
|
671
|
|
The segment information as
reviewed by the chief operating decision maker does not include a measure of
segment assets per segment as all of the significant assets are used in the
operations of all, rather than any one, of the segments. The Company does not
have dedicated assets assigned to a particular operating segment. Accordingly,
it is not meaningful to attempt an arbitrary allocation and segment asset
allocation is therefore not presented.
It is impractical to disclose
revenues from external customers for each product and service or each group of
similar products and services.
16. Income tax in interim periods
For the purposes of interim
financial reporting, the Company determines the appropriate income tax provision
in accordance with the guidance in APB Opinion 28,
Interim Reporting
, and
FASB Interpretation No. 18,
Accounting for Income Taxes in Interim
Periods
. Accordingly, the tax charge is calculated by first applying the
effective tax rate expected to be applicable for the full fiscal year to
ordinary income. This amount is then adjusted for the tax effect of significant
unusual or extraordinary items that are reported separately, and have an impact
on the tax charge. The cumulative effect of any change in the enacted tax rate
on the opening balance of deferred tax assets and liabilities is also included
in the tax charge as a discrete event in the interim period in which the
enactment date occurs.
For the three months ended
September 30, 2008, the tax charge was calculated using the expected effective
tax rate for the year (34.55%) . Our effective tax rate for the three months
ended September 30, 2008 was 27.1% and includes the effect of the change in the
fully distributed tax rate from 35.45% to 34.55% . The change in the fully
distributed tax rate from 35.45% to 34.55% is discussed below.
19
16. Income tax in interim periods (continued)
The Company increased its
unrecognized tax benefits by $0.1 million and reduced its deferred tax assets by
approximately $0.1 million during the three months ended September 30, 2008. As
of September 30, 2008, the Company had accrued interest related to uncertain tax
positions of approximately $0.1 million on its balance sheet.
The Company does not expect the
change related to unrecognized tax benefits will have a significant impact on
its results of operations or financial position in the next 12 months.
The Company files income tax
returns mainly in South Africa, Austria, Russian Federation and in the US
federal jurisdiction. As of September 30, 2008, the Company is no longer subject
to income tax examination by the South African Revenue Service for years before
September 30, 2004. The Company is subject to income tax in other jurisdictions
outside South Africa, none of which are individually material to its financial
position, statement of cash flows, or results of operations.
On February 20, 2008, the Finance
Minister of South Africa announced the decrease in statutory rate of taxation
for South African domiciled companies from 29% to 28% for all fiscal years
ending on or after April 1, 2008. The change in tax rate was promulgated on July
22, 2008. The fully distributed tax rate was reduced to 34.55% from 35.45%
during the first quarter of fiscal 2009 and has resulted in an income tax
benefit included in the Companys income tax expense line on its unaudited
condensed consolidated statements of operations for the three months ended
September 30, 2008. The income tax expense of approximately $10.0 million for
the three months ended September 30, 2008, includes an income tax benefit of
approximately $3.5 million resulting from the reversal of a portion of the
deferred tax assets and liabilities recognized as of June 30, 2008.
20
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and
analysis of our financial condition and results of operations should be read in
conjunction with our unaudited condensed consolidated financial statements and
the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.
Forward-looking statements
Some of the statements in this
Quarterly Report on Form 10-Q constitute forward-looking statements. These
statements relate to future events or our future financial performance and
involve known and unknown risks, uncertainties and other factors that may cause
our or our industrys actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed, implied or inferred by these
forward-looking statements. Such factors include, among other things, those
listed under Risk Factors and elsewhere in our Annual Report on Form 10-K for
the year ended June 30, 2008. 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.
Trends and Material Developments Affecting our Business
South African Provincial Contracts
On November 3, 2008, the South
African Social Security Agency, or SASSA, notified bidders that it has
terminated the tender process without awarding new contracts, citing a number of
defects in the original request for proposal published by SASSA and in the bid
evaluation process. SASSA also stated that it has deferred a decision about
commencing a new tender process.
Refer to discussion under Part
II. Other InformationItem 1A. Risk Factors.
International Expansion
BGS Acquisition
On August 27, 2008, we acquired
80.1% of the issued share capital of BGS Smartcard Systems AG, or BGS, an
Austrian private company, for a total consideration of $101.6 million in cash
and the issuance of an aggregate of 40,134 shares of our common stock to certain
former BGS shareholders. We financed the cash portion of the purchase price with
the proceeds of short-term bank financing which we repaid in full on October 16,
2008. We discuss the bank financing facility in more detail under Liquidity and
Capital Resources. In connection with the bank financing, which was denominated
in US dollars, we entered into an asset swap arrangement (in the form of a
32-day call account instrument) in order to facilitate the bank loan. As a
result of a significant deprecation of the ZAR against the US dollar during the
time the asset swap was in place, we recorded an unrealized gain of
approximately $6.1 million for the first quarter of fiscal 2009 and expect to
record an additional gain during our second fiscal quarter. We discuss the
impact of this asset swap arrangement on our results of operations in more
detail under - Results of Operations Consolidated overall results of
operations
BGS provides smart card-based
payment systems to banks, enterprises and government authorities in Russia,
Ukraine, Uzbekistan, India and Oman. BGS system, Dual Universal Electronic
Transactions (DUET), was developed by BGS as a derivative of the first version
of our UEPS technology that we licensed to BGS in 1993. BGS largest customer is
Sberbank, the largest financial institution in Russia, which owns the remaining
19.9% of BGS. We acquired BGS because it fits in well with our strategy to grow
in developing economies.
21
The results of BGS operations
are reflected in our financial statements from September 1, 2008. BGS
activities are similar to those performed by our hardware, software and related
technology sales segment and include payment system implementations which occur
on an ad hoc basis. Accordingly, revenues are difficult to predict, however,
over the past two fiscal years BGS has experienced strong hardware sales and
software licensing activities during our second quarter of each fiscal year and
we expect this trend to continue during our 2009 fiscal year.
Iraq
We do not equity account or
consolidate the results of our activities in Iraq. Our UEPS banking and payment
system went live in Iraq during the first quarter of fiscal 2009 and we
commenced registration of war victims. We performed software development
activities and delivered ATMs and smart cards to an Iraqi consortium. We expect
to generate revenues in the second quarter of fiscal 2009 from license fees and
the additional sale of smart cards.
Ghana
We do not equity account or
consolidate the results of our activities in Ghana. During the first quarter of
fiscal 2009 we continued with the delivery of hardware including POS devices and
the remaining smart cards under our contract with the Bank of Ghana. In
addition, we commenced delivery of smart cards and ATMs under additional
purchase orders we received. Enrolment of e-zwich users continued in Ghana
during the first quarter of fiscal 2009. We expect to deliver additional smart
cards during the second quarter of fiscal 2009.
Namibia
We own 50% of SmartSwitch Namibia
(Proprietary) Limited, or SmartSwitch Namibia, and the other 50% is owned by
Namibia Post Limited, or NamPost, a government entity which provides post office
and banking services across Namibia. As of September 30, 2008, SmartSwitch
Namibia has activated 245,270 UEPS smart cards and has signed up 180 merchants
to accept the UEPS smart cards.
Botswana
We own 50% of Smartswitch
Botswana (Proprietary) Limited, or SmartSwitch Botswana, and the other 50% is
owned by Capricorn Investment Holdings (Botswana) Proprietary Limited, or
Capricorn, which owns 100% of Botswana-based Bank Gaborone Limited and the
majority holding in a number of financial services companies operating in
Botswana.
During the first quarter of
fiscal 2009, SmartSwitch Botswana commenced registration of food voucher
recipients under the tender granted by the Department of Social Services in
Botswana. SmartSwitch Botswana expects to commence these activities in the
second quarter of fiscal 2009.
Colombia
We own 50% of VTU De Colombia SA,
or VTU Colombia, and have fully installed and integrated the VTU system in
Colombia. The VTU system in Colombia is now active with Colombias first and
third largest mobile operators. VTU Colombia currently operates in Bogotá,
Baranquilla and Cartegena and VTU Colombia is expected to expand the VTU system
nationally in the next four quarters.
22
VTU Colombia commenced VTU
operations in August 2007. The following chart presents the growth in VTU
Colombia revenue, in Colombia pesos, or COP, and the number of transactions
during the fourteen month period ended September 30, 2008:
The average exchange rate during
the fourteen months ended September 30, 2008 was US$ 1: COP 1,974.
Vietnam
We own 30% of Vietnam Payment
Technologies, or VinaPay, which was authorized and licensed to commence business
activities at the end of May 2007. The VTU system became fully operational and
the first commercial transactions were performed by customers in late December
2007. VinaPay experienced strong revenue growth during the third quarter of
fiscal 2008. In addition, we continue preliminary discussions with two of
Vietnams other mobile operators to utilize the VTU system.
23
VinaPay commenced VTU operations
in late December 2007 and generates revenues from mobile phone users when they
purchase airtime using the VTU system. In August 2008, VinaPays sales and
customer service teams focused on increasing the potential VTU distributors and
sub-distributors base through a marketing promotion program for its distribution
network. The following chart presents the growth in VinaPay revenue, in
Vietnamese dong, or VND, and the number of transactions during the nine month
period ended September 30, 2008:
The average exchange rate during
the ten months ended October 31, 2008 was US$ 1: VND 16,590.
Other Countries
We have also implemented UEPS
systems in Rwanda, Burundi, Malawi and Mozambique, some of which are considered
among the poorest countries in the world. In Malawi, our system has been
implemented by the Reserve Bank of Malawi as a national payment system.
In addition, our relationship
with MTN Group (Africa/Middle Easts largest mobile operator group) regarding
VTU continues to progress. Both MTN Ivory Coast and MTN Rwanda have purchased
VTU systems, bringing the number of MTN operators using VTU for electronic
pre-paid airtime top-up to six.
Listing on JSE Limited
On October 8, 2008, we listed all
of our outstanding shares of common stock on the JSE Limited, or JSE, in South
Africa. The listing, a secondary or inward listing, of all of our common stock
on the JSE was a trigger event and accordingly all remaining outstanding special
convertible preferred stock (together with B class shares and loans, link units)
converted to Net1 common stock. As a result of the conversion, the number of
outstanding shares of common stock has increased by 4,801,291 and the number of
outstanding shares of special convertible preferred stock has decreased by
4,801,291 to nil. In addition, as a result of the conversion, Net1 owned all of
the 236,977,187 B class preference shares and B class loans. We are required to
maintain a register of shareholders in South Africa and on October 8, 2008,
these 4,801,291 shares of common stock were transferred to the South African
register. Our remaining 53,598,304 shares of common stock are included on our
register of shareholders maintained in the US.
24
On October 16, 2008, Net1 Applied
Technologies South Africa Limited, or New Aplitec, repaid the A and B class
loans to Net1 and bought back the B class preference shares from Net1 for a
total of approximately $84.7 million (ZAR 847.4 million at the negotiated $:ZAR
exchange rate on October 16, 2008). As a result, as of October 16, 2008, the
only class of shares that New Aplitec has in issue are its A class ordinary
shares, all of which are owned by Net1.
The main purposes for our listing
on the JSE were to:
-
enhance South African investors awareness of us, thereby enlarging our
potential investor base and increasing trade in our shares;
-
provide ourselves with an additional source from which capital to
facilitate growth can be obtained;
-
optimize and simplify our capital structure by eliminating the linked
units;
-
enable us to externalize our South African reserves when required;
-
externalize our South African reserves without incurring significant
leakage;
-
facilitate direct investment in our common stock by South African
residents and the investors utilizing the trading platform operated by the
JSE; and
-
create additional liquidity for current South African investors.
As a result of our listing on the
JSE our shareholders are now able to trade their share of common stock on the
Nasdaq Global Select Market, or Nasdaq, and the JSE. During the first quarter of
fiscal 2009, we incurred expenses of approximately $0.4 million related to our
inward listing on the JSE.
Progress of wage payment implementation
During the first quarter of
fiscal 2009, we entered into an agreement with our first major corporate
customer to utilize the wage payment system. Our customer is the largest
provider of security and guarding services in South Africa and employs
approximately 20,000 people. We commenced with the registration process during
the second quarter of fiscal 2009 and we expect to complete the enrollment of
all employees by the end of the third quarter of fiscal 2009.
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, 2008.
-
Revenue Recognition System Implementation Projects;
-
Deferred taxation;
-
Stock-based compensation;
-
Intangible assets acquired through the acquisition of Prism and BGS;
-
Accounts receivable and allowance 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, including the expected dates of adoption and effects
on financial condition, results of operations and cash flows.
Recent accounting
pronouncements not yet adopted as of September 30, 2008
Refer to Note 1 of the unaudited
condensed consolidated financial statements for a full description of recent
accounting pronouncements not yet adopted as of September 30, 2008, including
the expected dates of adoption and effects on financial condition, results of
operations and cash flows.
25
Currency Exchange Rate Information
Actual exchange rates
The actual exchange rates for and
at the end of the periods presented were as follows:
Table 1
|
|
Three months ended
|
|
|
Year ended
|
|
|
|
September
30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
ZAR : $ average exchange rate
|
|
7.7860
|
|
|
7.1224
|
|
|
7.3123
|
|
Highest ZAR : $ rate during period
|
|
8.3835
|
|
|
7.5977
|
|
|
8.2440
|
|
Lowest ZAR : $ rate during period
|
|
7.1557
|
|
|
6.7905
|
|
|
6.4262
|
|
Rate at end of period
|
|
8.1976
|
|
|
6.9219
|
|
|
7.9645
|
|
ZAR: US $ Exchange Rates
Translation exchange
rates
We are required to translate our
results of operations from ZAR to US dollars on a monthly basis. Thus, the
average rates used to translate this data for the first quarter of fiscal 2009
and 2007, vary slightly from the averages shown in the table above. The
translation rates we use in presenting our results of operations are the rates
shown in the following table:
Table 2
|
|
Three months ended
|
|
|
Year ended
|
|
|
|
September
30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
Income and expense items: $1 = ZAR.
|
|
7.8045
|
|
|
7.1237
|
|
|
7.2905
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items: $1 = ZAR
|
|
8.1976
|
|
|
6.9219
|
|
|
7.9645
|
|
26
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.
We analyze our business and
operations in terms of four inter-related but independent operating segments:
(1) transaction-based activities, (2) smart card accounts, (3) financial
services, and (4) hardware, software and related technology sales. In addition,
corporate and corporate office activities that are impracticable to ascribe
directly to any of the other operating segments, as well as any inter-segment
eliminations, are included in corporate/eliminations.
First quarter fiscal 2009
compared to the first quarter of fiscal 2008
The following factors had a
significant influence on our results of operations during the first quarter of
fiscal 2009 as compared with the same period in the prior year:
-
increased net income resulting from an unrealized foreign exchange rate
gain related to the asset swap we entered into during the period that the
short-term loan facility was to remain outstanding;
-
increased net income as a result of the change in our fully distributed
tax rate from 35.45% to 34.55%;
-
significant weakening of the South African rand, our functional currency,
against the US dollar, our reporting currency, which had a negative impact on
our revenues and net income in US dollars;
-
increased revenues and operating income in all provinces where we
distribute social welfare grants;
-
increased revenues and operating income from hardware sales under our
contract to provide the Central Bank of Ghana with a National Switch and Smart
Card Payment System utilizing our UEPS technology;
-
increased revenues and operating income from the continued adoption of our
merchant acquiring system by cardholders;
-
decrease in operating income as a result of stock-based compensation
charges related to grants of stock options and restricted stock in August
2008.
Consolidated overall
results of operations
This discussion is based on the
amounts which were prepared in accordance with US GAAP.
The following tables show the
changes in the items comprising our statements of operations, both in US dollars
and in ZAR:
|
|
In United States Dollars
|
|
Table 3
|
|
(US
GAAP)
|
|
|
|
Three
months ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
$ %
|
|
|
|
$ 000
|
|
|
$ 000
|
|
|
change
|
|
Revenue
|
|
67,935
|
|
|
60,259
|
|
|
13%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
19,236
|
|
|
15,143
|
|
|
27%
|
|
Selling, general and administration
|
|
17,998
|
|
|
16,464
|
|
|
9%
|
|
Depreciation and amortization
|
|
3,423
|
|
|
2,746
|
|
|
25%
|
|
Operating income
|
|
27,278
|
|
|
25,906
|
|
|
5%
|
|
Unrealized foreign exchange gain related to short-term
|
|
|
|
|
|
|
|
|
|
investment
|
|
6,076
|
|
|
-
|
|
|
|
|
Interest income, net
|
|
3,162
|
|
|
2,982
|
|
|
6%
|
|
Income before income taxes
|
|
36,516
|
|
|
28,888
|
|
|
26%
|
|
Income tax expense
|
|
9,902
|
|
|
10,872
|
|
|
(9)%
|
|
Income before minority interest and earnings
from
|
|
|
|
|
|
|
|
|
|
equity-accounted investments
|
|
26,614
|
|
|
18,016
|
|
|
48%
|
|
Minority interest
|
|
60
|
|
|
(196
|
)
|
|
|
|
Loss from equity-accounted investments
|
|
(310
|
)
|
|
(284
|
)
|
|
9%
|
|
Net income
|
|
26,244
|
|
|
17,928
|
|
|
46%
|
|
27
|
|
In South African Rand
|
|
Table 4
|
|
(US
GAAP)
|
|
|
|
Three
months ended September 30,
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
|
2008
|
|
|
2007
|
|
|
%
|
|
|
|
ZAR 000
|
|
|
ZAR 000
|
|
|
change
|
|
Revenue
|
|
530,197
|
|
|
429,269
|
|
|
24%
|
|
Cost of goods sold, IT processing, servicing and support
|
|
150,127
|
|
|
107,875
|
|
|
39%
|
|
Selling, general and administration
|
|
141,845
|
|
|
117,285
|
|
|
21%
|
|
Depreciation and amortization
|
|
26,714
|
|
|
19,561
|
|
|
37%
|
|
Operating income
|
|
211,511
|
|
|
184,548
|
|
|
15%
|
|
Unrealized foreign exchange gain related to short-term
|
|
|
|
|
|
|
|
|
|
investment
|
|
48,800
|
|
|
-
|
|
|
|
|
Interest income, net
|
|
24,678
|
|
|
21,243
|
|
|
16%
|
|
Income before income taxes
|
|
284,989
|
|
|
205,791
|
|
|
38%
|
|
Income tax expense
|
|
77,280
|
|
|
77,449
|
|
|
-%
|
|
Income before minority interest and earnings
from
|
|
|
|
|
|
|
|
|
|
equity-accounted investments
|
|
207,709
|
|
|
128,342
|
|
|
62%
|
|
Minority interest
|
|
468
|
|
|
(1,396
|
)
|
|
|
|
Loss from equity-accounted investments
|
|
(2,419
|
)
|
|
(2,023
|
)
|
|
20%
|
|
Net income
|
|
204,822
|
|
|
127,715
|
|
|
60%
|
|
Analyzed in ZAR the increase in
revenue and cost of goods sold, IT processing, servicing and support for the
first quarter of fiscal 2009, was primarily due to the higher volumes in our
transaction-based activities, a greater number of UEPS-based smart card holders
and the sale of hardware to the Bank of Ghana and Nedbank Limited, or
Nedbank.
Our operating income margin for
the first quarter of fiscal 2009 decreased to 40% from 43% for the first quarter
of fiscal 2008 mainly as a result of increased intangible asset amortization
related to the BGS acquisition, increases in goods and services purchased from
third parties, including the effects of the increase in inflation in South
Africa, and stock based compensation charges.
The unrealized foreign exchange
gain resulted from an asset swap arrangement (in the form of a 32-day call
account instrument) that we entered into in connection with the short-term bank
financing we obtained to fund the BGS acquisition. We were required to mark to
market the instrument as of September 30, 2008, and have recorded an unrealized
gain of approximately $6.1 million (ZAR 48.8 million) for the first quarter of
fiscal 2009. The call account instrument was repaid to us with accrued interest
on October 16, 2008. We realized a total gain of approximately $24.8 million (or
ZAR 248.1 million at the $:ZAR exchange rate on the date of the repayment) on
this instrument. During the second quarter of fiscal 2009, we expect to
recognize an additional gain of approximately $18.7 million (at the $:ZAR
exchange rate on the date of the repayment).
Selling, general and
administration expenses increased during the first quarter of fiscal 2009 from
the comparable quarter in fiscal 2008 primarily due to the stock-based
compensation charge related to the restricted stock grants awarded in the first
and third quarters of fiscal 2008, increases in goods and services purchased
from third parties, including the effects of the increase in inflation in South
Africa and expenses of $0.4 million related to our JSE listing.
Our direct costs of maintaining a
listing on Nasdaq and obtaining a listing on the JSE, as well as compliance with
the Sarbanes-Oxley Act of 2002, or Sarbanes, particularly Section 404 of
Sarbanes, includes independent directors fees, legal fees, fees paid to Nasdaq,
our compliance officers salary, fees paid to consultants who assist with
Sarbanes compliance, fees paid to the JSE and consultants and advisors assisting
with the JSE listing, and fees paid to our independent accountants related to
the audit and review process. This has resulted in expenditures of $0.9 million
(ZAR 7.1 million) and $0.6 million (ZAR 4.2 million) during the first quarters
of fiscal 2009 and 2008, respectively.
28
The table below presents the
amortization related to the acquired intangible assets recognized in the Prism
and BGS acquisitions and the related tax effects included in our reported
results for the first quarter of fiscal 2009 and 2008:
|
|
Three months ended
|
|
Table 5
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
$ 000
|
|
|
$ 000
|
|
Amortization included depreciation and amortization:
|
|
2,141
|
|
|
1,397
|
|
Prism acquisition
|
|
1,275
|
|
|
1,397
|
|
BGS acquisition
|
|
866
|
|
|
-
|
|
|
|
|
|
|
|
|
Deferred tax included in income tax expense:
|
|
651
|
|
|
506
|
|
Prism acquisition
|
|
434
|
|
|
506
|
|
BGS acquisition
|
|
217
|
|
|
-
|
|
|
|
Three months ended
|
|
Table 6
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
ZAR 000
|
|
|
ZAR 000
|
|
Amortization included depreciation and amortization:
|
|
16,710
|
|
|
9,951
|
|
Prism acquisition
|
|
9,951
|
|
|
9,951
|
|
BGS acquisition
|
|
6,759
|
|
|
-
|
|
|
|
|
|
|
|
|
Deferred tax included in income tax expense:
|
|
5,079
|
|
|
3,607
|
|
Prism acquisition
|
|
3,385
|
|
|
3,607
|
|
BGS acquisition
|
|
1,694
|
|
|
-
|
|
Property, plant and equipment
acquired to provide administration and distribution services to our customers is
depreciated over the shorter of expected useful life and the contract period
with the provincial government. We are currently in an extension phase with all
our contracts and the majority of our property, plant and equipment related to
the administration and distribution of social welfare grants has been written
off. Accordingly, depreciation expense related to these activities has decreased
during the first quarter of fiscal 2009 compared with the first quarter of
fiscal 2008. This reduction in depreciation was partially offset by the increase
in depreciation related to new back-end processing computers and our
participating merchant POS terminals.
Interest on surplus cash for the
first quarter of fiscal 2009 increased to $6.7 million (ZAR 52.3 million) from
$5.3 million (ZAR 37.7 million) for the first quarter of fiscal 2008. The
increase in interest on surplus cash held in South Africa was due to a higher
average daily ZAR cash balance during the first quarter of fiscal 2009 compared
with the first quarter of fiscal 2008 and higher deposit rates resulting from
the adjustment in the South African prime interest rate from an average of
approximately 13.24% per annum for the first quarter of fiscal 2008 to 15.50%
per annum for the first quarter of fiscal 2009.
Included in interest expense is
the facility fee of approximately $0.7 million (ZAR 5.8 million) that we paid to
the lender under the short-term loan facility we obtained to fund the BGS
acquisition and approximately $0.5 million (ZAR 3.9 million) interest on the
short-term loan facility. Excluding the impact of this facility fee and the
interest on the short-term loan facility, during the first quarter of fiscal
2009 interest expense increased due to an increase in the average rates of
interest on our short-term facilities. In ZAR, excluding the impact of the
facility fee, finance costs increased to $2.9 million (ZAR 22.6 million) for the
first quarter of fiscal 2009 from $2.3 million (ZAR 16.4 million) for the first
quarter of fiscal 2008.
Total tax expense for the first
quarter of fiscal 2009 was $9.9 million (ZAR 77.3 million) compared with $10.9
million (ZAR 77.4 million) during the same period in the comparable quarter
of the prior fiscal year. Deferred tax assets and liabilities are measured utilizing
the enacted fully distributed tax rate. Accordingly, a reduction in the fully
distributed tax rate from 35.45% to 34.55% results in lower deferred tax assets
and liabilities and the net change of $3.5 million (ZAR 26.5 million) is included
in our income tax expense in our unaudited condensed consolidated statement
of operations for the first quarter of fiscal 2009. In ZAR, without giving effect
to the change in our fully-distributed tax rate, our total tax expense increased,
primarily due to the unrealized foreign exchange gain discussed above. Our effective
tax rate for the first quarter of fiscal 2009 was 27.1%, compared to 37.6% for
the first quarter of fiscal 2008. The change in our effective tax rate was primarily
due to reduction in our fully distributed tax rate to 34.55%, offset by an increase
in non-deductible expenses during the first quarter of fiscal 2009 compared
to the first quarter of fiscal 2008.
Loss from equity-accounted
investments for the first quarter of fiscal 2009 and 2008 were $0.3 million (ZAR
2.4 million) and $0.3 million (ZAR 2.0 million), respectively.
29
Results of operations by
operating segment
The composition of revenue and
the contributions of our business activities to operating income are illustrated
below.
Table 7
|
In United States Dollars (US GAAP)
|
|
|
Three months ended September 30,
|
|
|
2008
|
|
% of
|
|
2007
|
|
% of
|
|
%
|
|
Operating Segment
|
$ 000
|
|
total
|
|
$ 000
|
|
total
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
40,344
|
|
59%
|
|
38,164
|
|
63%
|
|
6%
|
|
Smart card accounts
|
8,570
|
|
13%
|
|
9,136
|
|
15%
|
|
(6)%
|
|
Financial services
|
1,784
|
|
3%
|
|
2,183
|
|
4%
|
|
(18)%
|
|
Hardware, software and related technology
sales
|
17,237
|
|
25%
|
|
10,776
|
|
18%
|
|
60%
|
|
Total consolidated revenue
|
67,935
|
|
100%
|
|
60,259
|
|
100%
|
|
13%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
21,638
|
|
79%
|
|
20,589
|
|
79%
|
|
5%
|
|
Smart card accounts
|
3,895
|
|
14%
|
|
4,152
|
|
16%
|
|
(6)%
|
|
Financial services
|
327
|
|
1%
|
|
446
|
|
2%
|
|
(27)%
|
|
Hardware, software and related technology
sales
|
4,134
|
|
15%
|
|
1,940
|
|
7%
|
|
113%
|
|
Corporate/eliminations
|
(2,716
|
)
|
(9)%
|
|
(1,221
|
)
|
(4)%
|
|
122%
|
|
Total consolidated
operating income
|
27,278
|
|
100%
|
|
25,906
|
|
100%
|
|
5%
|
|
Table 8
|
In South African Rand (US GAAP)
|
|
|
Three months ended September 30,
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
|
ZAR
|
|
% of
|
|
ZAR
|
|
% of
|
|
%
|
|
Operating Segment
|
000
|
|
total
|
|
000
|
|
total
|
|
change
|
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
314,864
|
|
59%
|
|
271,870
|
|
63%
|
|
16%
|
|
Smart card accounts
|
66,884
|
|
13%
|
|
65,083
|
|
15%
|
|
3%
|
|
Financial services
|
13,923
|
|
3%
|
|
15,551
|
|
4%
|
|
(10)%
|
|
Hardware, software and related technology
sales
|
134,526
|
|
25%
|
|
76,765
|
|
18%
|
|
75%
|
|
Total consolidated revenue
|
530,197
|
|
100%
|
|
429,269
|
|
100%
|
|
24%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
Transaction-based activities
|
168,874
|
|
79%
|
|
146,671
|
|
79%
|
|
15%
|
|
Smart card accounts
|
30,398
|
|
14%
|
|
29,578
|
|
16%
|
|
3%
|
|
Financial services
|
2,552
|
|
1%
|
|
3,177
|
|
2%
|
|
(20)%
|
|
Hardware, software and related technology
sales
|
32,264
|
|
15%
|
|
13,820
|
|
7%
|
|
133%
|
|
Corporate/eliminations
|
(22,577
|
)
|
(9)%
|
|
(8,698
|
)
|
(4)%
|
|
160%
|
|
Total consolidated
operating income
|
211,511
|
|
100%
|
|
184,548
|
|
100%
|
|
15%
|
|
Transaction-based
activities
In US dollars, revenues increased
by 6% for the first quarter of fiscal 2009 from the first quarter of fiscal
2008. Operating income increased by 5% for the first quarter of fiscal 2009 from
the first quarter of fiscal 2008.
In ZAR, revenues increased by 16%
for the first quarter of fiscal 2009 from the first quarter of fiscal 2008.
Operating income increased by 15% for the first quarter of fiscal 2009 from the
first quarter of fiscal 2008.
The increase in revenues and
operating income were primarily due to higher average revenue per grant paid in
all provinces where we provide a welfare distribution service, higher volumes
from four of our provincial contracts, continued adoption of our merchant
acquiring system in the provinces where we distribute welfare grants and
increased transacting ability at participating retailers POS devices in these
provinces. We discuss these factors in more detail below.
Revenues for transaction-based
activities include the transaction fees we earn through our merchant acquiring
system and reflect the elimination of inter-company transactions.
Operating income margin of our
transaction-based activities for the first quarter of each of fiscal 2009 and
2008 was 54%. Consistent with prior years, we have experienced inflationary
increases in our costs components that were higher than the increases we
negotiated with our customers.
30
Higher average
revenue per grant paid and higher overall volumes from our provincial
contracts
:
During the first quarter of
fiscal 2009, we experienced growth in four of the provinces where we administer
payments of social welfare grants. This growth was mainly due to an increase in
the number of child support grants and disability grants approved by the various
provincial governments. In total, the volume of payments processed during the
first quarter of fiscal 2009 increased 3% to 12,129,996 from the first quarter
of fiscal 2008.
The volumes under existing
provincial contracts during the first quarter of fiscal 2009 as well as average
revenue per grant paid are detailed below:
Table 9
|
Three months ended September 30,
|
|
|
Number of
|
|
Average Revenue per Grant Paid
|
|
|
Grants
Paid
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Province
|
2008
|
|
2007
|
|
$(1)
|
|
$(2)
|
|
ZAR(1)
|
|
ZAR(2)
|
|
KwaZulu-Natal
(A)
.
|
5,230,041
|
|
5,040,155
|
|
3.07
|
|
2.95
|
|
23.89
|
|
21.01
|
|
Limpopo
(B)
|
2,958,456
|
|
2,935,110
|
|
2.33
|
|
2.35
|
|
18.15
|
|
16.76
|
|
North West
(C)
|
1,385,537
|
|
1,219,059
|
|
3.30
|
|
2.96
|
|
25.68
|
|
21.10
|
|
Northern Cape
(D)
|
497,726
|
|
496,100
|
|
3.09
|
|
2.68
|
|
24.03
|
|
19.06
|
|
Eastern Cape
(E)
|
2,058,236
|
|
2,137,975
|
|
2.12
|
|
2.11
|
|
16.52
|
|
15.02
|
|
Total
|
12,129,996
|
|
11,828,399
|
|
|
|
|
|
|
|
|
|
(1) Average Revenue per Grant
Paid excludes $ 0.71 (ZAR 5.50) related to the provision of smart card accounts.
(2) Average Revenue per Grant
Paid excludes $ 0.77 (ZAR 5.50) related to the provision of smart card accounts.
(
A)
- in ZAR, the
increase in the Average Revenue per Grant Paid in KwaZulu-Natal was due to an
increase in the value of all grant types, which forms the basis of our
remuneration in this province.
(B)
- in ZAR, the increase
in the Average Revenue per Grant Paid in Limpopo was due to the negotiated
annual price adjustment effective from January 2008.
(C)
- in ZAR, the increase
in the Average Revenue per Grant Paid in North West was due to the negotiated
annual price adjustment approved by the provincial government in September
2007.
(D)
- in ZAR, the increase
in the Average Revenue per Grant Paid in Northern Cape was due to the negotiated
annual price adjustment effective from January 2008.
(E)
- in ZAR, the increase
in the Average Revenue per Grant Paid in Eastern Cape was due to negotiated
price increases effective from January 2008.
Key statistics and
indicators related to our merchant acquiring system:
During the first quarter of fiscal
2009 we performed an extensive exercise to identify those merchants that had
contracted to participate in our merchant acquiring system and had an installed
but unused POS device. After discussions with these merchants a number of them
cancelled their contracts to participate in our merchant acquiring system. In
addition, we have implemented procedures to identify merchants that are abusing
our merchant acquiring system. If a merchant is identified as abusing the merchant
acquiring system, its contract is terminated and its equipment is removed. However,
these contract cancellations and terminations have had no impact on the number
of grants paid through our merchant acquiring system.
31
The key statistics and indicators
of our merchant acquiring system during the first quarter of fiscal 2009 and
2008, in each of the South African provinces where we distribute social welfare
grants are summarized in the table below:
Table 10
|
|
Three months ended
|
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
NC, EC,
|
|
|
NC, EC,
|
|
|
|
KZN, L
|
|
|
KZN, L
|
|
Province included (1)
|
|
and NW
|
|
|
and NW
|
|
Total POS devices installed
|
|
4,170
|
|
|
4,305
|
|
Number of participating UEPS retail locations
|
|
2,382
|
|
|
2,578
|
|
Value of transactions processed through POS devices during
the quarter
|
|
|
|
|
|
|
(2) (in $ 000)
|
|
319,410
|
|
|
266,934
|
|
Value of transactions processed through POS devices during
the
|
|
|
|
|
|
|
completed pay cycles for the quarter (3)
(in $ 000)
|
|
293,899
|
|
|
266,810
|
|
Value of transactions processed through POS devices during
the quarter
|
|
|
|
|
|
|
(2) (in ZAR 000)
|
|
2,486,912
|
|
|
1,901,570
|
|
Value of transactions processed through POS devices during
the
|
|
|
|
|
|
|
completed pay cycles for the quarter (3)
(in ZAR 000)
|
|
2,288,288
|
|
|
1,900,684
|
|
Number of grants paid through POS devices during the quarter
(2)
|
|
4,543,147
|
|
|
3,716,230
|
|
Number of grants paid through POS devices
during the completed pay
|
|
|
|
|
|
|
cycles for the quarter (3)
|
|
4,208,634
|
|
|
3,715,383
|
|
Average number of grants processed per terminal
during the quarter (2) .
|
|
1,061
|
|
|
858
|
|
Average number of grants processed per terminal during the
completed
|
|
|
|
|
|
|
pay cycles for the quarter (3)
|
|
983
|
|
|
858
|
|
(1) NC = Northern Cape, EC = Eastern
Cape, KZN = KwaZulu-Natal, L = Limpopo, NW = North West.
(2) Refers to
events occurring during the quarter (i.e., based on three calendar months).
(3) Refers to events occurring during the completed pay cycle.
The following chart presents the
number of POS devices installed and the average spend per POS device,
per pay
cycle and calendar month
, during the 18 month period ended September 30,
2008:
32
The following chart presents the
growth in the value of loads at merchant locations processed through our
installed base of POS devices,
per pay cycle and calendar month
, during
the 18 month period ended September 30, 2008:
The following graph presents the
number of social welfare grants loaded at merchant locations,
per pay cycle
and calendar month
, for the 18 month period ended September 30, 2008:
33
EasyPay
transaction fees:
During the first quarter of
fiscal 2009 and 2008, EasyPay processed 135 million and 119 million transactions
with an approximate value of $4.1 billion (ZAR 31.7 billion) and $3.7 billion
(ZAR 26.1 billion), respectively. The average fee per transaction during the
first quarter of fiscal 2009 and 2008, was $0.03 (ZAR 0.22) and $0.03 (ZAR
0.21), respectively. We expect that retail sales in South Africa during the 2008
Christmas season will be adversely affected by the global credit crisis and
recent weakness in the South African economy. Accordingly, we believe that the
number of transactions processed by EasyPay during the second quarter of fiscal
2009 will not increase compared to the second quarter of fiscal 2008. We do not
expect a significant fluctuation, in ZAR, in the average fee per transaction
during the second quarter of fiscal 2009.
Operating income margins
generated by EasyPay during the first quarter of fiscal 2009 and 2008, were 42%
and 40%, respectively, which is lower than those generated by our pension and
welfare business and reduced the operating income margins within our
transaction-based activities segment. Our operating income margin at EasyPay
increased primarily as a result of the implementation of a new integrated switch
which has improved operating efficiencies. We expect the new integrated switch
to greatly enhance our offering at EasyPay and enable us to take advantage of
new business opportunities.
Amortization of EasyPay
intangible assets during the first quarter of fiscal 2009 and 2008, respectively
of $0.4 million (ZAR 3.2 million), is included in the calculation of EasyPay
operating margins. Operating income margin before amortization of EasyPay
intangible assets during the first quarter of fiscal 2009 and 2008 was 53% and
52%, respectively.
Smart card accounts
In US dollars, revenues decreased
by 6% for the first quarter of fiscal 2009 from the first quarter of fiscal
2008. Operating income decreased by 6% for the first quarter of fiscal 2009 from
the first quarter of fiscal 2008.
In ZAR, revenues increased by 3%
for the first quarter of fiscal 2009 from the first quarter of fiscal 2008.
Operating income increased by 3% for the first quarter of fiscal 2009 from the
first quarter of fiscal 2008.
Operating income margin from
providing smart card accounts was constant at 45% for the first quarter of
fiscal 2009 and 2008.
In ZAR, revenue from the
provision of smart card-based accounts grew in proportion to the higher number
of beneficiaries serviced through our social welfare payment contracts. A total
number of 4,039,359 smart card-based accounts were active at September 30, 2008,
compared to 3,943,580 active accounts as at September 30, 2007. The increase in
the number of active accounts resulted from an increase in the number of
beneficiaries in four provinces qualifying for government grants and the
transfer of beneficiaries in the North West province from the South African Post
Office to our system.
Financial services
In US dollars, revenues decreased
by 18% for the first quarter of fiscal 2009 from the first quarter of fiscal
2008. Operating income decreased by 27% for the first quarter of fiscal 2009
from the first quarter of fiscal 2008.
In ZAR, revenues decreased by 10%
for the first quarter of fiscal 2009 from the first quarter of fiscal 2008.
Operating income decreased by 20% for the first quarter of fiscal 2009 from the
first quarter of fiscal 2008.
Revenues from UEPS-based lending
decreased during the first quarter of fiscal 2009 compared with the first
quarter of fiscal 2008 primarily due to the lower number of loans granted. In
addition, on average, the return on these UEPS-based loans was lower during the
first quarter of fiscal 2009 compared with the first quarter of fiscal 2008. We
offer the UEPS-based loans to our beneficiaries with the primary purpose of
assisting them to repay expensive loans with other loan providers and to escape
the debt spiral that they are trapped in. Once our UEPS-based loans are repaid,
we believe that the beneficiaries have an enhanced ability to remain debt-free,
or take loans in amounts smaller than the original refinancing facility we
offered to them. We believe that once cardholders escape the debt spiral they
will have more disposable income to spend, including through our merchant
acquiring base.
Revenues from our traditional
microlending business decreased during the quarter due to increased competition,
our strategic decision not to grow this business, and an overall lower return on
traditional microlending loans as a result of compliance with the National
Credit Act, or NCA. The NCA regulates fees and interest charged on micro-lending
loans and imposes credit check obligations on lenders prior to granting of
credit to individuals. The loan portfolio of the traditional microlending
businesses has declined as a result of our strategic decision not to grow this
business and compliance with the NCA.
34
Our current UEPS-based lending
portfolio comprises loans made to elderly pensioners in some of the provinces
where we distribute social welfare grants. We insure the UEPS-based lending book
against default and thus no allowance is required. We consider UEPS-based
lending less risky than traditional microfinance loans because the grants are
distributed to these lenders by us and these loans are insured. We establish an
allowance for doubtful traditional microlending loans in respect of which we
consider it likely that all or a portion of the principal amount of the loan or
interest thereon will not be repaid by the borrower. We consider default likely
after a specified period of non-payment, which is generally not more than 150
days. We assess this allowance based on a review by management of the aging of
outstanding amounts, the payment history in relation to those specific accounts
and the overall default history.
Some of the key indicators of
these businesses are illustrated below:
Table 11
|
As at September 30,
|
|
|
2008
|
|
2007
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
$%
|
|
ZAR
|
|
ZAR
|
|
ZAR %
|
|
|
$ 000
|
|
$ 000
|
|
change
|
|
000
|
|
000
|
|
change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional microlending:
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance loans receivable gross
|
2,595
|
|
5,249
|
|
(51
|
)%
|
21,270
|
|
36,336
|
|
(41)%
|
|
Allowance for doubtful
finance loans
|
|
|
|
|
|
|
|
|
|
|
|
|
receivable
|
(1,086
|
)
|
(3,011
|
)
|
(64
|
)%
|
(8,900
|
)
|
(20,840
|
)
|
(57)%
|
|
Finance
loans receivable net
|
1,509
|
|
2,238
|
|
(33
|
)%
|
12,370
|
|
15,496
|
|
(20)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UEPS-based lending:
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance loans receivable net and
|
|
|
|
|
|
|
|
|
|
|
|
|
gross (i.e.,
no allowance)
|
2,605
|
|
3,064
|
|
(15
|
)%
|
21,355
|
|
21,205
|
|
1%
|
|
Total
finance loans receivable,
|
|
|
|
|
|
|
|
|
|
|
|
|
net
|
4,114
|
|
5,302
|
|
|
|
33,725
|
|
36,701
|
|
|
|
Operating income margin for the
financial services segment decreased to 18% for the first quarter of fiscal 2009
from 20% for the first quarter of fiscal 2008 primarily due to a lower return on
our UEPS-based lending products and continued difficult operating conditions in
our traditional micro-lending operations, as well as the effect of implementing
the NCA.
Hardware, software and
related technology sales
In US dollars, revenues increased
by 60% for the first quarter of fiscal 2009 from the first quarter of fiscal
2008. Operating income increased by 113% for the first quarter of fiscal 2009
from the first quarter of fiscal 2008.
In ZAR, revenues increased by 75%
for the first quarter of fiscal 2009 from the first quarter of fiscal 2008.
Operating income increased by 133% for the first quarter of fiscal 2009 from the
first quarter of fiscal 2008.
Our Hardware, software and
related technology sales segment includes the results of BGS from September 1,
2008. BGS generated revenues and operating income of $1.1 million and $0.4
million, respectively, during the first quarter of fiscal 2009, before
amortization of the BGS intangible assets identified and recognized. The
amortization of the BGS intangible asset of $0.9 million reduces our operating
income.
The increase in revenues and
operating income was primarily due to delivery of hardware to Ghana and Nedbank.
In addition, we completed software development activities and delivered hardware
under our contract with an Iraqi consortium.
During the first quarter of
fiscal 2009 we delivered hardware, including smart cards and terminals, to the
Bank of Ghana and recognized revenue of approximately $3.9 million (ZAR 30.4
million). During the first quarter of fiscal 2008 we recognized revenue of
approximately $1.0 million (ZAR7.0 million) from software development and
customization activities related to the Bank of Ghana contract
During the first quarter of
fiscal 2009 we recognized revenue of $2.3 million (ZAR 18.2 million) from sales
of hardware to Nedbank.
Amortization of Prism intangible
assets during the first quarter of fiscal 2009 and 2008, respectively, was
approximately $0.9 million (ZAR 6.7 million) and reduced our operating income.
35
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 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 affected our revenues and operating income in this segment
from period to period.
Corporate/eliminations
In US dollars, our operating loss
increased by $1.5 million for the first quarter of fiscal 2009 compared with the
first quarter of fiscal 2008.
In ZAR, our operating loss
increased by ZAR 12.5 million for the first quarter of fiscal 2009 compared with
the first quarter of fiscal 2008.
The increase in our losses in
this segment resulted from increases in corporate head office-related
expenditure, including the effects of the increase in inflation in South Africa,
stock-based compensation charges and the JSE listing costs.
Our operating losses include
expenditure related to compliance with Sarbanes, non-executive directors fees;
employee and executive salaries and bonuses; stock-based compensation; legal and
auditor fees; directors and officers insurance premiums; telecommunications
expenses; property-related expenditures including utilities, rental, security
and maintenance; and elimination entries.
Liquidity and Capital Resources
Our business has historically
generated and continues to generate high levels of cash. At September 30, 2008,
our cash balances were $245.9 million, which comprised mainly ZAR-denominated
balances of ZAR 611.1 million ($74.5 million) and US dollar-denominated balances
of $157.3 million. Our cash balances decreased from June 30, 2008, levels mainly
as a result of payment of taxes, the timing of receipt of payment from the
provincial governments and the pre-funding of social welfare grants for the
October 2008 payment cycle in the last days of September 2008.
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. However, at
September 30, 2008, we held $135 million in 32-day call accounts. We gave a
call notice on September 10, 2008, for the $135 million and the funds were released
on October 15, 2008.
Historically, we have financed
all operations, research and development, working capital, capital expenditures
and acquisitions through our internally generated cash. However, as a result of
South African exchange control restrictions, we were required to obtain a
short-term loan facility of $110 million to finance the BGS acquisition. We
utilized approximately $103 million of this facility to fund the acquisition and
pay the $1.1 million loan facility fee. In early October 2008, we utilized an
additional $1.0 million of this facility and in mid-October 2008, we repaid the
loan facility in full. Excluding this $110 million loan facility, we have
aggregate credit facilities of $63.8 million (ZAR 523.7 million). We take the
following factors into account when considering whether to borrow under our
financing facilities:
As a result of the global
liquidity crisis, our South African bank increased the overdraft rate on our
short-term facilities on October 10, 2008, from 13.25% to 14.35% .
36
We have a unique cash flow cycle
due to our obligations to pre-fund the payments of social welfare grants in the
KwaZulu-Natal and Eastern Cape provinces. We provide the funds required for the
grant payments on behalf of these provincial governments from our own cash
resources and are reimbursed within two weeks by the KwaZulu-Natal and Eastern
Cape governments, thus exposing ourselves to these provinces credit risk. These
obligations result in a peak funding requirement, on a monthly basis, of
approximately $41.5 million (ZAR 340 million) for each of the KwaZulu-Natal and
Eastern Cape contracts. The funding requirements are at peak levels for the
first three weeks of every month during the year.
The amount disbursed through
merchants during September 2008 was reimbursed to us by the provincial
governments during the first two weeks of October 2008. We typically reimburse
merchants within 48 hours after they distribute the grants to the social welfare
beneficiaries, however, the provincial governments reimburse the amount due to
us within two weeks after the distribution date. This practice results in a
significant net cash outflow at the end of a month, and a quarter, however, the
situation is typically reversed within a week.
We currently believe that our
cash and credit facilities are sufficient to fund our current operations for at
least the next four quarters. However, if we are awarded additional provinces in
the SASSA tender, we will likely need additional funding to pre-fund the payment
of social welfare grants for these additional provinces. In anticipation of this
need, we have sought and received a letter of intent from a major South African
banking institution to increase the amount of our credit facilities. In
addition, we may seek to access the global debt capital markets for this
purpose. However, there can be no assurance that we will be able to increase our
credit facilities or raise other debt capital on satisfactory terms, or at all.
Cash flows from
operating activities
Three months ended September
30, 2008
Net cash outflows from operating
activities for the first quarter of fiscal 2009 was $33.0 million (ZAR 257.8
million) compared to net cash inflows from operating activities of $40.2 million
(ZAR 286.5 million) for the first quarter of fiscal 2008. The net cash outflow
during the first quarter of fiscal 2009 resulted from the provincial governments
paying the amounts due related to the September 2008 pay cycle in early October
2008. In addition, we commenced our grant payment service for October 2008 in
the last four days of September at merchant locations only. We typically
reimburse merchants within 48 hours after they distribute the grant to the
beneficiary and therefore we reimbursed merchants for the October 2008 grants
distributed by them during September 2008. The provincial governments typically
repay us between seven and 14 days of distributing the grant.
During the first quarter of
fiscal 2009 we made an additional second provisional payment of $7.4 million
(ZAR 57.3 million) related to our 2008 tax year in South Africa and paid taxes
of $1.2 million related to our 2008 tax year in the United States. See the table
below for a summary of all taxes paid (refunded).
Taxes paid during the first
quarter of fiscal 2009 and 2008 were as follows:
Table 12
|
|
Three
months ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
$
|
|
|
$
|
|
|
ZAR
|
|
|
ZAR
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxation paid related to prior years
|
|
8,602
|
|
|
8,357
|
|
|
66,886
|
|
|
60,465
|
|
Taxation refunds received
|
|
(61
|
)
|
|
(10
|
)
|
|
(471
|
)
|
|
(66
|
)
|
Total tax paid
|
|
8,541
|
|
|
8,347
|
|
|
66,415
|
|
|
60,399
|
|
We expect to pay our third
provisional payment related to our 2008 tax year and our first provisional
payment related to our 2009 tax year during the second quarter of fiscal 2009.
Cash flows from
investing activities
Three months ended September
30, 2008
Cash used in investing activities
for the first quarter of fiscal 2009 includes capital expenditure of $2.8
million (ZAR 21.98 million), of which $2.1 million (ZAR 16.1 million) relates to
six backend processing machines to maintain and expand current operations and
$0.2 million (ZAR 1.6 million) relates to modifications to vehicles acquired to
distribute social welfare grants.
37
During the first quarter of
fiscal 2009 we paid $95.3 million (ZAR 743.3 million), net of cash received, for
80.1% of the outstanding ordinary capital of BGS. Under the stock purchase
agreement we will be required to pay an additional $2.0 million (at the $:EUR
exchange rate on September 30, 2008) to the former shareholders of BGS on March
31, 2009.
In August 2008, we acquired
additional shares of VinaPay for approximately $0.3 million. Our current
shareholding in VinaPay remains at 30%. These funds will be used to fund
operating activities.
In September 2008, we acquired
additional shares of VTU Colombia for approximately $0.3 million. Our
shareholding in VTU Colombia remains at 50%. These funds will be used to fund
operating activities.
Cash used in investing activities
for the first quarter of fiscal 2008 includes capital expenditure of $0.7
million (ZAR 4.8 million), of which $0.2 million (ZAR 1.8 million) relates the
acquisition of POS terminals for our merchant acquiring system.
Cash flows from
financing activities
Three months ended September
30, 2008
During the first quarter of
fiscal 2009 we received $110 million under a short-term loan facility, the
proceeds of which we used to fund the BGS acquisition and to pay a $1.1 million
facility fee. We repaid the facility in full during the second quarter of fiscal
2009.
During the first quarter of each
of fiscal 2009 and 2008 we received $0.16 (ZAR 1.2 million) and $0.15 million
(ZAR 1.1 million), respectively, from employees exercising stock options and
repaying loans.
Off-Balance Sheet Arrangements
We have no off-balance sheet
arrangements.
Capital Expenditures
We operate in an environment
where our contracts for the payment of social welfare grants require substantial
capital investment to establish our operational infrastructure when a contract
commences. Further capital investment is required when the number of
beneficiaries increases to the point where the maximum capacity of the original
infrastructure is exceeded.
We discuss our capital
expenditures during the first quarter of fiscal 2009 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 September
30, 2008. We anticipate that capital spending for the second quarter of fiscal
2009 will relate primarily to on-going replacement of equipment used to
administer and distribute social welfare grants and provide a switching service
through EasyPay. We expect to fund these expenditures through internally
generated funds.
Contingent Liabilities,
Commitments and Contractual Obligations
We lease various premises under
operating leases. Our minimum future commitments for lease premises as well as
other commitments are as follows:
Table 13
|
|
Payments
due by Period, as at September 30, 2008 (in $ 000s)
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
than 1
|
|
|
1-3
|
|
|
3-5
|
|
|
than 5
|
|
|
|
Total
|
|
|
year
|
|
|
years
|
|
|
years
|
|
|
years
|
|
Short-term loan facility
|
$
|
110,000
|
|
$
|
110,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Operating lease obligations
|
|
5,956
|
|
|
2,190
|
|
|
3,071
|
|
|
695
|
|
|
-
|
|
Purchase obligations
|
|
6,523
|
|
|
6,523
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Capital commitments
|
|
98
|
|
|
98
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
122,577
|
|
$
|
118,811
|
|
$
|
3,071
|
|
$
|
695
|
|
|
-
|
|
38
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
We seek to reduce our 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, 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 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 South African rand, on the one hand, and the US
dollar and the euro, on the other hand. As of September 30, 2008 and 2007, our
outstanding foreign exchange contracts were as follows:
As of September 30, 2008
|
|
|
|
|
|
Fair market
|
|
|
Notional amount
|
|
Strike price
|
|
value price
|
|
Maturity
|
EUR
|
140,000
|
|
ZAR
|
11.5630
|
|
ZAR
|
11.8030
|
|
October 3, 2008
|
USD
|
24,600
|
|
ZAR
|
8.0090
|
|
ZAR
|
8.3003
|
|
October 10, 2008
|
EUR
|
3,891
|
|
ZAR
|
11.9409
|
|
ZAR
|
11.8561
|
|
October 15, 2008
|
EUR
|
5,880
|
|
ZAR
|
11.6292
|
|
ZAR
|
11.8643
|
|
October 17, 2008
|
EUR
|
85,210
|
|
ZAR
|
11.9685
|
|
ZAR
|
11.9216
|
|
October 31, 2008
|
EUR
|
8,608
|
|
ZAR
|
11.9685
|
|
ZAR
|
11.9216
|
|
October 31, 2008
|
EUR
|
82,400
|
|
ZAR
|
12.2199
|
|
ZAR
|
11.9216
|
|
October 31, 2008
|
EUR
|
-82,400
|
|
ZAR
|
12.5773
|
|
ZAR
|
11.8619
|
|
October 31, 2008
|
EUR
|
82,400
|
|
ZAR
|
12.7820
|
|
ZAR
|
12.0035
|
|
November 28, 2008
|
As of September 30, 2007
|
|
|
|
|
|
Fair market
|
|
|
Notional amount
|
|
Strike price
|
|
value price
|
|
Maturity
|
USD
|
324,000
|
|
ZAR
|
7.289
|
|
ZAR
|
6.9847
|
|
November 30, 2007
|
Translation Risk
Translation risk relates to the
risk that our results of operations will vary significantly as the US dollar is
our reporting currency, but we earn most of our revenues and incur most of our
expenses in ZAR. The US dollar to ZAR exchange rate has fluctuated significantly
over the past three years. As exchange rates are outside our control, there can
be no assurance that future fluctuations will not adversely affect our results
of operations and financial condition.
Interest Rate Risk
As a result of our normal
borrowing and leasing activities, our operating results are exposed to
fluctuations in interest rates, which we manage primarily through our regular
financing activities. We generally maintain limited investment in cash
equivalents and have occasionally invested in marketable securities. Typically,
for every 1% increase in SARBs repurchase, or repo rate, our interest expense
on pre-funding social welfare grants in the KwaZulu-Natal and Eastern Cape
provinces increases by $19,611 per month, while interest earned per month on any
surplus cash increases by $10,531 per $12.2 million (ZAR 100 million).
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.
39
Micro-lending Credit
Risk
We are exposed to credit risk in
our microlending activities, which provides unsecured short-term loans to
qualifying customers. We manage this risk by assigning each prospective customer
a creditworthiness score, which takes into account a variety of factors such
as employment status, salary earned, other debts and total expenditures on
normal household and lifestyle expenses.
40
Item 4. Controls and Procedures
Evaluation of
disclosure controls and procedures
Under the supervision and with
the participation of our management, including our chief executive officer and
our chief financial officer, we conducted an evaluation of our disclosure controls
and procedures, as such term is defined under Rule 13a-15(e) promulgated under
the Securities Exchange Act of 1934, as amended, as of September 30, 2008. Management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives
and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on this evaluation,
the chief executive officer and the chief financial officer concluded that our
disclosure controls and procedures were effective as of September 30, 2008.
Changes in Internal
Control over Financial Reporting
There have not been any changes
in our internal control over financial reporting during the fiscal quarter ended
September 30, 2008, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
41
Part II. Other Information
Item 1A. Risk Factors
See Item 1A RISK FACTORS in Part
I of the Companys Annual Report on Form 10-K for the fiscal year ended June 30,
2008 for a discussion of the Companys risk factors. Except for the four risk
factors discussed below, there have been no material changes to these risk
factors.
SASSA recently notified
bidders that it has terminated the tender process to award contracts for the
distribution of social welfare payments and has deferred a decision regarding
commencing a new tender process. Until SASSA makes a further announcement, there
will continue to be substantial uncertainty about the future contract award
process. Our existing contracts are now terminable by SASSA on 30 days notice
and any non-renewal or termination of our contracts would materially and
adversely affect our business.
We currently derive a majority of
our revenues from contracts to distribute social welfare grants on behalf of
five of the nine provincial governments of South Africa. For the foreseeable
future, our revenues, results of operations and cash flows will depend on this
concentrated group of customers. During the years ended June 30, 2008, 2007 and
2006, and the three months ended September 30, 2008, we derived approximately
67%, 70%, 77% and 64%, respectively, of our revenues from payments made to us by
these provinces under our government social welfare contracts.
In early 2007, the South African
Social Security Agency, or SASSA, commenced a national tender for the award of
contracts to distribute social welfare grants throughout South Africa. We
participated in the tender process and timely submitted proposals for each of
South Africas nine provinces, as well as a proposal for the entire country.
There were a series of extensive delays during the tender process which resulted
in numerous extensions of our bid proposals as well as an extension of our
existing contracts. Our existing contracts currently expire on March 31, 2009;
however, SASSA retains the right to terminate any or all of these contracts on
30 days notice to us. On November 3, 2008, SASSA notified bidders that it has
terminated the tender process without awarding new contracts, citing a number of
defects in the original request for proposal published by SASSA and in the bid
evaluation process. SASSA also stated that it has deferred a decision about
commencing a new tender process.
As a result of SASSAs decision
to terminate the tender process and to defer a decision about commencing a new
tender process, there is substantial uncertainty about the future contract award
process. We intend to continue to provide services under our existing contracts
according to their respective terms, as we have for over a decade, but we cannot
assure you that these contracts will continue past March 31, 2009. It is even
possible that SASSA could seek to terminate any or all of our contracts before
then. If SASSA does initiate a new tender process,, we cannot assure you that
the tender will result in our receiving contracts 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 new contracts, we cannot
predict the terms that such contracts will contain. Any new contract we receive
may contain pricing or other terms, such as provisions relating to early
termination, that are not as favorable to us as the contracts under which we
currently operate. In addition, we believe it is likely that any new tender
specification would include a requirement for the successful bidder to pre-fund
the social welfare grants in the relevant province for a one month period, as we
currently are required to do under certain of our existing provincial contracts,
which would result in significant cash flow funding requirements for the
contractor. The recently terminated tender process and the surrounding
uncertainty consumed a substantial amount of our managements time and attention
during the past two years. Any future tender initiated by SASSA would require
our management to devote further resources to the tender process which could
adversely affect their ability to focus on other matters, including potential
international business development activities.
Moreover, even if we were to
receive new contracts containing similar economic terms to those of our current
contracts, our profit margins could be adversely affected to the extent that any
such contracts would require us to incur significant capital expenditures during
the initial implementation phase. Historically, we have incurred a significant
portion of the expenses associated with these contracts during the initial
implementation phase, which averages approximately 18 months, and have
historically enjoyed higher profit margins on these contracts after the
completion of the implementation period. Therefore, to the extent that we were
to be awarded a new contract that required significant capital expenditures, our
profit margins would be adversely affected if the contract were to be terminated
for any reason during the implementation period.
42
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.
Depreciation of the South
African rand against the US dollar has adversely affected and may continue to
adversely affect our reported operating results and our stock price.
The South African rand, or ZAR,
is the primary operating currency for our business operations while our
financial results are reported in US dollars. Our future revenues and profits
may experience significant fluctuations as the rate of exchange between the ZAR
and the US dollar fluctuates. We cannot assure you what effect, if any, changes
in the exchange rate of the ZAR against the US dollar will have on our results
of operations and financial condition. While the US dollar/ZAR exchange rate has
historically been volatile, the ZAR weakened against the US dollar during the
2008 fiscal year. Moreover, as a result of the recent dramatic changes in the
world financial markets, including the collapse of major financial institutions
and the perception that there may be a prolonged global recession that would
adversely affect developing economies like South Africas, the ZAR declined
significantly against the US dollar during the quarter ended September 30, 2008,
and this decline continued throughout October 2008. The depreciation of the ZAR
may also be affected by political instability in South Africa and neighboring
Zimbabwe. Because our revenues are primarily denominated in ZAR, the decline in
the value of the ZAR against the US dollar has adversely affected our reported
results of operations. We also believe that the recent decline in the trading
price of our common stock is at least partially attributable to the depreciation
of the ZAR against the US dollar. We cannot predict whether or not the
depreciation of the ZAR against the US dollar will continue; however continued
weakness in the ZAR may adversely affect our future operating results and may
also continue to affect the price at which our common stock trades. Refer to
Item 7 Currency Exchange Rate InformationActual exchange ratestable 3 and
the graph beneath table 3 included in our Annual Report on Form 10-K and Item
2 Currency Exchange Rate InformationActual exchange ratestable 1 and the
graph beneath table 1 in this Quarterly Report on Form 10-Q.
We generally do not engage in any
currency hedging transactions intended to reduce the effect of fluctuations in
foreign currency exchange rates on our results of operations, other than
economic hedging relating to our inventory purchases which are settled in US
dollars or euros. We have used forward contracts in order to hedge our economic
exposure to the ZAR/US dollar and ZAR/euro exchange rate fluctuations from these
foreign currency transactions. We cannot guarantee that we will enter into
hedging transactions in the future or, if we do, that these transactions will
successfully protect us against currency fluctuations.
It may be difficult for us
to implement our acquisition strategy especially in light of recent global
market and economic conditions.
Acquisitions are a significant
part of our long-term growth strategy as we seek to grow our business
internationally and to deploy our technologies in new markets outside South
Africa. We believe that it is frequently desirable to issue equity or
equity-linked securities, as full or partial consideration for strategic
acquisitions. However, the recent decline in our stock price as a result of
turmoil in the global financial markets, the fear of the prolonged global
recession and depreciation of the ZAR has reduced the feasibility of our
pursuing acquisitions in which we would issue our stock at least in the near
term. In addition, the conditions in the global credit markets and other related
trends affecting the banking industry have caused significant operating losses
and bankruptcies throughout the banking industry which has made acquisition
financing more difficult to obtain. Many lenders and institutional investors
have ceased to provide funding to even the most credit-worthy borrowers. If our
stock price remains too low to serve as acquisition currency or if we are unable
to obtain acquisition financing, we may be unable to take advantage of potential
acquisitions or to otherwise expand our business as planned.
43
The failure of any bank or
financial institution in which we keep our cash and cash equivalents may prevent
us from funding our business or may lead to substantial losses of assets.
We maintain a significant amount
of cash and cash equivalents to fund our business operations at [several] major
South African and European banks and financial institutions. As of September 30,
2008, we maintained an aggregate of $245.9 million in cash and cash equivalents
which were deposited with such banks and financial institutions, excluding the
cash equivalent represented by the 32-day call instrument we terminated on
October 16, 2008. Although we maintain a policy of entering into transactions
only with South African and European banks and 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, due to the current credit
crisis and global economic conditions, it is possible that despite such ratings,
one or more of these banks or financial institutions may fail. The failure of
one or more of these institutions may cause us to lose a significant amount of
cash and cash equivalents. In addition to the actual value of our company which
would be reduced due to the loss of cash and cash equivalents, our business
could be materially and adversely affected by the failure of any institution
where we maintain our cash and cash equivalents because we require significant
amounts of cash to pre-fund the payment of social welfare grants. Failure to
meet our pre-funding obligations would result in a default under our provincial
contracts which require pre-funding. Although to date we have not experienced
any such losses or been prevented from funding our business operations, in light
of recent global economic conditions such losses may occur in the future.
44
Item 6. Exhibits
The following exhibits are filed as part of this Form 10-Q
Exhibit
Number
|
|
Description
|
2.12
|
|
Share
Purchase Agreement between ARDES Netherlands B.V. and each of the other
Sellers specified therein and Net 1 UEPS Technologies, Inc.
|
10.41
|
|
Facility
Agreement, dated August 27, 2008, by and among Smartswitch Netherlands
C.V., Net1 Applied Technologies Netherlands B.V. and Investec Bank (UK)
Limited
|
10.42
|
|
Deed
of Guarantee, dated August 27, 2008, by and between Net 1 UEPS Technologies,
Inc. and Investec Bank (UK) Limited
|
10.43
|
|
Charge
Over Deposits, dated August 27, 2008, by and between Net 1 UEPS Technologies,
Inc. and Investec Bank (UK) Limited
|
10.44
|
|
Cession
and Pledge in Security, dated August 27, 2008, by and between Net 1
UEPS Technologies, Inc. and Investec Bank (UK) Limited
|
10.45
|
|
Deed
of Subordination, dated August 27, 2008, by and among Smartswitch Netherlands
C.V., Net 1 UEPS Technologies, Inc. and Investec Bank (UK) Limited
|
10.46*
|
|
Restricted
Stock Agreement by and between Net 1 UEPS Technologies, Inc. and Christopher
Stefan Seabrooke dated August 27, 2008*
|
10.47*
|
|
Restricted
Stock Agreement by and between Net 1 UEPS Technologies, Inc. and Paul
Edwards dated August 27, 2008*
|
10.48*
|
|
Form
of Stock Option Agreement, by and between Net 1 UEPS Technologies, Inc.
and recipients of stock options under the Amended and Restated 2004
Stock Option Incentive Plan of Net 1 UEPS Technologies, Inc.
|
31.1
|
|
Certifications
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
31.2
|
|
Certifications
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
32
|
|
Certifications
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of Sarbanes- Oxley Act of 2002
|
* Indicates
a management contract or compensatory plan or arrangement.
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on November 6, 2008.
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
45
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