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
December 31, 2010
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ___________________ To
___________________
Commission file number:
000-31203
NET 1 UEPS TECHNOLOGIES,
INC.
(Exact name of registrant as specified in its
charter)
Florida
|
98-0171860
|
(State or other jurisdiction
|
(IRS Employer
|
of incorporation or organization)
|
Identification No.)
|
President Place, 4
th
Floor, Cnr. Jan
Smuts Avenue and Bolton Road
Rosebank, Johannesburg 2196, South
Africa
(Address of principal executive offices, including zip code)
Registrants telephone number, including area code:
27-11-343-2000
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO
[ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
YES [ ] NO [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act (check one):
[X] Large accelerated filer
|
[ ] Accelerated
filer
|
|
|
[ ] Non-accelerated filer
|
[ ] Smaller reporting company
|
(do not check if a smaller reporting company)
|
|
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
YES [
] NO [X ]
As of January 31, 2011 (the latest practicable date), 45,535,353
shares of the registrants common stock, par value $0.001 per share, net of
treasury shares, were outstanding.
Form 10-Q
NET 1 UEPS TECHNOLOGIES, INC.
Table of Contents
1
Part I. Financial Information
Item 1. Financial Statements
NET 1 UEPS TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
|
|
Unaudited
|
|
|
(A)
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(In thousands, except share data)
|
|
ASSETS
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
71,383
|
|
$
|
153,742
|
|
Pre-funded social welfare grants receivable (Note 3)
|
|
4,772
|
|
|
6,660
|
|
Accounts
receivable, net of allowances of December: $1,687; June: $807
|
|
76,308
|
|
|
41,854
|
|
Finance loans receivable, net of allowances of December:
$-; June: $-
|
|
9,511
|
|
|
4,221
|
|
Inventory
(Note 4)
|
|
6,986
|
|
|
3,622
|
|
Deferred income taxes
|
|
17,655
|
|
|
16,330
|
|
Total current assets before settlement assets
|
|
186,615
|
|
|
226,429
|
|
Settlement assets
|
|
157,448
|
|
|
83,661
|
|
Total
current assets
|
|
344,063
|
|
|
310,090
|
|
PROPERTY, PLANT AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION OF December: $43,635; June: $35,271
|
|
32,738
|
|
|
7,286
|
|
EQUITY-ACCOUNTED INVESTMENTS (Note 4)
|
|
2,452
|
|
|
2,598
|
|
GOODWILL (Note 6)
|
|
184,215
|
|
|
76,346
|
|
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION
OF December: $48,034; June: $34,226 (Note 6)
|
|
192,022
|
|
|
68,347
|
|
OTHER LONG-TERM ASSETS, including available
for sale securities (Note 5)
|
|
15,016
|
|
|
7,423
|
|
TOTAL ASSETS
|
|
770,506
|
|
|
472,090
|
|
LIABILITIES
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
Bank overdraft
|
|
420
|
|
|
-
|
|
Accounts
payable
|
|
13,410
|
|
|
3,596
|
|
Other payables
|
|
72,941
|
|
|
50,855
|
|
Current
portion of long-term borrowings (note 8)
|
|
7,166
|
|
|
-
|
|
Income taxes payable
|
|
5,553
|
|
|
3,476
|
|
Total current liabilities before settlement obligations
|
|
99,490
|
|
|
57,927
|
|
Settlement obligations
|
|
157,448
|
|
|
83,661
|
|
Total current liabilities
|
|
256,938
|
|
|
141,588
|
|
DEFERRED INCOME TAXES
|
|
62,052
|
|
|
38,858
|
|
LONG-TERM BORROWINGS (note 8)
|
|
107,934
|
|
|
-
|
|
OTHER LONG-TERM LIABILITIES, including non-controlling
interest loans
|
|
5,219
|
|
|
4,343
|
|
TOTAL LIABILITIES
|
|
432,143
|
|
|
184,789
|
|
COMMITMENTS AND CONTINGENCIES
|
|
-
|
|
|
-
|
|
EQUITY
|
|
NET1 EQUITY:
|
|
|
|
|
|
|
COMMON STOCK (Note 9)
|
|
|
|
|
|
|
Authorized:
200,000,000 with $0.001 par value;
Issued
and outstanding shares, net of treasury - December: 45,535,353;
June:
45,378,397
|
|
59
|
|
|
59
|
|
PREFERRED STOCK
|
|
|
|
|
|
|
Authorized
shares: 50,000,000 with $0.001 par value;
Issued
and outstanding shares, net of treasury: 2010: -; 2009: -
|
|
-
|
|
|
-
|
|
ADDITIONAL PAID-IN-CAPITAL
|
|
137,614
|
|
|
133,543
|
|
TREASURY SHARES,
AT COST: December: 13,149,042; June: 13,149,042
|
|
(173,671
|
)
|
|
(173,671
|
)
|
ACCUMULATED OTHER COMPREHENSIVE
LOSS
|
|
(38,381
|
)
|
|
(66,396
|
)
|
RETAINED EARNINGS
|
|
409,720
|
|
|
392,343
|
|
TOTAL NET1 EQUITY
|
|
335,341
|
|
|
285,878
|
|
NON-CONTROLLING INTEREST
|
|
3,022
|
|
|
1,423
|
|
TOTAL EQUITY
|
|
338,363
|
|
|
287,301
|
|
TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY
|
$
|
770,506
|
|
$
|
472,090
|
|
(A) Derived from audited
financial statements
See Notes to
Unaudited Condensed Consolidated Financial Statements
2
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Operations
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except per share
data)
|
|
|
(In thousands, except per share
data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
$
|
89,011
|
|
$
|
73,864
|
|
$
|
153,294
|
|
$
|
139,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, IT processing, servicing
and support
|
|
29,182
|
|
|
20,915
|
|
|
47,249
|
|
|
37,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administration
|
|
28,763
|
|
|
18,866
|
|
|
59,089
|
|
|
36,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
9,092
|
|
|
4,664
|
|
|
13,996
|
|
|
9,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
21,974
|
|
|
29,419
|
|
|
32,960
|
|
|
55,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST (EXPENSE) INCOME, net
|
|
(2,080
|
)
|
|
1,893
|
|
|
756
|
|
|
4,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
19,894
|
|
|
31,312
|
|
|
33,716
|
|
|
60,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE (Note 13)
|
|
9,836
|
|
|
11,492
|
|
|
16,043
|
|
|
22,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME FROM CONTINUING
OPERATIONS BEFORE LOSS FROM
EQUITY- ACCOUNTED INVESTMENTS
|
|
10,058
|
|
|
19,820
|
|
|
17,673
|
|
|
37,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM EQUITY-ACCOUNTED
INVESTMENTS (Note 5)
|
|
(166
|
)
|
|
(270
|
)
|
|
(382
|
)
|
|
(381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
9,892
|
|
|
19,550
|
|
|
17,291
|
|
|
37,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(ADD) LESS: NET (LOSS)
INCOME ATTRIBUTABLE TO NON-CONTROLLING
INTEREST
|
|
(56
|
)
|
|
266
|
|
|
(86
|
)
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO NET1
|
$
|
9,948
|
|
$
|
19,284
|
|
$
|
17,377
|
|
$
|
37,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, in United States
dollars
(
Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings attributable
to Net1 shareholders
|
$
|
0.22
|
|
$
|
0.43
|
|
$
|
0.38
|
|
$
|
0.79
|
|
Diluted earnings attributable to Net1 shareholders
|
$
|
0.22
|
|
$
|
0.42
|
|
$
|
0. 38
|
|
$
|
0.79
|
|
See Notes to Unaudited Condensed
Consolidated Financial Statements
3
NET 1 UEPS TECHNOLOGIES, INC.
|
Unaudited Condensed Consolidated Statement of Changes
in Equity (in thousands)
|
Net 1 UEPS
Technologies, Inc. Shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
of
|
|
|
|
|
|
Additional
|
|
|
|
|
|
comprehensive
|
|
|
Total
|
|
|
controlling
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Paid-In
|
|
|
Retained
|
|
|
(loss)
|
|
|
Net1
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Earnings
|
|
|
income
|
|
|
Equity
|
|
|
Interests
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2010
|
|
58,527,439
|
|
$
|
59
|
|
|
(13,149,042
|
)
|
$
|
(173,671
|
)
|
$
|
133,543
|
|
$
|
392,343
|
|
$
|
(66,396
|
)
|
$
|
285,878
|
|
$
|
1,423
|
|
$
|
287,301
|
|
Restricted stock granted
|
|
156,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan portion related to
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
20
|
|
Stock-based compensation charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,996
|
|
|
|
|
|
|
|
|
2,996
|
|
|
|
|
|
2,996
|
|
Utilization of APIC pool
related to vested restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
(160
|
)
|
|
|
|
|
(160
|
)
|
Acquisition of KSNET (note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
3,097
|
|
|
3,097
|
|
Acquisition of 19.90% non-controlling interest (note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,215
|
|
|
|
|
|
(290
|
)
|
|
925
|
|
|
(1,809
|
)
|
|
(884
|
)
|
Comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,377
|
|
|
|
|
|
17,377
|
|
|
(86
|
)
|
|
17,291
|
|
Other comprehensive income
(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in foreign
currency
translation reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,305
|
|
|
28,305
|
|
|
397
|
|
|
28,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2010
|
|
58,684,395
|
|
$
|
59
|
|
|
(13,149,042
|
)
|
$
|
(173,671
|
)
|
$
|
137,614
|
|
$
|
409,720
|
|
$
|
(38,381
|
)
|
$
|
335,341
|
|
$
|
3,022
|
|
$
|
338,363
|
|
See Notes to Unaudited Condensed
Consolidated Financial Statements
4
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Comprehensive Income
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
9,948
|
|
$
|
19,284
|
|
$
|
17,377
|
|
$
|
37,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized loss
on asset available for sale, net of tax
|
|
-
|
|
|
(684
|
)
|
|
-
|
|
|
(684
|
)
|
Movement in foreign currency translation
reserve
|
|
815
|
|
|
(997
|
)
|
|
28,305
|
|
|
12,490
|
|
Total other comprehensive income, net of taxes
|
|
815
|
|
|
(1,681
|
)
|
|
28,305
|
|
|
11,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
10,763
|
|
|
17,603
|
|
|
45,682
|
|
|
49,031
|
|
(Add)
Less comprehensive loss (gain)
attributable
to non-controlling interest
|
|
(170
|
)
|
|
(227
|
)
|
|
(311
|
)
|
|
19
|
|
Comprehensive
income attributable to Net1
|
$
|
10,933
|
|
$
|
17,830
|
|
$
|
45,993
|
|
$
|
49,012
|
|
See Notes to Unaudited Condensed
Consolidated Financial Statements
5
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
9,892
|
|
$
|
19,550
|
|
$
|
17,291
|
|
$
|
37,147
|
|
Depreciation and amortization
|
|
9,092
|
|
|
4,664
|
|
|
13,996
|
|
|
9,243
|
|
Loss from equity-accounted investments
|
|
166
|
|
|
270
|
|
|
382
|
|
|
381
|
|
Fair value adjustments
|
|
3,344
|
|
|
(29
|
)
|
|
238
|
|
|
(171
|
)
|
Interest payable
|
|
67
|
|
|
77
|
|
|
140
|
|
|
155
|
|
Profit on disposal of property, plant and equipment
|
|
(3
|
)
|
|
3
|
|
|
(8
|
)
|
|
2
|
|
Stock-based compensation charge
|
|
1,558
|
|
|
1,432
|
|
|
2,996
|
|
|
2,854
|
|
Decrease in accounts receivable, pre-funded social welfare
grants receivable and finance loans receivable
|
|
(13,563
|
)
|
|
491
|
|
|
(2,608
|
)
|
|
5,990
|
|
(Increase) Decrease in inventory
|
|
2,168
|
|
|
1,671
|
|
|
66
|
|
|
2,686
|
|
Increase in accounts payable and other payables
|
|
(2,248
|
)
|
|
(9,367
|
)
|
|
3,777
|
|
|
(9,342
|
)
|
Increase in taxes payable
|
|
(6,364
|
)
|
|
(6,527
|
)
|
|
(1,230
|
)
|
|
(316
|
)
|
(Decrease) Increase in deferred taxes
|
|
(12,165
|
)
|
|
1,536
|
|
|
(12,938
|
)
|
|
2,111
|
|
Net
cash (used in) provided by operating
activities
|
|
(8,056
|
)
|
|
13,771
|
|
|
22,102
|
|
|
50,740
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(4,011
|
)
|
|
(685
|
)
|
|
(4,779
|
)
|
|
(1,326
|
)
|
Proceeds from disposal of property, plant and equipment
|
|
11
|
|
|
13
|
|
|
18
|
|
|
62
|
|
Advance of loans to equity-accounted investment
|
|
-
|
|
|
-
|
|
|
(375
|
)
|
|
-
|
|
Repayment of loan by equity-accounted investment
|
|
34
|
|
|
-
|
|
|
407
|
|
|
-
|
|
Acquisition of KSNET, net of cash acquired
|
|
(230,225
|
)
|
|
-
|
|
|
(230,225
|
)
|
|
-
|
|
Net change in settlement assets
|
|
(31,641
|
)
|
|
-
|
|
|
(47,185
|
)
|
|
-
|
|
Net cash used in investing
activities
|
|
(265,832
|
)
|
|
(672
|
)
|
|
(282,139
|
)
|
|
(1,264
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan portion related to options
|
|
-
|
|
|
-
|
|
|
20
|
|
|
720
|
|
Treasury stock acquired
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(126,304
|
)
|
Long-term borrowings obtained (Note 8)
|
|
116,353
|
|
|
-
|
|
|
116,353
|
|
|
-
|
|
Acquisition of remaining 19.9% of Net1 UTA
|
|
(594
|
)
|
|
-
|
|
|
(594
|
)
|
|
-
|
|
Repayment of short-term borrowings
|
|
419
|
|
|
-
|
|
|
419
|
|
|
(137
|
)
|
Net change in settlement obligations
|
|
31,641
|
|
|
-
|
|
|
47,185
|
|
|
-
|
|
Net cash generated
from (used in) financing
activities
|
|
147,819
|
|
|
-
|
|
|
163,383
|
|
|
(125,721
|
)
|
Effect of exchange rate changes on cash
|
|
(2,709
|
)
|
|
460
|
|
|
14,295
|
|
|
8,330
|
|
Net (decrease) increase in cash and cash
equivalents
|
|
(128,778
|
)
|
|
13,559
|
|
|
(82,359
|
)
|
|
(67,915
|
)
|
Cash and cash equivalents beginning of
period
|
|
200,161
|
|
|
139,312
|
|
|
153,742
|
|
|
220,786
|
|
Cash and cash equivalents end of
period
|
$
|
71,383
|
|
$
|
152,871
|
|
$
|
71,383
|
|
$
|
152,871
|
|
See Notes to Unaudited Condensed
Consolidated Financial Statements
6
NET 1 UEPS TECHNOLOGIES, INC.
Notes to the
Unaudited Condensed Consolidated Financial Statements
for the Three
and Six Months Ended December 31, 2010 and 2009
(All amounts stated in thousands of United States Dollars, unless otherwise
stated)
1.
Basis
of Presentation and Summary of Significant Accounting Policies
Unaudited
Interim Financial Information
The
accompanying unaudited condensed consolidated financial statements include all
majority-owned subsidiaries over which the Company exercises control and have
been prepared in accordance with US generally accepted accounting principles
(GAAP) and the rules and regulations of the Securities and Exchange Commission
for quarterly reports on Form 10-Q and include all of the information and
disclosures required for interim financial reporting. The results of operations
for the three and six months ended December 31, 2010 and 2009 are not
necessarily indicative of the results for the full year. The Company believes
that the disclosures are adequate to make the information presented not
misleading.
These
financial statements should be read in conjunction with the financial
statements, accounting policies and financial notes thereto included in the
Companys Annual Report on Form 10-K for the fiscal year ended June 30, 2010 and
the financial statements, accounting policies and financial notes thereto of
KSNET, Inc. (KSNET) included in the Companys Current Report on Form 8-K/A
filed on January 12, 2011. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments), which are necessary for a
fair representation of financial results for the interim periods presented.
References
to the Company refer to Net1 and its consolidated subsidiaries, unless the
context otherwise requires. References to Net1 are references solely to Net 1
UEPS Technologies, Inc.
The
Company has included updates to its revenue recognition and income taxes
accounting policies as a result of its acquisition of KSNET.
Revenue
recognition
Card
VAN
Card
value added network (VAN) services consist of services relating to
authorization of credit card transactions including transmission of transaction
details (Authorization Service), and collection of receipts associated with
the credit card transactions (Collection Service). With its Authorization
Service, the Company connects credit card companies with merchants online when a
customer uses his/her credit card via terminals installed at merchants sites
and the Companys central processing server for approval of credit card
transactions. Immediately after approval of credit card transactions, the
Company transmits details of the transactions to credit card companies online
for processing payments. Collection Service captures the transaction data and
gathers receipts as documented evidence and provides them to credit card
companies upon request. The Company earns service fees based on the number of
transactions processed for credit card companies when services are rendered in
accordance with the contracts entered into between credit card companies and the
Company. The Company bills for its service charges to credit card companies each
month. Each service could be provided either individually or collectively, based
on terms of contracts.
The
Company charges commission fees to credit card companies for the Authorization
Service provided based on the number of approvals transferred. The right to
receive a service fee is due once a credit card transaction has been approved
and details of the transaction are transmitted by the Company. Therefore,
revenues from the Authorization Service are recognized when the credit card
transactions are authorized and details of the transactions are transmitted. The
Company earns a Collection Service fee once it has provided settled funds to the
credit card companies. Therefore, revenue from the Collection Service is
recognized when the Company collects the receipts and provides them to the card
companies.
For
multi-element arrangements, the Company has identified two deliverables. The
first deliverable is the Authorization Service, and the second deliverable is
the Collection Service. The Company evaluates each deliverable in an arrangement
to determine whether it represents a separate unit of accounting. A deliverable
constitutes a separate unit of accounting when it has standalone value and there
are no customer-negotiated refunds or return rights for the delivered elements.
If the arrangement includes a customer-negotiated refund or return right
relative to the delivered item and the delivery and performance of the
undelivered item is considered probable and substantially in the Company's
control, the delivered element constitutes a separate unit of accounting. In
instances when the aforementioned criteria are not met, the deliverable is
combined with the undelivered elements and the allocation of the arrangement
consideration and revenue recognition is determined for the combined unit as a
single unit. Allocation of the consideration is determined at arrangement
inception on the basis of each unit's relative selling price. In such
circumstances, the Company uses a hierarchy to determine the selling price to be
used for allocating revenue to deliverables: (i) vendor-specific objective
evidence of fair value (VSOE), (ii) third-party evidence of selling price
(TPE), and (iii) best estimate of the selling price (ESP).
7
1.
Basis
of Presentation and Summary of Significant Accounting Policies
(continued)
Revenue
recognition (continued)
Card
VAN (continued)
VSOE
generally exists only when the Company sells the deliverable separately and is
the price actually charged by the Company for that deliverable. ESPs reflect the
Companys best estimates of what the selling prices of elements would be if they
were sold regularly on a stand-alone basis. Because the Company has neither VSOE
nor TPE for the two deliverables, the allocation of revenue has been based on
the Companys ESPs. Amounts allocated to the Authorization and the Collection
Service are recognized at the time of service provided the other conditions for
revenue recognition have been met.
The
Companys process for determining its ESP for deliverables without VSOE or TPE
considers multiple factors that may vary depending upon the unique facts and
circumstances related to each deliverable. Key factors considered by the Company
in developing the ESPs include prices charged by the Company, historical pricing
practices and controls, range of prices for various customers and the nature of
the services. Consideration is also given to market conditions such as
competitor pricing strategies and market perception.
Banking
VAN
Banking
VAN is a division supporting a companys fund management business (large payment
transfers, collections, etc.) by relaying financial transactions between client
companies and financial institutions. Financial transactions between two or more
business enterprises, or between business enterprises and their customers, are
conducted through the transaction-processing network established between the
Company and the banks. Revenue from the Banking VAN service is recognized when
the service is rendered by the Company.
Payment
Gateway service (PG service)
With
its PG service, the Company provides the Internet-based settlement service
between an on-line shopping mall and a credit card company when a customer uses
his/her credit card, debit card or on-line payment to pay for goods or services.
The Company receives fees for carrying out settlements for electronic
transactions. Revenue from the PG service is recognized when the service is
rendered by the Company.
Sale
of merchandise
The
Company buys terminals from manufacturers, and subsequently sells them through
its agencies. Revenue is recognized when significant risks and rewards of
ownership of terminals have passed to the buyer, usually on delivery of the
terminals to the buyer.
Income
taxes
Under
the Corporate Income Tax Law in the Republic of Korea, corporate taxpayers are
subject to corporate income taxes on taxable income at 22% (10% is applicable to
the first KRW 200 million of taxable income) in tax year ended 2010. On top of
the corporate income tax, a 10% resident surtax is also assessed on the
corporate income tax rate; thus the statutory tax rate becomes 24.2% or 11%
depending on the amount of taxable income; therefore, the income tax rate during
the periods ended December 31, 2010, was 24.2% .
Translation
of foreign currencies
The
primary functional currency of the Company is the South African Rand (ZAR) and
its reporting currency is the US dollar. The Company also has consolidated
entities which have the euro, Russian ruble, Korean won (KRW) or Indian rupee
as their functional currency. The current rate method is used to translate the
financial statements of the Company to US dollar. Under the current rate method,
assets and liabilities are translated at the exchange rates in effect at the
balance sheet date. Revenues and expenses are translated at average rates for
the period. Translation gains and losses are reported in accumulated other
comprehensive income in total equity.
Foreign
exchange transactions are translated at the spot rate ruling at the date of the
transaction. Monetary items are translated at the closing spot rate at the
balance sheet date. Transactional gains and losses are recognized in income for
the period.
8
1.
Basis
of Presentation and Summary of Significant Accounting Policies
(continued)
Recent
accounting pronouncements adopted
On
July 1, 2010, the Company adopted the new Financial Accounting Standards Board
(FASB) guidance on the consolidation of variable interest entities. This
guidance changed how a reporting entity determines when an entity that is
insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. The determination of whether a reporting entity
is required to consolidate another entity is based on, among other things, the
other entitys purpose and design and the reporting entitys ability to direct
the activities of the other entity that most significantly impact the other
entitys economic performance. The guidance also requires a reporting entity to
provide additional disclosures about its involvement with variable interest
entities and any significant changes in risk exposure due to such involvement.
The adoption of this guidance did not have an impact on the Companys condensed
consolidated financial statements.
On
July 1, 2010, the Company adopted the new FASB guidance issued on the accounting
for transfers of financial assets. This guidance requires more information about
transfers of financial assets, including securitization transactions, and where
entities have continuing exposure to the risks related to transferred financial
assets. It eliminates the concept of a qualifying special-purpose entity,
changes the requirements for de-recognizing financial assets, and requires
additional disclosures. The adoption of this guidance did not have an impact on
the Companys condensed consolidated financial statements.
On
July 1, 2010, the Company adopted the new FASB guidance on revenue recognition
in multiple-deliverable revenue arrangements. The guidance amended the existing
guidance on allocating consideration received between the elements in a
multiple-deliverable arrangement and established a selling price hierarchy for
determining the selling price of a deliverable. The selling price used for each
deliverable will be based on VSOE if available, third-party evidence if VSOE is
not available, or estimated selling price if neither VSOE nor third-party
evidence is available. The guidance replaced the term fair value in the
revenue allocation with selling price to clarify that the allocation of
revenue is based on entity specific assumptions rather than the assumptions of a
market place participant. The guidance eliminates the residual method of
allocation and requires that arrangement consideration be allocated using the
relative selling price method. It also significantly expands the disclosures
related to a vendors multiple-deliverable revenue arrangements. The adoption of
this guidance did not have an impact on the Companys condensed consolidated
financial statements for the periods presented.
On
July 1, 2010, the Company adopted the new FASB guidance which amended the scope
of existing software revenue recognition accounting. Tangible products
containing software components and non-software components that function
together to deliver the products essential functionality would be scoped out of
the accounting guidance on software and accounted for based on other appropriate
revenue recognition guidance. This guidance must be adopted in the same period
that the company adopts the amended guidance for arrangements with multiple
deliverables described in the preceding paragraph. The adoption of this guidance
did not have an impact on the Companys condensed consolidated financial
statements for the periods presented.
On
July 1, 2010, the Company adopted new FASB guidance on the effect of
denominating the exercise price of a share-based payment award in the currency
of the market in which the underlying equity security trades. This guidance
clarifies that an employee share-based payment award with an exercise price
denominated in the currency of a market in which a substantial portion of the
entitys equity securities trades should not be considered to contain a
condition that is not a market, performance, or service condition. Therefore, an
entity would not classify such an award as a liability if it otherwise qualifies
as equity. The adoption of this guidance did not have an impact on the Companys
condensed consolidated financial statements for the periods presented.
Recent
accounting pronouncements not yet adopted as of December 31, 2010
In
December 2010, the FASB issued guidance related to disclosure of supplementary
pro forma information for business combinations. The guidance specifies that if
a public entity presents comparative financial statements, the entity should
disclose revenue and earnings of the combined entity as though the business
combination(s) that occurred during the current year had occurred as of the
beginning of the comparable prior annual reporting period only. The guidance is
effective prospectively for business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2010. Early adoption is permitted. The Company will adopt
this guidance prospectively.
In
December 2010, the FASB issued guidance regarding
Step 2 of the goodwill
impairment test for reporting units with zero or negative carrying amounts
.
The guidance modifies Step 1 of the goodwill impairment test for reporting units
with zero or negative carrying amounts and requires the company to perform Step
2 if it is more likely than not that a goodwill impairment may exist. The
guidance is effective for fiscal years and interim periods within those years,
beginning after December 15, 2010. Early adoption is not permitted. The Company
will adopt the authoritative guidance on July 1, 2011 and is currently assessing
the impact on its condensed consolidated financial statements.
9
2.
Acquisitions
2011
acquisitions
98.73%
of KSNET
On
October 29, 2010, the Company acquired KSNET for KRW 270 billion (approximately
$241 million based on exchange rates on October 29, 2010), subject to
post-closing working capital adjustment which is still being discussed between
the Company and the former shareholders of KSNET. The acquisition of KSNET
expands the Companys international footprint as well as diversifies the
Companys revenue, earnings and product portfolio. The combination is expected
to capitalize on multiple revenue synergies and provide an established base in
Asia for further business development activities in the region.
Most
of KSNETs revenue is derived from the provision of payment processing services
to approximately 200,000 merchants and to card issuers in Korea through its VAN.
KSNET has a diverse product offering and the Company believes is the only total
payments solutions provider offering card VAN, payment gateway and banking VAN
services in Korea, which differentiates KSNET from other Korean payment solution
providers and allows it to cross-sell its products across its customer base.
The
following table sets forth the preliminary allocation of the purchase price:
Cash and cash equivalents
|
$
|
10,507
|
|
Accounts receivable, net
|
|
28,748
|
|
Inventory
|
|
2,788
|
|
Settlement assets
|
|
13,164
|
|
Long-term receivable,
|
|
288
|
|
Property, plant and equipment, net
|
|
24,052
|
|
Goodwill (note 6)
|
|
98,247
|
|
Intangible assets, net (note 6)
|
|
127,796
|
|
Other long-term assets
|
|
6,263
|
|
Trade payables
|
|
(9,643
|
)
|
Other payables
|
|
(10,527
|
)
|
Income taxes payable
|
|
(2,428
|
)
|
Settlement obligations
|
|
(13,164
|
)
|
Long-term deferred income tax liabilities
|
|
(31,063
|
)
|
Other long-term liabilities
|
|
(1,199
|
)
|
Total net assets of KSNET
attributable to shareholders, including goodwill
|
|
243,829
|
|
Less attributable to non-controlling interest
|
|
(3,097
|
)
|
Total purchase price
|
$
|
240,732
|
|
The
preliminary purchase price allocation is based on management estimates as of
December 31, 2010, and may be adjusted up to one year following the closing of
the acquisition. The purchase price allocation has not been finalized, as
management has not yet analyzed in detail the assets acquired and liabilities
assumed. The Company expects to finalize the purchase price allocation on or
before June 30, 2011.
The
Company incurred transaction-related expenditures of $1.7 million and $5.1
million, respectively, during the three and six months ended December 31, 2010,
related to this acquisition and expects to incur some additional expenses during
the three months ending March 31, 2011. The Company is currently unable to
quantify the amount of these additional expenditures.
10
2.
Acquisitions (continued)
2011
acquisitions (continued)
98.73%
of KSNET (continued)
The
results of KSNETs operations are reflected in the Companys financial
statements from November 1, 2010. The following pro forma revenue, net income
and per share information has been prepared as if the acquisition of KSNET had
occurred on July 1, 2010 and 2009, respectively:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
98,914
|
|
$
|
97,570
|
|
$
|
185,405
|
|
$
|
179,621
|
|
Net income
|
$
|
6,865
|
|
$
|
14,166
|
|
$
|
17,013
|
|
$
|
29,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic in United States dollars
|
|
0.15
|
|
|
0.31
|
|
|
0.37
|
|
|
0.62
|
|
Earnings per share diluted in United
States dollars
|
|
0.15
|
|
|
0.31
|
|
|
0.37
|
|
|
0.62
|
|
The
pro forma financial information presented above includes the business
combination accounting and other effects from the acquisition including (1)
intangibles asset amortization expense related to acquired intangibles and the
related deferred tax effects; (2) the loss of interest income, net of taxation,
as a result of funding a portion of the purchase price in cash; (3) an increase
in interest expense resulting from the long-term borrowing obtained to fund a
portion of the purchase price and (4) an adjustment to exclude all applicable
transaction-related costs recognized in our condensed consolidated statements of
operations. The pro forma net income and per share information presented above
does not include any cost savings or other synergies that may result from the
acquisition.
The
pro forma information as presented above is for informational purposes only and
is not indicative of the results of operations that would have been achieved if
the acquisition had occurred on these dates.
19.9%
of Net1 UTA
On
December 23, 2010, the Company acquired the remaining 19.9% of the issued share
capital of Net 1 Universal Technologies (Austria) AG (Net1 UTA) for $0.6
million in cash. The Company now owns 100% of Net1 UTA.
3.
Pre-funded
social welfare grants receivable
Pre-funded
social welfare grants receivable represents amounts pre-funded by the Company to
certain merchants participating in the merchant acquiring system. The January
2011 payment service commenced during the last four days of December 2010 and
was offered at merchant locations only.
4.
Inventory
The
Companys inventory comprised the following categories as of December 31,
2010 and June 30, 2010.
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
Raw materials
|
$
|
139
|
|
$
|
75
|
|
Finished goods
|
|
6,847
|
|
|
3,547
|
|
|
$
|
6,986
|
|
$
|
3,622
|
|
11
5.
Fair
value of financial instruments and equity-accounted investments
Fair
value of financial instruments
Risk
managemen
t
The
Company seeks to reduce its exposure to currencies other than the South African
rand through a policy of matching, to the extent possible, assets and
liabilities denominated in those currencies. In addition, the Company uses
financial instruments in order to economically hedge its exposure to exchange
rate and interest rate fluctuations arising from its operations. The Company is
also exposed to equity price and liquidity risks as well as credit risks.
Currency
exchange risk
The
Company is subject to currency exchange risk because it purchases inventories
that it is required to settle in other currencies, primarily the euro and US
dollar. The Company uses foreign exchange forward contracts in order to limit
its exposure in these transactions to fluctuations in exchange rates between the
South African rand, on the one hand, and the US dollar and the euro, on the
other hand. In addition, during September 2010, the Company entered into foreign
exchange forward contracts, which matured in October 2010, in order to hedge the
fluctuations in the ZAR/ US dollar related to the anticipated flow of funds from
South Africa to the United States to fund a portion of the KSNET purchase price.
The
Companys outstanding foreign exchange contracts are as follows: As of December
31, 2010 None As of December 31, 2009
|
|
|
|
|
|
Fair market
|
|
|
Notional amount
|
|
Strike price
|
|
value price
|
|
Maturity
|
USD
|
1,000,000
|
|
EUR
|
1.4391
|
|
EUR
|
1.4318
|
|
January 4, 2010
|
EUR
|
719,400
|
|
ZAR
|
10.9306
|
|
ZAR
|
10.7468
|
|
January 29, 2010
|
Translation
risk
Translation
risk relates to the risk that the Companys results of operations will vary
significantly as the US dollar is its reporting currency, but it earns most of
its revenues and incurs most of its expenses in ZAR. The US dollar to ZAR
exchange rate has fluctuated significantly over the past two years. As exchange
rates are outside the Companys control, there can be no assurance that future
fluctuations will not adversely affect the Companys results of operations and
financial condition.
Interest
rate risk
As
a result of its normal borrowing and leasing activities, the Companys operating
results are exposed to fluctuations in interest rates, which it manages
primarily through regular financing activities. The Company generally maintains
limited investment in cash equivalents and has occasionally invested in
marketable securities.
Credit
risk
Credit
risk relates to the risk of loss that the Company would incur as a result of
non-performance by counterparties. The Company maintains credit risk policies
with regard to its counterparties to minimize overall credit risk. These
policies include an evaluation of a potential counterpartys financial
condition, credit rating, and other credit criteria and risk mitigation tools as
the Companys management deems appropriate.
With
respect to credit risk on financial instruments, the Company maintains a policy
of entering into such transactions only with South African and European
financial institutions that have a credit rating of BBB or better, as determined
by credit rating agencies such as Standard & Poors, Moodys and Fitch
Ratings.
12
5.
Fair
value of financial instruments and equity-accounted investments
(continued)
Fair
value of financial instruments (continued)
Risk
management (continued)
Equity
price and liquidity risk
Equity
price risk relates to the risk of loss that the Company would incur as a result
of the volatility in the exchange-traded price of equity securities that it
holds and the risk that it may not be able to liquidate these securities.
Liquidity risk relates to the risk of loss that the Company would incur as a
result of the lack of liquidity on the exchange on which these securities are
listed. The Company may not be able to sell some or all of these securities at
one time, or over an extended period of time without influencing the exchange
traded price, or at all.
Financial
instruments
The
following section describes the valuation methodologies the Company uses to
measure is significant financial asset at fair value.
Investments
in common stock
In
general, and where applicable, the Company uses quoted prices in active markets
for identical assets or liabilities to determine fair value. This pricing
methodology would apply to Level 1 investments. If quoted prices in active
markets for identical assets or liabilities are not available to determine fair
value, then the Company uses quoted prices for similar assets and liabilities or
inputs other than the quoted prices that are observable either directly or
indirectly. These investments would be included in Level 2 investments. In
circumstances in which inputs are generally unobservable, values typically
reflect managements estimates of assumptions that market participants would use
in pricing the asset or liability. The fair values are therefore determined
using model-based techniques that include option pricing models, discounted cash
flow models, and similar techniques. Investments valued using such techniques
are included in Level 3 investments.
The
Company's Level 3 asset represents an investment of 84,632,525 shares of common
stock of Finbond. The Companys ownership interest in Finbond as of December 31,
2010, is approximately 22%. The Company has no rights to participate in the
financial, operating, or governance decisions made by Finbond. The Company also
has no participation on Finbonds board of directors whether through contractual
agreement or otherwise. Consequently, the Company has concluded that it does not
have significant influence over Finbond and therefore equity accounting is not
appropriate.
Finbonds
shares are traded on the JSE Limited (JSE) and the Company has designated such
shares as available for sale investments. The Company has concluded that the
market for Finbond shares is not active and consequently has employed
alternative valuation techniques in order to determine the fair value of such
stock. Currently, the operations of Finbond include primarily mortgage brokering
services, property investment and microlending. In determining the fair value of
Finbond, the Company has considered amongst other things Finbonds historical
financial information (including its most recent public accounts), press
releases issued by Finbond and its published net asset value. The Company
believes that the best indicator of fair value of Finbond is its published net
asset value and has used this value to determine the fair value.
The
following table presents the Companys assets and liabilities measured at fair
value on a recurring basis as of December 31, 2010 according to the fair value
hierarchy:
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in common stock
(available for sale assets included in
OTHER LONG-TERM ASSETS)
|
|
-
|
|
$
|
88
|
|
$
|
8,404
|
|
$
|
8,492
|
|
|
Total assets
at fair value
|
|
-
|
|
$
|
88
|
|
$
|
8,404
|
|
$
|
8,492
|
|
13
5.
Fair
value of financial instruments and equity-accounted investments
(continued)
Financial
instruments (continued)
The
following table presents the Companys assets measured at fair value on a
recurring basis as of December 31, 2009 according to the fair value hierarchy:
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in common stock
(available for sale assets
included in
OTHER LONG-TERM ASSETS)
|
|
-
|
|
|
-
|
|
$
|
6,732
|
|
$
|
6,732
|
|
|
Total assets at
fair value
|
|
-
|
|
|
-
|
|
$
|
6,732
|
|
$
|
6,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
-
|
|
$
|
28
|
|
|
-
|
|
$
|
28
|
|
|
Total
liabilities at fair value
|
|
-
|
|
$
|
28
|
|
|
-
|
|
$
|
28
|
|
Assets
and liabilities measured at fair value on a nonrecurring basis
The
Company measures its equity-accounted investments at fair value on a
nonrecurring basis. The Company has no liabilities that are measured at fair
value on a nonrecurring basis. These equity-accounted investments are recognized
at fair value when they are deemed to be other-than-temporarily impaired.
The
Company reviews the carrying values of its investments when events and
circumstances warrant and considers all available evidence in evaluating when
declines in fair value are other-than-temporary. The fair values of the
Companys investments are determined using the best information available, and
may include quoted market prices, market comparables, and discounted cash flow
projections. An impairment charge is recorded when the cost of the investment
exceeds its fair value and the excess is determined to be other-than-temporary.
The Company has not recorded any impairment charges during the reporting periods
presented herein.
During
the three and six months ended December 31, 2010, SmartSwitch Namibia repaid
outstanding loans, including outstanding interest. The repayments received have
been allocated to the equity-accounted investments presented in our condensed
consolidated balance sheet as of December 31, 2010, and reduce this balance. The
cash inflow from principal repayments have been allocated to cash flows from
investing activities and the cash inflow from the interest repayments have been
included in cash flow from operating activities in our condensed consolidated
statement of cash flows for the three and six months ended December 31, 2010.
In
July 2010, the Company provided additional loan funding of $375,000 for a
specific growth initiative at VTU Colombia. As of December 31, 2010, the
Companys share in VTU Colombias accumulated losses continued to exceed its
investment. VTU Colombias other shareholders are providing short-term funding
for continued operations and the Company has no obligation to provide any
additional funding at this stage.
The
Company has sold hardware, software and/or licenses to SmartSwitch Namibia and
SmartSwitch Botswana and defers recognition of 50% of the net income after tax
related to these sales until SmartSwitch Namibia and SmartSwitch Botswana has
used the purchased asset or has sold it to a third party. The deferral of the
net income after tax is shown in the Elimination column in the table below.
The
functional currency of the Companys equity-accounted investments is not the US
dollar and thus the investments are restated at the period end US dollar/foreign
currency exchange rate with an entry against accumulated other comprehensive
loss. The functional currency of SmartSwitch Namibia is the Namibian dollar, the
functional currency of SmartSwitch Botswana is the Botswana pula, the functional
currency of VTU Colombia is the Colombian peso and the functional currency of
Vinapay is the Vietnamese dong.
14
5.
Fair
value of financial instruments and equity-accounted investments
(continued)
Financial
instruments (continued)
Assets
and liabilities measured at fair value on a nonrecurring basis
(continued)
Summarized
below is the Companys interest in equity-accounted investments as of June 30,
2010 and December 31, 2010:
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Loans
|
|
|
(Loss)
|
|
|
Elimination
|
|
|
|
Total
|
|
|
Balance as of June 30, 2010
|
$
|
3,549
|
|
$
|
2,512
|
|
$
|
(3,905
|
)
|
$
|
442
|
|
|
$
|
2,598
|
|
|
Loans provided
|
|
|
|
|
375
|
|
|
|
|
|
|
|
|
|
375
|
|
|
Loan repaid
|
|
|
|
|
(476
|
)
|
|
|
|
|
|
|
|
|
(476
|
)
|
|
(Loss) Earnings from equity-
accounted
investments
|
|
-
|
|
|
-
|
|
|
(554
|
)
|
|
172
|
|
|
|
(382
|
)
|
|
SmartSwitch
Namibia
(1)
|
|
-
|
|
|
-
|
|
|
42
|
|
|
44
|
|
|
|
86
|
|
|
SmartSwitch
Botswana
(1)
|
|
-
|
|
|
-
|
|
|
(94
|
)
|
|
128
|
|
|
|
34
|
|
|
VTU Colombia
|
|
-
|
|
|
-
|
|
|
(449
|
)
|
|
-
|
|
|
|
(449
|
)
|
|
VinaPay
|
|
-
|
|
|
-
|
|
|
(53
|
)
|
|
-
|
|
|
|
(53
|
)
|
|
Foreign currency
adjustment
(2)
|
|
248
|
|
|
238
|
|
|
(81
|
)
|
|
(68
|
)
|
|
|
337
|
|
|
Balance as of December 31, 2010
|
$
|
3,797
|
|
$
|
2,649
|
|
$
|
(4,540
|
)
|
$
|
546
|
|
|
$
|
2,452
|
|
(1) includes
the recognition of realized net
income.
(2) the
foreign currency adjustment represents the effects of the combined net currency
fluctuations between the functional currency of the equity-accounted investments
and the US dollar.
Summarized
below is the Companys equity-accounted (loss) earnings for the three months
ended December 31, 2010:
|
|
|
Loss
|
|
|
Elimination
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Earnings from equity-
accounted investments
|
$
|
(252
|
)
|
$
|
86
|
|
|
$
|
(166
|
)
|
|
SmartSwitch Namibia
|
|
22
|
|
|
20
|
|
|
|
42
|
|
|
SmartSwitch Botswana
|
|
(40
|
)
|
|
66
|
|
|
|
26
|
|
|
VTU Colombia
|
|
(204
|
)
|
|
-
|
|
|
|
(204
|
)
|
|
VinaPay
|
$
|
(30
|
)
|
$
|
-
|
|
|
$
|
(30
|
)
|
There were
no significant sales to these investees that require elimination during the
three and six months ended December 31, 2010 and 2009.
6.
Goodwill
and intangible assets
Goodwill
Summarized
below is the movement in the carrying value of goodwill for the six months ended
December 31, 2010.
|
|
Carrying
|
|
|
|
value
|
|
|
|
|
|
Balance as of June 30, 2010
|
$
|
76,346
|
|
Acquisitions
(1)
|
|
98,247
|
|
Foreign currency
adjustment
(2)
|
|
9,622
|
|
Balance as
of December 31, 2010
|
$
|
184,215
|
|
(1)
represents goodwill arising from the acquisition of KSNET and has been
translated at the foreign exchange rates applicable on the date the transactions
became effective. This goodwill has been allocated to the International
transaction-based activities operating
segment.
(2) the
foreign currency adjustment represents the effects of the fluctuations between
the ZAR and KRW against the US dollar on the carrying value of goodwill.
15
6.
Goodwill
and intangible assets (continued)
Goodwill
(continued)
Goodwill
has been allocated to the Companys reportable segments as follows:
|
|
As of
|
|
|
As of
|
|
|
|
December
|
|
|
June 30,
|
|
|
|
31, 2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
SA transaction-based
activities
|
$
|
43,257
|
|
$
|
37,568
|
|
International transaction-based activities
|
|
97,189
|
|
|
-
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
Hardware, software and
related technology sales
|
|
43,769
|
|
|
38,778
|
|
Total
|
$
|
184,215
|
|
$
|
76,346
|
|
Intangible
assets
Summarized
below is the carrying value and accumulated amortization of the intangible
assets as of December 31, 2010 and June 30, 2010:
|
|
|
As
of December 31, 2010
|
|
|
As
of June 30, 2010
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
(1)
|
$
|
179,452
|
|
$
|
(31,299
|
)
|
$
|
148,153
|
|
$
|
77,452
|
|
$
|
(22,519
|
)
|
$
|
54,933
|
|
|
Software and unpatented
technology (1)
|
|
40,810
|
|
|
(4,603
|
)
|
|
36,207
|
|
|
11,047
|
|
|
(1,343
|
)
|
|
9,704
|
|
|
FTS patent
|
|
5,765
|
|
|
(5,667
|
)
|
|
98
|
|
|
5,007
|
|
|
(4,880
|
)
|
|
127
|
|
|
Exclusive licenses
|
|
4,506
|
|
|
(4,265
|
)
|
|
241
|
|
|
4,506
|
|
|
(3,941
|
)
|
|
565
|
|
|
Trademarks (1)
|
|
8,608
|
|
|
(1,895
|
)
|
|
6,713
|
|
|
3,766
|
|
|
(1,411
|
)
|
|
2,355
|
|
|
Customer database
|
|
915
|
|
|
(305
|
)
|
|
610
|
|
|
795
|
|
|
(132
|
)
|
|
663
|
|
|
Total finite-lived intangible assets
|
$
|
240,056
|
|
$
|
(48,034
|
)
|
$
|
192,022
|
|
$
|
102,573
|
|
$
|
(34,226
|
)
|
$
|
68,347
|
|
(1) Includes the customer relationships, software and
unpatented technology and trademarks acquired as part of the KSNET acquisition
in October 2010.
Aggregate
amortization expense on the finite-lived intangible assets for the three and six
months ended December 31, 2010, was approximately $6.1 million and $10.3
million, respectively (three and six months ended December 31, 2009, was
approximately $3.7 million and $7.3 million, respectively).
Future
estimated annual amortization expense for the next five fiscal years, assuming
exchange rates prevailing on December 31, 2010, is presented in the table below.
Actual amortization expense in future periods could differ from this estimate as
a result of acquisitions, changes in useful lives, exchange rate fluctuations
and other relevant factors.
2011
|
$
|
24,124
|
|
2012
|
|
27,682
|
|
2013
|
|
25,982
|
|
2014
|
|
23,137
|
|
2015
|
$
|
23,137
|
|
16
7.
Short-term
facilities
As
of December 31, 2010, the Company had a short-term facility in South African
rand of approximately $37.6 million, translated at exchange rates applicable as
of December 31, 2010, with Nedbank Limited (Nedbank). As of December 31, 2010,
the overdraft rate on this facility was 7.85% . Certain of the Companys South
African subsidiaries have provided a cross deed of suretyship whereby each of
these companies has bound itself as surety and co-principal debtor with each
other for the fulfillment of each other's obligations under the facility. These
South African subsidiaries have agreed that any debit and credit bank account
balances with Nedbank may be set off against each other. Certain South African
subsidiaries have ceded trade receivables with an aggregate value of
approximately $19.6 million, translated at exchange rates applicable as of
December 31, 2010, as security for the facility as well as the Companys
investment in Cash Paymaster Services (Proprietary) Limited, a wholly owned
South African subsidiary. As of December 31, 2010, the Company had utilized none
of its South African short-term facility.
In
addition, Net1 UTA had short-term facilities of approximately $1.3 million,
translated at exchange rates applicable as of December 31, 2010, with each of
two of Austrias largest banks. These facilities are available to the Company.
The interest rate applicable to these short-term facilities is negotiated when
the facilities are utilized. As of December 31, 2010, the Company had utilized
none of its Austrian short-term facilities.
Management
believes that the Companys current short-term facilities are sufficient in
order to meet its future obligations as they arise.
8.
Long-term
borrowings
The
Company financed a portion of the KSNET acquisition price and related
transaction expenses with the proceeds of a KRW 130.5 billion (approximately
$115.9 million based on October 29, 2010 exchange rates) five-year senior
secured loan facility provided by a consortium of banks under a facilities
agreement (the Facilities Agreement). The Facilities Agreement provides for
three separate facilities: a Facility A loan to the Companys wholly owned
subsidiary, Net1 Applied Technologies Korea (Net1 Korea), of up to KRW 130.5
billion (divided into Facility A1 (KRW 65.5 billion) and Facility A2 (KRW 65.0
billion)) and a Facility B loan to KSNET of up to KRW 65.0 billion. The Facility
B loan, if drawn, must be used to repay the Facility A2 loan and may be borrowed
only if Net1 Korea and KSNET complete a merger transaction with each other.
Interest on the loans is payable quarterly and is based on the Korean CD rate in
effect from time to time plus a margin of 4.10% for Facility A loans and 3.90%
for the Facility B loan. The CD rate was 2.8% on December 31, 2011. Interest of
approximately $1.3 million, translated at exchange rates applicable as of
December 31, 2010, has been accrued as of December 31, 2010.
The
Facility A1 loan matures on the fifth anniversary of the initial drawdown with
no required principal prepayments. Principal on the Facility A2 loan and
Facility B loan is repayable in scheduled installments, beginning twelve months
after initial drawdown and thereafter, semi-annually with final maturity
scheduled for 54 months after initial drawdown. The first scheduled installment
of $7.2 million, translated at exchange rates applicable as of December 31,
2010, is due on October 29, 2011, and has been classified as current in our
condensed consolidated balance sheet.
The
loans are secured by substantially all of KSNETs assets, a pledge by Net1 Korea
of its entire equity interest in KSNET and a pledge by the immediate parent of
Net1 Korea (also one of the Companys subsidiaries) of its entire equity
interest in Net1 Korea. The Facilities Agreement contains customary covenants
that require Net1 Korea and its consolidated subsidiaries to maintain certain
specified financial ratios (including a leverage ratio and a debt service
coverage ratio) and restrict their ability to make certain distributions with
respect to their capital stock, prepay other debt, encumber their assets, incur
additional indebtedness, make capital expenditures above specified levels,
engage in certain business combinations and engage in other corporate
activities. The loans under the Facilities Agreement are without recourse to,
and the covenants and other agreements contained therein do not apply to, the
Company or any of our subsidiaries (other than Net1 Korea and its subsidiaries,
including KSNET).
9.
Capital
structure
The
Companys capital structure is described in Note 11 to the Companys audited
consolidated financial statements included within the Companys Annual Report on
Form 10-K for the fiscal year ended June 30, 2010.
Common
stock repurchases
During
the three and six months ended December 31, 2010, the Company did not repurchase
any shares. On July 28, 2009, the Company repurchased an aggregate of 9,221,526
shares of its common stock from two shareholders, who originally acquired their
shares in connection with the Aplitec transaction. The purchase price was $13.50
(ZAR 105.98) per share and was paid from the Companys cash reserves in ZAR for
an aggregate purchase price of $124.5 million (ZAR 977.3 million).
17
10. Earnings per share
Basic
earnings per share includes restricted stock awards that meet the definition of
a participating security. Restricted stock awards are eligible to receive
non-forfeitable dividend equivalents at the same rate as common stock. Basic
earnings per share have been calculated using the two-class method and basic
earnings per share for the three and six months ended December 31, 2010 and
2009, reflects only undistributed earnings.
Diluted
earnings per share have been calculated to give effect to the number of
additional shares of common stock that would have been outstanding if the
potential dilutive instruments had been issued in each period. The calculation
of diluted earnings per share for the three and six months ended December 31,
2010 and 2009, includes the dilutive effect of a portion of the restricted stock
awards granted to employees as these restricted stock awards are considered
contingently issuable shares for the purposes of the diluted earnings per share
calculation and as of December 31, 2010 and 2009, the vesting conditions in
respect of a portion of the awards had not been satisfied.
The
following table details the weighted average number of outstanding shares used
for the calculation of earnings per share for the three and six months ended
December 31, 2010 and 2009.
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
Weighted average number of outstanding shares
of
common stock basic
|
|
45,433
|
|
|
45,378
|
|
|
45,409
|
|
|
47,097
|
|
Weighted average effect of dilutive securities:
employee stock options
|
|
61
|
|
|
210
|
|
|
46
|
|
|
157
|
|
Weighted average number of outstanding shares
of
common stock diluted
|
|
45,494
|
|
|
45,588
|
|
|
45,455
|
|
|
47,254
|
|
11. Stock-based compensation
Stock
option and restricted stock activity
Options
The
following table summarizes stock option activity for the three and six months
ended December 31, 2010, and 2009:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
Grant
|
|
|
|
|
Number
|
|
|
exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
Date Fair
|
|
|
|
|
of shares
|
|
|
price
|
|
|
(in years)
|
|
|
Value
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding July 1, 2010
|
|
1,813,656
|
|
$
|
19.76
|
|
|
7.41
|
|
$
|
585
|
|
|
|
|
|
Granted under Plan
|
|
307,000
|
|
|
10.59
|
|
|
10.00
|
|
|
|
|
$
|
801
|
|
|
Outstanding December 31, 2010
|
|
2,120,656
|
|
$
|
18.44
|
|
|
7.32
|
|
$
|
908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding July 1, 2009
|
|
1,896,994
|
|
$
|
19.03
|
|
|
8.30
|
|
$
|
1,576
|
|
|
|
|
|
Exercised
|
|
(83,338
|
)
|
|
-
|
|
|
-
|
|
$
|
1,667
|
|
|
|
|
|
Outstanding December 31, 2009
|
|
1,813,656
|
|
$
|
19.76
|
|
|
7.92
|
|
$
|
4,195
|
|
|
|
|
No
stock options became exercisable during the three and six months ended December
31, 2010 and 2009.
No
stock options were exercised during the three and six months ended December 31,
2010. During the six months ended December 31, 2009, the Company received
approximately $0.3 million from stock options exercised and approximately $0.4
million from repayment of stock option-related loans. The Company issues new
shares to satisfy stock option exercises.
18
11. Stock-based compensation (continued)
Stock
option and restricted stock activity (continued)
Restricted
stock
The
following table summarizes restricted stock activity for the three and six
months ended December 31, 2010, and 2009:
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
|
Shares of
|
|
|
Grant
|
|
|
|
|
Restricted
|
|
|
Date Fair
|
|
|
|
|
Stock
|
|
|
Value
|
|
|
Non-vested July 1, 2010
|
|
407,828
|
|
|
-
|
|
|
Granted August
2010
|
|
13,956
|
|
|
$185
|
|
|
Granted October 2010
|
|
60,000
|
|
|
$740
|
|
|
Granted November
2010
|
|
83,000
|
|
|
$879
|
|
|
Vested September 2010
|
|
(201,704
|
)
|
|
-
|
|
|
Non-vested December 31, 2010
|
|
363,080
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-vested July 1, 2009
|
|
597,162
|
|
|
-
|
|
|
Granted August 2009
|
|
10,098
|
|
|
$185
|
|
|
Vested September
2009
|
|
(198,338
|
)
|
|
-
|
|
|
Non-vested December 31,
2009
|
|
408,922
|
|
|
-
|
|
The
fair value of restricted stock vested during the six months ended December 31,
2010 and 2009, was $2.3 million and $3.8 million, respectively.
Stock-based
compensation charge and unrecognized compensation cost
The
Company has recorded a stock compensation charge of $1.6 million and $1.4
million for the three months ended December 31, 2010 and 2009, 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 December
31, 2010
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
1,558
|
|
$
|
51
|
|
$
|
1,507
|
|
|
Total
three months ended December 31, 2010
|
$
|
1,558
|
|
$
|
51
|
|
$
|
1,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December
31, 2009
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
1,431
|
|
$
|
51
|
|
$
|
1,380
|
|
|
Total
three months ended December 31, 2009
|
$
|
1,431
|
|
$
|
51
|
|
$
|
1,380
|
|
19
11. Stock-based compensation (continued)
Stock-based
compensation charge and unrecognized compensation cost
The
Company has recorded a stock compensation charge of $3.0 million and $2.9
million for the six months ended December 31, 2010 and 2009, respectively, which
comprised:
|
|
|
|
|
|
Allocated to
|
|
|
|
|
|
|
|
|
|
|
cost of goods
|
|
|
|
|
|
|
|
|
|
|
sold, IT
|
|
|
Allocated to
|
|
|
|
|
|
|
|
processing,
|
|
|
selling,
|
|
|
|
|
Total
|
|
|
servicing
|
|
|
general and
|
|
|
|
|
charge
|
|
|
and support
|
|
|
administration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation charge
|
$
|
2,996
|
|
$
|
102
|
|
$
|
2,894
|
|
|
Total
Six months ended December 31, 2010
|
$
|
2,996
|
|
$
|
102
|
|
$
|
2,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation charge
|
$
|
2,854
|
|
$
|
102
|
|
$
|
2,752
|
|
|
Total
Six months ended December 31, 2009
|
$
|
2,854
|
|
$
|
102
|
|
$
|
2,752
|
|
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 December 31, 2010, the total unrecognized compensation cost related to stock
options was approximately $4.2 million, which the Company expects to recognize
over approximately three and a half years. As of December 31, 2010, the total
unrecognized compensation cost related to restricted stock awards was
approximately $4.0 million, which the Company expects to recognize over
approximately four years.
As
of December 31, 2010, the Company has recorded a deferred tax asset of
approximately $0.9 million related to the stock-based compensation charge
recognized related to employees of Net1 as it is able to deduct the grant date
fair value for taxation purposes in the United States.
12. Operating segments
The
Company discloses segment information as reflected in the management information
systems reports that its chief operating decision makers use in making decisions
and to report certain entity-wide disclosures about products and services, major
customers, and the countries in which the entity holds material assets or
reports material revenues.
Effective
October 1, 2010, the Company allocated its international transaction-based
activities to a new operating segment, namely International transaction-based
activities. This operating segment comprises the transaction processing
activities of KSNET, Net1 Virtual Card, and NUETS transaction processing
activities for its initiative in Iraq. Segment results for fiscal 2010 have not
been restated due to the insignificance of the transaction processing activities
of Net1 Virtual Card, and NUETS transaction processing activities for its
initiative in Iraq. However, for comparative purposes in future periods, the
Companys reported results for the six months ended December 31, 2010, include
all legacy international transaction-processing activities from July 1, 2010 and
include KSNET from November 1, 2010.
The
Company currently has five reportable segments: SA transaction-based activities,
International transaction-based activities, Smart card accounts, Financial
services and Hardware, software and related technology sales. Each segment,
other than International transaction-based activities and the Hardware, software
and related technology sales segment, operates mainly within South Africa. The
Companys reportable segments offer different products and services and require
different resources and marketing strategies and share the Companys assets.
The
SA transaction-based activities segment currently consists mainly of a state
pension and welfare benefit distribution service provided to the South African
government and transaction processing for retailers, utilities, medical-related
claim service customers and banks. Fee income is earned based on the number of
beneficiaries included in the government pay-file as well as from merchants and
card holders using the Companys merchant retail application. In addition,
utility providers and banks are charged a fee for transaction processing
services performed on their behalf at retailers. This segment has individually
significant customers that each provides more than 10% of the total revenue of
the Company. For the three and six months ended December 31, 2010, there was one
such customer providing 45% and 51%, respectively, of total revenue (the three
and six months ended December 31, 2009: there was one such customer providing
63% and 67%, respectively, of total revenue).
20
12. Operating segments (continued)
The
International transaction-based activities segment currently consists mainly of
KSNET which generates revenue from the provision of payment processing services
to merchants and card issuers through its VAN. This segment generates fee
revenue from the provision of payment processing services and to a lesser extent
from the sale of goods, primarily point of sale terminals to customers in Korea.
The segment also generates transaction fee revenue from transaction processing
of UEPS-enabled smartcards through NUETS initiative in Iraq.
The
Smart card accounts segment derives revenue from the provision of smart card
accounts, as a fixed monthly fee per card is charged for the maintenance of
these accounts.
The
Financial services segment provides short-term loans as a principal and life
insurance products on an agency basis and generates initiation and services
fees.
The
Hardware, software and related technology sales segment markets, sells and
implements the UEPS as well as develops and provides Prism secure transaction
technology, solutions and services. The segment also includes the operations of
Net1 UTA, which comprise mainly hardware sales and licenses of the DUET system.
The segment undertakes smart card system implementation projects, delivering
hardware, software and business solutions in the form of customized systems.
Sales of hardware, SIM cards, cryptography services, SIM card licenses and other
software licenses are recorded within this segment. This segment also generates
rental income from hardware provided to merchants enrolled in the Companys
merchant retail application.
Corporate/Eliminations
includes the Companys head office cost centers in addition to the elimination
of inter-segment transactions.
The
Company evaluates segment performance based on operating income. The following
tables summarize segment information which is prepared in accordance with GAAP:
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues to external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
$
|
46,588
|
|
$
|
45,415
|
|
$
|
91,010
|
|
$
|
90,393
|
|
International transaction-based activities
|
|
16,950
|
|
|
-
|
|
|
17,420
|
|
|
-
|
|
Smart card accounts
|
|
8,434
|
|
|
8,137
|
|
|
16,404
|
|
|
16,211
|
|
Financial services
|
|
1,623
|
|
|
858
|
|
|
2,871
|
|
|
1,650
|
|
Hardware, software and
related technology sales
|
|
15,416
|
|
|
19,454
|
|
|
25,589
|
|
|
31,124
|
|
Total
|
|
89,011
|
|
|
73,864
|
|
|
153,294
|
|
|
139,378
|
|
Inter-company revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
1,002
|
|
|
1,020
|
|
|
1,938
|
|
|
2,051
|
|
International transaction-based
activities
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Hardware, software and related technology
sales
|
|
730
|
|
|
366
|
|
|
992
|
|
|
884
|
|
Total
|
|
1,732
|
|
|
1,386
|
|
|
2,930
|
|
|
2,935
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
18,547
|
|
|
26,733
|
|
|
35,986
|
|
|
53,401
|
|
International transaction-based activities
|
|
327
|
|
|
-
|
|
|
116
|
|
|
-
|
|
Smart card accounts
|
|
3,832
|
|
|
3,699
|
|
|
7,454
|
|
|
7,369
|
|
Financial services
|
|
1,231
|
|
|
546
|
|
|
2,160
|
|
|
1,077
|
|
Hardware, software and
related technology sales
|
|
(319
|
)
|
|
1,660
|
|
|
(2,979
|
)
|
|
(53
|
)
|
Corporate/Eliminations
|
|
(1,644
|
)
|
|
(3,219
|
)
|
|
(9,777
|
)
|
|
(6,007
|
)
|
Total
|
|
21,974
|
|
|
29,419
|
|
|
32,960
|
|
|
55,787
|
|
Interest earned
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
International transaction-based activities
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Hardware, software and
related technology sales
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Corporate/Eliminations
|
|
1,350
|
|
|
2,160
|
|
|
4,434
|
|
|
4,807
|
|
Total
|
$
|
1,350
|
|
$
|
2,160
|
|
$
|
4,434
|
|
$
|
4,807
|
|
21
12. Operating segments (continued)
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
$
|
192
|
|
$
|
257
|
|
$
|
348
|
|
$
|
522
|
|
International transaction-based
activities
|
|
109
|
|
|
-
|
|
|
179
|
|
|
-
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1
|
|
Hardware, software and related technology
sales
|
|
27
|
|
|
2
|
|
|
28
|
|
|
4
|
|
Corporate/Eliminations
|
|
3,102
|
|
|
8
|
|
|
3,123
|
|
|
16
|
|
Total
|
|
3,430
|
|
|
267
|
|
|
3,678
|
|
|
543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based
activities
|
|
2,298
|
|
|
963
|
|
|
4,471
|
|
|
2,444
|
|
International transaction-based
activities
|
|
3,885
|
|
|
-
|
|
|
3,899
|
|
|
-
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Financial services
|
|
138
|
|
|
128
|
|
|
271
|
|
|
251
|
|
Hardware, software
and related technology sales
|
|
2,561
|
|
|
3,278
|
|
|
4,982
|
|
|
5,964
|
|
Corporate/Eliminations
|
|
210
|
|
|
295
|
|
|
373
|
|
|
584
|
|
Total
|
|
9,092
|
|
|
4,664
|
|
|
13,996
|
|
|
9,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
5,140
|
|
|
7,494
|
|
|
9,979
|
|
|
15,006
|
|
International transaction-based
activities
|
|
182
|
|
|
-
|
|
|
303
|
|
|
-
|
|
Smart card accounts
|
|
1,073
|
|
|
1,035
|
|
|
2,087
|
|
|
2,062
|
|
Financial services
|
|
344
|
|
|
152
|
|
|
604
|
|
|
301
|
|
Hardware, software and related technology
sales
|
|
19
|
|
|
479
|
|
|
(577
|
)
|
|
513
|
|
Corporate/Eliminations
|
|
3,078
|
|
|
2,332
|
|
|
3,647
|
|
|
4,641
|
|
Total
|
|
9,836
|
|
|
11,492
|
|
|
16,043
|
|
|
22,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based
activities
|
|
13,215
|
|
|
19,039
|
|
|
25,660
|
|
|
38,005
|
|
International transaction-based
activities
|
|
3
|
|
|
-
|
|
|
(367
|
)
|
|
-
|
|
Smart card accounts
|
|
2,759
|
|
|
2,663
|
|
|
5,369
|
|
|
5,306
|
|
Financial services
|
|
885
|
|
|
393
|
|
|
1,554
|
|
|
774
|
|
Hardware, software
and related technology sales
|
|
(435
|
)
|
|
1,139
|
|
|
(2,496
|
)
|
|
(594
|
)
|
Corporate/Eliminations
|
|
(6,479
|
)
|
|
(3,950
|
)
|
|
(12,343
|
)
|
|
(6,266
|
)
|
Total
|
|
9,948
|
|
|
19,284
|
|
|
17,377
|
|
|
37,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
770,506
|
|
|
423,765
|
|
|
770,506
|
|
|
423,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based
activities
|
|
742
|
|
|
598
|
|
|
1,284
|
|
|
1,014
|
|
International transaction-based
activities
|
|
3,087
|
|
|
-
|
|
|
3,238
|
|
|
-
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Financial services
|
|
157
|
|
|
58
|
|
|
216
|
|
|
118
|
|
Hardware, software
and related technology sales
|
|
25
|
|
|
29
|
|
|
41
|
|
|
194
|
|
Corporate/Eliminations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
4,011
|
|
$
|
685
|
|
$
|
4,779
|
|
$
|
1,326
|
|
The
segment information as reviewed by the chief operating decision maker does not
include a measure of segment assets per segment as all of the significant assets
are used in the operations of all, rather than any one, of the segments. The
Company does not have dedicated assets assigned to a particular operating segment.
Accordingly, it is not meaningful to attempt an arbitrary allocation and segment
asset allocation is therefore not presented.
It
is impractical to disclose revenues from external customers for each product and
service or each group of similar products and services.
22
13. Income tax in interim periods
For
the purposes of interim financial reporting, the Company determines the
appropriate income tax provision by first applying the effective tax rate
expected to be applicable for the full fiscal year to ordinary income. This
amount is then adjusted for the tax effect of significant unusual or
extraordinary items, for instance non-deductible transaction-related expenses,
that are reported separately, and have an impact on the tax charge. The
cumulative effect of any change in the enacted tax rate, if and when applicable,
on the opening balance of deferred tax assets and liabilities is also included
in the tax charge as a discrete event in the interim period in which the
enactment date occurs.
For
the three and six months ended December 31, 2010, the tax charge was calculated
using the expected effective tax rate for the year. The Companys effective tax
rate for the three and six months ended December 31, 2010, was 49.4% and 47.6%,
respectively, as a result of non-deductible expenses, including
transaction-related expenses and interest expense related to the acquisition of
KSNET.
The
Company increased its unrecognized tax benefits by $0.1 million and $0.2
million, respectively, during the three and six months ended December 31, 2010.
As of December 31, 2010, the Company had accrued interest related to uncertain
tax positions of approximately $0.2 million on its balance sheet.
The
Company does not expect the change related to unrecognized tax benefits will
have a significant impact on its results of operations or financial position in
the next 12 months.
The
Company files income tax returns mainly in South Africa, Korea, Austria, the
Russian Federation and in the US federal jurisdiction. As of December 31, 2010,
the Company is no longer subject to income tax examination by the South African
Revenue Service for years before December 31, 2007. In 2007, the Korea National
Tax Service had effectively completed the examination of the Companys returns
in Korea related to years 2002 through 2006. The Company is subject to income
tax in other jurisdictions outside South Africa and Korea, none of which are
individually material to its financial position, statement of cash flows, or
results of operations.
23
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and the notes thereto appearing elsewhere in
this Quarterly Report on Form 10-Q.
Forward-looking statements
Some
of the statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements. These statements relate to future events or our
future financial performance and involve known and unknown risks, uncertainties
and other factors that may cause our or our industrys actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed, implied or
inferred by these forward-looking statements. Such factors include, among other
things, those listed under Risk Factors and elsewhere in our Annual Report on
Form 10-K for the year ended June 30, 2010 and our Quarterly Report on Form 10-Q
for the quarter ended September 30, 2010. In some cases, you can identify
forward-looking statements by terminology such as may, will, should,
could, would, expects, plans, intends, anticipates, believes,
estimates, predicts, potential or continue or the negative of such terms
and other comparable terminology.
Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we do not know whether we can achieve positive future results,
levels of activity, performance, or goals. Actual events or results may differ
materially. We undertake no obligation to update any of the forward-looking
statements after the date of this Quarterly Report on Form 10-Q to conform those
statements to reflect the occurrence of unanticipated events, except as required
by applicable law.
You
should read this Quarterly Report on Form 10-Q and the documents that we
reference herein and the documents we have filed as exhibits hereto and which we
have filed with the Securities and Exchange Commission completely and with the
understanding that our actual future results, levels of activity, performance
and achievements may be materially different from what we expect. We qualify all
of our forward-looking statements by these cautionary statements.
Business Developments During the Second Quarter of Fiscal
2011
South
Africa
SASSA
contract extension
We
recently received a six month extension of our current SASSA contract on the
same terms and conditions. As a result of this extension, the contract now runs
through September 30, 2011, unless it is further extended. SASSA has indicated
that it intends to commence a new tender process and requested the extension to
allow it to conclude the tender process. For a more detailed discussion of our
SASSA contract and risks associated therewith, we refer you to the first two
risk factors contained in our Annual Report on Form 10-K for the year ended June
30, 2010. Under our SASSA contract, we provide our social welfare grants
distribution service to SASSA in five of South Africas nine provinces
(KwaZulu-Natal, Limpopo, North West, Northern Cape and Eastern Cape). The
contract contains a standard pricing formula for all provinces based on a
transaction fee per beneficiary paid, regardless of the number or amount of
grants paid per beneficiary, calculated on a guaranteed minimum number of
beneficiaries per month.
EasyPay
Kiosk pilot project extended to end of fiscal 2011
In
September 2010, we launched our EasyPay Kiosk, or EP Kiosk, pilot project at
select locations in the Gauteng province of South Africa. The EP Kiosk enables
users to purchase prepaid electricity and airtime and perform any post paid bill
payment service requirements using the interactive user-friendly touch screen
kiosk interface. The user will also be able to transfer prepaid voucher value to
other mobile phone users. Users can register their own prepaid voucher wallet on
the EP Kiosk, with access to the wallet guaranteed via biometric identification
of the user at time of registration. A five digit personal identification
number, or PIN, is also required by the user so as to facilitate transactions
done via their own mobile phones or via the website.
The
EP Kiosk is a cash-acceptor and does not issue change in cash, rather it issues
a prepaid value voucher in lieu of change which can be used to purchase prepaid
electricity and airtime or perform any post paid bill payment service
requirements through an EP Kiosk or via the mobile phone site or the
internet.
The
pilot project showed good momentum during the second quarter of fiscal 2011 and
has been extended until the end of the fourth quarter of fiscal 2011 at which
time we will assess whether the EP Kiosk is a viable business medium.
24
Outside
South Africa
Acquisition
of KSNET in the Republic of Korea
On
October 29, 2010, we acquired 98.73% of KSNET, Inc., or KSNET, a leading
Republic of Korea payment processor, for KRW 270 billion (approximately $240
million based on October 29, 2010 exchange rates). Most of KSNETs revenue is
derived from the provision of payment processing services to approximately
200,000 merchants and to card issuers in Korea through its value-added network,
or VAN. KSNET has a diverse product offering and we believe it is the only total
payments solutions provider offering card VAN, payment gateway and banking VAN
services in Korea, which differentiates KSNET from other Korean payment solution
providers and allows it to cross-sell its products across its customer base.
The
acquisition of KSNET expands our international footprint as well as diversifies
our revenue, earnings and product portfolio. The combination is expected to
capitalize on multiple revenue synergies and provide an established base in Asia
for further business development activities in the region.
The
African Continent and Iraq
During
the second quarter of fiscal 2011, Net1 Universal Electronic Technological
Solutions (Proprietary) Limited, or NUETS, received an order for an additional
2,000 EFTPOS devices for deployment in Iraq, bringing the total number of EFTPOS
devices ordered to date to 5,050.
It
also recorded revenue from transaction fees and the delivery of UEPS-enabled
smartcards under its contract with the government of Iraq. NUETS expects to
generate ongoing revenues from transaction fees under the Iraqi contract and
from EFTPOS sales during the third quarter of fiscal 2011. NUETS has entered the
second phase of its initiative in Ghana and now generates recurring income in
the form of hardware and software maintenance fees.
NUETS
continued to service its current customers on the African continent and in Iraq
and continued its business development efforts in multiple new countries on the
African continent during the quarter.
During
the second quarter of fiscal 2011, SmartSwitch Namibia generated incremental
transaction fees from transactions conducted between Namibian merchants and
UEPS-enabled smartcards. SmartSwitch Botswana generated transaction fees during
the second quarter of fiscal 2011 from the payment of food voucher grants. We
expect SmartSwitch Namibia and Botswana to continue generating transaction fees
during the third quarter of fiscal 2011.
Net
1 Universal Technologies (Austria) AG, or Net1 UTA
During
the second quarter of fiscal 2011, we acquired the remaining 19.9% of Net1 UTA
for $0.6 million, and now own 100% of Net1 UTA.
During
the second quarter of fiscal 2011, Net1 UTA received an order from the leading
banks of Uzbekistan for the delivery of 1.1 million smart cards and 2.500 EFTPOS
terminals during 2011. Growth at Net1 UTA continued to be adversely impacted by
our transitioning of its business model from a hardware and software
sale-oriented model to one which generates recurring transaction fees, as well
as by challenging economic conditions in Eastern Europe. During the second
quarter of fiscal 2011 Net1 UTA sold hardware and software licenses to a
customer in Uzbekistan.
Net1
Virtual Card
We
launched our VCPay
TM
, offering in the United States during the second
quarter of fiscal 2011. Our mobile phone-based virtual payment card application
is designed to eliminate fraud in Card-Not-Present (CNP) transactions. We have
teamed up with MetroPCS Communications, Inc., or MetroPCS, The Bancorp Bank, a
wholly-owned subsidiary of The Bancorp, Inc., FSV Payment Systems and MoneyGram
International to offer a comprehensive card issuing, processing and distribution
network to wireless subscribers in the United States.
MetroPCS
offers our VCPay
TM
to its prepaid customers as an application that is
pre-loaded on new Smartphones or can be downloaded on select existing devices.
VCPay
TM
allows a subscriber to generate a unique, one-time use
prepaid virtual card number to securely purchase goods and services or perform
bill payments in any CNP environment. We believe that the VCPay
TM
application is the first mobile phone-based prepaid program with no requirement
for the user to have a physical card or a bank account. Subscribers can load
their prepaid virtual accounts with cash at any of MoneyGrams 40,000 U.S. agent
locations, which are located in most communities including many grocery,
pharmacy and convenience store chains, or electronically via their bank accounts
or via direct deposit.
25
New International transaction-based activities operating
segment
Effective
October 1, 2010, we have allocated our international transaction-based
activities to a new operating segment, namely International transaction-based
activities. This operating segment comprises the transaction processing
activities of KSNET, Net1 Virtual Card, and NUETS transaction processing
activities for its initiative in Iraq.
KSNET
currently contributes the majority of the revenue, operating income and net
income of this segment.
Segment
results for fiscal 2010 have not been restated due to the insignificance of
the transaction processing activities of Net1 Virtual Card, and NUETS transaction
processing activities for its initiative in Iraq. However, for comparative purposes
in future periods, our reported results for the first half of fiscal 2011 include
all legacy international transaction-processing activities from July 1, 2010
and include KSNET from November 1, 2010.
Critical Accounting Policies
Our
unaudited condensed consolidated financial statements have been prepared in
accordance with US GAAP, which requires management to make estimates and
assumptions about future events that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities. As future
events and their effects cannot be determined with absolute certainty, the
determination of estimates requires managements judgment based on a variety of
assumptions and other determinants such as historical experience, current and
expected market conditions and certain scientific evaluation techniques.
Critical
accounting policies are those that reflect significant judgments or
uncertainties, and potentially may result in materially different results under
different assumptions and conditions. Management has identified the following
critical accounting policies that are described in more detail in our Annual
Report on Form 10-K for the year ended June 30, 2010.
-
Deferred taxation;
-
Stock-based compensation;
-
Intangible assets acquired through acquisitions;
-
Accounts receivable and provision for doubtful debts; and
-
Research and development.
Recent accounting pronouncements adopted
Refer
to Note 1 of the unaudited condensed consolidated financial statements for a
full description of recent accounting pronouncements adopted as of December 31,
2010, 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
December 31, 2010
Refer
to Note 1 of the unaudited condensed consolidated financial statements for a
full description of recent accounting pronouncements not yet adopted as of
December 31, 2010, including the expected dates of adoption and effects on
financial condition, results of operations and cash flows.
Currency Exchange Rate Information
Actual
exchange rates
The
actual exchange rates for and at the end of the periods presented were as
follows:
Table 1
|
|
Three months ended
|
|
|
Six months ended
|
|
|
Year ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
ZAR : $ average exchange rate
|
|
6.9296
|
|
|
7.5212
|
|
|
7.1436
|
|
|
7.6741
|
|
|
7.6117
|
|
Highest ZAR : $ rate during period
|
|
7.1754
|
|
|
8.2035
|
|
|
7.7809
|
|
|
8.3187
|
|
|
8.3187
|
|
Lowest ZAR : $ rate during period
|
|
6.5708
|
|
|
7.2120
|
|
|
6.5708
|
|
|
7.2120
|
|
|
7.1731
|
|
Rate at end of period
|
|
6.6468
|
|
|
7.4174
|
|
|
6.6468
|
|
|
7.4174
|
|
|
7.6529
|
|
26
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 three
and six months ended December 31, 2010 and 2009, vary slightly from the averages
shown in the table above. The translation rates we use in presenting our results
of operations are the rates shown in the following table:
Table 2
|
|
Three months ended
|
|
|
Six months ended
|
|
|
Year ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income and expense items: $1 = ZAR .
|
|
6.9402
|
|
|
7.5238
|
|
|
7.1410
|
|
|
7.6723
|
|
|
7.6092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items: $1 = ZAR
|
|
6.6468
|
|
|
7.4174
|
|
|
6.6468
|
|
|
7.4174
|
|
|
7.6529
|
|
Results of operations
The
discussion of our consolidated overall results of operations is based on amounts
as reflected in Item 1 Financial Statements which are reported in US dollars
and are prepared in accordance with US GAAP. Our discussion analyzes our results
of operations both in US dollars and ZAR, because ZAR is the functional currency
of the entities which contribute the majority of our profits and is the currency
in which the majority of our transactions are initially incurred and measured.
Due to the significant impact of currency fluctuations between the US dollar and
ZAR on our reported results and because we use the US dollar as our reporting
currency, we believe that the supplemental presentation of our results of
operations in ZAR is useful to investors to understand the changes in the
underlying trends of our business. The results of operations for the three and
six months ended December 31, 2010, include the operations of MediKredit and
FIHRST for the entire period (which operations have been allocated to our SA
transaction-based activities operating segment) and the operations of KSNET from
November 1, 2010, (which operations have been allocated to our International
transaction-based activities operating segment.)
We
analyze our business and operations in terms of five inter-related but
independent operating segments: (1) SA transaction-based activities, (2)
International transaction-based activities, (3) smart card accounts, (4)
financial services, and (5) hardware, software and related technology sales. In
addition, corporate and corporate office activities that are impracticable to
ascribe directly to any of the other operating segments, as well as any
inter-segment eliminations, are included in corporate/eliminations.
27
Second quarter fiscal 2011 compared to the second quarter of
fiscal 2010
The
following factors had an influence on our results of operations during the
second quarter of fiscal 2011 as compared with the same period in the prior
year:
-
SASSA price and volume reductions:
Our new contract with
SASSA has reduced our revenue and operating income as a result of the
previously announced price and volume reductions;
-
Favorable impact from the weakness of the US dollar:
The US
dollar depreciated by 8% compared to the ZAR during the second quarter of
fiscal 2011 compared to fiscal 2010 which has had a positive impact on our
reported results;
-
Increased revenue from KSNET at lower operating margins, before
acquired intangible asset amortization,
than our legacy
business:
Our KSNET acquisition in October 2010 positively impacted
our revenue during the second quarter of fiscal 2011, however, because KSNET
has an operating margin, before acquired intangible asset amortization, that
is lower than our legacy businesses, it negatively impacted our operating
margin. The inclusion of KSNET in our results has also contributed to the
increase in selling, general and administration and depreciation and
amortization expenses;
-
Increased transaction volumes at EasyPay:
Our reported
results were favorably impacted by increased transaction volumes at EasyPay
resulting from growth in value-added services;
-
Increased revenue from MediKredit and FIRHST at lower operating
margins than other SA transaction-based
activity business:
Our MediKredit and FIHRST acquisitions positively impacted our revenue
during the second quarter of fiscal 2011, however, because MediKredit
generated a modest operating loss and FIHRST has operating margin that is
lower than our other transaction-based activity businesses, they negatively
impacted our operating margin. The inclusion of these businesses in our
results has also contributed to the increase in selling, general and
administration expense;
-
Increased user adoption in Iraq:
Our reported results were
positively impacted by increased transaction revenues at NUETS from the
adoption of our UEPS technology in Iraq;
-
Lower revenues and margins from hardware, software and related
technology sales segment:
Our hardware, software and related
technology sales segment was adversely impacted by lower revenues at Net1 UTA,
offset by ad hoc hardware sales;
-
Intangible asset amortization related to acquisitions:
Our
reported results were adversely impacted by additional intangible asset
amortization of approximately $2.0 million related to the acquisitions of
KSNET in the second quarter of fiscal 2011, as well as MediKredit and FIHRST
during the third quarter of fiscal 2010;
-
Lower interest income and increased interest expense resulting from
KSNET acquisition:
Our reported results were adversely impacted by
lower interest income due to the payment of a portion of the KSNET purchase
price in cash and increased interest expense due to the payment of a portion
of the KSNET purchase price utilizing long- term debt and facility fees of
approximately $1.7 million; and
-
Non-recurring items included in selling, general and administration
expense:
During the second quarter of fiscal 2011, we recognized an
unrealized foreign exchange gain of $2.7 million and incurred
transaction-related expenses of $1.8 million, primarily for the acquisition of
KSNET.
Consolidated overall results of operations
This
discussion is based on the amounts which were prepared in accordance with US
GAAP.
28
The
following tables show the changes in the items comprising our statements of
operations, both in US dollars and in ZAR:
|
|
In United States Dollars
|
Table 3
|
|
(US
GAAP)
|
|
|
Three
months ended December 31,
|
|
|
2010
|
|
|
|
2009
|
|
|
|
$%
|
|
|
$000
|
|
|
|
$000
|
|
|
|
change
|
Revenue
|
|
89,011
|
|
|
|
73,864
|
|
|
|
21%
|
Cost of goods sold, IT processing, servicing and support
|
|
29,182
|
|
|
|
20,915
|
|
|
|
40%
|
Selling, general and administration
|
|
28,763
|
|
|
|
18,866
|
|
|
|
52%
|
Depreciation and amortization
|
|
9,092
|
|
|
|
4,664
|
|
|
|
95%
|
Operating income
|
|
21,974
|
|
|
|
29,419
|
|
|
|
(25)%
|
Interest income, net
|
|
(2,080
|
)
|
|
|
1,893
|
|
|
|
(210)%
|
Income before income taxes
|
|
19,894
|
|
|
|
31,312
|
|
|
|
(36)%
|
Income tax expense
|
|
9,836
|
|
|
|
11,492
|
|
|
|
(14)%
|
Net income before loss from equity-accounted
investments
|
|
10,058
|
|
|
|
19,820
|
|
|
|
(49)%
|
Loss from equity-accounted investments
|
|
(166
|
)
|
|
|
(270
|
)
|
|
|
(39)%
|
Net income
|
|
9,892
|
|
|
|
19,550
|
|
|
|
(49)%
|
(Add) Less: net (loss) income attributable to non-controlling
interest
|
|
(56
|
)
|
|
|
266
|
|
|
|
(121)%
|
Net income attributable to us
|
|
9,948
|
|
|
|
19,284
|
|
|
|
(48)%
|
|
|
In South African Rand
|
Table 4
|
|
(US
GAAP)
|
|
|
Three
months ended December 31,
|
|
|
2010
|
|
|
|
2009
|
|
|
|
ZAR
|
|
|
ZAR
|
|
|
|
ZAR
|
|
|
|
%
|
|
|
000
|
|
|
|
000
|
|
|
|
change
|
Revenue
|
|
617,754
|
|
|
|
555,738
|
|
|
|
11%
|
Cost of goods sold, IT processing, servicing and support
|
|
202,529
|
|
|
|
157,359
|
|
|
|
29%
|
Selling, general and administration
|
|
199,621
|
|
|
|
141,944
|
|
|
|
41%
|
Depreciation and amortization
|
|
63,101
|
|
|
|
35,091
|
|
|
|
80%
|
Operating income
|
|
152,503
|
|
|
|
221,344
|
|
|
|
(31)%
|
Interest income, net
|
|
(14,436
|
)
|
|
|
14,243
|
|
|
|
(201)%
|
Income before income taxes
|
|
138,067
|
|
|
|
235,587
|
|
|
|
(41)%
|
Income tax expense
|
|
68,264
|
|
|
|
86,464
|
|
|
|
(21)%
|
Net income before loss from equity-accounted
investments
|
|
69,803
|
|
|
|
149,123
|
|
|
|
(53)%
|
Loss from equity-accounted investments
|
|
(1,152
|
)
|
|
|
(2,031
|
)
|
|
|
(43)%
|
Net income
|
|
68,651
|
|
|
|
147,092
|
|
|
|
(53)%
|
(Add) Less: net (loss) income attributable to non-controlling
interest
|
|
(389
|
)
|
|
|
2,001
|
|
|
|
(119)%
|
Net income attributable to us
|
|
69,040
|
|
|
|
145,091
|
|
|
|
(52)%
|
Analyzed
in ZAR, the increase in revenue for the second quarter of fiscal 2011, was
primarily due to higher revenues from the inclusion of KSNET, FIHRST and
MediKredit, increased transaction volumes at EasyPay and higher utilization of
our UEPS system in Iraq, which was partially offset by our new SASSA contract,
discussed under Business Developments during the Second Quarter of Fiscal
2011South AfricaSASSA contract extension update and fewer sales of hardware,
software and related technology. Analyzed in ZAR, cost of goods sold, IT
processing, servicing and support for the second quarter of fiscal 2011 was
higher primarily due to the inclusion of KSNET, FIHRST and MediKredit.
Analyzed
in ZAR, selling, general and administration expense increased during the second
quarter of fiscal 2011 primarily due to increases in goods and services
purchased from third parties and the inclusion of KSNET, FIHRST and MediKredit
operations. During the second quarter of fiscal 2011, selling, general and
administration expense also included transaction-related costs of $1.8 million
(ZAR 12.3 million), primarily for the KSNET acquisition. Selling, general and
administration was positively impacted by an unrealized gain of $2.7 million
(ZAR 19.1 million) on a foreign exchange contract related to an intercompany
dividend from South Africa to the United States which was used to partially fund
the acquisition of KSNET.
29
Our
operating income margin for the second quarter of fiscal 2011 and 2010 was 25%
and 40%, respectively. We discuss the components of the operating income margin
under Results of operations by operating segment, however the significant
decrease is attributable to the price and volumes reductions under our SASSA
contract, lower margin contribution from KSNET and transaction-related costs.
Our
direct costs of maintaining a listing on Nasdaq and the JSE, as well as
compliance with the Sarbanes-Oxley Act of 2002, or Sarbanes, particularly
Section 404 of Sarbanes, primarily includes independent directors fees, legal
fees, fees paid to Nasdaq and the JSE, investor relations expenses, our
compliance officers salary, fees paid to consultants who assist with Sarbanes
compliance and fees paid to our independent accountants related to the audit and
review process. This has resulted in expenditures of $1.1 million (ZAR 7.8
million) and $0.5 million (ZAR 3.7 million) during the second quarter of fiscal
2011 and 2010, respectively.
In
ZAR, depreciation and amortization increased during fiscal 2011 primarily as a
result of intangible asset amortization related to the KSNET, MediKredit and
FIHRST acquisitions. The intangible asset amortization related to our various
acquisitions has been allocated to our operating segments as presented in the
tables below:
|
|
Three months ended
|
|
Table 5
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
$000
|
|
|
$000
|
|
Amortization included in depreciation and amortization
expense:
|
|
5,914
|
|
|
3,436
|
|
SA transaction-based activities
|
|
1,437
|
|
|
807
|
|
International transaction-based
activities
|
|
2,032
|
|
|
-
|
|
Hardware, software and related technology
|
|
2,445
|
|
|
2,629
|
|
|
|
Three months ended
|
|
Table 6
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
ZAR 000
|
|
|
ZAR 000
|
|
Amortization included in depreciation and amortization
expense:
|
|
41,047
|
|
|
25,850
|
|
SA transaction-based activities
|
|
9,973
|
|
|
6,072
|
|
International transaction-based
activities
|
|
14,102
|
|
|
-
|
|
Hardware, software and related technology
|
|
16,972
|
|
|
19,778
|
|
Interest
on surplus cash for the second quarter of fiscal 2011 decreased to $1.4 million
(ZAR 9.4 million) from $2.2 million (ZAR 16.3 million) for the second quarter of
fiscal 2010. The decrease in interest on surplus cash held in South Africa was
due to a lower average daily ZAR cash balance during the second quarter of
fiscal 2011 compared with the second quarter of fiscal 2010 as a result of the
payment of a portion of the KSNET purchase price in cash as well as lower
deposit rates resulting from the adjustment in the South African prime interest
rate from an average of approximately 10.50% per annum for the second quarter of
fiscal 2010 to 9.27% per annum for the second quarter of fiscal 2011.
Interest
expense increased during the second quarter of fiscal 2011 due to additional
interest expense resulting from the utilizing of a long-term facility to fund a
portion of the KSNET acquisition. Finance costs increased to $3.4 million (ZAR
23.8 million) for the second quarter of fiscal 2011 from $0.3 million (ZAR 2.0
million) for the second quarter of fiscal 2010.
Total
tax expense for the second quarter of fiscal 2011 was $9.8 million (ZAR 68.3
million) compared with $11.5 million (ZAR 86.5 million) during the same period
in the prior fiscal year. Our total tax expense decreased primarily due to lower
taxable income resulting from the SASSA price and volume reductions and a
decrease in overall profitability. Our effective tax rate for the second quarter
of fiscal 2011 was 49.4%, compared to 36.7% for the second quarter of fiscal
2010. The change in our effective tax rate was primarily due to an increase in
non-deductible expenses, primarily related to the KSNET acquisition, during the
second quarter of fiscal 2011 compared to the second quarter of fiscal 2010.
Net
loss from equity-accounted investments for the second quarter of fiscal 2011
decreased from the prior year primarily due to an increase in transaction fees
generated by SmartSwitch Namibia and SmartSwitch Botswana. VTU Colombia and
VinaPay continue to incur losses.
30
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 December 31,
|
|
|
2010
|
|
|
|
% of
|
|
|
2009
|
|
|
% of
|
|
|
%
|
Operating Segment
|
|
$ 000
|
|
|
|
total
|
|
|
$000
|
|
|
total
|
|
|
change
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
46,588
|
|
|
|
52%
|
|
|
45,415
|
|
|
61%
|
|
|
3%
|
International transaction-based activities
|
|
16,950
|
|
|
|
19%
|
|
|
|
|
|
|
|
|
nm
|
Smart card accounts
|
|
8,434
|
|
|
|
9%
|
|
|
8,137
|
|
|
11%
|
|
|
4%
|
Financial services
|
|
1,623
|
|
|
|
2%
|
|
|
858
|
|
|
1%
|
|
|
89%
|
Hardware, software and related technology sales
|
|
15,416
|
|
|
|
17%
|
|
|
19,454
|
|
|
27%
|
|
|
(21)%
|
Total consolidated
revenue
|
|
89,011
|
|
|
|
100%
|
|
|
73,864
|
|
|
100%
|
|
|
21%
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
18,547
|
|
|
|
84%
|
|
|
26,733
|
|
|
91%
|
|
|
(31)%
|
Operating income before amortization
|
|
19,984
|
|
|
|
|
|
|
27,540
|
|
|
|
|
|
(27)%
|
Amortization of intangible
assets
|
|
(1,437
|
)
|
|
|
|
|
|
(807
|
)
|
|
|
|
|
78%
|
International transaction-based activities
|
|
327
|
|
|
|
1%
|
|
|
-
|
|
|
|
|
|
nm
|
Operating income before
amortization
|
|
2,359
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
(2,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Smart card accounts
|
|
3,832
|
|
|
|
17%
|
|
|
3,699
|
|
|
13%
|
|
|
4%
|
Financial services
|
|
1,231
|
|
|
|
6%
|
|
|
546
|
|
|
2%
|
|
|
125%
|
Hardware, software and related technology
sales
|
|
(319
|
)
|
|
|
(1)%
|
|
|
1,660
|
|
|
6%
|
|
|
(119)%
|
Operating (loss) income before amortization
.
|
|
2,126
|
|
|
|
|
|
|
4,289
|
|
|
|
|
|
(50)%
|
Amortization of intangible
assets
|
|
(2,445
|
)
|
|
|
|
|
|
(2,629
|
)
|
|
|
|
|
(7)%
|
Corporate/eliminations
|
|
(1,644
|
)
|
|
|
(7)%
|
|
|
(3,219
|
)
|
|
(12)%
|
|
|
(49)%
|
Total consolidated
operating income
|
|
21,974
|
|
|
|
100%
|
|
|
29,419
|
|
|
100%
|
|
|
(25)%
|
Table 8
|
|
In
South African Rand (US GAAP)
|
|
|
Three
months ended December 31,
|
|
|
2010
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
|
% of
|
|
|
ZAR
|
|
|
|
% of
|
|
|
%
|
Operating Segment
|
|
000
|
|
|
|
total
|
|
|
000
|
|
|
|
total
|
|
|
change
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
323,330
|
|
|
|
52%
|
|
|
341,694
|
|
|
|
61%
|
|
|
(5)%
|
International transaction-based activities
|
|
117,636
|
|
|
|
19%
|
|
|
|
|
|
|
|
|
|
nm
|
Smart card accounts
|
|
58,534
|
|
|
|
9%
|
|
|
61,221
|
|
|
|
11%
|
|
|
(4)%
|
Financial services
|
|
11,264
|
|
|
|
2%
|
|
|
6,455
|
|
|
|
1%
|
|
|
75%
|
Hardware, software and related technology sales
|
|
106,990
|
|
|
|
17%
|
|
|
146,368
|
|
|
|
27%
|
|
|
(27)%
|
Total consolidated
revenue
|
|
617,754
|
|
|
|
100%
|
|
|
555,738
|
|
|
|
100%
|
|
|
11%
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
128,720
|
|
|
|
84%
|
|
|
201,134
|
|
|
|
91%
|
|
|
(36)%
|
Operating income before amortization
|
|
138,693
|
|
|
|
|
|
|
207,206
|
|
|
|
|
|
|
(33)%
|
Amortization of intangible
assets
|
|
(9,973
|
)
|
|
|
|
|
|
(6,072
|
)
|
|
|
|
|
|
64%
|
International transaction-based activities
|
|
2,269
|
|
|
|
1%
|
|
|
|
|
|
|
|
|
|
nm
|
Operating income before
amortization
|
|
16,371
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
(14,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Smart card accounts
|
|
26,595
|
|
|
|
17%
|
|
|
27,831
|
|
|
|
13%
|
|
|
(4)%
|
Financial services
|
|
8,543
|
|
|
|
6%
|
|
|
4,108
|
|
|
|
2%
|
|
|
108%
|
Hardware, software and related technology
sales
|
|
(2,214
|
)
|
|
|
(1)%
|
|
|
12,490
|
|
|
|
6%
|
|
|
(118)%
|
Operating (loss) income before amortization
.
|
|
14,758
|
|
|
|
|
|
|
32,268
|
|
|
|
|
|
|
(54)%
|
Amortization of intangible
assets
|
|
(16,972
|
)
|
|
|
|
|
|
(19,778
|
)
|
|
|
|
|
|
(14)%
|
Corporate/eliminations
|
|
(11,410
|
)
|
|
|
(7)%
|
|
|
(24,219
|
)
|
|
|
(12)%
|
|
|
(53)%
|
Total consolidated
operating income
|
|
152,503
|
|
|
|
100%
|
|
|
221,344
|
|
|
|
100%
|
|
|
(31)%
|
31
SA
transaction-based activities
In
ZAR, the decreases in revenue were primarily due to the new SASSA contract at
lower economics, which was partially offset by increased transaction volumes at
EasyPay and the inclusion of MediKredit and FIHRST.
Revenues
for SA transaction-based activities include the transaction fees we earn through
our merchant acquiring system and reflect the elimination of inter-company
transactions.
Operating
income margin of our SA transaction-based activities decreased to 40% from 59% a
year ago. The decrease was primarily due to the lower revenues generated under
our SASSA contract, additional intangible asset amortization related to the
acquisition of MediKredit and FIHRST and lower margins in our recently-acquired
transaction processing operations compared with legacy SA transaction-based
activities.
Pension
and welfare operations
:
Our
revenue and operating income related to our pension and welfare operations were
impacted by our new contract discussed under Business Developments during the
Second Quarter of Fiscal 2011South AfricaSASSA contract extension. Our
pension and welfare operations continue to generate the majority of our revenues
and operating income in this operating segment and for us as a whole.
South
African transaction processors:
The
table below presents the total volume and value processed during the second
quarter of fiscal 2011 and 2010 by our transaction processors:
Table 9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
|
|
Total
volume (000s)
|
|
|
Total
value $ (000)
|
|
|
Total
value ZAR (000)
|
|
processor
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
EasyPay
|
|
187,853
|
|
|
173,740
|
|
|
6,256,492
|
|
|
5,206,686
|
|
|
43,421,306
|
|
|
39,174,180
|
|
MediKredit
|
|
2,171
|
|
|
-
|
|
|
112,426
|
|
|
-
|
|
|
780,258
|
|
|
-
|
|
FIHRST
|
|
5,691
|
|
|
-
|
|
|
2,592,735
|
|
|
-
|
|
|
17,994,096
|
|
|
-
|
|
Our
results for the second quarter of fiscal 2011 includes the intangible asset
amortization related to our MediKredit, FIHRST acquisitions but excludes RMTs
intangible assets which were fully amortized in the third quarter of fiscal
2010. Our results for the second quarter of fiscal 2010 includes amortization
related to the RMT intangible assets.
32
Key
statistics of our merchant acquiring system:
The
key statistics and indicators of our merchant acquiring system during the second
quarter of fiscal 2011 and 2010, in each of the South African provinces where we
distribute social welfare grants are summarized in the table below:
Table 10
|
|
Three months ended
|
|
|
|
December
31,
|
|
|
|
2010
|
|
|
2009
|
|
Province included (1)
|
|
NC, EC, KZN, L and NW
|
|
|
NC, EC, KZN, L and NW
|
|
Total POS devices installed
|
|
4,823
|
|
|
4,670
|
|
Number of participating UEPS retail locations
|
|
2,562
|
|
|
2,547
|
|
Value of transactions processed through POS
devices during the quarter (2) (in $ 000)
|
|
393,691
|
|
|
372,041
|
|
Value of transactions processed through POS
devices during the completed pay cycles for the quarter (3) (in $ 000)
|
|
394,924
|
|
|
367,998
|
|
Value of transactions processed through POS
devices during the quarter (2) (in ZAR 000)
|
|
2,728,101
|
|
|
2,798,201
|
|
Value of transactions processed through POS
devices during the completed pay cycles for the quarter (3) (in ZAR 000)
|
|
2,736,648
|
|
|
2,767,792
|
|
Number of grants paid through POS devices during
the quarter (2)
|
|
4,580,255
|
|
|
4,569,316
|
|
Number of grants paid through POS devices during
the completed pay cycles for the quarter (3)
|
|
4,599,893
|
|
|
4,506,829
|
|
Average number of grants processed per terminal
during the quarter (2) .
|
|
955
|
|
|
994
|
|
Average number of grants processed per terminal
during the completed pay cycles for the quarter (3)
|
|
959
|
|
|
980
|
|
(1)
|
NC = Northern Cape, EC = Eastern Cape, KZN =
KwaZulu-Natal, L = Limpopo, NW = North West.
|
(2)
|
Refers to events occurring during the quarter (i.e.,
based on three calendar months).
|
(3)
|
Refers to events occurring during the completed pay
cycle.
|
International
transaction-based activities
KSNET currently contributes the majority of our revenues in this operating
segment. Operating margin for the segment is lower than our legacy South African
transaction-based businesses and was negatively impacted by start-up
expenditures related to our Virtual Card launch in the United States, but
partially offset by improving profitability of NUETS initiative in Iraq.
Our
results for the second quarter of fiscal 2011 include the intangible asset
amortization related to our KSNET acquisition from November 1, 2010.
Smart
card accounts
In
ZAR, revenue from the provision of smart card-based accounts decreased in
proportion to the lower number of beneficiaries serviced through our SASSA
contract. A total number of 3,520,558 smart card-based accounts were active at
December 31, 2010, compared to 3,680,888 active accounts as at December 31,
2009. The year over year decrease in the number of active accounts resulted
largely from the suspension and removal of invalid or fraudulent grants by
SASSA, however active accounts were flat on a sequential basis.
Operating
income margin from providing smart card accounts was constant at 45% for the
second quarter of fiscal 2011 and 2010.
Financial
services
Revenue
from UEPS-based lending increased primarily due to an increase in the number of
loans granted. In addition, on average, the return on these UEPS-based loans was
higher. Our current UEPS-based lending portfolio comprises loans made to elderly
pensioners in some of the provinces where we distribute social welfare grants.
We insure the UEPS-based lending book against default and thus no allowance is
required.
Operating
income margin for the financial services segment increased to 76% for the second
quarter of fiscal 2011 from 64% for the second quarter of fiscal 2010 primarily
due to an increase in lending activity.
33
Hardware,
software and related technology sales
The
following table presents our revenue and operating income during the second
quarter of fiscal 2011 and 2010:
|
|
Three months ended
|
|
Table 12
|
|
December
31,
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
$000
|
|
|
|
$000
|
|
Revenue
|
|
15,416
|
|
|
|
19,454
|
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
12,151
|
|
|
|
10,762
|
|
Net1 UTA
|
|
3,265
|
|
|
|
8,692
|
|
|
|
|
|
|
|
|
|
Operating income before amortization of intangible
assets
|
|
2,126
|
|
|
|
4,289
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
(319
|
)
|
|
|
1,660
|
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
1,725
|
|
|
|
2,042
|
|
Net1 UTA
|
|
(2,044
|
)
|
|
|
(382
|
)
|
Net1 UTA excluding amortization
of acquisition related intangible assets
|
|
237
|
|
|
|
2,095
|
|
Amortization
of acquisition related intangible assets
|
|
(2,281
|
)
|
|
|
(2,477
|
)
|
|
|
Three months ended
|
|
Table 13
|
|
December
31,
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
ZAR 000
|
|
|
|
ZAR 000
|
|
Revenue
|
|
106,990
|
|
|
|
146,368
|
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
84,330
|
|
|
|
80,971
|
|
Net1 UTA
|
|
22,660
|
|
|
|
65,397
|
|
|
|
|
|
|
|
|
|
Operating income before amortization of intangible
assets
|
|
14,758
|
|
|
|
32,268
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
(2,214
|
)
|
|
|
12,490
|
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
11,972
|
|
|
|
15,365
|
|
Net1 UTA
|
|
(14,186
|
)
|
|
|
(2,875
|
)
|
Net1 UTA excluding amortization
of acquisition related intangible assets
|
|
1,645
|
|
|
|
15,762
|
|
Amortization
of acquisition related intangible assets
|
|
(15,831
|
)
|
|
|
(18,637
|
)
|
The
decrease in revenue was primarily due to lower revenues generated by Net1 UTA,
partially offset by ad hoc hardware sales. Our operating margin during the first
quarter of fiscal 2011, was negatively impacted by an allowance for credit
losses of $0.5 million (ZAR 3.8 million).
As
we expand internationally, whether through traditional selling arrangements to
provide products and services (such as in Ghana and Iraq) or through joint
ventures (such as with SmartSwitch Namibia and SmartSwitch Botswana), we expect
to receive revenues from sales of hardware and from software customization and
licensing to establish the infrastructure of POS terminals and smart cards
necessary to enable utilization of the UEPS and DUET technology in a particular
country. To the extent that we enter into joint ventures and account for the
investment as an equity investment, we are required to eliminate our portion of
the sale of hardware, software and licenses to the investees. The sale of
hardware, software and licenses under these arrangements occur on an ad hoc
basis as new arrangements are established, which can materially affect our
revenues and operating income in this segment from period to period.
Corporate/eliminations
The
decrease in our corporate expenses resulted from an unrealized foreign exchange
gain on a foreign exchange contract of $2.7 million (ZAR 19.1 million) related
to an intercompany dividend from South Africa to the United States to be used to
partially fund the acquisition of KSNET, partially offset by higher corporate
head office-related expenditure, including the effects of inflation in South
Africa, stock-based compensation charges and transaction-related expenditures of
$1.8 million (ZAR 12.3 million).
34
Our
corporate expenses also includes expenditure related to compliance with
Sarbanes; non-executive directors fees; employee and executive salaries and
bonuses; stock-based compensation; legal and audit fees; directors and officers
insurance premiums; telecommunications expenses; property-related expenditures
including utilities, rental, security and maintenance; and elimination entries.
First
half fiscal 2011 compared to the first half of fiscal 2010
The
following factors had an influence on our results of operations during the first
half of fiscal 2011 as compared with the same period in the prior year:
-
SASSA price and volume reductions:
Our new contract with
SASSA has reduced our revenue and operating income as a result of the
previously announced price and volume reductions;
-
Favorable impact from the weakness of the US dollar:
The US
dollar depreciated by 7% compared to the ZAR during the first half of fiscal
2011 compared to fiscal 2010 which has had a positive impact on our reported
results;
-
Increased revenue from KSNET at lower operating margins, before
acquired intangible asset amortization,
than our legacy
business:
Our KSNET acquisition in October 2010 positively impacted
our revenue during the first half of fiscal 2011, however, because KSNET has
an operating margin, before acquired intangible asset amortization, that is
lower than our legacy businesses, it negatively impacted our operating margin.
The inclusion of KSNET in our results has also contributed to the increase in
selling, general and administration and depreciation and amortization
expenses;
-
Increased transaction volumes at EasyPay:
Our reported
results were favorably impacted by increased transaction volumes at EasyPay
resulting from growth in value-added services;
-
Increased revenue from MediKredit and FIRHST at lower operating
margins than other SA transaction-based
activity business:
Our MediKredit and FIHRST acquisitions positively impacted our revenue
during the first half of fiscal 2011, however, because MediKredit generated a
modest operating loss and FIHRST has operating margin that is lower than our
other SA transaction-based activity businesses, they negatively impacted our
operating margin. The inclusion of these businesses in our results has also
contributed to the increase in selling, general and administration expense;
-
Increased user adoption in Iraq:
Our reported results were
positively impacted by increased transaction revenues at NUETS from the
adoption of our UEPS technology in Iraq;
-
Lower revenues and margins from hardware, software and related
technology sales segment:
Our hardware, software and related
technology sales segment continues to be adversely impacted by lower revenues
generated by Net1 UTA, card sales and software maintenance and development
activities;
-
Intangible asset amortization related to acquisitions:
Our
reported results were adversely impacted by additional intangible asset
amortization of approximately $2.0 million related to the acquisitions of
KSNET in the first half of fiscal 2011, as well as MediKredit and FIHRST
during the third quarter of fiscal 2010;
-
Lower interest income and increased interest expense resulting from
KSNET acquisition:
Our reported results were adversely impacted by
lower interest income due to the payment of a portion of the KSNET purchase
price in cash and increased interest expense due to the payment of a portion
of the KSNET purchase price utilizing long- term debt and facility fees of
approximately $1.7 million; and
-
Non-recurring items included in selling, general and administration
expense:
During the first half of fiscal 2011, we recognized
transaction-related expenses of $5.1 million, primarily for the acquisition of
KSNET. Our reported operating income also includes the net positive impact of
$0.3 million related to a foreign exchange contract resulting from an
intercompany dividend from South Africa to the United States which was used to
partially fund the acquisition of KSNET
Consolidated overall results of
operations
This
discussion is based on the amounts which were prepared in accordance with US
GAAP.
35
The
following tables show the changes in the items comprising our statements of
operations, both in US dollars and in ZAR:
|
|
In United States Dollars
|
Table 14
|
|
(US
GAAP)
|
|
|
Six
months ended December 31,
|
|
|
2010
|
|
|
2009
|
|
|
$%
|
|
|
$ 000
|
|
|
$ 000
|
|
|
change
|
Revenue
|
|
153,294
|
|
|
139,378
|
|
|
10%
|
Cost of goods sold, IT processing, servicing and support
|
|
47,249
|
|
|
37,742
|
|
|
25%
|
Selling, general and administration
|
|
59,089
|
|
|
36,606
|
|
|
61%
|
Depreciation and amortization
|
|
13,996
|
|
|
9,243
|
|
|
51%
|
Operating income
|
|
32,960
|
|
|
55,787
|
|
|
(41)%
|
Interest income, net
|
|
756
|
|
|
4,264
|
|
|
(82)%
|
Income before income taxes
|
|
33,716
|
|
|
60,051
|
|
|
(44)%
|
Income tax expense
|
|
16,043
|
|
|
22,523
|
|
|
(29)%
|
Net income before loss from equity-accounted
investments
|
|
17,673
|
|
|
37,528
|
|
|
(53)%
|
Loss from equity-accounted investments
|
|
(382
|
)
|
|
(381
|
)
|
|
0%
|
Net income
|
|
17,291
|
|
|
37,147
|
|
|
(53)%
|
Add: net loss attributable to non-controlling interest
|
|
(86
|
)
|
|
(78
|
)
|
|
10%
|
Net income attributable to us
|
|
17,377
|
|
|
37,225
|
|
|
(53)%
|
|
|
In South African Rand
|
Table 15
|
|
(US
GAAP)
|
|
|
Six
months ended December 31,
|
|
|
2010
|
|
|
2009
|
|
|
ZAR
|
|
|
ZAR
|
|
|
ZAR
|
|
|
%
|
|
|
000
|
|
|
000
|
|
|
change
|
Revenue
|
|
1,094,672
|
|
|
1,069,347
|
|
|
2%
|
Cost of goods sold, IT processing, servicing and support
|
|
337,406
|
|
|
289,567
|
|
|
17%
|
Selling, general and administration
|
|
421,954
|
|
|
280,851
|
|
|
50%
|
Depreciation and amortization
|
|
99,945
|
|
|
70,915
|
|
|
41%
|
Operating income
|
|
235,367
|
|
|
428,014
|
|
|
(45)%
|
Interest income, net
|
|
5,399
|
|
|
32,715
|
|
|
(84)%
|
Income before income taxes
|
|
240,766
|
|
|
460,729
|
|
|
(48)%
|
Income tax expense
|
|
114,563
|
|
|
172,803
|
|
|
(34)%
|
Net income before loss from equity-accounted
investments
|
|
126,203
|
|
|
287,926
|
|
|
(56)%
|
Loss from equity-accounted investments
|
|
(2,728
|
)
|
|
(2,923
|
)
|
|
(7)%
|
Net income
|
|
123,475
|
|
|
285,003
|
|
|
(57)%
|
Add: net loss attributable to non-controlling interest
|
|
(614
|
)
|
|
(598
|
)
|
|
3%
|
Net income attributable to us
|
|
124,089
|
|
|
285,601
|
|
|
(57)%
|
Analyzed
in ZAR, the increase in revenue for the first half of fiscal 2011, was primarily
due to higher revenues from the inclusion of KSNET, FIHRST and MediKredit,
increased transaction volumes at EasyPay and higher utilization of our UEPS
system in Iraq, which was partially offset by our new SASSA contract, discussed
under Business Developments during the Second Quarter of Fiscal 2011South
AfricaSASSA contract extension and fewer sales of hardware, software and
related technology. Analyzed in ZAR, cost of goods sold, IT processing,
servicing and support for the first half of fiscal 2011 was higher primarily due
to the inclusion of KSNET, FIHRST and MediKredit.
Analyzed
in ZAR, selling, general and administration expense increased during the first
half of fiscal 2011 primarily due to increases in goods and services purchased
from third parties and the inclusion of KSNET, FIHRST and MediKredit operations.
During the first half of fiscal 2011, selling, general and administration
expense was also adversely impacted by transaction-related costs of $5.1 million
(ZAR 36.6 million), primarily for the KSNET acquisition.
Our
operating income margin for the first half of fiscal 2011 and 2010 was 22% and
40%, respectively. We discuss the components of the operating income margin
under Results of operations by operating segment, however the significant
decrease is attributable to the price and volumes reductions under our SASSA
contract and transaction-related costs.
36
Our
direct costs of maintaining a listing on Nasdaq and JSE, as well as compliance
with Sarbanes, primarily includes independent directors fees, legal fees, fees
paid to Nasdaq and the JSE, investor relations expenses, our compliance
officers salary, fees paid to consultants who assist with Sarbanes compliance
and fees paid to our independent accountants related to the audit and review
process. This has resulted in expenditures of $1.7 million (ZAR 12.0 million)
and $1.2 million (ZAR 8.8 million) during the first half of fiscal 2011 and
2010, respectively.
In
ZAR, depreciation and amortization increased during fiscal 2011, primarily as a
result of intangible asset amortization related to the MediKredit and FIHRST
acquisitions. The intangible asset amortization related to our various
acquisitions has been allocated to our operating segments as presented in the
tables below:
|
|
Six months ended
|
|
Table 16
|
|
December
31,
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
$ 000
|
|
|
|
$ 000
|
|
Amortization included in depreciation and amortization
expense:
|
|
9,588
|
|
|
|
6,759
|
|
SA transaction-based activities
|
|
2,793
|
|
|
|
1,588
|
|
International transaction-based
activities
|
|
2,032
|
|
|
|
-
|
|
Hardware, software and related technology
|
|
4,763
|
|
|
|
5,171
|
|
|
|
Six months ended
|
|
Table 17
|
|
December
31,
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
ZAR 000
|
|
|
|
ZAR 000
|
|
Amortization included in depreciation and amortization
expense:
|
|
68,473
|
|
|
|
51,852
|
|
SA transaction-based activities
|
|
19,945
|
|
|
|
12,183
|
|
International transaction-based
activities
|
|
14,511
|
|
|
|
-
|
|
Hardware, software and related technology
|
|
34,017
|
|
|
|
39,669
|
|
Analyzed
in ZAR, interest on surplus cash for the first half of fiscal 2011 increased to
$4.4 million (ZAR 31.7 million) from $4.9 million (ZAR 36.9 million) for the
first half of fiscal 2010. The increase in interest on surplus cash held in
South Africa was due to a higher average daily ZAR cash balance during the first
half of fiscal 2011 compared with the first half of fiscal 2010, partially
offset by lower deposit rates resulting from the adjustment in the South African
prime interest rate from an average of approximately 10.62% per annum for the
first half of fiscal 2010 to 9.58% per annum for the first half of fiscal
2011.
Interest
expense increased during the first half of fiscal 2011 due additional interest
expense resulting from the utilizing of a long-term facility to fund a portion
of the KSNET acquisition. Finance costs increased to $3.7 million (ZAR 26.3
million) for the first half of fiscal 2011 from $0.5 million (ZAR 4.2 million)
for the first half of fiscal 2010.
Total
tax expense for the first half of fiscal 2011 was $16.1 million (ZAR 114.6
million) compared with $22.5 million (ZAR 172.8 million) during the same period
in the prior fiscal year. Our total tax expense decreased primarily due to lower
taxable income resulting from the SASSA price and volume reductions and a
decrease in overall profitability. Our effective tax rate for the first half of
fiscal 2011 was 47.6%, compared to 37.5% for the first half of fiscal 2010. The
change in our effective tax rate was primarily due to an increase in
non-deductible expenses, primarily related to the KSNET acquisition, during the
first half of fiscal 2011 compared to the first half of fiscal 2010.
Net
loss from equity-accounted investments for the first half of fiscal 2011
decreased from the prior year primarily due to an increase in transaction fees
generated by SmartSwitch Namibia and SmartSwitch Botswana. VTU Colombia and
VinaPay continue to incur losses.
37
Results of operations by operating segment
The
composition of revenue and the contributions of our business activities to
operating income are illustrated below.
Table 18
|
|
In
United States Dollars (US GAAP)
|
|
|
Six
months ended December 31,
|
|
|
2010
|
|
|
|
% of
|
|
|
|
2009
|
|
|
|
% of
|
|
|
|
%
|
Operating Segment
|
|
$000
|
|
|
|
total
|
|
|
|
$000
|
|
|
|
total
|
|
|
|
change
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
91,010
|
|
|
|
59%
|
|
|
|
90,393
|
|
|
|
65%
|
|
|
|
1%
|
International transaction-based activities
|
|
17,420
|
|
|
|
11%
|
|
|
|
|
|
|
|
|
|
|
|
nm
|
Smart card accounts
|
|
16,404
|
|
|
|
11%
|
|
|
|
16,211
|
|
|
|
12%
|
|
|
|
1%
|
Financial services
|
|
2,871
|
|
|
|
2%
|
|
|
|
1,650
|
|
|
|
1%
|
|
|
|
74%
|
Hardware, software and related technology sales
|
|
25,589
|
|
|
|
17%
|
|
|
|
31,124
|
|
|
|
22%
|
|
|
|
(18)%
|
Total consolidated revenue
|
|
153,294
|
|
|
|
100%
|
|
|
|
139,378
|
|
|
|
100%
|
|
|
|
10%
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
35,986
|
|
|
|
109%
|
|
|
|
53,401
|
|
|
|
96%
|
|
|
|
(33)%
|
Operating income before amortization
|
|
38,779
|
|
|
|
|
|
|
|
54,989
|
|
|
|
|
|
|
|
(29)%
|
Amortization of intangible
assets
|
|
(2,793
|
)
|
|
|
|
|
|
|
(1,588
|
)
|
|
|
|
|
|
|
76%
|
International transaction-based activities
|
|
116
|
|
|
|
-%
|
|
|
|
-
|
|
|
|
|
|
|
|
nm
|
Operating income before
amortization
|
|
2,148
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
(2,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Smart card accounts
|
|
7,454
|
|
|
|
23%
|
|
|
|
7,369
|
|
|
|
13%
|
|
|
|
1%
|
Financial services
|
|
2,160
|
|
|
|
7%
|
|
|
|
1,077
|
|
|
|
2%
|
|
|
|
101%
|
Hardware, software and related technology sales
|
|
(2,979
|
)
|
|
|
(9
|
)%
|
|
|
(53
|
)
|
|
|
-%
|
|
|
|
5521%
|
Operating (loss) income before amortization
.
|
|
1,784
|
|
|
|
|
|
|
|
5,118
|
|
|
|
|
|
|
|
(65)%
|
Amortization of intangible
assets
|
|
(4,763
|
)
|
|
|
|
|
|
|
(5,171
|
)
|
|
|
|
|
|
|
(8)%
|
Corporate/eliminations
|
|
(9,777
|
)
|
|
|
(30
|
)%
|
|
|
(6,007
|
)
|
|
|
(11
|
)%
|
|
|
63%
|
Total consolidated operating
income
|
|
32,960
|
|
|
|
100%
|
|
|
|
55,787
|
|
|
|
100%
|
|
|
|
(41)%
|
Table 19
|
|
In
South African Rand (US GAAP)
|
|
|
Six
months ended December 31,
|
|
|
2010
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
ZAR
|
|
|
|
% of
|
|
|
|
ZAR
|
|
|
% of
|
|
|
|
%
|
Operating Segment
|
|
000
|
|
|
|
total
|
|
|
|
000
|
|
|
total
|
|
|
|
change
|
Consolidated revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
649,902
|
|
|
|
59%
|
|
|
|
693,521
|
|
|
65%
|
|
|
|
(6)%
|
International transaction-based activities
|
|
124,396
|
|
|
|
11%
|
|
|
|
|
|
|
|
|
|
|
nm
|
Smart card accounts
|
|
117,141
|
|
|
|
11%
|
|
|
|
124,375
|
|
|
12%
|
|
|
|
(6)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial services
|
|
20,502
|
|
|
|
2%
|
|
|
|
12,659
|
|
|
1%
|
|
|
|
62%
|
Hardware, software and related technology sales
|
|
182,731
|
|
|
|
17%
|
|
|
|
238,792
|
|
|
22%
|
|
|
|
(23)%
|
Total consolidated revenue
|
|
1,094,672
|
|
|
|
100%
|
|
|
|
1,069,347
|
|
|
100%
|
|
|
|
2%
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
256,976
|
|
|
|
109%
|
|
|
|
409,708
|
|
|
96%
|
|
|
|
(37)%
|
Operating income before
amortization
|
|
276,921
|
|
|
|
|
|
|
|
421,891
|
|
|
|
|
|
|
(34)%
|
Amortization of intangible assets
|
|
(19,945
|
)
|
|
|
|
|
|
|
(12,183
|
)
|
|
|
|
|
|
64%
|
International transaction-based activities
|
|
828
|
|
|
|
-%
|
|
|
|
|
|
|
|
|
|
|
nm
|
Operating income before amortization
|
|
15,339
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
Amortization of intangible
assets
|
|
(14,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Smart card accounts
|
|
53,229
|
|
|
|
23%
|
|
|
|
56,537
|
|
|
13%
|
|
|
|
(6)%
|
Financial services
|
|
15,425
|
|
|
|
7%
|
|
|
|
8,263
|
|
|
2%
|
|
|
|
87%
|
Hardware, software and related technology sales
|
|
(21,273
|
)
|
|
|
(9
|
)%
|
|
|
(407
|
)
|
|
-%
|
|
|
|
5127%
|
Operating (loss) income
before amortization .
|
|
12,744
|
|
|
|
|
|
|
|
39,262
|
|
|
|
|
|
|
(68)%
|
Amortization of intangible assets
|
|
(34,017
|
)
|
|
|
|
|
|
|
(39,669
|
)
|
|
|
|
|
|
(14)%
|
Corporate/eliminations
|
|
(69,818
|
)
|
|
|
(30
|
)%
|
|
|
(46,087
|
)
|
|
(11
|
)%
|
|
|
51%
|
Total consolidated operating income
|
|
235,367
|
|
|
|
100%
|
|
|
|
428,014
|
|
|
100%
|
|
|
|
(45)%
|
38
SA
transaction-based activities
In
ZAR, the decreases in revenue were primarily due to the new SASSA nine month
contract at lower economics, which was partially offset by increased transaction
volumes at EasyPay and the inclusion of MediKredit and FIHRST.
Revenues
for SA transaction-based activities include the transaction fees we earn through
our merchant acquiring system and reflect the elimination of inter-company
transactions.
Operating
income margin of our SA transaction-based activities decreased to 40% from 59% a
year ago. The decrease was primarily due to the lower revenues generated under
our SASSA contract, additional intangible asset amortization related to the
acquisition of MediKredit and FIHRST and lower margins in our recently-acquired
transaction processing operations compared with legacy SA transaction-based
activities.
Pension
and welfare operations
:
Our
revenue and operating income related to our pension and welfare operations were
impacted by our new contract discussed under Business Developments during the
Second Quarter of Fiscal 2011South AfricaSASSA contract extension. Our
pension and welfare operations continue to generate the majority of our revenues
and operating income in this operating segment and for us as a whole.
South
African transaction processors:
The
table below presents the total volume and value processed during the first half
of fiscal 2011 and 2010 by our transaction processors:
Table 20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
|
|
Total
volume (000s
)
|
|
|
Total
value $ (000
)
|
|
|
Total
value ZAR (000
)
|
|
processor
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
EasyPay
|
|
361,943
|
|
|
326,283
|
|
|
11,300,805
|
|
|
9,399,559
|
|
|
80,699,052
|
|
|
72,116,131
|
|
MediKredit
|
|
4,714
|
|
|
-
|
|
|
227,141
|
|
|
-
|
|
|
1,622,016
|
|
|
-
|
|
FIHRST
|
|
11,183
|
|
|
-
|
|
|
4,613,548
|
|
|
-
|
|
|
32,945,344
|
|
|
-
|
|
Our
results for the first half of fiscal 2011 includes the intangible asset
amortization related to our MediKredit and FIHRST acquisitions but excludes
RMTs intangible assets which were fully amortized in the third quarter of
fiscal 2010. Our results for the first half of fiscal 2010 includes amortization
related to the RMT intangible assets.
International
transaction-based activities
See
discussion under Second quarter of fiscal 2011 compared to the second quarter
of fiscal 2010Results of operations by operating segmentInternational
transaction-based activities.
Smart
card accounts
In
ZAR, revenue from the provision of smart card-based accounts decreased in
proportion to the lower number of beneficiaries serviced through our SASSA
contract. A total number of 3,520,558 smart card-based accounts were active at
December 31, 2010, compared to 3,680,888 active accounts as at December 31,
2009. The year over year decrease in the number of active accounts resulted
largely from the suspension and removal of invalid or fraudulent grants by
SASSA.
Operating
income margin from providing smart card accounts was constant at 45% for the
first half of fiscal 2011 and 2010.
Financial
services
Revenue
from UEPS-based lending increased primarily due to an increase in the number of
loans granted. In addition, on average, the return on these UEPS-based loans was
higher. Our current UEPS-based lending portfolio comprises loans made to elderly
pensioners in some of the provinces where we distribute social welfare grants.
We insure the UEPS-based lending book against default and thus no allowance is
required.
Operating
income margin for the financial services segment increased to 75% for the first
half of fiscal 2011 from 65% for the first half of fiscal 2010 primarily due to
an increase in lending activity.
39
Hardware, software and related technology sales
The
following table presents our revenue and operating income during the first half
of fiscal 2011 and 2010:
|
|
Six months ended
|
|
Table 21
|
|
December
31,
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
$000
|
|
|
|
$000
|
|
Revenue
|
|
25,589
|
|
|
|
31,124
|
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
18,671
|
|
|
|
21,384
|
|
Net1 UTA
|
|
6,918
|
|
|
|
9,740
|
|
|
|
|
|
|
|
|
|
Operating income before amortization of intangible
assets
|
|
1,784
|
|
|
|
5,118
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
(2,979
|
)
|
|
|
(53
|
)
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
1,131
|
|
|
|
4,074
|
|
Net1 UTA
|
|
(4,110
|
)
|
|
|
(4,127
|
)
|
Net1 UTA excluding amortization
of acquisition related intangible assets
|
|
334
|
|
|
|
746
|
|
Amortization
of acquisition related intangible assets
|
|
(4,444
|
)
|
|
|
(4,873
|
)
|
|
|
Six months ended
|
|
Table 22
|
|
December
31,
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
ZAR 000
|
|
|
|
ZAR 000
|
|
Revenue
|
|
182,731
|
|
|
|
238,792
|
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
133,330
|
|
|
|
164,064
|
|
Net1 UTA
|
|
49,401
|
|
|
|
74,728
|
|
|
|
|
|
|
|
|
|
Operating income before amortization of intangible
assets
|
|
12,744
|
|
|
|
39,262
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
(21,273
|
)
|
|
|
(407
|
)
|
Hardware, software and related technology
sales excluding Net1 UTA
|
|
8,077
|
|
|
|
31,256
|
|
Net1 UTA
|
|
(29,350
|
)
|
|
|
(31,663
|
)
|
Net1 UTA excluding amortization
of acquisition related intangible assets
|
|
2,385
|
|
|
|
5,724
|
|
Amortization
of acquisition related intangible assets
|
|
(31,735
|
)
|
|
|
(37,387
|
)
|
The
decrease in revenue was primarily due to lower revenues generated by Net1 UTA,
card sales and software maintenance and development activities In ZAR, the
decrease in operating income was primarily due to lower sales activity and an
allowance for credit losses of $0.5 million (ZAR 3.8 million) related to a
customer in South America.
Corporate/eliminations
The
increase in our corporate expenses resulted from higher corporate head
office-related expenditure, including the effects of inflation in South Africa,
stock-based compensation charges and transaction related expenditures of $5.1
million (ZAR 36.6 million).
Our
corporate expenses also includes expenditure related to compliance with
Sarbanes; non-executive directors fees; employee and executive salaries and
bonuses; stock-based compensation; legal and audit fees; directors and officers
insurance premiums; telecommunications expenses; property-related expenditures
including utilities, rental, security and maintenance; and elimination entries.
Liquidity
and Capital Resources
Our
business has historically generated and continues to generate high levels of
cash. At December 31, 2010, our cash balances were $71.4 million, which
comprised mainly ZAR-denominated balances of ZAR 280.0 million ($42.1 million),
KRW-denominated balances of KRW 19.6 billion ($17.3 million) and US
dollar-denominated balances of $6.1 million and other currency deposits,
primarily euro, of $5.9 million. The decrease in our cash balances from June 30,
2010, is primarily as a result of the payment of approximately $124.3 million to
fund a portion of the KSNET purchase price and the Secondary Taxation on
Companies, or STC, of $13.6 million incurred related to dividends paid from
South Africa to the United States connected with the KSNET transaction.
40
We
generally invest the surplus cash held by our South African operations in
overnight call accounts that we maintain at South African banking institutions,
and surplus cash held by our non-South African companies in the US and European
money markets. We have invested surplus cash in Korea in short term investment
accounts at Korean banking institutions. In addition, under a facilities
agreement described below (the Facilities Agreement) we are required to invest
the interest payable on these facilities in the next six months in a interest
reserve account in Korea.
Historically,
we have financed most of our operations, research and development, working
capital, capital expenditures and acquisitions through our internally generated
cash. We take the following factors into account when considering whether to
borrow under our financing facilities:
We
financed a portion of the KSNET acquisition price and related transaction
expenses with the proceeds of a KRW 130.5 billion (approximately $115.9 million
based on October 29, 2010 exchange rates) loan under the Facilities Agreement.
The Facilities Agreement provides for three separate facilities: a Facility A
loan to our wholly owned subsidiary, Net1 Applied Technologies Korea, or Net1
Korea, of up to KRW 130.5 billion (divided into Facility A1 (KRW 65.5 billion)
and Facility A2 (KRW 65.0 billion)) and a Facility B loan to KSNET of up to KRW
65.0 billion. The Facility B loan, if drawn, must be used to repay the Facility
A2 loan and may be borrowed only if Net1 Korea and KSNET complete a merger
transaction with each other. Interest on the loans is payable quarterly and is
based on the Korean CD rate in effect from time to time plus a margin of 4.10%
for Facility A loans and 3.90% for the Facility B loan. The Facility A1 loan
matures on the fifth anniversary of the initial drawdown with no required
principal prepayments. Principal on the Facility A2 loan and Facility B loan is
repayable in scheduled installments, beginning twelve months after initial
drawdown and thereafter, semi-annually with final maturity scheduled for 54
months after initial drawdown. The loans are secured by substantially all of
KSNETs assets, a pledge by Net1 Korea of its entire equity interest in KSNET
and a pledge by the immediate parent of Net1 Korea (also one of our
subsidiaries) of its entire equity interest in Net1 Korea. The Facilities
Agreement contains customary covenants that require Net1 Korea and its
consolidated subsidiaries to maintain certain specified financial ratios
(including a leverage ratio and a debt service coverage ratio) and restrict
their ability to make certain distributions with respect to their capital stock,
prepay other debt, encumber their assets, incur additional indebtedness, make
capital expenditures above specified levels, engage in certain business
combinations and engage in other corporate activities. The loans under the
Facilities Agreement are without recourse to, and the covenants and other
agreements contained therein do not apply to, us or any of our subsidiaries
(other than Net1 Korea and its subsidiaries, including KSNET).
We
have a unique cash flow cycle due to the funding mechanism under our SASSA
contact and our pre-funding of certain merchants. Under our SASSA contract, we
receive the grant funds 48 hours prior to the provision of the service and any
interest we earn on these amounts is for the benefit of SASSA. We pre-fund
certain merchants for grants paid through our merchant acquiring system on our
behalf before the start of the payment service at pay points. We typically
reimburse merchants that are not pre-funded within 48 hours after they
distribute the grants to the social welfare beneficiaries.
We
currently believe that our cash and available credit facilities are sufficient
to meet our business requirements for at least the next four quarters, including
working capital requirements, capital expenditures and debt service obligations.
Cash
flows from operating activities
Three
months ended December 31, 2010
Net
cash utilized in operating activities for the second quarter of fiscal 2011 was
$8.1 million (ZAR 55.9 million) compared to cash provided by operating
activities of $13.8 million (ZAR 103.6 million) for the second quarter of fiscal
2010. The movement in cash was primarily due to the payment of STC described
below and the SASSA price and volume reductions which were effective July 1,
2010.
During
the second quarter of fiscal 2011 we made our first provisional tax payment of
$16.6 million (ZAR 113.7 million) related to our 2011 tax year in South Africa.
We made a fourth provisional tax payment of $0.5 million (ZAR 3.7 million)
related to our 2010 tax year in Korea. In addition, we paid STC of $13.6 million
(ZAR 95 million) related to intercompany dividends paid from South Africa to the
United States.
During
the second quarter of fiscal 2010 we made our first provisional tax payment of
$15.8 million (ZAR 118.8 million) related to our 2010 tax year in South Africa.
See the table below for a summary of all taxes paid (refunded).
41
Taxes
paid during the second quarter of fiscal 2011 and 2010 were as follows:
Table 23
|
|
Three
months ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
$
|
|
|
$
|
|
|
ZAR
|
|
|
ZAR
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First provisional payments
|
|
16,565
|
|
|
15,809
|
|
|
113,708
|
|
|
118,788
|
|
Third provisional payments
|
|
335
|
|
|
239
|
|
|
2,296
|
|
|
1,789
|
|
Taxation refunds received
|
|
-
|
|
|
(3
|
)
|
|
-
|
|
|
(13
|
)
|
Secondary taxation on Companies
|
|
13,592
|
|
|
-
|
|
|
95,000
|
|
|
0
|
|
Foreign taxes - fourth provisional payments
|
|
531
|
|
|
-
|
|
|
3,713
|
|
|
-
|
|
Total tax paid
|
|
31,023
|
|
|
16,045
|
|
|
214,717
|
|
|
120,564
|
|
We
expect to pay STC of $1.2 million, translated at exchange rates applicable as of
December 31, 2010, related to intercompany dividends paid from South Africa to
the United States during the third quarter of fiscal 2011.
Six
months ended December 31, 2010
Net
cash provided by operating activities for the first half of fiscal 2011 was
$22.1 million (ZAR 157.8 million) compared to $50.7 million (ZAR 389.3 million)
for the first half of fiscal 2010. Our net cash from operating activities
decreased primarily due to the SASSA price and volume reductions which were
effective July 1, 2010.
During
the first half of fiscal 2011 we made an additional second provisional tax
payment of $1.8 million (ZAR 12.7 million) related to our 2010 tax year in South
Africa. In addition we paid our first provisional tax payment of $16.6 million
(ZAR 113.7 million) related to our 2011 tax year in South Africa. We made a
fourth provisional tax payment of $0.5 million (ZAR 3.7 million) related to our
2010 tax year in Korea. Finally, we paid Secondary Tax on Companies, or STC, of
$13.6 million (ZAR 95 million) related to intercompany dividends paid from South
Africa to the United States.
During
the first half of fiscal 2010 we made an additional second provisional tax
payment of $3.9 million (ZAR 29.6 million) related to our 2009 tax year in South
Africa. In addition, we made a first provisional payment of $15.8 million (ZAR
118.8 million) related to our 2010 tax year in South Africa. See the table below
for a summary of all taxes paid (refunded).
Taxes
paid during the first half of fiscal 2011 and 2010 were as follows:
Table 24
|
|
Six
months ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
$
|
|
|
$
|
|
|
ZAR
|
|
|
ZAR
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First provisional payments
|
|
16,565
|
|
|
15,809
|
|
|
113,708
|
|
|
118,788
|
|
Third provisional payments
|
|
335
|
|
|
239
|
|
|
2,296
|
|
|
1,789
|
|
Taxation paid related to prior years
|
|
1,774
|
|
|
3,929
|
|
|
12,716
|
|
|
29,611
|
|
Taxation refund received
|
|
(172
|
)
|
|
(241
|
)
|
|
(1,302
|
)
|
|
(1,913
|
)
|
Secondary taxation on Companies
|
|
13,592
|
|
|
-
|
|
|
95,000
|
|
|
-
|
|
Foreign taxes - fourth provisional payments
|
|
531
|
|
|
-
|
|
|
3,713
|
|
|
-
|
|
Total tax paid
|
|
32,625
|
|
|
19,736
|
|
|
226,131
|
|
|
148,275
|
|
Cash
flows from investing activities
Three
months ended December 31, 2010
During
the second quarter of fiscal 2011, we paid approximately $230.2 million (ZAR 1.6
billion), net of cash received, for 98.73% of KSNET.
Cash
used in investing activities for the second quarter of fiscal 2011 includes
capital expenditure of $4.0 million (ZAR 27.8 million), primarily for the
acquisition of payment processing terminals in Korea, kiosks to service our
EasyPay Kiosk pilot project, the acquisition of POS devices to service our
merchant acquiring system and the replacement of motor vehicles.
We
received principal loan repayments from SmartSwitch Namibia of $0.1 million
during the second quarter of fiscal 2011.
42
Cash
used in investing activities for the second quarter of fiscal 2010 includes
capital expenditure of $0.7 million (ZAR 5.2 million), primarily for the
acquisition of POS devices to service our merchant acquiring system,
improvements to leasehold property and the acquisition of computer
equipment.
Six
months ended December 31, 2010
During
the first half of fiscal 2011, we paid approximately $230.2 million (ZAR 1.6
billion), net of cash received, for 98.73% of KSNET.
Cash
used in investing activities for the first half of fiscal 2011 includes capital
expenditure of $4.8 million (ZAR 34.1 million), primarily for the acquisition of
payment processing terminals in Korea, kiosks to service our EasyPay Kiosk pilot
project, the acquisition of POS devices to service our merchant acquiring
system, the replacement of computer and electronic hardware and the replacement
of motor vehicles.
SmartSwitch
Namibia commenced repayment of loans provided by its shareholders during the
first half of fiscal 2010 and cash flows from investing activities for the first
half of fiscal 2011 includes principal repayments of $0.4 million. In July 2010,
we provided additional loan funding to VTU Colombia of approximately $0.4
million.
Cash
used in investing activities for the first half of fiscal 2010 includes capital
expenditure of $1.3 million (ZAR 10.2 million), primarily for the acquisition of
POS devices to service our merchant acquiring system, improvements to leasehold
property and the acquisition of computer equipment.
Cash
flows from financing activities
Three
months ended December 31, 2010
During
the second quarter of fiscal 2011, we obtained loans under the Facilities
Agreement to fund a portion of the KSNET purchase price. In addition, we paid
approximately $0.6 million for the remaining 19.9% of Net1 UTA during the second
quarter of fiscal 2011.
There
were no significant cash flows from financing activities during the second
quarter of fiscal 2010.
Six
months ended December 31, 2010
During
the first half of fiscal 2011 we obtained loans under the Facilities Agreement
to fund a portion of the KSNET purchase price. In addition, we paid
approximately $0.6 million for the remaining 19.9% of Net1 UTA during the first
half of fiscal 2011.
During
the first half of fiscal 2010 we repurchased, using our ZAR reserves, 9,221,526
shares of our common stock from Brait S.A. and its investment entities
affiliates for $13.50 (ZAR 105.98) per share, for an aggregate repurchase price
of $124.5 million (ZAR 977.3 million). In addition, we incurred costs of
approximately $0.5 million (ZAR 3.9 million) related to the repurchase of these
shares. During the second quarter of fiscal 2010, we also paid $1.3 million on
account of shares we repurchased on June 30, 2009, under our share buy-back
program. We also received $0.7 (ZAR 5.5 million) from employees exercising stock
options and repaying loans.
Off-Balance Sheet Arrangements
We
have no off-balance sheet arrangements.
Capital Expenditures
We
discuss our capital expenditures during the second quarter of fiscal 2011 under
Liquidity and capital resources Cash flows from investing activities. All
of our capital expenditures for the past three fiscal years have been funded
through internally generated funds. We had outstanding capital commitments of
$0.1 million as of December 31, 2010. We anticipate that capital spending for
the third quarter of fiscal 2011 will relate primarily to on-going replacement
of equipment used to administer and distribute social welfare grants, provide a
switching service through EasyPay and expand our operations in Korea. We expect
to fund these expenditures through internally generated funds.
43
Contingent Liabilities, Commitments and Contractual
Obligations
We
lease various premises under operating leases. Our minimum future commitments
for leased premises as well as other commitments are as follows:
Table 24
|
|
Payments
due by Period, as at December 31, 2010(in $ 000s)
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
than 1
|
|
|
1-3
|
|
|
3-5
|
|
|
than 5
|
|
|
|
Total
|
|
|
year
|
|
|
years
|
|
|
years
|
|
|
years
|
|
Interest-bearing liabilities (A)
|
$
|
119,579
|
|
$
|
7,166
|
|
$
|
28,664
|
|
$
|
79,270
|
|
$
|
4,479
|
|
Operating lease obligations
|
|
6,604
|
|
|
3,379
|
|
|
2,713
|
|
|
512
|
|
|
-
|
|
Purchase obligations
|
|
2,000
|
|
|
2,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Capital commitments
|
|
37
|
|
|
37
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
128,220
|
|
$
|
12,582
|
|
$
|
31,377
|
|
$
|
79,782
|
|
$
|
4,479
|
|
|
(A)
|
- includes $115.1 million of loans under the Facilities
Agreement discussed under Liquidity and Capital
Resources
|
44
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
We
seek to reduce our exposure to currencies other than the South African rand, or
ZAR, through a policy of matching, to the extent possible, assets and
liabilities denominated in those currencies. In addition, we use financial
instruments to economically hedge our exposure to exchange rate and interest
rate fluctuations arising from our operations. We are also exposed to equity
price and liquidity risks as well as credit risks.
Currency
Exchange Risk
We
are subject to currency exchange risk because we purchase inventories that we
are required to settle in other currencies, primarily the euro and US dollar. We
have used forward contracts to limit our exposure in these transactions to
fluctuations in exchange rates between the ZAR, on the one hand, and the US
dollar and the euro, on the other hand. As of December 31, 2010 and 2009, our
outstanding foreign exchange contracts were as follows:
As
of December 31, 2010
None.
As
of December 31, 2009
|
|
|
|
|
|
Fair market
|
|
|
Notional amount
|
|
Strike price
|
|
value price
|
|
Maturity
|
USD
|
1,000,000
|
|
EUR
|
1.4391
|
|
EUR
|
1.4318
|
|
January 4,2010
|
EUR
|
719,400
|
|
ZAR
|
10.9306
|
|
ZAR
|
10.7468
|
|
January 29, 2010
|
Translation
Risk
Translation
risk relates to the risk that our results of operations will vary significantly
as the US dollar is our reporting currency, but we earn most of our revenues and
incur most of our expenses in ZAR and generate a significant amount of revenue
and related and operating expenses in KRW. The US dollar fluctuated
significantly over the past three years, including against the ZAR and KRW. As
exchange rates are outside our control, there can be no assurance that future
fluctuations will not adversely affect our results of operations and financial
condition.
Interest
Rate Risk
As
a result of our normal borrowing and leasing activities, our operating results
are exposed to fluctuations in interest rates, which we manage primarily through
our regular financing activities. As discussed under Item 2Liquidity and
Capital Resources we recently negotiated and utilized a five-year senior
secured loan facility to acquire KSNET which currently bears interest at the
Korean CD rate plus 4.10% . As interest rates, and specifically the Korean CD
rate, are outside our control, there can be no assurance that future increases
in interest rates, specifically the Korean CD rate, will not adversely affect
our results of operations and financial condition.
The
following table illustrates the effect on our annual expected interest charge,
translated at exchange rates applicable as of December 31, 2010, as a result of
a change in the Korean CD rate. The effects of a hypothetical 1% increase and a
1% decrease in the Korean CD rate as of December 31, 2010, is shown. The
selected 1% hypothetical change does not reflect what could be considered the
best or worst case scenarios.
|
|
As
of December 31, 2010
|
|
Table 25
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
annual
|
|
|
|
|
|
|
|
|
|
expected
|
|
|
|
Annual
|
|
|
|
|
|
interest charge
|
|
|
|
expected
|
|
|
Hypothetical
|
|
|
after change in
|
|
|
|
interest
|
|
|
change in
|
|
|
Korean CD
|
|
|
|
charge
|
|
|
Korean CD
|
|
|
rate
|
|
|
|
($ 000)
|
|
|
rate
|
|
|
($ 000)
|
|
Interest on Facilities Agreement
|
|
7,781
|
|
|
1%
|
|
|
8,932
|
|
|
|
|
|
|
(1)%
|
|
|
7,781
|
|
We
generally maintain limited investment in cash equivalents and have occasionally
invested in marketable securities. The interest earned on our bank balances
and short term cash investments is dependent on the prevailing interest rates
in the jurisdictions where our cash reserves are invested.
45
Credit
Risk
Credit
risk relates to the risk of loss that we would incur as a result of
non-performance by counterparties. We maintain credit risk policies with regard
to our counterparties to minimize overall credit risk. These policies include an
evaluation of a potential counterpartys financial condition, credit rating, and
other credit criteria and risk mitigation tools as our management deems
appropriate.
With
respect to credit risk on financial instruments, we maintain a policy of
entering into such transactions only with South African and European financial
institutions that have a credit rating of BBB or better, as determined by credit
rating agencies such as Standard & Poors, Moodys and Fitch Ratings.
Equity
Price and Liquidity Risk
Equity
price risk relates to the risk of loss that we would incur as a result of the
volatility in the exchange-traded price of equity securities that we hold and
the risk that we may not be able to liquidate these securities. We have invested
in approximately 22% of the issued share capital of Finbond Group Limited, which
are exchange-traded equity securities. The fair value of these securities as of
December 31, 2010, represented approximately 1% of our total assets, including
these securities. We expect to hold these securities for an extended period of
time and we are not concerned with short-term equity price volatility with
respect to these securities provided that the underlying business, economic and
management characteristics of the company remain sound.
The
market price of these securities may fluctuate for a variety of reasons,
consequently, the amount we may obtain in a subsequent sale of these securities
may significantly differ from the reported market value.
Liquidity
risk relates to the risk of loss that we would incur as a result of the lack of
liquidity on the exchange on which these securities are listed. We may not be
able to sell some or all of these securities at one time, or over an extended
period of time without influencing the exchange traded price, or at all.
The
following table summarizes our exchange traded equity securities with equity
price risk as of December 31, 2010. The effects of a hypothetical 10% increase
and a 10% decrease in market prices as of December 31, 2010 is also shown. The
selected 10% hypothetical change does not reflect what could be considered the
best or worst case scenarios. Indeed, results could be far worse due both to the
nature of equity markets and the aforementioned liquidity risk.
|
|
As
of December 31, 2010
|
|
Table 26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hypothetical
|
|
|
|
|
|
|
|
|
|
Estimated fair
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
value after
|
|
|
Increase
|
|
|
|
Fair
|
|
|
|
|
|
hypothetical
|
|
|
(Decrease) in
|
|
|
|
value
|
|
|
Hypothetical
|
|
|
change in price
|
|
|
Shareholders
|
|
|
|
($ 000)
|
|
|
price change
|
|
|
($ 000)
|
|
|
Equity
|
|
Exchange-traded equity securities
|
|
8,404
|
|
|
10%
|
|
|
9,244
|
|
|
0.25%
|
|
|
|
|
|
|
(10)%
|
|
|
7,564
|
|
|
(0.25)%
|
|
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 December 31, 2010. 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 December 31, 2010.
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 December 31, 2010, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
46
Part II. Other Information
Item 1A. Risk Factors
See
Item 1A RISK FACTORS in Part I of our Annual Report on Form 10-K for the fiscal
year ended June 30, 2010 and our Quarterly Report on Form 10-Q for the quarter
ended September 30, 2010, for a discussion of our risk factors.
Item 6. Exhibits
The
following exhibits are filed as part of this Form 10-Q:
Exhibit
Number
|
|
Description
|
10.51
|
|
Senior Facilities Agreement
dated October 29, 2010, between Net 1 Applied Technologies Korea, as
borrower, Hana Daetoo Securities Co., Ltd., as mandated lead arranger,
Shinhan Bank and Woori Bank, as co-arrangers, the financial institutions
listed therein as original lenders and Hana Bank, as agent and security
agent (incorporated by reference to Exhibit 10.51 to our Form 8-K filed
on November 3, 2010)
|
31.1*
|
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a) under the
Exchange Act
|
31.2*
|
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a) under the
Exchange Act
|
32*
|
|
Certification
pursuant to 18 USC Section 1350
|
|
|
|
101.INS*
|
|
XBRL
Instance Document
|
101.SCH*
|
|
XBRL Taxonomy Extension Schema
|
101.CAL*
|
|
XBRL
Taxonomy Extension Calculation Linkbase
|
101.DEF*
|
|
XBRL Taxonomy Extension Definition Linkbase
|
101.LAB*
|
|
XBRL
Taxonomy Extension Label Linkbase
|
101.PRE*
|
|
XBRL Taxonomy Extension Presentation Linkbase
|
* Filed herewith.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on February 3, 2011.
NET 1 UEPS TECHNOLOGIES, INC.
By: /s/ Dr. Serge C.P. Belamant
Dr. Serge C.P. Belamant
Chief
Executive Officer, Chairman of the Board and Director
By: /s/ Herman Gideon Kotzé
Herman Gideon Kotzé
Chief
Financial Officer, Treasurer and Secretary, Director
47
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