UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
OR
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF
1934
For the transition period from _____________ to ______________
Commission file number: 000-31203
NET 1 U.E.P.S. TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
| Florida | 65-0903895 |
| (State or other jurisdiction | (IRS Employer |
| of incorporation) | Identification No.) |
President Place, 4th Floor, Cnr.
Jan Smuts and Bolton Avenue
Rosebank, Johannesburg, South Africa
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: 27-11-343-2001
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to the filing requirements for at least
the past 90 days. YES x
NO ¨
Indicate by check mark whether the registrant is an accelerated
filed (as defined in Rule 12b-2 of the
Exchange Act). YES ¨
NO x
Indicate the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest
practicable date: 157,291,824 shares of Common Stock, $0.001 par value,
were outstanding at December 31, 2004.
THE INFORMATION IN THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACTS, INCLUDED IN OR INCORPORATED BY REFERENCE INTO THIS FORM 10-K, ARE FORWARD-LOOKING STATEMENTS. IN ADDITION, WHEN USED IN THIS DOCUMENT THE WORDS "ANTICIPATE," "ESTIMATE," "INTENDS," "PROJECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED OR PROJECTED.
ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS WE INCLUDE IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT ASSURE YOU THAT THESE EXPECTATIONS WILL PROVE TO BE CORRECT.
Form 10-Q
NET 1 U.E.P.S. TECHNOLOGIES, INC.
Table of Contents
Part I. Financial Information
Item 1. Financial Statements
NET 1 U.E.P.S. TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
| Unaudited | Audited | |||||
| December 31, | June 30, | |||||
| 2004 | 2004 | |||||
| (In thousands, except share data) | ||||||
| ASSETS | ||||||
| CURRENT ASSETS | ||||||
| Cash and cash equivalents | $ | 105,316 | $ | 80,282 | ||
| Accounts receivable | 10,989 | 18,196 | ||||
| Finance loans receivable, net of allowances of – December: $9,523; June: $8,387 | 10,665 | 9,300 | ||||
| Deferred expenditure on smart cards | 4,749 | 6,031 | ||||
| Inventory | 2,624 | 1,054 | ||||
| Deferred income taxes | 4,053 | 2,549 | ||||
| Total current assets | 138,396 | 117,412 | ||||
| LONG TERM RECEIVABLE | 1,143 | 1,106 | ||||
| PROPERTY, PLANT AND EQUIPMENT, NET OF ACCUMULATED | ||||||
| DEPRECIATION OF – December: $21,021; June: $23,225 | 7,988 | 7,638 | ||||
| EQUITY ACCOUNTED INVESTMENT | 1,340 | 878 | ||||
| GOODWILL | 16,217 | 15,212 | ||||
| INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF – | ||||||
| December: $4,501; June: $3,019 | 9,834 | 10,386 | ||||
| TOTAL ASSETS | 174,918 | 152,632 | ||||
| LIABILITIES | ||||||
| CURRENT LIABILITIES | ||||||
| Bank overdraft | - | 19 | ||||
| Accounts payable | 23,750 | 23,693 | ||||
| Income taxes payable | 9,388 | 24,119 | ||||
| Total current liabilities | 33,138 | 47,831 | ||||
| DEFFERRED INCOME TAXES | 13,760 | 8,961 | ||||
| LONG TERM LIABILITIES | - | 252 | ||||
| TOTAL LIABILITIES | 46,898 | 57,044 | ||||
| SHAREHOLDERS’ EQUITY | ||||||
| COMMON STOCK | ||||||
| Authorized: 500,000,000 with $0.001 par value; | ||||||
| Issued and outstanding shares - December: 157,291,824; June: 135,235,220 | 157 | 135 | ||||
| SPECIAL CONVERTIBLE PREFERRED STOCK | ||||||
| Authorized: 300,000,000 with $0.001 par value; | ||||||
| Issued and outstanding shares - December: 170,910,534; June: 192,967,138 | 171 | 193 | ||||
| B CLASS PREFERRED STOCK | ||||||
| Authorized: 330,000,000 with $0.001 par value; | ||||||
| Issued and outstanding shares (net of shares held by the Company) - December: | 34 | 38 | ||||
| 209,890,129; June: 236,977,187 | ||||||
| ADDITIONAL PAID-IN-CAPITAL | 71,685 | 71,681 | ||||
| ACCUMULATED OTHER COMPREHENSIVE INCOME | 25,008 | 15,039 | ||||
| RETAINED EARNINGS | 30,965 | 8,502 | ||||
| TOTAL SHAREHOLDERS’ EQUITY | 128,020 | 95,588 | ||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 174,918 | $ | 152,632 | ||
See Notes to Interim Unaudited Condensed Consolidated Financial Statements
2
NET 1 U.E.P.S. TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Operations
| Three months ended | Six months ended | |||||||||||
| December 31, | December 31, | December 31, | December 31, | |||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||
| (In thousands, except share data) | (In thousands, except share data) | |||||||||||
| REVENUE | $ | 45,995 | $ | 29,338 | $ | 89,218 | $ | 55,189 | ||||
| EXPENSE | ||||||||||||
| COST OF GOODS SOLD, IT PROCESSING, | ||||||||||||
| SERVICING AND SUPPORT | 13,978 | 9,551 | 28,779 | 18,257 | ||||||||
| GENERAL AND ADMINISTRATION | 12,092 | 9,644 | 22,368 | 17,300 | ||||||||
| DEPRECIATION AND AMORTIZATION | 1,654 | 1,269 | 3,229 | 2,417 | ||||||||
| REORGANIZATION CHARGES | - | 246 | - | 246 | ||||||||
| OPERATING INCOME | 18,271 | 8,628 | 34,842 | 16,969 | ||||||||
| INTEREST INCOME, net | 548 | 674 | 1,203 | 1,561 | ||||||||
| INCOME BEFORE INCOME TAXES | 18,819 | 9,302 | 36,045 | 18,530 | ||||||||
| INCOME TAX EXPENSE | 6,707 | 3,801 | 13,915 | 7,507 | ||||||||
| NET INCOME BEFORE EARNINGS FROM EQUITY | ||||||||||||
| ACCOUNTED INVESTMENT | 12,112 | 5,501 | 22,130 | 11,023 | ||||||||
| EARNINGS FROM EQUITY ACCOUNTED | ||||||||||||
| INVESTMENT | 124 | - | 333 | - | ||||||||
| NET INCOME | $ | 12,236 | $ | 5,501 | $ | 22,463 | $ | 11,023 | ||||
| Basic earnings per share, in cents – common stock | ||||||||||||
| and linked units | 3.73 | 2.85 | 6.84 | 5.71 | ||||||||
| Diluted earnings per share, in cents – common stock | ||||||||||||
| and linked units | 3.66 | 2.85 | 6.73 | 5.71 | ||||||||
See Notes to Interim Unaudited Condensed Consolidated Financial Statements
3
NET 1 U.E.P.S. TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Cash Flow
| Three months ended | Six months ended | |||||||||||
| December 31, | December 31, | December 31, | December 31, | |||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||
| (In thousands) | (In thousands) | |||||||||||
| Cash flows from operating activities | ||||||||||||
| Cash received from customers | $ | 80,342 | $ | 37,601 | $ | 108,969 | $ | 57,358 | ||||
| Cash paid to suppliers and employees | (37,714 | ) | (17,636 | ) | (60,499 | ) | (33,173 | ) | ||||
| Interest received | 4,246 | 3,407 | 7,830 | 7,101 | ||||||||
| Finance costs paid | (3,681 | ) | (2,733 | ) | (6,614 | ) | (5,540 | ) | ||||
| Income taxes paid | (25,803 | ) | (4,079 | ) | (31,984 | ) | (7,136 | ) | ||||
| Net cash provided by operating activities | 17,390 | 16,560 | 17,702 | 18,610 | ||||||||
| Cash flows from investing activities | ||||||||||||
| Capital expenditures | (779 | ) | (1,128 | ) | (1,722 | ) | (1,938 | ) | ||||
| Proceeds from disposal of property, plant and equipment | 5 | 7 | 21 | 18 | ||||||||
| Net cash used in investing activities | (774 | ) | (1,121 | ) | (1,701 | ) | (1,920 | ) | ||||
| Cash flows from financing activities | ||||||||||||
| Repayment of bank overdrafts | - | - | (19 | ) | - | |||||||
| Dividends paid | - | (310 | ) | - | (5,088 | ) | ||||||
| Net cash used in financing activities | - | (310 | ) | (19 | ) | (5,088 | ) | |||||
| Effect of exchange rate changes on cash | 11,098 | 5,310 | 9,052 | 7,568 | ||||||||
| Net increase in cash and cash equivalents | 27,714 | 20,439 | 25,034 | 19,170 | ||||||||
| Cash and cash equivalents – beginning of period | 77,602 | 53,044 | 80,282 | 54,313 | ||||||||
| Cash and cash equivalents at end of period | $ | 105,316 | $ | 73,483 | $ | 105,316 | $ | 73,483 | ||||
See Notes to Interim Unaudited Condensed Consolidated Financial Statements
4
NET 1 U.E.P.S. TECHNOLOGIES, INC.
Notes to the Interim Unaudited Condensed Consolidated Financial Statements
for the three and six months ended December 31, 2004 and 2003
(All amounts stated in thousands of United States Dollars, unless otherwise
stated)
1. Basis of Presentation and Summary of Significant Accounting Policies
Unaudited Interim Financial Information
As a result of the transaction described fully in the 10-K, the former shareholders of Net1 Applied Technology Holdings Limited (“Aplitec”) obtained a majority voting interest in the Company on June 7, 2004. Generally accepted accounting principles require that the company whose shareholders retain a majority interest in a combined business be treated as the acquirer for accounting purposes. Consequently, this transaction has been accounted for as a reverse acquisition. Accordingly, all the financial information included in this Form 10-Q unless indicated otherwise for the periods up to June 7, 2004, i.e. for the six months ended December 31, 2003 represent the results of Aplitec prior to the date it acquired Net1. For the period from June 7, 2004, i.e. for the six months ended December 31, 2004 the financial information presented herein represents the consolidated results of Aplitec and Net1 with Net1 as the acquired entity. Unless the context otherwise provides, the reference to the Company refers to Net1 and its subsidiaries (including Aplitec).
The accompanying unaudited condensed consolidated financial statements include all majority owned subsidiaries over which the Company exercises control and have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q and include all of the information and disclosures required by generally accepted accounting principles (“GAAP”) for interim financial reporting. The results of operations for the three and six months ended December 31, 2004 and 2003 are not necessarily indicative of the results for the full year. The Company believes that the disclosures are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004, as filed with the Securities and Exchange Commission on October 12, 2004. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair representation of financial results for the interim periods presented.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with the provisions of Accounting Principle Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations. Accordingly, compensation expense is not required to be recorded when stock options/ awards are granted to employees as long as the exercise price is not less than the fair market value of the stock when the option/ award is granted. In October 1995, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard 123, Accounting for Stock-Based Compensation (“SFAS 123”). SFAS 123 allows the Company to continue to follow the present APB 25 guidelines, but requires pro-forma disclosures of net income and earnings per share as if the Company had adopted the provisions of the Statement. In December 2002, the FASB issued Statement of Financial Accounting Standard 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an Amendment of FASB Statement No. 123 (“SFAS 148”), which provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. SFAS 148 requires prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation and amends Accounting Principle Board Opinion No. 28, Interim Financial Reporting (“APB 28”), to require disclosure about those effects in interim financial information. These disclosure requirements became effective for the Company’s third quarter of fiscal 2003. The Company has continued to account for stock-based compensation under the provisions of APB 25 using the intrinsic value method.
5
1. Basis of Presentation and Summary of Significant Accounting Policies (continued)
There was no stock compensation charge under APB 25 for either of the three or six months ended December 31, 2004 and 2003. Had compensation expense for share options granted under the stock option plan been determined based on fair value at the grant dates consistent with the method required in accordance with SFAS 123, the Company’s net income and earnings per share in accordance with US GAAP for the three and six months ended December 31, 2004 and 2003 would have been as presented in the pro-forma disclosures below:
| Three months ended | Six months ended | |||||||||||
| December 31, | December 31, | |||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||
| Net income | $ | 12,236 | $ | 5,501 | $ | 22,463 | $ | 11,023 | ||||
| Add back: stock-based compensation expense included in | ||||||||||||
| reported net income, net of related tax effects | - | - | - | - | ||||||||
| Deduct: total stock-based compensation expense | ||||||||||||
| determined under fair value based method for all | ||||||||||||
| awards, net of related tax effects | (218 | ) | - | (437 | ) | - | ||||||
| Pro-forma net income | $ | 12,018 | $ | 5,501 | $ | 22,026 | $ | 11,023 | ||||
| Earnings per share, basic and diluted (US cents): | ||||||||||||
| Basic, as reported | 3.73 | 2.9 | 6.84 | 5.7 | ||||||||
| Basic, pro forma | 3.57 | 5.7 | 6.54 | 5.7 | ||||||||
| Weighted average assumptions: | ||||||||||||
| Risk-free interest rate | 3.50% | - | 3.50% | - | ||||||||
| Dividend yield | 0.00% | - | 0.00% | - | ||||||||
| Stock volatility | 72.00% | - | 72.00% | - | ||||||||
| Average expected life (years) | 7.00 | - | 7.00 | - | ||||||||
Translation of foreign currencies
The functional currency of the Company is the South African Rand and its reporting currency is the United States Dollar. The current rate method is used to translate the financial statements of the Company to United States Dollars. Under the current rate method, assets and liabilities are translated at the exchange rates in effect at the balance sheet date. Revenues and expenses are translated at average rates for the period. Translation gains and losses are reported in accumulated other comprehensive income in shareholders’ equity.
Foreign exchange transactions are translated at the spot rate ruling at the date of the transaction. Monetary items are translated at the closing spot rate at the balance sheet date. Transactional gains and losses are recognized in income for the period.
Recent accounting pronouncements
FASB Statement No.153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions, was issued in December 2004 and is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of the statement shall be applied prospectively. The amendments made by the statement are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, Opinion 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. Opinion 29 provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. The Company does not believe that adoption of the statement will have an impact on its overall results of operations or financial position.
FASB Statement 123 (Revision 2004), Share-Based Payment, was issued in December 2004 and is effective for reporting periods beginning after June 15, 2005. The new statement requires all share-based payments to employees to be recognized in the financial statements based on their fair values. The Company currently accounts for its share-based payments to employees under the intrinsic value method of accounting set forth in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issues to Employees.” Additionally, the Company complies with the stock-based employer compensation disclosure requirements of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123.” The Company plans to adopt the new statement in the first quarter of its next fiscal year, beginning July 1, 2005.
6
2. Goodwill and Intangible Assets
On July 1, 2002 the Company adopted SFAS 142 for US GAAP purposes, which required that goodwill and certain intangible assets with indefinite useful lives, including those recorded in past business combinations, no longer be amortized, but instead be tested for impairment at least annually. The standard also required the completion of a transitional impairment test with any resulting impairment identified treated as a cumulative effect of a change in accounting principle.
Prior to SFAS 142, the Company assessed goodwill for impairment based on the guidance in Accounting Principles Board Opinion No. 17, Intangible Assets and SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and had to evaluate the periods of amortization continually to determine whether later events and circumstances warranted revised estimates of useful lives; impairment had to be recognized when the carrying amount exceeded the fair market value of the asset.
Summarized below is the carrying value and accumulated amortization of the intangible assets that will continue to be amortized under SFAS 142, as well as the carrying amount of goodwill, which will no longer be amortized.
| December 31, 2004 | June 30, 2004 | ||||||||||||||||||
| Gross | Net | Gross | Net | ||||||||||||||||
| carrying | Accumulated | carrying | carrying | Accumulated | carrying | ||||||||||||||
| value | amortization | value | value | amortization | value | ||||||||||||||
| Goodwill | $ | 20,743 | $ | (4,526 | ) | $ | 16,217 | $ | 19,302 | $ | (4,090 | ) | $ | 15,212 | |||||
| Finite-lived intangible assets: | |||||||||||||||||||
| Contract rights | 2,958 | (1,069 | ) | 1,889 | 2,673 | (520 | ) | 2,153 | |||||||||||
| Customer contracts | 114 | (14 | ) | 100 | 114 | (2 | ) | 112 | |||||||||||
| Exclusive licences | 4,506 | (377 | ) | 4,129 | 4,506 | (54 | ) | 4,452 | |||||||||||
| FTS patent | 6,757 | (3,041 | ) | 3,716 | 6,106 | (2,443 | ) | 3,663 | |||||||||||
| Other patents | - | - | - | 6 | - | 6 | |||||||||||||
| Total finite-lived intangible assets | $ | 14,335 | $ | (4,501 | ) | $ | 9,834 | $ | 13,405 | $ | (3,019 | ) | $ | 10,386 | |||||
FTS Patent
The Company obtained its patent for the Funds Transfer System (FTS) on its acquisition of Net1 Investment Holdings (Proprietary) Limited (“Net1 Holdings”) on July 12, 2000. 100% of Net1 Holdings’ issued share capital was acquired for a historical cost of approximately $3.2 million (or $4.5 million at the December 31, 2004 exchange rate of $1 : ZAR5.6704), which was satisfied through the issuance of 9,750,000 of the Company’s common shares. In addition, a deferred taxation adjustment was required to increase the historical carrying value to $4.8 million (or $6.8 million at the quarter end exchange rate of $1:ZAR5.6704) . Net1 Holdings was a holding company that did not generate significant revenues or expenses and did not have significant assets or liabilities other than the FTS patent rights for South Africa and surrounding territories, on which the Company’s smart card applications are based.
Aggregate amortization expense on the FTS patent for the three and six months ended December 31, 2004 was approximately $0.16 million and $0.31, respectively (three and six months to December 31, 2003: $0.14 million and $0.27 million, respectively). Estimated amortization expense to be reported in future periods is estimated at $0.6 million per annum, however this amount could differ from the actual amortization as a result of new intangible asset acquisitions, changes in useful lives and other relevant factors.
Contract Rights
In December 2003 the Company entered into an agreement with various black economic empowerment partners (the “partners”) whereby the partners would provide certain services, for example, debt collection and dispute resolution, related to the Cash Paymaster Services Northern contract. The total amount paid to the partners is approximately $2.3 million (or $3 million at the December 31, 2004 exchange rate of $1:ZAR5.6704) . The amount paid will be amortized over the contract period of 3 years.
Amortization for the three and six months to December 31, 2004 is approximately $0.23 million and $0.45, respectively. Estimated amortization expense to be reported in future periods is estimated at $0.9 million per annum, however this amount could differ from the actual amortization as a result of changes in the contract period and other relevant factors.
7
2. Goodwill and Intangible Assets (continued)
Customer contracts and exclusive licenses
The customer contracts and exclusive licenses were valued by an independent third party and these assets were valued at approximately $0.1 million and $4.5 million, respectively, with estimated useful lives of 5 and 7 years respectively. Amortization expense for the customer contracts and exclusive licenses for the three and six months ended December 31, 2004 is $0.01 million and $0.16 million, respectively, and $0.01 million and $0.32 million, respectively. Esti