UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
June 30, 2012
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
from _______to _______
Commission file number:
000-31203
NET 1 UEPS TECHNOLOGIES,
INC.
(Exact name of registrant as specified in its
charter)
Florida
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98-0171860
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(State or other jurisdiction
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(I.R.S. Employer
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of incorporation or organization)
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Identification No.)
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President Place, 4
th
Floor, Cnr. Jan
Smuts Avenue and Bolton Road
Rosebank, Johannesburg 2196, South
Africa
(Address of principal executive offices)
Registrants telephone number, including area code:
27-11-343-2000
Securities registered pursuant to section 12(b) of the Act:
Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock,
par value $0.001 per
share
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NASDAQ Global Select Market
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Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
[ ] No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
[ ] No [X]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filings requirements for the past 90 days.
Yes
[X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
[ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer,
accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act (Check one):
[ ]
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Large accelerated filer
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[X]
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Accelerated filer
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|
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[ ]
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Non-accelerated filer
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[ ]
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Smaller reporting company
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(Do not check if a smaller reporting company)
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|
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes [
] No [X]
The aggregate market value of the registrant's common stock held
by non-affiliates of the registrant as of December 31, 2011 (the last business
day of the registrants most recently completed second fiscal quarter), based
upon the closing price of the common stock as reported by The Nasdaq Global
Select Market on such date, was $286,757,561. This calculation does not reflect
a determination that persons are affiliates for any other purposes.
As of August 21, 2012, 45,548,902 shares of the registrants
common stock, par value $0.001 per share were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement for our 2012
Annual Meeting of Shareholders are incorporated by reference into Part III of
this Form 10-K.
NET 1 UEPS TECHNOLOGIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
Year Ended June 30, 2012
1
PART I
FORWARD LOOKING STATEMENTS
In
addition to historical information, this Annual Report on Form 10-K contains
forward-looking statements that involve risks and uncertainties that could cause
our actual results to differ materially from those projected, anticipated or
implied in the forward-looking statements. Factors that might cause or
contribute to such differences include, but are not limited to, those discussed
in Item 1ARisk Factors. In some cases, you can identify forward-looking
statements by terminology such as may, will, should, could, would,
expects, plans, intends, anticipates, believes, estimates,
predicts, potential or continue or the negative of such terms and other
comparable terminology. You should not place undue reliance on these
forward-looking statements, which reflect our opinions only as of the date of
this Annual Report. We undertake no obligation to release publicly any revisions
to the forward-looking statements after the date of this Annual Report. You
should carefully review the risk factors described in other documents we file
from time to time with the Securities and Exchange Commission, including the
Quarterly Reports on Form 10-Q to be filed by us in our 2013 fiscal year, which
runs from July 1, 2012 to June 30, 2013.
ITEM 1. BUSINESS
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 in South 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 in South 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 in South 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 in South 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 in South 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 in South 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 in Korea, 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 in Mexico, Spain and India.
All
references to the Company, we, us, or our are references to Net 1 UEPS
Technologies, Inc. and its consolidated subsidiaries, collectively, and all
references to Net1 are to Net 1 UEPS Technologies, Inc. only, except as
otherwise indicated or where the context indicates otherwise.
2
Market Opportunity
Services
for the Under-banked:
According to the World Bank, three quarters of the
world's poor, living on less than $2 a day, have no bank account. As a result,
2.5 billion adults around the world, or 50% of the worlds adult population, do
not have bank accounts or access to financial services. This situation arises
when banking fees are either too high relative to an individuals income, a bank
account provides little or no meaningful benefit or there is insufficient
infrastructure to provide financial services economically in the individuals
geographic location. We refer to these people as the unbanked and the
under-banked. These individuals typically receive wages, welfare benefits, money
transfers or loans in the form of cash, and conduct commercial transactions,
including the purchase of food and clothing, in cash.
The
use of cash, however, presents significant risks. In the case of recipients,
they generally have no secure way of protecting their cash other than by
converting it immediately into goods, carrying it with them or hiding it. In
cases where an individual has access to a bank account, the typical deposit,
withdrawal and account fees meaningfully reduce the money available to meet
basic needs. For government agencies and employers, using cash to pay welfare
benefits or wages results in significant expense due to the logistics of
obtaining that cash, moving it to distribution points and protecting it from
theft.
Our
target under-banked customer base in most emerging economies, and particularly
in South Africa, has limited access to formal financial services and therefore
relies heavily on the unregulated informal sector for such services. By
leveraging our smart card and mobile technologies, we are able to offer
affordable, secure and reliable financial services such as loans and insurance
products to these consumers and alleviate some of the challenges they face in
dealing with the informal sector.
With
over 25 million cards issued in more than ten developing countries around the
world, our track record and scale uniquely positions us to continue further
geographical penetration of our technology in additional emerging countries.
Online
transaction processing services:
The rapid global growth of retail credit
and debit card transactions is reflected in the April 2012 Nilson Report,
according to which worldwide annual general purpose card purchase dollar volume
increased 17.5% to $15.4 trillion in 2011, while transaction volume increased by
11.7% to 161.3 billion transactions and cards issued increased by 12.4% to 6.5
billion cards during the same period. General purpose cards include the major
card network brands such as MasterCard, Visa, China UnionPay and American
Express. In South Africa we operate the largest bank-independent transaction
processing service through EasyPay, where we have developed a suite of
value-added services such as bill payment, airtime top-up, gift card, money
transfer and pre-paid utility purchases that we offer as a complete solution to
merchants and retailers. In Korea, through KSNET, we operate the second largest
transaction processor by volume, where we provide card processing, banking
value-added services and payment gateway functionality to the retail industry.
Our expertise in on-line transaction processing and value-added services
provides us with the opportunity to participate globally in this rapidly growing
market segment.
Mobile
Payments:
Despite lacking access to formal financial services, large
proportions of the under-banked customer segment own and utilize mobile phones.
The World Banks research has confirmed the rising popularity of using mobile
phones to transfer money and banking that often does not require setting up an
account at a brick-and-mortar bank. The World Bank has stated that mobile
banking, which allows account holders to pay bills, make deposits or conduct
other transactions via text messaging, has expanded to 16 percent of the market
in Sub-Saharan Africa, where traditional banking has been hampered by
transportation and other infrastructure problems.
Mobile
phones are therefore increasingly viewed as a channel through which this
underserved population can gain access to formal financial and other services.
Today, most mobile payment solutions offered by various participants in the
industry largely provide access to information and basic services, such as
allowing consumers to check account balances or transfer funds between existing
accounts with the financial institution, but they offer limited functionality
and ability to use the mobile device as an actual payments and banking
instrument. Our UEPS solution is enabled to run on the SIM cards in mobile
phones and provides our users with secure payment and banking functionality.
Healthcare:
Given the lack of broad-based healthcare services in many emerging economies,
governments are increasingly focused on driving initiatives to provide
affordable and accessible healthcare services to their populations. Similarly,
countries such as the United States are embarking on expansive overhauls of
their existing healthcare systems.
Through
our MediKredit and XeoHealth services we combine our payments expertise with our
real-time rules engine and claims processing technology to offer governments,
funders and providers of healthcare a comprehensive solution that offers a
completely automated healthcare rules adjudication and payment system, reducing
both cost and time.
3
Our Key Products
The
UEPS Technology
UEPS
We
developed our core UEPS technology to enable the affordable delivery of
financial products and services to the worlds unbanked and under-banked
populations. Our native UEPS technology is designed to provide the secure
delivery of these products and services in the most under-developed or rural
environments, even in those that have little or no communications
infrastructure. Unlike a traditional credit or debit card where the operation of
the account occurs on a centralized computer, each of our smart cards
effectively operates as an individual bank account for all types of
transactions. All transactions that take place through our system occur between
two smart cards at the POS as all of the relevant information necessary to
perform and record transactions reside on the smart cards.
The
transfer of money or other information can take place without any communication
with a centralized computer since all validation, creation of audit records,
encryption, decryption and authorization take place on, or are generated
between, the smart cards themselves. Importantly, the cards are protected
through the use of biometric fingerprint identification, which is designed to
ensure the security of funds and card holder information. Transactions are
generally settled by merchants and other commercial participants in the system
by sending transaction data to a mainframe computer on a batch basis.
Settlements can be performed online or offline. The mainframe computer provides
a central database of transactions, creating a complete audit trail that enables
us to replace lost smart cards while preserving the notional account balance,
and to identify fraud.
Our
UEPS technology includes functionality that allows the following:
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Transparent and automatic recovery of transactions;
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Transaction cancellation;
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Refunds;
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Multiple audit trails;
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Offline loading and spending;
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Biometric identification;
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Continuous debit;
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Multiple wallets;
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Morphing of other common payment systems, such as the EuroPay,
MasterCard and Visa global standard, or EMV;
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Automatic credit;
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Automatic debit;
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Interest calculations; and
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Milking / batching of large transaction volumes in an off-line
environment.
Our
UEPS technology incorporates the software, smart cards, payment terminals,
back-end infrastructure and transaction security to provide a complete payment
and transaction processing solution.
Within
industry verticals, our UEPS technology is applied to electronic commerce
transactions in the fields of social security, wage distribution, banking,
medical and patient management, money transfers, voting and identification
systems. Market sectors include government and NGOs, healthcare, telecoms,
financial institutions, retailers, petroleum and utilities.
UEPS/EMV
Our
latest version of the UEPS technology is interoperable with the global EMV
standard, allowing the cards to be used wherever EMV cards are accepted, while
also providing all the additional functionality offered by UEPS. This UEPS/EMV
functionality is especially relevant in areas where there is an established
payment system and provides flexibility to our customers to be serviced at any
point of service.
Payment
Transaction Management
Our
payment transaction management service incorporates the entire electronic funds
transfer, or EFT, and non-EFT transactions suites, allowing merchants to accept
a range of payment tokens/instruments and banks to acquire those payment
tokens/instruments. This encompasses conventional magnetic-stripe cards, credit,
debit and private label cards, and contact and contact-less smart cards with PIN
and/or biometric cardholder verification.
The
service utilizes a complex set of processing rules defined by the card
associations, central banks and local issuers governing the acceptance or
rejection of the payment token/instrument presented to a merchant. These rules
are applied for goods or services and vary by merchant category as background
tasks of the transaction management service.
4
We
provide a complete end-to-end reconciliation and settlement service to our
business partners, including dynamic reconciliation, report and screen-query
tools for down-to-store-level management and control purposes, backed by
24x7x365 monitoring and support, reconciliation, settlement, reporting, full
disaster recovery and redundancy services.
Our
flexible transaction management solutions enable simple integration to various
hardware platforms and pay-point applications within large retail groups,
smaller stores and franchises. These platforms include: retail POS, EFT
terminals, standalone PCs, self service terminals and kiosks, ATMs, mobile
phones and the internet.
We
also provide a range of value-added services as part of our transaction
management offering, such as bill payments, gift cards, prepaid airtime, prepaid
utilities and money transfers.
Healthcare
Transaction Management
We
offer financial and clinical risk management solutions to both funders and
providers of healthcare, through online real-time management of healthcare
transactions. Our adaptable healthcare claims processing and managed care
services are designed to accommodate the complex benefit design as well as other
processing requirements of our clients and our functionality extends to all
healthcare claim types, including pharmacy, doctor, public and private hospital
claims. Our service is enabled by our proprietary claims processing and managed
care systems that adjudicate medical claims allowing patients and healthcare
providers to have immediate and accurate information on the financial and
clinical impacts of, and payment responsibilities for services and products
provided by healthcare providers.
Our
proprietary software allows for real-time claim adjudication involving the
submission of an electronic data interchange claim and receipt of a response
with the adjudication details within seconds. Our system allows for real-time
messaging with an immediate response to an enquiry within a single, synchronous
communication session. Our intellectual property incorporates rule stacking
technology that allows for the creation of a rule for a specific patient for a
specific healthcare product or service, which rule is then used to adjudicate
against in real-time. This unique technology offers complex rule applications in
a scalable and flexible manner on all medical claim types it is a heuristic
computerized framework that dynamically creates scenario-specific rules.
Payroll
Transaction Management
Our
payroll transaction management service offers employers an easy and flexible
method of making payments to creditors arising from payroll processing. Our
solution enhances the electronic movement of money in the business and financial
community, assisting our clients to manage net pay, third party, garnishee order
and creditor payments correctly, promptly and securely. In addition, we provide
the relevant information to the recipient organization via predefined schedules
or payment remittance advices, thus simplifying the process of reconciliation.
Mobile
Virtual Card
We
have developed an innovative mobile phone-based payment solution, MVC, that
enables secure purchases with no disruption to existing merchant infrastructures
and significant incentives for all stakeholders.
The
MVC solution utilizes existing and traditional payment methods but enhances them
by replacing plastic card data with a one-time-use virtual card data, hence
eliminating the risk of theft, phishing, skimming, spoofing, etc. The virtual
card data replaces digit-for-digit the credit (or debit) card number, the
expiration date and the card verification value with only the issuer bank
identification number (first 6-digit) remaining constant.
The
MVC solution uses the mobile phone to generate virtual cards offline. The mobile
phone is the most available, cost-effective, secure and portable platform for
generating virtual cards for remote payments (online, phone and catalogue
orders). Following a simple registration process, the virtual card application
is activated over-the-air, enabling the phone to generate virtual card numbers
completely off-line. MVCs are used like traditional plastic credit or debit
cards, except that as soon as the transaction is authorized, the generated card
number expires immediately. While MVC has been focused primarily on card not
present transactions for internet payments in our initial deployments, we have
the ability to customize the software as industry acceptance increases to
incorporate new trends such as presentation through NFC or Quick Response, or
QR, Codes.
5
Consumers
can easily generate a new card on their mobile phone to shop on the internet or
to place a catalogue or telephone order. MVCs are completely secure and can also
be sent in a single click to family, friends, and service providers. Once the
authorization request reaches the issuing bank processor, our servers decrypt
the virtual card data, authenticate the consumer and pass the transaction
request to the card issuer for authorization. MVC can be offered as a prepaid
solution or directly linked to a subscribers credit or debit card or other
funding account. Subscribers can load prepaid virtual accounts with cash at
participating locations, or electronically via their bank accounts or via direct
deposit.
The
benefits of MVC include, for:
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Card issuers
- increased transactional revenues from existing
accounts, driving more transactional revenues and elimination of fraudulent
card use.
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Mobile network operators
- revenues from payments, reduced churn,
opportunities for powerful co-branding schemes.
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Consumers
- convenience, peace of mind, ease of use, rewards.
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Merchants
- elimination of charge-backs and fraud at no extra
cost
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Financial
services
We
have developed a suite of financial services that is offered to customers
utilizing our payment solutions. We are able to provide our customers with
competitive microfinance, life insurance and money transfer products based on
our understanding of their risk profiles, earning and spending patterns,
demographics and lifestyle requirements.
Hardware
solutions
We
provide hardware solutions that have been developed to optimize the performance
of our payment and transaction processing solutions. These hardware solutions
include;
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Cryptographic solutions
- Our internally-developed
range of PIN encryption devices, card acceptance modules and hardware
security modules are primarily aimed at the financial, retail,
telecommunication, utilities and petroleum sectors. These devices and
modules are suited for high-speed transaction processing requirements,
acceptance of multiple payment tokens, value-added services at point of
transaction, and adherence to stringent transaction security and payment
association standards such as TDES and EMV.
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Chip and GSM licensing
- We supply chip cards into
the South African and other international markets. We work with mobile
network operators, card manufacturers and semiconductor manufacturers to
provide card technology, solutions and software that enable mobile
telephony, mobile transactions and value-added services to take place in a
trusted, secure and convenient manner. These chip products and technology
include operating system and application development, card manufacture and
production, from concept and design through, printing, packaging and
distribution. At the core of our chip business is the strategy of
licensing chip software to a wide spectrum of other industry
participants.
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POS solutions
We supply our secure, integrated
POS payment products and systems, including:
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FlexiLANE An in-store controller ideally suited to
multi-lane retail and petroleum station environments. The in- store
controller forms an interfacing and concentration layer between a group of
distributed terminal devices and a centralized payment and value-added
service, or VAS, aggregator. This helps large retailers and petroleum
companies to overcome the challenges associated with processing multiple
transactions from multiple access devices using multiple tender
types;
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FlexiGATE A terminal and payment gateway that manages
the routing of all FlexiLANE traffic and enables retailers to supply VAS
such as airtime top-up, electricity payment and bill payment;
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FlexiPOS An innovative retail solution that allows the
retailer's various payment and VAS solution requirements to be streamlined
into a single payment terminal. FlexiPOS transforms the POS terminal into
a convenient and consumer friendly place of purchase, place of payment and
place of service; and
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EMV Net1s payment expertise helps ensure that
retailers together with their acquirers meet the requirements of upgrading
software, terminals and security for conformity with the latest
international chip card standards.
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Ingenico POS equipment
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Virtual top-up
- our VTU solution facilitates
mobile phone-based prepaid airtime vending. The VTU technology enables
prepaid cell phone users to purchase additional airtime simply, securely
and conveniently. The vendor uses its GSM handset to purchase bulk airtime
from a mobile network operator. Airtime value, as opposed to a virtual
voucher, is then transferred directly from the vendors cellular handset
to that of the customer. When the vendor runs out of airtime value, it is
a simple task to purchase more to resell to
customers.
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6
Our Strategy
We
intend to provide the leading transacting system for the billions of unbanked
and under-banked people in the world to engage in electronic transactions, as
well as to provide our transaction processing, value-added services processing,
new secure mobile payment technologies and health care processing services
globally. To achieve these goals, we are pursuing the following strategies:
Build
on our significant and established South African infrastructure
In South
Africa, we are one of the leading independent transaction processors, as the
national provider of social welfare payment distribution services to the
countrys large unbanked and under-banked population, the largest third-party
processor of retail merchant transactions, the leading processor of third-party
payroll payments and the leading processor of health care claims. We believe
that our large cardholder base, specialized technology and payment
infrastructure, together with our strong government and business relationships,
position us at the epicenter of commerce in the country.
We
believe that we are well-positioned to continue to gain market share and build
upon the critical mass that we have developed in South Africa and have
identified the following opportunities to continue to drive growth in our South
African business:
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Government focus on expansion of social
benefits
As a result of the South African governments focus
on the provision of social grants as a core element of its social assistance
and poverty alleviation policies, and our new five-year contract to distribute
such grants on a national basis, we believe that we are in a position
to provide services to over 50% of the countrys adult population.
Through our national distribution platform and relationships with a number
of leading companies across multiple industries, we believe we can provide
many of the services consumed by our cardholders who would otherwise have
to rely on the informal sector.
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Government focus on implementing a national
health insurance system
The South African government is in the
process of designing a national health insurance system to bring affordable
quality health care to all South Africans. Through our MediKredit healthcare
rules adjudication engine and transaction processing switch, we believe
we are well-placed to assist the South African government with a secure,
real time solution for the high volume of anticipated healthcare transactions
that the envisaged new system will generate.
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Increasing adoption of existing services
Our
technology supports a variety of other products and smart card to smart
card, or S2S, services that expand the use of our technology and provide
us with new sources of transaction-based revenues. During the last several
years, we have introduced these new products and services in South Africa
for existing and newly-enrolled cardholders. We have installed our POS
terminals in thousands of mostly rural merchant locations throughout the
country which allows beneficiaries to receive their grants at these locations
and transact business with the retailers using our smart card. During
fiscal 2012, we processed 19.0 million transactions with a total value
of ZAR 13.4 billion at these merchant locations.
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Introduction of new services
We
are also poised to benefit from the introduction and adoption of new services
across our various platforms, which we believe will generate significant
incremental transaction fee revenue from current and new users at a relatively
low cost to us. Some of these services include:
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Acceptance of UEPS cards in traditional POS terminals
and bank ATMs
We have enabled our cards to be compliant with
international EMV standards, which will allow our cardholder base to purchase
goods and services at merchant POS locations that currently accept MasterCard-branded
cards and all South African ATMs. This additional functionality will allow
us to expand significantly the number of terminals and ATMs that use our
smart card, capturing fees from new transactions and positioning our cards
to be used by a larger share of the banked population.
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Value-added services through multiple EasyPay
channels
EasyPay is the largest bank-independent financial
switch and merchant processor in South Africa for credit and debit card
transactions. EasyPay processed 425 million transactions with a total
value of ZAR 92.9 billion during fiscal 2012. Our technology also allows
us to provide a variety of additional, value-added payment services, such
as bill payment, prepaid mobile top-up, prepaid utility services and gift
cards, that we can sell into our existing card holder base as well as
to new customers. We have developed additional platforms to access EasyPays
offerings such as a self service kiosks, or EasyPay Kiosk, and web and
mobile phone applications to create a larger, seamless, value-added payments
eco- system.
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Third-party payments from payroll processing through
FIHRST
Through our FIHRST service, we offer employers an
easy and flexible method of making payments to employees and payroll-related
creditors. By combining the FIHRST service and the EasyPay product suite,
we can provide employees with the ability to pay their bills or purchase
prepaid airtime and utilities as a payroll deduction or by providing them
with credit facilities.
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7
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Using our first wave/second wave approach to expand into new
markets
We use what we refer to as a first wave/second wave approach to
market expansion. In the first wave, we seek to identify an application for
which there is a demonstrated and immediate need in a particular territory and
then sell and implement our technology to fulfill this initial need. As a
result, we should achieve the deployment of the required technological
infrastructure as well as the registration of a critical mass of cardholders
or customers. During this phase, we should generate revenues from the sale of
our software and hardware devices, as well as ongoing revenues from
transaction fees, maintenance services and the use of our biometric
verification engine. Once the infrastructure has been deployed and we achieve
a critical mass of customers, we intend to focus on the second wave, which
should allow us to use this infrastructure to provide users, at a low
incremental cost to us, with a wide array of financial products and services
for which we can charge fees based on the value of the transactions performed.
|
|
|
|
•
|
Leveraging our new payment technologies to gain access to developed
economies
While our business has traditionally focused on marketing
products and services to the worlds unbanked and under-banked population, we
have developed and acquired proprietary technology, such as our MVC
application for mobile telephones that is designed to eliminate fraud
associated with card not present credit card transactions, which are those
effected by telephone or over the internet. We have introduced this
technology, as well as our XeoRules
TM
healthcare management system
in the United States, and we plan to expand our offering into Western Europe
and other developed economies.
|
|
|
|
•
|
Pursue strategic acquisition opportunities or partnerships to gain
access to new markets or complementary product
We will continue to
pursue acquisition opportunities and partnerships that provide us with an
entry point for our existing products into a new market, or provides us with
technologies or solutions complementary to our current offerings.
|
Our Clusters and Business Units
Our
company is organized into the following clusters and within each cluster,
separate business units.
Transactional
Solutions Cluster
Cash
Paymaster Services (CPS)
Our
CPS business unit deploys our UEPS Social Grant Distribution technology to
distribute social welfare grants on a monthly basis to over nine million
beneficiaries in South Africa. These social welfare grants are distributed on
behalf of SASSA. During our 2012, 2011 and 2010 fiscal years, we derived 41%,
47%, and 66% of our revenues respectively, from CPS social welfare grant
distribution business.
CPS
provides a secure and affordable transacting channel between social welfare
grant beneficiaries, SASSA and formal businesses. CPS enrolls social welfare
grant beneficiaries by issuing them a UEPS/EMV smart card that digitally stores
their biometric fingerprint templates on the smart card, enabling them to access
their social welfare grants securely at any time or place. The smart card is
issued to the beneficiary on site and utilizes optical fingerprint sensor
technology to identify and verify a beneficiary. The beneficiary simply inserts
a smart card into the POS device and is prompted to present his fingerprint. If
the fingerprint matches the one stored on the smart card, the smart card is
loaded with the value created for that particular smart card. Additionally,
during enrolment we capture the beneficiarys voice print to perform biometric
verification when using channels such as ATMs and traditional POS terminals that
normally do not have fingerprint readers.
The
smart card provides the holder with access to all of the UEPS functionality,
which includes the ability to have the smart card funded with pension or welfare
payments, make retail purchases, enjoy the convenience of pre-paid facilities
and qualify for a range of affordable financial services, including insurance
and short-term loans as well as standard EMV transactional capabilities to
operate wherever MasterCard is accepted. The smart card also offers the card
holder the ability to make debit order payments to a variety of third parties,
including utility companies, schools and retail merchants, with which the holder
maintains an account. The card holder can also use the same smart card as a
savings account.
Our
UEPS - Social Grant Distribution technology provides numerous benefits to
government agencies and beneficiaries. The system offers government a reliable
service at a reasonable price. For beneficiaries, our smart card offers
convenience, security, affordability, flexibility and accessibility. They can
avoid long waiting lines at payment locations and do not have to get to payment
locations on scheduled payment dates to receive cash. They do not lose money if
they lose their smart cards, since a lost smart card is replaceable and the
biometric fingerprint or voice identification technology helps prevent fraud.
Their personal security risks are reduced since they do not have to safeguard
their cash. Beneficiaries have access to affordable financial services, can save
and earn interest on their smart cards and can perform money transfers to
friends and relatives living in other provinces. Finally, beneficiaries pay no
transaction fees when they use our infrastructure to load their smart cards,
perform balance inquiries, make purchases or downloads, or effect monthly debit
orders. For us, the system allows us to reduce our operating costs by reducing
the amount of cash we have to transport.
8
This
business unit has been allocated to our South African transaction-based
activities and smart card accounts reporting segments.
KSNET
Our
KSNET business unit is a significant payment solutions provider in Korea, has
the broadest product offering in the country, a base of approximately 220,000
merchants and an extensive direct and indirect sales network. KSNET is based in
Seoul, Korea. KSNETs core operations comprise of three project offerings,
namely card value-added network, or VAN, payment gateway, or PG, and banking
VAN. KSNET is able to realize significant synergies across these core operations
because it is the only payment solutions provider that offers all three of these
offerings in Korea. Over 90% of KSNETs revenue comes from the provision of
payment processing services to merchants and card issuers through its card
VAN.
KSNETs
core product offerings are described in more detail below:
-
Card VAN
KSNETs card VAN offering manages credit and other
non-cash alternative payment mechanisms for retail transaction processing for
a wide range of merchants and every credit card issuer in Korea. Non-cash
alternative payment mechanisms for which KSNET provides processing services
include all credit and debit cards and e-currency (K-cash and TMoney). KSNET
also records cash transactions for the Korean National Tax Service in the form
of cash receipts.
-
PG
KSNET offers PG services to the rapidly growing number of
merchants that are moving online in Korea. PG provides these merchants with a
host of alternative payment solutions including the ability to accept credit
and debit cards, gift and other prepaid cards, and bank account transfers. PG
also provides virtual account capabilities. KSNET is currently the only card
VAN provider that also provides PG services in Korea. PG offers us an
attractive growth opportunity as e-commerce transactions represent an
increasing share of payments, driven by increased wire-line and wireless
broadband penetration, an increasing number of merchants moving online, and
the enhanced security of online transactions driving consumer acceptance. We
believe that KSNET can become the leading provider in the PG industry by
leveraging its existing merchant base and entering into new markets earlier
than competitors.
-
Banking VAN
KSNETs banking VAN operations currently include
account transaction processing services, payment and collections to banks,
corporate firms, governmental bodies, and educational institutions. We
distinguish card VAN from banking VAN because in the Korean VAN market,
banking VAN is recognized as a distinct service from card VAN. We are the only
card VAN provider that also provides banking VAN services. Because the banking
VAN business industry is at a nascent stage, the market at this time is
relatively small.
This
business unit has been allocated to our international transaction-based
activities reporting segment.
EasyPay
Our
EasyPay business unit operates the largest bank-independent financial switch in
Southern Africa and is based in Cape Town, South Africa. EasyPay focuses on the
provision of high-volume, secure and convenient payment, prepayment and
value-added services to the South African market. EasyPays infrastructure
connects into all major South African banks and switches both debit and credit
card EFT transactions for some of South Africas leading retailers and petroleum
companies. It is a South African Reserve Bank, or SARB, approved third-party
payment processor.
In
addition to its core transaction processing and switching operations, EasyPay
provides a complete end-to-end reconciliation and settlement service to its
customers. This service includes dynamic reconciliation as well as easy-to-use
report and screen-query tools for down-to-store-level, management and control
purposes.
The
EasyPay suite of services includes:
-
EFT
EasyPay switches credit, debit and fleet card transactions for
leading South African retailers and petroleum companies;
-
EasyPay bill payment
EasyPay offers consumers a point-of-sale bill
payment service which is integrated into a large number of national retailers,
the internet, self service kiosks and mobile handsets. EasyPay processes
monthly account payment transactions for over 350 different bill issuers
including major local authorities, telephone companies, utilities, medical
service providers, traffic departments, mail order companies, banks and
insurance companies;
-
EasyPay prepaid electricity
This service enables local utility
companies such as Eskom Holdings Limited and a growing number of local
authorities on a national basis to sell prepaid electricity to their
customers;
-
Prepaid airtime
EasyPay vends airtime at retail POS terminals for
all the South African mobile telephone network operators;
-
Electronic gift voucher
EasyPay supports the electronic generation,
issuance and redemption of paper or card-based gift vouchers;
-
EasyPay licenses
EasyPay enables the issuance of new South African
Broadcasting television licenses and the capturing of existing license details
within retail environments via a web-based user interface;
9
-
Third party switching and processing support
EasyPay switches
transactions from retail POS systems to the relevant back-end systems;
-
Hosting services
EasyPays infrastructure supports the hosting of
payment or back-up servers and applications on behalf of third parties,
including utility companies;
-
EasyPay Kiosk
We have developed a biometrically enabled self
service kiosk that allows our EasyPay customers to access all the value-added
services provided by EasyPay and to create and load their EasyPay virtual
wallets with value; and
-
EasyPay Web and Mobile
This service enables EasyPay customers to
access all the value-added services provided by EasyPay, such as bill payments
and the purchase of prepaid airtime and utilities through a secure website
that may be accessed through personal computers or through mobile handsets.
EasyPay
provides 24x7 monitoring and support services, reconciliation, automated
clearing bureau settlement, reporting, full disaster recovery and redundancy
services.
This
business unit has been allocated to our South African transaction-based
activities reporting segment.
MediKredit/
XeoHealth
Our
MediKredit business unit operates and markets our Healthcare Transaction
Management systems and solutions in South Africa and is based in Johannesburg,
South Africa. We estimate that MediKredits products affect 4.2 million of the
seven million health-insured lives in South Africa. We also service the
claims-processing needs of certain public hospitals, 100 medical scheme plans
and ten of the major healthcare administrators in South Africa. Our
functionality caters for all healthcare claim types which include pharmacy,
doctor, private and public hospital claims.
MediKredit
has been allocated to our South African transaction-based activities reporting
segment.
Our
XeoHealth business unit operates from Frederick, Maryland, and offers our
XeoRules real time adjudication, or RTS, solutions for the end-to-end electronic
processing of medical claims information in the U.S. XeoHealth has recently won
a number of projects in the U.S. either as the primary contractor for the
provision of our RTS solution to customers, or as a subcontractor to parties
contracted to provide an adjudication solution.
XeoHealth
has been allocated to our international transaction-based activities reporting
segment.
FIHRST
FIHRST
offers South African employers our payroll transaction management service and is
based in Johannesburg, South Africa. FIHRST currently processes payments
exceeding R77.7 billion on behalf of our clients every year, enabling salaries
departments to achieve greater levels of efficiency and employee service. We
have been chosen as the preferred payments partner by more than 1,250 employer
groups of all sizes across all sectors of the economy, representing 850,000
employees. FIHRST is recognized by and works in partnership with the majority of
third party payroll organizations including pension fund and medical aid
administrators.
This
business unit has been allocated to our South African transaction-based
activities reporting segment.
Universal
Electronic Technological Solutions (UETS)
Our
UETS business unit is based in Johannesburg, South Africa and focuses on the
sale, implementation and support of our UEPS technology, ranging from large
scale, national projects to smaller, product specific regional projects. UETS
focuses on identifying, defining and activating an entry point to commence
operations in Africa (excluding South Africa), and in Iraq.
UETS
markets the following solutions and products:
-
The UEPS national switching, settlement, clearing and smart card solutions
offering interoperability with existing banking infrastructure;
-
Wave 2 opportunities, such as financial services in countries with an
established UEPS infrastructure;
-
Individual stand-alone UEPS applications, with processing outsourced to
Net1 regional offices, similar to the model deployed for the payment of
welfare grants in Iraq;
-
UEPS mobile banking solutions targeted at banks and/or mobile operators;
-
E-Government applications such as multi-purpose national identity cards
and national welfare & healthcare solutions; and
-
Secure verification of existing EMV Debit / credit card transactions using
Net1s biometric identification technology.
10
Our
UETS team also provides business development support in territories where UEPS
systems have been sold and implemented, such as Ghana, Malawi, Namibia and
Botswana.
This
business unit has been allocated to our international transaction-based
activities and hardware, software and related technology sales reporting
segments.
Mobile
Virtual Card
Our
Net1 Virtual Card business unit is managed from Johannesburg, South Africa with
business development support branches in the USA, Austria, India and Indonesia.
Our MVC technology provides a completely secure, off-line payment solution for
card not present transactions, such as payments made for internet purchases, The
MVC technology runs as a application on any mobile phone and utilizes Net1s
patented cryptographic card generator to secure any payment transaction. The
advent of new technologies such as NFC or QR Codes also enables the utilization
of our MVC technology for card present payments.
Our
launch customer in the US, MetroPCS, is one of the top five US wireless
carriers. MetroPCS offers our MVC technology under the VCPay
TM
brand
as an application that is pre-loaded on new smart phones. We believe our VCPay
application is the first mobile phone-based prepaid program with no requirement
for the user to have a physical card or bank account. In addition, we have
entered into agreements with MoneyGram International, a global money transfer
company, and GreenDot Corporation, a major issuer of prepaid credit cards in the
United States, to enable subscribers to load their prepaid virtual accounts with
cash at any of MoneyGrams and GreenDots 100,000 US agents, which are located
in most communities including many grocery, pharmacy and convenience store
chains, or electronically via their bank accounts or via direct deposit.
We
have also concluded deals for the provision of MVC services and/or licenses with
customers in Mexico, Spain and India.
This
business unit has been allocated to our international transaction-based
activities reporting segments.
Hardware
and Software Sales Cluster
We
have dedicated business units responsible for the development, production,
marketing, maintenance and support of our Hardware Solutions. These business
units are:
-
Cryptographic solutions
based in Johannesburg and Durban, South
Africa, this business unit manages our Incognito range of PIN encryption
devices, card acceptance modules and hardware security modules. These
solutions are used globally by numerous customers in the financial, retail,
telecommunication, utilities and petroleum sectors and by all other Net1
business units that operate payment and transaction processing services.
-
Chip and GSM licensing
this business unit is a supplier of chip
cards and GSM licenses into the South African and other international markets.
We operate our own small factory in Johannesburg, South Africa and license
numerous mobile network operators, card manufacturers and semiconductor
manufacturers to provide card technology, solutions and software that enable
mobile telephony, mobile transactions and value-added services.
-
POS solutions
based in Johannesburg, South Africa, our POS
Solutions business unit is responsible for marketing in South Africa our
secure, integrated POS payment products and systems.
-
VTU
based in Johannesburg, South Africa, our VTU business unit is
responsible for the global marketing and support of our VTU solution.
-
Smart card-based payment systems in Europe and other
based in
Vienna, Austria, our Net1 UTA business unit provides smart card-based payment
systems to banks, enterprises and government authorities in Russia, Ukraine,
Uzbekistan and Oman.
These
business units have been allocated to our hardware, software and related
technology sales reporting segment.
Financial
Services Cluster
Finance
Holdings
This
business unit is responsible for identifying financial services products that
can be provided to our UEPS cardholders in South Africa and then marketing and
implementing the provision of those products. We currently provide micro-loans
to our UEPS cardholders who receive social welfare grants through our system in
the KwaZulu-Natal and Northern Cape provinces. We provide the loans ourselves
and generate revenue from the service fees charged on these loans.
Our
wage payment system offers wage earners a UEPS card that allows them to receive
payment, transact and access other financial services in a secure,
cost-effective way.
11
SmartLife
SmartLife
is a licensed South African life insurance company and provides us with an
opportunity to offer relevant insurance products directly to our existing
customer and employee base in South 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. SmartLife
commenced activities in the second quarter of fiscal 2012.
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.
These
business units have been allocated to our financial services reporting segment.
Corporate
Cluster
The
Corporate Cluster provides global support services to our business units, joint
ventures and investments for the following activities:
-
Group executive
responsible for the overall company management,
defining our global strategy, investor relations and corporate finance
activities.
-
Finance and administration
provides company-wide support in the
areas of accounting, treasury, human resources, administration, legal,
secretarial, taxation, compliance and internal audit.
-
Group information technology
defines our overall IT strategy and
the overall systems architecture and is responsible for the identification and
management of the groups research and development activities.
-
Joint ventures and investments unit
provides governance support to
our joint ventures and assists with the evaluation of new investment
opportunities.
Competition
In
addition to competition that our UEPS system faces from the use of cash, checks,
credit and debit cards, existing payment systems and the providers of financial
services, there are a number of other products that use smart card technology in
connection with a funds transfer system. While it is impossible for us to
estimate the total number of competitors in the global payments marketplace, we
believe that the most competitive product in this marketplace is EMV, a system
that is promoted by most of the major card companies such as Visa, MasterCard,
JCB and American Express. The competitive advantage of our UEPS offering is that
our technology can operate real-time, but in an off-line environment, using
biometric identification instead of the standard PIN methodology employed by our
competitors. We have enhanced our competitive advantage through the development
of 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 in South Africa through the issuance of
MasterCard-branded UEPS/EMV cards to our social welfare grant customers. We
estimate that we process less than 1% of all global payment transactions in the
international marketplace.
In
South Africa, and specifically in the payment of salaries and wages, our
competitors include the local banks and other transaction processors. The South
African banks and the South African Post Office, or SAPO, also offer employees
the option to open low cost bank accounts that enable the employees to receive
their salaries or wages through the formal banking payment networks.
The
payment of social welfare grants in South Africa is determined through a highly
competitive tender process managed by SASSA. The participants in SASSAs tender
processes have historically included the local banks, other payment processors,
SAPO and mobile operators. We compete primarily on the basis of the innovative
nature and security of our technology as well as the broadest distribution
footprint. We are able to load social welfare grants on behalf of the South
African government directly onto a biometrically secured UEPS/EMV smart card in
rural areas where there is little or no infrastructure or in semi-urban areas
through our merchant acquiring system. Our UEPS/EMV-enabled smart cards are
therefore used as a means of identification, security and as a transacting
instrument. Grants loaded onto our UEPS/EMV-enabled smart cards can be used both
online and offline and beneficiaries pay no monthly account or transaction fees.
The usefulness of a traditional bank card to its holder is dependent on the
availability of a branch network, ATM infrastructure and merchants accepting the
card. Access to bank branches, ATMs and merchants accepting traditional bank
cards are limited or non-existent in the rural areas of South Africa. We believe
the security, functionality and simplicity of our UEPS/EMV smart card provides
us with a unique ability to service these rural areas of South Africa, as well
as all urban areas through the existing POS and ATM infrastructure.
Our
technology eliminates the risk associated with receiving social welfare grants
in cash as well as the costs associated with transaction fees charged by banks
when beneficiaries exceed the minimum number of free transactions per month.
12
We
believe that SASSA considers the technology utilized, pricing of the payment
service rendered and other factors such as black economic empowerment, or BEE,
rating as the most important factors when considering potential service
providers. We compete with other service providers on these aspects through
SASSAs tender processes, when applicable, or through contract extension
negotiations. Following the award of the SASSA tender to us in January 2012 to
pay all social welfare grants in South Africa for a period of five years
commencing April 1, 2012, we believe that the next competitive tender process
will commence during 2016.
We
have identified 10 major card VAN companies in Korea, of which KSNET is one of
the four largest. The other three large VAN companies are NICE Information &
Telecommunication Inc., First Data Korea Limited and Korea Information &
Communications Company, Limited. Entities operating in the VAN industry in Korea
compete on pricing and customer service.
EasyPays
competitors include BankservAfrica, UCS, eCentric and Transaction Junction.
BankservAfrica is the largest transaction processor in South Africa which
processes all transactions on behalf of the South African banks and claims to
process in excess of 2.6 billion transactions valued at trillions of rands
annually. During fiscal 2012, EasyPay processed 425 million transactions with a
total value of ZAR 92.9.
In
addition to our traditional competitors, we expect that we will increasingly
compete with a number of emerging entities in the mobile payments industry.
While the industry is still in its infancy, a number of entities are
establishing their presence in this space. Specifically identified entities
include traditional payment networks such as Visa, MasterCard and American
Express; commercial banks such as Barclays and Citigroup; established technology
companies such as Apple, Google and PayPal; mobile operators such as AT&T,
Verizon, Vodafone and Bharti Airtel; as well as companies specifically focused
on mobile payments such as M-Pesa, Monetise and Square.
Research and Development
During
fiscal 2012, 2011 and 2010, we incurred research and development expenditures of
$3.9 million, $5.7 million and $7.6 million, respectively. These expenditures
consist primarily of the salaries of our software engineers and developers. Our
research and development activities relate primarily to the continual revision
and improvement of our core UEPS and UEPS/EMV software and its functionality and
the design and development of our MVC concept. For example, we continually
advance our security protocols and algorithms as well as develop new UEPS
features that we believe will enhance the attractiveness of our product and
service offerings. Our research and development efforts also focus on taking
advantage of improvements in the hardware platforms that are not proprietary to
us but which form part of our system.
Intellectual Property
Our
success depends in part on our ability to develop, maintain and protect our
intellectual property. We rely on a combination of patents, copyrights,
trademarks and trade secret laws, as well as non-disclosure agreements to
protect our intellectual property. We seek to protect new intellectual property
developed by us by filing new patents worldwide. We hold a number of trademarks
in various countries.
Financial Information about Geographical Areas and Operating
Segments
Note
22 to our consolidated financial statements included in this annual report
contains detailed financial information about our operating segments for fiscal
2012, 2011 and 2010. During fiscal 2012, we reallocated certain of our operating
activities among these segments, as described under Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Revenues
based on the geographic location from which the sale originated and geographic
location where long-lived assets are held for the years ended June 30, are
presented in the table below:
|
|
|
Revenue
|
|
|
Long-lived assets
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South Africa
|
$
|
272,063
|
|
$
|
264,485
|
|
$
|
267,478
|
|
$
|
140,308
|
|
$
|
115,809
|
|
$
|
111,430
|
|
|
Korea
|
|
114,096
|
|
|
68,392
|
|
|
-
|
|
|
224,272
|
|
|
258,791
|
|
|
-
|
|
|
Europe
|
|
2,413
|
|
|
10,465
|
|
|
12,301
|
|
|
38
|
|
|
139
|
|
|
42,489
|
|
|
Rest of world
|
|
1,692
|
|
|
78
|
|
|
585
|
|
|
6,873
|
|
|
6,817
|
|
|
8,081
|
|
|
Total
|
$
|
390,264
|
|
$
|
343,420
|
|
$
|
280,364
|
|
$
|
371,491
|
|
$
|
381,556
|
|
$
|
162,000
|
|
13
Employees
As
of June 30, 2012, we had 4,851 employees, which included approximately 2,500
temporary employees contracted to assist with our SASSA implementation. On a
segmental basis, 206 employees were part of our management, 4,080 were employed
in South African transaction-based activities, 178 were employed in
international transaction-based activities, 12 were employed in financial
services and 375 were employed in smart card, hardware, software and related
technology sales and corporate activities.
We
expect our employee base to remain at approximately 5,000 people for most of
fiscal 2013 until we have concluded the implementation of our SASSA contract.
Once complete, we expect our permanent employee base to stabilize around
approximately 3,000 employees.
On
a functional basis, four of our employees were part of executive management, 181
were employed in sales and marketing, 225 were employed in finance and
administration, 321 were employed in information technology and 4,120 were
employed in operations.
As
of June 30, 2012, approximately 90 of the 4,080 employees we have in South
Africa who were performing transaction-based activities were members of the
South African Commercial Catering and Allied Workers Union and approximately 157
of the 179 employees we have in Korea who perform international
transaction-based activities were members of the KSNET Union. We believe we have
a good relationship with our employees and these unions.
Corporate history
Net1
was incorporated in Florida in May 1997. Until June 2004, Net1 was a development
stage company and its business consisted only of holding a license to payment
systems intellectual property and an exclusive marketing agreement for the UEPS
technology outside South Africa, Namibia, Botswana and Swaziland. In June 2004,
Net1 acquired Net1 Applied Technologies Holdings Limited, or Aplitec, a public
company listed on the JSE Limited, or JSE. Aplitec owned the payment systems
intellectual property in South Africa, Namibia, Botswana and Swaziland and one
of its subsidiaries was the other party to the marketing agreement described
above. The primary purpose of the Aplitec transaction was to consolidate all
intellectual property into one company, to establish a first-mover advantage in
developing economies for the commercialization of the UEPS technology, and to
exploit market opportunities for growth through strategic alliances and
acquisitions. The transaction permitted Aplitecs shareholders to reinvest the
sale proceeds in Net1, but under South African exchange control regulations,
those shareholders were not permitted to hold Net1s securities directly. In
2005, Net1 completed an initial public offering and listed on the Nasdaq Stock
Market. In October 2008, Net1 listed on the JSE, in a secondary listing, which
enabled the former Aplitec shareholders (as well as South African residents
generally) to hold Net1 common stock directly.
Available information
We
maintain an Internet website at www.net1.com. Our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports are available free of charge through the SEC filings portion of
our website, as soon as reasonably practicable after they are filed with the
Securities and Exchange Commission. The information posted on our website is not
incorporated into this Annual Report on Form 10-K.
Executive Officers and Significant Employees of the
Registrant
Executive
officers
The
table below presents our executive officers, their ages and their titles:
Name
|
Age
|
Title
|
Dr. Serge C.P. Belamant
|
58
|
Chief executive
officer, chairman and director
|
Mr. Herman G. Kotze
|
42
|
Chief financial officer,
treasurer, secretary and director
|
Mr. Phil-Hyun Oh
|
53
|
Chief executive
officer and president, KSNET, Inc.
|
Mr. Nitin Soma
|
45
|
Senior vice president information
technology
|
Dr.
Belamant
is one of the founders of our company and has been our chief
executive officer since October 2000 and the chairman of our board since
February 2003. He was also chief executive officer of Aplitec. Dr. Belamant also
serves on the boards of a number of other companies that perform welfare
distribution services and the provision of microfinance to customers. Dr.
Belamant spent ten years working as a computer scientist for Control Data
Corporation where he won a number of international awards. Later, he was
responsible for the design, development, implementation and operation of the
Saswitch ATM network in South Africa that rates today as the third largest ATM
switching system in the world. Dr. Belamant has patented a number of inventions,
including our original funds transfer system patent, ranging from biometrics to
gaming-related inventions.
14
Dr. Belamant has more than 30 years of experience in the fields
of operations research, security, biometrics, artificial intelligence and online
and offline transaction processing systems. Dr. Belamant holds a PhD in
Information Technology and Management.
Mr.
Kotze
has been our chief financial officer, secretary and treasurer since
June 2004. From January 2000 until June 2004, he served on the board of Aplitec
as group financial director. Mr. Kotzé joined Aplitec in November 1998 as a
strategic financial analyst. Mr. Kotzé is a member of the South African
Institute of Chartered Accountants.
Mr.
Oh
has served as chief executive officer and president of KSNET since 2007.
Prior to that, he was the Managing Partner at Dasan Accounting Firm and was the
Head of the Investment Banking Division at Daewoo Securities. Mr. Oh is
responsible for the day to day operations of KSNET and as its chief executive
officer and president is instrumental in setting and implementing its strategy
and objectives.
Mr.
Soma
has served as our Senior Vice President of Information Technology since
June 2004. Mr. Soma joined Aplitec in 1997. He specializes in transaction
switching and interbank settlements. Mr. Soma represented Nedcor Bank in
assisting with the technical specifications for the South African Interbank
Standards. He is also responsible for the ATM settlement process to balance ATMs
with the host as well as balance the host with different card users. Mr. Soma
designed the Stratus Back-End System for Aplitec, and is responsible for the
Nedbank Settlement System for the Point of Sales Devices. Mr. Soma has over 15
years of experience in the development and design of smart card payment systems.
Significant
employees
Business
Functions:
Dr.
Gerhard Claassen
(53): General Manager Cryptographic Solutions Dr.
Claassen joined us in August 2000 and is responsible for the marketing and
business development of our cryptographic solutions consisting of the internally
developed Incognito range of security solutions, as well as ToDos authenticators
and the Cybertrust PKI products.
Wimpie
du Plessis
(60): Managing director: MediKredit Mrs. du Plessis joined
us in January 1999 and is responsible for the marketing and business development
of our MediKredit and XeoHealth offerings worldwide.
K.
H. Kang
(46): Division Director - Marketing Division 2 Mr. Kang joined us
in December 1994 and is responsible for KSNETs market division that focuses
primarily on banking VAN, PG and market development.
M.
B. Lee
(47): Division Director - Marketing Division 1 Mr. Lee joined us in
August 1994 and is responsible for KSNETs market division that focuses
primarily on card VAN.
Igor
Medan
(39): Joint Managing Director: Net1 UTA Mr. Medan has been the Joint
Managing Director of Net1 UTA since 2011. Net1 UTA is responsible for the
marketing and business development of our payment solutions in Russia, the CIS,
Oman, India, Asia and Latin America.
Nanda
Pillay
(41): General Manager: CPS and EasyPay Mr. Pillay joined us in May
2000 and is responsible for our South African operations, consisting of CPS and
EasyPay.
Armando
Piedra
(39): Joint Managing Director: Net1 UTA Mr. Piedra has been the
Joint Managing Director of Net1 UTA since 2011. Net1 UTA is responsible for the
marketing and business development of our payment solutions in Russia, the CIS,
Oman, India, Asia and Latin America.
James
Sneedon
(43): Business Unit Leader: VTU Mr. Sneedon joined us January 2001
and is responsible for the marketing and business development of our VTU
products.
Brenda
Stewart
(54): Managing director: Net1 Universal Electronic Technological
Solutions Mrs. Stewart joined us in 1997 and is responsible for the marketing
and business development of our UEPS solutions in Africa (excluding South
Africa) and Iraq.
Trevor
Smit
(54): Managing director: FIHRST Mr. Smit joined us in May 2007 and is
responsible for the marketing and business development of our FIHRST offering.
Chris
van der Walt
(50): Managing director: SmartLife Mr. van der Walt joined us
in July 2011 and is responsible for the marketing and business development of
our insurance offerings through SmartLife.
15
Support
functions:
Chris
Britz
(51): Vice President - Group production, repairs & maintenance
Mr. Britz joined us in April 2001 and is responsible for the groups production
facilities, as well as all internal and external repairs and maintenance of
terminals and other hardware.
Lawrie
Chalmers
(51): Vice President - Group Human Resources Mr. Chalmers joined
us in April 1998 and is responsible for the groups South African human
resources activities, including recruitment, payroll, training and industrial
relations.
Y.
H. Cho
(46): Head of research director Mr. Cho joined us in July 1999 and
is responsible for KSNETs information technology department.
M.
Y. Jun
(44): Head of Strategy, Planning and Finance Mr. Jun joined us in
September 2000 and is responsible for KSNETs financial function, including
financial accounting, taxation and statutory reporting.
Dhruv
Chopra
(38): Vice President: Investor Relations Mr. Chopra is responsible
for managing our investor relations function globally.
Paul
Encarnacao
(36): Vice President Finance Mr. Encarnacao joined us in June
2004 and is responsible for the preparation of the groups generally accepted
accounting principles in the United States of America, or US GAAP, consolidated
accounts and statutory reports.
Alan
Keschner
(51): Vice President: Joint Ventures and Investments Mr. Keschner
joined us in January 2012 and provides governance support to our joint ventures
as our representative on the various boards of directors.
Warren
Segall
(47): Vice President: Compliance Mr. Segall joined us in July 2006
and is our compliance officer.
Cara
van Straaten
(51): Group Financial Controller Ms. Van Straaten joined us
in July 2004 and is responsible for the groups South African financial
function, including financial accounting, taxation and statutory reporting.
16
ITEM
1A. RISK FACTORS
OUR
OPERATIONS AND FINANCIAL RESULTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES,
INCLUDING THOSE DESCRIBED BELOW, THAT COULD ADVERSELY AFFECT OUR BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS, CASH FLOWS, AND THE TRADING PRICE OF
OUR COMMON STOCK.
Risks Relating to Our Business
We
derive a majority of our revenues from our new contract with SASSA for the
distribution of pension and welfare benefits in all of South Africas nine
provinces. While the new contract has substantially increased the number of
beneficiaries to whom we distribute benefits, it has also increased our
dependence on our pension and welfare business while also reducing our operating
margin, at least in the short term. Further, if we cannot successfully leverage
an expanded beneficiary base to provide recipients with additional financial and
other services, our financial performance may suffer.
On
January 17, 2012, SASSA awarded us a tender to provide payment services for
social grants in all of South Africas nine provinces for a period of five
years. On February 3, 2012, we entered into a new contract, together with a
related service level agreement, with SASSA. Under our prior SASSA contract, we
provided payment services in only five provinces.
Although
our revenues from our new SASSA contract have increased as a result of the
larger number of beneficiaries we now serve, we also have incurred and will
continue to incur significant increases in operating expenses. We have made
significant capital expenditures to build out our infrastructure across South
Africa, primarily in the additional four provinces. As a result, despite the
higher volumes of payments, these additional expenses have resulted in lower
operating margins in our pension and welfare business. We could also encounter
delays or unexpected expenses during the implementation phase of the contract,
which could adversely affect us and require additional management time and
attention. While our goal is to offset the additional increases in operating
expenses and capital expenditures by expanding the scope and volumes of
financial and other services we can provide to our beneficiaries, we may not be
successful in doing so, which could adversely affect our business, results of
operations, operating cash flow and financial condition.
Moreover,
the expansion of our service offering to all nine South African provinces has
increased our dependence on our contract with SASSA, which is and will continue
to be our largest customer. For the fiscal year ended June 30, 2012, our pension
and welfare accounted for approximately 41% of our revenues. If we were to lose
all or part of these revenues for any reason, our business would suffer
significantly.
In
order to meet our obligations under our SASSA contract, we are required to
deposit government funds with financial institutions in South Africa before
commencing the payment cycle and are exposed to counterparty risk.
In
order to meet our obligations under our SASSA contract, we are required to
deposit government funds, which will ultimately be used to pay social welfare
grants, with financial institutions in South Africa before commencing the
payment cycle. If these financial institutions are unable to meet their
commitments to us, in a timely manner or at all, we would be unable to discharge
our obligations under our SASSA contract and could be subject to penalties, loss
of reputation and potentially, the cancellation of our contract. As we are
unable to influence these financial institutions' operations, including their
internal information technology structures, capital structures, risk management,
business continuity and disaster recovery programs, or their regulatory
compliance systems, we are exposed to counterparty risk.
Two
of the unsuccessful tenderors have challenged SASSAs award of the tender to us.
On
February 8, 2012, AllPay filed an application in the North Gauteng High Court of
South Africa seeking to set aside the award of the SASSA tender to us. AllPay
was one of the unsuccessful bidders during the recent SASSA tender process and
was a former contractor to SASSA. We are included as one of several respondents
in this proceeding. As a respondent, we are entitled to oppose the application,
which we are doing. When SASSA publicly announced the award of the tender to us
in January 2012, it stated that it had conducted the tender in accordance with
all relevant legislation. The matter was argued before the High Court on May 29
to 31, 2012, and we expect that judgment will be handed down during the first
quarter of fiscal 2013. Any of the parties to the proceeding will thereafter be
entitled to apply to the High Court for leave to appeal the judgment and,
provided that such leave is granted, the appeal process could take several
months to be finalized. We cannot predict when the proceeding will be resolved
or its ultimate outcome.
17
On
February 3, 2012, another unsuccessful bidder and former SASSA contractor,
Empilweni Payout Services (Pty) Ltd, requested SASSA to provide it with all
reasons for the award and information that we provided to SASSA in connection
with the tender process. Empilweni filed a High Court application to compel
SASSA to provide such reasons and information. We opposed the application but
SASSA provided certain of the requested information to Empilweni pursuant to an
agreed court order. No further action is expected in this proceeding.
In
addition, on March 22, 2012, Empilweni filed an urgent High Court application to
interdict and restrain SASSA from taking any steps to implement our appointment
as a service provider of SASSA in the province of Mpumalanga, pursuant to the
award of the tender. On March 27, 2012 the High Court ruled that the matter was
not urgent and accordingly it was struck from the court roll. If Empilweni wants
to proceed, it would have to do so on a non-urgent basis. Empilweni has taken no
further steps to advance this proceeding since March 27, 2012.
If
AllPays challenge is successful, the contract could be set aside. If Empilweni
advances proceedings and is successful a portion of the contract could be set
aside. It is also possible that other unsuccessful bidders may challenge the
award. Our management may be required to expend significant time and resources
in an attempt to defeat these challenges.
We
have disclosed competitively sensitive information as a result of the AllPay
litigation, which could adversely affect our competitive position in the future.
In
connection with the AllPay litigation discussed above challenging the award of
the SASSA tender to us, we have included our entire SASSA tender submission in
the court record, which court record is in the public domain. Our tender
submission contains competitively sensitive business information. As a result of
this disclosure, our existing and future competitors have access to this
information which could adversely affect our competitive position in any future
similar tender submissions to the extent that such information continues to
remain competitively sensitive.
We
may undertake acquisitions that could increase our costs or liabilities or be
disruptive to our business.
Acquisitions
are a significant part of our long-term growth strategy as we seek to grow our
business internationally and to deploy our technologies in new markets both
inside and outside South Africa. However, we may not be able to locate suitable
acquisition candidates at prices that we consider appropriate. If we do identify
an appropriate acquisition candidate, we may not be able to successfully
negotiate the terms of an acquisition, finance the acquisition or, if the
acquisition occurs, integrate the acquired business into our existing business.
These transactions may require debt financing or additional equity financing,
resulting in additional leverage or dilution of ownership.
Acquisitions
of businesses or other material operations and the integration of these
acquisitions will require significant attention from our senior management which
may divert their attention from our day to day business. The difficulties of
integration may be increased by the necessity of coordinating geographically
dispersed organizations, integrating personnel with disparate business
backgrounds and combining different corporate cultures. We also may not be able
to maintain key employees or customers of an acquired business or realize cost
efficiencies or synergies or other benefits that we anticipated when selecting
our acquisition candidates. In addition, we may need to record write-downs from
future impairments of goodwill or other intangible assets, which could reduce
our future reported earnings. Finally, acquisition candidates may have
liabilities or adverse operating issues that we fail to discover through due
diligence prior to the acquisition.
We
have a significant amount of indebtedness that requires us to comply with
restrictive and financial covenants. If we are unable to comply with these
covenants, we could default on this debt, which would have a material adverse
effect on our business and financial condition.
As
of June 30, 2012, we had approximately $94 million of outstanding indebtedness,
which we incurred to finance the KSNET acquisition. These loans are secured by
substantially all of KSNETs assets, a pledge by Net1 Korea of its entire equity
interest in KSNET and a pledge by the immediate parent of Net1 Korea (also one
of our subsidiaries) of its entire equity interest in Net1 Korea. The terms of
the loan facility require Net1 Korea and its consolidated subsidiaries to
maintain certain specified financial ratios (including a leverage ratio and a
debt service coverage ratio) and restrict their ability to make certain
distributions with respect to their capital stock, prepay other debt, encumber
their assets, incur additional indebtedness, make capital expenditures above
specified levels, engage in certain business combinations and engage in other
corporate activities. Although these covenants only apply to our Korean
subsidiaries, these security arrangements and covenants may reduce our operating
flexibility or our ability to engage in other transactions that may be
beneficial to us. If we are unable to comply with these covenants, we could be
in default and the indebtedness could be accelerated. If this were to occur, we
might not be able to obtain waivers of default or to refinance the debt with
another lender and as a result, our business and financial condition would
suffer.
18
A
prolonged economic slowdown or lengthy or severe recession in South Africa or
elsewhere could harm our operations.
A
prolonged economic downturn or recession could materially impact our results
from operations. A recessionary economic environment could have a negative
impact on mobile phone operators, our cardholders and retailers and could reduce
the level of transactions we process and the take-up of financial services we
offer, which would, in turn, negatively impact our financial results. If
financial institutions and retailers experience decreased demand for their
products and services our hardware, software and related technology sales will
reduce, resulting in lower revenue.
The
loss of the services of Dr. Belamant or any of our other executive officers
would adversely affect our business.
Our
future financial and operational performance depends, in large part, on the
continued contributions of our senior management, in particular, Dr. Serge
Belamant, our Chief Executive Officer and Chairman and Herman Kotze, our Chief
Financial Officer. Many of our key responsibilities are performed by these two
individuals, and the loss of the services of either of them could disrupt our
development efforts or business relationships and our ability to continue to
innovate and to meet customers needs, which could have a material adverse
effect on our business and financial performance. We do not have employment
agreements with these executive officers and they may terminate their employment
at any time.
In
addition, the success of our KSNET business depends heavily on the continued
services of its president, Phil-Hyun Oh and the other senior members of the
KSNET management team. We do not maintain any key person life insurance
policies.
We
face a highly competitive employment market and may not be successful in
attracting and retaining a sufficient number of skilled employees, particularly
in the technical and sales areas and senior management.
Our
future success depends on our ability to continue to develop new products and to
market these products to our target users. In order to succeed in our product
development and marketing efforts, we need to identify, attract, motivate and
retain sufficient numbers of qualified technical and sales personnel. An
inability to hire and retain such technical personnel would adversely affect our
ability to enhance our existing intellectual property, to introduce new
generations of technology and to keep abreast of current developments in
technology. Demand for personnel with the range of capabilities and experience
we require is high and there is no assurance that we will be successful in
attracting and retaining these employees. The risk exists that our technical
skills and sales base may be depleted over time because of natural attrition.
Furthermore, social and economic factors in South Africa have led, and continue
to lead, numerous qualified individuals to leave the country, thus depleting the
availability of qualified personnel in South Africa. In addition, our
multi-country strategy will also require us to hire and retain highly qualified
managerial personnel in each of these markets. If we cannot recruit and retain
people with the appropriate capabilities and experience and effectively
integrate these people into our business, it could negatively affect our product
development and marketing activities.
We
face competition from the incumbent retail banks in South Africa and SAPO in the
unbanked market segment, which could limit growth in our transaction-based
activities segment.
The
incumbent South African retail banks have created a common banking product,
generally referred to as a Mzansi account, for unbanked South Africans, which
offers limited transactional capabilities at reduced charges, when compared to
the accounts traditionally offered by these banks. According to the FinScope
survey, which is an annual survey conducted by the FinMark Trust, a non-profit
independent trust, approximately 4.4 million and 3.5 million people in South
Africa claimed to use a Mzansi account in 2009 and 2008, respectively. As the
competition to bank the unbanked in South Africa intensifies with the Mzansi
account and other similar product offerings, we may not be successful in
marketing our low-cost banking product to our target population.
Moreover,
as our product offerings increase and gain market acceptance in South Africa,
the banks and SAPO may seek governmental or other regulatory intervention if
they view us as disrupting their funds transfer or other businesses.
We
may face competition from other companies that offer smart card technology,
other innovative payment technologies and payment processing, which could result
in loss of our existing business and adversely impact our ability to
successfully market additional products and services.
Our
primary competitors in the payment processing market include other independent
processors, as well as financial institutions, independent sales organizations,
and, potentially card networks. Many of our competitors are companies who are
larger than we are and have greater financial and operational resources than we
have.
19
These
factors may allow them to offer better pricing terms or incentives to customers,
which could result in a loss of our potential or current customers or could
force us to lower our prices as well. Either of these actions could have a
significant effect on our revenues and earnings.
In
addition to competition that our UEPS system faces from the use of cash, checks,
credit and debit cards, existing payment systems and the providers of financial
services and low cost bank accounts, there are a number of other products that
use smart card technology in connection with a funds transfer system. During the
past several years, smart card technology has become increasingly prevalent. We
believe that the most competitive product in this marketplace is EMV, a system
that is promoted by most of the major card companies such as Visa, MasterCard,
JCB and American Express. Also, governments and financial institutions are, to
an increasing extent, implementing general-purpose reloadable prepaid cards as a
low-cost alternative to provide financial services to the unbanked population.
Moreover, while we see the acceptance over time of using a mobile phone to
facilitate financial services as an opportunity, there is a risk that other
companies will be able to introduce such services to the marketplace
successfully and that customers may prefer those services to ours, based on
technology, price or other factors.
The
period between our initial contact with a potential customer and the sale of our
UEPS products or services to that customer tends to be long and may be subject
to delays which may have an impact on our revenues.
The
period between our initial contact with a potential customer and the purchase of
our UEPS products and services is often long and subject to delays associated
with the budgeting, approval and competitive evaluation processes that
frequently accompany significant capital expenditures. A lengthy sales cycle may
have an impact on the timing of our revenues, which may cause our quarterly
operating results to fall below investor expectations. A customers decision to
purchase our products and services is often discretionary, involves a
significant commitment of resources, and is influenced by customer budgetary
cycles. To sell our products and services successfully we generally must educate
our potential customers regarding the uses and benefits of our products and
services, which can require the expenditure of significant time and resources;
however, there can be no assurance that this significant expenditure of time and
resources will result in actual sales of our products and services.
Our
proprietary rights may not adequately protect our
technologies.
Our
success depends in part on our obtaining and maintaining patent, trade secret,
copyright and trademark protection of our technologies in the United States and
other jurisdictions as well as successfully enforcing this intellectual property
and defending this intellectual property against third-party challenges. We will
only be able to protect our technologies from unauthorized use by third parties
to the extent that valid and enforceable intellectual property protections, such
as patents or trade secrets, cover them. In particular, we place considerable
emphasis on obtaining patent and trade secret protection for significant new
technologies, products and processes. Furthermore, the degree of future
protection of our proprietary rights is uncertain because legal means afford
only limited protection and may not adequately protect our rights or permit us
to gain or keep our competitive advantage.
We
cannot predict the breadth of claims that may be allowed or enforced in our
patents. For example, we might not have been the first to make the inventions
covered by each of our patents and patent applications or to file patent
applications and it is possible that none of our pending patent applications
will result in issued patents. It is possible that others may independently
develop similar or alternative technologies. Also, our issued patents may not
provide a basis for commercially viable products, or may not provide us with any
competitive advantages or may be challenged, invalidated or circumvented by
third parties.
We
also rely on trade secrets to protect our technology, especially where we
believe patent protection is not appropriate or obtainable. However, trade
secrets are difficult to protect. We have confidentiality agreements with
employees, and consultants to protect our trade secrets and proprietary
know-how. These agreements may be breached and or may not have adequate remedies
for such breach. While we use reasonable efforts to protect our trade secrets,
our employees, consultants or others may unintentionally or willfully disclose
our information to competitors. If we were to enforce a claim that a third party
had illegally obtained and was using our trade secrets, our enforcement efforts
would be expensive and time consuming, and the outcome would be unpredictable.
Moreover, if our competitors independently develop equivalent knowledge, methods
and know-how, it will be more difficult for us to enforce our rights and our
business could be harmed. If we are not able to defend the patent or trade
secret protection position of our technologies, then we will not be able to
exclude competitors from developing or marketing competing technologies.
We
also rely on trademarks to establish a market identity for some of our products.
To maintain the value of our trademarks, we might have to file lawsuits against
third parties to prevent them from using trademarks confusingly similar to or
dilutive of our registered or unregistered trademarks. Also, we might not obtain
registrations for our pending trademark applications, and might have to defend
our registered trademark and pending trademark applications from challenge by
third parties.
20
Defending
our intellectual property rights or defending ourselves in infringement suits
that may be brought against us is expensive and time-consuming and may not be
successful.
Litigation
to enforce our patents, trademarks or other intellectual property rights or to
protect our trade secrets could result in substantial costs and may not be
successful. Any loss of, or inability to protect, intellectual property in our
technology could diminish our competitive advantage and also seriously harm our
business. In addition, the laws of certain foreign countries may not protect our
intellectual property rights to the same extent as do the laws in countries
where we currently have patent protection. Our means of protecting our
intellectual property rights in countries where we currently have patent or
trademark protection, or any other country in which we operate, may not be
adequate to fully protect our intellectual property rights. Similarly, if third
parties claim that we infringe their intellectual property rights, we may be
required to incur significant costs and devote substantial resources to the
defense of such claims. We may be required to discontinue using and selling any
infringing technology and services, to expend resources to develop
non-infringing technology or to purchase licenses or pay royalties for other
technology. In addition, if we are unsuccessful in defending any such
third-party claims, we could suffer costly judgments and injunctions that could
materially adversely affect our business, results of operations or financial
condition.
System
failures, including breaches in the security of our system, could harm our
business.
We
may experience system failures from time to time, and any lengthy interruption
in the availability of our back-end system computer could harm our revenues and
profits, and could subject us to the scrutiny of our customers.
Frequent
or persistent interruptions in our services could cause current or potential
customers and users to believe that our systems are unreliable, leading them to
avoid our technology altogether, and could permanently harm our reputation and
brands. These interruptions would increase the burden on our engineering staff,
which, in turn, could delay our introduction of new applications and services.
Finally, because our customers may use our products for critical transactions,
any system failures could result in damage to our customers businesses. These
customers could seek significant compensation from us for their losses. Even if
unsuccessful, this type of claim could be time consuming and costly for us to
address.
Although
our systems have been designed to reduce downtime in the event of outages or
catastrophic occurrences, they remain vulnerable to damage or interruption from
earthquakes, floods, fires, power loss, telecommunication failures, terrorist
attacks, computer viruses, computer denial-of-service attacks and similar
events. Some of our systems are not fully redundant, and our disaster recovery
planning may not be sufficient for all eventualities.
Protection
against fraud is of key importance to the purchasers and end users of our
solutions. We incorporate security features, including encryption software,
biometric identification and secure hardware, into our solutions to protect
against fraud in electronic transactions and to provide for the privacy and
integrity of card holder data. Our solutions may be vulnerable to breaches in
security due to defects in the security mechanisms, the operating system and
applications or the hardware platform. Security vulnerabilities could jeopardize
the security of information transmitted using our solutions. If the security of
our solutions is compromised, our reputation and marketplace acceptance of our
solutions will be adversely affected, which would cause our business to suffer,
and we may become subject to damage claims. We have not yet experienced any
security breaches affecting our business.
Despite
any precautions we may take, the occurrence of a natural disaster or other
unanticipated problems with our system could result in lengthy interruptions in
our services. Our current business interruption insurance may not be sufficient
to compensate us for losses that may result from interruptions in our service as
a result of system failures.
Our
strategy of partnering with companies outside South Africa may not be
successful.
In
order for us to expand our operations into foreign markets, it may be necessary
for us to establish partnering arrangements with companies outside South Africa,
such as the ones we have established in Namibia, Botswana and Colombia. The
success of these endeavors is, however, subject to a number of factors over
which we have little or no control, such as finding suitable partners with the
appropriate financial, business and technical backing and continued governmental
support for planned implementations. In some countries, finding suitable
partners and obtaining the appropriate support from the government involved may
take a number of years before we can commence implementation. Some of these
partnering arrangements may take the form of joint ventures in which we receive
a minority interest. Minority ownership carries with it numerous risks,
including dependence on partners to provide knowledge of local market conditions
and to facilitate the acquisition of any necessary licenses and permits, as well
as the inability to control the joint venture vehicle and to direct its policies
and strategies. Such a lack of control could result in the loss of all or part
of our investment in such entities. In addition, our foreign partners may have
different business methods and customs which may be unfamiliar to us and with
which we disagree. Our joint venture partners may not be able to implement our
business model in new areas as efficiently and quickly as we have been able to
do in South Africa. Furthermore, limitations imposed on our South African
subsidiaries by South African exchange control regulations, as well as
limitations imposed on us by the Investment Company Act of 1940, may limit our
ability to establish partnerships or entities in which we do not obtain a
controlling interest.
21
We
may have difficulty managing our growth, especially as we expand our business
internationally.
We
continue to experience growth, both in the scope of our operations and size of
our organization. This growth is placing significant demands on our management,
especially as a result of our recent SASSA tender award and as we expand our
business internationally. Continued growth would increase the challenges
involved in implementing appropriate operational and financial systems,
expanding our technical and sales and marketing infrastructure and capabilities,
providing adequate training and supervision to maintain high quality standards,
and preserving our culture and values. International growth, in particular,
means that we must become familiar and comply with complex laws and regulations
in other countries, especially laws relating to taxation.
Additionally,
continued growth will place significant additional demands on our management and
our financial and operational resources, and will require that we continue to
develop and improve our operational, financial and other internal controls. If
we cannot scale and manage our business appropriately, we will not experience
our projected growth and our financial results may suffer.
We
pre-fund the payment of social welfare grants through our merchant acquiring
system in South Africa and pre-fund the settlement of certain customers in Korea
and a significant level of payment defaults by these merchants or customers
would adversely affect us.
We
pre-fund social welfare grants through the merchants who participate in our
merchant acquiring system in the South African provinces where we operate as
well as prefund the settlement of funds to certain customers in Korea. These
pre-funding obligations expose us to the risk of default by these merchants and
customers. Although we have not experienced any material defaults by merchants
or customers in the return of pre-funded amounts to us, we cannot guarantee that
material defaults will not occur in the future. A material level of merchant or
customer defaults could have a material adverse effect on us, our financial
position and results of operations.
We
may incur material losses in connection with our distribution of cash to
recipients of social welfare grants.
Many
social welfare recipients use our services to access cash using their smart
cards. We use armored vehicles to deliver large amounts of cash to rural areas
across South Africa to enable these welfare recipients to receive this cash. In
some cases, we also store the cash that will be delivered by the armored
vehicles in depots overnight or over the weekend to facilitate delivery to these
rural areas. We cannot insure against certain risks of loss or theft of cash
from our delivery vehicles and we will therefore bear the full cost of certain
uninsured losses or theft in connection with the delivery process, and such
losses could materially and adversely affect our financial condition, cash flows
and results of operations. We have not incurred any material losses resulting
from cash distribution in recent years, but there is no assurance that we will
not incur material losses in the future.
We
depend upon third-party suppliers, making us vulnerable to supply shortages
and price fluctuations, which could harm our business.
We
obtain our smart cards, POS devices and the other hardware we use in our
business from a limited number of suppliers, and do not manufacture this
equipment ourselves. We generally do not have long-term agreements with our
manufacturers or component suppliers. If our suppliers become unwilling or
unable to provide us with adequate supplies of parts or products when we need
them, or if they increase their prices, we may not be able to find alternative
sources in a timely manner and could be faced with a critical shortage. This
could harm our ability to implement new systems and cause our revenues to
decline. Even if we are able to secure alternative sources in a timely manner,
our costs could increase. A supply interruption or an increase in demand beyond
current suppliers capabilities could harm our ability to distribute our
equipment and thus, to acquire a new source of customers who use our UEPS
technology. Any interruption in the supply of the hardware necessary to operate
our technology, or our inability to obtain substitute equipment at acceptable
prices in a timely manner, could impair our ability to meet the demand of our
customers, which would have an adverse effect on our business.
Shipments
of our electronic payment systems may be delayed by factors outside of our
control, which can harm our reputation and our relationships with our customers.
The
shipment of payment systems requires us or our manufacturers, distributors or
other agents to obtain customs or other government certifications and approvals
and, on occasion, to submit to physical inspection of our systems in transit.
Failure to satisfy these requirements, and the very process of trying to satisfy
them, can lead to lengthy delays in the delivery of our solutions to our direct
or indirect customers. Delays and unreliable delivery by us may harm our
reputation and our relationships with our customers.
22
Risks Relating to Operating in South Africa and Other
Foreign Markets
Fluctuations
in the value of the South African rand have had, and will continue to have, a
significant impact on our reported results of operations, which may make it
difficult to evaluate our business performance between reporting periods and may
also adversely affect our stock price.
The
South African rand, or ZAR, is the primary operating currency for our business
operations while our financial results are reported in US dollars. This means
that as long as the ZAR remains our primary operating currency, depreciation in
the ZAR against the US dollar, and to a lesser extent, the Korean won, would
negatively impact our reported revenue and net income, while a strengthening of
the ZAR would have the opposite effect. Depreciation in the ZAR may negatively
impact the prices at which our stock trades. The US dollar/ZAR exchange rate has
historically been volatile and we expect this volatility to continue. We provide
detailed information about historical exchange rates in Item 7Managements
Discussion and Analysis of Financial Condition and Results of
OperationsCurrency Exchange Rate Information.
Due
to the significant fluctuation in the value of the ZAR and its impact on our
reported results, you may find it difficult to compare our results of operations
between financial reporting periods even though we provide supplemental
information about our results of operations determined on a ZAR basis. This
difficulty may increase as we expand our business internationally and record
additional revenue and expenses in the euro and other currencies. It may also
have a negative impact on our stock price.
We
generally do not engage in any currency hedging transactions intended to reduce
the effect of fluctuations in foreign currency exchange rates on our results of
operations, other than economic hedging relating to our inventory purchases
which are settled in US dollars or euros. We have used forward contracts in
order to hedge our economic exposure to the ZAR/US dollar and ZAR/euro exchange
rate fluctuations from these foreign currency transactions. We cannot guarantee
that we will enter into hedging transactions in the future or, if we do, that
these transactions will successfully protect us against currency fluctuations.
South
Africas high levels of poverty, unemployment and crime may increase our costs
and impair our ability to maintain a qualified workforce.
While
South Africa has a highly developed financial and legal infrastructure, it also
has high levels of crime and unemployment and there are significant differences
in the level of economic and social development among its people, with large
parts of the population, particularly in the rural areas, having limited access
to adequate education, healthcare, housing and other basic services, including
water and electricity. In addition, South Africa has a high prevalence of
HIV/AIDS and tuberculosis. Government policies aimed at alleviating and
redressing the disadvantages suffered by the majority of citizens under previous
governments may increase our costs and reduce our profitability, all of which
could negatively affect our business. These problems may prompt emigration of
skilled workers, hinder investment into South Africa and impede economic growth.
As a result, we may have difficulties attracting and retaining qualified
employees.
The
economy of South Africa is exposed to high inflation and interest rates which
could increase our operating costs and thereby reduce our
profitability.
The
economy of South Africa in the past has been, and in the future may continue to
be, characterized by rates of inflation and interest rates that are
substantially higher than those prevailing in the United States and other highly
developed economies. High rates of inflation could increase our South
African-based costs and decrease our operating margins. Although higher interest
rates would increase the amount of income we earn on our cash balances, they
would also adversely affect our ability to obtain cost-effective debt financing
in South Africa.
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.
The
South African government, through the Broad-Based Black Economic Empowerment
Act, 2003, established a legislative framework for the promotion of BEE. The law
recognizes two distinct mechanisms for the achievement of BEE
objectivescompliance with codes of good practice, which have already been
issued, and compliance with industry-specific transformation charters. Although
the charter that will likely apply to our company has not yet been finalized, we
believe it is likely that the charter will not differ substantially from the
codes of good practice. Achievement of BEE objectives is measured by a
scorecard which establishes a weighting to various components of BEE. One
component of BEE is achieving a certain percentage of shareholdings by black
South Africans in South African businesses over a period of years. This
shareholding component carries the highest BEE scorecard weighting. Other
components include procuring goods and services from black-owned businesses or
from businesses that have earned good BEE scores and achieving certain levels of
black South African employment. Compliance with the codes and applicable
charters are not enforced through civil or criminal sanction, but compliance
does affect the ability of a company to secure contracts in the public and
private sectors.
23
Thus, it will be important for us to achieve applicable BEE
objectives. Failing to do so could jeopardize our ability to maintain existing
business, including our South African pension and welfare business, or to secure
future business.
In
2012, we entered into a Broad Based Black Economic Empowerment transaction
pursuant to which we granted an option to purchase up to 8,955,000 shares of our
common stock to a special purpose vehicle that represents a consortium of black
South Africans, community groups and the Net1 Foundation (the BBBEE
consortium). The option is exercisable at a price of US$8.96 per share at any
time until April 19, 2013. One of the primary purposes of entering into this
transaction was to improve our BEE score. However, to date the option granted to
the BBBEE consortium has not been exercised and if it expires unexercised or it
is exercised only in part, we may not achieve the objectives we sought to
achieve when we entered into the transaction. Refer to Note 16 to our
consolidated financial statements.
We
have taken a number of actions as a company to increase empowerment of black
South Africans, including the BBBEE transaction discussed above. However, it is
possible that these actions may not be sufficient to enable us to achieve
applicable BEE objectives. In that event, in order to avoid risking the loss of
our government and private contracts, we may have to seek to comply through
other means, including by selling or placing additional shares of Net1 or of our
South African subsidiaries to black South Africans. Such sales of shares could
have a dilutive impact of your ownership interest, which could cause the market
price of our stock to decline.
South
African exchange control regulations could hinder our ability to make foreign
investments and obtain foreign-denominated financing.
South
Africas exchange control regulations restrict the export of capital from South
Africa, the Republic of Namibia and the Kingdoms of Lesotho and Swaziland, known
collectively as the Common Monetary Area without the prior approval of SARB.
While the South African government has relaxed exchange controls in recent
years, it is difficult to predict whether or how it will further relax or
abolish exchange control measures in the foreseeable future.
Although
Net1 is a US corporation and is not itself subject to South African exchange
control regulations, these regulations do restrict the ability of our South
African subsidiaries to raise and deploy capital outside the Common Monetary
Area, to borrow money in currencies other than the South African rand and to
hold foreign currency. Exchange control restrictions may also affect the ability
of these subsidiaries to pay dividends to Net1 unless the affected subsidiary
can show that any payment of such dividend will not place it in an over-borrowed
position. As of June 30, 2012, approximately 59% of our cash and cash
equivalents were held by our South African subsidiaries. Exchange control
regulations could make it difficult for our South African subsidiaries to: (i)
export capital from South Africa; (ii) hold foreign currency or incur
indebtedness denominated in foreign currencies without the approval of SARB;
(iii) acquire an interest in a foreign venture without the approval of SARB and
first having complied with the investment criteria of SARB; (iv) repatriate to
South Africa profits of foreign operations; and (v) limit our business to
utilize profits of one foreign business to finance operations of a different
foreign business.
Under
current exchange control regulations, SARB approval would be required for any
acquisition of our company which would involve payment to our South African
shareholders of any consideration other than South African rand. This
restriction could limit our management in its ability to consider strategic
options and thus, our shareholders may not be able to realize the premium over
the current trading price of our shares.
Most
of South Africas major industries are unionized, and the majority of employees
belong to trade unions. We face the risk of disruption from labor disputes and
new South African labor laws.
In
the past, trade unions have had a significant impact on the collective
bargaining process as well as on social and political reform in South Africa in
general. Although only approximately 2% percent of our South African workforce
is unionized and we have not experienced any labor disruptions in recent years,
such labor disruptions may occur in the future. In addition, developments in
South African labor laws may increase our costs or alter our relationship with
our employees and trade unions, which may have an adverse effect on us, our
financial condition and our operations.
24
Operating
in South Africa and other emerging markets subjects us to greater risks than
those we would face if we operated in more developed markets.
Emerging
markets such as South Africa, as well as some of the other markets into which we
have recently begun to expand, including African countries outside South Africa,
South America, Southeast Asia and Central and Eastern Europe, are subject to
greater risks than more developed markets. While we focus our business primarily
on emerging markets because that is where we perceive there to be the greatest
opportunities to market our products and services successfully, the political,
economic and market conditions in many of these markets present risks that could
make it more difficult to operate our business successfully.
Some
of these risks include:
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political and economic instability, including higher
rates of inflation and currency fluctuations;
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high levels of corruption, including bribery of public
officials;
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loss due to civil strife, acts of war or terrorism,
guerrilla activities and insurrection;
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a lack of well-developed legal systems which could make
it difficult for us to enforce our intellectual property and contractual
rights;
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logistical and communications challenges;
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potential adverse changes in laws and regulatory
practices, including import and export license requirements and
restrictions, tariffs, legal structures and tax laws;
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difficulties in staffing and managing operations and
ensuring the safety of our employees;
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restrictions on the right to convert or repatriate
currency or export assets;
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greater risk of uncollectible accounts and longer
collection cycles;
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indigenization and empowerment programs; and
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exposure to liability under US securities and foreign
trade laws, including the Foreign Corrupt Practices Act, or FCPA, and
regulations established by the US Department of Treasurys Office of
Foreign Assets Control, or OFAC.
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Many
of these countries and regions are in various stages of developing institutions
and political, legal and regulatory systems that are characteristic of
democracies. However, institutions in these countries and regions may not yet be
as firmly established as they are in democracies in the developed world. Many of
these countries and regions are also in the process of transitioning to a market
economy and, as a result, are experiencing changes in their economies and their
government policies that can affect our investments in these countries and
regions. Moreover, the procedural safeguards of the new legal and regulatory
regimes in these countries and regions are still being developed and, therefore,
existing laws and regulations may be applied inconsistently. In some
circumstances, it may not be possible to obtain the legal remedies provided
under those laws and regulations in a timely manner.
As
the political, economic and legal environments remain subject to continuous
development, investors in these countries and regions face uncertainty as to the
security of their investments. Any unexpected changes in the political or
economic conditions in these or neighboring countries or others in the region
may have a material adverse effect on the international investments that we have
made or may make in the future, which may in turn have a material adverse effect
on our business, operating results, cash flows and financial condition.
Risks Relating to Government Regulation
We
are required to comply with certain US laws and regulations, including the
Foreign Corrupt Practices Act as well as economic and trade sanctions, which
could adversely impact our future growth.
We
must comply with the FCPA, which prohibits US companies or their agents and
employees from providing anything of value to a foreign official for the
purposes of influencing any act or decision of these individuals in their
official capacity to help obtain or retain business, direct business to any
person or corporate entity or obtain any unfair advantage. In addition, OFAC
administers and enforces economic and trade sanctions against targeted foreign
countries, entities and individuals based on US foreign policy and national
security goals.
25
Any
failure by us to adopt appropriate compliance procedures and ensure that our
employees, agents and business partners comply with the FCPA could subject us to
substantial penalties. In addition, the requirement that we comply with the FCPA
could put us at a competitive disadvantage with companies that are not required
to comply with the FCPA or could otherwise harm our business. For example, in
many emerging markets, there may be significant levels of official corruption,
and thus, bribery of public officials may be a commonly accepted cost of doing
business. Our refusal to engage in illegal behavior, such as paying bribes, may
result in us not being able to obtain business that we might otherwise have been
able to secure or possibly even result in unlawful, selective or arbitrary
action being taken against us by foreign officials. Furthermore, the trade
sanctions administered and enforced by OFAC target countries which are typically
less developed countries. Since less developed countries present some of the
best opportunities for us to expand our business internationally, restrictions
against entering into transactions with those foreign countries, as well as with
certain entities and individuals in those countries, can adversely affect our
ability to grow our business.
Changes
in current South African government regulations relating to social welfare grants
could adversely affect our revenues and cash flows.
We
derive a substantial portion of our current business from the distribution of
social welfare grants in South Africa. Because social welfare eligibility and
grant amounts are regulated by the South African government, any changes to or
reinterpretations of the government regulations relating to social welfare may
result in the non-renewal or reduction of grants for certain individuals, or a
determination that currently eligible social welfare grant recipients are no
longer eligible. If any of these changes were to occur, the number of grants we
distribute could decrease which could result in a reduction of our revenue and
cash flows
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We
do not have a South African banking license and therefore we provide our social
welfare grant distribution and wage payment solution through an arrangement with
a third-party bank, which limits our control over this business and the economic
benefit we derive from it. If this arrangement were to terminate, we would not
be able to operate our social welfare grant distribution and wage payment
business without alternate means of access to a banking license
The
South African retail banking market is highly regulated. Under current law and
regulations, our South African social welfare grant distribution and wage
payment business activities in the unbanked market requires us to be registered
as a bank in South Africa or to have access to an existing banking license. We
are not currently so registered, but we have entered into an agreement with
Grindrod Bank Limited that enables us to implement our social welfare grant
distribution and wage payment solution in compliance with the relevant laws and
regulations. If the agreement were to be terminated, we would not be able to
operate these services unless we were able to obtain access to a banking license
through alternate means.
In
addition, the South African Financial Advisory and Intermediary Services Act,
2002, requires persons who give advice regarding the purchase of financial
products or who act as intermediaries between financial product suppliers and
consumers in South Africa to register as financial service providers. We have
applied for a license under this Act in order to continue to provide advice and
intermediary services in respect of the financial products on which we advise
and the payment processing services we provide in South Africa on behalf of
insurers and other financial product suppliers. If we fail to obtain this
license, we may be stopped from continuing this part of our business in South
Africa.
Our
payment processing businesses are subject to substantial governmental regulation
and may be adversely affected by liability under, or any future inability to
comply with, existing or future regulations or requirements.
Our
payment processing activities are subject to extensive regulation. Compliance
with the requirements under these various regulatory regimes may cause us to
incur significant additional costs and failure to comply with such requirements
could result in the shutdown of the non-complying facility, the imposition of
liens, fines and/or civil or criminal liability.
We
may be subject to regulations regarding privacy, data use and/or security which
could adversely affect our business.
We
are subject to regulations in a number of the countries in which we operate
relating to the collection, use, retention, security and transfer of personally
identifiable information about the people who use our products and services, in
particular, personal financial and health information. New laws in this area
have been passed by several jurisdictions, and other jurisdictions are
considering imposing additional restrictions. The interpretation and application
of user data protection laws are in a state of flux. These laws may be
interpreted and applied inconsistently from country to country and our current
data protection policies and practices may not be consistent with those
interpretations and applications. Complying with these varying requirements
could cause us to incur substantial costs or require us to change our business
practices in a manner adverse to our business.
26
Any
failure, or perceived failure, by us to comply with any regulatory requirements
or international privacy or consumer protection-related laws and regulations
could result in proceedings or actions against us by governmental entities or
others, subject us to significant penalties and negative publicity and adversely
affect us. In addition, as noted above, we are subject to the possibility of
security breaches, which themselves may result in a violation of these laws.
Risks Relating to our Common Stock
Our
stock price has been and may continue to be volatile.
Our
stock price has experienced recent significant volatility. During the 2012
fiscal year, our stock price ranged from a low of $5.77 to a high of $11.21. We
expect that the trading price of our common stock may continue to be volatile as
a result of a number of factors, including, but not limited to the following:
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the extent to which we are able to implement our
new SASSA contract successfully;
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fluctuations in currency exchange rates,
particularly the US dollar/ZAR exchange rate;
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quarterly variations in our operating results, especially
if our operating results fall below the expectations of securities
analysts and investors;
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announcements of acquisitions, disposals or impairments
of intangible assets;
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the timing of or delays in the commencement,
implementation or completion of major projects;
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large purchases or sales of our common stock;
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general conditions in the markets in which we operate;
and
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economic and financial conditions.
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A
majority of our common stock is beneficially owned by a small number of
shareholders. The interests of these shareholders may conflict with those of our
other shareholders.
There
is a concentration of ownership of our outstanding common stock because
approximately 41% of our outstanding common stock is owned by two shareholders.
Based on their most recent SEC filings disclosing ownership of our shares,
International Value Advisers, LLC, or IVA, and investment entities affiliated
with General Atlantic LLC beneficially owned 27.2% and 14.1% of our outstanding
common stock, respectively. General Atlantic also has the right to
representation on our board of directors although it is not currently exercising
that right.
In
addition, pursuant to a Broad Based Black Economic Empowerment transaction
described above, we have granted an option to purchase up to 8,955,000 shares of
our common stock, equal to 19.7% of our current issued and outstanding shares,
to the BBBEE consortium. The option is exercisable at US$8.96 per share at any
time until April 19, 2013. The BBBEE consortium is currently represented on our
board by invitation and has the right to representation on our board if and so
long as it owns more than 10% of our outstanding common stock.
The
interests of IVA, the BBBEE consortium and General Atlantic may be different
from or conflict with the interests of our other shareholders. As a result of
the ownership by IVA, the BBBEE consortium and General Atlantic, as well as the
BBBEE consortiums and General Atlantics right to board representation, they
will be able, if they act together, to influence our management and affairs and
all matters requiring shareholder approval, including the election of directors
and approval of significant corporate transactions. This concentration of
ownership may have the effect of delaying or preventing a change of control of
our company, thus depriving shareholders of a premium for their shares, or
facilitating a change of control that other shareholders may oppose.
We
may seek to raise additional financing by issuing new securities with terms or
rights superior to those of our shares of common stock, which could adversely
affect the market price of our shares of common stock.
We
may require additional financing to fund future operations, including expansion
in current and new markets, programming development and acquisition, capital
costs and the costs of any necessary implementation of technological innovations
or alternative technologies, or to fund acquisitions. Because of the exposure to
market risks associated with economies in emerging markets, we may not be able
to obtain financing on favorable terms or at all. If we raise additional funds
by issuing equity securities, the percentage ownership of our current
shareholders will be reduced, and the holders of the new equity securities may
have rights superior to those of the holders of shares of common stock, which
could adversely affect the market price and voting power of shares of common
stock. If we raise additional funds by issuing debt securities, the holders of
these debt securities would similarly have some rights senior to those of the
holders of shares of common stock, and the terms of these debt securities could
impose restrictions on operations and create a significant interest expense for
us.
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We
may have difficulty raising necessary capital to fund operations or acquisitions
as a result of market price volatility for our shares of common stock.
In
recent years, the securities markets in the United States have experienced a
high level of price and volume volatility, and the market price of securities of
many companies have experienced wide fluctuations that have not necessarily been
related to the operations, performance, underlying asset values or prospects of
such companies. For these reasons, our shares of common stock can also be
expected to be subject to volatility resulting from purely market forces over
which we will have no control. If our business development plans are successful,
we may require additional financing to continue to develop and exploit existing
and new technologies, to expand into new markets and to make acquisitions, all
of which may be dependent upon our ability to obtain financing through debt and
equity or other means.
Issuances
of significant amounts of stock in the future could potentially dilute your
equity ownership and adversely affect the price of our common stock.
We
believe that it is necessary to maintain a sufficient number of available
authorized shares of our common stock in order to provide us with the
flexibility to issue shares for business purposes that may arise from time to
time. For example, we could sell additional shares to raise capital to fund our
operations or to acquire other businesses, issue additional shares under our
stock incentive plan or declare a stock dividend. Our board may authorize the
issuance of additional shares of common stock without notice to, or further
action by, our shareholders, unless shareholder approval is required by law or
the rules of the NASDAQ Stock Market. The issuance of additional shares could
dilute the equity ownership of our current shareholders. In addition, additional
shares that we issue would likely be freely tradable which could adversely
affect the trading price of our common stock.
Failure
to maintain effective internal control over financial reporting in accordance
with Section 404 of the Sarbanes-Oxley Act, especially over companies that we
may acquire, could have a material adverse effect on our business and stock
price.
Under
Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes, we are required to
furnish a management certification and auditor attestation regarding the
effectiveness of our internal control over financial reporting. We are required
to report, among other things, control deficiencies that constitute a material
weakness or changes in internal control that materially affect, or are
reasonably likely to materially affect, internal control over financial
reporting. A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of annual or interim
financial statements will not be prevented or detected on a timely basis.
The
requirement to evaluate and report on our internal controls also applies to
companies that we acquire. Some of these companies may not be required to comply
with Sarbanes prior to the time we acquire them. The integration of these
acquired companies into our internal control over financial reporting could
require significant time and resources from our management and other personnel
and may increase our compliance costs. If we fail to successfully integrate the
operations of these acquired companies into our internal control over financial
reporting, our internal control over financial reporting may not be effective.
While
we continue to dedicate resources and management time to ensuring that we have
effective controls over financial reporting, failure to achieve and maintain an
effective internal control environment could have a material adverse effect on
the markets perception of our business and our stock price.
You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions based upon U.S. laws, including
the federal securities laws or other foreign laws, against us or our directors
and officers and experts.
While
Net1 is incorporated in the state of Florida, United States, the company is
headquartered in Johannesburg, South Africa and substantially all of the
companys assets are located outside the United States.
In
addition, all of Net1s directors and officers reside outside of the United
States and our experts, including our independent registered public accountants,
are based in South Africa. As a result, even though you could effect service of
legal process upon Net1, as a Florida corporation, in the United States, you may
not be able to collect any judgment obtained against Net1 in the United States,
including any judgment based on the civil liability provisions of the U.S.
federal securities laws, because substantially all of our assets are located
outside the United States. Moreover, it may not be possible for you to effect
service of legal process upon the majority of our directors and officers or upon
our experts within the United States or elsewhere outside South Africa and any
judgment obtained against any of our foreign directors, officers and experts in
the United States, including one based on the civil liability provisions of the
U.S. federal securities laws, may not be collectible in the United States and
may not be enforced by a South African court.
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A
foreign judgment is not directly enforceable in South Africa, but constitutes a
cause of action which will be enforced by South African courts provided that:
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the court or arbitral body which pronounced the judgment had international
jurisdiction and competence to entertain the case according to the principles
recognized by South African law with reference to the jurisdiction of foreign
courts;
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the judgment is final and conclusive (that is, it cannot be altered by the
court which pronounced it);
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the judgment has not lapsed;
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the recognition and enforcement of the judgment by South African courts
would not be contrary to public policy in South Africa, including observance
of the rules of natural justice which require that no award is enforceable
unless the defendant was duly served with documents initiating proceedings,
that he was given a fair opportunity to be heard and that he enjoyed the right
to be legally represented in a free and fair trial before an impartial
tribunal;
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the judgment was not obtained by improper or fraudulent means;
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the judgment does not involve the enforcement of a penal or foreign
revenue law or any award of multiple or punitive damages; and
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the enforcement of the judgment is not otherwise precluded by the
provisions of the Protection of Business Act 99 of 1978 (as amended), of the
Republic of South Africa.
It
has been the policy of South African courts to award compensation for the loss
or damage actually sustained by the person to whom the compensation is awarded.
South African courts have awarded compensation to shareholders who have suffered
damages as a result of a diminution in the value of their shares based on
various actions by the corporation and its management. Although the award of
punitive damages is generally unknown to the South African legal system, that
does not mean that such awards are necessarily contrary to public policy.
Whether a judgment was contrary to public policy depends on the facts of each
case. Exorbitant, unconscionable, or excessive awards will generally be contrary
to public policy. South African courts cannot enter into the merits of a foreign
judgment and cannot act as a court of appeal or review over the foreign court.
Further, if a foreign judgment is enforced by a South African court, it will be
payable in South African currency. Also, under South Africas exchange control
laws, the approval of SARB is required before a defendant resident in South
Africa may pay money to a nonresident plaintiff in satisfaction of a foreign
judgment enforced by a court in South Africa.
It
is doubtful whether an original action based on United States federal securities
laws may be brought before South African courts. A plaintiff who is not resident
in South Africa may be required to provide security for costs in the event of
proceedings being initiated in South Africa. Furthermore, the Rules of the High
Court of South Africa require that documents executed outside South Africa must
be authenticated for the purpose of use in South African courts.
In
reaching the foregoing conclusions, we consulted with our South African legal
counsel, Cliffe Dekker Hofmeyr Inc.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
29
ITEM 2. PROPERTIES
We
lease our corporate headquarters facility which consists of approximately 83,000
square feet in Johannesburg, South Africa. We also lease properties throughout
South Africa, a 12,088 square foot manufacturing facility in Lazer Park, a
14,230 square foot manufacturing facility in Brakpan and 96 depot facilities. We
also lease additional office space in Johannesburg, Pretoria, Cape Town and
Durban, South Africa; Vienna, Austria; Seoul, Republic of Korea; Moscow, Russia;
New York, New York and Fredrick, Maryland. These leases expire at various dates
through 2017.
We
own land and buildings in Ahnsung,Kyung-gi, Republic of Korea, which facility is
used for the storage of business documents. We believe we have adequate
facilities for our current business operations.
ITEM 3. LEGAL PROCEEDINGS
On
February 8, 2012, AllPay Consolidated Investment Holdings (Pty) Ltd filed an
application in the North Gauteng High Court of South Africa seeking to set aside
the award of the SASSA tender to us. AllPay was one of the unsuccessful bidders
during the recent SASSA tender process and was a former contractor to SASSA. We
are included as one of several respondents in this proceeding. As a respondent,
we are entitled to oppose the application, which we are doing. When SASSA
publicly announced the award of the tender to us in January 2012, it stated that
it had conducted the tender in accordance with all relevant legislation. The
High Court heard this matter on May 29 to 31, 2012. We expect that it will hand
down a decision during the first quarter of fiscal 2013. Any of the parties to
the proceeding will thereafter be entitled to apply to the High Court for leave
to appeal the judgment and, provided that such leave is granted, the appeal
process could take several months to be finalized. We cannot predict when the
proceeding will be resolved or its ultimate outcome.
On
February 3, 2012, another unsuccessful bidder and former SASSA contractor,
Empilweni Payout Services (Pty) Ltd, requested SASSA to provide it with all
reasons for the award and information that we provided to SASSA in connection
with the tender process. Empilweni filed a High Court application to compel
SASSA to provide such reasons and information. We opposed the application but
SASSA provided certain of the requested information to Empilweni pursuant to an
agreed court order. No further action is expected in this proceeding.
In
addition, on March 22, 2012, Empilweni filed an urgent High Court application to
interdict and restrain SASSA from taking any steps to implement our appointment
as a service provider of SASSA in the province of Mpumalanga, pursuant to the
award of the tender. On March 27, 2012 the High Court ruled that the matter was
not urgent and accordingly it was struck from the court roll. If Empilweni wants
to proceed, it would have to do so on a non-urgent basis. Empilweni has taken no
further steps to advance this proceeding since March 27, 2012.
There
are no other material pending legal proceedings, other than ordinary routine
litigation incidental to our business, to which we are a party or of which any
of our property is the subject.
ITEM 4. MINE SAFETY DISCLOSURES
Not
applicable.
30
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market
Information
Our
common stock is listed on The Nasdaq Global Select Market, or Nasdaq, in the
United States under the symbol UEPS and on the JSE in South Africa under the
symbol NT1. The Nasdaq is our principal market for the trading of our common
stock.
The
following table sets forth, for the periods indicated, the high and low sales
prices of our common stock as reported by Nasdaq.
Period
|
|
High
|
|
Low
|
Quarter ended September 30,
2010
|
|
$15.04
|
|
$10.72
|
Quarter ended December 31, 2010
|
|
$12.97
|
|
$10.35
|
Quarter ended March 31, 2011
|
|
$12.31
|
|
$8.24
|
Quarter ended June 30, 2011
|
|
$8.92
|
|
$7.29
|
Quarter ended September 30,
2011
|
|
$9.00
|
|
$5.77
|
Quarter ended December 31, 2011
|
|
$8.59
|
|
$5.80
|
Quarter ended March 31, 2012
|
|
$11.21
|
|
$6.71
|
Quarter ended June 30, 2012
|
|
$10.33
|
|
$7.79
|
Our
transfer agent in the United States is Computershare Shareowner Services LLC,
480 Washington Blvd, Jersey City, New Jersey, 07310. According to the records of
our transfer agent, as of August 17, 2012, there were 19 shareholders of record
of our common stock. A substantially greater number of holders of our common
stock are street name or beneficial holders, whose shares are held of record
by banks, brokers, and other financial institutions. Our transfer agent in South
Africa is Link Market Services South Africa (Pty) Ltd, 13th Floor, Rennie House,
19 Ameshoff Street, Braamfontein, 2001, South Africa.
Dividends
We
have not paid any dividends on our shares of common stock during our last two
fiscal years and presently intend to retain future earnings to finance the
expansion of the business. We do not anticipate paying any cash dividends in the
foreseeable future. The future dividend policy will depend on our earnings,
capital requirements, expansion plans, financial condition and other relevant
factors.
Issuer
Purchases of Equity Securities
We
did not purchase any shares of our common stock during the fourth quarter of
fiscal 2012. We currently have $97,848,570 available under our $100 million
Board of Directors approved share repurchase authorization. The authorization
has no expiration date.
The
table below presents our common stock purchased during fiscal 2012 per quarter:
|
|
|
|
|
Average price
|
|
|
|
Total number
|
|
|
paid per
|
|
|
|
of shares
|
|
|
share
|
|
Period
|
|
purchased
|
|
|
(US dollars)
|
|
First
|
|
180,656
|
|
|
6.25
|
|
Second
|
|
-
|
|
|
-
|
|
Third
|
|
-
|
|
|
-
|
|
Fourth
|
|
-
|
|
|
-
|
|
Total
fiscal 2012
|
|
180,656
|
|
|
6.25
|
|
31
Share
performance graph
The
chart below compares the five-year cumulative return, assuming the reinvestment
of dividends, where applicable, on our common stock with that of the S&P 500
Index and the NASDAQ Industrial Index. This graph assumes $100 was invested on
June 30, 2007, in each of our common stock, the S&P 500 companies, and the
companies in the NASDAQ Industrial Index.
32
ITEM 6. SELECTED FINANCIAL DATA
The
following selected historical consolidated financial data should be read
together with Item 7Managements Discussion and Analysis of Financial
Condition and Results of Operations and Item 8Financial Statements and
Supplementary Data. The following selected historical financial data as of June
30, 2012 and 2011, and for the three years ended June 30, 2012 have been derived
from our consolidated financial statements included elsewhere in this Annual
Report on Form 10-K. The selected historical consolidated financial data
presented below as of June 30, 2010, 2009 and 2008 and for the years ended June
30, 2009 and 2008, have been derived from our consolidated financial statements,
which are not included herein. The selected historical financial data as of each
date and for each period presented have been prepared in accordance with US
GAAP. These historical results are not necessarily indicative of results to be
expected in any future period.
Consolidated Statements of Operations Data
(in
thousands, except per share data)
|
|
Year Ended June 30
|
|
|
|
2012
|
|
|
2011(1)
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Revenue
|
$
|
390,264
|
|
$
|
343,420
|
|
$
|
280,364
|
|
$
|
246,822
|
|
$
|
254,056
|
|
Cost of goods sold, IT processing, servicing and support
|
|
141,000
|
|
|
109,858
|
|
|
72,973
|
|
|
70,091
|
|
|
67,486
|
|
Selling, general and administrative(2)
|
|
137,404
|
|
|
119,692
|
|
|
80,854
|
|
|
64,833
|
|
|
65,362
|
|
Equity instrument granted pursuant to BBBEE transaction (3)
|
|
14,211
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Depreciation and amortization
|
|
36,499
|
|
|
34,671
|
|
|
19,348
|
|
|
17,082
|
|
|
10,822
|
|
Profit on sale of microlending business
|
|
-
|
|
|
-
|
|
|
-
|
|
|
455
|
|
|
-
|
|
Impairment losses(4)
|
|
-
|
|
|
41,771
|
|
|
37,378
|
|
|
1,836
|
|
|
-
|
|
Operating income
|
|
61,150
|
|
|
37,428
|
|
|
69,811
|
|
|
93,435
|
|
|
110,386
|
|
Foreign exchange gain related to short-term
investment(5)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
26,657
|
|
|
-
|
|
Interest (expense) income, net
|
|
(769
|
)
|
|
(1,018
|
)
|
|
9,069
|
|
|
10,828
|
|
|
15,722
|
|
Income before income taxes
|
|
60,381
|
|
|
36,410
|
|
|
78,880
|
|
|
130,920
|
|
|
126,108
|
|
Income tax expense(6)
|
|
15,936
|
|
|
33,525
|
|
|
40,822
|
|
|
42,744
|
|
|
39,192
|
|
Income from continuing operations
|
|
44,651
|
|
|
2,647
|
|
|
38,990
|
|
|
86,601
|
|
|
86,695
|
|
Net income attributable to Net1
|
|
44,651
|
|
|
2,647
|
|
|
38,990
|
|
|
86,601
|
|
|
86,695
|
|
Income from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.99
|
|
$
|
0.06
|
|
$
|
0.84
|
|
$
|
1.53
|
|
$
|
1.50
|
|
Diluted
|
$
|
0.99
|
|
$
|
0.06
|
|
$
|
0.84
|
|
$
|
1.53
|
|
$
|
1.49
|
|
(1) KSNET was acquired effective November 1, 2010, and our
reported results for fiscal 2011 include KSNET revenues of $68.4 million and a
net loss of $4.1 million, after acquisition-related intangible assets
amortization, deferred taxes related to acquisition-related intangible asset
amortization and interest related to financing obtained to partially fund the
acquisition.
(2) Selling, general and administrative expense includes a
charge of $2.8 million (2012), $1.7 million (2011), $5.5 million (2010), $4.9
million (2009) and $3.8 million (2008), respectively, in respect of stock-based
compensation.
(3) On April 19, 2012, we issued an option to purchase
8,955,000 shares of our common stock to a BEE consortium pursuant to a BBBEE
transaction that we entered into on January 25, 2012. The fair value of the
option was determined as approximately $14.2 million and has been expensed in
full.
(4) Customer relationships acquired in the acquisition of Net1 UTA
were impaired in fiscal 2011. Goodwill related to the hardware, software and
related technology sales segment was impaired during fiscal 2010, and goodwill
related to the financial services segment was impaired during fiscal 2009.
(5) The foreign exchange gain related to a short-term investment in the form
of an asset swap arrangement which matured during fiscal 2009.
(6) The
fully-distributed tax rate for fiscal 2012 was 28%, for fiscal 2011, 2010 and
2009 it was 34.55% and for fiscal 2008 it was 35.45% . Our income tax expense
for fiscal 2012 includes the effects of the change in South African tax law to
impose a 15% dividends withholding tax (a tax levied and withheld by a company
on distributions to its shareholders) to replace the 10% Secondary Taxation on
Companies (a tax levied directly on a company on dividend distributions) (STC)
(refer to Note 19 of our consolidated financial statements). Our income tax
expense for fiscal 2012 also includes a valuation allowance of $8.2 million
related to foreign tax credits we believe we may not recover (refer to Note 19
of our consolidated financial statements). Our income tax expense for fiscal
2011 includes valuation allowances related to our Net1 UTA business of $8.9
million and a reversal of $10.4 million related to the customer impairment loss.
Our income tax expense for fiscal 2009 and 2008 includes the impact of the
change in the fully-distributed rate during those fiscal years of approximately
$3.5 million and $5.4 million, respectively.
33
Additional Operating Data:
(in thousands, except
percentages)
|
|
Year ended June 30,
|
|
|
|
2012(1)
|
|
|
2011(1)
|
|
|
2010(1)
|
|
|
2009
|
|
|
2008
|
|
Cash flows provided by operating activities
|
$
|
20,406
|
|
$
|
66,223
|
|
$
|
68,683
|
|
$
|
106,768
|
|
$
|
118,760
|
|
Cash flows used in investing activities
|
$
|
292,539
|
|
$
|
323,685
|
|
$
|
90,186
|
|
$
|
107,856
|
|
$
|
3,903
|
|
Cash flows provided by (used in) financing
activities .
|
$
|
231,907
|
|
$
|
183,269
|
|
$
|
(48,478
|
)
|
$
|
(40,248
|
)
|
$
|
2,864
|
|
Operating income margin
|
|
16%
|
|
|
11%
|
|
|
25%
|
|
|
38%
|
|
|
43%
|
|
(1) Cash flows used in investing activities include movements
in settlement assets and cash flows provided by (used in) financing activities
include movement in settlement liabilities.
Consolidated Balance Sheet Data:
(in thousands)
|
|
As of June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Cash and cash equivalents
|
$
|
39,123
|
|
$
|
95,263
|
|
$
|
153,742
|
|
$
|
220,786
|
|
$
|
272,475
|
|
Total current assets before settlement assets
|
|
175,236
|
|
|
213,421
|
|
|
226,429
|
|
|
290,294
|
|
|
345,734
|
|
Goodwill (1)
|
|
182,737
|
|
|
209,570
|
|
|
76,346
|
|
|
116,197
|
|
|
76,938
|
|
Intangible assets (1)
|
|
93,930
|
|
|
119,856
|
|
|
68,347
|
|
|
75,890
|
|
|
22,216
|
|
Total assets
|
|
955,893
|
|
|
781,645
|
|
|
472,090
|
|
|
499,487
|
|
|
454,071
|
|
Total current liabilities before settlement obligations
|
|
75,367
|
|
|
104,396
|
|
|
57,927
|
|
|
77,809
|
|
|
76,503
|
|
Total long-term debt
|
|
79,760
|
|
|
111,776
|
|
|
4,343
|
|
|
4,185
|
|
|
3,766
|
|
Total Net1 equity
|
$
|
341,515
|
|
$
|
323,006
|
|
$
|
285,878
|
|
$
|
373,217
|
|
$
|
340,328
|
|
(1) Refer to Note 9 to our consolidated financial statements
for discussion of the movement in our goodwill and intangible assets during
fiscal 2011.
34
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis should be read in conjunction with Item
6Selected Financial Data and Item 8Financial 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 in South 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 in South 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 in South 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 in South 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 in South 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 in South 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 in Korea, 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 in Mexico, Spain and India.
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, in Ghana, we sold a complete UEPS to
the Central 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 in South
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 in Iraq, 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 in Korea 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 in South 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 as Botswana, Namibia and Colombia. 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 investees 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
On
January 17, 2012, SASSA awarded us a tender to provide payment services for
social grants in all of South Africas nine provinces for a period of five
years. On February 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 of ZAR16.44 per beneficiary paid, or ZAR 14.42 net
of VAT. The new pricing terms became effective on April 1, 2012, upon the March
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 on April 2, 2012 and thus successfully completed the first phase
of implementation.
The
second phase requires us to re-enroll all social grant beneficiaries in South
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 early July 2012 and plan to be substantially complete by
March 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 1ARisk Factors and Item 3Legal 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
On
April 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 on January 25, 2012. While we believe that this
transaction will improve our BEE rating, and therefore provide us with
additional business opportunities in South 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
On
July 1, 2011, we acquired SmartLife, a South African long-term insurance
company, for ZAR 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 in South
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
On
October 3, 2011, we acquired the South African prepaid airtime and electricity
businesses of Eason & 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 Easons 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 in South 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 in South 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 in South 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.
Outside
South Africa
KSNET
The
KSNET management team has commenced a number of strategic initiatives in the
Republic 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 in Korea 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
units 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 for
Community Behavioral Health, or CBH, a not-for-profit corporation contracted by
the City 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
from December 2011 from this contract.
Additionally,
XeoHealth has been subcontracted by Cognosante 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 the
North 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 until June 30,
2013. In addition to the North Dakota RAC, XeoHealth has also been subcontracted
by Cognosante 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 by September
2012.
XeoRules
is XeoHealths 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 in the 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 in Mexico 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 in Latin 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
Spain and India.
The
African Continent and Iraq
During
fiscal 2012, NUETS recorded revenue from transaction fees under its contract
with the government of Iraq. NUETS has entered the second phase of its
initiative in Ghana and now generates recurring income in the form of hardware
and software maintenance fees. 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 since January 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 in Ghana, we believe that the increase in usage
demonstrates the attractiveness of our technology in countries outside South
Africa.
NUETS
continued to service its current customers on the African continent and in Iraq
and continued its business development efforts, including responding to a number
of tenders, in multiple 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:
-
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;
-
Following XeoHealths 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
-
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:
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
managements judgment based on a variety of assumptions and other determinants
such as historical experience, current and expected market conditions and
certain scientific evaluation techniques. 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 in August 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 in August 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 managements 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 ended
June 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 groups
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 June 30, 2012
Refer
to Note 2 of our consolidated financial statements for a full description of
recent accounting pronouncements not yet adopted as of June 30, 2012, including
the expected dates of adoption and effects on financial condition, results of
operations and cash flows.
Currency Exchange Rate Information
Actual
exchange rates
The
actual exchange rates for and at the end of the periods presented were as
follows:
Table 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
|
|
(1)
KRW : $ average, highest and lowest exchange rates are from November 1, 2010
(KSNET acquisition date) to June 30, 2011.
43
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
ended June 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 from July 1, 2011, and Eason from October 1, 2011
and KSNET, MediKredit and FIHRST. Fiscal 2011 results include MediKredit and
FIHRST for the entire period and KSNET from November 1, 2010, but do not include
Eason and SmartLife. Fiscal 2010 results include MediKredit and FIHRST from
January 1, 2010 and March 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:
-
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 $5.4 million which were
paid as a result of the tender award to us;
-
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;
-
Replacement of STC with a dividends withholding tax in South Africa:
As a 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 $18.3 million deferred tax benefit;
-
Foreign tax credit valuation allowance:
Our tax expense
includes the negative impact of a $8.2 million foreign tax credit valuation
allowance;
-
Fair value charge resulting from issue of equity instrument pursuant
to BBBEE transaction:
The fair value charge of $14.2 million related
to our BBBEE transaction negatively impacted our reported results during
fiscal 2012;
-
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;
-
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 Easons 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
-
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 UTAs
intangibles in 2011;
-
Profit on liquidation of SmartSwitch Nigeria:
We recorded a
non-cash profit of $4.0 million on the liquidation of SmartSwitch Nigeria in
fiscal 2012; and
-
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 and support
|
|
141,000
|
|
|
109,858
|
|
|
28%
|
|
Selling, general and administration
|
|
137,404
|
|
|
119,692
|
|
|
15%
|
|
Equity instrument issued pursuant to BBBEE transaction
|
|
14,211
|
|
|
-
|
|
|
nm
|
|
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 equity-accounted investments
|
|
44,445
|
|
|
2,885
|
|
|
nm
|
|
Income (Loss) from equity-accounted investments
|
|
220
|
|
|
(339
|
)
|
|
(165)%
|
|
Net income
|
|
44,665
|
|
|
2,546
|
|
|
nm
|
|
Less (Add) net income (loss) attributable to
non-controlling interest
|
|
14
|
|
|
(101
|
)
|
|
(114)%
|
|
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 and support
|
|
1,088,322
|
|
|
768,589
|
|
|
42%
|
|
Selling, general and administration
|
|
1,058,190
|
|
|
837,389
|
|
|
26%
|
|
Equity instrument issued pursuant to BBBEE transaction
|
|
112,066
|
|
|
-
|
|
|
nm
|
|
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 equity-accounted investments
|
|
343,053
|
|
|
20,183
|
|
|
nm
|
|
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
non-controlling interest
|
|
108
|
|
|
(707
|
)
|
|
(115%
|
)
|
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 in Iraq, 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 in
August 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 our January
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 ended June 30,
|
|
|
|
2012
|
|
|
|
2011
|
|
|
|
$ 000
|
|
|
|
$ 000
|
|
Amortization included in depreciation and amortization
expense:
|
|
19,557
|
|
|
|
21,692
|
|
South African transaction-based activities
|
|
6,171
|
|
|
|
5,702
|
|
International transaction-based
activities
|
|
13,015
|
|
|
|
8,602
|
|
Hardware, software and related technology
sales
|
|
371
|
|
|
|
7,388
|
|
Table 8
|
|
Year ended June 30,
|
|
|
|
2012
|
|
|
|
2011
|
|
|
|
ZAR 000
|
|
|
|
ZAR 000
|
|
Amortization included in depreciation and amortization
expense:
|
|
150,952
|
|
|
|
151,761
|
|
South African transaction-based activities
|
|
47,625
|
|
|
|
39,891
|
|
International transaction-based
activities
|
|
100,458
|
|
|
|
60,181
|
|
Hardware, software and related technology
sales
|
|
2,869
|
|
|
|
51,689
|
|
During
fiscal 2011, customer relationships acquired as part of the Net1 UTA acquisition
in August 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 activities
|
|
201,207
|
|
|
|
52%
|
|
|
|
189,206
|
|
|
|
55%
|
|
|
|
6%
|
|
International transaction-based activities
|
|
118,281
|
|
|
|
30%
|
|
|
|
70,382
|
|
|
|
20%
|
|
|
|
68%
|
|
Smart card accounts
|
|
31,263
|
|
|
|
8%
|
|
|
|
33,315
|
|
|
|
10%
|
|
|
|
(6%
|
)
|
Financial services
|
|
8,121
|
|
|
|
2%
|
|
|
|
7,350
|
|
|
|
2%
|
|
|
|
10%
|
|
Hardware, software and related technology sales
|
|
31,392
|
|
|
|
8%
|
|
|
|
43,167
|
|
|
|
13%
|
|
|
|
(27%
|
)
|
Total consolidated revenue
|
|
390,264
|
|
|
|
100%
|
|
|
|
343,420
|
|
|
|
100%
|
|
|
|
14%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction-based activities
|
|
49,824
|
|
|
|
81%
|
|
|
|
75,668
|
|
|
|
202%
|
|
|
|
(34%
|
)
|
Operating income before amortization
|
|
55,995
|
|
|
|
|
|
|
|
81,370
|
|
|
|
|
|
|
|
(31%
|
)
|
Amortization
|
|
(6,171
|
)
|
|
|
|
|
|
|
(5,702
|
)
|
|
|
|
|
|
|
8%
|
|
International transaction-based activities
|
|
1,257
|
|
|
|
2%
|
|
|
|
(220
|
)
|
|
|
(1%
|
)
|
|
|
(671%
|
)
|
Operating income before
amortization
|
|
14,272
|
|
|
|
|
|
|
|
8,382
|
|
|
|
|
|
|
|
70%
|
|
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 technology sales
|
|
3,619
|
|
|
|
6%
|
|
|
|
(48,372
|
)
|
|
|
(129%
|
)
|
|
|
(107%
|
)
|
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
income
|
|
61,150
|
|
|
|
100%
|
|
|
|
37,428
|
|
|
|
100%
|
|
|
|
63%
|
|
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 activities
|
|
1,553,036
|
|
|
|
52%
|
|
|
|
1,323,723
|
|
|
|
55%
|
|
|
17%
|
|
International transaction-based activities
|
|
912,964
|
|
|
|
30%
|
|
|
|
492,406
|
|
|
|
20%
|
|
|
85%
|
|
Smart card accounts
|
|
241,307
|
|
|
|
8%
|
|
|
|
233,078
|
|
|
|
10%
|
|
|
4%
|
|
Financial services
|
|
62,683
|
|
|
|
2%
|
|
|
|
51,422
|
|
|
|
2%
|
|
|
22%
|
|
Hardware, software and related technology sales
|
|
242,302
|
|
|
|
8%
|
|
|
|
302,005
|
|
|
|
13%
|
|
|
(20%
|
)
|
Total consolidated revenue
|
|
3,012,292
|
|
|
|
100%
|
|
|
|
2,402,634
|
|
|
|
100%
|
|
|
25%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction-based activities
|
|
384,572
|
|
|
|
81%
|
|
|
|
529,388
|
|
|
|
202%
|
|
|
(27%
|
)
|
Operating income before
amortization
|
|
432,197
|
|
|
|
|
|
|
|
569,279
|
|
|
|
|
|
|
(24%
|
)
|
Amortization
|
|
(47,625
|
)
|
|
|
|
|
|
|
(39,891
|
)
|
|
|
|
|
|
19%
|
|
International transaction-based activities
|
|
9,702
|
|
|
|
2%
|
|
|
|
(1,539
|
)
|
|
|
(1%
|
)
|
|
(730%
|
)
|
Operating income before amortization
|
|
110,160
|
|
|
|
|
|
|
|
58,642
|
|
|
|
|
|
|
88%
|
|
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 technology sales
|
|
27,934
|
|
|
|
6%
|
|
|
|
(338,420
|
)
|
|
|
(129%
|
)
|
|
(108%
|
)
|
Operating income before
amortization and
impairment of intangibles
|
|
30,803
|
|
|
|
|
|
|
|
5,507
|
|
|
|
|
|
|
459%
|
|
Impairment of intangibles
|
|
-
|
|
|
|
|
|
|
|
(292,238
|
)
|
|
|
|
|
|
nm
|
|
Amortization of intangibles
|
|
(2,869
|
)
|
|
|
|
|
|
|
(51,689
|
)
|
|
|
|
|
|
(94%
|
)
|
Corporate/eliminations
|
|
(84,951
|
)
|
|
|
(18%
|
)
|
|
|
(68,472
|
)
|
|
|
(25%
|
)
|
|
24%
|
|
Total consolidated operating
income
|
|
471,992
|
|
|
|
100%
|
|
|
|
261,853
|
|
|
|
100%
|
|
|
80%
|
|
South
African transaction-based activities
In
ZAR, the increases in segment revenue were primarily due to higher revenues
earned, from April 1, 2012, under our new SASSA contract, higher prepaid airtime
sales resulting primarily from the Eason acquisition and increased transaction
volumes at MediKredit, offset by a lower contribution from EasyPay. Segment
revenues include the transaction fees we earn through our merchant acquiring
system and reflect the elimination of inter-company transactions.
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 2012South
AfricaSASSA 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 from October 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 EasyPays 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 from October 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 since June 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
SASSAs award of the new tender to us for the payment of all social grants in
South 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 in the 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 in Iraq. 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 November 1, 2011.
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 from April 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 at
June 30, 2012 compared to 3,561,105 active accounts as at June 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 in Ghana and Iraq.
During
fiscal 2011, customer relationships of $41.8 million acquired as part of the
Net1 UTA acquisition was impaired.
Amortization
of Prism intangible assets during fiscal 2012 and 2011, respectively, was
approximately $0.4 million (ZAR 2.9 million) and $0.7 million (ZAR 4.6 million)
and reduced our operating income.
51
As
we expand internationally, whether through traditional selling arrangements to
provide products and services (such as in Ghana and Iraq) or through joint
ventures (such as with SmartSwitch Namibia and SmartSwitch Botswana), we expect
to receive revenues from sales of hardware and from software customization and
licensing to establish the infrastructure of POS terminals and smart cards
necessary to enable utilization of the UEPS technology in a particular country.
To the extent that we enter into joint ventures and account for the investment
as an equity investment, we are required to eliminate our portion of the sale of
hardware, software and licenses to the investees. The sale of hardware, software
and licenses under these arrangements occur on an ad hoc basis as new
arrangements are established, which can materially affect our revenues and
operating income in this segment from period to period.
Corporate/
Eliminations
The
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 in August 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:
-
Impairment loss related to Net1 UTA customer relationships:
We recorded an impairment loss of $41.8 million related to Net1 UTAs
customer relationships;
-
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;
-
Valuation allowances related to Net1 UTA deferred tax assets:
During fiscal 2011, we recorded valuation allowances totaling $8.9
million related to Net1 UTA deferred tax assets;
-
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;
-
Increased revenue from KSNET at lower operating margins, before
acquired intangible asset amortization, than our
legacy
business:
Our KSNET acquisition in October 2010 positively impacted
our revenue during fiscal 2011, however, because KSNET has an operating
margin, before acquired intangible asset amortization, that is lower than our
legacy businesses, it negatively impacted our operating margin. The inclusion
of KSNET in our results also contributed to the increase in selling, general
and administration and depreciation and amortization expenses;
-
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;
-
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;
-
Increased user adoption in Iraq:
Our reported results were
positively impacted by increased transaction revenues at NUETS from the
adoption of our UEPS technology in Iraq;
-
Lower revenues and margins from hardware, software and related
technology sales segment:
Results for this segment were adversely
impacted by lower revenues from all contributors;
-
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;
-
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 $2.0 million;
-
Reversal of stock-based compensation charges:
Our reported
results were positively impacted by the reversal of stock-based compensation
charge of $3.5 million (ZAR 24.5 million), primarily as a result of the
forfeitures of a portion of the performance-based restricted stock granted in
August 2007; and
52
-
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 and support
|
|
109,858
|
|
|
72,973
|
|
|
51%
|
|
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 equity-accounted
investments
|
|
2,885
|
|
|
38,058
|
|
|
(92)%
|
|
(Loss) Earnings from equity-accounted investments
|
|
(339
|
)
|
|
93
|
|
|
(465)%
|
|
Net income
|
|
2,546
|
|
|
38,151
|
|
|
(93)%
|
|
Add: net loss attributable to non-controlling interest
|
|
(101
|
)
|
|
(839
|
)
|
|
(88)%
|
|
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 and support
|
|
768,589
|
|
|
555,274
|
|
|
38%
|
|
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 equity-accounted
investments
|
|
20,183
|
|
|
289,594
|
|
|
(93)%
|
|
(Loss) Earnings from equity-accounted investments
|
|
(2,372
|
)
|
|
708
|
|
|
(435)%
|
|
Net income
|
|
17,811
|
|
|
290,302
|
|
|
(94)%
|
|
Add: net loss attributable to non-controlling interest
|
|
(707
|
)
|
|
(6,384
|
)
|
|
(89)%
|
|
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 in August 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 ended June 30,
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
000
|
|
|
|
000
|
|
Amortization included in depreciation and
amortization expense:
|
|
21,692
|
|
|
|
14,138
|
|
South African transaction-based activities
|
|
5,702
|
|
|
|
4,205
|
|
International transaction-based
activities
|
|
8,602
|
|
|
|
-
|
|
Hardware, software and related technology
sales
|
|
7,388
|
|
|
|
9,933
|
|
Table 16
|
|
Year ended June 30,
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
ZAR 000
|
|
|
|
ZAR 000
|
|
Amortization included in depreciation and
amortization expense:
|
|
151,761
|
|
|
|
107,588
|
|
South African transaction-based activities
|
|
39,891
|
|
|
|
31,999
|
|
International transaction-based
activities
|
|
60,181
|
|
|
|
-
|
|
Hardware, software and related technology
sales
|
|
51,689
|
|
|
|
75,589
|
|
During
fiscal 2011, customer relationships acquired as part of the Net1 UTA acquisition
in August 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 in April 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 activities
|
|
189,206
|
|
|
|
55%
|
|
|
|
191,362
|
|
|
|
68%
|
|
|
|
(1)%
|
|
International transaction-based activities
|
|
70,382
|
|
|
|
20%
|
|
|
|
-
|
|
|
|
-
|
|
|
|
nm
|
|
Smart card accounts
|
|
33,315
|
|
|
|
10%
|
|
|
|
31,971
|
|
|
|
11%
|
|
|
|
4%
|
|
Financial services
|
|
7,350
|
|
|
|
2%
|
|
|
|
4,023
|
|
|
|
1%
|
|
|
|
82%
|
|
Hardware, software and related technology sales
|
|
43,167
|
|
|
|
13%
|
|
|
|
53,008
|
|
|
|
20%
|
|
|
|
(17)%
|
|
Total consolidated revenue
|
|
343,420
|
|
|
|
100%
|
|
|
|
280,364
|
|
|
|
100%
|
|
|
|
22%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction-based activities
|
|
75,668
|
|
|
|
202%
|
|
|
|
106,036
|
|
|
|
152%
|
|
|
|
(30)%
|
|
Operating income before amortization
|
|
81,370
|
|
|
|
|
|
|
|
110,241
|
|
|
|
|
|
|
|
(27)%
|
|
Amortization
|
|
(5,702
|
)
|
|
|
|
|
|
|
(4,205
|
)
|
|
|
|
|
|
|
36%
|
|
International transaction-based activities
|
|
(220
|
)
|
|
|
(1)%
|
|
|
|
-
|
|
|
|
-
|
|
|
|
nm
|
|
Operating income before
amortization
|
|
8,382
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
nm
|
|
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 technology sales
|
|
(48,372
|
)
|
|
|
(129)%
|
|
|
|
(42,524
|
)
|
|
|
(61)%
|
|
|
|
17%
|
|
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
income
|
|
37,428
|
|
|
|
100%
|
|
|
|
69,811
|
|
|
|
100%
|
|
|
|
(46)%
|
|
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 activities
|
|
1,323,723
|
|
|
|
55%
|
|
|
|
1,456,131
|
|
|
|
68%
|
|
|
|
(9)%
|
|
International transaction-based activities
|
|
492,406
|
|
|
|
20%
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Nm
|
|
Smart card accounts
|
|
233,078
|
|
|
|
10%
|
|
|
|
243,277
|
|
|
|
11%
|
|
|
|
(4)%
|
|
Financial services
|
|
51,422
|
|
|
|
2%
|
|
|
|
30,612
|
|
|
|
1%
|
|
|
|
67%
|
|
Hardware, software and related technology sales
|
|
302,005
|
|
|
|
13%
|
|
|
|
403,354
|
|
|
|
20%
|
|
|
|
(23)%
|
|
Total consolidated revenue
|
|
2,402,634
|
|
|
|
100%
|
|
|
|
2,133,374
|
|
|
|
100%
|
|
|
|
13%
|
|
Consolidated operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction-based activities
|
|
529,388
|
|
|
|
202%
|
|
|
|
806,860
|
|
|
|
152%
|
|
|
|
(35)%
|
|
Operating income before amortization
|
|
569,279
|
|
|
|
|
|
|
|
838,859
|
|
|
|
|
|
|
|
(33)%
|
|
Amortization
|
|
(39,891
|
)
|
|
|
|
|
|
|
(31,999
|
)
|
|
|
|
|
|
|
25%
|
|
International transaction-based activities
|
|
(1,539
|
)
|
|
|
(1)%
|
|
|
|
-
|
|
|
|
-
|
|
|
|
Nm
|
|
Operating income before
amortization
|
|
58,642
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
Nm
|
|
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 technology sales
|
|
(338,420
|
)
|
|
|
(129)%
|
|
|
|
(323,578
|
)
|
|
|
(61)%
|
|
|
|
8%
|
|
Operating income before amortization and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
impairment of intangibles
|
|
5,507
|
|
|
|
|
|
|
|
36,431
|
|
|
|
|
|
|
|
(85)%
|
|
Impairment of intangibles
|
|
(292,238
|
)
|
|
|
|
|
|
|
(284,420
|
)
|
|
|
|
|
|
|
3%
|
|
Amortization of intangibles
|
|
(51,689
|
)
|
|
|
|
|
|
|
(75,589
|
)
|
|
|
|
|
|
|
(32)%
|
|
Corporate/eliminations
|
|
(68,472
|
)
|
|
|
(25)%
|
|
|
|
(84,570
|
)
|
|
|
(16)%
|
|
|
|
(19)%
|
|
Total consolidated operating
income
|
|
261,853
|
|
|
|
100%
|
|
|
|
531,212
|
|
|
|
100%
|
|
|
|
(51)%
|
|
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 RMTs 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 FIHRSTs 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 in the United States, but was
partially offset by improving profitability of NUETS initiative in Iraq.
Operating income margin for fiscal 2011 was 0%.
Our
results for fiscal 2011 include the intangible asset amortization related to our
KSNET acquisition from November 1, 2010.
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 at
June 30, 2011, compared to 3,532,620 active accounts as at June 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 in Ghana
and Iraq.
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 $0.7 million (ZAR 4.6 million) and $0.6 million (ZAR 4.6 million)
and reduced our operating income.
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 in August 2007. These
reductions were offset by higher corporate head office-related expenditure,
including the effects of inflation in South 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
At
June 30, 2012, our cash balances were $39.1 million, which comprised mainly
ZAR-denominated balances of ZAR 179.4 million ($21.6 million), KRW-denominated
balances of KRW 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 from June 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 in Korea 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 in Korea.
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 ZAR 250 million
($30.2 million) which remained fully undrawn as of June 30, 2012.
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 on January 30, 2012.
As
of June 30, 2012, we had outstanding long-term debt of 108.7 billion KRW
(approximately $93.8 million translated at exchange rates applicable as of June
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 of June 30,
2012) plus a margin of 4.10% . Semi-annual principal payments of approximately
$7.0 million (translated at exchange rates applicable as of June 30, 2012) were
due starting in October 2011, with final maturity scheduled for October 2015.
The
loans are secured by substantially all of KSNETs assets, a pledge by our
subsidiary, Net1 Korea, of its entire equity interest in KSNET and a pledge by
the immediate parent of Net1 Korea (also one of our subsidiaries) of its entire
equity interest in Net1 Korea. The Facilities Agreement contains customary
covenants that require Net1 Korea and its consolidated subsidiaries to maintain
certain specified financial ratios (including a leverage ratio and a debt
service coverage ratio) and restrict their ability to make certain distributions
with respect to their capital stock, prepay other debt, encumber their assets,
incur additional indebtedness, make capital expenditures above specified levels,
engage in certain business combinations and engage in other corporate
activities. As of June 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
Net1 Korea and its subsidiaries, including KSNET).
We
have a unique cash flow cycle due to the funding mechanism under our SASSA
contact and our pre-funding of certain merchants. 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 in
Korea 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 the July 2012 pay cycle, we
did not have any significant amounts due to non-prefunded merchants
participating in our merchant acquiring system as of June 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 effective July 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 in South 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 in South Africa. We also paid taxes totaling $2.4
million in other tax jurisdictions, primarily Korea.
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 in South 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 in South Africa. We also paid taxes totaling $2.6
million in other tax jurisdictions, primarily Korea.
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 in Korea and POS devices
to service our merchant acquiring system in South 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 in Korea, kiosks to service our EasyPay Kiosk pilot
project, the acquisition of POS devices to service our merchant acquiring
system, the replacement of computer and electronic hardware and the replacement
of motor vehicles.
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 $19.2 million and acquired
180,656 shares of our common stock for $1.1 million.
During
fiscal 2011 we obtained long-term debt to fund a portion of the KSNET purchase
price. We also repaid KSNETs outstanding debt of $7.1 million. In addition, we
paid the facility fee of approximately $3.1 million in October 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 from Brait 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 on June 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 ended June 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 ResourcesCash 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 of June
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 in Korea.
60
Contractual Obligations
The
following table sets forth our contractual obligations as of June 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 obligations (A)
|
|
111,256
|
|
|
20,916
|
|
|
90,340
|
|
|
-
|
|
|
-
|
|
Operating lease obligations
|
|
10,211
|
|
|
3,785
|
|
|
4,657
|
|
|
1,769
|
|
|
-
|
|
Purchase obligations
|
|
13,724
|
|
|
13,724
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Capital commitments
|
|
5,019
|
|
|
5,019
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other long-term obligations (B)
|
|
25,791
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
25,791
|
|
Total
|
|
166,001
|
|
|
43,444
|
|
|
94,997
|
|
|
1,769
|
|
|
25,791
|
|
(A)
|
Includes $111.3 million of long-term debt discussed
under Liquidity and capital resources and includes interest payable at
the rate applicable as of June 30, 2012.
|
(B)
|
Includes policy holder liabilities $24.8 million
related to our insurance business.
|
61
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
We
seek to reduce our exposure to currencies other than the South African rand, or
ZAR, through a policy of matching, to the extent possible, assets and
liabilities denominated in those currencies. In addition, we use financial
instruments to economically hedge our exposure to exchange rate and interest
rate fluctuations arising from our operations. We are also exposed to equity
price and liquidity risks as well as credit risks.
Currency
Exchange Risk
We
are subject to currency exchange risk because we purchase inventories that we
are required to settle in other currencies, primarily the euro and US dollar. We
have used forward contracts to limit our exposure in these transactions to
fluctuations in exchange rates between the ZAR, on the one hand, and the US
dollar and the euro, on the other hand. As of June 30, 2012, and 2011, our
outstanding foreign exchange contracts were as follows:
As
of June 30, 2012
None.
As
of June 30, 2011
None.
Translation
Risk
Translation
risk relates to the risk that our results of operations will vary significantly
as the US dollar is our reporting currency, but we earn most of our revenues and
incur most of our expenses in ZAR and generate a significant amount of revenue
and related and operating expenses in KRW. The US dollar fluctuated
significantly over the past three years, including against the ZAR and KRW. As
exchange rates are outside our control, there can be no assurance that future
fluctuations will not adversely affect our results of operations and financial
condition.
Interest
Rate Risk
As
a result of our normal borrowing and leasing activities, our operating results
are exposed to fluctuations in interest rates, which we manage primarily through
our regular financing activities. In addition, outstanding indebtedness under
our Facilities Agreement bears interest at the Korean CD rate plus 4.10% . As
interest rates, and specifically the Korean CD rate, are outside our control,
there can be no assurance that future increases in interest rates, specifically
the Korean CD rate, will not adversely affect our results of operations and
financial condition. As of June 30, 2012, the Korean CD rate was 3.54% .
The
following table illustrates the effect on our annual expected interest charge,
translated at exchange rates applicable as of June 30, 2012, as a result of a
change in the Korean CD rate. The effects of a hypothetical 1% increase and a 1%
decrease in the Korean CD rate as of June 30, 2012, is shown. The selected 1%
hypothetical change does not reflect what could be considered the best or worst
case scenarios.
|
|
As of June 30, 2012
|
|
Table 23
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
annual
|
|
|
|
|
|
|
|
|
|
expected
|
|
|
|
Annual
|
|
|
|
|
|
interest charge
|
|
|
|
expected
|
|
|
Hypothetical
|
|
|
after change in
|
|
|
|
interest
|
|
|
change in
|
|
|
Korean CD
|
|
|
|
charge
|
|
|
Korean CD
|
|
|
rate
|
|
|
|
($ 000)
|
|
|
rate
|
|
|
($ 000)
|
|
Interest on Facilities Agreement
|
|
7,165
|
|
|
1%
|
|
|
8,102
|
|
|
|
|
|
|
(1%
|
)
|
|
6,227
|
|
We
generally maintain limited investment in cash equivalents and have occasionally
invested in marketable securities. The interest earned on our bank balances and
short term cash investments is dependent on the prevailing interest rates in the
jurisdictions where our cash reserves are invested.
62
Credit
Risk
Credit
risk relates to the risk of loss that we would incur as a result of
non-performance by counterparties. We maintain credit risk policies with regard
to our counterparties to minimize overall credit risk. These policies include an
evaluation of a potential counterpartys financial condition, credit rating, and
other credit criteria and risk mitigation tools as our management deems
appropriate.
With
respect to credit risk on financial instruments, we maintain a policy of
entering into such transactions only with South African and European financial
institutions that have a credit rating of BBB or better, as determined by credit
rating agencies such as Standard & Poors, Moodys and Fitch Ratings.
Equity
Price and Liquidity Risk
Equity
price risk relates to the risk of loss that we would incur as a result of the
volatility in the exchange-traded price of equity securities that we hold and
the risk that we may not be able to liquidate these securities. We have invested
in approximately 27% of the issued share capital of Finbond Group Limited which
are exchange-traded equity securities. The fair value of these securities as of
June 30, 2012, represented approximately 1% of our total assets, including these
securities. We expect to hold these securities for an extended period of time
and we are not concerned with short-term equity price volatility with respect to
these securities provided that the underlying business, economic and management
characteristics of the company remain sound.
The
market price of these securities may fluctuate for a variety of reasons,
consequently, the amount we may obtain in a subsequent sale of these securities
may significantly differ from the reported market value.
Liquidity
risk relates to the risk of loss that we would incur as a result of the lack of
liquidity on the exchange on which these securities are listed. We may not be
able to sell some or all of these securities at one time, or over an extended
period of time without influencing the exchange traded price, or at all.
The
following table summarizes our exchange-traded equity securities with equity
price risk as of June 30, 2011. The effects of a hypothetical 10% increase and a
10% decrease in market prices as of June 30, 2012, is also shown. The selected
10% hypothetical change does not reflect what could be considered the best or
worst case scenarios. Indeed, results could be far worse due both to the nature
of equity markets and the aforementioned liquidity risk.
|
|
As of June 30, 2012
|
|
Table 24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hypothetical
|
|
|
|
|
|
|
|
|
|
Estimated fair
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
value after
|
|
|
Increase
|
|
|
|
Fair
|
|
|
|
|
|
hypothetical
|
|
|
(Decrease) in
|
|
|
|
value
|
|
|
Hypothetical
|
|
|
change in price
|
|
|
Shareholders
|
|
|
|
($ 000)
|
|
|
price change
|
|
|
($ 000)
|
|
|
Equity
|
|
Exchange-traded equity securities .
|
|
8,679
|
|
|
10%
|
|
|
9,547
|
|
|
0.25%
|
|
|
|
|
|
|
(10%
|
)
|
|
7,811
|
|
|
(0.25%
|
)
|
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our
consolidated financial statements, together with the report of our independent
registered public accounting firm, appear on pages F-1 through F-52 of this
Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not
applicable.
63
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation
of disclosure controls and procedures
Under
the supervision and with the participation of our management, including our
chief executive officer and our chief financial officer, we conducted an evaluation
of our disclosure controls and procedures, as such term is defined under Rule
13a-15(e) under the Securities Exchange Act of 1934. Based on this evaluation,
the chief executive officer and the chief financial officer concluded that our
disclosure controls and procedures were effective as of June 30, 2012.
Internal
Control over Financial Reporting
Internal
control over financial reporting is a process designed by, or under the
supervision, of the companys chief executive officer and chief financial
officer, or persons performing similar functions, and effected by the companys
board of directors, management, and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with GAAP.
Internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the companys assets that could have a
material effect on the consolidated financial statements.
Inherent
Limitations in Internal Control over Financial Reporting
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial
reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.
Managements
Report on Internal Control Over Financial Reporting
Management,
including our chief executive officer and our chief financial officer, is
responsible for establishing and maintaining adequate internal control over our
financial reporting. Management conducted an evaluation of the effectiveness of
internal control over financial reporting based on the Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management concluded that our
internal control over financial reporting was effective as of June 30, 2012.
Deloitte & Touche (South Africa), our independent registered public
accounting firm, has issued an audit report on our internal control over
financial reporting.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting during the most
recent fiscal quarter ended June 30, 2012, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Shareholders of Net 1 UEPS Technologies, Inc.
We
have audited the internal control over financial reporting of Net 1 UEPS
Technologies, Inc. and subsidiaries (the Company) as of June 30, 2012, based
on criteria established in
Internal ControlIntegrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in Managements report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on
the Companys internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers or persons performing similar functions, and effected by the
company's board of directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of June 30, 2012, based on the
criteria established in
Internal ControlIntegrated Framework
issued by
the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the consolidated
financial statements as of and for the year ended June 30, 2012 of the Company
and our report dated August 23, 2012, expressed an unqualified opinion on those
financial statements.
/s/ Deloitte & Touche (South Africa)
Per PJ Smit
Partner
August 23, 2012
National Executive: LL Bam Chief Executive AE Swiegers Chief
Operating Officer GM Pinnock Audit DL Kennedy Risk Advisory NB Kader Tax L
Geeringh Consulting & Clients & Industries
JK Mazzocco Talent &
Transformation CR Beukman Finance M Jordan Strategy S Gwala Special
Projects
TJ Brown Chairman of the Board MJ Comber Deputy Chairman of the
Board
A full list of partners and directors is available on request
65
ITEM 9B. OTHER INFORMATION
None.
66
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Information
about our executive officers is set out in Part I, Item 1 under the caption
Executive Officers and Significant Employees of the Registrant. The other
information required by this Item is incorporated by reference to the sections
of our definitive proxy statement for our 2012 annual meeting of shareholders
entitled Board of Directors and Corporate Governance and Additional
Information.
ITEM 11. EXECUTIVE COMPENSATION
The
information required by this Item is incorporated by reference to the sections
of our definitive proxy statement for our 2012 annual meeting of shareholders
entitled Executive Compensation, Board of Directors and Corporate
GovernanceCompensation of Directors and Remuneration Committee Interlocks
and Insider Participation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
information required by this Item is incorporated by reference to the sections
of our definitive proxy statement for our 2012 annual meeting of shareholders
entitled Security Ownership of Certain Beneficial Owners and Management and
Equity Compensation Plan Information.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
The
information required by this Item is incorporated by reference to the sections
of our definitive proxy statement for our 2012 annual meeting of shareholders
entitled Certain Relationships and Related Transactions and Board of
Directors and Corporate Governance.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
information required by this Item is incorporated by reference to the sections
of our definitive proxy statement for our 2012 annual meeting of shareholders
entitled Audit and Non-Audit Fees.
67
PART IV
ITEM 15. EXHIBITS and FINANCIAL STATEMENT SCHEDULES
a)
|
The following documents are filed as part of this report
1. Financial Statements
|
|
|
|
The following financial statements are included on pages
F-1 through F-52.
|
2.
Financial Statement Schedules
Financial
statement schedules have been omitted since they are either not required, not
applicable, or the information is otherwise included.
(b) Exhibits
|
|
|
|
|
|
Incorporated by
Reference Herein
|
Exhibit
|
|
|
|
Included
|
|
|
|
|
|
|
No.
|
|
Description of Exhibit
|
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Herewith
|
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Form
|
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Exhibit
|
|
Filing Date
|
|
|
|
|
|
|
|
|
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3.1
|
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Amended and Restated Articles
of Incorporation
|
|
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8-K
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3.1
|
|
December 1, 2008
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|
|
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3.2
|
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Amended and Restated By-Laws
of Net 1 UEPS Technologies, Inc.
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|
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8-K
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3.2
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November 5, 2009
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|
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4.1
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Form of common stock certificate
|
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S-1
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4.1
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|
June 20, 2005
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10.1
|
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Distribution Agreement, dated
July 1, 2002, between Net 1 UEPS Technologies, Inc. and Net 1 Investment
Holdings (Pty) Limited
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S-4
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10.1
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|
February 3, 2004
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|
|
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10.2
|
|
Patent and Technology Agreement,
dated June 19, 2000, by and between Net 1 Holdings S.a.r.1. and Net 1
UEPS Technologies, Inc.
|
|
|
|
S-4
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|
10.2
|
|
February 3, 2004
|
|
|
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|
|
|
10.3
|
|
Technology License Agreement
between Net 1 Investment Holdings (Proprietary) Limited and Visa International
Service Association
|
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S-1
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|
10.12
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|
May 26, 2005
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|
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10.4
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|
Product License Agreement between
Net 1 Holdings S.a.r.1. and Net 1 Operations S.a.r.1.
|
|
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|
S-4/A
|
|
10.8
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|
April 21, 2004
|
|
|
|
|
|
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|
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10.5
|
|
Non Exclusive UEPS License Agreement
between Net 1 Investment Holdings (Proprietary) Limited and SIA Netcards
|
|
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|
S-4/A
|
|
10.10
|
|
April 21, 2004
|
|
|
|
|
|
|
|
|
|
|
|
10.6
|
|
Assignment of Copyright and License
of Patents and Trade Marks between MetroLink (Proprietary) Limited and
Net 1 Products (Proprietary) Limited
|
|
|
|
S-1
|
|
10.18
|
|
May 26, 2005
|
|
|
|
|
|
|
|
|
|
|
|
10.7
|
|
Agreement between Nedcor Bank
Limited and Net 1 Products (Proprietary) Limited
|
|
|
|
S-1/A
|
|
10.16
|
|
July 19, 2005
|
|
|
|
|
|
|
|
|
|
|
|
10.8
|
|
Patent and Technology Agreement
by and among Net 1 Investment Holdings (Proprietary) Limited, Net 1 Applied
Technology Holding Limited and Nedcor Bank Limited
|
|
|
|
S-1
|
|
10.19
|
|
May 26, 2005
|
68
10.9
|
Patent and Technology Agreement
by and among Net 1 Holdings S.a.r.1., Net 1 Applied Technology Holdings
Limited and Nedcor Bank Limited
|
|
S-1/A
|
10.19
|
July 19, 2005
|
|
|
|
|
|
|
10.10
|
Agreement by and among Nedbank
Limited, Net 1 UEPS Technologies, Inc., and Net 1 Applied Technologies
South Africa Limited
|
|
S-1/A
|
10.20
|
July 19, 2005
|
|
|
|
|
|
|
10.11
|
Banking Facility between Nedbank
Limited and Net 1 Applied Technologies South Africa Limited dated as of
April 30, 2010
|
|
10-K
|
10.13
|
August 26, 2010
|
|
|
|
|
|
|
10.12*
|
Amended and Restated Stock Incentive
Plan of Net 1 UEPS Technologies, Inc.
|
|
14A
|
A
|
October 28, 2009
|
|
|
|
|
|
|
10.13*
|
Form
of Restricted Stock Agreement
|
X
|
|
|
|
|
|
|
|
|
|
10.14*
|
Form
of Stock Option Agreement
|
X
|
|
|
|
|
|
|
|
|
|
10.15*
|
Form
of Restricted Stock Agreement (non- employee directors)
|
X
|
|
|
|
|
|
|
|
|
|
10.16
|
Share Purchase Agreement, dated
as of September 14, 2010, by and among Net 1 UEPS Technologies, Inc.,
Payment Services Asia LLC and H&Q NPS Van Investment, Ltd.
|
|
8-K
|
2.1
|
September 17, 2010
|
|
|
|
|
|
|
10.17
|
Senior Facilities Agreement dated
October 29, 2010, between Net 1 Applied Technologies Korea, as borrower,
Hana Daetoo Securities Co., Ltd., as mandated lead arranger, Shinhan Bank
and Woori Bank, as co-arrangers, the financial institutions listed therein
as original lenders and Hana Bank, as agent and security agent
|
|
8-K
|
10.51
|
November 3, 2010
|
|
|
|
|
|
|
10.18
|
Service Level Agreement, dated
as of August 24, 2010, between the South African Social Security Agency
and Cash Paymaster Services (Pty) Limited
|
|
10-Q
|
10.52
|
November 9, 2010
|
|
|
|
|
|
|
10.19*
|
Employment agreement dated September
17, 2010 between KSNET, Inc. and Phil-Hyun Oh
|
|
10-K
|
10.19
|
August 25, 2011
|
|
|
|
|
|
|
10.20
|
Registration Rights Agreement
dated November 10, 2011 between the Company and shareholders affiliated
with General Atlantic LLC
|
|
8-K
|
99.1
|
November 10, 2011
|
|
|
|
|
|
|
10.21
|
Relationship Agreement dated
January 25, 2012 by and among the Company, Business Venture Investments
No 1567 (Proprietary) Limited (RF), Mosomo Investment Holdings (Proprietary)
Limited and Brian Kgomotso Mosehla
|
|
8-K
|
99.1
|
January 26, 2012
|
|
|
|
|
|
|
10.22
|
Form of Option to be issued by
the Company to Business Venture Investments No 1567 (Proprietary) Limited
(RF)
|
|
8-K
|
99.2
|
January 26, 2012
|
|
|
|
|
|
|
10.23
|
Contract for the Payment of Social
Grants dated February 3, 2012 between CPS and SASSA
|
|
8-K
|
99.1
|
February 6, 2012
|
|
|
|
|
|
|
10.24
|
Service Level Agreement dated
February 3, 2012 between CPS and SASSA
|
|
8-K
|
99.2
|
February 6, 2012
|
|
|
|
|
|
|
12
|
Statement
of Ratio of Earnings to Fixed Charges
|
X
|
|
|
|
|
|
|
|
|
|
14
|
Amended and Restated Code of
Ethics
|
|
8-K
|
14
|
August 27, 2009
|
|
|
|
|
|
|
21
|
Subsidiaries
of Registrant
|
X
|
|
|
|
|
|
|
|
|
|
23
|
Consent
of Independent Registered Public Accounting Firm
|
X
|
|
|
|
|
|
|
|
|
|
31.1
|
Certification
of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities Exchange Act of 1934, as amended
|
X
|
|
|
|
69
Confidential treatment has been granted for certain portions
of this Exhibit pursuant to Rule 24b-2 of the Exchange Act, and thus, such
portions have been omitted.
* Indicates a management contract or
compensatory plan or arrangement.
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
NET 1 UEPS TECHNOLOGIES, INC.
By: /s/ Serge C.P. Belamant
Serge C.P. Belamant
Chief Executive
Officer, Chairman of the Board and Director
Date: August 23, 2012
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
NAME
|
TITLE
|
DATE
|
|
|
|
|
Chief Executive Officer and Chairman of the
Board
|
August 23, 2012
|
/s/ Serge C.P. Belamant
|
and Director (Principal Executive Officer)
|
|
Serge C.P. Belamant
|
|
|
|
|
|
|
Chief Financial Officer, Treasurer and
Secretary and
|
August 23, 2012
|
/s/ Herman Gideon Kotzé
|
Director (Principal Financial and Accounting
Officer)
|
|
Herman Gideon Kotzé
|
|
|
|
|
|
/s/ Paul Edwards
|
Director
|
August 23, 2012
|
Paul Edwards
|
|
|
|
|
|
/s/ Khomotso Brian Mosehla
|
Director
|
August 23, 2012
|
Khomotso Brian Mosehla
|
|
|
|
|
|
/s/ Alasdair Jonathan Kemsley Pein
|
Director
|
August 23, 2012
|
Alasdair Jonathan Kemsley Pein
|
|
|
|
|
|
/s/ Christopher Stefan Seabrooke
|
Director
|
August 23, 2012
|
Christopher Stefan Seabrooke
|
|
|
71
NET 1 UEPS TECHNOLOGIES, INC.
LIST OF CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Shareholders of Net 1 UEPS Technologies, Inc.
We
have audited the accompanying consolidated balance sheets of Net 1 UEPS
Technologies, Inc. and subsidiaries (the Company) as of June 30, 2012 and 2011
and the related consolidated statements of operations, comprehensive income,
changes in equity and cash flows for each of the three years in the period ended
June 30, 2012. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Net 1 UEPS Technologies, Inc. and
subsidiaries as of June 30, 2012 and 2011, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2012, in conformity with accounting principles generally accepted in the United
States of America.
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Company's internal control over
financial reporting as of June 30, 2012, based on the criteria established in
Internal ControlIntegrated Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated August
23, 2012, expressed an unqualified opinion on the Company's internal control
over financial reporting.
/s/ Deloitte & Touche (South Africa)
Per PJ Smit
Partner
August 23, 2012
National Executive: LL Bam Chief Executive AE Swiegers Chief
Operating Officer GM Pinnock Audit DL Kennedy Risk Advisory NB Kader Tax L
Geeringh Consulting & Clients & Industries
JK Mazzocco Talent &
Transformation CR Beukman Finance M Jordan Strategy S Gwala Special
Projects
TJ Brown Chairman of the Board MJ Comber Deputy Chairman of the
Board
A full list of partners and directors is available on
request
F-2
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED
BALANCE SHEETS
as of June 30, 2012 and 2011
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands, except share data)
|
|
ASSETS
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
39,123
|
|
$
|
95,263
|
|
Pre-funded
social welfare grants receivable (Note 4)
|
|
9,684
|
|
|
4,579
|
|
Accounts receivable, net (Note 5)
|
|
101,918
|
|
|
82,780
|
|
Finance
loans receivable, net
|
|
8,141
|
|
|
8,141
|
|
Deferred expenditure on smart cards
|
|
4,587
|
|
|
51
|
|
Inventory
(Note 6)
|
|
6,192
|
|
|
6,725
|
|
Deferred income taxes (Note 19)
|
|
5,591
|
|
|
15,882
|
|
Total current assets before settlement assets
|
|
175,236
|
|
|
213,421
|
|
Settlement assets
|
|
409,166
|
|
|
186,668
|
|
Total current assets
|
|
584,402
|
|
|
400,089
|
|
PROPERTY, PLANT AND EQUIPMENT, net (Note 8)
|
|
52,616
|
|
|
35,807
|
|
EQUITY-ACCOUNTED INVESTMENTS (Note 7)
|
|
1,508
|
|
|
1,860
|
|
GOODWILL (Note 9)
|
|
182,737
|
|
|
209,570
|
|
INTANGIBLE ASSETS, net (Note 9)
|
|
93,930
|
|
|
119,856
|
|
OTHER LONG-TERM ASSETS, including available
for sale securities (Note 7)
|
|
40,700
|
|
|
14,463
|
|
TOTAL ASSETS
|
|
955,893
|
|
|
781,645
|
|
LIABILITIES
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
Accounts payable
|
|
13,172
|
|
|
11,360
|
|
Other
payables (Note 11)
|
|
42,157
|
|
|
71,265
|
|
Current portion of long-term borrowings (Note 13)
|
|
14,019
|
|
|
15,062
|
|
Income
taxes payable
|
|
6,019
|
|
|
6,709
|
|
Total current liabilities before settlement obligations
|
|
75,367
|
|
|
104,396
|
|
Settlement obligations
|
|
409,166
|
|
|
186,668
|
|
Total current liabilities
|
|
484,533
|
|
|
291,064
|
|
DEFERRED INCOME TAXES (Note 19)
|
|
20,988
|
|
|
52,785
|
|
LONG-TERM BORROWINGS (Note 13)
|
|
79,760
|
|
|
110,504
|
|
OTHER LONG-TERM LIABILITIES
|
|
25,791
|
|
|
1,272
|
|
TOTAL LIABILITIES
|
|
611,072
|
|
|
455,625
|
|
COMMITMENTS AND CONTINGENCIES (Note 23)
|
|
|
|
|
|
|
EQUITY
|
|
COMMON STOCK (Note 14)
|
|
|
|
|
|
|
Authorized
shares: 200,000,000 with $0.001 par value;
Issued
and outstanding shares, net of treasury: 2012: 45,548,902; 2011: 45,152,805
|
|
59
|
|
|
59
|
|
PREFERRED STOCK
|
|
|
|
|
|
|
Authorized
shares: 50,000,000 with $0.001 par value;
Issued
and outstanding shares, net of treasury: 2012: -; 2011: -
|
|
-
|
|
|
-
|
|
ADDITIONAL PAID-IN CAPITAL
|
|
153,360
|
|
|
136,430
|
|
TREASURY SHARES, AT COST: 2012: 13,455,090;
2011: 13,274,434 (Note 14)
|
|
(175,823
|
)
|
|
(174,694
|
)
|
ACCUMULATED OTHER COMPREHENSIVE LOSS
|
|
(75,722
|
)
|
|
(33,779
|
)
|
RETAINED EARNINGS
|
|
439,641
|
|
|
394,990
|
|
TOTAL
NET1 EQUITY
|
|
341,515
|
|
|
323,006
|
|
NON-CONTROLLING INTEREST
|
|
3,306
|
|
|
3,014
|
|
TOTAL EQUITY
|
|
344,821
|
|
|
326,020
|
|
TOTAL LIABILITIES AND EQUITY
|
$
|
955,893
|
|
$
|
781,645
|
|
See accompanying notes to consolidated financial statements.
F-3
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
for the years ended June 30, 2012, 2011 and 2010
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE (Note 15)
|
$
|
390,264
|
|
$
|
343,420
|
|
$
|
280,364
|
|
Sale of goods
|
|
19,152
|
|
|
30,130
|
|
|
36,228
|
|
Loan-based interest and
fees received
|
|
8,433
|
|
|
7,276
|
|
|
4,214
|
|
Services rendered
|
|
362,679
|
|
|
306,014
|
|
|
239,922
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold, IT processing, servicing
and support
|
|
141,000
|
|
|
109,858
|
|
|
72,973
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administration
|
|
137,404
|
|
|
119,692
|
|
|
80,854
|
|
|
|
|
|
|
|
|
|
|
|
Equity instrument issued pursuant to BBBEE
transaction (Note 16)
|
|
14,211
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
36,499
|
|
|
34,671
|
|
|
19,348
|
|
|
|
|
|
|
|
|
|
|
|
IMPAIRMENT LOSSES (Note 9)
|
|
-
|
|
|
41,771
|
|
|
37,378
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
61,150
|
|
|
37,428
|
|
|
69,811
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME
|
|
8,576
|
|
|
7,654
|
|
|
10,116
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
9,345
|
|
|
8,672
|
|
|
1,047
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
60,381
|
|
|
36,410
|
|
|
78,880
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE (Note 19)
|
|
15,936
|
|
|
33,525
|
|
|
40,822
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME BEFORE EARNINGS (LOSS) FROM EQUITY- ACCOUNTED INVESTMENTS
|
|
44,445
|
|
|
2,885
|
|
|
38,058
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) FROM EQUITY-ACCOUNTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENTS (Note 7)
|
|
220
|
|
|
(339
|
)
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
44,665
|
|
|
2,546
|
|
|
38,151
|
|
|
|
|
|
|
|
|
|
|
|
LESS (ADD): NET INCOME (LOSS) ATTRIBUTABLE TO NON-CONTROLLING
INTEREST
|
|
14
|
|
|
(101
|
)
|
|
(839
|
)
|
|
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO NET1
|
$
|
44,651
|
|
$
|
2,647
|
|
$
|
38,990
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
(Note 20)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings attributable to Net1 shareholders
in $
|
|
0.99
|
|
|
0.06
|
|
|
0.84
|
|
Diluted earnings attributable
to Net1 shareholders in $
|
|
0.99
|
|
|
0.06
|
|
|
0.84
|
|
See accompanying notes to consolidated financial statements.
F-4
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
for the years ended June 30, 2012, 2011 and 2010
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
$
|
44,665
|
|
$
|
2,546
|
|
$
|
38,151
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE (LOSS)
INCOME:
|
|
|
|
|
|
|
|
|
|
Net unrealized (income) loss on asset
available for sale, net of tax
|
|
1,547
|
|
|
(691
|
)
|
|
(684
|
)
|
Movement in foreign
currency translation reserve
|
|
(43,617
|
)
|
|
34,002
|
|
|
(7,517
|
)
|
TOTAL OTHER COMPREHENSIVE (LOSS) INCOME
|
|
(42,070
|
)
|
|
33,311
|
|
|
(8,201
|
)
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME
|
|
2,595
|
|
|
35,857
|
|
|
29,950
|
|
Less
(Add) comprehensive income (loss) attributable to non-
controlling interest
|
|
113
|
|
|
(303
|
)
|
|
1,116
|
|
COMPREHENSIVE INCOME ATTRIBUTABLE TO NET1
|
$
|
2,708
|
|
$
|
35,554
|
|
$
|
31,066
|
|
Certain amounts for the year ended June 30, 2011 and 2010,
respectively, have been reclassified to reflect the appropriate attribution of
net income (loss) and other movements between Net1 and its non-controlling
interest.
See accompanying notes to consolidated financial statements.
F-5
NET 1 UEPS
TECHNOLOGIES,
INC.
CONSOLIDATED
STATEMENTS
OF
CHANGES
IN
EQUITY
(in
thousands)
|
|
Net 1 UEPS Technologies, Inc. Shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Total
|
|
|
Non-
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Paid-In
|
|
|
Retained
|
|
|
|
|
|
Net1
|
|
|
controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Earnings
|
|
|
AOC(L)I
|
|
|
Equity
|
|
|
Interests
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2009
|
|
58,434,003
|
|
$
|
59
|
|
|
(3,927,516
|
)
|
$
|
(48,637
|
)
|
$
|
126,914
|
|
$
|
353,353
|
|
$
|
(58,472
|
)
|
$
|
373,217
|
|
$
|
2,539
|
|
$
|
375,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
83,338
|
|
|
-
|
|
|
|
|
|
|
|
|
303
|
|
|
|
|
|
|
|
|
303
|
|
|
|
|
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
|
|
10,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of loan note consideration for
stock issued in accordance with 2004 Stock Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
417
|
|
|
|
|
|
|
|
|
417
|
|
|
|
|
|
417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,670
|
|
|
|
|
|
|
|
|
5,670
|
|
|
|
|
|
5,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury shares acquired (Note 14)
|
|
|
|
|
|
|
|
(9,221,526
|
)
|
|
(125,034
|
)
|
|
|
|
|
|
|
|
|
|
|
(125,034
|
)
|
|
|
|
|
(125,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefits from stock awards sold
by employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
239
|
|
|
|
|
|
|
|
|
239
|
|
|
|
|
|
239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,990
|
|
|
|
|
|
38,990
|
|
|
(839
|
)
|
|
38,151
|
|
Other comprehensive (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized
loss on available
for
sale investment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(684
|
)
|
|
(684
|
)
|
|
|
|
|
(684
|
)
|
Movement in
foreign currency
translation
reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,240
|
)
|
|
(7,240
|
)
|
|
(277
|
)
|
|
(7,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2010
|
|
58,527,439
|
|
$
|
59
|
|
|
(13,149,042
|
)
|
$
|
(173,671
|
)
|
$
|
133,543
|
|
$
|
392,343
|
|
$
|
(66,396
|
)
|
$
|
285,878
|
|
$
|
1,423
|
|
$
|
287,301
|
|
F-6
NET 1 UEPS
TECHNOLOGIES,
INC.
CONSOLIDATED
STATEMENTS
OF
CHANGES
IN
EQUITY
(in
thousands)
|
|
Net 1 UEPS Technologies, Inc. Shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Total
|
|
|
Non-
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Paid-In
|
|
|
Retained
|
|
|
|
|
|
Net1
|
|
|
controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Earnings
|
|
|
AOC(L)I
|
|
|
Equity
|
|
|
Interests
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2010
|
|
58,527,439
|
|
$
|
59
|
|
|
(13,149,042
|
)
|
$
|
(173,671
|
)
|
$
|
133,543
|
|
$
|
392,343
|
|
$
|
(66,396
|
)
|
$
|
285,878
|
|
$
|
1,423
|
|
$
|
287,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
|
|
156,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of loan note consideration for
stock issued in accordance with 2004 Stock Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,212
|
|
|
|
|
|
|
|
|
5,212
|
|
|
|
|
|
5,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of stock-based compensation charge
|
|
(257,156
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,492
|
)
|
|
|
|
|
|
|
|
(3,492
|
)
|
|
|
|
|
(3,492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury shares acquired (Note 14)
|
|
|
|
|
|
|
|
(125,392
|
)
|
|
(1,023
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,023
|
)
|
|
|
|
|
(1,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilization of income tax benefits from stock
awards sold by employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
(68
|
)
|
|
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of KSNET (Note 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
3,097
|
|
|
3,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of 19.90% non-controlling interest
(Note 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,215
|
|
|
|
|
|
(290
|
)
|
|
925
|
|
|
(1,809
|
)
|
|
(884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,647
|
|
|
|
|
|
2,647
|
|
|
(101
|
)
|
|
2,546
|
|
Other comprehensive
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized
loss on available for sale
investment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(691
|
)
|
|
(691
|
)
|
|
|
|
|
(691
|
)
|
Movement in
foreign currency
translation
reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,598
|
|
|
33,598
|
|
|
404
|
|
|
34,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2011
|
|
58,427,239
|
|
$
|
59
|
|
|
(13,274,434
|
)
|
$
|
(174,694
|
)
|
$
|
136,430
|
|
$
|
394,990
|
|
$
|
(33,779
|
)
|
$
|
323,006
|
|
$
|
3,014
|
|
$
|
326,020
|
|
F-7
NET 1 UEPS
TECHNOLOGIES,
INC.
Consolidated
Statement
of
Changes
in Equity
(dollar
amounts
in
thousands)
|
|
Net 1 UEPS Technologies, Inc. Shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number o
f
|
|
|
|
|
|
Additional
|
|
|
|
|
|
other
|
|
|
Total
|
|
|
Non-
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Paid-In
|
|
|
Retained
|
|
|
comprehensive
|
|
|
Net1
|
|
|
controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Earnings
|
|
|
(loss) income
|
|
|
Equity
|
|
|
Interest
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2011
|
|
58,427,239
|
|
$
|
59
|
|
|
(13,274,434
|
)
|
$
|
(174,694
|
)
|
$
|
136,430
|
|
$
|
394,990
|
|
$
|
(33,779
|
)
|
$
|
323,006
|
|
$
|
3,014
|
|
$
|
326,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
|
|
582,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,909
|
|
|
|
|
|
|
|
|
2,909
|
|
|
|
|
|
2,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of stock-based compensation charge
|
|
(5,976
|
)
|
|
|
|
|
|
|
|
|
|
|
(134
|
)
|
|
|
|
|
|
|
|
(134
|
)
|
|
|
|
|
(134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity instrument charge (Note 16)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,211
|
|
|
|
|
|
|
|
|
14,211
|
|
|
|
|
|
14,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury shares acquired (Note 14)
|
|
|
|
|
|
|
|
(180,656
|
)
|
|
(1,129
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,129
|
)
|
|
|
|
|
(1,129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilization of APIC pool related to vested
restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
(56
|
)
|
|
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidation of SmartSwitch Nigeria (Note
18)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
280
|
|
|
280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of 10% of SmartLife (Note 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
188
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KSNET purchase accounting adjustment (Note
3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63
|
)
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss), net of taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,651
|
|
|
|
|
|
44,651
|
|
|
14
|
|
|
44,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain on available for
sale
investment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,547
|
|
|
1,547
|
|
|
|
|
|
1,547
|
|
Movement
in foreign currency
translation
reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,490
|
)
|
|
(43,490
|
)
|
|
(127
|
)
|
|
(43,617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2012
|
|
59,003,992
|
|
$
|
59
|
|
|
(13,455,090
|
)
|
$
|
(175,823
|
)
|
$
|
153,360
|
|
$
|
439,641
|
|
$
|
(75,722
|
)
|
$
|
341,515
|
|
$
|
3,306
|
|
$
|
344,821
|
|
See accompanying notes to consolidated financial
statements.
F-8
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
for the years ended June 30, 2012, 2011 and 2010
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
$
|
44,665
|
|
$
|
2,546
|
|
$
|
38,151
|
|
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
36,499
|
|
|
34,671
|
|
|
19,348
|
|
Impairment of intangible asset
|
|
-
|
|
|
41,771
|
|
|
-
|
|
Impairment of goodwill
|
|
-
|
|
|
-
|
|
|
37,378
|
|
(Earnings) Loss from equity-accounted
investments
|
|
(220
|
)
|
|
339
|
|
|
(93
|
)
|
Fair value adjustment
|
|
(3,375
|
)
|
|
728
|
|
|
78
|
|
Interest payable
|
|
8,823
|
|
|
2,487
|
|
|
301
|
|
Facility fee amortized
|
|
389
|
|
|
1,958
|
|
|
-
|
|
(Profit) Loss on disposal of property,
plant and equipment
|
|
(64
|
)
|
|
(5
|
)
|
|
69
|
|
Net loss (profit) on
sale of 10% of SmartLife (2012) and VinaPay (2011)
|
|
81
|
|
|
(14
|
)
|
|
-
|
|
Profit on liquidation of subsidiary
(Note 18)
|
|
(3,994
|
)
|
|
-
|
|
|
-
|
|
Realized loss on sale
of SmartLife investments
|
|
25
|
|
|
-
|
|
|
-
|
|
Stock compensation charge, net of
forfeitures
|
|
2,775
|
|
|
1,720
|
|
|
5,670
|
|
Fair value of BBBEE
equity instrument granted (Note 16)
|
|
14,211
|
|
|
-
|
|
|
-
|
|
(Increase) Decrease in
accounts and finance loans receivable, and
pre-
funded grants receivable
|
|
(31,974
|
)
|
|
(3,568
|
)
|
|
4,666
|
|
(Increase) Decrease in
deferred expenditure on smart cards
|
|
(4,554
|
)
|
|
-
|
|
|
8
|
|
(Increase) Decrease in inventory
|
|
(717
|
)
|
|
289
|
|
|
3,867
|
|
Decrease in accounts
payable and other payables
|
|
(18,496
|
)
|
|
(1,041
|
)
|
|
(27,138
|
)
|
Decrease in taxes payable
|
|
(7,483
|
)
|
|
(1,800
|
)
|
|
(7,582
|
)
|
Decrease in deferred
taxes
|
|
(16,185
|
)
|
|
(13,858
|
)
|
|
(6,040
|
)
|
NET CASH
PROVIDED BY OPERATING ACTIVITIES
|
|
20,406
|
|
|
66,223
|
|
|
68,683
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
(39,167
|
)
|
|
(15,053
|
)
|
|
(2,730
|
)
|
Proceeds from disposal of property, plant
and equipment
|
|
764
|
|
|
76
|
|
|
106
|
|
Acquisitions, net of cash acquired (Note 3)
|
|
(6,154
|
)
|
|
(230,225
|
)
|
|
(10,319
|
)
|
Settlement from former shareholders of
KSNET (Note 3)
|
|
4,945
|
|
|
-
|
|
|
-
|
|
Acquisition of available-for-sale securities (Note 7)
|
|
(948
|
)
|
|
-
|
|
|
-
|
|
Purchase of investments related to
SmartLife
|
|
(2,320
|
)
|
|
-
|
|
|
-
|
|
Proceeds from maturity of investments related to SmartLife
|
|
2,321
|
|
|
-
|
|
|
-
|
|
Proceeds from disposal of VinaPay
|
|
-
|
|
|
150
|
|
|
-
|
|
Acquisition of and advance of loans to equity-accounted
investments
|
|
-
|
|
|
(375
|
)
|
|
-
|
|
Repayment of loan by equity-accounted
investment
|
|
122
|
|
|
475
|
|
|
-
|
|
Other investing activities, net
|
|
(1
|
)
|
|
35
|
|
|
-
|
|
Net change in settlement assets
|
|
(252,101
|
)
|
|
(78,768
|
)
|
|
(77,243
|
)
|
NET CASH USED IN INVESTING
ACTIVITIES
|
|
(292,539
|
)
|
|
(323,685
|
)
|
|
(90,186
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Long-term borrowings (repaid) obtained (Note 13)
|
|
(19,172
|
)
|
|
116,353
|
|
|
-
|
|
Acquisition of treasury stock (Note 14)
|
|
(1,129
|
)
|
|
(1,023
|
)
|
|
(126,304
|
)
|
Proceeds on sale of 10% of SmartLife (Note 3)
|
|
107
|
|
|
-
|
|
|
-
|
|
Proceeds from issue of common stock
|
|
-
|
|
|
-
|
|
|
720
|
|
Loan portion related to options
|
|
-
|
|
|
20
|
|
|
-
|
|
Payment of facility fee (Note 13)
|
|
-
|
|
|
(3,088
|
)
|
|
-
|
|
Repayment of short-term borrowings
|
|
-
|
|
|
(6,705
|
)
|
|
-
|
|
Repayment of bank overdraft
|
|
-
|
|
|
(462
|
)
|
|
(137
|
)
|
Acquisition of remaining 19.9% of Net1 UTA
|
|
-
|
|
|
(594
|
)
|
|
-
|
|
Net change in settlement obligations
|
|
252,101
|
|
|
78,768
|
|
|
77,243
|
|
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES
|
|
231,907
|
|
|
183,269
|
|
|
(48,478
|
)
|
Effect of exchange rate changes on cash
|
|
(15,914
|
)
|
|
15,714
|
|
|
2,937
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH
EQUIVALENTS
|
|
(56,140
|
)
|
|
(58,479
|
)
|
|
(67,044
|
)
|
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR
|
|
95,263
|
|
|
153,742
|
|
|
220,786
|
|
CASH AND CASH EQUIVALENTS AT END OF
YEAR
|
$
|
39,123
|
|
$
|
95,263
|
|
$
|
153,742
|
|
See accompanying notes to consolidated financial statements.
F-9
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial
statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
1.
DESCRIPTION
OF BUSINESS AND BASIS OF PRESENTATION
Description
of Business
Net
1 UEPS Technologies, Inc. (Net1 and collectively with its consolidated
subsidiaries, the Company) was incorporated in the State of Florida on May 8,
1997. The Company provides payment solutions and transaction processing services
across a wide range of industries and in various geographies. It has developed
and markets a smart-card based alternative payment system for the unbanked and
underbanked populations of developing economies. Its universal electronic
payment system (UEPS) uses biometrically secure smart cards that operate in
real-time but offline, which allows users to enter into transactions at any time
with other card holders in even the most remote areas. The Company also develops
and provides secure transaction technology solutions and services, and offers
transaction processing, financial and clinical risk management solutions to
various industries. The Companys technology is widely used in South Africa
today, where it distributes pension and welfare payments to recipients in South
Africa, processes debit and credit card payment transactions on behalf of
retailers through its EasyPay system, processes value-added services such as
bill payments and prepaid electricity for the major bill issuers and local
councils in South Africa and provides mobile telephone top-up transactions for
the major South African mobile carriers. The Company also processes third-party
and associated payroll payments for employees through its FIHRST system and
provides funders and providers of healthcare with an on-line real-time
management system for healthcare transactions through its MediKredit service.
Through KSNET, the Company offers card processing, payment gateway (PG) and
banking value-added services (VAN) in Korea.
Basis
of presentation
The
accompanying consolidated financial statements include subsidiaries over which
Net1 exercises control and have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP).
2.
SIGNIFICANT ACCOUNTING POLICIES
Principles
of consolidation
The
financial statements of entities which are controlled by Net1, referred to as
subsidiaries, are consolidated. Inter-company accounts and transactions are
eliminated upon consolidation.
The
Company, if it is the primary beneficiary, consolidates entities which are
considered to be variable interest entities (VIE). The primary beneficiary is
considered to be the entity that will absorb a majority of the entity's expected
losses, receive a majority of the entity's expected residual returns, or both.
No entities were required to be consolidated in terms of these requirements
during the years ended June 30, 2012, 2011 and 2010.
Use
of estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Translation
of foreign currencies
The
primary functional currency of the Company is the South African Rand (ZAR) and
its reporting currency is the US dollar. The Company also has consolidated
entities which have the euro, Russian ruble, Korean won (KRW) or Indian rupee
as their functional currency. The current rate method is used to translate the
financial statements of the Company to US dollar. Under the current rate method,
assets and liabilities are translated at the exchange rates in effect at the
balance sheet date. Revenues and expenses are translated at average rates for
the period. Translation gains and losses are reported in accumulated other
comprehensive income in total equity.
Foreign
exchange transactions are translated at the spot rate ruling at the date of the
transaction. Monetary items are translated at the closing spot rate at the
balance sheet date. Transactional gains and losses are recognized in income for
the period.
F-10
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Loan
provisions and allowance for doubtful debts
UEPS-based
lending
Beginning
in fiscal 2012, the Company no longer insures its UEPS-based lending book and
provides for the principal and services fees upon default. The Company considers
a UEPS-based loan and related service fee to be in default when the borrower
dies or can not be found. For the years ended June 30, 2011 and 2010 no
provision was required for UEPS-based lending. The principal amount of the loan
was insured and the amount due to be recovered from the insurer is recorded as a
receivable once the amount is deemed unrecoverable. Once the loan was deemed
unrecoverable, service fees related to the unrecoverable insured loan were not
recognized.
Allowance
for doubtful debts
A
specific provision is established where it is considered likely that all or
a portion of the amount due from customers renting point of sale (POS)
equipment, receiving support and maintenance or transaction services or purchasing
licenses from the Company will not be recovered. Non-recoverability is assessed
based on a review by management of the ageing of outstanding amounts, the location
of the customer and the payment history in relation to those specific amounts.
Inventory
Inventory
is valued at the lower of cost and market value. Cost is determined on a
first-in, first-out basis and includes transport and handling costs.
Equity-accounted
investments
The
Company uses the equity method to account for investments in companies when it
has significant influence but not control over the operations of the
equity-accounted company. Under the equity method, the Company initially records
the investment at cost and then adjusts the carrying value of the investment to
recognize the proportional share of the equity-accounted companys net income
(loss). In addition, dividends received from the equity-accounted company reduce
the carrying value of the Companys investment.
Property,
plant and equipment
Property,
plant and equipment are shown at cost less accumulated depreciation. Property,
plant and equipment are depreciated on the straight-line basis at rates which
are estimated to amortize the assets to their anticipated residual values over
their useful lives. Within the following asset classifications, the expected
economic lives are approximately:
Computer equipment
|
3 to 5 years
|
Office equipment
|
2 to 10 years
|
Vehicles
|
4 to 8 years
|
Furniture and fittings
|
5 to 10 years
|
Plant and equipment
|
5 to 10 years
|
The
gain or loss arising on the disposal or retirement of an asset is determined as
the difference between the sales proceeds and the carrying amount of the asset
and is recognized in income.
Leasehold
improvement costs
Costs
incurred in the adaptation of leased properties to serve the requirements of the
Company are capitalized and amortized over the shorter of the estimated useful
life of the asset and the remaining term of the lease.
F-11
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Goodwill
Goodwill
represents the excess of the purchase price of an acquired enterprise over the
fair values of the identifiable assets acquired and liabilities assumed. The
Company tests for impairment of goodwill on an annual basis and at any other
time if events or circumstances change that would more likely than not reduce
the fair value of the reporting unit goodwill below its carrying amount.
Circumstances
that could trigger an impairment test include but are not limited to: a
significant adverse change in the business climate or legal factors; an adverse
action or assessment by a regulator; unanticipated competition; loss of key
personnel; the likelihood that a reporting unit or significant portion of a
reporting unit will be sold or otherwise disposed; and results of testing for
recoverability of a significant asset group within a reporting unit.
If
the carrying amount of the reporting unit goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recorded in the statement of
operations. Measurement of the fair value of a reporting unit is based on one or
more of the following fair value measures: the amount at which the unit as a
whole could be bought or sold in a current transaction between willing parties;
present value techniques of estimated future cash flows; or valuation techniques
based on multiples of earnings or revenue, or a similar performance measure.
Intangible
assets
Intangible
assets are shown at cost less accumulated amortization. Intangible assets are
amortized over the following useful lives:
Customer relationships
|
1 to 15 years
|
Software and unpatented technology
|
3 to 5 years
|
FTS patent
|
10 years
|
Exclusive licenses
|
7 years
|
Trademarks
|
3 to 20 years
|
Customer databases
|
3 years
|
Intangible
assets are periodically evaluated for recoverability, and those evaluations take
into account events or circumstances that warrant revised estimates of useful
lives or that indicate that impairment exists.
Policy Reserves and
Liabilities
Reserves
for future policy benefits and claims payable:
The
Company determines its reserves for future policy benefits under its life
insurance products using the financial soundness valuation method and
assumptions as of the issue date as to mortality, interest, persistency and
expenses plus provisions for adverse deviations.
Deposits
on investment contracts
For
the Companys interest-sensitive life contracts, liabilities approximate the
policyholders account value. For deferred annuities, the fixed option on
variable annuities, guaranteed investment contracts and other investment
contracts, the liability is the policyholders account value.
F-12
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Reinsurance
contracts held
The
Company enters into reinsurance contracts with reinsurers under which the
Company is compensated for the entire amount or a portion of losses arising on
one or more of the insurance contracts it issues.
The
expected benefits to which the Company is entitled under its reinsurance
contracts held are recognized as reinsurance assets. These assets consist of
short-term balances due from reinsurers (classified within accounts receivable,
net) as well as long-term receivables (classified with other long-term assets)
that are dependent on the present value of expected claims and benefits arising
net of expected premiums payable under the related reinsurance contracts.
Amounts recoverable from or due to reinsurers are measured consistently with the
amounts associated with the reinsured contracts and in accordance with the terms
of each reinsurance contract.
Reinsurance
assets are assessed for impairment at each balance sheet date. If there is
reliable objective evidence that amounts due may not be recoverable, the Company
reduces the carrying amount of the reinsurance asset to its recoverable amount
and recognizes that impairment loss in its condensed consolidated statement of
operations.
Reinsurance
premiums are recognized when due for payment under each reinsurance contract.
Sales
taxes
Revenue
and expenses are presented net of sales, use and value added taxes, as the case
may be.
Revenue
recognition
The
Company recognizes revenue when:
-
there is persuasive evidence of an agreement or arrangement;
-
delivery of products has occurred or services have been rendered;
-
the sellers price to the buyer is fixed or determinable; and
-
collectability is reasonably assured.
The
Companys principal revenue streams and their respective accounting treatments
are discussed below:
Fees
Pension
and welfare and South African participating merchants
The
Company provides a state welfare benefit distribution service to the South
Africa Social Security Agency. Fee income received for these services is
recognized in the statement of operations when distributions have been made to
the beneficiaries.
Beneficiaries
are able to load their welfare grants at merchants enrolled in the Companys
participating merchant system in certain provinces. There is no charge to the
beneficiary to load the grant onto a smart card at the merchant location,
however, a fee is charged to the merchant for purchases made at the merchant
using the smart card. A fee is also charged to the merchant when the beneficiary
makes a cash withdrawal. Fee income received for these services is recognized in
the statement of operations when the transaction occurs.
F-13
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue
recognition (continued)
Fees
(continued)
Card
VAN, banking VAN and payment gateway
Card
VAN services consist of services relating to authorization of credit card
transactions including transmission of transaction details (authorization
service), and collection of receipts associated with the credit card
transactions (collection service). With its authorization service, the Company
connects credit card companies with merchants online when a customer uses
his/her credit card via terminals installed at merchants sites and the
Companys central processing server for approval of credit card transactions.
Immediately after approval of credit card transactions, the Company transmits
details of the transactions to credit card companies online for processing
payments. Collection service captures the transaction data and gathers receipts
as documented evidence and provides them to credit card companies upon request.
The Company earns service fees based on the number of transactions processed for
credit card companies when services are rendered in accordance with the
contracts entered into between credit card companies and the Company. The
Company bills for its service charges to credit card companies each month. Each
service could be provided either individually or collectively, based on terms of
contracts.
The
Company charges commission fees to credit card companies for the authorization
service provided based on the number of approvals transferred. The right to
receive a service fee is due once a credit card transaction has been approved
and details of the transaction are transmitted by the Company. Therefore,
revenues from the authorization service are recognized when the credit card
transactions are authorized and details of the transactions are transmitted. The
Company earns a collection service fee once it has provided settled funds to the
credit card companies. Therefore, revenue from the collection service is
recognized when the Company collects the receipts and provides them to the card
companies.
For
multiple-element arrangements, the Company has identified two deliverables. The
first deliverable is the authorization service, and the second deliverable is
the collection service. The Company evaluates each deliverable in an arrangement
to determine whether it represents a separate unit of accounting. A deliverable
constitutes a separate unit of accounting when it has standalone value and there
are no customer-negotiated refunds or return rights for the delivered elements.
If the arrangement includes a customer-negotiated refund or return right
relative to the delivered item and the delivery and performance of the
undelivered item is considered probable and substantially in the Company's
control, the delivered element constitutes a separate unit of accounting. In
instances when the aforementioned criteria are not met, the deliverable is
combined with the undelivered elements and the allocation of the arrangement
consideration and revenue recognition is determined for the combined unit as a
single unit. Allocation of the consideration is determined at arrangement
inception on the basis of each unit's relative selling price. In such
circumstances, the Company uses a hierarchy to determine the selling price to be
used for allocating revenue to deliverables: (i) vendor-specific objective
evidence of fair value (VSOE), (ii) third-party evidence of selling price
(TPE), and (iii) best estimate of the selling price (ESP).
VSOE
generally exists only when the Company sells the deliverable separately and is
the price actually charged by the Company for that deliverable. ESPs reflect the
Companys best estimates of what the selling prices of elements would be if they
were sold regularly on a stand-alone basis. Because the Company has neither VSOE
nor TPE for the two deliverables, the allocation of revenue has been based on
the Companys ESPs. Amounts allocated to the authorization and the collection
service are recognized at the time of service, provided the other conditions for
revenue recognition have been met.
The
Companys process for determining its ESP for deliverables without VSOE or TPE
considers multiple factors that may vary depending upon the unique facts and
circumstances related to each deliverable. Key factors considered by the Company
in developing the ESPs include prices charged by the Company, historical pricing
practices and controls, range of prices for various customers and the nature of
the services. Consideration is also given to market conditions such as
competitor pricing strategies and market perception.
F-14
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
2.
SIGNIFICANT
ACCOUNTING POLICIES (continued)
Revenue
recognition (continued)
Fees
(continued)
Card
VAN, banking VAN and payment gateway (continued)
Banking
VAN is a division supporting a companys fund management business (large payment
transfers, collections, etc.) by relaying financial transactions between client
companies and financial institutions. Financial transactions between two or more
business enterprises, or between business enterprises and their customers, are
conducted through the transaction-processing network established between the
Company and the banks. Revenue from the banking VAN service is recognized when
the service is rendered by the Company.
With
its PG service, the Company provides the Internet-based settlement service
between an on-line shopping mall and a credit card company when a customer uses
his/her credit card, debit card or on-line payment to pay for goods or services.
The Company receives fees for carrying out settlements for electronic
transactions. Revenue from the PG service is recognized when the service is
rendered by the Company.
Other
fees and commissions
The
Company provides an automated payment collection service to third parties, for
which it charges monthly fees. These fees are recognized in the statement of
operations as the underlying services are performed. The Company provides
medical-related claims adjudication, reconciliation and settlement services
(medical-related claim service) to customers, for which it charges fees. These
fees are recognized in the statement of operations as the underlying services
are performed. The Company sells prepaid electricity and recognizes a commission
in its statement of operations once the prepaid electricity token has been
delivered to the customer.
Contract
variations fees
The
Company records additional revenue from variations to contracts for the
provision of state welfare benefits, if:
-
there is persuasive evidence of an agreement; and
-
collectability is reasonably assured; and
-
all material terms and conditions of the agreement have been adhered to.
Hardware
and prepaid airtime voucher sales
Revenue
from hardware and airtime voucher sales is recognized when risk of loss has
transferred to the customer and there are no unfulfilled Company obligations
that affect the customers final acceptance of the arrangement. Any cost of
warranties and remaining obligations that are inconsequential or perfunctory are
accrued when the corresponding revenue is recognized.
The
Company buys terminals from manufacturers, and subsequently sells them through
its agencies. Revenue is recognized when significant risks and rewards of
ownership of terminals have passed to the buyer, usually on delivery of the
terminals to the buyer.
To
the extent that sales of hardware are made in an arrangement that includes
software that is more than incidental, the Company considers post-contract
maintenance and technical support or other future obligations which could impact
the timing and amount of revenue recognized.
Software
Revenue
from licensed software is recognized on a subscription basis over the period
that the client is entitled to use the license. Revenue from the sale of
software is recognized if all revenue recognition criteria have been met.
Post-contract maintenance and technical support in respect of software is
generally negotiated and sold as a separate service and is recognized over the
period such items are delivered.
F-15
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
2.
SIGNIFICANT
ACCOUNTING POLICIES (continued)
Revenue
recognition (continued)
Interest
income
Interest
income earned from micro-lending activities is recognized in the statement of
operations as it falls due, using the effective interest rate method by
reference to the constant interest rate stated in each loan agreement. Fees
earned for establishing loans are recognized over the period of the loan as
interest income.
Systems
implementation projects
The
Company undertakes smart card system implementation projects. The hardware and
software installed in these projects are in the form of customized systems,
which ordinarily involve modification to meet the customers specifications.
Software delivered under such arrangements is available to the customer
permanently, subject to the payment of annual license fees. Revenue for such
arrangements is recognized under the percentage of completion method, save for
annual license fees, which are recognized in the period to which they relate.
Up-front and interim payments received are recorded as client deposits until
customer acceptance.
The
Companys customer arrangements may have multiple deliverables. Generally, the
Companys multiple element arrangements fall within the scope of specific
accounting standards that provide guidance regarding the separation of elements
in multiple-deliverable arrangements and the allocation of consideration among
those elements. If not, the Company unbundles multiple element arrangements into
separate units of accounting when the delivered element(s) has stand-alone value
and fair value of the undelivered element(s) exists.
Terminal
rental income
The
Company leases terminals to merchants participating in its merchant acquiring
system. Operating rental income is recognized monthly on a straight-line basis
in accordance with the lease agreement.
Other
income
Revenue
from service and maintenance activities is charged to customers on a
time-and-materials basis and is recognized in the statement of operations as
services are delivered to customers.
Research
and development expenditure
Research
and development expenditures is charged to net income in the period in which it
is incurred. During the years ended June 30, 2012, 2011 and 2010, the Company
incurred research and development expenditures of $3.9 million, $5.7 million and
$7.6 million, respectively.
Computer
software development
Product
development costs in respect of software intended for sale to licensees are
expensed as incurred until technological feasibility is attained. Technological
feasibility is attained when the Companys software has completed system testing
and has been determined to be viable for its intended use. The time between the
attainment of technological feasibility and completion of software development
is generally short with immaterial amounts of development costs incurred during
this period.
Costs
in respect of the development of software for the Companys internal use are
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.
F-16
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
2.
SIGNIFICANT
ACCOUNTING POLICIES (continued)
Income
taxes
The
Company provides for income taxes using the asset and liability method. This
approach recognizes the amount of taxes payable or refundable for the current
year, as well as deferred tax assets and liabilities for the future tax
consequence of events recognized in the financial statements and tax returns.
Deferred income taxes are adjusted to reflect the effects of changes in tax laws
or enacted tax rates.
On
December 20, 2011, there was a change in South African tax law to impose a
dividends withholding tax (a tax levied and withheld by a company on
distributions to its shareholders) to replace the Secondary Taxation on
Companies (a tax levied directly on a company on dividend distributions)
(STC). The change was effective on April 1, 2012. Therefore the Company
measured its South African income taxes and deferred income taxes for the year
ended June 30, 2012, using the enacted statutory tax rate in South Africa of
28%. For years prior to 2012 the tax rate in South Africa varied depending on
whether income was distributed. During the years ended June 30, 2011 and 2010,
the income tax rate was 28%, but upon distribution, STC of 10% was due based on
the amount of dividends declared net of dividends received during a dividend
cycle. The Company therefore measured its income taxes and deferred income taxes
for the years ended June 30, 2011 and 2010 using a combined rate of 34.55% .
Currently
the Company intends to permanently reinvest its undistributed South African
earnings as of June 30, 2012 in South Africa. Accordingly, the Company has not
recognized a deferred tax liability related to any future distributions of these
undistributed earnings. The Company will be required to record a taxation charge
if it decides not to permanently reinvest its undistributed earnings. This may
result in an increase in the Companys effective tax rate in future periods.
In
establishing the appropriate income tax valuation allowances, the Company
assesses the realizability of its net deferred tax assets, and based on all
available evidence, both positive and negative, determines whether it is more
likely than not that the net deferred tax assets or a portion thereof will be
realized.
Uncertain
tax positions are recognized in the financial statements for positions which are
considered more likely than not of being sustained based on the technical merits
of the position on audit by the tax authorities. The measurement of the tax
benefit recognized in the financial statements is based upon the largest amount
of tax benefit that, in managements judgement, is greater than 50% likely of
being realized based on a cumulative probability assessment of the possible
outcomes.
The
Companys policy is to include interest related to unrecognized tax benefits in
interest income, net and penalties in selling, general and administration in the
consolidated statements of operations.
Stock-based
compensation
Stock-based
compensation represents the cost related to stock-based awards granted. The
Company measures stock-based compensation cost at the grant date, based on the
estimated fair value of the award, and recognizes the cost as an expense on a
straight-line basis (net of estimated forfeitures) over the requisite service
period. In respect of awards with only service conditions that have a graded
vesting schedule, the Company recognizes compensation cost on a straight-line
basis over the requisite service period for the entire award. The forfeiture
rate is estimated using historical trends of the number of awards forfeited
prior to vesting. The expense is recorded in the statement of operations and
classified based on the recipients respective functions.
The
Company records deferred tax assets for awards that result in deductions on the
Companys income tax returns, based on the amount of compensation cost
recognized and the Companys statutory tax rate in the jurisdiction in which it
will receive a deduction. Differences between the deferred tax assets recognized
for financial reporting purposes and the actual tax deduction reported on the
Companys income tax return are recorded in additional paid-in capital (if the
tax deduction exceeds the deferred tax asset) or in the statement of operations
(if the deferred tax asset exceeds the tax deduction and no additional paid-in
capital exists from previous awards).
F-17
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
2.
SIGNIFICANT
ACCOUNTING POLICIES (continued)
Equity
instruments issued to third parties
Equity
instruments issued to third parties represents the cost related to equity
instruments granted. The Company measures equity instrument issued to third
parties cost at the grant date, based on the estimated fair value of the award,
and recognizes the cost as an expense on a straight-line basis (net of estimated
forfeitures) over the requisite service period. The forfeiture rate is estimated
based on the Companys expectation of the number of awards that will be
forfeited prior to vesting.
The
Company records deferred tax assets for equity instrument awards that result in
deductions on the Companys income tax returns, based on the amount of equity
instrument cost recognized and the Companys statutory tax rate in the
jurisdiction in which it will receive a deduction. Differences between the
deferred tax assets recognized for financial reporting purposes and the actual
tax deduction reported on the Companys income tax return are recorded in the
statement of operations.
Settlement
assets and settlement obligations
Settlement
assets comprise (1) cash received from the South African government that the
Company holds pending disbursement to beneficiaries of social welfare grants,
(2) cash received from health care plans which the Company disburses to health
care service providers once it adjudicates claims and (3) cash received from
customers on whose behalf the Company processes payroll payments that the
Company will disburse to customer employees, payroll-related payees and other
payees designated by the customer.
Settlement
obligations comprise (1) amounts that the Company is obligated to disburse to
beneficiaries of social welfare grants, (2) amounts which are due to health care
service providers after claims have been adjudicated and reconciled, provided
that the Company shall have previously received such funds from health care plan
customers and (3) amounts that the Company is obligated to pay to customer
employees, payroll-related payees and other payees designated by the customer.
The
balances at each reporting date may vary widely depending on the timing of the
receipts and payments of these assets and obligations
Recent
accounting pronouncements adopted
The
following summary of recent accounting pronouncements reflects only the new
authoritative accounting guidance issued that is relevant and applicable to the
Company.
On
July 1, 2011, the Company adopted the new Financial Accounting Standards Board
(FASB) guidance regarding Step 2 of the goodwill impairment test for reporting
units with zero or negative carrying amounts. The guidance modifies Step 1 of
the goodwill impairment test for reporting units with zero or negative carrying
amounts and requires the company to perform Step 2 if it is more likely than not
that a goodwill impairment may exist. The guidance is effective for fiscal years
and interim periods within those years, beginning after December 15, 2010. Early
adoption is not permitted. The adoption of this guidance did not have an impact
on the Companys consolidated financial statements because none of its reporting
units have zero or negative carrying amounts.
On
July 1, 2011, the Company adopted the new FASB guidance regarding fair value
measurement amendments to achieve common fair value measurement and disclosure
requirements in GAAP and International Financial Reporting Standards (IFRSs).
The guidance improves the comparability of fair value measurements presented
and disclosed in accordance with GAAP and IFRSs by changing the wording used
to describe many of the requirements in GAAP for measuring fair value and disclosure
of information. The amendments to this guidance provide explanations on how
to measure fair value but do not require any additional fair value measurements
and do not establish valuation standards or affect valuation practices outside
of financial reporting. The amendments clarify existing fair value measurements
and disclosure requirements to include application of the highest and best use
and valuation premises concepts; measuring fair value of an instrument classified
in a reporting entitys equity; and disclosures requirements regarding
quantitative information about unobservable inputs categorized within Level
3 of the fair value hierarchy. In addition, clarification is provided for measuring
the fair value of financial instruments that are managed in a portfolio and
the application of premiums and discounts in a fair value measurement. The guidance
is effective for fiscal years and interim periods within those years, beginning
after December 15, 2010. The adoption of this guidance did not have a significant
impact on the Companys consolidated financial statements.
F-18
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
2.
SIGNIFICANT
ACCOUNTING POLICIES (continued)
Recent
accounting pronouncements adopted (continued)
In
June 2011, the FASB issued guidance regarding the presentation of comprehensive
income. The guidance improves the comparability, consistency, and transparency
of financial reporting and increases the prominence of items reported in other
comprehensive income. The amendments to the guidance requires entities to
present the total of comprehensive income, the components of net income, and the
components of other comprehensive income either in a single continuous statement
of comprehensive income or in two separate but consecutive statements. Entities
are no longer permitted to present components of other comprehensive income as
part of the statement of changes in equity. Any adjustments for items that are
reclassified from other comprehensive income to net income are to be presented
on the face of the entities' financial statement regardless of the method of
presentation for comprehensive income. The amendments do not change items to be
reported in comprehensive income or when an item of other comprehensive income
must be reclassified to net income, nor do the amendments change the option to
present the components of other comprehensive income either net of related tax
effects or before related tax effects. The Company currently presents its
comprehensive income in two separate but consecutive statements and therefore
the adoption of this guidance did not impact its presentation of comprehensive
income.
Recent
accounting pronouncements not yet adopted as of June 30, 2012
In
September 2011, the FASB issued guidance regarding
Testing Goodwill for
Impairment
. The guidance allows an entity to first assess qualitative
factors to determine whether it is necessary to perform the two-step
quantitative goodwill impairment test. Under this guidance, an entity would not
be required to calculate the fair value of a reporting unit unless the entity
determines, based on a qualitative assessment, that it is more likely than not
that its fair value is less than its carrying amount. The guidance includes a
number of events and circumstances for an entity to consider in conducting the
qualitative assessment. The guidance is effective for annual and interim
goodwill impairment tests performed for fiscal years beginning after December
15, 2011. Early adoption is permitted. The Company is currently evaluating the
impact of this guidance on its goodwill impairment testing process.
3.
ACQUISITIONS
The
cash paid, net of cash received related to the Companys various acquisitions
that are discussed below during the year ended June 30, 2012, 2011 and 2010 are
summarized in the table below:
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
SmartLife
|
$
|
1,673
|
|
$
|
-
|
|
$
|
-
|
|
Prepaid business
|
|
4,481
|
|
|
-
|
|
|
-
|
|
KSNET
|
|
-
|
|
|
230,225
|
|
|
-
|
|
MediKredit
|
|
-
|
|
|
-
|
|
|
981
|
|
FIHRST
|
|
-
|
|
|
-
|
|
|
9,338
|
|
Total cash paid, net of cash received
|
$
|
6,154
|
|
$
|
230,225
|
|
$
|
10,319
|
|
2012
acquisitions
Acquisition
of prepaid airtime and electricity business in October 2011
On
October 3, 2011, the Company acquired the South African prepaid airtime and
electricity businesses of Eason & Son, Ltd (Eason), an Irish private
limited company, for approximately $4.5 million in cash. The principal assets
acquired comprise prepaid airtime and electricity businesses customer list,
accounts receivable books, inventory and a perpetual license to utilize Easons
internally developed transaction-based system software (EBOS).
The
business has been integrated with EasyPay and allocated to the Companys South
African transaction-based activities operating segment. The Company believes
that the acquisition will enable it to expand its prepaid customer base and over
time integrate all of its prepaid offerings onto the EBOS system.
F-19
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
3.
ACQUISITIONS (continued)
2012
acquisitions (continued)
SmartLife
On
July 1, 2011, the Company acquired SmartLife (formerly known as Saambou Life
Assurers Limited), a South African long-term insurance company, for ZAR 13
million (approximately $1.8 million) in cash. Prior to its acquisition by the
Company, SmartLife 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 the Companys
financial services operating segment.
The
acquisition of SmartLife provides the Company with an opportunity to offer
relevant insurance products directly to its existing customer and employee base
in South Africa. The Company intends 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.
In
November 2011, the Company sold 10% of SmartLife to a strategic partner for $0.1
million and recognized a loss on sale of $0.08 million.
The
final purchase price allocation of the prepaid business and SmartLife
acquisitions, translated at the foreign exchange rates applicable on the date of
acquisition, are provided in the table below:
|
|
|
Prepaid
|
|
|
|
|
|
|
|
|
|
|
business
|
|
|
SmartLife
|
|
|
Total
|
|
|
Accounts receivable, net
|
$
|
1,083
|
|
$
|
152
|
|
$
|
1,235
|
|
|
Inventory
|
|
305
|
|
|
-
|
|
|
305
|
|
|
Customer relationships
|
|
895
|
|
|
-
|
|
|
895
|
|
|
Software and unpatented technology
|
|
2,449
|
|
|
-
|
|
|
2,449
|
|
|
Deferred tax liability
|
|
(251
|
)
|
|
-
|
|
|
(251
|
)
|
|
Cash and cash equivalents
|
|
-
|
|
|
169
|
|
|
169
|
|
|
Financial investments (allocated to other
long-term assets)
|
|
-
|
|
|
3,059
|
|
|
3,059
|
|
|
Reinsurance assets (allocated to other long-term assets)
|
|
-
|
|
|
28,492
|
|
|
28,492
|
|
|
Other payables
|
|
-
|
|
|
(185
|
)
|
|
(185
|
)
|
|
Policy holder liabilities (allocated to other long-term
liabilities)
|
|
-
|
|
|
(29,845
|
)
|
|
(29,845
|
)
|
|
Total
purchase price
|
$
|
4,481
|
|
$
|
1,842
|
|
$
|
6,323
|
|
Pro
forma results of operations have not been presented because the effect of the
prepaid business and SmartLife acquisitions, individually and in the aggregate,
were not material to the Companys consolidated results of operations. During
the year ended June 30, 2012, the Company did not incur transaction-related
expenditures related to these acquisitions.
Since
the closing of the acquisition, the prepaid business and SmartLife acquisitions
have contributed revenue of $14.3 million and $0.7 million, respectively, and a
net loss, including intangible assets amortization, of $0.2 million and $0.3
million, respectively.
2011
acquisitions
98.73%
of KSNET Inc. (KSNET) in October 2010 and final settlement in December 2011
On
October 29, 2010, the Company acquired KSNET for KRW 270 billion (approximately
$240 million based on exchange rates on October 29, 2010), and a post-closing
working capital adjustment. The acquisition of KSNET expands the Companys
international footprint as well as diversifies the Companys revenue, earnings
and product portfolio. In December 2011, the Company received $4.9 million, in
cash, in final settlement of any and all claims and contractual adjustments
between the Company and the former shareholders of KSNET. This amount has been
applied against the goodwill recognized on the acquisition of KSNET and has
reduced the goodwill balance. As required by the Companys Korean debt
agreement, the Company has used the settlement proceeds to prepay a portion of
its outstanding debt thereunder. The prepayment was made on January 30, 2012.
F-20
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
3.
ACQUISITIONS (continued)
2011
acquisitions (continued)
98.73%
of KSNET Inc. (KSNET) in October 2010 and final settlement in December 2011
(continued)
Most
of KSNETs revenue is derived from the provision of payment processing services
to approximately 220,000 merchants and to card issuers in Korea through its VAN.
KSNET has a diverse product offering and the Company believes it is the only
total payments solutions provider offering card VAN, PG and banking VAN services
in Korea, which differentiates KSNET from other Korean payment solution
providers and allows it to cross-sell its products across its customer base.
The
following table sets forth the allocation of the purchase price:
|
|
|
June 30,
|
|
|
Fiscal 2012
|
|
|
June 30,
|
|
|
|
|
2012
|
|
|
settlement
|
|
|
2011
|
|
|
Cash and cash equivalents
|
$
|
10,507
|
|
$
|
-
|
|
$
|
10,507
|
|
|
Accounts receivable, net
|
|
28,748
|
|
|
-
|
|
|
28,748
|
|
|
Inventory
|
|
2,788
|
|
|
-
|
|
|
2,788
|
|
|
Current deferred tax assets
|
|
837
|
|
|
(74
|
)
|
|
911
|
|
|
Settlement assets
|
|
13,164
|
|
|
-
|
|
|
13,164
|
|
|
Long-term receivable
|
|
288
|
|
|
-
|
|
|
288
|
|
|
Property, plant and equipment
|
|
24,052
|
|
|
-
|
|
|
24,052
|
|
|
Goodwill (Note 9)
|
|
115,900
|
|
|
(4,239
|
)
|
|
120,139
|
|
|
Intangible assets (Note 9)
|
|
102,829
|
|
|
-
|
|
|
102,829
|
|
|
Other long-term assets
|
|
6,324
|
|
|
-
|
|
|
6,324
|
|
|
Trade payables
|
|
(9,643
|
)
|
|
-
|
|
|
(9,643
|
)
|
|
Other payables
|
|
(14,789
|
)
|
|
(696
|
)
|
|
(14,093
|
)
|
|
Income taxes payable
|
|
(3,363
|
)
|
|
-
|
|
|
(3,363
|
)
|
|
Settlement obligations
|
|
(13,164
|
)
|
|
-
|
|
|
(13,164
|
)
|
|
Long-term deferred income tax liabilities
(Note 19)
|
|
(24,459
|
)
|
|
-
|
|
|
(24,459
|
)
|
|
Other long-term liabilities
|
|
(1,199
|
)
|
|
-
|
|
|
(1,199
|
)
|
|
Total net assets attributable
to shareholders, including goodwill
|
|
238,820
|
|
|
(5,009
|
)
|
|
243,829
|
|
|
Less attributable to
non-controlling interest
|
|
(3,033
|
)
|
|
64
|
|
|
(3,097
|
)
|
|
Total
purchase price
|
$
|
235,787
|
|
$
|
(4,945
|
)
|
$
|
240,732
|
|
The
Company incurred transaction-related expenditures of $5.6 million during the
year ended June 30, 2011.
19.9%
of Net1 Universal Electronic Technologies (Austria) AG, formerly BGS Smartcard
Systems AG (Net1 UTA)
On
December 23, 2010, the Company acquired the remaining 19.9% of the issued share
capital of Net 1 Universal Technologies (Austria) AG (Net1 UTA)
for $0.6 million in cash. The Company now owns 100% of Net1 UTA. The transaction
was accounted for as an equity transaction with a non-controlling interest and
accordingly, no gain or loss was recognized in the Companys consolidated
statement of operations. The carrying amount of the non-controlling interest
was adjusted to reflect the change in ownership interest in Net1 UTA. The difference
between the fair value of the consideration paid and the amount by which the
non-controlling interest was adjusted, of $0.9 million, was recognized in equity
attributable to Net1.
F-21
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
3.
ACQUISITIONS (continued)
2010
Acquisitions
MediKredit
Integrated Healthcare Solutions (Proprietary) Limited (MediKredit)
On
January 1, 2010, the Company acquired 100% of MediKredit, a South African
private company, for ZAR 74 million (approximately $10 million) in cash.
MediKredit offers transaction processing, financial and clinical risk management
solutions to both health care plans and health care service providers, primarily
in South Africa.
FIHRST
Management Services (Proprietary) Limited business and related software
(collectively FIHRST)
On
March 31, 2010, the Company acquired FIHRST, a South African business, for ZAR
70 million (approximately $9 million). FIHRST offers a third-party and
associated payroll payments solution to companies in South Africa.
The
final purchase price allocation of the MediKredit and FIHRST acquisitions,
translated at the foreign exchange rates applicable on the date of acquisition,
are provided in the table below:
|
|
MediKredit
|
|
|
FIHRST
|
|
|
Total
|
|
Cash and cash equivalents
|
$
|
9,005
|
|
$
|
77
|
|
$
|
9,082
|
|
Accounts receivable, net
|
|
2,940
|
|
|
640
|
|
|
3,580
|
|
Property, plant and equipment
|
|
1,290
|
|
|
106
|
|
|
1,396
|
|
Intangible assets (see Note 9)
|
|
6,070
|
|
|
7,983
|
|
|
14,053
|
|
Trade and other payables
|
|
(9,931
|
)
|
|
(337
|
)
|
|
(10,268
|
)
|
Deferred tax assets
|
|
2,718
|
|
|
436
|
|
|
3,154
|
|
Deferred tax liabilities (see
Note 19)
|
|
(2,097
|
)
|
|
(623
|
)
|
|
(2,720
|
)
|
Goodwill (see Note 9)
|
|
-
|
|
|
1,187
|
|
|
1,187
|
|
Total purchase
price
|
$
|
9,995
|
|
$
|
9,469
|
|
$
|
19,464
|
|
Pro
forma results of operations have not been presented because the effect of the
MediKredit and FIHRST acquisitions, individually and in the aggregate, were not
material to the Companys consolidated results of operations. During the year
ended June 30, 2010, the Company incurred transaction-related expenditures of
$0.4 million related to these acquisitions. Such expenditures were recognized in
the Companys consolidated statements of operations.
4.
PRE-FUNDED
SOCIAL WELFARE GRANTS RECEIVABLE
Pre-funded
social welfare grants receivable represents amounts pre-funded by the Company to
certain merchants participating in the merchant acquiring system. The July 2012
payment service commenced on July 1, 2012, but the Company pre-funded certain
merchants participating in the merchant acquiring systems in the last two days
of June 2012.
F-22
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
5.
ACCOUNTS
RECEIVABLE, net
|
|
|
|
2012
|
|
|
|
|
2011
|
|
|
|
Accounts receivable,
trade, net
|
|
$
|
50,406
|
|
|
|
$
|
42,197
|
|
|
|
Accounts receivable,
trade, gross
|
|
|
51,194
|
|
|
|
|
42,925
|
|
|
|
Allowance
for doubtful accounts receivable, end of year
|
|
|
788
|
|
|
|
|
728
|
|
|
|
Allowance for doubtful accounts receivable, beginning of year
re-measured
at
year end rates
|
|
|
621
|
|
|
|
|
902
|
|
|
|
Allowance reversed to statement of operations, re-measured at year
end rates .
|
|
|
(114
|
)
|
|
|
|
(47
|
)
|
|
|
Allowance
acquired in acquisitions, re-measured at year end rates
|
|
|
131
|
|
|
|
|
190
|
|
|
|
Allowance charged to statement of operations, re-measured at year
end rates
|
|
|
50
|
|
|
|
|
364
|
|
|
|
Amount
utilized, re-measured at year end rates
|
|
|
100
|
|
|
|
|
(681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
establishment costs related to Grindrod opportunity
|
|
|
-
|
|
|
|
|
175
|
|
|
|
Other receivables
|
|
|
51,512
|
|
|
|
|
40,408
|
|
|
|
Total accounts receivable, net
|
|
$
|
101,918
|
|
|
|
$
|
82,780
|
|
|
Receivables
from customers renting POS equipment from the Company are included in accounts
receivable, trade, and are stated net of an allowance for certain amounts that
the Companys management has identified may be unrecoverable. Accounts
receivable, trade, also includes amounts due by customers from the sale of
hardware, software licenses and SIM cards and provision of transaction
processing services. The allowances for credit losses acquired in the KSNET
transactions are presented in the tables above, stated at exchange rates
prevailing at June 30, 2011.
Cash
payments to agents in Korea are amortized over the contract period with the
agent. As of June 30, 2012 and 2011, respectively, other receivables include
approximately $24.5 million and $16.8 million related to these prepayments.
6.
INVENTORY
The
Companys inventory comprised the following categories as of June 30, 2012 and
2011.
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Raw materials
|
$
|
30
|
|
$
|
24
|
|
Finished goods
|
|
6,162
|
|
|
6,701
|
|
|
$
|
6,192
|
|
$
|
6,725
|
|
7.
FAIR
VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS
Fair
value of financial instruments
Initial
recognition and measurement
Financial
instruments are recognized when the Company becomes a party to the transaction.
Initial measurements are at cost, which includes transaction costs subsequent to
initial recognition. These instruments are measured as set out below:
Risk
managemen
t
The
Company seeks to reduce its exposure to currencies other than the South African
rand through a policy of matching, to the extent possible, assets and
liabilities denominated in those currencies. In addition, the Company uses
financial instruments in order to economically hedge its exposure to exchange
rate and interest rate fluctuations arising from its operations. The Company is
also exposed to equity price and liquidity risks as well as credit risks.
F-23
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
7.
FAIR
VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS (continued)
Fair
value of financial instruments (continued)
Risk
management (continued)
Currency
exchange risk
The
Company is subject to currency exchange risk because it purchases inventories
that it is required to settle in other currencies, primarily the euro and US
dollar. The Company has used forward contracts in order to limit its exposure in
these transactions to fluctuations in exchange rates between the South African
rand, on the one hand, and the US dollar and the euro, on the other hand.
The
Companys outstanding foreign exchange contracts are as follows: As of June 30,
2012 None.
As
of June 30, 2011
None.
Translation
risk
Translation
risk relates to the risk that the Companys results of operations will vary
significantly as the US dollar is its reporting currency, but it earns most of
its revenues and incurs most of its expenses in ZAR. The US dollar to ZAR
exchange rate has fluctuated significantly over the past two years. As exchange
rates are outside the Companys control, there can be no assurance that future
fluctuations will not adversely affect the Companys results of operations and
financial condition.
Interest
rate risk
As
a result of its normal borrowing and leasing activities, the Companys operating
results are exposed to fluctuations in interest rates, which it manages
primarily through regular financing activities. The Company generally maintains
limited investment in cash equivalents and has occasionally invested in
marketable securities. The Company, through its recently acquired insurance
business, maintains investments in fixed maturity investments which are exposed
to fluctuations in interest rates.
Credit
risk
Credit
risk relates to the risk of loss that the Company would incur as a result of
non-performance by counterparties. The Company maintains credit risk policies
with regard to its counterparties to minimize overall credit risk. These
policies include an evaluation of a potential counterpartys financial
condition, credit rating, and other credit criteria and risk mitigation tools as
the Companys management deems appropriate.
With
respect to credit risk on financial instruments, the Company maintains a policy
of entering into such transactions only with South African and European
financial institutions that have a credit rating of BBB or better, as determined
by credit rating agencies such as Standard & Poors, Moodys and Fitch
Ratings.
F-24
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
7.
FAIR
VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS (continued)
Fair
value of financial instruments (continued)
Risk
management (continued)
UEPS-based
microlending credit risk
The
Company is exposed to credit risk in its UEPS-based microlending activities,
which provides unsecured short-term loans to qualifying customers, primarily its
social grant recipient base. The Company manages this risk by performing an
affordability test for each prospective customer and assigns a creditworthiness
score, which takes into account a variety of factors such as other debts and
total expenditures on normal household and lifestyle expenses.
Equity
Price and Liquidity Risk
Equity
price risk relates to the risk of loss that the Company would incur as a result
of the volatility in the exchange-traded price of equity securities that it
holds and the risk that it may not be able to liquidate these securities. The
market price of these securities may fluctuate for a variety of reasons,
consequently, the amount the Company may obtain in a subsequent sale of these
securities may significantly differ from the reported market value.
Liquidity
risk relates to the risk of loss that the Company would incur as a result of the
lack of liquidity on the exchange on which these securities are listed. The
Company may not be able to sell some or all of these securities at one time, or
over an extended period of time without influencing the exchange traded price,
or at all.
Financial
instruments
Fair
value is defined as the price that would be received upon sale of an asset or
paid upon transfer of a liability in an orderly transaction between market
participants at the measurement date and in the principal or most advantageous
market for that asset or liability. The fair value should be calculated based on
assumptions that market participants would use in pricing the asset or
liability, not on assumptions specific to the entity. In addition, the fair
value of liabilities should include consideration of non-performance risk
including the Companys own credit risk.
Fair
value measurements and inputs are categorized into a fair value hierarchy which
prioritizes the inputs into three levels based on the extent to which inputs
used in measuring fair value are observable in the market. Each fair value
measurement is reported in one of the three levels which is determined by the
lowest level input that is significant to the fair value measurement in its
entirety.
These
levels are:
-
Level 1 inputs are based upon unadjusted quoted prices for identical
instruments traded in active markets.
-
Level 2 inputs are based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments in markets
that are not active, and model-based valuation techniques for which all
significant assumptions are observable in the market or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities.
-
Level 3 inputs are generally unobservable and typically reflect
managements estimates of assumptions that market participants would use in
pricing the asset or liability. The fair values are therefore determined using
model-based techniques that include option pricing models, discounted cash
flow models, and similar techniques.
F-25
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
7.
FAIR
VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS (continued)
Financial
instruments (continued)
The
following section describes the valuation methodologies the Company uses to
measure financial assets and liabilities at fair value.
Investments
in common stock
In
general, and where applicable, the Company uses quoted prices in active markets
for identical assets or liabilities to determine fair value. This pricing
methodology would apply to Level 1 investments. If quoted prices in active
markets for identical assets or liabilities are not available to determine fair
value, then the Company uses quoted prices for similar assets and liabilities or
inputs other than the quoted prices that are observable either directly or
indirectly. These investments would be included in Level 2 investments. In
circumstances in which inputs are generally unobservable, values typically
reflect managements estimates of assumptions that market participants would use
in pricing the asset or liability. The fair values are therefore determined
using model-based techniques that include option pricing models, discounted cash
flow models, and similar techniques. Investments valued using such techniques
are included in Level 3 investments.
Asset
measured at fair value using significant unobservable inputs investment in
Finbond Group Limited (Finbond)
The
Company's Level 3 asset represents an investment of 156,788,712 shares of common
stock of Finbond, which are exchange-traded equity securities. Finbonds shares
are traded on the JSE Limited (JSE) and the Company has designated such shares
as available for sale investments. The Company has concluded that the market for
Finbond shares is not active and consequently has employed alternative valuation
techniques in order to determine the fair value of such stock. Currently, the
operations of Finbond relate primarily to the provision of microlending
products. In determining the fair value of Finbond, the Company has considered
amongst other things Finbonds historical financial information (including its
most recent public accounts), press releases issued by Finbond and its published
net asset value. The Company believes that the best indicator of fair value of
Finbond is its published net asset value and has used this value to determine
the fair value.
The
fair value of these securities as of June 30, 2012, represented approximately 1%
of the Companys total assets, including these securities. The Company expects
to hold these securities for an extended period of time and it is not concerned
with short-term equity price volatility with respect to these securities
provided that the underlying business, economic and management characteristics
of the company remain sound.
In
March 2012, Finbond completed a rights issue and the Company acquired an
additional 72,156,187 shares for approximately $1 million. The Companys
ownership interest in Finbond as of June 30, 2012, is approximately 27%. The
Company has no rights to participate in the financial, operating, or governance
decisions made by Finbond. The Company also has no participation on Finbonds
board of directors whether through contractual agreement or otherwise.
Consequently, the Company has concluded that it does not have significant
influence over Finbond and therefore equity accounting is not appropriate.
Derivative
transactions - Foreign exchange contracts
As
part of the Companys risk management strategy, the Company enters into
derivative transactions to mitigate exposures to foreign currencies using
foreign exchange contracts. These foreign exchange contracts are
over-the-counter customized derivative transactions. Substantially all of the
Companys derivative exposures are with counterparties that have long-term
credit ratings of BBB or better. The Company uses quoted prices in active
markets for similar assets and liabilities to determine fair value. The Company
has no derivatives that require fair value measurement under level 1 or 3 of the
fair value hierarchy.
F-26
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
7.
FAIR
VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS (continued)
Financial
instruments (continued)
The
following table presents the Companys assets and liabilities measured at fair
value on a recurring basis as of June 30, 2012 according to the fair value
hierarchy:
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to insurance business
(included in other
long-term
assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
2,628
|
|
$
|
-
|
|
$
|
-
|
|
$
|
2,628
|
|
|
Investment in Finbond
(available for sale assets
included in other
long-term assets)
|
|
-
|
|
|
-
|
|
|
8,679
|
|
|
8,679
|
|
|
Other
|
|
-
|
|
|
262
|
|
|
-
|
|
|
262
|
|
|
Total assets at
fair value
|
$
|
2,628
|
|
$
|
262
|
|
$
|
8,679
|
|
$
|
11,569
|
|
The
following table presents the Companys assets and liabilities measured at fair
value on a recurring basis as of June 30, 2011 according to the fair value
hierarchy:
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Finbond
(available for sale assets
included in other long-term
assets)
|
|
-
|
|
$
|
-
|
|
$
|
8,161
|
|
$
|
8,161
|
|
|
Other
|
|
-
|
|
|
275
|
|
|
-
|
|
|
275
|
|
|
Total assets at
fair value
|
|
-
|
|
$
|
275
|
|
$
|
8,161
|
|
$
|
8,436
|
|
Trade
and other receivables
Trade
and other receivables originated by the Company are stated at cost less
allowance for doubtful debts. The fair value of trade and other receivables
approximate their carrying value due to their short-term nature.
Trade
and other payables
The
fair values of trade and other payables approximates their carrying amounts, due
to their short-term nature.
Assets
and liabilities measured at fair value on a nonrecurring basis
The
Company measures its equity-accounted investments at fair value on a
nonrecurring basis. The Company has no liabilities that are measured at fair
value on a nonrecurring basis. These equity-accounted investments are recognized
at fair value when they are deemed to be other-than-temporarily impaired.
F-27
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
7.
FAIR
VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS (continued)
Financial
instruments (continued)
Assets
and liabilities measured at fair value on a nonrecurring basis (continued)
The
Company reviews the carrying values of its investments when events and
circumstances warrant and considers all available evidence in evaluating when
declines in fair value are other-than-temporary. The fair values of the
Companys investments are determined using the best information available, and
may include quoted market prices, market comparables, and discounted cash flow
projections. An impairment charge is recorded when the cost of the investment
exceeds its fair value and the excess is determined to be other-than-temporary.
The Company has not recorded any impairment charges during the reporting periods
presented herein.
Equity-accounted
investments
The
Company owns 50% of the ordinary shares in and loans extended to SmartSwitch
Namibia (Proprietary) Limited (SmartSwitch Namibia). The Company has
determined that this entity is a VIE, as the loan to the entity represents a
variable interest, but that the Company is not the primary beneficiary.
Therefore, the Company has not consolidated this entity and has accounted for
this investment using the equity method. The interest earned by the Company on
the loans to the entity has been eliminated.
The
Company also owns 50% of the ordinary shares of SmartSwitch Botswana
(Proprietary) Limited (SmartSwitch Botswana) and 20% of VTU De Colombia S.A.
(VTU Colombia). In April 2011, VTU Colombia admitted another new independent
shareholder which resulted in a dilution of the Companys investment from 37.50%
to approximately 20%. The funds received from these new shareholders by VTU
Colombia were used to fund its continuing operations the Company has no
obligation to provide any additional funding at this stage.
The
Company sold its 30% interest in the issued and outstanding ordinary share
capital of Vietnam Payment Technologies Joint Stock Company (VinaPay) in April
2011. The Company received gross proceeds of approximately $0.15 million and
recognized a profit on sale of this investment of approximately $0.02 million.
During
the year ended June 30, 2011, SmartSwitch Namibia commenced repaying its
outstanding loans, including outstanding interest. The repayments received have
been allocated to the equity-accounted investments presented in our consolidated
balance sheets, and reduced these balances. The cash inflow from principal
repayments have been allocated to cash flows from investing activities and the
cash inflow from the interest repayments have been included in cash flow from
operating activities in our consolidated statement of cash flows for the years
ended June 30, 2012 and 2011, respectively.
During
the year ended June 30, 2011, SmartSwitch Botswana capitalized all shareholder
loan funding provided and shareholders agreed to waive all interest on these
loans. The net effect of the reversal of the interest and related foreign
exchange effects are included in the Companys consolidated statements of
operations for the year ended June 30, 2011.
In
July 2010, the Company provided additional loan funding of $375,000 for a
specific growth initiative at VTU Colombia. As of June 30, 2012 and 2011,
respectively, the Companys share in VTU Colombias accumulated losses continued
to exceed its investment.
The
Company has sold hardware, software and/or licenses to SmartSwitch Namibia and
SmartSwitch Botswana and defers recognition of 50% of the net income after tax
related to these sales until SmartSwitch Namibia and SmartSwitch Botswana has
used the purchased asset or has sold it to a third-party. The deferral of the
net income after tax is shown in the Elimination column in the table below.
F-28
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
7.
FAIR
VALUE OF FINANCIAL INSTRUMENTS AND EQUITY-ACCOUNTED INVESTMENTS (continued)
Equity-accounted
investments (continued)
The
functional currency of the Companys equity-accounted investments is not the US
dollar and thus the investments are translated at the period end US
dollar/foreign currency exchange rate with an entry against accumulated other
comprehensive loss. The functional currency of SmartSwitch Namibia is the
Namibian dollar, the functional currency of SmartSwitch Botswana is the Botswana
pula, the functional currency of VTU Colombia is the Colombian peso and the
functional currency of VinaPay is the Vietnamese dong.
Summarized
below is the Companys interest in equity-accounted investments as of June 30,
2012 and 2011:
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Loans
|
|
|
(Loss)
|
|
|
Elimination
|
|
|
|
Total
|
|
|
Balance as of June 30, 2011
|
$
|
4,051
|
|
$
|
1,630
|
|
$
|
(3,828
|
)
|
$
|
7
|
|
|
$
|
1,860
|
|
|
Loan repaid
|
|
-
|
|
|
(130
|
)
|
|
-
|
|
|
-
|
|
|
|
(130
|
)
|
|
Interest repaid
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(139
|
)
|
|
|
(139
|
)
|
|
Earnings (loss) from equity- accounted
investments
|
|
-
|
|
|
-
|
|
|
170
|
|
|
50
|
|
|
|
220
|
|
|
SmartSwitch
Namibia
(1)
|
|
-
|
|
|
-
|
|
|
210
|
|
|
29
|
|
|
|
239
|
|
|
SmartSwitch
Botswana
(1)
|
|
-
|
|
|
-
|
|
|
(40
|
)
|
|
21
|
|
|
|
(19
|
)
|
|
Foreign currency
adjustment
(2)
|
|
(533
|
)
|
|
(81
|
)
|
|
247
|
|
|
64
|
|
|
|
(303
|
)
|
|
Balance as of June 30, 2012
|
$
|
3,518
|
|
$
|
1,419
|
|
$
|
(3,411
|
)
|
$
|
(18
|
)
|
|
$
|
1,508
|
|
(1)
includes the recognition of realized net
income.
(2)
the foreign currency adjustment represents the effects of the combined net
currency fluctuations between the functional currency of the equity-accounted
investments and the US dollar.
|
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Loans
|
|
|
(Loss)
|
|
|
Elimination
|
|
|
|
Total
|
|
|
Balance as of June 30, 2010
|
$
|
3,549
|
|
$
|
2,512
|
|
$
|
(3,905
|
)
|
$
|
442
|
|
|
$
|
2,598
|
|
|
Loans provided
|
|
-
|
|
|
375
|
|
|
-
|
|
|
-
|
|
|
|
375
|
|
|
Loan repaid
|
|
|
|
|
(475
|
)
|
|
|
|
|
-
|
|
|
|
(475
|
)
|
|
Interest repaid
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(292
|
)
|
|
|
(292
|
)
|
|
Loans converted to equity
|
|
1,015
|
|
|
(1,015
|
)
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
(Loss) Earnings from equity- accounted
investments
|
|
-
|
|
|
-
|
|
|
(268
|
)
|
|
(71
|
)
|
|
|
(339
|
)
|
|
SmartSwitch
Namibia
(1)
|
|
-
|
|
|
-
|
|
|
187
|
|
|
70
|
|
|
|
257
|
|
|
SmartSwitch
Botswana
(1)
|
|
-
|
|
|
-
|
|
|
347
|
|
|
(421
|
)
|
|
|
(74
|
)
|
|
VTU
Colombia
(1)
|
|
-
|
|
|
-
|
|
|
(729
|
)
|
|
280
|
|
|
|
(449
|
)
|
|
VinaPay
(1)
|
|
-
|
|
|
-
|
|
|
(73
|
)
|
|
-
|
|
|
|
(73
|
)
|
|
Sale of VinaPay
|
|
(579
|
)
|
|
-
|
|
|
443
|
|
|
-
|
|
|
|
(136
|
)
|
|
Proceeds sale of VinaPay
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
150
|
|
|
Profit on sale
of VinaPay
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
(14
|
)
|
|
Foreign currency adjustment
(2)
|
|
66
|
|
|
233
|
|
|
(98
|
)
|
|
(72
|
)
|
|
|
129
|
|
|
Balance as of June 30, 2011
|
$
|
4,051
|
|
$
|
1,630
|
|
$
|
(3,828
|
)
|
$
|
7
|
|
|
$
|
1,860
|
|
(1)
includes the recognition of realized net
income.
(2)
the foreign currency adjustment represents the effects of the combined net
currency fluctuations between the functional currency of the equity-accounted
investments and the US dollar.
F-29
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
8.
PROPERTY, PLANT AND EQUIPMENT, net
|
|
2012
|
|
|
2011
|
|
Cost:
|
|
|
|
|
|
|
Land
|
$
|
847
|
|
$
|
910
|
|
Building and structures
|
|
465
|
|
|
499
|
|
Computer
equipment
|
|
88,669
|
|
|
64,411
|
|
Furniture and office equipment
|
|
14,091
|
|
|
8,297
|
|
Motor vehicles
|
|
20,413
|
|
|
8,824
|
|
Plant and equipment
|
|
2,373
|
|
|
2,873
|
|
|
|
126,858
|
|
|
85,814
|
|
Accumulated depreciation:
|
|
|
|
|
|
|
Land
|
|
-
|
|
|
-
|
|
Building and structures
|
|
67
|
|
|
29
|
|
Computer
equipment
|
|
59,062
|
|
|
33,417
|
|
Furniture and office equipment
|
|
5,815
|
|
|
6,378
|
|
Motor vehicles
|
|
7,178
|
|
|
7,745
|
|
Plant and equipment
|
|
2,120
|
|
|
2,438
|
|
|
|
74,242
|
|
|
50,007
|
|
Carrying amount:
|
|
|
|
|
|
|
Land
|
|
847
|
|
|
910
|
|
Building and structures
|
|
398
|
|
|
470
|
|
Computer
equipment
|
|
29,607
|
|
|
30,994
|
|
Furniture and office equipment
|
|
8,276
|
|
|
1,919
|
|
Motor vehicles
|
|
13,235
|
|
|
1,079
|
|
Plant and equipment
|
|
253
|
|
|
435
|
|
|
$
|
52,616
|
|
$
|
35,807
|
|
9.
GOODWILL AND INTANGIBLE ASSETS, net Goodwill
Summarized
below is the movement in the carrying value of goodwill for the years ended June
30, 2012, 2011 and 2010:
|
|
Carrying
|
|
|
|
value
|
|
Balance as of July 1, 2009
|
$
|
116,197
|
|
Acquisitions
|
|
1,187
|
|
Impairment of goodwill
|
|
(37,378
|
)
|
Foreign currency adjustment
(1)
|
|
(3,660
|
)
|
Balance as of June 30, 2010
|
$
|
76,346
|
|
Acquisition of KSNET (Note 3)
(2)
|
|
120,139
|
|
Foreign currency adjustment
(1)
|
|
13,085
|
|
Balance as of June 30, 2011
|
|
209,570
|
|
Reduction in goodwill related
to net settlement (Note 3)
|
|
(4,239
|
)
|
Foreign currency adjustment
(1)
|
|
(22,594
|
)
|
Balance as of June 30, 2012
|
$
|
182,737
|
|
(1)
the foreign currency adjustment represents the effects of the fluctuations
between the South African rand and the Korean won, and the US dollar on the
carrying
value.
(2)
represents goodwill arising from the acquisition of KSNET. This goodwill has
been allocated to the international transaction-based activities operating
segment (see Note 3).
F-30
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
9.
GOODWILL AND INTANGIBLE ASSETS, net
(continued)
Goodwill
(continued)
Goodwill
associated with the acquisition of KSNET represents the excess of cost over the
fair value of acquired net assets. The KSNET goodwill is not deductible for tax
purposes. See Note 3 for the allocation of the purchase price to the fair value
of acquired net assets.
The
Company assesses the carrying value of goodwill for impairment annually, or more
frequently, whenever events occur and circumstances change indicating potential
impairment. The Company performs its annual impairment test as at June 30 of
each year. The results of our impairment tests during the year ended June 30,
2012 and 2011, indicated that the fair value of the Companys reporting units
exceeded their carrying values and therefore the Companys reporting units were
not at risk of potential impairment.
Goodwill
has been allocated to the Companys reportable segments as follows:
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
South African transaction-based activities
|
$
|
34,692
|
|
$
|
42,005
|
|
International transaction-based activities
|
|
111,798
|
|
|
124,895
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
Hardware, software and related technology
sales
|
|
36,247
|
|
|
42,670
|
|
Total
|
$
|
182,737
|
|
$
|
209,570
|
|
Intangible
assets, net
Impairment
loss
The
Company assesses the carrying value of intangible assets for impairment whenever
events occur or circumstances change indicating that the carrying amount of the
intangible asset may not be recoverable. During the year ended June 30, 2011,
one of Net1 UTAs largest customers advised the Company of its intention to
transition to an alternative payment platform. As a consequence of this
development, as well as deteriorating trading conditions and uncertainty
surrounding the timing and quantum of future net cash inflows, the Company
reviewed customer relationships acquired as part of the Net1 UTA acquisition for
impairment. As a result of this review, the Company recognized an impairment
loss of $41.8 million during its third quarter of fiscal 2011 related to the
entire carrying value of customer relationships acquired in the Net1 UTA
acquisition in August 2008. In addition, the Company reversed the deferred tax
liability of $10.4 million associated with this intangible asset.
The
impairment loss recognized was allocated to the Companys hardware, software and
related technology sales operating segment.
F-31
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
9.
GOODWILL AND INTANGIBLE ASSETS, net (continued)
Intangible
assets, net (continued)
Intangible
assets acquired
Summarized
below is the fair value of intangible assets acquired, translated at the
exchange rate applicable as of the relevant acquisition dates, and the
weighted-average amortization period:
|
|
|
|
|
Weighted-
|
|
|
|
Fair value
|
|
|
Average
|
|
|
|
as of
|
|
|
Amortization
|
|
|
|
acquisition
|
|
|
period (in
|
|
|
|
date
|
|
|
years)
|
|
Finite-lived intangible
asset:
|
|
|
|
|
|
|
KSNET customer relationships
|
$
|
74,663
|
|
|
10
|
|
FIHRST customer
relationships
|
|
1,804
|
|
|
10
|
|
Net1 UTA customer relationships
(1)
|
|
68,859
|
|
|
7
|
|
Prepaid business
customer relationships
|
|
895
|
|
|
0.75
|
|
KSNET software and unpatented
technology
|
|
24,380
|
|
|
5
|
|
FIHRST software
and unpatented technology
|
|
6,179
|
|
|
3
|
|
MediKredit software and
unpatented technology
|
|
5,249
|
|
|
3
|
|
Prepaid business
software and unpatented technology
|
|
2,449
|
|
|
3
|
|
KSNET trademarks
|
|
3,786
|
|
|
8
|
|
MediKredit
customer database
|
$
|
821
|
|
|
3
|
|
(1)
Impaired during the year ended June 30, 2011
The
Company recognized a deferred tax liability of approximately $0.2 million
related to the acquisition of the prepaid business customer relationships during
the year ended June 30, 2012. The Company recognized a deferred tax liability of
approximately $24.5 million related to the acquisition of the KSNET intangible
assets during the year ended June 30, 2011. The Company recognized a deferred
tax asset of approximately $0.4 million related to the acquisition of the FIHRST
software and a deferred tax liability of approximately $2.7 million related to
the MediKredit and the remaining FIHRST intangible assets during the year ended
June 30, 2010.
Summarized
below is the carrying value and accumulated amortization of intangible assets as
of June 30, 2012 and 2011:
|
|
|
As
of June 30, 2012
|
|
|
As
of June 30, 2011
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
carrying
|
|
|
Accumulated
|
|
|
carrying
|
|
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
value
|
|
|
amortization
|
|
|
value
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships(1)
|
$
|
91,692
|
|
$
|
(22,617
|
)
|
$
|
69,075
|
|
$
|
100,155
|
|
$
|
(15,283
|
)
|
$
|
84,872
|
|
|
Software and unpatented
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
technology(1)
|
|
36,082
|
|
|
(15,968
|
)
|
|
20,114
|
|
|
37,697
|
|
|
(8,999
|
)
|
|
28,698
|
|
|
FTS patent
|
|
4,623
|
|
|
(4,623
|
)
|
|
-
|
|
|
5,598
|
|
|
(5,598
|
)
|
|
-
|
|
|
Exclusive licenses
|
|
4,506
|
|
|
(4,506
|
)
|
|
-
|
|
|
4,506
|
|
|
(4,506
|
)
|
|
-
|
|
|
Trademarks
|
|
7,125
|
|
|
(2,507
|
)
|
|
4,618
|
|
|
8,130
|
|
|
(2,288
|
)
|
|
5,842
|
|
|
Customer database
|
|
734
|
|
|
(611
|
)
|
|
123
|
|
|
888
|
|
|
(444
|
)
|
|
444
|
|
|
Total finite-lived intangible assets .
|
$
|
144,762
|
|
$
|
(50,832
|
)
|
$
|
93,930
|
|
$
|
156,974
|
|
$
|
(37,118
|
)
|
$
|
119,856
|
|
(1)
June 30, 2012 balances include the customer relationships and software and
unpatented technology acquired as part of the prepaid business acquisition in
October 2011;
F-32
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
9.
GOODWILL AND INTANGIBLE ASSETS, net (continued) Intangible assets,
net (continued)
Amortization
expense charged for the years to June 30, 2012, 2011 and 2010 was $19.4 million,
$22.5 million, and $15.2 million, respectively.
Future
estimated annual amortization expense for the next five fiscal years, assuming
exchange rates prevailing on June 30, 2012, is presented in the table below.
Actual amortization expense in future periods could differ from this estimate as
a result of acquisitions, changes in useful lives, exchange rate fluctuations
and other relevant factors.
2013
|
$
|
16,961
|
|
2014
|
|
14,678
|
|
2015
|
|
14,614
|
|
2016
|
|
10,769
|
|
2017
|
|
8,506
|
|
Thereafter
|
$
|
28,402
|
|
10.
REINSURANCE ASSETS AND POLICY HOLDER LIABILITIES UNDER INSURANCE AND INVESTMENT
CONTRACTS
Reinsurance
assets and policy holder liabilities under insurance contracts
Summarized
below is the movement in reinsurance assets and policy holder liabilities under
insurance contracts during the year ended June 30, 2012:
|
|
Reinsurance
|
|
|
Insurance
|
|
|
|
assets (1)
|
|
|
contracts (2)
|
|
Balances acquired on July 1,
2011
|
$
|
28,492
|
|
$
|
(28,492
|
)
|
Claims and policyholders benefits under
insurance contracts
|
|
254
|
|
|
(360
|
)
|
Foreign currency adjustment
(3)
|
|
(5,151
|
)
|
|
5,151
|
|
Balance as of
June 30, 2012
|
$
|
23,595
|
|
$
|
(23,701
|
)
|
(1)
Included in other long-term
assets;
(2)
Included in other long-term
liabilities;
(3)
The foreign currency adjustment represents the effects of the fluctuations
between the ZAR against the US dollar.
The
Company has agreements with reinsurance companies in order to limit its losses
from large insurance contracts, however, if the reinsurer is unable to meet its
obligations, the Company retains the liability.
The
value of insurance contract liabilities is based on best estimates assumptions
of future experience plus prescribed margins, as required in the markets in
which these products are offered, namely South Africa. The process of deriving
the best estimates assumptions plus prescribed margins includes assumptions
related to future mortality and morbidity (an appropriate base table of standard
mortality is chosen depending on the type of contract and class of business),
withdrawals (based on recent withdrawal investigations and expected future
trends), investment returns (based on government treasury rates adjusted by an
applicable margin), expense inflation (based on a 10 year real return on
CPI-linked government bonds from the risk-free rate and adding an allowance for
salary inflation and book shrinkage of 1% per annum) and claim reporting delays
(based on average industry experience).
F-33
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
10.
REINSURANCE ASSETS AND POLICY HOLDER LIABILITIES UNDER INSURANCE AND INVESTMENT
CONTRACTS (CONTINUED)
Assets
and policy holder liabilities under investment contracts
Summarized
below is the movement in assets and policy holder liabilities under investment
contracts during the year ended June 30, 2012:
|
|
|
|
|
Investment
|
|
|
|
Assets (1)
|
|
|
contracts (2)
|
|
Balances acquired on July 1,
2011
|
$
|
1,353
|
|
$
|
(1,353
|
)
|
Foreign currency adjustment
(3)
|
|
(244
|
)
|
|
244
|
|
Balance as of
June 30, 2012
|
$
|
1,109
|
|
$
|
(1,109
|
)
|
(1)
Included in other long-term
assets;
(2)
Included in other long-term
liabilities;
(3)
The foreign currency adjustment represents the effects of the fluctuations
between the ZAR against the US dollar.
The
Company does not offer any investment products with guarantees related to
capital or returns.
11.
OTHER PAYABLES
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Participating merchants
settlement obligation
|
$
|
5,291
|
|
$
|
30,316
|
|
Payroll-related payables
|
|
2,199
|
|
|
1,842
|
|
Accruals
|
|
11,413
|
|
|
7,976
|
|
Value-added tax payable
|
|
2,405
|
|
|
3,186
|
|
Other
|
|
9,695
|
|
|
16,238
|
|
Provisions
|
|
11,154
|
|
|
11,707
|
|
|
$
|
42,157
|
|
$
|
71,265
|
|
12.
SHORT-TERM
FACILITIES
The
Company has a ZAR 250 million ($30.2 million, translated at exchange rates
applicable as of June 30, 2012) short-term South African credit facility. As of
June 30, 2012, the overdraft rate on this facility was 7.85% . The Company has
ceded its investment in Cash Paymaster Services (Proprietary) Limited, a wholly
owned South African subsidiary, as security for the facility. As of June 30,
2012 and June 30, 2011, the Company had utilized none of its South African
short-term facility.
13.
LONG-TERM
BORROWINGS
The
Company financed a portion of the KSNET acquisition price and related
transaction expenses with the proceeds of a KRW 130.5 billion (approximately
$115.9 million based on October 29, 2010 exchange rates) five-year senior
secured loan facility provided by a consortium of banks under a facilities
agreement (the Facilities Agreement). The current carrying value as of June
30, 2012, is $93.8 million. The Facilities Agreement provides for three separate
facilities: a Facility A loan to the Companys wholly owned subsidiary, Net1
Applied Technologies Korea (Net1 Korea), of up to KRW 130.5 billion (divided
into Facility A1 (KRW 65.5 billion) and Facility A2 (KRW 65.0 billion)) and a
Facility B loan to KSNET of up to KRW 65.0 billion. The Facility B loan, if
drawn, must be used to repay the Facility A2 loan and may be borrowed only if
Net1 Korea and KSNET complete a merger transaction with each other. Interest on
the loans is payable quarterly and is based on the Korean CD rate in effect from
time to time plus a margin of 4.10% for Facility A loans and 3.90% for the
Facility B loan. The CD rate was 3.54% on June 30, 2012. Total interest expense
for the year ended June 30, 2012 and 2011, respectively, was $8.8 million and
$7.5 million, and includes amortization of facility fees of $0.4 million and
$2.0 million. Interest of approximately $1.2 million, translated at exchange
rates applicable as of June 30, 2012, has been accrued as of June 30, 2012.
F-34
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
13.
LONG-TERM
BORROWINGS (continued)
The
Facility A1 loan matures on the fifth anniversary of the initial drawdown with
no required principal prepayments. Principal on the Facility A2 loan and
Facility B loan is repayable in scheduled installments, beginning twelve months
after initial drawdown and thereafter, semi-annually with final maturity
scheduled for 54 months after initial drawdown. During the year ended June 30,
2012, the Company made the first and second principal payments totaling
approximately $14.3 million and an unscheduled $4.8 million principal payment
with the proceeds of the net settlement received from the former shareholders of
KSNET. The third and fourth scheduled installments of approximately $14.0
million, translated at exchange rates applicable as of June 30, 2012, are due in
equal installments of $7.0 million each, on October 29, 2012 and April 29, 2013,
respectively, and have been classified as current in the Companys consolidated
balance sheet. As of June 30, 2012, the carrying amount of the long-term
borrowings approximated its fair value
The
loans are secured by substantially all of KSNETs assets, a pledge by Net1 Korea
of its entire equity interest in KSNET and a pledge by the immediate parent of
Net1 Korea (also one of the Companys subsidiaries) of its entire equity
interest in Net1 Korea. The Facilities Agreement contains customary covenants
that require Net1 Korea and its consolidated subsidiaries to maintain certain
specified financial ratios (including a leverage ratio and a debt service
coverage ratio) and restrict their ability to make certain distributions with
respect to their capital stock, prepay other debt, encumber their assets, incur
additional indebtedness, make capital expenditures above specified levels,
engage in certain business combinations and engage in other corporate
activities. The loans under the Facilities Agreement are without recourse to,
and the covenants and other agreements contained therein do not apply to, the
Company or any of the Companys subsidiaries (other than Net1 Korea and its
subsidiaries, including KSNET).
14.
COMMON
STOCK
Common
stock
Holders
of shares of Net1s common stock are entitled to receive dividends and other
distributions when declared by Net1s board of directors out of funds available.
Payment of dividends and distributions is subject to certain restrictions under
the Florida Business Corporation Act, including the requirement that after
making any distribution Net1 must be able to meet its debts as they become due
in the usual course of its business.
Upon
voluntary or involuntary liquidation, dissolution or winding up of Net1, holders
of common stock share ratably in the assets remaining after payments to
creditors and provision for the preference of any preferred stock according to
its terms. There are no pre-emptive or other subscription rights, conversion
rights or redemption or scheduled installment payment provisions relating to
shares of common stock. All of the outstanding shares of common stock are fully
paid and non-assessable.
Each
holder of common stock is entitled to one vote per share for the election of
directors and for all other matters to be voted on by shareholders. Holders of
common stock may not cumulate their votes in the election of directors, and are
entitled to share equally and ratably in the dividends that may be declared by
the board of directors, but only after payment of dividends required to be paid
on outstanding shares of preferred stock according to its terms. The shares of
Net1 common stock are not subject to redemption.
Common
stock repurchases (continued)
In
February 2010 and in May 2010, the Companys Board of Directors authorized the
repurchase of up to $50 million of the Company's common stock, for a total of
$100 million. The authorization does not have an expiration date.
The
share repurchase authorization will be used at managements discretion,
subject to limitations imposed by SEC Rule 10b-18 and other legal requirements
and subject to price and other internal limitations established by the Board.
Repurchases will be funded from the Companys available cash. Share repurchases
may be made through open market purchases, privately negotiated transactions,
or both. There can be no assurance that the Company will purchase any shares
or any particular number of shares.
F-35
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
14.
COMMON STOCK (continued)
Common
stock repurchases (continued)
The
authorization may be suspended, terminated or modified at any time for any
reason, including market conditions, the cost of repurchasing shares, liquidity
and other factors that management deems appropriate. During the year ended June
30, 2012 and 2011, respectively, the Company repurchased 180,656 and 125,392
shares for approximately $1.1 million and $1.0 million. The Company did not
repurchase any of its shares during the year ended June 30, 2010 under this
authorization.
On
July 28, 2009, the Company repurchased an aggregate of 9,221,526 shares of its
common stock from two shareholders, who originally acquired their shares in
connection with the Aplitec transaction. The purchase price was $13.50 (ZAR
105.98) per share and was paid from the Companys cash reserves in ZAR for an
aggregate purchase price of $124.5 million (ZAR 977.3 million).
15.
REVENUE
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of goods comprising mainly hardware
and software sales
|
$
|
19,152
|
|
$
|
30,130
|
|
$
|
36,228
|
|
|
Loan-based interest and fees received
|
|
8,433
|
|
|
7,276
|
|
|
4,214
|
|
|
Services rendered comprising mainly fees
and commissions
|
|
362,679
|
|
|
306,014
|
|
|
239,922
|
|
|
|
$
|
390,264
|
|
$
|
343,420
|
|
$
|
280,364
|
|
During
the years ended June 30, 2012, 2011 and 2010, the Company did not recognize any
revenue using the percentage of completion method.
16.
EQUITY
INSTRUMENT ISSUED PURSUANT TO BBBEE TRANSACTION
On
April 19, 2012, the Company issued an option to purchase 8,955,000 shares of its
common stock to a BEE consortium pursuant to a BBBEE transaction that it entered
into on January 25, 2012. The option expires one year after issue and is
currently exercisable.
The
fair value of the option was determined as approximately $14.2 million and has
been expensed in full. The fair value was determined on the date that all
conditions to the BEE transaction had been fulfilled using the Cox Ross
Rubinstein binomial model. The Company used an expected volatility of 47%, an
expected life of one year, a risk free rate of 0.90% and no future dividends in
its calculation of the fair value. The estimated expected volatility is
calculated based on the Companys 250 day volatility.
17.
STOCK-BASED
COMPENSATION
Amended
and Restated Stock Incentive Plan
The
Companys Amended and Restated Stock Incentive Plan (the Plan) has been
approved by its shareholders. No evergreen provisions are included in the Plan.
This means that the maximum number of shares issuable under the Plan is fixed
and cannot be increased without shareholder approval, the plan expires by its
terms upon a specified date, and no new stock options are awarded automatically
upon exercise of an outstanding stock option. Shareholder approval is required
for the repricing of awards or the implementation of any award exchange program.
The Plan permits Net1 to grant to its employees, directors and consultants
incentive stock options, nonqualified stock options, stock appreciation rights,
restricted stock, performance-based awards and other awards based on its common
stock. The Remuneration Committee of the Companys Board of Directors
(Remuneration Committee) administers the Plan.
F-36
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
17.
STOCK-BASED
COMPENSATION
Amended
and Restated Stock Incentive Plan (continued)
The
total number of shares of common stock issuable under the Plan is 8,552,580. The
maximum number of shares for which awards, other than performance-based awards,
may be granted in any combination during a calendar year to any participant is
569,120. The maximum limits on performance-based awards that any participant may
be granted during a calendar year are 569,120 shares subject to stock option
awards and $20 million with respect to awards other than stock options. Shares
that are subject to awards which terminate or lapse without the payment of
consideration may be granted again under the Plan. Shares delivered to the
Company as part or full payment for the exercise of an option or to satisfy
withholding obligations upon the exercise of an option may be granted again
under the Plan in the Remuneration Committees discretion. No awards may be
granted under the Plan after June 7, 2019, but awards granted on or before such
date may extend to later dates.
Options
General
Terms of Awards
Option
awards are generally granted with an exercise price equal to the market price of
the Company's stock at the date of grant, with vesting conditioned upon the
recipients continuous service through the applicable vesting date and expire 10
years after the date of grant. The options generally become exercisable in
accordance with a vesting schedule ratably over a period of five years from the
date of grant. The Company issues new shares to satisfy stock option award
exercises but may also use treasury shares.
Valuation
Assumptions
The
fair value of each option is estimated on the date of grant using the Cox Ross
Rubinstein binomial model that uses the assumptions noted in the following
table. The estimated expected volatility is calculated based on the Companys
250 day volatility. The estimated expected life of the option was determined
based historical behavior of employees who were granted options with similar
terms. The Company has estimated no forfeitures for options awarded in 2012 and
2011. No stock options were granted during the year ended June 30, 2010. The
table below presents the range of assumptions used to value options granted
during the years ended June 30, 2012 and 2011:
|
2012
|
|
2011
|
Expected volatility
|
37% - 39%
|
|
35%
|
Expected dividends
|
0%
|
|
0%
|
Expected life (in years)
|
3
|
|
3
|
Risk-free rate
|
1.9% - 0.9%
|
|
2.0%
|
Restricted
Stock
General
Terms of Awards
Shares
of restricted stock are considered to be non-vested equity shares. Restricted
stock generally vests ratably over a three year period, with vesting conditioned
upon the recipients continuous service through the applicable vesting date and
under certain circumstances, the achievement of certain performance targets, as
described below.
Restricted
stock awarded to non-employee directors of the Company vests ratably over a
three year period. In addition, for awards in 2009, until 11 months after the
restricted stock become vested and nonforfeitable, the shares may not be sold,
assigned, transferred, pledged, hypothecated, exchanged, or disposed of in any
way (whether by operation of law or otherwise). If a recipient ceases to be a
member of the Board of Directors for any reason, all shares of his restricted
stock that are not then vested and nonforfeitable will be immediately forfeited
and transferred to the Company for no consideration.
The
Company issues new shares to satisfy restricted stock awards.
F-37
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
17.
STOCK-BASED
COMPENSATION (continued)
Amended
and Restated Stock Incentive Plan (continued)
Restricted
Stock (continued)
Valuation
Assumptions
The
fair value of restricted stock is based on the closing price of the Companys
stock quoted on The Nasdaq Global Select Market on the date of grant.
Performance
Conditions - Restricted Stock Granted in August 2007
In
August 2007, the Remuneration Committee approved an award of 591,500 shares of
restricted stock to executive officers and other employees of the Company. The
award provided for vesting of one-third of the award shares on each of September
1, 2009, 2010 and 2011, conditioned upon each recipients continuous service
through the applicable vesting date and the Company achieving the financial
performance target for that vesting date. Specifically, the financial
performance targets were a 20% increase, compounded annually, in fundamental
diluted earnings per share (expressed in South African rand) (2007 Fundamental
EPS) above Fundamental EPS for the fiscal year ended June 30, 2007. For award
shares vesting prior to September 1, 2009, the annual required increase in the
case of Dr. Belamant and Mr. Kotze was 25% rather than 20%. On November 5, 2009,
the Companys board of directors, on the recommendation of the Remuneration
Committee, determined that the annual required target for Dr. Belamant and Mr.
Kotze be 20%, effective immediately, to be consistent with the terms of the
restricted stock awards granted to other employees. There were no other
amendments to the terms of the restricted stock awards. For the purpose of the
award, 2007 Fundamental EPS was calculated by adjusting GAAP diluted earnings
per share (as reflected in the Companys audited consolidated financial
statements) to exclude the effects related to the amortization of intangible
assets, stock-based compensation charges, one-time, large, unusual expenses as
determined at the discretion of the Remuneration Committee, and assuming a
constant tax rate of 30%. If Fundamental EPS for the specified fiscal year did
not equal or exceed the 2007 Fundamental EPS target for such year, no award
shares would become vested or nonforfeitable on the corresponding vesting date
but would be available to become vested and nonforfeitable as of a subsequent
vesting date if the 2007 Fundamental EPS target for a subsequent fiscal year
were met; provided that the recipients service continued through such
subsequent vesting date. Any outstanding award shares that had not become vested
and nonforfeitable as of September 1, 2011, would be forfeited by the recipient
on September 1, 2011, and transferred to the Company for no consideration.
The
first two tranches of this award vested on September 1, 2009 and 2010, for
employees that continued to provide the requisite service as the financial
performance targets were met. The third tranche did not vest because the
financial performance target was not met. Refer also Stock option and
restricted stock activityrestricted stock below
.
Performance
Conditions - Restricted Stock Granted in October and November 2010
In
October 2010, the Remuneration Committee approved an award of 60,000 shares of
restricted stock to an employee of the Company. Under the terms of the award,
the shares would vest on June 30, 2014, conditioned upon the employees
continuous service through June 30, 2014, and on the employee receiving an
incremental incentive bonus, as defined in the employees employment agreement
for each of the periods ended June 30, 2011, 2012, 2013 and 2014. Any
outstanding award shares that had not become vested and nonforfeitable as of
June 30, 2014, would be forfeited by the recipient on June 30, 2014, and
transferred to the Company for no consideration. The October 2010 restricted
stock award did not vest because the financial performance target was not met
for June 30, 2011. Refer also Stock option and restricted stock
activityrestricted stock below
.
F-38
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
17.
STOCK-BASED
COMPENSATION (continued)
Amended
and Restated Stock Incentive Plan (continued)
Restricted
Stock (continued)
Performance
Conditions - Restricted Stock Granted in October and November 2010
(continued)
In
November 2010, the Remuneration Committee approved an award of 83,000 shares of
restricted stock to two of the Companys executive officers. The award provides
for vesting of one-third of the award shares on each of November 10, 2011, 2012
and 2013, conditioned upon each recipients continuous service through the
applicable vesting date and the Company achieving the financial performance
target for that vesting date. Specifically, the financial performance targets is
Fundamental EPS, as defined below, of $1.44, $1.60 and $1.90 for the years ended
June 30, 2011, 2012 and 2013, respectively. For the purpose of this award,
Fundamental EPS is calculated as Companys diluted earnings per share as
reflected in the Companys consolidated financial statements, measured in U.S.
dollars and determined in accordance with GAAP, adjusted to exclude the effects
related to the amortization of intangible assets and acquisition-related costs,
stock-based compensation charges, foreign exchange gains and losses arising from
foreign currency hedging transactions, and other items that the Committee may
determine in its discretion to be appropriate (for example, accounting changes
and one-time or unusual items), and assumes a constant tax rate equal to the
Companys effective tax rate for the year ended June 30, 2010. If Fundamental
EPS for the specified fiscal year does not equal or exceed the Fundamental EPS
target for such year, no award shares will become vested or nonforfeitable on
the corresponding vesting date but are available to become vested and
nonforfeitable as of a subsequent vesting date if the Fundamental EPS target for
a subsequent fiscal year is met; provided that the recipients service continues
through such subsequent vesting date. Any outstanding award shares that have not
become vested and nonforfeitable as of November 10, 2013, will be forfeited by
the recipient on November 10, 2013, and transferred to the Company for no
consideration. One-third of the award shares vested on November 10, 2011.
Stock
Appreciation Rights
The
Remuneration Committee also may grant stock appreciation rights, either singly
or in tandem with underlying stock options. Stock appreciation rights entitle
the holder upon exercise to receive an amount in any combination of cash or
shares of common stock (as determined by the Remuneration Committee) equal in
value to the excess of the fair market value of the shares covered by the right
over the grant price. No stock appreciation rights have been granted.
Stock
option and restricted stock activity
Options
The
following table summarizes stock option activity for the years ended June 30,
2012, 2011 and 2010:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
Grant
|
|
|
|
|
|
|
|
average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
Date Fair
|
|
|
|
|
Number of
|
|
|
exercise
|
|
|
Term
|
|
|
Value
|
|
|
Value
|
|
|
|
|
shares
|
|
|
price
|
|
|
(in years)
|
|
|
($000)
|
|
|
($000)
|
|
|
Outstanding July 1, 2009
|
|
1,896,994
|
|
$
|
19.03
|
|
|
8.30
|
|
$
|
1,576
|
|
|
-
|
|
|
Exercised
|
|
(83,338
|
)
|
|
3.00
|
|
|
-
|
|
|
1,667
|
|
|
-
|
|
|
Outstanding June 30, 2010
|
|
1,813,656
|
|
|
19.76
|
|
|
7.41
|
|
|
585
|
|
|
-
|
|
|
Granted under Plan: November
2010
|
|
307,000
|
|
|
10.59
|
|
|
10.00
|
|
|
-
|
|
$
|
2.61
|
|
|
Outstanding June 30, 2011
|
|
2,120,656
|
|
|
18.44
|
|
|
6.82
|
|
|
243
|
|
|
|
|
|
Granted under Plan: August 2011
|
|
165,000
|
|
|
6.59
|
|
|
10.0
|
|
|
297
|
|
$
|
1.80
|
|
|
Granted under
Plan: October 2011
|
|
202,000
|
|
|
7.98
|
|
|
10.0
|
|
|
442
|
|
$
|
2.19
|
|
|
Forfeitures
|
|
(240,073
|
)
|
|
21.68
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Outstanding June 30, 2012
|
|
2,247,583
|
|
$
|
16.28
|
|
|
6.43
|
|
$
|
602
|
|
|
-
|
|
F-39
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
17.
STOCK-BASED
COMPENSATION (continued)
Stock
option and restricted stock activity (continued)
Options
(continued)
These
options have an exercise price range of $6.59 to $24.46.
|
Exercisable
|
|
1,373,916
|
|
$
|
19.43
|
|
|
5.40
|
|
$
|
229
|
|
During
each of the years ended June 30, 2012, 2011 and 2010, approximately 300,000,
380,000 and 374,000, stock options became exercisable, respectively. During the
year ended June 30, 2012, employees forfeited 240,073 stock options. There were
no forfeitures during the years ended June 30, 2011 and 2010, respectively.
During the year ended June 30, 2010, the Company received approximately $0.7
million from stock options exercised. No stock options were exercised during the
years ended June 30, 2012 and 2011, respectively.
Restricted
stock
The
following table summarizes restricted stock activity for the years ended June
30, 2012, 2011 and 2010:
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Shares of
|
|
|
Grant Date
|
|
|
|
Restricted
|
|
|
Fair Value
|
|
|
|
Stock
|
|
|
($000)
|
|
Non-vested July 1, 2009
|
|
597,162
|
|
|
-
|
|
Granted August 2009
|
|
10,098
|
|
$
|
185
|
|
Vested
|
|
(199,432
|
)
|
|
3,800
|
|
Non-vested June 30, 2010
|
|
407,828
|
|
|
-
|
|
Granted August 2010
|
|
13,956
|
|
|
185
|
|
Granted October 2010
|
|
60,000
|
|
|
740
|
|
Granted November 2010
|
|
83,000
|
|
|
879
|
|
Vested
|
|
(203,956
|
)
|
|
2,267
|
|
Awards not vesting
|
|
(257,156
|
)
|
|
-
|
|
Non-vested June 30, 2011
|
|
103,672
|
|
|
|
|
Granted August 2011
|
|
30,155
|
|
|
199
|
|
Granted February 2012
|
|
550,000
|
|
|
6,111
|
|
Granted May 2012
|
|
2,574
|
|
|
23
|
|
Vested - August 2011
|
|
(6,141
|
)
|
|
40
|
|
Vested - November 2011
|
|
(27,667
|
)
|
|
209
|
|
Forfeitures
|
|
(5,976
|
)
|
$
|
50
|
|
Non-vested June 30, 2012
|
|
646,617
|
|
|
|
|
The
fair value of restricted stock vested during the year ended June 30, 2012, 2011
and 2010, was $0.2 million, $2.3 million and $3.8 million, respectively. One of
the Companys non-employee directors resigned effective June 29, 2012, and he
forfeited 5,976 restricted shares that had not vested.
The
third tranche of 197,156 shares of restricted stock granted in August 2007 to
executive officers and other employees of the Company and 60,000 shares granted
to an employee of the Company in October 2010 did not vest because the agreed
performance target was not achieved. The Company has recorded a reversal of the
compensation charge related to August 2007 and October 2010 restricted stock of
$3.4 million and $0.09 million, respectively, during the year ended June 30,
2011. These 257,156 shares of restricted stock will be returned to the Company
and, in accordance with the Plan, are available for future issuances by the
Remuneration Committee.
F-40
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
17.
STOCK-BASED
COMPENSATION (continued)
Stock-based
compensation charge and unrecognized compensation cost
The
Company has recorded a net stock compensation charge of $2.8 million, $1.7
million and $5.7 million for the year ended June 30, 2012, 2011 and 2010,
respectively, which comprised:
|
|
|
|
|
|
Allocated to
|
|
|
|
|
|
|
|
|
|
|
cost of goods
|
|
|
|
|
|
|
|
|
|
|
sold, IT
|
|
|
Allocated to
|
|
|
|
|
Total
|
|
|
processing,
|
|
|
selling,
|
|
|
|
|
charge
|
|
|
servicing
|
|
|
general and
|
|
|
|
|
(reversal)
|
|
|
and support
|
|
|
administration
|
|
|
Year ended June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
2,909
|
|
$
|
-
|
|
$
|
2,909
|
|
|
Reversal of stock compensation
charge related to options forfeited
|
|
(134
|
)
|
|
-
|
|
|
(134
|
)
|
|
Total year ended June 30, 2012
|
$
|
2,775
|
|
$
|
-
|
|
$
|
2,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2011
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
charge
|
$
|
5,212
|
|
$
|
193
|
|
$
|
5,019
|
|
|
Reversal of stock compensation charge related
to August 2007
and October 2010 restricted stock that did
not vest
|
|
(3,492
|
)
|
|
-
|
|
|
(3,492
|
)
|
|
Total year
ended June 30, 2011
|
$
|
1,720
|
|
$
|
193
|
|
$
|
1,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$
|
5,670
|
|
$
|
202
|
|
$
|
5,468
|
|
|
Total year
ended June 30, 2010
|
$
|
5,670
|
|
$
|
202
|
|
$
|
5,468
|
|
The
stock compensation charge and reversals have been allocated to cost of goods
sold, IT processing, servicing and support and selling, general and
administration based on the allocation of the cash compensation paid to the
employees.
As
of June 30, 2012, the total unrecognized compensation cost related to stock
options was approximately $0.8 million, which the Company expects to recognize
over approximately three years. As of June 30, 2012, the total unrecognized
compensation cost related to restricted stock awards was approximately $5.9
million, which the Company expects to recognize over approximately three years.
Tax
consequences
There
are no tax consequences related to options and restricted stock granted to
employees of Company subsidiaries incorporated in South Africa. The Company has
recorded a deferred tax asset of approximately $1.1 million and $0.8 million,
respectively, for the years ended June 30, 2012 and 2011, related to the
stock-based compensation charge recognized related to employees of Net1 as it is
able to deduct the difference between the market value on date of exercise by
the option recipient and the exercise price from income subject to taxation in
the United States.
F-41
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
18.
PROFIT ON LIQUIDATION OF SMARTSWITCH NIGERIA
The
Company has ceased operations in the Federation of Nigeria due to an inability
to implement its technology on a profitable basis. During the year ended June
30, 2012, the Company, together with the other shareholders, agreed to liquidate
SmartSwitch Nigeria, the company through which operating activities in Nigeria
were performed. SmartSwitch Nigeria was capitalized primarily with shareholder
loans. The Company eliminated its portion of the loan funding on consolidation,
and included the loans due to the non-controlling interest in long-term
borrowings on its June 30, 2011, consolidated balance sheet. The shareholders of
SmartSwitch Nigeria have agreed to waive all outstanding capital and interest
repayments related to the loan funding initially provided as part of the
liquidation processes. The non-cash profit on liquidation of SmartSwitch Nigeria
of $4.0 million includes the write back of all assets and liabilities, including
non-controlling interest loans, of SmartSwitch Nigeria, except for expected
liabilities related to the liquidation of SmartSwitch Nigeria. The profit has
been allocated to corporate/eliminations.
19.
INCOME
TAXES
Income
tax provision
The
table below presents the components of income before income taxes as of June 30,
2012, 2011 and 2010:
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South Africa
|
$
|
67,054
|
|
$
|
108,349
|
|
$
|
136,197
|
|
|
United States
|
|
(6,340
|
)
|
|
(15,053
|
)
|
|
(6,909
|
)
|
|
Other
|
|
(333
|
)
|
|
(56,886
|
)
|
|
(50,408
|
)
|
|
Income before income taxes
|
$
|
60,381
|
|
$
|
36,410
|
|
$
|
78,880
|
|
Presented
below is the provision for income taxes by location of the taxing jurisdiction
for each of the years ended June 30:
|
|
|
2012
|
|
|
|
2011
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax
|
$
|
49,092
|
|
|
$
|
117,141
|
|
|
$
|
109,669
|
|
|
South Africa
|
|
26,787
|
|
|
|
38,882
|
|
|
|
47,225
|
|
|
United States
|
|
20,746
|
|
|
|
77,085
|
|
|
|
62,443
|
|
|
Other
|
|
1,559
|
|
|
|
1,174
|
|
|
|
1
|
|
|
Deferred taxation (benefit) charge
|
|
(4,598
|
)
|
|
|
(4,862
|
)
|
|
|
(2,770
|
)
|
|
South Africa
|
|
(2,941
|
)
|
|
|
(776
|
)
|
|
|
(441
|
)
|
|
United States
|
|
31
|
|
|
|
2,306
|
|
|
|
(1,236
|
)
|
|
Other
|
|
(1,688
|
)
|
|
|
(6,392
|
)
|
|
|
(1,093
|
)
|
|
Capital gains tax
|
|
1,465
|
|
|
|
-
|
|
|
|
-
|
|
|
Secondary taxation on companies
|
|
327
|
|
|
|
-
|
|
|
|
-
|
|
|
Change in tax rate
|
|
(18,315
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Foreign tax credits generated United States
|
|
(12,035
|
)
|
|
|
(78,754
|
)
|
|
|
(66,077
|
)
|
|
Income tax provision
|
$
|
15,936
|
|
|
$
|
33,525
|
|
|
$
|
40,822
|
|
The
capital gains tax paid represents the taxes paid resulting from an intercompany
capital transaction in South Africa during the year ended June 30, 2012. There
were no capital gains taxes paid during the years ended June 30, 2011 and 2010,
respectively.
The
Companys South African subsidiary paid a dividend to Net1 after the tax law had
changed but before the effective date of the South African dividends withholding
tax which resulted in the payment of STC in the third quarter of the year ended
June 30, 2012. For the first half of the year ended June 30, 2012, and in the
years ended June 30, 2011 and 2010, the Companys effective tax rate included an
accrual for STC and therefore any STC obligation arising during these periods
was charged against the STC liability provided. This STC liability was released
during the year end June 30, 2012, as a result of the change in tax law
discussed below.
F-42
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
19.
INCOME TAXES (continued)
Income
tax provision (continued)
On
December 20, 2011, there was a change in South African tax law to impose a
dividends withholding tax (a tax levied and withheld by a company on
distributions to its shareholders) to replace STC. The change was effective on
April 1, 2012. As a result, the Company has recorded a net deferred taxation
benefit of approximately $18.3 million in income taxation expense in its
consolidated statements of operations during the year ended June 30, 2012. There
were no changes to the enacted tax rate in the year ended June 30, 2011 and
2010.
As
a result of the change in South African tax law and the Companys intention to
permanently reinvest its undistributed earnings in South Africa, the Company
does not believe it will be able to recover foreign tax credits previously
recognized of $8.2 million. The movement in valuation allowance during the year
ended June 30, 2012, includes a valuation allowance related to this foreign tax
credits. The movement in the valuation allowance for the year ended June 30,
2011 relates to valuation allowances for foreign tax credits and the Net1 UTA
valuation allowances related to its license ruling, tax deductible goodwill, and
net operating loss carryforwards.
Net1
included actual and deemed dividends received from New Aplitec in its year ended
June 30, 2012, 2011 and 2010, taxation computation. Net1 applied net operating
losses against this income. Net1 generated foreign tax credits as a result of
the inclusion of the dividends in its taxable income. Net1 has applied certain
of these foreign tax credits against its current income tax provision for the
year ended June 30, 2012, 2011 and 2010, respectively.
A reconciliation
of income taxes, calculated at the fully-distributed South African income tax
rate to the Companys effective tax rate, for the years ended June 30,
2012, 2011 and 2010 is as follows:
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Income tax rate reconciliation:
|
|
|
|
|
|
|
|
|
|
|
Income taxes at fully-distributed South
African tax rates
|
|
28.00%
|
|
|
34.55%
|
|
|
34.55%
|
|
|
Permanent items
|
|
6.60%
|
|
|
6.93%
|
|
|
21.45%
|
|
|
Foreign tax rate differential
|
|
7.22%
|
|
|
5.46%
|
|
|
0.24%
|
|
|
Foreign tax credits
|
|
(21.12%
|
)
|
|
(209.00)%
|
|
|
(82.70)%
|
|
|
Taxation on deemed dividends
in the United States
|
|
31.29%
|
|
|
217.52%
|
|
|
85.60%
|
|
|
Capital gains tax paid
|
|
2.43%
|
|
|
-%
|
|
|
-%
|
|
|
Secondary taxation on
companies
|
|
0.54%
|
|
|
-%
|
|
|
-%
|
|
|
Movement in valuation allowance
|
|
1.23%
|
|
|
34.01%
|
|
|
(5.02)%
|
|
|
Prior year adjustments
|
|
0.53%
|
|
|
2.61%
|
|
|
(2.37)%
|
|
|
Change in tax law
|
|
(30.33%
|
)
|
|
-%
|
|
|
-%
|
|
|
Income tax
provision
|
|
26.39%
|
|
|
92.08%
|
|
|
51.75%
|
|
The
permanent items during the years ended June 30, 2012, relates principally to
stock-based compensation charges, interest expense and an equity award issued
pursuant to the Companys BBBEE transaction, which is not deductible for tax
purposes. The permanent items during the years ended June 30, 2011 relates
principally to interest expense and transaction-related expenditure which is not
deductible for tax purposes. The permanent items during the year ended June 30,
2010, relates principally to impairment of goodwill which is not deductible for
tax purposes.
F-43
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
19.
INCOME
TAXES (continued)
Deferred
tax assets and liabilities
Deferred
income taxes reflect the temporary differences between the financial reporting
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. The primary
components of the temporary differences that gave rise to the Companys deferred
tax assets and liabilities as at June 30, and their classification, were as
follows:
|
|
|
2012
|
|
|
2011
|
|
|
Total deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss
carryforwards
|
$
|
11,869
|
|
$
|
10,696
|
|
|
Provisions and accruals
|
|
2,450
|
|
|
2,715
|
|
|
FTS patent
|
|
1,436
|
|
|
1,831
|
|
|
Intangible assets
|
|
18,290
|
|
|
22,338
|
|
|
Foreign tax credits
|
|
19,089
|
|
|
22,566
|
|
|
Other
|
|
5,006
|
|
|
4,785
|
|
|
Total
deferred tax assets before valuation allowance
|
|
58,140
|
|
|
64,931
|
|
|
Valuation
allowances
|
|
(47,496
|
)
|
|
(45,866
|
)
|
|
Total deferred tax assets, net of valuation allowance
|
|
10,644
|
|
|
19,065
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
22,215
|
|
|
29,307
|
|
|
STC liability, net of STC credits
|
|
-
|
|
|
24,380
|
|
|
Other
|
|
3,826
|
|
|
2,281
|
|
|
Total deferred tax
liabilities
|
|
26,041
|
|
|
55,968
|
|
|
|
|
|
|
|
|
|
|
Reported as
|
|
|
|
|
|
|
|
Current deferred tax assets
|
|
5,591
|
|
|
15,882
|
|
|
Long term deferred tax liabilities
|
|
20,988
|
|
|
52,785
|
|
|
Net deferred
income tax liabilities
|
$
|
15,397
|
|
$
|
36,903
|
|
Decrease
in total deferred tax assets
Net
operating loss carryforwards
Included
in total deferred tax assets net operating loss carryforwards are net
operating losses generated by MediKredit of $3.5 million. MediKredit net
operating losses increased by $0.1 million during the year ended June 30, 2012,
and a valuation allowance has been created against this amount. Net operating
loss carryforwards also includes $6.7 million related to Net1 UTA. A valuation
allowance has been created for the full amount of the Net1 UTA net operating
losses.
Intangible
assets
Included
in total deferred tax assets intangible assets as of June 30, 2012, is an
intangible asset related to license rights in Net1 UTA. These license rights are
termed software for Austrian tax purposes and were valued for Austrian tax
purposes based on previous license payments at €50.76 million in June 2006. The
Company expects to amortize the license rights in its tax returns over a period
of 15 years. Any unused amounts are not carried forward to the subsequent year
of assessment. During the years ended June 30, 2012 and 2011, Net1 UTA utilized
approximately $0.04 million and $0.2 million, respectively, of these license
rights against its taxable income and in 2011 expensed $1.2 million unutilized
deferred tax asset. In addition, during the year ended June 30, 2011, the
Company provided in full for this deferred tax asset and recognized an
additional valuation allowance of $2.7 million. As of June 30, 2012, the gross
carrying value of this deferred tax asset is approximately $9.6 million and
there is a full valuation allowance.
F-44
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
19.
INCOME
TAXES (continued)
Deferred
tax assets and liabilities (continued)
Decrease
in total deferred tax assets (continued)
Intangible
assets (continued)
Net1
Applied Technologies Austria GmbH (Net1Austria) generated tax deductible
goodwill related to the acquisition of Net1 UTA in August 2008 and under
Austrian tax law Net1Austria can deduct up to 50% of the goodwill recognized, as
defined under Austrian tax law, over a period of 15 years. Unused amounts are
carried forward to subsequent years of assessment and are included in net
operating loss carryforwards. During the year ended June 30, 2011, the Company
provided in full for the deferred tax asset and recognized an additional
valuation allowance of approximately $1.7 million. As of June 30, 2012, the
gross value of this goodwill deferred tax asset was approximately $8.4 million
and there is a full valuation allowance. The Company did not utilize the
goodwill deferred tax asset during the years ended June 30, 2012 and 2011,
respectively.
Decrease
in total deferred tax liabilities
Intangible
assets
Deferred
tax liabilities intangible assets have decreased during the year ended
June 30, 2012, primarily as a result of the amortization of the underlying KSNET
intangible assets during the year.
STC
liability, net of STC credits
Deferred
tax liabilities STC liability, net of STC credits have decreased during the
year ended June 30, 2012, primarily as a result of the change in South African
tax law to replace STC with a dividend withholdings tax.
Valuation
allowance
At
June 30, 2012, the Company had deferred tax assets of $10.6 million (2011: $19.1
million), net of the valuation allowance. Management believes, based on the
weight of available positive and negative evidence it is more likely than not
that the Company will realize the benefits of these deductible differences, net
of the valuation allowance. However, the amount of the deferred tax asset
considered realizable could be adjusted in the future if estimates of taxable
income are revised.
At
June 30, 2012, the Company had a valuation allowance of $47.5 million (2011:
$45.9 million) to reduce its deferred tax assets to estimated realizable value.
The valuation allowances at June 30, 2012 and 2011, relate primarily to
intangible assets including tax deductible goodwill (2012: $18.0 million, 2011:
$22.1 million); foreign tax credits (2012: $19.1 million, 2011: $14.3 million);
net operating loss carryforwards (2012: $9.6 million, 2011: $8.1 million) and
the FTS patent (2012: $0.7 million, 2011: $1.1 million).
Net
operating loss carryforwards and foreign tax credits
United
States
As
of June 30, 2012, Net1 had net operating loss carryforwards that will expire, if
unused, as follows:
Year of expiration
|
|
US net
|
|
|
|
operating loss
|
|
|
|
carry
|
|
|
|
forwards
|
|
2024
|
$
|
4,072
|
|
During
the years ended June 30, 2012 and 2011, Net1 generated additional foreign tax
credits related to the cash dividends received. Net1 had no net unused foreign
tax credits that are more likely than not to be realized as of June 30, 2012
(June 30, 2011: 8.2 million). The unused foreign tax credits generated expire
after ten years in 2022, 2021, 2020 and 2019.
F-45
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
19.
INCOME
TAXES (continued)
Deferred
tax assets and liabilities (continued)
Net
operating loss carryforwards and foreign tax credits (continued)
South
Africa and Austria
Net
operating losses incurred in South Africa generally expire if a company does not
trade during the year. In South Africa, the subsidiary companies that incurred
the losses are currently trading and will continue to trade for the foreseeable
future. Net operating losses incurred in Austria generally do not expire.
Uncertain
tax positions
As
of June 30, 2012 and 2011, respectively the Company has unrecognized tax
benefits of $1.3 million and $2.7 million, all of which would impact the
Companys effective tax rate. The Company files income tax returns mainly in
South Africa, Korea, Austria, the Russian Federation and in the US federal
jurisdiction. As of June 30, 2012, the Companys South African subsidiaries are
no longer subject to income tax examination by the South African Revenue Service
for periods before June 30, 2008. The Company is subject to income tax in other
jurisdictions outside South Africa, none of which are individually material to
its financial position, statement of cash flows, or results of operations. The
Company does not expect the change related to unrecognized tax benefits will
have a significant impact on its results of operations or financial position in
the next 12 months.
The
following is a reconciliation of the total amounts of unrecognized tax benefits
for the year ended June 30, 2012, 2011 and 2010:
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Unrecognized tax benefits - opening balance
|
$
|
2,664
|
|
$
|
1,460
|
|
$
|
1,060
|
|
|
Gross decreases - tax positions in prior
periods
|
|
(1,159
|
)
|
|
-
|
|
|
|
|
|
Gross increases - tax
positions in current period
|
|
97
|
|
|
1,233
|
|
|
368
|
|
|
Lapse of statute limitations
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Foreign currency adjustment
|
|
(288
|
)
|
|
(29
|
)
|
|
32
|
|
|
Unrecognized tax benefits -
closing balance
|
$
|
1,314
|
|
$
|
2,664
|
|
$
|
1,460
|
|
As
of June 30, 2012 and 2011, the Company had accrued interest related to uncertain
tax positions of approximately $0.03 million and $0.2 million, respectively, on
its balance sheet.
20.
EARNINGS
PER SHARE
Basic
earnings per share include restricted stock awards that meet the definition of a
participating security. Restricted stock awards are eligible to receive
non-forfeitable dividend equivalents at the same rate as common stock. Basic
earnings per share have been calculated using the two-class method and basic
earnings per share for the years ended June 30, 2012, 2011 and 2010, reflects
only undistributed earnings.
Diluted
earnings per share has been calculated to give effect to the number of
additional common stock that would have been outstanding if the potential
dilutive instruments had been issued in each period. The calculation of diluted
earnings per share includes the dilutive effect of a portion of the restricted
stock awards granted to employees in August 2007, October 2010, November 2010
and February 2012 as these restricted stock awards are considered contingently
issuable shares for the purposes of the diluted earnings per share calculation
and the vesting conditions in respect of a portion of the awards had been
satisfied. The vesting conditions are discussed in Note 17.
F-46
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
20.
EARNINGS
PER SHARE (continued)
The
following tables detail the weighted average number of outstanding shares used
for the calculation of earnings per share as of June 30, 2012, 2011 and 2010:
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
000
|
|
|
000
|
|
|
000
|
|
|
Weighted average number of
outstanding shares of common stock basic
|
|
45,187
|
|
|
45,175
|
|
|
46,245
|
|
|
Weighted average effect of dilutive
securities: equity instruments
|
|
59
|
|
|
56
|
|
|
190
|
|
|
Weighted average number of
outstanding shares of common stock diluted
|
|
45,246
|
|
|
45,231
|
|
|
46,435
|
|
Options
to purchase 10,589,863 shares of the Companys common stock at prices ranging
from $7.98 to $24.46 per share were outstanding during the year ended June 30,
2012, but were not included in the computation of diluted earnings per share
because the options exercise price were greater than the average market price
of the Companys common shares. The options, which expire at various dates
through on October 28 2014 and includes the 8,955,000 equity instrument issued
pursuant to BBBEE transaction, were still outstanding as of June 30, 2012.
21.
SUPPLEMENTAL
CASH FLOW INFORMATION
Supplemental
cash flow information:
The
following table presents the supplemental cash flow disclosures for the years
ended June 30, 2012, 2011 and 2010:
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
Cash received from interest
|
$
|
9,180
|
|
$
|
8,764
|
|
$
|
10,294
|
|
|
Cash paid for interest
|
$
|
9,773
|
|
$
|
5,660
|
|
$
|
747
|
|
|
Cash paid for income taxes
|
$
|
30,704
|
|
$
|
48,630
|
|
$
|
54,143
|
|
Financing
activities
Treasury
shares, at cost acquired on June 30, 2009, for approximately $1.3 million were
paid for on July 1, 2009 and are included in the Companys consolidated cash
flow statement for the year ended June 30, 2010.
22.
OPERATING
SEGMENTS
The
Company discloses segment information as reflected in the management information
systems reports that its chief operating decision maker uses in making decisions
and to report certain entity-wide disclosures about products and services, major
customers, and the countries in which the entity holds material assets or
reports material revenues.
The
Company has reallocated its EP Kiosk business unit to the South African
transaction-based activities segment from the hardware, software and related
technology segment, as the unit is no longer in pilot phase and now forms part
of EasyPay. Following XeoHealths first contract signing, the Company has
allocated its revenue and costs to the international transaction-based
activities segment, which were previously included in the South African
transaction-based activities segment. Revenue and administration costs related
to the Companys comprehensive financial services offerings are all included in
the financial services segment. The effect of these reallocations has not
significantly impacted the Companys reported results. Re-casted amounts for the
year ended June 30, 2011, also include the effects of reallocating the Companys
initiatives in Iraq, Nigeria and Net1 VCC.
F-47
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
22.
OPERATING
SEGMENTS (continued)
The
impact of these reallocations on the Companys revenue, operating income (loss)
and net income (loss) is presented in the table below:
|
|
|
Year ended June 30, 2011
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
|
previously
|
|
|
|
|
|
|
|
Re-casted
|
|
|
reported
|
|
|
Difference
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues to external customers
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
$
|
189,206
|
|
$
|
188,590
|
|
$
|
616
|
|
|
International transaction-based
activities
|
|
70,382
|
|
|
69,947
|
|
|
435
|
|
|
Smart card accounts
|
|
33,315
|
|
|
33,315
|
|
|
-
|
|
|
Financial services
|
|
7,350
|
|
|
7,313
|
|
|
37
|
|
|
Hardware, software and related technology sales
|
|
43,167
|
|
|
44,255
|
|
|
(1,088
|
)
|
|
Total
|
|
343,420
|
|
|
343,420
|
|
|
-
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
75,668
|
|
|
74,642
|
|
|
1,026
|
|
|
International transaction-based activities
|
|
(220
|
)
|
|
1,707
|
|
|
(1,927
|
)
|
|
Smart card accounts
|
|
15,140
|
|
|
15,140
|
|
|
-
|
|
|
Financial services
|
|
4,999
|
|
|
5,658
|
|
|
(659
|
)
|
|
Hardware, software and related
technology sales
|
|
(48,372
|
)
|
|
(49,930
|
)
|
|
1,558
|
|
|
Corporate/Eliminations
|
|
(9,787
|
)
|
|
(9,789
|
)
|
|
2
|
|
|
Total
|
|
37,428
|
|
|
37,428
|
|
|
-
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
SA transaction-based activities
|
|
54,009
|
|
|
52,613
|
|
|
1,396
|
|
|
International transaction-based activities
|
|
652
|
|
|
2,700
|
|
|
(2,048
|
)
|
|
Smart card accounts
|
|
10,904
|
|
|
10,904
|
|
|
-
|
|
|
Financial services
|
|
3,587
|
|
|
4,061
|
|
|
(474
|
)
|
|
Hardware, software and related
technology sales
|
|
(45,191
|
)
|
|
(46,316
|
)
|
|
1,125
|
|
|
Corporate/Eliminations
|
|
(21,314
|
)
|
|
(21,315
|
)
|
|
1
|
|
|
Total
|
$
|
2,647
|
|
$
|
2,647
|
|
$
|
-
|
|
There
were no reallocations between the Companys June 30, 2012 and 2010, operating
segments.
The
Company currently has five reportable segments: South African transaction-based
activities, international transaction-based activities, smart card accounts,
financial services and hardware, software and related technology sales. Each
segment, other than international transaction-based activities and the hardware,
software and related technology sales segments, operates mainly within South
Africa. The Companys reportable segments offer different products and services
and require different resources and marketing strategies and share the Companys
assets.
The
South African transaction-based activities segment currently consists mainly of
a state pension and welfare benefit distribution service provided to the South
African government and transaction processing for retailers, utilities,
medical-related claim service customers and banks. Fee income is earned based on
the number of beneficiaries paid as well as from merchants and card holders
using the Companys merchant acquiring system. Utility providers and banks are
charged a fee for transaction processing services performed on their behalf at
retailers. In addition, the operating segment includes sales of prepaid products
(electricity and airtime). The Company earns a commission for prepaid
electricity sales and revenue from the sale of airtime vouchers. This segment
has individually significant customers that each provides more than 10% of the
total revenue of the Company. For the year ended June 30, 2012, there was one
such customer, providing 41% of total revenue (2011: one such customer,
providing 47% of total revenue; 2010: one such customer, providing 66% of total
revenue).
F-48
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
22.
OPERATING
SEGMENTS (continued)
The
international transaction-based activities segment currently consists mainly of
KSNET which generates revenue from the provision of payment processing services
to merchants and card issuers through its VAN. This segment generates fee
revenue from the provision of payment processing services and to a lesser extent
from the sale of goods, primarily point of sale terminals, to customers in
Korea. The segment also generates transaction fee revenue from transaction
processing of UEPS-enabled smartcards through NUETS initiative in Iraq and
transaction processing of medical-related claims. The Company allocated its
international transaction-based activities to this segment effective July 1,
2010, and the Companys reported results for the year ended June 30, 2011,
include all legacy international transaction-processing activities from July 1,
2010 and include KSNET from November 1, 2010. Segment results for the year ended
June 30, 2010, have not been re-casted due to the insignificance of the
transaction processing activities of Net1 Virtual Card, and NUETS transaction
processing activities in Iraq.
The
smart card accounts segment derives revenue from the provision of smart card
accounts, as a fixed monthly fee per card is charged for the maintenance of
these accounts. The financial services segment provides short-term loans as a
principal and life insurance products on an agency basis and generates
initiation and services fees. As a result of the acquisition of SmartLife, we
earn premium income from the sale of life insurance products and investment
income.
The
hardware, software and related technology sales segment markets, sells and
implements the UEPS as well as develops and provides Prism secure transaction
technology, solutions and services. The segment also includes the operations of
Net1 UTA, which comprise mainly hardware sales and licenses of the DUET system.
The segment undertakes smart card system implementation projects, delivering
hardware, software and business solutions in the form of customized systems.
Sales of hardware, SIM cards, cryptography services, SIM card licenses and other
software licenses are recorded within this segment. This segment also generates
rental income from hardware provided to merchants enrolled in the Companys
merchant retail application. The impairment losses incurred during the years
ended June 30, 2011 and 2010, of approximately $41.8 million and $37.4 million,
respectively, discussed in Note 9 are included in the results of this operating
segment.
Corporate/eliminations
includes the Companys head office cost centers in addition to the elimination
of inter-segment transactions. The profit related to the liquidation of
SmartSwitch Nigeria discussed in Note 16 has been allocated to
corporate/eliminations.
The
Company evaluates segment performance based on operating income. The following
tables summarize segment information which is prepared in accordance with GAAP:
|
|
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
Revenues to external customers
|
|
|
|
|
|
|
|
|
|
South African
transaction-based activities
|
$
|
201,207
|
|
$
|
189,206
|
|
$
|
191,362
|
|
International transaction-based
activities
|
|
118,281
|
|
|
70,382
|
|
|
-
|
|
Smart card accounts
|
|
31,263
|
|
|
33,315
|
|
|
31,971
|
|
Financial services
|
|
8,121
|
|
|
7,350
|
|
|
4,023
|
|
Hardware, software
and related technology sales
|
|
31,392
|
|
|
43,167
|
|
|
53,008
|
|
Total
|
|
390,264
|
|
|
343,420
|
|
|
280,364
|
|
Inter-company revenues
|
|
|
|
|
|
|
|
|
|
South African transaction-based
activities
|
|
5,452
|
|
|
4,015
|
|
|
3,837
|
|
International
transaction-based activities
|
|
-
|
|
|
-
|
|
|
-
|
|
Smart card accounts
|
|
1,065
|
|
|
-
|
|
|
-
|
|
Financial services
|
|
-
|
|
|
-
|
|
|
-
|
|
Hardware, software and related
technology sales
|
|
1,784
|
|
|
2,281
|
|
|
1,892
|
|
Total
|
$
|
8,301
|
|
$
|
6,296
|
|
$
|
5,729
|
|
F-49
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
22.
OPERATING
SEGMENTS (continued)
|
|
|
June 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
South African transaction-based
activities
|
$
|
49,824
|
|
$
|
75,668
|
|
$
|
106,036
|
|
|
International transaction-based
activities
|
|
1,257
|
|
|
(220
|
)
|
|
-
|
|
|
Smart card accounts
|
|
12,820
|
|
|
15,140
|
|
|
14,532
|
|
|
Financial services
|
|
4,636
|
|
|
4,999
|
|
|
2,881
|
|
|
Hardware, software
and related technology sales
|
|
3,619
|
|
|
(48,372
|
)
|
|
(42,524
|
)
|
|
Corporate/ Eliminations
|
|
(11,006
|
)
|
|
(9,787
|
)
|
|
(11,114
|
)
|
|
Total
|
|
61,150
|
|
|
37,428
|
|
|
69,811
|
|
|
Interest earned
|
|
|
|
|
|
|
|
|
|
|
South African transaction-based
activities
|
|
-
|
|
|
-
|
|
|
-
|
|
|
International transaction-based
activities
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Financial services
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Hardware, software
and related technology sales
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Corporate/ Eliminations
|
|
8,576
|
|
|
7,654
|
|
|
10,116
|
|
|
Total
|
|
8,576
|
|
|
7,654
|
|
|
10,116
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
South African transaction-based
activities
|
|
463
|
|
|
652
|
|
|
981
|
|
|
International transaction-based
activities
|
|
44
|
|
|
526
|
|
|
-
|
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Financial services
|
|
2
|
|
|
15
|
|
|
1
|
|
|
Hardware, software
and related technology sales
|
|
109
|
|
|
59
|
|
|
5
|
|
|
Corporate/ Eliminations
|
|
8,727
|
|
|
7,420
|
|
|
60
|
|
|
Total
|
|
9,345
|
|
|
8,672
|
|
|
1,047
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
South African transaction-based
activities
|
|
9,370
|
|
|
8,997
|
|
|
6,714
|
|
|
International transaction-based
activities
|
|
26,206
|
|
|
16,584
|
|
|
-
|
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Financial services
|
|
345
|
|
|
539
|
|
|
510
|
|
|
Hardware, software
and related technology sales
|
|
624
|
|
|
7,846
|
|
|
10,978
|
|
|
Corporate/ Eliminations
|
|
(46
|
)
|
|
705
|
|
|
1,146
|
|
|
Total
|
|
36,499
|
|
|
34,671
|
|
|
19,348
|
|
|
Income taxation expense
|
|
|
|
|
|
|
|
|
|
|
South African transaction-based
activities
|
|
13,948
|
|
|
21,003
|
|
|
29,713
|
|
|
International transaction-based
activities
|
|
(449
|
)
|
|
(1,003
|
)
|
|
-
|
|
|
Smart card accounts
|
|
3,590
|
|
|
4,238
|
|
|
4,068
|
|
|
Financial services
|
|
1,286
|
|
|
1,394
|
|
|
806
|
|
|
Hardware, software
and related technology sales
|
|
894
|
|
|
(3,111
|
)
|
|
684
|
|
|
Corporate/ Eliminations
|
|
(3,333
|
)
|
|
11,004
|
|
|
5,551
|
|
|
Total
|
|
15,936
|
|
|
33,525
|
|
|
40,822
|
|
|
Net income attributable to Net1
|
|
|
|
|
|
|
|
|
|
|
South African transaction-based
activities
|
|
35,414
|
|
|
54,009
|
|
|
75,536
|
|
|
International transaction-based
activities
|
|
2,190
|
|
|
652
|
|
|
-
|
|
|
Smart card accounts
|
|
9,230
|
|
|
10,904
|
|
|
10,465
|
|
|
Financial services
|
|
3,309
|
|
|
3,587
|
|
|
2,073
|
|
|
Hardware, software
and related technology sales
|
|
2,616
|
|
|
(45,191
|
)
|
|
(43,405
|
)
|
|
Corporate/ Eliminations
|
|
(8,108
|
)
|
|
(21,314
|
)
|
|
(5,679
|
)
|
|
Total
|
$
|
44,651
|
|
$
|
2,647
|
|
$
|
38,990
|
|
F-50
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
22.
OPERATING
SEGMENTS (continued)
|
|
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for long-lived assets
|
|
|
|
|
|
|
|
|
|
South African transaction-based
activities
|
$
|
23,408
|
|
$
|
2,423
|
|
$
|
2,177
|
|
International
transaction-based activities
|
|
14,978
|
|
|
12,113
|
|
|
-
|
|
Smart card accounts
|
|
-
|
|
|
-
|
|
|
-
|
|
Financial services
|
|
620
|
|
|
400
|
|
|
302
|
|
Hardware, software and related
technology sales
|
|
161
|
|
|
117
|
|
|
251
|
|
Corporate/ Eliminations
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
39,167
|
|
$
|
15,053
|
|
$
|
2,730
|
|
The
segment information as reviewed by the chief operating decision maker does not
include a measure of segment assets per segment as all of the significant assets
are used in the operations of all, rather than any one, of the segments. The
Company does not have dedicated assets assigned to a particular operating segment.
Accordingly, it is not meaningful to attempt an arbitrary allocation and segment
asset allocation is therefore not presented.
It
is impractical to disclose revenues from external customers for each product and
service or each group of similar products and services.
Geographic
Information
Revenues
based on the geographic location from which the sale originated for the years
ended June 30, are presented in the table below:
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
South Africa
|
$
|
272,063
|
|
$
|
264,485
|
|
$
|
267,478
|
|
Korea
|
|
114,096
|
|
|
68,392
|
|
|
-
|
|
Europe
|
|
2,413
|
|
|
10,465
|
|
|
12,301
|
|
Rest of world
|
|
1,692
|
|
|
78
|
|
|
585
|
|
Total
|
$
|
390,264
|
|
$
|
343,420
|
|
$
|
280,364
|
|
23.
COMMITMENTS
AND CONTINGENCIES
Operating
lease commitments
The
Company leases certain premises. At June 30, 2012, the future minimum payments
under operating leases consist of:
Due within 1 year
|
$
|
3,785
|
|
Due within 2 years
|
|
2,878
|
|
Due within 3 years
|
|
1,779
|
|
Due within 4 years
|
|
1,504
|
|
Due within 5 years
|
$
|
265
|
|
Operating
lease payments related to the premises and equipment were $7.5 million, $7.0
million and $5.2 million, respectively, for the years ended June 2012, 2011 and
2010, respectively.
Capital
commitments
As
of June 30, 2012 and 2011, the Company had outstanding capital commitments of
approximately $5.0 million and $0.4 million, respectively.
F-51
NET 1 UEPS TECHNOLOGIES, INC.
|
Notes to the consolidated financial statements
|
for the years ended June 30, 2012, 2011 and 2010
|
(All amounts stated
in thousands of United States Dollars, unless otherwise stated)
|
23.
COMMITMENTS
AND CONTINGENCIES (continued)
Purchase
obligations
As
of June 30, 2012 and 2011, the Company had purchase obligations totaling $5.0
million and $1.9 million, respectively.
Contingencies
The
Company is subject to a variety of insignificant claims and suits that arise
from time to time in the ordinary course of business.
Management
currently believes that the resolution of these matters, individually or in the
aggregate, will not have a material adverse impact on the Companys financial
position, results of operations and cash flows.
24.
RELATED
PARTY TRANSACTIONS
During
the year end June 30, 2010, the Company engaged the services of PBel (Pty) Ltd
(PBel) to perform software development services, primarily software utilized
on mobile phones and by cash-accepting kiosks. All software developed is the
Companys property. PBel is jointly owned by Dr. Belamant and his son. The PBel
transaction was approved by the Companys Audit Committee and thus Dr. Belamant
did not participate in the Boards decision to engage PBel. During the year
ended June 30, 2012 and 2011, the Company recognized expenses related to PBel of
approximately $0.8 million and $0.9 million, respectively, for software
development services. As of each of June 30, 2012 and 2011, respectively, the
Companys accounts payable included $0.08 million due to PBel.
25.
UNAUDITED
QUARTERLY RESULTS
The
following tables contain selected unaudited consolidated statements of income
(loss) for each quarter of fiscal 2012 and 2011:
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jun 30,
|
|
|
Mar 31,
|
|
|
Dec 31,
|
|
|
Sep 30,
|
|
|
Total
|
|
|
|
|
2012
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
YTD
|
|
|
|
|
(In thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
107,616
|
|
$
|
90,664
|
|
$
|
92,058
|
|
$
|
99,926
|
|
$
|
390,264
|
|
|
Operating (loss) income
|
|
(2,402
|
)
|
|
12,478
|
|
|
20,228
|
|
|
30,846
|
|
|
61,150
|
|
|
Net (loss) income attributable to Net1
|
$
|
(7,977
|
)
|
$
|
7,766
|
|
$
|
25,094
|
|
$
|
19,768
|
|
$
|
44,651
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share,
in $
|
|
(0.17
|
)
|
|
0.17
|
|
|
0.56
|
|
|
0.44
|
|
|
0.99
|
|
|
Diluted (loss) earnings per share, in $
|
|
(0.17
|
)
|
|
0.17
|
|
|
0.56
|
|
|
0.44
|
|
|
0.99
|
|
|
|
|
Three months ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jun 30,
|
|
|
Mar 31,
|
|
|
Dec 31,
|
|
|
Sep 30,
|
|
|
Total
|
|
|
|
|
2011
|
|
|
2011
|
|
|
2010
|
|
|
2010
|
|
|
YTD
|
|
|
|
|
(In thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
97,368
|
|
$
|
92,758
|
|
$
|
89,011
|
|
$
|
64,283
|
|
$
|
343,420
|
|
|
Operating income (loss)
|
|
26,593
|
|
|
(22,125
|
)
|
|
21,974
|
|
|
10,986
|
|
|
37,428
|
|
|
Net income (loss) attributable to Net1
|
$
|
6,832
|
|
$
|
(21,562
|
)
|
$
|
9,948
|
|
$
|
7,429
|
|
$
|
2,647
|
|
|
Earnings (Loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share,
in $
|
|
0.15
|
|
|
(0.47
|
)
|
|
0.22
|
|
|
0.16
|
|
|
0.06
|
|
|
Diluted
earnings (loss) per share, in $
|
|
0.15
|
|
|
(0.47
|
)
|
|
0.22
|
|
|
0.16
|
|
|
0.06
|
|
*********************
F-52
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