NET 1 UEPS TECHNOLOGIES INC – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Edgar Online, Inc. |
The following discussion and analysis should be read in conjunction with Item 6-"Selected Financial Data" and Item 8-"Financial Statements and Supplementary Data." In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See Item 1A- "Risk Factors" and "Forward Looking Statements."
Overview
We are a leading provider of payment solutions and transaction processing services across multiple industries and in a number of emerging economies.
We have developed and market a comprehensive transaction processing solution that encompasses our smart card-based alternative payment system for the unbanked and under-banked populations of developing economies and for mobile transaction channels. Our market-leading system can enable the billions of people globally who generally have limited or no access to a bank account to enter affordably into electronic transactions with each other, government agencies, employers, merchants and other financial service providers. Our universal electronic payment system, or UEPS, uses biometrically secure smart cards that operate in real-time but offline, unlike traditional payment systems offered by major banking institutions that require immediate access through a communications network to a centralized computer. This offline capability means that users of our system can conduct transactions at any time with other card holders in even the most remote areas so long as a smart card reader, which is often portable and battery powered, is available. Our off-line systems also offer the highest level of availability and affordability by removing any elements that are costly and are prone to outages. Our latest version of the UEPS technology has now been certified by EMV, which facilitates our traditionally proprietary UEPS system to interoperate with the global EMV standard and allows card holders to transact at any EMV-enabled point of sale terminal or ATM. The new UEPS/EMV technology is currently being deployed on an extensive scale inSouth Africa through the issuance of MasterCard-branded UEPS/EMV cards to our social welfare grant customers. In addition to effecting purchases, cash-backs and any form of payment, our system can be used for banking, health care management, international money transfers, voting and identification. We also provide secure transaction technology solutions and services, by offering transaction processing, financial and clinical risk management solutions to various industries. We have extensive expertise in secure online transaction processing, cryptography, mobile telephony and integrated circuit card (chip/smart card) technologies. Our technology is widely used inSouth Africa today, where we distribute pension and welfare payments, using our UEPS/EMV technology, to over nine million recipients across the entire country, process debit and credit card payment transactions on behalf of retailers that we believe represent nearly 65% of retailers within the formal retail sector inSouth Africa through our EasyPay system, process value-added services such as bill payments and prepaid airtime and electricity for the major bill issuers and local councils inSouth Africa , and provide mobile telephone top-up transactions for all of the South African mobile carriers. We are the largest provider of third-party and associated payroll payments inSouth Africa through our FIHRST service that processes monthly payments for approximately 1,250 employer groups representing over 850,000 employees. Our MediKredit service provides the majority of funders and providers of healthcare inSouth Africa with an on-line real-time management system for healthcare transactions. We perform a similar service in the US through our XeoHealth subsidiary. Internationally, though KSNET, the second largest transaction processor by volume inKorea , we offer card processing, payment gateway and banking value-added services in that country. The acquisition of KSNET during the second quarter of fiscal 2011, expands our international footprint as well as diversifies our revenue, earnings and product portfolio. We have also concluded deals for the provision of MVC services and/or licenses with customers inMexico ,Spain andIndia .
Sources of Revenue
We generate our revenues by charging transaction fees to government agencies, merchants, financial service providers, employers and healthcare providers; by providing loans and insurance products and by selling hardware, licensing software and providing related technology services.
We have structured our business and our business development efforts around four related but separate approaches to deploying our technology. In our most basic approach, we act as a supplier, selling our equipment, software, and related technology to a customer. As an example, inGhana , we sold a complete UEPS to theCentral Bank , which owns and operates the resulting transaction settlement system. The revenue and costs associated with this approach are reflected in our hardware, software and related technology sales segment. 35 -------------------------------------------------------------------------------- We have found that we have greater revenue and profit opportunities, however, by acting as a service provider instead of a supplier. In this approach we own and operate the UEPS ourselves, charging one-time and on-going fees for the use of the system either on a fixed or ad valorem basis. This is the case inSouth Africa , where we distribute welfare grants on behalf of the South African government and wages on behalf of employers on a fixed fee basis, but charge a fee on an ad valorem basis for goods and services purchased using our smart card. The revenue and costs associated with this approach are reflected in our smart card accounts, South African transaction-based activities and financial services segments. We have adopted a variation of this approach inIraq , where we operate a UEPS system on an outsourced basis on behalf of a consortium consisting of the Iraqi government and local Iraqi banks, in return for transaction fees based on the volume and value of transactions processed through the system. Because our smart cards are designed to enable the delivery of more advanced services and products, we are also willing to supply those services and products directly where the business case is compelling. For instance, we provide short-term UEPS-based loans to our smart card holders. This is an example of the third approach that we have taken. Here we can act as the principal in operating a business that can be better delivered through our UEPS. We can also act as an agent, for instance, in the provision of insurance policies. In both cases, the revenue and costs associated with this approach are reflected in our financial services segment. Through KSNET, we earn most of our revenue from payment processing services we provide to approximately 220,000 merchants and to card issuers inKorea through our value-added network. In the US, we earn transaction fees from our customers utilizing our XeoRules on-line real-time management system for healthcare transactions. We also generate fees from our customers who utilize our VCPay technology to generate a unique, one-time use prepaid virtual card number to securely purchase goods and services or perform bill payments in any card not present environment. The revenue and costs at KSNET, XeoHealth and VCPay as well as those from our Iraqi contract, are reflected in our international transaction-based activities segment. We also generate fees from transaction processing for both funders and providers of healthcare inSouth Africa and from providing a payroll transaction management service to South African companies. In both cases, the revenue and costs associated with these services are reflected in our South African transaction-based activities segment. Finally, we have entered into business partnerships or joint ventures to introduce our UEPS and VTU solutions to new markets such asBotswana ,Namibia andColombia . In these situations, we take an equity position in the business while also acting as a supplier of technology. In evaluating these types of opportunities, we seek to maintain a highly disciplined approach, carefully selecting partners, participating closely in the development of the business plan and remaining actively engaged in the management of the new business. In most instances, the joint venture or partnership has a license to use the UEPS in the specific territory, including the back-end system. We account for our equity investments using the equity method. When we equity-account these investments, we are required under US GAAP to eliminate our share of the net income generated from sales of hardware and software to the investee. We recognize this net income from these equity-accounted investments during the period in which the hardware and software is utilized in the investee's operations, or has been sold to third-party customers, as the case may be.
We believe that this flexible approach enables us to drive adoption of our solution while capturing the value created by the implementation of our technology.
Business Developments during Fiscal 2012
South Africa SASSA contract OnJanuary 17, 2012 , SASSA awarded us a tender to provide payment services for social grants in all ofSouth Africa's nine provinces for a period of five years. OnFebruary 3, 2012 , we entered into a new contract, together with a related service level agreement, with SASSA pursuant to which we pay, on behalf of SASSA, social grants to all persons nationally who are entitled to receive such grants, for a firm price ofZAR16.44 per beneficiary paid, orZAR 14.42 net of VAT. The new pricing terms became effective onApril 1, 2012 , upon theMarch 31, 2012 expiration of our then-existing contract with SASSA to provide social grant distribution in five provinces. Thus, our fiscal 2012 results of operations include three quarters of operations under the prior contract, which contained a standard pricing formula for all five 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. 36 -------------------------------------------------------------------------------- We commenced the implementation of our new contract during the third quarter of fiscal 2012. The implementation is being conducted in two phases. The first phase involved issuing approximately 2.5 million MasterCard-branded debit cards to beneficiaries that we did not serve under our previous contract in order to establish the payment process to pay all social grants in the country. We commenced the national grant payment process for approximately 9.2 million beneficiaries onApril 2, 2012 and thus successfully completed the first phase of implementation. The second phase requires us to re-enroll all social grant beneficiaries inSouth Africa . This enrollment process will require us to capture the personal and biometric information of each beneficiary and issue each grant recipient with our latest MasterCard-branded UEPS/EMV combination smart cards. These smart cards can be used across all elements of the South African National Payment System, including at ATMs and POSs, in addition to our current UEPS merchant acquiring system and mobile pay points. We commenced the second phase of the enrollment process in earlyJuly 2012 and plan to be substantially complete byMarch 2013 . In order to complete the first phase of the implementation on time, we hired approximately 2,500 temporary employees required to assist with the first phase of the beneficiary enrollment process. Once we have completed the second phase, we expect our permanent employee base to increase from pre-new contract levels by approximately 900 people. Additionally, following the conclusion of the new service level agreement, we paid certain of our executives and key employees special bonuses of$5.4 million (ZAR 41.8 million ) in recognition of their contributions to the compilation of the successful SASSA tender, the development of the new technologies and the support provided for the implementation of the tender award. During fiscal 2012 we incurred direct implementation expenses (excluding the bonuses discussed above) of approximately$10.9 million (ZAR 83.9 million ) including staff, travel, premises hire for enrollment, stationery, delivery and advertising costs. We are unable to quantify the value of time spent by our executives and pension and welfare operations managers and staff that service the five provinces in which we operated under the previous contract and that have assisted in the implementation of the national award. We also incurred approximately$21.2 million in capital expenditures, primarily to acquire registration workstations, payment vehicles and the branch infrastructure required for the national implementation. We anticipate cumulative capital expenditures related to the ramp of our national contract to be in the$45 to $50 million range, of which roughly two-thirds should be incurred by the end of the second quarter of fiscal 2013.
See Item 1A-"Risk Factors" and Item 3-"Legal Proceedings" for more information and the risks associated with our SASSA contract, the recently initiated new tender process and for an update on litigation between us and SASSA.
Issue of option pursuant to Broad Based Black Economic Empowerment transaction
OnApril 19, 2012 , we issued a one-year option to purchase 8,955,000 shares of our common stock to a BEE consortium pursuant to the previously-announced BEE transaction that we entered into onJanuary 25, 2012 . While we believe that this transaction will improve our BEE rating, and therefore provide us with additional business opportunities inSouth Africa , additional steps may become necessary to achieve these goals. For a discussion of additional risks associated with compliance with the South African Broad Based Black Economic Empowerment Act, please see the risk factor entitled "If we do not achieve applicable black economic empowerment objectives in our South African businesses, we risk losing our government and private contracts. In addition, it is possible that we may be required to achieve black shareholding of our company in a manner that could dilute your ownership." in Item 1A.
Acquisition of SmartLife
OnJuly 1, 2011 , we acquired SmartLife, a South African long-term insurance company, forZAR 13 million (approximately$1.8 million ) in cash. Prior to its acquisition by us,Smart Life had been administered as a ring-fenced life-insurance license by a large South African insurance company, had not written any new insurance business for a number of years and had reinsured all of its risk exposure under its life insurance products. SmartLife has been allocated to our financial services operating segment. The acquisition of SmartLife provides us with an opportunity to offer relevant insurance products directly to our existing customer and employee base inSouth Africa . We intend to offer this customer base a full spectrum of products applicable to this market segment, including credit life, group life, funeral and education insurance policies.
Acquisition of Eason prepaid airtime and electricity business
OnOctober 3, 2011 , we acquired the South African prepaid airtime and electricity businesses ofEason & Son, Ltd , or Eason, an Irish private limited company, for approximately$4.5 million in cash. The principal assets acquired comprise customer and supplier lists, accounts receivable books, inventory, point of service terminals and a perpetual license to utilize Eason's internally developed transaction-based system software, namely EBOS. The business has been integrated with EasyPay and has been allocated to our South African transaction-based activities operating segment. We expect over time to integrate all of our prepaid offerings onto the EBOS system. 37
--------------------------------------------------------------------------------
South African transaction processors, excluding pension and welfare
FIHRST continues to grow its market share in the employer and employee payment processing space via the offering of our expanded services and the acquisition of new employer and employee groups. MediKredit signed agreements with new providers, including public hospitals, private hospitals and specialist doctors, and has commenced adjudication and processing activities for these providers.
Partnership with MasterCard
Following our EMV certification and subsequent strategic decision to issue MasterCard-branded UEPS/EMV cards to our welfare recipients inSouth Africa as part of our SASSA contract, we entered into a partnership with MasterCard to facilitate the interoperability of our UEPS technology with the traditional EMV payment system to address the financial services needs of the unbanked population inSouth Africa and a number of other emerging African countries by leveraging the UEPS/EMV technology.
Partnership with Vodacom
As part of our national SASSA rollout inSouth Africa , we have partnered with Vodacom, one of the largest mobile operators in the country and a subsidiary of Vodafone Group, to issue welfare recipients with a free Vodacom SIM card in addition to our UEPS/EMV smart card as a way to communicate monthly with beneficiaries regarding grant information, a free phone call for voice biometric verification, and a channel to distribute customized marketing offers via SMS for various products and services. OutsideSouth Africa KSNET The KSNET management team has commenced a number of strategic initiatives in theRepublic of Korea to maintain and expand our current market share and to grow into adjacent markets. In fiscal 2012, KSNET increased the number of merchants it served by 20,000 as a result of its strategic marketing initiatives to target the small and medium merchant market segment, and currently serves approximately 220,000 merchants. The competitive value added network environment inKorea has resulted in a nominal anticipated loss of operation margin, which we expect to continue for the foreseeable future, and expect further nominal margin loss in the short to medium-term. However, management expects that its efforts to penetrate the small and medium sized merchant base as well as the introduction of additional services that leverage the existing infrastructure may improve the unit's margin profile over time.
XeoHealth
During the second quarter of fiscal 2012, we commenced processing 4010 and 5010 data, including capitation information and creating state reporting claims files forCommunity Behavioral Health , or CBH, a not-for-profit corporation contracted by theCity of Philadelphia to provide behavioral health services for Philadelphia Medicaid recipients. XeoHealth licenses its XeoRules SaaS offering to CBH including implementation services. XeoHealth has recognized implementation revenue during the implementation phase and recurring transaction-based revenue fromDecember 2011 from this contract. Additionally, XeoHealth has been subcontracted byCognosante LLC , a U.S. provider of health IT services to state and federal agencies and regional health organizations, to assist with the provision of recovery audit contractor, or RAC, services to theNorth Dakota Department of Human Services ,Medical Services Division . XeoHealth will earn a fee based on a percentage of the final recoveries identified by our XeoRules claims auditing service for the past five years, as well as the desk review recovery referrals identified through our XeoRules engine untilJune 30, 2013 . In addition to the North Dakota RAC, XeoHealth has also been subcontracted byCognosante to provide both the automated audit as well the analysis services as required by the RAC for the State of Missouri Medicaid. XeoHealth will be compensated based on a percentage of the final recoveries identified by our XeoRules claims re-adjudicating service for the audit period of three years, as well as the desk review recovery referrals identified through our XeoRules engine. We expect XeoHealth to commence providing RAC services bySeptember 2012 . XeoRules is XeoHealth's internally developed 5010 and ICD-10 enabled real-time claims adjudication engine. XeoRules significantly reduces the time and radically improves the efficiency and accuracy of healthcare claims adjudication and data processing. We continue to enjoy significant interest from various participants in the U.S. healthcare industry in our solution for the current and newly updated Health Insurance Portability and Accountability Act-mandated electronic data interchange transactions. 38
--------------------------------------------------------------------------------
Mobile Virtual Card
We launched our VCPay offering inthe United States during fiscal 2011. Our mobile phone-based virtual payment card application is designed to eliminate fraud in card not present transactions. During the first quarter of fiscal 2012, we engaged the services of a specialist advisory firm to assist us with the general management of our VCPay initiatives in the US, the identification of the various strategic channels for VCPay deployment and the commercialization of VCPay in our targeted industry verticals. The Banamex VCPay initiative inMexico is currently in the system integration testing phase, with hardware having been deployed and prepared for launch in the second quarter of fiscal 2013. We believe that this first implementation of our VCPay technology inLatin America , spearheaded by one of the largest financial institutions in the region, as a catalyst to increase the footprint of VCPay services in the region.
Late in fiscal 2012, we have signed additional MVC deployments with new customers in
The African Continent and
During fiscal 2012, NUETS recorded revenue from transaction fees under its contract with the government ofIraq . NUETS has entered the second phase of its initiative inGhana and now generates recurring income in the form of hardware and software maintenance fees. According to data from our customer,Ghana Interbank Payment and Settlement Systems, during the first six months of calendar 2012, value and volume of transactions involving e-Zwich increased ten-fold sinceJanuary 1, 2012 and as additional payment infrastructure is deployed, usage is expected to increase further. Although we do not receive a transaction fee from our system inGhana , we believe that the increase in usage demonstrates the attractiveness of our technology in countries outsideSouth Africa . NUETS continued to service its current customers on the African continent and inIraq and continued its business development efforts, including responding to a number of tenders, in multiple countries on the African continent during the year. In addition, NUETS has developed a limited investment / software as a service business model and we expect to deploy the UEPS technology in selected African markets using this approach in the future.
Our partnership with MasterCard may also bring us additional business development opportunities for current or future MasterCard member banks who seek the offline and additional functionality incorporated in our new UEPS/EMV payment technology.
Reallocation of certain activities among reporting segments
During fiscal 2012, we made the following changes to our reporting segments:
º We have reallocated our EP Kiosk business unit to the South African
transaction-based activities segment from the hardware, software and
related technology sales segment, as the unit is no longer in pilot phase
and now forms part of EasyPay;
º Following XeoHealth's first contract announcement, we have allocated its
revenue and costs to the international transaction-based activities segment
which were previously included in the South African transaction-based
activities segment; and
º Revenue and administration costs related to our comprehensive financial
services offerings are now all included in the financial services segment.
39 -------------------------------------------------------------------------------- The tables below present our revenue and operating income, both as reported and as revised to reflect the reallocations described above, for each quarter of fiscal 2011: [[Image Removed]] Furthermore, the activities of Net1 UTA related primarily to the commercialization of our MVC offering during the first quarter of fiscal 2012 have been allocated to our international transaction-based activities operating segment. 40
-------------------------------------------------------------------------------- Refer to Note 22 to our consolidated financial statements for a description of our operating segments and segment financial information for fiscal 2012, 2011 and 2010.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with US GAAP, which requires management to make estimates and assumptions about future events that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities. As future events and their effects cannot be determined with absolute certainty, the determination of estimates requires management's judgment based on a variety of assumptions and other determinants such as historical experience, current and expected market conditions and certain scientific evaluation techniques. Management believes that the following accounting policies are critical due to the degree of estimation required and the impact of these policies on the understanding of the results of our operations and financial condition.
Deferred Taxation
We estimate our tax liability through the calculations done for the determination of our current tax liability, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities which are disclosed on our balance sheet. Management then has to assess the likelihood that deferred tax assets are more likely than not to be realized in future periods. In the event it is determined that the deferred tax assets to be realized in the future would be in excess of the net recorded amount, an adjustment to the deferred tax asset valuation allowance would be recorded. This adjustment would increase income in the period such determination was made. Likewise, should it be determined that all or part of the net deferred tax asset would not be realized in the future, an adjustment to increase the deferred tax asset valuation allowance would be charged to income in the period such determination is made. In assessing the need for a valuation allowance, historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and practicable tax planning strategies are considered. During fiscal 2012, 2011, and 2010, we recorded increases to our valuation allowance of$12.0 million ,$19.5 million and$5.0 million , respectively.
Stock-based Compensation and Equity Instrument issued pursuant to BBBEE transaction
Stock-based compensation
Management is required to make estimates and assumptions related to our valuation and recording of stock-based compensation charges under current accounting standards. These standards require all share-based compensation to employees to be recognized in the statement of operations based on their respective grant date fair values over the requisite service periods and also requires an estimation of forfeitures when calculating compensation expense. We utilize the Cox Ross Rubinstein binomial model to measure the fair value of stock options granted to employees and directors and recognize compensation cost on a straight line basis. Option-pricing models require estimates of a number of key valuation inputs including expected volatility, expected dividend yield, expected term and risk-free interest rate. Our management has estimated forfeitures based on historic employee behavior under similar compensation plans. No stock options were granted during fiscal 2010. The fair value of stock options is affected by the assumptions selected. Net stock-based compensation expense from continuing operations was$2.8 million ,$1.7 million , and$5.7 million for fiscal 2012, 2011 and 2010, respectively. Net stock-based compensation expense for fiscal 2011, includes a reversal of$3.5 million related to a portion of the restricted stock granted inAugust 2007 that did not vest as the performance condition prescribed in the terms of the awards was not met. Equity instrument We recorded$14.2 million of expense associated with the issuance of equity instruments as part of the BBBEE transaction during fiscal 2012 as such awards were fully vested during the period.
Intangible Assets Acquired Through Acquisitions
The fair values of the identifiable intangible assets acquired through acquisitions were determined by management using the purchase method of accounting. We completed acquisitions during fiscal 2012, 2011 and 2010, where we identified and recognized intangible assets. We have used the relief from royalty method, the multi-period excess earnings method, the income approach and the cost approach to value acquisition-related intangible assets. In so doing, we made assumptions regarding expected future revenues and expenses to develop the underlying forecasts, applied contributory asset charges, discount rates, exchange rates, cash tax charges and useful lives. 41 -------------------------------------------------------------------------------- The valuations were based on information available at the time of the acquisition and the expectations and assumptions that have been deemed reasonable by us. No assurance can be given, however, that the underlying assumptions or events associated with such assets will occur as projected. For these reasons, among others, the actual cash flows may vary from forecasts of future cash flows. To the extent actual cash flows vary, revisions to the useful life or impairment of intangible assets may be necessary. For instance, during fiscal 2011, we recognized an impairment loss of approximately$41.8 million related to the entire carrying value of customer relationships acquired in the Net1 UTA acquisition inAugust 2008 .
Business Combinations and the Recoverability of Goodwill
A component of our growth strategy has been to acquire and integrate businesses that complement our existing operations. The purchase price of an acquired business is allocated to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair value at the date of purchase. The difference between the purchase price and the fair value of the net assets acquired is recorded as goodwill. In determining the fair value of assets acquired and liabilities assumed in a business combination, we use various recognized valuation methods, including present value modeling. Further, we make assumptions using certain valuation techniques, including discount rates and timing of future cash flows. We review the carrying value of goodwill annually or more frequently if circumstances indicate impairment may have occurred. In performing this review, we are required to estimate the fair value of goodwill that is implied from a valuation of the reporting unit to which the goodwill has been allocated after deducting the fair values of all the identifiable assets and liabilities that form part of the reporting unit. The determination of the fair value of a reporting unit requires us to make significant judgments and estimates. In determining the fair value of reporting units, we consider the value of our business as a whole and allocate this value across our reporting units based on the weighted average of the returns of the reporting units. We base our estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. In addition, we make judgments and assumptions in allocating assets and liabilities to each of our reporting units. The results of our impairment tests during fiscal 2012 indicated that the fair value of our reporting units exceeded their carrying values and therefore our reporting units were not at risk of potential impairment.
Accounts Receivable and Provision for Doubtful Debts
We maintain a provision for doubtful debts related to our hardware, software and related technology sales and international transaction-based activities segments as a result of sales or rental of hardware, support and maintenance services provided; or sale of licenses to customers; or the provision of transaction processing services to our customers. Our policy is to regularly review the aging of outstanding amounts due from customers and adjust the provision based on management's estimate of the recoverability of the amounts outstanding. Management considers factors including period outstanding, creditworthiness of the customers, past payment history and the results of discussions by our credit department with the customer. We consider this policy to be appropriate taking into account factors such as historical bad debts, current economic trends and changes in our customer payment patterns. Additional provisions may be required should the ability of our customers to make payments when due deteriorate in the future. A significant amount of judgment is required to assess the ultimate recoverability of these receivables, including on-going evaluation of the creditworthiness of each customer.
Research and Development
Accounting standards require product development costs to be charged to expenses as incurred until technological feasibility is attained. Technological feasibility is attained when our software has completed system testing and has been determined viable for its intended use. The time between the attainment of technological feasibility and completion of software development has been short. Accordingly, we did not capitalize any development costs during the years endedJune 30, 2012 , 2011 or 2010, particularly because the main part of our development is the enhancement and upgrading of existing products.
Costs to develop software for our internal use is expensed as incurred, except to the extent that these costs are incurred during the application development stage. All other costs including those incurred in the project development and post-implementation stages are expensed as incurred.
A significant amount of judgment is required to separate research costs, new development costs and ongoing development costs based as the transition between these stages. A multitude of factors need to be considered by management, including an assessment of the state of readiness of the software and the existence of markets for the software. The possibility of capitalizing development costs in the future may have a material impact on the group's profitability in the period when the costs are capitalized, and in subsequent periods when the capitalized costs are amortized. 42
--------------------------------------------------------------------------------
Recent Accounting Pronouncements Recent accounting pronouncements adopted
Refer to Note 2 of our consolidated financial statements for a full description of recent accounting pronouncements, including the expected dates of adoption and effects on financial condition, results of operations and cash flows.
Recent accounting pronouncements not yet adopted as of
Refer to Note 2 of our consolidated financial statements for a full description of recent accounting pronouncements not yet adopted as of
Currency Exchange Rate Information
Actual exchange rates
The actual exchange rates for and at the end of the periods presented were as follows: Table 3 Year ended June 30, 2012 2011 (1) 2010 ZAR : $ average exchange rate 7.7920 7.0286 7.6117 Highest ZAR : $ rate during period 8.6987 7.7809 8.3187 Lowest ZAR : $ rate during period 6.6096 6.4925 7.1731 Rate at end of period 8.2881 6.8449 7.6529 KRW : $ average exchange rate 1,130 1,113 n/a Highest KRW : $ rate during period 1,202 1,169 n/a Lowest KRW : $ rate during period 1,029 1,059 n/a Rate at end of period 1,159 1,079 n/a
43 --------------------------------------------------------------------------------
[[Image Removed]] [[Image Removed]] 44
--------------------------------------------------------------------------------
Translation exchange rates
We are required to translate our results of operations from ZAR to US dollars on a monthly basis. Thus, the average rates used to translate this data for the years endedJune 30, 2012 , 2011 and 2010, vary slightly from the averages shown in the table above. The translation rates we use in presenting our results of operations are the rates shown in the following table: Year ended Table 4 June 30, 2012 2011 2010 Income and expense items: $1 = ZAR 7.7186 6.9962 7.6092 Income and expense items: $1 = KRW 1,104 1,121 n/a Balance sheet items: $1 = ZAR 8.2881 6.8449 7.6529 Balance sheet items: $1 = KRW 1,159 1,079 n/a
Results of Operations
The discussion of our consolidated overall results of operations is based on amounts as reflected in our audited consolidated financial statements which are prepared in accordance with US GAAP. We analyze our results of operations both in US dollars, as presented in the consolidated financial statements, and supplementally in ZAR, because ZAR is the functional currency of the entities which contribute the majority of our profits and is the currency in which the majority of our transactions are initially incurred and measured. Due to the significant impact of currency fluctuations between the US dollar and ZAR on our reported results and because we use the US dollar as our reporting currency, we believe that the supplemental presentation of our results of operations in ZAR is useful to investors to understand the changes in the underlying trends of our business. Fiscal 2012 results include SmartLife fromJuly 1, 2011 , and Eason fromOctober 1, 2011 and KSNET, MediKredit and FIHRST. Fiscal 2011 results include MediKredit and FIHRST for the entire period and KSNET fromNovember 1, 2010 , but do not include Eason and SmartLife. Fiscal 2010 results include MediKredit and FIHRST fromJanuary 1, 2010 andMarch 31, 2010 , respectively, and do not include KSNET, SmartLife and Eason.
The discussion below gives effect to the reallocation of certain activities among our various operating segments as discussed above.
Fiscal 2012 Compared to Fiscal 2011
The following factors had an influence on our results of operations during fiscal 2012 as compared with the same period in the prior year:
º Impact of new SASSA contract: Our new SASSA contract has resulted in higher
revenues from SASSA during the fourth quarter of fiscal 2012. We commenced
implementing the new contract during the third quarter of fiscal 2012 and
incurred additional implementation and staff costs of approximately $10.9
million,excluding cash bonuses of
of the tender award to us;
º Unfavorable impact from the strengthening of the US dollar: The US dollar
appreciated by 10% against the ZAR during fiscal 2012 which negatively
impacted our reported results;
º Replacement of STC with a dividends withholding tax in
result of a change in South African tax law that replaces STC with a
dividends withholding tax, our tax expense includes the positive impact of
a
º Foreign tax credit valuation allowance: Our tax expense includes the
negative impact of a
º Fair value charge resulting from issue of equity instrument pursuant to
BBBEE transaction: The fair value charge of
BBBEE transaction negatively impacted our reported results during fiscal
2012;
º Inclusion of revenue contribution from KSNET at lower operating margin
(before acquired intangible asset amortization) than our legacy business:
The inclusion of KSNET contributed to an increase in revenues for fiscal
2012; however, because KSNET has an operating margin (before acquired
intangible asset amortization) that is lower than our legacy businesses, it
reduced our overall operating margin. KSNET also contributed to the
increase in selling, general and administration and depreciation and
amortization expenses;
º Inclusion of revenue contribution from Eason at lower operating margin than
our legacy business: The inclusion of the acquired Eason business from the
second quarter of fiscal 2012 contributed to an increase in revenues for
fiscal 2012; however, because Eason's prepaid airtime sales business has a
operating margin (before acquired intangible asset amortization) that is
lower than our legacy businesses, it reduced our overall operating margin;
45
--------------------------------------------------------------------------------
º Intangible asset amortization related to acquisitions: We recorded
additional intangible asset amortization related to the acquisitions of
KSNET and Eason which was offset by the full impairment of Net1 UTA's
intangibles in 2011;
º Profit on liquidation of SmartSwitch Nigeria: We recorded a non-cash profit
of
and
º Fiscal 2011 intangible asset impairment and transaction-related expenses:
During 2011, we impaired intangible assets related to the Net1 UTA acquisition of$41.8 million and incurred transaction-related expenses of$5.7 million , primarily for the acquisition of KSNET. Consolidated overall results of operations
This discussion is based on the amounts which were prepared in accordance with US GAAP.
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 5 (US GAAP) Year ended June 30, 2012 2011 % $ '000 $ '000 change Revenue 390,264 343,420 14%
Cost of goods sold, IT processing, servicing 141,000 109,858
28%
and support Selling, general and administration 137,404 119,692
15%
Equity instrument issued pursuant to BBBEE 14,211 -
nm
transaction
Depreciation and amortization 36,499 34,671
5%
Impairment of intangible assets - 41,771 (100)% Operating income 61,150 37,428 63% Interest income 8,576 7,654 12% Interest expense 9,345 8,672 8% Income before income taxes 60,381 36,410 66% Income tax expense 15,936 33,525 (52)% Net income before income (loss) from 44,445 2,885
nm
equity-accounted investments Income (Loss) from equity-accounted investments 220 (339 )
(165)%
Net income 44,665 2,546
nm
Less (Add) net income (loss) attributable to 14 (101 )
(114)%
non-controlling interest Net income attributable to Net1 44,651 2,647 nm In South African Rand Table 6 (US GAAP) Year ended June 30, 2012 2011 ZAR ZAR % '000 '000 change Revenue 3,012,292 2,402,634 25%
Cost of goods sold, IT processing, servicing 1,088,322 768,589
42%
and support Selling, general and administration 1,058,190 837,389
26%
Equity instrument issued pursuant to BBBEE 112,066 -
nm
transaction
Depreciation and amortization 281,722 242,565
16%
Impairment of intangible assets - 292,238 (100% Operating income 471,992 261,853 80% Interest income 66,195 53,549 24% Interest expense 72,130 60,671 19% Income before income taxes 466,057 254,731 83% Income tax expense 123,004 234,548 (48% ) Net income before income (loss) from 343,053 20,183
nm
equity-accounted investments Income (Loss) from equity-accounted investments 1,698 (2,372 ) (172% ) Net income 344,751 17,811
nm
Less (Add) net income (loss) attributable to 108 (707 ) (115% ) non-controlling interest Net income attributable to Net1 344,643 18,518 nm 46
-------------------------------------------------------------------------------- Analyzed in ZAR, the increase in revenue was primarily due to the inclusion of KSNET, incremental revenue resulting from our new SASSA contract award, higher prepaid airtime sales resulting from the Eason acquisition, increase in the number of UEPS-based loans made, and higher utilization of our UEPS system inIraq , offset by lower hardware and software sales.
Analyzed in ZAR, cost of goods sold, IT processing, servicing and support was higher primarily due to the inclusion of KSNET and incremental costs resulting from our new SASSA contract award.
The increase in selling, general and administration expense is the result of the KSNET acquisition and SASSA implementation costs of$10.9 million and cash bonuses of$5.4 million paid which was offset by lower stock-based compensation charge, primarily because the performance-based restricted stock granted inAugust 2007 was fully expensed in prior periods and due to the non-cash profit related to the liquidation of SmartSwitch Nigeria of$4.0 million . During fiscal 2011, selling, general and administration expense included transaction-related costs of$6.0 million (ZAR 42.3 million ), primarily for the KSNET acquisition. The grant date fair value of the equity instrument issued pursuant to ourJanuary 2012 BBBEE transaction was$14.2 million (ZAR 112.1 million ) and has been expensed in full in fiscal 2012. Our operating income margin for fiscal 2012 and 2011 was 16% and 11%, respectively. We discuss the components of the operating income margin under "-Results of operations by operating segment", however the increase is attributable to lower stock-based compensation charges and the non-cash profit related to the liquidation of SmartSwitch Nigeria of$4.0 million in fiscal 2012 compared with fiscal 2011 and transaction-related costs during fiscal 2011. In ZAR, depreciation and amortization increased primarily as a result of an increase in depreciation related to assets used to service our obligations under our new SASSA contract and an increase in KSNET depreciation and intangible asset amortization, but was partially offset by the full impairment of Net1 UTA intangibles in 2011. The intangible asset amortization related to our various acquisitions has been allocated to our operating segments as presented in the tables below: Table 7 Year endedJune 30, 2012 2011 $ '000 $ '000 Amortization included in depreciation and 19,557
21,692
amortization expense:
South African transaction-based activities 6,171 5,702 International transaction-based activities 13,015 8,602 Hardware, software and related technology 371 7,388 sales Table 8 Year ended June 30, 2012 2011 ZAR '000 ZAR '000 Amortization included in depreciation and 150,952
151,761
amortization expense:
South African transaction-based activities 47,625 39,891 International transaction-based activities 100,458 60,181 Hardware, software and related technology 2,869 51,689
sales
During fiscal 2011, customer relationships acquired as part of the Net1 UTA acquisition inAugust 2008 were reviewed for impairment following deteriorating trading conditions and uncertainty surrounding the timing and quantum of future net cash inflows. As a consequence of this review, we recognized an impairment loss of approximately$41.8 million related to the entire carrying value of customer relationships acquired. In addition, we reversed the deferred tax liability of$10.4 million associated with this intangible asset. In ZAR, interest on surplus cash increased to$8.6 million (ZAR 66.2 million ) from$7.7 million (ZAR 53.4 million ). The increase resulted primarily from higher average daily ZAR cash balances offset by lower deposit rates resulting from the decrease in the South African prime interest rate from an average of approximately 9.29% to 9.00% per annum. Interest expense increased to$9.3 million (ZAR 72.1 million ) from$8.7 million (ZAR 60.7 million ) due to the incurrence of long-term debt to fund a portion of the KSNET purchase price. Interest expense for fiscal 2012 and 2011 includes amortized debt facility fees of$0.4 million (ZAR 3.0 million ) and$2.0 million (ZAR 13.7 million ), respectively. 47 -------------------------------------------------------------------------------- Total tax expense for fiscal 2012 decreased to$16.0 million (ZAR 123.0 million ) from$33.5 million (ZAR 234.5 million ). In fiscal 2012 our effective tax rate decreased to 26.4% from 92.1% . Our fiscal 2012 tax expense includes$18.3 million related to a change in South African tax law and the creation of a valuation allowance of$12.0 million related to foreign tax credits. The reduction in our effective tax rate was primarily due to the tax law change, a non-taxable profit on liquidation of SmartSwitch Nigeria, offset by an increase in non-deductible expenses, including stock-based compensation charges, an equity instrument issued pursuant to our BEE transaction and interest expenses related to our Korean long-term debt. Our fiscal 2011 tax expense includes the effect of the reversal of$10.4 million related to deferred tax liabilities related to impaired Net1 UTA customer relationships and a valuation allowances of$8.9 million related to Net1 UTA deferred tax assets. Net earnings from equity-accounted investments for fiscal 2012 were$0.2 million (ZAR 1.7 million ) compared with a loss of$0.3 million (ZAR 2.4 million ) during fiscal 2011. We sold VinaPay in fiscal 2011 and in fiscal 2012 we did not account for the equity accounted losses in VTU Colombia as the accumulated losses have exceeded our initial investments. Net earnings from equity-accounted investments for fiscal 2012 was primarily due to an increase in transaction fees generated by SmartSwitch Namibia and SmartSwitch Botswana and due to the exclusion of VinaPay and VTU Colombia loss-making results.
Results of operations by operating segment
The composition of revenue and the contributions of our business activities to operating income are illustrated below
Table 9 In United States Dollars (US GAAP) Year ended June 30, 2012 % of 2011 % of % Operating Segment $'000 total $'000 total change Consolidated revenue: South African transaction-based 201,207 52% 189,206 55% 6%
activities
International transaction-based 118,281 30% 70,382
20% 68% activities Smart card accounts 31,263 8% 33,315 10% (6% ) Financial services 8,121 2% 7,350 2% 10% Hardware, software and related 31,392 8% 43,167 13% (27% ) technology sales Total consolidated revenue 390,264 100% 343,420 100% 14% Consolidated operating income (loss): South African transaction-based 49,824 81% 75,668 202% (34% ) activities Operating income before 55,995 81,370 (31% ) amortization Amortization (6,171 ) (5,702 ) 8%
International transaction-based 1,257 2% (220 )
(1% ) (671% ) activities Operating income before 14,272 8,382 70% amortization Amortization (13,015 ) (8,602 ) 51% Smart card accounts 12,820 21% 15,140 40% (15% ) Financial services 4,636 8% 4,999 13% (7% ) Hardware, software and related 3,619 6% (48,372 ) (129% ) (107% ) technology sales Operating income before amortization and impairment of intangibles 3,990 787 407% Impairment of intangibles - (41,771 ) nm Amortization of intangibles (371 ) (7,388 ) (95% ) Corporate/eliminations (11,006 ) (18% ) (9,787 )
(25% ) 12%
Total consolidated operating 61,150 100% 37,428
100% 63% income 48
--------------------------------------------------------------------------------
Table 10 In South African Rand (US GAAP) Year ended June 30, 2012 2011 ZAR % of ZAR % of % Operating Segment '000 total '000 total change Consolidated revenue: South African transaction-based 1,553,036 52% 1,323,723 55% 17% activities International transaction-based 912,964 30% 492,406 20% 85% activities Smart card accounts 241,307 8% 233,078 10% 4% Financial services 62,683 2% 51,422 2% 22% Hardware, software and related 242,302 8% 302,005 13% (20% ) technology sales Total consolidated revenue 3,012,292 100% 2,402,634 100% 25% Consolidated operating income (loss): South African transaction-based 384,572 81% 529,388 202% (27% ) activities Operating income before 432,197 569,279 (24% ) amortization Amortization (47,625 ) (39,891 ) 19% International transaction-based 9,702 2% (1,539 ) (1% ) (730% ) activities Operating income before 110,160 58,642 88% amortization Amortization (100,458 ) (60,181 ) 67% Smart card accounts 98,952 21% 105,922 40% (7% ) Financial services 35,783 8% 34,974 13% 2% Hardware, software and related 27,934 6% (338,420 ) (129% ) (108% ) technology sales Operating income before 30,803 5,507 459% amortization and impairment of intangibles Impairment of intangibles - (292,238 ) nm Amortization of (2,869 ) (51,689 ) (94% ) intangibles Corporate/eliminations (84,951 ) (18% ) (68,472 ) (25% ) 24% Total consolidated 471,992 100% 261,853 100% 80% operating income
South African transaction-based activities
In ZAR, the increases in segment revenue were primarily due to higher revenues earned, from
Our operating income margin for the fiscal 2012 and 2011 was 25% and 40%, respectively, and has declined primarily due to SASSA implementation costs and cash bonuses paid and higher low-margin prepaid airtime sales and higher intangible asset amortization attributable to the Eason acquisition.
Pension and welfare operations:
Our new contract discussed under "-Business Developments during Fiscal 2012-South Africa-SASSA contract" had a positive impact on revenue but decreased our operating margin. Our pension and welfare operations continue to generate the majority of our revenues and operating income in this operating segment and overall.
South African transaction processors:
The table below presents the total volume and value processed during fiscal 2012 and 2011 by our transaction processors:
Table 11
Transaction Total volume ('000s) Total value $ ('000)
Total value ZAR ('000)
processor 2012 2011 2012 2011 2012 2011 EasyPay(1) 443,227 715,945 12,171,663
24,307,247 93,948,192 165,500,752
Remaining core 418,831 493,018 11,383,734 15,662,653 87,866,487 106,642,308
Discontinued 24,396 222,927 787,929 8,644,594 6,081,705 58,858,444 MediKredit
10,677 9,805 620,439 513,503 4,788,923 3,592,572 FIHRST 24,266 21,954 10,069,927
9,792,178 77,725,741 68,508,034
(1) - includes Eason prepaid airtime and electricity volume and value fromOctober 1, 2011 and reclassified to reflect the consolidation of value-added services through EasyPay and to reflect the remaining core processing activities. 49
-------------------------------------------------------------------------------- We are refocusing EasyPay's activities on higher-margin value-added services and have terminated certain inefficient activities such as the hosting of processing servers for financial institutions. We have reclassified the 2011 transaction volumes and values in the table above to reflect the consolidation of value-added services through EasyPay and to reflect the remaining core processing activities. Our results for fiscal 2012 include intangible asset amortization related to our Eason acquisition fromOctober 2011 and MediKredit and FIHRST for the full year. Our results for fiscal 2011 include intangible asset amortization related to our MediKredit and FIHRST acquisitions for the full year.
Continued adoption of our merchant acquiring system:
The key statistics and indicators of our merchant acquiring system on a quarterly basis during the last 18 months in each of the five South African provinces where we distributed social welfare grants during the quarter are summarized in the table below.
The increase in the number of POS devices sinceJune 30, 2011 , is due to increased rental or purchase of POS devices by current merchants requesting additional equipment and new merchants joining our UEPS merchant acquiring system. The decrease in the number of participating UEPS retail locations is due to us cancelling contracts due to non-payment by the merchants. Under our normal credit control procedures we regularly scrutinize and review long outstanding debtors accounts, and after all efforts have been exhausted, we cancel our relationship with these defaulting merchants. The cancellation of these contracts has not, and should not, have a significant impact on our results of operations and as demonstrated by the key statistics below, we believe that our merchant acquiring system is functioning optimally. Table 12 Three months ended Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30, 2011 2011 2011 2011 2012 2012
Total POS devices installed as of period end 4,835 4,921
4,867 5,034 4,976 6,353
Number of participating UEPS retail locations as of period end 2,541 2,482
2,438 2,485 2,416 2,477
Value of transactions processed through POS devices during the quarter (1) (in $ '000) 411,233 446,068
493,760 404,551 484,862 349,392
Value of transactions processed through POS devices during the completed pay cycles for the quarter (2) (in $ '000) 401,723 444,750
471,942 415,369 459,495 463,555
Value of transactions processed through POS devices during the quarter (1) (in ZAR '000) 2,920,454 3,037,006
3,523,339 3,282,747 3,773,295 2,843,719
Value of transactions processed through POS devices during the completed pay cycles for the quarter (2) (in ZAR '000) 2,852,913 3,028,036
3,367,648 3,370,534 3,575,890 3,772,900
Number of grants paid through POS devices during the quarter (1) 4,804,540 4,850,146
5,091,858 4,687,607 5,320,585 3,942,781
Number of grants paid through POS devices during the completed pay cycles for the quarter (2) 4,739,062 4,839,106
4,960,121 4,820,153 5,088,020 5,191,904
Average number of grants processed per terminal during the quarter (1) 995 994 1,040 947 1,063 696 Average number of grants processed per terminal during the completed pay cycles for the quarter (2) 981 992 1,014 974 1,017 917
(1) Refers to events occurring during the quarter (i.e., based on three calendar months).
(2) Refers to events occurring during the completed pay cycle.
Under our previous contract with SASSA to distribute social welfare grants in five South African provinces, we established a dedicated UEPS merchant acquiring system where our beneficiaries could load and spend their grants. Following SASSA's award of the new tender to us for the payment of all social grants inSouth Africa , we will issue each grant recipient with our latest MasterCard-branded UEPS/EMV combination smart cards. These smart cards can be used across all elements of the South African National Payment System, including at ATMs and POSs, in addition to our current UEPS merchant acquiring system and mobile pay points. 50
-------------------------------------------------------------------------------- We will continue to supply our merchant acquiring solution to those merchants who are not already acquired, but given the availability of all EMV-enabled POS devices and ATMs to our beneficiaries on a national basis, we do not expect any further growth in the number and value of transactions processed through our own merchant acquiring network. We believe that the continued presentation of the above metrics in fiscal 2013 will not provide any meaningful information and will therefore discontinue this disclosure.
International transaction-based activities
KSNET continues to contribute the majority of our revenues in this operating segment. Operating margin for the segment is lower than most of our South African transaction-based businesses and was negatively impacted by start-up expenditures related to our XeoHealth launch inthe United States , MVC activities at Net1 UTA and on-going losses at Net1 Virtual Card, but these expenses were partially offset by revenue contributions from KSNET, and to a lesser extent from XeoHealth and NUETS' initiative inIraq . Operating income margin for fiscal 2012 and 2011 was 1% and 0%, respectively.
Our results for fiscal 2012 include the intangible asset amortization related to our KSNET acquisition for the full year and for fiscal 2011 from
Smart card accounts
In ZAR, our revenue from this operating segment was higher because the number of smart card-based accounts has increased as a result of the SASSA award, however, our revenue per account has decreased. We have reduced our pricing for smart card accounts after taking into consideration the lower price and higher volumes of the new SASSA contract. The new pricing, effective fromApril 1, 2012 , reduced the average revenue from R5.50 to R4.00 and the operating income margin from 45.45% to 28.50% . Operating income margin from providing smart card accounts for fiscal 2012 and 2011 was 41% and 45%, respectively. In ZAR, revenue from the provision of smart card-based accounts increased in proportion to the increased number of beneficiaries serviced through our SASSA contract. A total number of 5,578,518 smart card-based accounts were active atJune 30, 2012 compared to 3,561,105 active accounts as atJune 30, 2011 . Financial services UEPS-based lending contributes the majority of the revenue and operating income in this operating segment. Revenue increased primarily due to an increase in the number of loans granted. Our current UEPS-based lending portfolio comprises loans made to qualifying old age grant recipients in some of the provinces where we distribute social welfare grants. We continue to incur start-up expenditures related to our SmartLife business and other financial services offerings. SmartLife did not contribute significantly to our operating income in fiscal 2012 as it had not commenced operating activities under its new business model. Operating income margin for the financial services segment decreased to 57% from 68%, primarily as a result of start-up expenditures related to SmartLife and other financial services offerings, which was offset by increased UEPS-based lending activities.
Hardware, software and related technology sales
In ZAR, the decrease in revenue was due to a lower contribution from all drivers of hardware and software sales. However, the increase in operating margin to 13% from 2% (before the intangible asset impairment) is attributable to the sale of more software and license revenues in 2012, which contribute higher margins compared to hardware sales. UETS was impacted by significantly lower hardware sales, primarily terminals and cards, as these sales are generally made on an ad hoc basis. The majority of these sales occur within the first two years after the commencement of a project, such as inGhana andIraq .
During fiscal 2011, customer relationships of
Amortization of Prism intangible assets during fiscal 2012 and 2011, respectively, was approximately
51 -------------------------------------------------------------------------------- As we expand internationally, whether through traditional selling arrangements to provide products and services (such as inGhana andIraq ) or through joint ventures (such as with SmartSwitch Namibia and SmartSwitchBotswana ), we expect to receive revenues from sales of hardware and from software customization and licensing to establish the infrastructure of POS terminals and smart cards necessary to enable utilization of the UEPS technology in a particular country. To the extent that we enter into joint ventures and account for the investment as an equity investment, we are required to eliminate our portion of the sale of hardware, software and licenses to the investees. The sale of hardware, software and licenses under these arrangements occur on an ad hoc basis as new arrangements are established, which can materially affect our revenues and operating income in this segment from period to period.
Corporate/ Eliminations
The increase in our corporate expenses resulted primarily from the equity instrument issued pursuant to our BBBEE transaction, offset by lower stock-based compensation charges, primarily because the performance-based restricted stock granted inAugust 2007 was fully expensed in prior periods and due to the$4.0 million profit related to the liquidation of SmartSwitch Nigeria. These expense reductions were offset by higher corporate head office-related expenses. In addition, the fiscal 2011 results include transaction related expenditures of$6.0 million (ZAR 42.3 million ), primarily related to the acquisition of KSNET. Our corporate expenses also include expenditure related to compliance with Sarbanes; non-executive directors' fees; employee and executive salaries and bonuses; stock-based compensation; legal and audit fees; directors and officers insurance premiums; telecommunications expenses; property-related expenditures including utilities, rental, security and maintenance; and elimination entries.
Fiscal 2011 Compared to Fiscal 2010
The following factors had an influence on our results of operations during fiscal 2011 as compared with the same period in the prior year:
º Impairment loss related to Net1 UTA customer relationships: We recorded an
impairment loss of
relationships;
º SASSA price and volume reductions: Our contract with SASSA that was in
place during fiscal 2011 reduced our revenue and operating income as a
result of price and volume reductions from our previous contract;
º Valuation allowances related to Net1 UTA deferred tax assets: During fiscal
2011, we recorded valuation allowances totaling
Net1 UTA deferred tax assets;
º Favorable impact from the weakness of the US dollar: The US dollar
depreciated by 8% compared to the ZAR during fiscal 2011 compared to fiscal
2010 which had a positive impact on our reported results;
º Increased revenue from KSNET at lower operating margins, before acquired
intangible asset amortization, than our legacy business: Our KSNET
acquisition in
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 also contributed to the increase in selling, general and
administration and depreciation and amortization expenses;
º Increased transaction volumes at EasyPay: Our reported results were
positively impacted by increased transaction volumes at EasyPay resulting
from growth in value-added services and higher than expected activity at
retailers during the Christmas season;
º Increased revenue from MediKredit and FIRHST at lower operating margins
than other South African transaction- based activity business: Our
MediKredit and FIHRST acquisitions positively impacted our revenue during
fiscal 2011, however, because MediKredit generated an 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 also contributed to the
increase in selling, general and administration expense;
º Increased user adoption in
impacted by increased transaction revenues at NUETS from the adoption of
our UEPS technology in
º Lower revenues and margins from hardware, software and related technology
sales segment: Results for this segment were adversely impacted by lower
revenues from all contributors;
º Intangible asset amortization related to acquisitions: Our reported results
for fiscal 2011 were adversely impacted by additional intangible asset
amortization related to the acquisitions of KSNET, MediKredit and FIHRST;
º Lower interest income and increased interest expense resulting from KSNET
acquisition: We received 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
º Reversal of stock-based compensation charges: Our reported results were
positively impacted by the reversal of stock-based compensation charge of
of a portion of the performance-based restricted stock granted in August
2007; and 52
--------------------------------------------------------------------------------
º Transaction-related expenses included in selling, general and
administration expense: During fiscal 2011, we incurred transaction-related
expenses of$6.0 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.
The following tables show the changes in the items comprising our statements of operations, both in US dollars and in ZAR:
In United States Dollars Table 13 (US GAAP) Year ended June 30, 2011 2010 % $ '000 $ '000 change Revenue 343,420 280,364 22%
Cost of goods sold, IT processing, servicing 109,858 72,973
51%
and support Selling, general and administration 119,692 80,854 48% Depreciation and amortization 34,671 19,348 79% Impairment loss 41,771 37,378 12% Operating income 37,428 69,811 (46)% Interest income 7,654 10,116 (24)% Interest expense 8,672 1,047 nm Income before income taxes 36,410 78,880 (54)% Income tax expense 33,525 40,822 (18)% Net income before earnings (loss) from 2,885 38,058
(92)%
equity-accounted investments (Loss) Earnings from equity-accounted (339 ) 93
(465)%
investments
Net income 2,546 38,151
(93)%
Add: net loss attributable to non-controlling (101 ) (839 )
(88)%
interest
Net income attributable to Net1 2,647 38,990 (93)% In South African Rand Table 14 (US GAAP) Year ended June 30, 2011 2010 ZAR ZAR % '000 '000 change Revenue 2,402,634 2,133,374 13%
Cost of goods sold, IT processing, servicing 768,589 555,274
38%
and support Selling, general and administration 837,389 615,243 36% Depreciation and amortization 242,565 147,225 65% Impairment loss 292,238 284,420 3% Operating income 261,853 531,212 (51)% Interest income 66,177 76,976 (14)% Interest expense 72,111 7,967 nm Income before income taxes 254,731 600,221 (58)% Income tax expense 234,548 310,627 (24)% Net income before earnings (loss) from 20,183 289,594
(93)%
equity-accounted investments (Loss) Earnings from equity-accounted (2,372 ) 708
(435)%
investments
Net income 17,811 290,302
(94)%
Add: net loss attributable to non-controlling (707 ) (6,384 )
(89)%
interest
Net income attributable to Net1 18,518 296,686
(94)%
Analyzed in ZAR, the increase in revenue and cost of goods sold, IT processing, servicing and support for fiscal 2011 was primarily due to the inclusion of KSNET, FIHRST and MediKredit, an increase in the number of UEPS-based loans made and increased transaction volumes at EasyPay. This increase was partially offset by lower revenues from our SASSA contract, and fewer sales from our hardware, software and related technology sales segment.
Included in fiscal 2011 selling, general and administration expense are transaction-related costs of$6.0 million (ZAR 42.3 million ), primarily related to the KSNET acquisition. The increase in selling, general and administration expense was offset by a reversal of stock-based compensation charge of$3.5 million (ZAR 24.5 million ), primarily as a result of forfeitures (based on failure to achieve the required vesting conditions) of a portion of performance-based restricted stock granted inAugust 2007 . The net fiscal 2011 stock-based compensation charge was$1.7 million (ZAR 12.0 million ), which is significantly lower than the fiscal 2010 charge of$5.7 million (ZAR 43.1 million ). Fiscal 2010 selling, general and administration expenses include acquisition-related costs of$0.6 million (ZAR 4.7 million ). 53 -------------------------------------------------------------------------------- Our operating income margin decreased to 11% from 25% resulting primarily from the impairment of intangibles, as well as from the price and volumes reductions under our SASSA contract. We discuss the components of the operating income margin in more detail under "-Results of operations by operating segment". 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: Table 15 Year endedJune 30, 2011 2010 '000 '000 Amortization included in depreciation and 21,692
14,138
amortization expense:
South African transaction-based activities 5,702 4,205 International transaction-based activities 8,602 - Hardware, software and related technology 7,388 9,933 sales Table 16 Year ended June 30, 2011 2010 ZAR '000 ZAR '000 Amortization included in depreciation and 151,761
107,588
amortization expense:
South African transaction-based activities 39,891 31,999 International transaction-based activities 60,181 - Hardware, software and related technology 51,689 75,589
sales
During fiscal 2011, customer relationships acquired as part of the Net1 UTA acquisition inAugust 2008 were reviewed for impairment following deteriorating trading conditions and uncertainty surrounding the timing and quantum of future net cash inflows. As a consequence of this review, we recognized an impairment loss of approximately$41.8 million related to the entire carrying value of customer relationships acquired. In addition, we reversed the deferred tax liability of$10.4 million associated with this intangible asset. During fiscal 2010, we recognized an impairment loss of approximately$37.4 million on goodwill allocated to the hardware, software and related technology sales segment as a result of deteriorating trading conditions of this segment, particularly at Net1 UTA, and uncertainty surrounding contract finalization dates which were expected to impact future cash flows. Interest on surplus cash for fiscal 2011 decreased to$7.7 million (ZAR 53.4 million ) from$10.1 million (ZAR 77.0 million ) for fiscal 2010. The decrease resulted primarily from lower average daily ZAR cash balances during fiscal 2011 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 decrease in the South African prime interest rate from an average of approximately 10.43% per annum for fiscal 2010 to 9.29% per annum for fiscal 2011. Fiscal 2011 interest expense increased to$8.7 million (ZAR 60.5 million ) from$1.0 million (ZAR 8.0 million ) for fiscal 2010 due to the incurrence of long-term debt to fund a portion of the KSNET purchase price. Interest expense includes amortized debt facility fees of$2.0 million (ZAR 13.7 million ). Total tax expense for fiscal 2011 decreased to$33.5 million (ZAR 234.5 million ) from$40.8 million (ZAR 310.6 million ) in fiscal 2010. Deferred tax assets and liabilities are measured utilizing the enacted fully-distributed tax rate. Excluding the impact of reversal of the Net1 UTA customer relationships deferred tax liability and the Net1 UTA valuation allowances, 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. As discussed above, our tax expense was reduced by the reversal of$10.4 million related to deferred tax liabilities related to impaired Net1 UTA customer relationships. Our tax expense increased due to valuation allowances of$8.9 million related to Net1 UTA deferred tax assets. Our effective tax rate for fiscal 2011 was 92.08%, compared to 51.8% for fiscal 2010. The change in our effective tax rate was primarily due to an increase in non-deductible expenses, including stock-based compensation charges, interest expenses related to our Korean debt facilities and acquisition-related expenses, and the Net1 UTA valuation allowance. Net1 loss from equity-accounted investments for fiscal 2011 were$0.3 million (ZAR 2.4 million ) compared with earnings of$0.1 million (ZAR 0.7 million ) during fiscal 2010. Net loss from equity-accounted investments for fiscal 2011 was primarily due to waiver of interest and related currency effects at SmartSwitch Botswana offset by an increase in transaction fees generated by SmartSwitch Namibia and SmartSwitch Botswana. VTU Colombia and VinaPay incurred losses during fiscal 2011 and 2010, respectively. VinaPay was sold inApril 2011 . 54
--------------------------------------------------------------------------------
Results of operations by operating segment
The composition of revenue and the contributions of our business activities to operating income are illustrated below.
Table 17 In United States Dollars (US GAAP) Year ended June 30, 2011 % of 2010 % of % Operating Segment $ '000 total $ '000 total change Consolidated revenue: South African transaction-based 189,206 55% 191,362 68% (1)% activities International transaction-based 70,382 20% - - nm activities Smart card accounts 33,315 10% 31,971 11% 4% Financial services 7,350 2% 4,023 1% 82% Hardware, software and related 43,167 13% 53,008 20% (17)% technology sales Total consolidated revenue 343,420 100% 280,364 100% 22% Consolidated operating income (loss): South African transaction-based 75,668 202% 106,036 152% (30)% activities Operating income before 81,370 110,241 (27)% amortization Amortization (5,702 ) (4,205 ) 36% International transaction-based (220 ) (1)% - - nm activities Operating income before 8,382 - nm amortization Amortization (8,602 ) - nm Smart card accounts 15,140 40% 14,532 21% 4% Financial services 4,999 13% 2,881 4% 96% Hardware, software and related (48,372 ) (129)% (42,524 ) (61)% 17% technology sales Operating income before amortization and impairment of intangibles 787 4,787 (116)% Impairment of intangibles (41,771 ) (37,378 ) 12% Amortization of intangibles (7,388 ) (9,933 ) (26)% Corporate/eliminations (9,787 ) (25)% (11,114 )
(16)% (12)%
Total consolidated operating 37,428 100% 69,811
100% (46)% income 55
--------------------------------------------------------------------------------
Table 18 In South African Rand (US GAAP) Year ended June 30, 2011 2010 ZAR % of ZAR % of % Operating Segment '000 total '000 total change Consolidated revenue: South African transaction-based 1,323,723 55% 1,456,131 68% (9)% activities International transaction-based 492,406 20% - - Nm activities Smart card accounts 233,078 10% 243,277 11% (4)% Financial services 51,422 2% 30,612 1% 67% Hardware, software and related 302,005 13% 403,354 20% (23)% technology sales Total consolidated revenue 2,402,634 100% 2,133,374 100% 13% Consolidated operating income (loss): South African transaction-based 529,388 202% 806,860 152% (35)% activities Operating income before 569,279 838,859 (33)% amortization Amortization (39,891 ) (31,999 ) 25% International transaction-based (1,539 ) (1)% - - Nm activities Operating income before 58,642 - Nm amortization Amortization (60,181 ) - Nm Smart card accounts 105,922 40% 110,578 21% (4)% Financial services 34,974 13% 21,922 4% 81% Hardware, software and related (338,420 ) (129)% (323,578 ) (61)% 8%
technology sales
Operating income before amortization and impairment of intangibles 5,507 36,431 (85)% Impairment of intangibles (292,238 ) (284,420 ) 3% Amortization of (51,689 ) (75,589 ) (32)% intangibles Corporate/eliminations (68,472 ) (25)% (84,570 ) (16)% (19)% Total consolidated 261,853 100% 531,212 100% (51)% operating income
South African transaction-based activities
In ZAR, the decreases in revenue were primarily due to a new SASSA contract that was in effect for fiscal 2011 at lower economics than the previous contract, which was partially offset by increased transaction volumes at EasyPay and the inclusion of MediKredit and FIHRST.
Revenues for South African 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 South African transaction-based activities decreased to 40% from 55% a year ago. The decrease was primarily due to the lower revenues generated under our SASSA contract, additional intangible asset amortization related to the acquisition of MediKredit and FIHRST and lower margins at MediKredit and FIHRST compared with legacy South African transaction-based activities.
Pension and welfare operations:
Our revenue and operating income related to our pension and welfare operations were negatively impacted by a new contract with SASSA that was in effect for fiscal 2011. During fiscal 2011, our pension and welfare operations continued 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 fiscal 2011 and 2010 by our transaction processors:
Table 19
Transaction Total volume ('000s) Total value $ ('000)
Total value ZAR ('000)
processor 2011 2010 2011 2010 2011 2010 EasyPay 715,945 655,176 24,307,247
18,904,176 165,500,752 143,847,549
Remaining core 493,018 439,767 15,662,653 12,143,835 106,642,308 92,406,087
Discontinued 222,927 215,409 8,644,594 6,760,341 58,858,444 51,441,462 MediKredit 9,805 5,411 513,503 227,881 3,592,572 1,734,015 FIHRST 21,954 5,260 9,792,178 1,858,590 68,508,034 14,142,572 56
-------------------------------------------------------------------------------- Our results for fiscal 2011 include intangible asset amortization related to our MediKredit and FIHRST acquisitions but exclude RMT's intangible assets which were fully amortized during fiscal 2010. Fiscal 2010 includes amortization related to the RMT intangible assets for three quarters, MediKredit intangible assets for two quarters and FIHRST's intangible assets for one quarter.
International transaction-based activities
For fiscal 2011, KSNET contributed the majority of our revenues in this operating segment. Operating margin for the segment was lower than our legacy South African transaction-based businesses and was negatively impacted by start-up expenditures related to our Virtual Card launch inthe United States , but was partially offset by improving profitability of NUETS' initiative inIraq . Operating income margin for fiscal 2011 was 0%.
Our results for fiscal 2011 include the intangible asset amortization related to our KSNET acquisition from
Smart card accounts
Operating income margin from providing smart card accounts was constant at 45% for each of fiscal 2011 and 2010.
In ZAR, revenue from the provision of smart card-based accounts increased in proportion to the increased number of beneficiaries serviced through our SASSA contract. A total number of 3,561,105 smart card-based accounts were active atJune 30, 2011 , compared to 3,532,620 active accounts as atJune 30, 2010 . Financial services
Revenue from UEPS-based lending increased primarily due to an increase in the number of loans granted. During fiscal 2011, our UEPS-based lending portfolio comprised 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 decreased to 68% from 72%.
Hardware, software and related technology sales
In ZAR, the decrease in revenue and operating income was primarily due to lower revenues by all major contributors to this operating segment as a result of challenging trading conditions. Net1 UTA failed to retain and expand hardware and software sales to its existing customer base and certain of our South African businesses were impacted by increased competition. UETS was impacted by significantly lower hardware sales, primarily terminals and cards, as these sales are generally made on an ad hoc basis. The majority of these sales occur within the first two years after the commencement of a project, such as inGhana andIraq . During fiscal 2011, customer relationships of$41.8 million acquired as part of the Net1 UTA acquisition were impaired. During fiscal 2010, we recognized a goodwill impairment loss of approximately$37.4 million (ZAR 284.4 million ) as a result of deteriorating trading conditions of this segment, particularly at Net1 UTA, and uncertainty surrounding contract finalization dates which were expected to impact future cash flows.
Amortization of Prism intangible assets during fiscal 2011 and 2010, respectively, was approximately
Corporate/ Eliminations
The decrease in our corporate expenses resulted primarily from the reversal of stock-based compensation charges of$3.5 million (ZAR 24.5 million ), primarily as a result of forfeitures (based on failure to achieve the required vesting conditions) of performance-based restricted stock issued inAugust 2007 . These reductions were offset by higher corporate head office-related expenditure, including the effects of inflation inSouth Africa , and transaction related expenditures of$6.0 million (ZAR 42.3 million ), primarily related to the acquisition of KSNET. 57
--------------------------------------------------------------------------------
Liquidity and Capital Resources
AtJune 30, 2012 , our cash balances were$39.1 million , which comprised mainly ZAR-denominated balances ofZAR 179.4 million ($21.6 million ), KRW-denominated balances ofKRW 13.8 billion ($11.9 million ) and US dollar-denominated balances of$4.1 million and other currency deposits, primarily euro, of$1.5 million . The decrease in our cash balances fromJune 30, 2011 , has resulted primarily from capital expenditures to expand operations as we implement our new SASSA contract, repayment of our long-term debt and strengthening in the USD against the ZAR, offset by an increase in cash generated from operations (before interest received and paid and net taxes paid). We currently believe that our cash and credit facilities are sufficient to fund our future operations, including our SASSA implementation, for at least the next four quarters. 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 inKorea in short-term investment accounts at Korean banking institutions. In addition, we are required to invest the interest payable under our Korean debt facilities due in the next six months in an interest reserve account inKorea . Historically, we have financed most of our operations, research and development, working capital, capital expenditures and acquisitions through our internally generated cash. When considering whether to borrow under our financing facilities, we consider the cost of capital, cost of financing, opportunity cost of utilizing surplus cash and availability of tax efficient structures to moderate financing costs.
We have a South African short-term credit facility of approximately
During the second quarter of fiscal 2012 we received$4.9 million , net, in cash, in final settlement of any and all claims and contractual adjustments between us and the former shareholders of KSNET. Our Korean debt agreement required us to use the settlement proceeds to repay a portion of our outstanding debt thereunder. We made the prepayment onJanuary 30, 2012 . As ofJune 30, 2012 , we had outstanding long-term debt of108.7 billion KRW (approximately$93.8 million translated at exchange rates applicable as ofJune 30, 2012 ) under credit facilities with a group of Korean banks. The loans bear interest at the Korean CD rate in effect from time to time (3.54% as ofJune 30, 2012 ) plus a margin of 4.10% . Semi-annual principal payments of approximately$7.0 million (translated at exchange rates applicable as ofJune 30, 2012 ) were due starting inOctober 2011 , with final maturity scheduled forOctober 2015 . The loans are secured by substantially all of KSNET's assets, a pledge by our subsidiary, Net1Korea , of its entire equity interest in KSNET and a pledge by the immediate parent of Net1Korea (also one of our subsidiaries) of its entire equity interest in Net1Korea . The Facilities Agreement contains customary covenants that require Net1Korea 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. As ofJune 30, 2012 , we were in compliance with all of the required covenants under the Facilities Agreement. 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 Net1Korea 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. We generally receive the grant funds 48 hours prior to the provision of the service in a trust account and any interest we earn on these amounts is for the benefit of SASSA. We are required to initiate payments before the start of the pay cycle month in order to have cash, merchant and interbank funds available when the payment cycle commences and this process requires that we have access to the grant funds to be paid. These funds are recorded as settlement assets and liabilities. Historically, we opened the pay cycle at certain participating merchants a few days before the payment of grants at pay sites, however, currently we do not commence the payment cycle at participating merchants before the start of the pay cycle month. We use our funds to pre-fund certain merchants for grants paid through our merchant acquiring system on our behalf a day or two before the pay cycle opens. We typically reimburse merchants that are not pre-funded within 48 hours after they distribute the grants to the social welfare beneficiaries.
In addition, as a transaction processor, and in certain instances as a claims adjudicator, we receive cash from:
• health care plans which we disburse to health care service providers once we have adjudicated claims;
• customers on whose behalf we processes off payroll payments that we will disburse to customer employees, payroll-related payees and other payees designated by the customer; and 58 -------------------------------------------------------------------------------- • credit card companies (as well as other types of payment services) which have business relationships with merchants selling goods and services via the internet inKorea that are our customers and on whose behalf we process the transactions between various parties and settle the funds from the credit card companies to our merchant customers. These funds do not represent cash that is available to us and we present these funds, and the associated liability, outside of our current assets and liabilities on our consolidated balance sheet. Movements in these cash balances are presented in investing activities and movements in the obligations are presented in financing activities in our consolidated statement of cash flows.
Cash flows from operating activities
Cash flows from operating activities for fiscal 2012 decreased to$20.4 million (ZAR 157.5 million ) from$66.2 million (ZAR 463.4 million ) for fiscal 2011. Excluding the impact of interest paid under our Korean debt and taxes presented in the table below, the decrease in cash provided by operating activities resulted from the timing of receipts of accounts receivable in our South African transaction-based activities operating segment and an increase in prefunding to merchants participating in our merchant acquiring system as described above. We have also incurred significant implementation costs related to our SASSA contract and, due to the timing of the opening of theJuly 2012 pay cycle, we did not have any significant amounts due to non-prefunded merchants participating in our merchant acquiring system as ofJune 30, 2012 . During fiscal 2012, we paid interest under the Facilities Agreement of$8.7 million . Cash flows from operating activities for fiscal 2011 decreased to$66.2 million (ZAR 463.4 million ) from$68.7 million (ZAR 522.1 million ) for fiscal 2010. Our net cash from operating activities decreased primarily due to the SASSA price and volume reductions which were effectiveJuly 1, 2010 . During fiscal 2011, we paid interest under the Facilities Agreement of$4.1 million . During fiscal 2012, we made a first provisional payment of$15.0 million (ZAR 123.3 million ), a second provisional payment of$8.5 million (ZAR 71.5 million ) related to our 2012 tax year inSouth Africa and paid STC of$1.8 million (ZAR 14.6 million ) related to cross-border intercompany dividends paid. We made an additional second provisional tax payment of$3.3 million (ZAR 24.8 million ) related to our 2010 tax year inSouth Africa . We also paid taxes totaling$2.4 million in other tax jurisdictions, primarilyKorea . During fiscal 2011, we made a first provisional payment of$16.6 million (ZAR 113.7 million ), a second provisional payment of$12.3 million (ZAR 84.0 million ) related to our 2011 tax year inSouth Africa and paid STC of$15.2 million (ZAR 106.5 million ) related to cross-border intercompany dividends paid. We made an additional second provisional tax payment of$1.8 million (ZAR 12.7 million ) related to our 2010 tax year inSouth Africa . We also paid taxes totaling$2.6 million in other tax jurisdictions, primarilyKorea .
Taxes paid during fiscal 2012 and 2011 were as follows:
Table 20 Year ended June 30, 2012 2011 2012 2011 $ $ ZAR ZAR '000 '000 '000 '000 First provisional payments 15,014 16,565 123,271 113,708 Second provisional payments 8,486 12,331 71,458 84,019 Third provisional payments - 335 - 2,296
Taxation paid related to prior years 3,326 1,774 24,803
12,716
Taxation refunds received (287 ) (213 ) (2,121 ) (1,577 ) Secondary taxation on companies 1,811 15,216 14,615 106,500 Total South African taxes paid 28,350 46,008 232,026 317,662 Foreign taxes paid, primarily Korea 2,355 2,622 18,288 18,098 Total tax paid 30,705 48,630 250,314 335,760 Cash flows from investing activities During fiscal 2012, we received a net settlement of$4.9 million from the former shareholders of KSNET. During fiscal 2011, we paid approximately$230.2 million (ZAR 1.6 billion ), net of cash received, for 98.73% of KSNET. We also paid$4.5 million (ZAR 34.8 million ) for the Eason prepaid electricity and airtime business during fiscal 2012. During fiscal 2010, we paid$1.0 million (ZAR 7.3 million ), net of cash received, for 100% of the outstanding ordinary capital of MediKredit and all claims outstanding and$9.4 million (ZAR 69.0 million ), net of cash received for the FIHRST business and software. 59 -------------------------------------------------------------------------------- Cash used in investing activities for fiscal 2012 includes capital expenditure of$39.2 million (ZAR 302.2 million ), primarily for payment vehicles for our SASSA contract, acquisition of payment processing terminals inKorea and POS devices to service our merchant acquiring system inSouth Africa . Cash used in investing activities for fiscal 2011 includes capital expenditure of$15.1 million (ZAR 105.6 million ), primarily for the acquisition of payment processing terminals inKorea , 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. Cash used in investing activities for fiscal 2010 includes capital expenditure of$2.7 million (ZAR 20.7 million ), primarily for the acquisition of POS devices to service our merchant acquiring system, improvements to leasehold property and the acquisition of computer equipment.
Cash flows from financing activities
During fiscal 2012, we made long-term debt repayments of
During fiscal 2011 we obtained long-term debt to fund a portion of the KSNET purchase price. We also repaid KSNET's outstanding debt of$7.1 million . In addition, we paid the facility fee of approximately$3.1 million inOctober 2010 and acquired 125,392 shares of our common stock for$1.0 million . During fiscal 2010 we repurchased, using our ZAR reserves, 9,221,526 shares of our common stock fromBrait S.A.'s investment affiliates for$13.50 (ZAR 105.98) per share, for an aggregate repurchase price of$124.5 million (ZAR 977.3 million ). In addition, we incurred costs of approximately$0.5 million (ZAR 3.9 million ) related to the repurchase of these shares. We also paid$1.3 million on account of shares we repurchased onJune 30, 2009 , under our 2009 share buy-back program and received$0.7 (ZAR 5.5 million ) from employees exercising stock options and repaying loans.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Capital Expenditures
Capital expenditures for the years endedJune 30, 2012 , 2011 and 2010 were as follows: Table 21 Year ended June 30, 2012 2011 2010 2012 2011 2010 ZAR ZAR ZAR Operating Segment $'000 $'000 $'000 '000 '000 '000 South African transaction-based activities 23,408 2,423 2,177 180,678 16,952 16,565 International transaction-based activities 14,978 12,113 - 115,610 84,745 - Smart card accounts - - - - - - Financial services 620 400 302 4,786 2,798 2,298 Hardware, software and related technology sales . 161 117 251 1,243 819 1,910 Corporate / Eliminations - - - - - - Consolidated total 39,167 15,053 2,730 302,317 105,314 20,773
Our capital expenditures for fiscal 2012, 2011 and 2010, are discussed under "-Liquidity and Capital Resources-Cash flows from investing activities."
All of our capital expenditures for the past three fiscal years were funded through internally-generated funds. We had outstanding capital commitments as ofJune 30, 2012 , of$5.0 million related mainly to equipment and cards to implement our new SASSA contract. We expect to fund these expenditures through internally-generated funds. We expect that our capital expenditures will increase significantly over the next 12 months as we transition into our new SASSA contract. In addition to these capital expenditures, we expect that capital spending for fiscal 2013 will also relate to providing a switching service through EasyPay and expanding our operations inKorea . 60
--------------------------------------------------------------------------------
Contractual Obligations
The following table sets forth our contractual obligations as ofJune 30, 2012 : Table 22 Payments due by Period, as of June 30, 2012 (in $ '000s) Less More than 1 1-3 3-5 than 5 Total year years years years Long-term debt 111,256 20,916 90,340 - - obligations (A) Operating lease 10,211 3,785 4,657 1,769 - obligations Purchase 13,724 13,724 - - - obligations Capital commitments 5,019 5,019 - - - Other long-term 25,791 - - - 25,791 obligations (B) Total 166,001 43,444 94,997 1,769 25,791
(A) - Includes
capital resources" and includes interest payable at the rate applicable as
of
business. 61
--------------------------------------------------------------------------------
Wordcount: | 15016 |
Advisor News
Annuity News
Health/Employee Benefits News
Life Insurance News