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,
2014
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 |
98-0171860 |
(State or other jurisdiction |
(I.R.S. Employer |
of incorporation or organization) |
Identification No.) |
President Place, 4th 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 |
Name of Each Exchange on Which Registered |
Common Stock, |
|
par value $0.001 per share |
NASDAQ Global Select Market
|
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):
[ ] |
Large accelerated filer |
[X] |
Accelerated filer |
[ ] |
Non-accelerated filer |
[ ] |
Smaller reporting company |
|
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).
Yes [
] No [X]
The aggregate market value of the registrant's common stock
held by non-affiliates of the registrant as of December 31, 2013 (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 $218,600,379. This calculation does not
reflect a determination that persons are affiliates for any other purposes.
As of August 25, 2014, 47,819,299 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 2014
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, 2014
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 2015 fiscal year, which
runs from July 1, 2014 to June 30, 2015.
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, and UEPS/EMV derivative discussed below, 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 been certified by the EuroPay,
MasterCard and Visa global standard, or 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
UEPS/EMV technology has been 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, healthcare 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 recipient
cardholders across the entire country, process debit and credit card payment
transactions on behalf of a wide range of retailers 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. We provide financial
inclusion services such as microloans, mobile transacting and prepaid utilities
to our cardholder base.
Internationally,
through KSNET, we are one of the top three value-added network, or VAN,
processors in South Korea, and we offer card processing, payment gateway and
banking value-added services in that country. Our XeoHealth service provides
funders and providers of healthcare in United States with an on-line real-time
management system for healthcare transactions.
Our
Net1 Mobile Solutions, or N1MS, business unit is responsible for the worldwide
technical development and commercialization of our array of web and mobile
applications and payment technologies, such as Mobile Virtual Card, or MVC, Chip
and GSM licensing and Virtual Top Up, or VTU, and has deployed solutions in many
countries, including South Africa, Namibia, Nigeria, Malawi, Cameroon, the
Philippines and Colombia.
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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.
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 recipient
cardholders, 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 30 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 continued global growth of retail
credit and debit card transactions is reflected in the March 2014 Nilson Report,
according to which worldwide annual general purpose card purchase dollar volume
increased 19.3% to $20.6 trillion in 2013, while transaction volume increased by
12.2% to 200 billion transactions and cards issued increased by 13.3% to 8.3
billion cards during the same period. General purpose cards include the major
card network brands such as MasterCard, Visa, 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 South Korea, through KSNET, we are one of the top three VAN
processors and we provide card processing, banking value-added services and
payment gateway functionality to more than 225,000 retailers. 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 for 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 rapidly expanded 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 and MVC solutions are enabled to run on the SIM cards in
mobile phones and provide 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 XeoHealth service we utilize 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.
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Our Core Proprietary Technologies
UEPS
and UEPS/EMV
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 point of service, or 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:
- Transparent and automatic recovery of transactions;
- Transaction cancellation;
- Refunds;
- Multiple audit trails;
- Offline loading and spending;
- Biometric identification;
- Continuous debit;
- Multiple wallets;
- Morphing of other common payment systems, such as EMV;
- Automatic credit;
- Automatic debit;
- Interest calculations; and
- 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 non-government organizations, or NGOs, healthcare, telecoms,
financial institutions, retailers, petroleum and utilities.
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 POS, including point of sale
devices and ATMs.
Mobile
Virtual Card
We
have developed an innovative mobile phone-based payment solution, namely MVC,
which 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 purchasing, money
transfers, phone and catalogue orders).
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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 near field communication, or
NFC, or Quick Response, or QR, Codes.
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:
- Card issuersincreased transactional revenues from existing
accounts, driving more transactional revenues and elimination of fraudulent
card use.
- Mobile network operatorsrevenues from payments, reduced churn,
opportunities for powerful co-branding schemes.
- Consumersconvenience, peace of mind, ease of use, rewards.
- Merchantselimination of charge-backs and fraud at no extra
cost.
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 healthcare processing services
globally. To achieve these goals, we are pursuing the following strategies:
Build
on our significant and established South African infrastructureIn South
Africa, we are one of the leading independent transaction processors, 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 and the leading processor of
third-party payroll payments. 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:
-
Government focus on expansion of social benefitsAs 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
SASSA 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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Increasing adoption of existing servicesOur 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 financial 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
recipient cardholders to receive their grants at these locations and transact
business with the retailers using our smart card. 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 allows us to significantly expand 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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Introduction of new servicesWe 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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Value-added services through multiple EasyPay
channelsEasyPay is the largest bank-independent financial switch
and merchant processor in South Africa for credit and debit card
transactions. 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 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 FIHRSTThrough 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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Using our first wave/second wave approach to expand
into new marketsWe 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. |
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Leveraging our new payment technologies to gain access
to developed and developing economiesWhile 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, with a specific focus on mobile payments, that is
particularly relevant to developed economies. Our MVC application for
mobile telephones, for example, is designed to eliminate fraud associated
with card-not-present credit card transactions effected by telephone or
over the internet and are prevalent in developed economies such as the
United States. We believe that mobile payments, mobile wallets and the
related applications should be a critical component of a payment
processors future strategy and we have dedicated a significant portion of
our research and development resources to ensure that we remain at the
forefront of this rapidly evolving technological space. While some of our
mobile solutions are more relevant in developed markets such as the United
States, we have also experienced significant demand for our mobile payment
solutions from developing economies, where mobile transacting is seen as
the best solution to rapidly leapfrog the antiquated payment solutions
typically available in these countries at minimal cost. |
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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 Business Units
Our
company is organized into the following business units.
Cash
Paymaster Services (CPS)
Our
CPS business unit is based in Johannesburg, South Africa, and deploys our
UEPS/EMVSocial Grant Distribution technology to distribute social welfare
grants on a monthly basis to over nine million recipient cardholders in South
Africa. These social welfare grants are distributed on behalf of the South
African Social Security Agency, or SASSA. During our 2014, 2013 and 2012 fiscal
years, we derived approximately 27%, 42%, and 41% of our revenues respectively,
from CPS social welfare grant distribution business.
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CPS
provides a secure and affordable transacting channel between social welfare
grant recipient cardholders, beneficiaries, SASSA and formal businesses. CPS
enrolls social welfare grant recipient cardholders and, as appropriate, the
respective beneficiaries by issuing the recipient cardholder with a UEPS/EMV
smart card that digitally stores their biometric fingerprint templates on the
card, enabling them to access their social welfare grants securely at any time
or place and providing them with a fully-fledged bank account.
The
smart card is issued to the recipient cardholder on site and utilizes optical
fingerprint sensor technology to identify and verify a recipient cardholder. The
recipient cardholder 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 recipient
cardholders 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/EMVSocial Grant Distribution technology provides numerous benefits
to government agencies, recipient cardholders and beneficiaries. The system
offers government a reliable service at a reasonable price. For recipient
cardholders and, as appropriate, the beneficiaries, our smart card offers
financial inclusion, 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. Recipient cardholders have access to affordable
financial services, can save money on their smart cards and can perform money
transfers to friends and relatives living in other provinces. Finally, recipient
cardholders pay no transaction fees when they use our infrastructure to load
their smart cards, perform balance inquiries, purchase goods 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.
This
business unit has been allocated to our South African transaction processing and
Financial inclusion and applied technologies reporting segments.
KSNET
Our
KSNET business unit is based in Seoul, South Korea, and is a significant payment
solutions provider in South Korea, has the broadest product offering in the
country, a base of approximately 225,000 merchants and an extensive direct and
indirect sales network. KSNETs core operations comprise of three project
offerings, namely card 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
South 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 VANKSNETs 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 South 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 South Korean National
Tax Service in the form of cash receipts.
- PGKSNET offers PG services to the rapidly growing number of
merchants that are moving online in South 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. 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.
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- Banking VANKSNETs 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 South 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
processing reporting segment.
EasyPay
Our
EasyPay business unit operates the largest bank-independent financial switch in
South 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:
- EFTEasyPay switches credit, debit and fleet card transactions for
leading South African retailers and petroleum companies;
- EasyPay bill paymentEasyPay 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 a number of bill issuers including
major local authorities, telephone companies, utilities, medical service
providers, traffic departments, mail order companies, banks and insurance
companies;
- EasyPay prepaid electricityThis 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 airtimeEasyPay vends airtime at retail POS terminals for
all the South African mobile telephone network operators;
- Electronic gift voucherEasyPay supports the electronic generation,
issuance and redemption of paper or card-based gift vouchers;
- EasyPay licensesEasyPay 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;
- Third party switching and processing supportEasyPay switches
transactions from retail POS systems to the relevant back-end systems;
- Hosting servicesEasyPays infrastructure supports the hosting of
payment or back-up servers and applications on behalf of third parties,
including utility companies;
- EasyPay KioskWe have developed a biometrically enabled self
service kiosk that allows our 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 MobileThis 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.
EasyPay
is also responsible for marketing our secure, integrated POS payment products
and systems in South Africa.
This
business unit has been allocated to our South African transaction processing
reporting segment.
Net1
Mobile Solutions
Our
N1MS business unit is managed from Johannesburg, South Africa with business
development support branches in the United States and India. This business unit
is responsible for the technical development and commercialization of our array
of web and mobile applications and payment technologies.
8
N1MS
offers an array of products and services that cater for the needs of the global
market and comprises of the following key business lines:
- Third Party PaymentsThrough FIHRST we are the largest provider of third party and payroll associated payments in South Africa, servicing over 1,800 employee groups that represent approximately 600,000 employees. Our market leading position is due to our ability to move informed money (the movement of money and its corresponding data to third party organizations). This allows us to provide one of the most comprehensive suites of financial services, ranging from garnishee orders through to payment modules and collections. We also offer the PayPlus service, providing employees with access to prepaid airtime, electricity and other value added services, or VAS.
- Prepaid Vending The Prepaid business line handles multichannel
distribution of electronic products and services aimed at a variety of
markets. Across Africa and abroad, our VTU solutions open up a separate
revenue stream for Mobile Network Operators, or MNOs, and other clients. The
stability and scalability of our VTU offerings enables our customers to
facilitate more than 100 million monthly transactions.
- MVC & Verification Our internationally patented MVC technology
is a market leading innovation which addresses the needs of the modern mobile
payment market. It is the easiest, most secure and most convenient way to pay
for goods and services online directly from a mobile phone. 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 an application on any mobile phone and utilizes our 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.
- MNOs SolutionsWe provide specialized solutions for MNOs that boost
average revenue per user, increase subscriber activity, and collect valuable
profiling data. Our solutions range from Advance Airtime and Mobile Wallet
technology, through to SMS Mega Promotions, tailor-made for each MNO with a
focus to maximize subscriber activity, brand perception and profitability.
- Chip & SIMThrough our partnerships with MNOs as well as Card
and Semiconductor manufacturers, we provide a strong lineup of feature rich
chip and SIM solutions. All of these include our wide range of GSM Masks and
custom software that enables mobile telephony, transactions and on-chip VAS.
We support the above chip and SIM developments with dedicated chip-card based
commerce frameworks. These incorporate POS, terminal and interbank transaction
switching and clearance aimed at national government, petroleum and retail
industries.
- Custom DevelopmentThe Custom Development business line produces
solutions that span across Web, Mobile, Server, POS and Desktop environments.
These solutions have been developed by addressing the needs of various
industries and now form an integral pillar in our product and service
portfolio. We develop both client-facing and background services, with
coverage on every relevant platform including Mobile (Android, iOS,
BlackBerry, Windows Phone 8 and J2ME) and Web (with full cross-browser
compatibility).
- CryptographyOur Cryptography business line focuses on
security-orientated products which include our range of PIN encryption
devices, card acceptance modules and Hardware Security Modules. These focus on
financial, retail, telecommunications, utilities and petroleum sectors. In
order to constantly enhance and improve our product offerings, special
attention is placed on the development of security initiatives including TDES,
EMV and PCI. We are a member of the STS association, actively participating in
developing new and improved standards that address the needs of the modern
cryptographic market.
This
business unit has been allocated to our South African processing, International
transaction processing, and Financial inclusion and applied technologies
reporting segments.
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 UEPS/EMV cardholders
with competitive microfinance, life insurance, transactional and money transfer
products based on our understanding of their risk profiles, demographics and
lifestyle requirements. Our financial services offerings are designed on the
principles of simplicity and cost-efficiency as they bring financial inclusion
to our millions of cardholders who were previously unable to access any formal
financial services. Our largest financial services offering is the provision of
short-term microloans to our South African UEPS/EMV cardholders, where we
provide the loans using our surplus cash reserves and earn revenue from the
service fees charged on these loans.
Following
the suspension of our life insurance license during fiscal 2013 by the South
African Financial Services Board, or FSB, that prevented us from writing any
further life insurance policies, we have agreed a plan with the FSB to uplift
the suspension. The eventual upliftment of the suspension is subject to FSB
approval of our implementation of this plan. We intend to offer our customer
base the insurance products applicable to this market segment when the
suspension is uplifted, focusing on group life and funeral insurance
policies.
9
Our
Financial Services activities have been allocated to our Financial inclusion and
applied technologies reporting segment.
XeoHealth
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 United States. XeoHealth has won
a number of projects in the United States either as the primary contractor for
the provision of our RTS solution to customers, or as a sub-contractor to
parties contracted to provide an adjudication solution.
XeoHealth
has been allocated to our International transaction processing reporting
segment.
Corporate
The
Corporate unit provides global support services to our business units, joint
ventures and investments for the following activities:
- Group executiveresponsible for the overall company management,
defining our global strategy, investor relations and corporate finance
activities.
- Finance and administrationprovides company-wide support in the
areas of accounting, treasury, human resources, administration, legal,
secretarial, taxation, compliance and internal audit.
- Group information technologydefines 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 unitprovides 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 that has 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 UEPS/EMV technology has been deployed on an
extensive scale in South Africa through the issuance of MasterCard-branded
UEPS/EMV cards to our social welfare grant recipient cardholders. 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
recipient cardholders 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 recipient cardholders exceed the minimum number of free transactions per
month.
10
We
believe that SASSA considers the technology utilized, pricing of the payment
service rendered and other factors such as 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. Our current SASSA
contract expires in 2017; however, as described in Item 3Legal Proceedings,
SASSA has been directed to conduct a new tender process which may result in the
award of a new tender prior to the expiration of our contract.
We
have identified 13 major card VAN companies in South Korea, of which KSNET is
one of the three largest. The other two large VAN companies are NICE Information
& Telecommunication Inc. and Korea Information & Communications Company,
Limited. Entities operating in the VAN industry in South 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
have processed in excess of 2.5 billion transactions during the twelve months
ended June 2013 valued at trillions of ZAR.
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 2014, 2013 and 2012, we incurred research and development expenditures of
$2.2 million, $1.3 million and $3.9 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 and mobile payment applications.
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
23 to our consolidated financial statements included in this annual report
contains detailed financial information about our operating segments for fiscal
2014, 2013 and 2012. 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 |
|
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
|
|
$000 |
|
|
$000 |
|
|
$000 |
|
|
$000 |
|
|
$000 |
|
|
$000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South Africa |
|
428,931 |
|
|
317,916 |
|
|
272,063 |
|
|
105,627 |
|
|
117,858 |
|
|
140,308 |
|
|
South Korea |
|
146,667 |
|
|
129,338 |
|
|
114,096 |
|
|
229,830 |
|
|
213,589 |
|
|
224,272 |
|
|
Rest of world |
|
6,058 |
|
|
4,893 |
|
|
4,105 |
|
|
6,593 |
|
|
7,676 |
|
|
6,911 |
|
|
Total |
|
581,656 |
|
|
452,147 |
|
|
390,264 |
|
|
342,050 |
|
|
339,123 |
|
|
371,491 |
|
Employees
As
of June 30, 2014, we had 4,415 employees. On a segmental basis, 193 employees
were part of our management, 2,631 were employed in South African transaction
processing, 228 were employed in International transaction processing, 1,363
were employed in Financial inclusion and applied technologies and
corporate/eliminations activities.
11
On
a functional basis, four of our employees were part of executive management, 121
were employed in sales and marketing, 212 were employed in finance and
administration, 323 were employed in information technology and 3,755 were
employed in operations.
As
of June 30, 2014, approximately 77 of the 2,631 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 164
of the 212 employees we have in South 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. In June 2004, Net1 acquired Net1
Applied Technology Holdings Limited, or Aplitec, a public company listed on the
Johannesburg Stock Exchange, or JSE. 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 contained on, or accessible
through, 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 |
60 |
Chief Executive
Officer, Chairman and Director |
Mr. Herman G. Kotzé |
44 |
Chief Financial Officer,
Treasurer, Secretary and Director |
Mr. Phil-Hyun Oh |
55 |
Chief Executive
Officer and President, KSNET, Inc. |
Mr. Nitin Soma |
47 |
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
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 still rates as one of the largest ATM switching systems in the
world. Dr. Belamant has patented a number of inventions, ranging from biometrics
to gaming-related inventions, including our original funds transfer system
patent. 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.
Kotzé 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. Prior to joining Aplitec, Mr. Kotzé was a business
analyst at the Industrial Development Corporation of South Africa. Mr. Kotzé
qualified as a member of the South African Institute of Chartered Accountants at
KPMG.
Mr.
Oh has served as Chief Executive Officer and President of KSNET since 2007.
He is the Chairman of the VAN Association in South Korea. 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 and designed the Stratus back-end system for
Aplitec. Mr. Soma has over 15 years of experience in the development and design
of smart card payment systems.
12
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
The
South African Constitutional Court has ordered SASSA to run a new tender process
for the payment of social grants. As a result, we cannot predict whether our
SASSA contract will remain in effect for the remainder of its five-year term. We
derive a substantial portion of our revenues from this contract and from the
provision of financial and other services to our cardholder base. If we were to
lose our SASSA contract, our business would suffer significantly.
On
April 17, 2014, the South African Constitutional Court issued its ruling on an
appropriate remedy following its declaration on November 29, 2013 that the
tender process followed by SASSA in awarding a contract to us was
constitutionally invalid. In its ruling, the Constitutional Court upheld the
declaration of invalidity of our SASSA contract, but suspended such declaration
until the awarding of a new tender by SASSA in accordance with the ruling or if
no tender is awarded, for the remainder of the existing five-year contract
period, as further described below.
The
Constitutional Court ordered SASSA to initiate a new tender process within 30
days after the ruling. The new tender must be for a period of five years and a
new and independent Bid Evaluation and Bid Adjudication Committee must be
appointed to evaluate and adjudicate the new tender process. The Constitutional
Court further ruled that if SASSA does not award a new tender, the declaration
of invalidity of our current SASSA contract will be further suspended until
completion of the five-year year period for which the contract was originally
awarded.
On
June 5, 2014, SASSA filed a progress report with the Constitutional Court in
which it stated that it has started taking the steps necessary to initiate a
new tender process. We cannot predict what the timing or outcome of the new
tender process will be, or if a new tender award will be made at all after the
process is complete. We intend to participate in the new tender, which will
consume a substantial portion of our managements time and attention. If SASSA
awards the new tender to another bidder, we would lose the benefit of the
remaining portion of our contract.
In
addition, our SASSA contract has enabled us to offer a variety of innovative
financial and other services, such as UEPS-based loans and procurement of
prepaid airtime, to our social welfare recipient cardholders. Although we
believe that our offerings frequently represent the lowest-cost alternative for
our customers for these types of services, if were to lose our SASSA contract,
it might be less convenient for our cardholder customers to purchase these
services from us and thus, we may have difficulty growing or even maintaining
this aspect of our South African business, which would negatively affect our
future operating performance.
The
DOJ and the SEC are investigating whether we have violated the Foreign Corrupt
Practices Act, or FCPA, and other federal criminal laws, which has adversely
impacted our business and reputation.
On
November 30, 2012, we received a letter from the U.S. Department of Justice,
Criminal Division, informing us that the DOJ and the Federal Bureau of
Investigation have begun an investigation into whether we and our subsidiaries,
including our officers, directors, employees, and agents and other persons and
entities possibly affiliated with us violated provisions of the FCPA and other
U.S. federal criminal laws by engaging in a scheme to make corrupt payments to
officials of the Government of South Africa in connection with securing our
SASSA contract and also engaged in violations of the federal securities laws in
connection with statements made by us in our SEC filings regarding this
contract. On the same date, we received a letter from the Division of
Enforcement of the SEC advising us that it is also conducting an investigation
concerning our company. The SEC letter states that the investigation is a
non-public, fact-finding inquiry and that the SEC investigation does not mean
that the SEC has concluded that we or anyone else has broken the law or that the
SEC has a negative opinion of any person, entity or security. We are continuing
to cooperate with the DOJ and the SEC regarding these investigations.
13
We
have been, and will continue to be, exposed to a variety of negative
consequences as a result of these investigations. There could be one or more
enforcement actions in respect of the matters that are the subject of one or
both of the investigations, and such actions, if brought, may result in
judgments, settlements, fines, penalties, injunctions, cease and desist orders
or other relief, criminal convictions and/or penalties. We cannot predict
accurately at this time the outcome or impact of the investigations.
In
addition, we have incurred and will continue to incur significant legal and
other costs in responding to requests for information seeking documents,
testimony and other information in connection with the investigations and cannot
predict at this time the ultimate amount of all such costs. These matters have
required the involvement of certain members of our senior management that has
materially and adversely affected their ability to devote their time to other
matters relating to our business. The investigations have negatively impacted
our ability to maintain our existing business relationships and to obtain new
business, as our business reputation has already suffered significant damage due
to the perceptions created by an investigation of this nature. We believe that
this damage to our reputation has, and will continue, to have a significant
impact on our ability to execute certain aspects of our business strategy
effectively. For example, in fiscal 2013 the FSB suspended Smart Lifes license
and prohibited it from writing any new long-term insurance policies in South
Africa. We believe that the suspension was triggered by the adverse publicity we
have received as a result of the DOJ and SEC investigations. While Smart Lifes
operations are not currently material, providing a variety of financial
products, such as insurance, to our cardholder base is an important part of our
future business strategy. In addition, in order to continue to fund the costs of
the investigations, we have had to upstream a portion of our ZAR cash reserves
to the United States, which has resulted in unfavorable currency conversion
rates and the incurrence of dividend withholding taxes that we would not
otherwise have had to pay.
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 litigation challenging the award of the SASSA tender to us,
we included our entire 2011 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.
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 financial
losses, 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.
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.
14
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, 2014, we had approximately $77.2 million of outstanding
indebtedness, which we incurred to finance our acquisition of KSNET in October
2010. These loans are secured by 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 Net1 Koreas ability to make certain
distributions with respect to its capital stock, prepay other debt, encumber its
assets, incur additional indebtedness, or engage in certain business
combinations. Although these covenants only apply to our South 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.
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.
Certain
South African banks have also developed their own low-cost banking products
targeted at the unbanked and under-banked market segment. According to the 2013
FinScope survey, which is an annual survey conducted by the FinMark Trust, a
non-profit independent trust, there has been a significant increase in the
banked population at the bottom of the pyramid as LSM 3-4 increased from 45% in
2012 to 57% in 2013. As the competition to bank the unbanked in South Africa
intensifies, we may not be successful in marketing our low-cost banking product
to our target population. Moreover, as our product offerings increase, gain
market acceptance and pose a competitive threat in South Africa, especially our
UEPS/EMV product with biometric verification and our financial services
offerings, the banks and SAPO may seek governmental or other regulatory
intervention if they view us as disrupting their transactional or other
businesses.
Our
microlending loan book exposes us to credit risk and our allowance for doubtful
finance loans receivable may not be sufficient to absorb future
write-offs.
We
expanded our microlending loan book by approximately 600% during fiscal 2014.
The majority of these finance loans made are for a period of six months or less
and we are in the process of determining and understanding the impairment risk
of the book. We have created an allowance for doubtful finance loans receivable
related to this book. However, this is a new allowance and management considered
factors including the period of the UEPS-loan outstanding, creditworthiness of
the customers and the past payment history and trends of its established
UEPS-based lending book. 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. However, additional allowances 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 finance loan receivables, including
on-going evaluation of the creditworthiness of each customer.
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. 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.
15
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.
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 Kotzé, 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.
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.
16
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.
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.
17
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.
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.
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 co-established in Namibia and India. 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.
We may have difficulty managing our growth.
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.
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.
18
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 South
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 South 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
recipient cardholders of social welfare grants.
Many
social welfare recipient cardholders 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 recipient cardholders 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.
Our
Smart Life business exposes us to risks typically experienced by life assurance
companies.
Smart
Life is a life insurance company and exposes us to risks typically experienced
by life assurance companies. Some of these risks include the extent to which we
are able to continue to reinsure our risks at acceptable costs, reinsurer
counterparty risk, maintaining regulatory capital adequacy, solvency and
liquidity requirements, our ability to price our insurance products
appropriately, the risk that actual claims experience may exceed our estimates
and the competitiveness of the South African insurance market. If we are unable
to maintain our desired level of reinsurance at prices that we consider
acceptable, we would have to either accept an increase in our exposure risk or
reduce our insurance writings. If our reinsurers are unable to meet their
commitments to us in a timely manner, or at all, we may be unable to discharge
our obligations under our insurance contracts. As such, we are exposed to
counterparty, including credit, risk of these reinsurers. Our product pricing
includes long-term assumptions regarding investment returns, mortality,
morbidity, persistency and operating costs and expenses of the business. Using
the wrong assumptions to price our insurance products could materially and
adversely affect our financial position, results of operations and cash flows.
19
Further,
even though we currently reinsure the majority of our insurance contract
liabilities, if our actual claims experience is higher than our estimates, our
financial position, results of operations and cash flows could be adversely
affected. Finally, the South African insurance industry is highly competitive.
Many of our competitors are well-established, represented nationally and market
similar products and we may not be able to effectively penetrate the South
African insurance market.
Risks Relating to Operating in South Africa and Other
Foreign Markets
If
we do not achieve applicable black economic empowerment, or BEE, 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 increase 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 sector-specific codes of good practice and compliance
with industry-specific transformation charters. In June 2012 the South African
government promulgated an Information and Communications Technology, or ICT,
sector-specific code, to which we are subject. Achievement of BEE objectives is
measured by the ICT sector scorecard which establishes a weighting to various
components of BEE. We have taken a number of actions as a company to increase
empowerment of black South Africans. 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.
We
expect that our BEE rating will be important to our ability to win a new
contract from SASSA and we continually seek ways to improve our BEE rating,
especially the equity component of our rating. In April 2014, we implemented a
BEE transaction pursuant to which we issued 4.4 million shares of our common
stock to our BEE partners for ZAR 60.00 per share, which represented a 25%
discount to the market price of our shares at the time that we negotiated the
transaction. We entered into this transaction to improve the equity component of
our BEE rating. We provided funding to the BEE partners in order for them to buy
these shares from us. In June 2014, and in accordance with the terms of
agreements, we repurchased approximately 2.4 million of these shares of our
common stock in order for the BEE partners to repay the loans we provided to
them. As a result of these transactions, as of June 30, 2014, the BEE partners
owned approximately 4% of our shares of common stock. Under the BEE agreements,
we have the option to exchange the remaining shares owned by the BEE partners
for shares in CPS.
It
is possible that we may find it necessary to issue additional shares to improve
our BEE rating. If we enter into further BEE transactions that involve the
issuance of equity, we cannot predict what the dilutive effect of such a
transaction would be on your ownership or how it would affect the market price
of our stock.
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 South 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. During fiscal 2014, the ZAR was significantly weaker against the US
dollar than during most of the preceding several years, which adversely affected
our 2014 revenue and net income. 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.
20
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.
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, 2014, approximately 69% 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; or (iv) repatriate
to South Africa profits of foreign operations. These regulations could also
limit our ability 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.
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.
21
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; |
|
- |
logistical and communications challenges; |
|
- |
potential adverse changes in laws and regulatory
practices, including import and export license requirements and
restrictions, tariffs, legal structures and tax laws; |
|
- |
difficulties in staffing and managing operations and
ensuring the safety of our employees; |
|
- |
restrictions on the right to convert or repatriate
currency or export assets; |
|
- |
greater risk of uncollectible accounts and longer
collection cycles; |
|
- |
indigenization and empowerment programs; and |
|
- |
exposure to liability under US securities and foreign
trade laws, including the FCPA, and regulations established by the US
Department of Treasurys Office of Foreign Assets Control, or OFAC.
|
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 FCPA
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.
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.
22
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 recipient cardholders
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.
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, or Grindrod, 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. We are also dependent on Grindrod to
defend us against attacks from the other South African banks who may regard the
rapid market acceptance of our UEPS/EMV product with biometric verification as
disruptive to their funds transfer or other businesses and may seek governmental
or other regulatory intervention.
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 are in
the process of applying for a license under this Act in order to sell financial
products. We currently comply with the Act by operating as a juristic
representative of a duly licensed third party. If our status as juristic
representative were to be cancelled and if we fail to obtain our own 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. 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.
23
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 2014
fiscal year, our stock price ranged from a low of $7.01 to a high of $13.00. 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:
|
- |
government or regulatory investigations, including
developments in the current US government investigations; |
|
- |
fluctuations in currency exchange rates, particularly the
US dollar/ZAR exchange rate; |
|
- |
announcement of additional BEE transactions, especially
one involving the issuance or potential issuance of equity securities or
dilution of our existing business in South Africa; |
|
- |
quarterly variations in our operating results, especially
if our operating results fall below the expectations of securities
analysts and investors; |
|
- |
announcements of acquisitions, disposals or impairments
of intangible assets; |
|
- |
the timing of or delays in the commencement,
implementation or completion of major projects; |
|
- |
large purchases or sales of our common stock; |
|
- |
general conditions in the markets in which we operate;
and |
|
- |
economic and financial conditions.
|
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 53% of our outstanding common stock is owned by three
shareholders. Based on their most recent SEC filings disclosing ownership of our
shares, International Value Advisers, LLC, or IVA, Allan Gray Proprietary
Limited, and investment entities affiliated with General Atlantic LLC,
beneficially owned approximately 27%, 18% and 8% 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.
The
interests of IVA, Allan Gray and General Atlantic may be different from or
conflict with the interests of our other shareholders. As a result of the
ownership by IVA, Allan Gray and General Atlantic, 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.
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.
24
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 shares in a BEE transaction,
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.
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:
- 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;
- the judgment is final and conclusive (that is, it cannot be altered by the
court which pronounced it);
- the judgment has not lapsed;
25
- 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;
- the judgment was not obtained by improper or fraudulent means;
- the judgment does not involve the enforcement of a penal or foreign
revenue law or any award of multiple or punitive damages; and
- 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 non-resident 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.
ITEM 2. PROPERTIES
We
lease our corporate headquarters facility which consists of approximately 93,000
square feet in Johannesburg, South Africa. We also lease properties throughout
South Africa, including a 12,088 square foot manufacturing facility in Lazer
Park and 134 depot facilities. We also lease additional office space in
Johannesburg, Cape Town and Durban, South Africa; Seoul, South Korea; and
Frederick, Maryland. These leases expire at various dates through 2018.
We
own land and buildings in Ahnsung, Kyung-gi, South Korea, which facility is used
for the storage of business documents. We believe we have adequate facilities
for our current business operations.
26
ITEM 3. LEGAL PROCEEDINGS
SASSA tender litigation
On
April 17, 2014, the South African Constitutional Court, the highest court in
South Africa, issued its ruling on an appropriate remedy following its
declaration on November 29, 2013, that the tender process followed by SASSA in
awarding a contract to us in January 2012 was constitutionally invalid. The
Constitutional Court upheld the declaration of invalidity of our SASSA contract,
but suspended such declaration until the awarding of a new tender by SASSA in
accordance with the ruling or if no tender is awarded, for the remainder of the
existing five-year contract period, as further described below.
The
Constitutional Court ordered SASSA to initiate a new tender process within 30
days after the ruling. The request for proposals for the new tender must contain
adequate safeguards to ensure that no loss of lawful existing social grants
occurs, the payment of lawful existing grants is not interrupted, and personal
data obtained in the payment process remains private and may not be used in any
manner for any purpose other than payment of grants or for any purpose
sanctioned by the Minister of Social Development. The new tender must be for a
period of five years and a new and independent Bid Evaluation and Bid
Adjudication Committee must be appointed to evaluate and adjudicate the new
tender process. Their evaluation and adjudication must be made public by filing,
with the Registrar of the Constitutional Court, a status report on the first
Monday of every quarter of the year until completion of the process.
The
Constitutional Court further ruled that if SASSA does not award a new tender,
the declaration of invalidity of our current SASSA contract will be further
suspended until completion of the five-year year period for which the contract
was originally awarded. In this event, SASSA must, within 14 days of its
decision not to award the tender, lodge a report to the Registrar of the
Constitutional Court setting out all the relevant information on whether and
when it will be ready to assume the duty to pay grants itself. Furthermore, CPS,
our wholly owned subsidiary that won the 2012 tender, must in this event file
with the Constitutional Court an audited statement of expenses incurred, income
received and net profit earned by it during the five year completed contract
period, which statement must also be verified by an independent auditor
appointed by SASSA and filed with the Constitutional Court. Finally, AllPay was
ordered to pay SASSAs and our costs in relation to the application to lead
further evidence brought in the main merits application and all parties were
ordered to pay their own costs related to the provision of further evidence to
the Constitutional Court in order for it to determine the ruling described
above.
The
Constitutional Court ruling effectively ends this litigation, which was
commenced by AllPay on February 8, 2012 in the High Court of South Africa
against us and SASSA, challenging SASSA's award of the tender to us.
Suit against AllPay
On
December 11, 2012, we commenced a lawsuit in the South Gauteng High Court in
South Africa against AllPay. In our lawsuit, we have alleged that AllPay,
wrongfully and unlawfully and with the intention of injuring our reputation,
infringing our goodwill and reducing our share price, competed unlawfully with
us, by
- directly or indirectly making false reports and providing false
information to members of the South African media which AllPay orchestrated
thereby creating the basis for false media reports which alleged or implied
that the SASSA tender process was tainted by corruption through bribes by or
on behalf of our subsidiary, CPS;
- introducing the media reports and allegations of corruption by or on
behalf of us in connection with the SASSA tender process into the court
proceedings in South Africa instituted by AllPay which sought to set aside the
award of the tender to us;
- causing an unfounded report to be made to the Johannesburg Stock Exchange,
or JSE, regarding disclosure that we made in relation to the SASSA contract;
- making a report to the DOJ, bringing to the attention of the DOJ the
corruption allegations and the South African media reports and repeating the
allegations made in the report to the JSE; and
- falsely seeking to create the impression in media reports and radio
interviews that it had been found in the South African court proceedings
described above that the tender process was tainted by corruption.
In
the lawsuit, we are seeking damages in the aggregate amount of ZAR 478 million
(approximately US$45.2 million based on the ZAR/US dollar exchange rate on June
30, 2014) plus interest and costs. The damages claimed may increase as we
quantify the continued impact of AllPays actions. A trial date will be applied
for after the exchange of the required pleadings and finalization of any
interlocutory issues which may arise. We cannot predict when this matter will go
to trial.
Our
application to prompt the Hawks to conduct an investigation into corruption
allegations that appeared in the South African media
On
February 14, 2013, we filed an application pursuant to Section 34 of the South
African Prevention of Corrupt Activities Act in South Africa with the South
African Police Service. Section 34 deals with the reporting of suspected fraud,
theft, extortion and forgery.
27
Matters
reported under Section 34 are usually referred for investigation to the South
African Directorate for Priority Crime Investigation, known as the Hawks. We
filed the Section 34 application to prompt the Hawks to conduct an investigation
into who may have made corruption allegations that appeared in the South African
media after we were awarded the SASSA tender in January 2012. The Hawks have
confirmed to us that our Section 34 application has been accepted for
investigation. We have provided certain electronic information to the Hawks at
their request and we will cooperate with the Hawks in their investigation.
United States securities litigation
On
December 24, 2013, Net1, our chief executive officer and our chief financial
officer were named as defendants in a purported class action lawsuit filed in
the United States District Court for the Southern District of New York alleging
violations of the federal securities laws. The lawsuit alleges that we made
materially false and misleading statements regarding our business and compliance
policies in our SEC filings and other public disclosures. The lawsuit was
brought on behalf of a purported shareholder of Net1 and all other similarly
situated shareholders who purchased our securities between August 27, 2009 and
November 27, 2013. The lawsuit seeks unspecified damages. On July 23, 2014, the
Court appointed a lead plaintiff and lead counsel. No motion for class
certification has been filed. We believe this lawsuit has no merit and intend to
defend it vigorously.
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.
28
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,
2012 |
|
$10.51 |
|
$7.84 |
Quarter ended December 31, 2012 |
|
$9.39 |
|
$3.01 |
Quarter ended March 31, 2013
|
|
$7.95 |
|
$5.01 |
Quarter ended June 30, 2013 |
|
$8.00 |
|
$6.60 |
Quarter ended September 30,
2013 |
|
$13.00 |
|
$7.01 |
Quarter ended December 31, 2013 |
|
$12.74 |
|
$7.33 |
Quarter ended March 31, 2014
|
|
$10.90 |
|
$7.58 |
Quarter ended June 30, 2014 |
|
$12.09 |
|
$7.03 |
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 20, 2014, there
were 10 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
In
June 2014, we repurchased 2,428,122 shares of our common stock from our BEE
partners pursuant to the Relationship Agreements with them, at a price of ZAR
109.98 per share. Our BEE transactions, including the repurchase, are described
in detail in footnote 14 to our consolidated financial statements.
In
August 2013, our Board of Directors authorized the repurchase of up to $100
million of our common stock from time to time. The authorization has no
expiration date. We have not repurchased any shares under this authorization.
The repurchase of shares described in the previous paragraph were effected
pursuant to a separate authorization by our Board of Directors.
29
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, 2009, in each of our common stock, the S&P 500 companies, and the
companies in the NASDAQ Industrial Index.
30
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, 2014 and 2013, and for the three years ended June 30, 2014 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, 2012, 2011 and 2010 and for the years ended June
30, 2011 and 2010, 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 |
|
|
|
2014(1) |
|
|
2013(1) |
|
|
2012(1) |
|
|
2011(2) |
|
|
2010 |
|
Revenue |
$ |
581,656 |
|
$ |
452,147 |
|
$ |
390,264 |
|
$ |
343,420 |
|
$ |
280,364 |
|
Cost of goods sold, IT processing, servicing
and support |
|
260,232 |
|
|
196,834 |
|
|
141,000 |
|
|
109,858 |
|
|
72,973 |
|
Selling, general and
administrative |
|
168,072 |
|
|
191,552 |
|
|
137,404 |
|
|
119,692 |
|
|
80,854 |
|
Equity instruments granted pursuant to BEE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
transactions (3) |
|
11,268 |
|
|
- |
|
|
14,211 |
|
|
- |
|
|
- |
|
Depreciation and amortization |
|
40,286 |
|
|
40,599 |
|
|
36,499 |
|
|
34,671 |
|
|
19,348 |
|
Impairment losses |
|
- |
|
|
- |
|
|
- |
|
|
41,771 |
|
|
37,378 |
|
Operating income |
|
101,798 |
|
|
23,162 |
|
|
61,150 |
|
|
37,428 |
|
|
69,811 |
|
Interest income |
|
14,817 |
|
|
12,083 |
|
|
8,576 |
|
|
7,654 |
|
|
10,116 |
|
Interest expense |
|
7,473 |
|
|
7,966 |
|
|
9,345 |
|
|
8,672 |
|
|
1,047 |
|
Income before income taxes |
|
109,142 |
|
|
27,279 |
|
|
60,381 |
|
|
36,410 |
|
|
78,880 |
|
Income tax expense |
|
39,379 |
|
|
14,656 |
|
|
15,936 |
|
|
33,525 |
|
|
40,822 |
|
Net income attributable to
Net1 |
|
70,111 |
|
|
12,977 |
|
|
44,651 |
|
|
2,647 |
|
|
38,990 |
|
Income from continuing operations per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
1.51 |
|
$ |
0.28 |
|
$ |
0.99 |
|
$ |
0.06 |
|
$ |
0.84 |
|
Diluted |
$ |
1.50 |
|
$ |
0.28 |
|
$ |
0.99 |
|
$ |
0.06 |
|
$ |
0.84 |
|
(1) Includes revenue and implementation costs related to our
SASSA contract from April 2012. In addition, 2014 includes recovery of $26.6
million of implementation costs from SASSA.
(2) Includes KSNET from November
2010.
(3) Includes a non-cash charge of approximately $11.3 million in 2014
related to common stock issued in our BEE transactions. In addition, 2012
includes a non-cash charge of approximately $14.2 million in connection with the
issuance of a now-expired option to purchase shares of our common stock in a
previous BEE transaction.
Additional Operating Data:
(in thousands, except
percentages)
|
|
Year ended June 30, |
|
|
|
2014(1) |
|
|
2013(1) |
|
|
2012(1) |
|
|
2011(1) |
|
|
2010(1) |
|
Cash flows provided by
operating activities |
$ |
37,145 |
|
$ |
55,917 |
|
$ |
20,406 |
|
$ |
66,223 |
|
$ |
68,683 |
|
Cash flows used in investing activities |
$ |
21,640 |
|
$ |
447,816 |
|
$ |
292,539 |
|
$ |
323,685 |
|
$ |
90,186 |
|
Cash flows provided by (used
in) financing activities . |
$ |
(13,378 |
) |
$ |
409,716 |
|
$ |
231,907 |
|
$ |
183,269 |
|
$ |
(48,478 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income margin |
|
18% |
|
|
5% |
|
|
16% |
|
|
11% |
|
|
25% |
|
(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.
31
Consolidated Balance Sheet Data:
(in thousands)
|
|
As of June 30, |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2011 |
|
|
2010 |
|
Cash and cash equivalents |
$ |
58,672 |
|
$ |
53,665 |
|
$ |
39,123 |
|
$ |
95,263 |
|
$ |
153,742 |
|
Total current assets before settlement assets |
|
282,908 |
|
|
184,723 |
|
|
175,236 |
|
|
213,421 |
|
|
226,429 |
|
Goodwill |
|
186,576 |
|
|
175,806 |
|
|
182,737 |
|
|
209,570 |
|
|
76,346 |
|
Intangible assets |
|
68,514 |
|
|
77,257 |
|
|
93,930 |
|
|
119,856 |
|
|
68,347 |
|
Total assets |
|
1,350,945 |
|
|
1,276,322 |
|
|
955,893 |
|
|
781,645 |
|
|
472,090 |
|
Total current liabilities before settlement obligations |
|
81,823 |
|
|
76,859 |
|
|
73,377 |
|
|
102,406 |
|
|
57,927 |
|
Total long-term debt |
|
62,388 |
|
|
66,632 |
|
|
79,760 |
|
|
111,776 |
|
|
4,343 |
|
Total equity |
$ |
441,748 |
|
$ |
339,969 |
|
$ |
346,811 |
|
$ |
328,010 |
|
$ |
287,301 |
|
- Remainder of this page left blank -
32
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 has
been 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, healthcare 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 recipient
cardholders across the entire country, process debit and credit card payment
transactions on behalf of a wide range of retailers 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. Our XeoHealth service
provides funders and providers of healthcare in United States with an on-line
real-time management system for healthcare transactions.
Internationally,
through KSNET, we are one of the top three VAN processors in South Korea, and we
offer card processing, payment gateway and banking value-added services in that
country.
Our
N1MS business unit is responsible for the worldwide technical development and
commercialization of our array of web and mobile applications and payment
technologies, such as MVC, Chip and GSM licensing and VTU and has deployed
solutions in many countries, including South Africa, Namibia, Nigeria, Cameroon,
the Philippines and Colombia.
Sources of Revenue
We
generate our revenues by charging transaction fees to government agencies,
merchants, financial service providers, utility providers, bill issuers,
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. The revenue and costs associated with this approach
are reflected in our Financial inclusion and applied technologies segment.
33
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 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 South African transaction
processing and Financial inclusion and applied technologies segments.
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
inclusion and applied technologies segment.
In
South Africa, we also generate fees from debit and credit card transaction
processing, the provision of value-added services such as bill payments, mobile
top-up and pre-paid utility sales, transaction processing for both funders and
providers of healthcare and from providing a payroll transaction management
service. The revenue and costs associated with these services are reflected in
our South African transaction processing and Financial inclusion and applied
technologies segments.
Through
KSNET, we earn most of our revenue from payment processing services we provide
to approximately 225,000 merchants and to card issuers in South 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 expired Iraqi contracts to February 2013, are
reflected in our International transaction processing segment.
Finally,
we have entered into business partnerships or joint ventures to introduce our
UEPS and VTU solutions to markets such as Namibia. 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.
Developments during Fiscal 2014
Constitutional Court pronounces remedy for SASSA tender award
On
April 17, 2014, the South African Constitutional Court, or Constitutional Court,
ruled on the appropriate remedy following its declaration on November 29, 2013,
that the tender process followed by the South African Social Security Agency, or
SASSA, in awarding a contract to Net1's wholly-owned subsidiary, Cash Paymaster
Services, or CPS, was constitutionally invalid. The declaration of invalidity of
the contract between SASSA and CPS was upheld, but suspended until a new tender
is awarded, or for the remainder of the existing contract period if no tender is
awarded. SASSA is required to initiate a new tender process within 30 days of
the Constitutional Court's ruling and any award must be for a period of five
years.
See Part I, Item 3Legal Proceedings, for additional details.
December 2013 BEE transactions and buy back of shares from BEE partners
During
fiscal 2014, we signed two BEE Relationship Agreements pursuant to which we
issued, in April 2014, an aggregate of 4,400,000 shares of our common stock to
our BEE partners for ZAR 60.00 per share. Our share price exceeded ZAR 120.00 on
June 4, 2014 and all outstanding amounts under the Relationship Agreements
became due and payable. The BEE partners were unable to pay all outstanding
amounts due on June 5, 2014, and accordingly a trigger event occurred. In June
2014, we repurchased a total of 2,428,122 shares of our common stock, at the
determined volume weighted average price of ZAR109.98, from the BEE partners.
Accordingly, the BEE partners owned 1,971,878 shares of our common stock as of
June 30, 2014. Refer to notes 14 and 17 to our consolidated financial statements
for a full description of and accounting for the BEE transactions.
34
Recovery
of additional implementation costs from SASSA
In
the fourth quarter of fiscal 2014, we received ZAR 277 million (or $26.6
million) from SASSA related to the recovery of additional implementation costs
incurred during the beneficiary re-registration process in fiscal 2012 and 2013.
At the time, SASSA requested us to biometrically register all social grant
beneficiaries (including all child beneficiaries), in addition to the grant
recipients who were issued with the SASSA-branded UEPS/EMV smart cards. As a
result, we performed approximately 11 million additional registrations that did
not form part of its monthly service fee. After an independent verification
process, SASSA agreed to pay the ZAR 277 million as full settlement of the
additional costs incurred.
Growth in mobile value-added services
Our
N1MS business unit introduced a new suite of mobile value-added services,
commencing with a prepaid airtime product during the first quarter of fiscal
2014 and experienced strong adoption throughout fiscal 2014. This product allows
our customers in South Africa to electronically purchase prepaid airtime without
having to visit a physical prepaid airtime vendor. N1MS also introduced a
similar service under the brand Pasavute in partnership with Telecom Networks
Malawi in the second half of fiscal 2014.
Traditional
prepaid airtime procurement is usually time consuming for the customer and
results in them having to pay additional costs. Our product allows our
customers, many of whom do not have their own means of transport or ready access
to transport, to purchase prepaid airtime without having to travel. We also
believe that our product is substantially cheaper than traditional prepaid
airtime channels, which often require customers to pay a substantial premium to
obtain airtime.
At
June 30, 2014, we had approximately 3.0 million registered users, effecting more than one
million transactions per day during peak periods. N1MS has also launched
additional mobile value-added services, including prepaid electricity, and
adoption rates of these products could be similar to its prepaid airtime
offering. We believe that these new products are also cheaper than existing
offerings and will make a meaningful difference in the lives of users of these
new products.
Financial services
During
fiscal 2014, we commenced the national rollout of our financial services
offering in the six provinces in which we did not offer our product during
fiscal 2013. The rollout has required us to employ and train additional staff
and incur set up costs, and rent additional premises in order to establish a
physical presence in these six provinces. We experienced significant growth in
our lending book during fiscal 2014 compared with 2013.
Disposal of non-core businesses
During
fiscal 2014, we concluded a number of corporate transactions as we continue to
restructure and re-focus our business on key long-term growth opportunities. We
sold MediKredit, our medical claims processing business in South Africa, and
NUETS business, which consisted primarily of customer contracts in Africa
except for Namibia and Botswana. We have also substantially liquidated our Net1
UTA business. Refer to notes 18 to our consolidated financial statements for a
full description of these transactions.
Change to internal reporting structure and restatement of
previously reported information
During
June 2014, we simplified our operating and internal reporting structures from
five reportable segments to three. Previously reported information has been
restated. Refer to Note 23 to our consolidated financial statements and
see Presentation of quarterly revenue and operating income by segment for
fiscal 2012 to 2014 below for more information.
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.
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.
35
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 earnings before interest, taxation, depreciation and
amortization, or EBITDA, and the EBITDA multiples applicable to peer and
industry comparables 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 2014 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.
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 2013 and 2012, 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.
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.
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 2014, we recorded a decrease of $29.0
million, and in fiscal 2013, and 2012, we recorded an increase of $6.6 million
and $1.6 million, respectively, to our valuation allowance.
Stock-based
Compensation and Equity Instrument issued pursuant to BEE transactions
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. The fair value of stock options is affected by the assumptions selected.
Net stock-based compensation expense from continuing operations was $3.7
million, $3.9 million and $2.8 million for fiscal 2014, 2013 and 2012,
respectively.
36
Equity
instruments
We
recorded non-cash charges of $11.3 million and $14.2 million associated with the
issuance of equity instruments as part of the BEE transactions during fiscal
2014 and fiscal 2012, respectively, as these awards were fully vested during
those periods. The option granted in fiscal 2012 expired unexercised in fiscal
2013, however, the expense recorded during fiscal 2012 was not reversed during
fiscal 2013 because the option had vested in full on the grant date in 2012.
Accounts
Receivable and Allowance for Doubtful Accounts Receivable
We
maintain an allowance for doubtful accounts receivable related to our Financial
inclusion and applied technologies 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.
UEPS-based
lending
We
created an allowance for doubtful finance loans receivable related to our
Financial inclusion and applied technologies segment as a result of UEPS-based
loans provided to our customers. Our policy is to regularly review the ageing of
outstanding amounts due from borrowers and adjust the provision based on
managements estimate of the recoverability of finance loans receivable. We
write off UEPS-based loans and related service fees if a borrower is in arrears
with repayments for more than three months or dies.
Management
considers factors including the period of the UEPS-loan outstanding,
creditworthiness of the customers and the past payment history and trends of its
established UEPS-based lending book. 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 allowances 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 finance loan 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, 2014, 2013 or 2012, 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.
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.
37
Recent
accounting pronouncements not yet adopted as of June 30, 2014
Refer
to Note 2 of our consolidated financial statements for a full description of
recent accounting pronouncements not yet adopted as of June 30, 2014, including
the expected dates of adoption and effects on financial condition, results of
operations and cash flows.
Currency Exchange Rate Information
Actual
exchange rates
The actual exchange rates for and at the end of the periods presented were as
follows:
Table 1 |
Year ended June 30, |
|
2014 |
|
2013 |
|
2012 |
ZAR : $ average exchange rate |
10.3798 |
|
8.8462 |
|
7.7920 |
Highest ZAR : $ rate during period |
11.2579 |
|
10.3587 |
|
8.6987 |
Lowest ZAR : $ rate during
period |
9.6259 |
|
8.0444 |
|
6.6096 |
Rate at end of period |
10.5887 |
|
9.8925 |
|
8.2881 |
|
|
|
|
|
|
KRW : $ average exchange rate |
1,068 |
|
1,112 |
|
1,130 |
Highest KRW : $ rate during
period |
1,147 |
|
1,162 |
|
1,202 |
Lowest KRW : $ rate during period |
1,014 |
|
1,019 |
|
1,029 |
Rate at end of period |
1,014 |
|
1,144 |
|
1,159 |
38
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, 2014, 2013 and 2012, 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 2 |
|
June 30, |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
Income and expense items: $1
= ZAR |
|
10.3966 |
|
|
8.7105 |
|
|
7.7186 |
|
Income and expense items: $1 = KRW |
|
1,049 |
|
|
1,072 |
|
|
1,104 |
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items: $1 = ZAR |
|
10.5887 |
|
|
9.8925 |
|
|
8.2881 |
|
Balance sheet items: $1 = KRW |
|
1,014 |
|
|
1,144 |
|
|
1,159 |
|
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.
Our
operating segment revenue presented in Results of operations by operating
segment represents total revenue per operating segment before intercompany
eliminations. A reconciliation between total operating segment revenue and
revenue presented in our consolidated financial statements is included in Note
23 to those statements.
Fiscal
2013 results include SmartSwitch Botswana from December 1, 2012 and N1MS from
September 1, 2012. Fiscal 2012 results include Smart Life from July 1, 2011 and
Eason from October 1, 2011. Refer also to Note 3 to the consolidated financial
statements.
39
The
discussion below gives effect to the reallocation of certain activities among
our various operating segments as discussed above.
Fiscal
2014 Compared to Fiscal 2013
The
following factors had an influence on our results of operations during fiscal
2014 as compared with the same period in the prior year:
- Unfavorable impact from the strengthening of the US dollar against
the ZAR: The US dollar appreciated by 19% against the ZAR during
fiscal 2014 which negatively impacted our reported results;
- $26.6 million recovery of expenses and 2013 implementation costs:
Our SASSA contract implementation is complete. During fiscal 2014 we
received approximately $26.6 million, or approximately $19.1 million, net of
tax, from SASSA related to the recovery of additional implementation costs
incurred during the beneficiary re-registration process in fiscal 2012 and
2013. Fiscal 2013 results include implementation-related expenditure,
including smart card costs, of approximately $66.5 million;
- Fair value charge resulting from issue of equity instruments
pursuant to BEE transactions: The fair value non-cash charge of $11.3
million related to our BEE transactions adversely impacted our reported
results during fiscal 2014;
- Increased contribution by KSNET: Our results were positively
impacted by growth in our South Korean operations;
- Higher revenue resulting from an increase in low-margin prepaid
airtime sales: Our revenue has increased as a result of the growth of
our prepaid airtime offering during fiscal 2014, which has lower margins
compared with our other South African businesses;
- National rollout of our financial services offering: We
continued the national rollout of our financial services offering during
fiscal 2014, which resulted in higher revenue from UEPS-based lending.
Profitability in the Financial inclusion and applied technologies segment
however was lower due to rollout costs, including hiring and training of
additional staff and infrastructure deployment as well as the creation of an
allowance for doubtful finance loans receivable;
- Ad hoc hardware sales in fiscal 2014: We sold more terminals
and cards during fiscal 2014 as a result of ad hoc orders received from our
customers;
- Lower DOJ and SEC investigation-related expenses: We
incurred DOJ and SEC investigation-related expenses of $3.9 million during
fiscal 2014 compared to $5.9 million during 2013; and
- Fiscal 2013 bad debt provision: In fiscal 2013 we provided
$2.3 million related to the expired NUETS Iraqi customer contracts.
Consolidated
overall results of operations
This
discussion is based on the amounts which were prepared in accordance with US
GAAP.
The
following tables show the changes in the items comprising our statements of
operations, both in US dollars and in ZAR:
|
|
In United States Dollars |
|
Table 3 |
|
(US GAAP) |
|
|
|
Year ended June 30, |
|
|
|
2014 |
|
|
2013 |
|
|
% |
|
|
|
$000 |
|
|
$ 000 |
|
|
change |
|
Revenue |
|
581,656 |
|
|
452,147 |
|
|
29% |
|
Cost of goods sold, IT processing, servicing and support |
|
260,232 |
|
|
196,834 |
|
|
32% |
|
Selling, general and administration |
|
168,072 |
|
|
191,552 |
|
|
(12% |
) |
Equity instruments issued pursuant to BEE transactions |
|
11,268 |
|
|
- |
|
|
nm |
|
Depreciation and amortization |
|
40,286 |
|
|
40,599 |
|
|
(1% |
) |
Operating income |
|
101,798 |
|
|
23,162 |
|
|
340% |
|
Interest income |
|
14,817 |
|
|
12,083 |
|
|
23% |
|
Interest expense |
|
7,473 |
|
|
7,966 |
|
|
(6% |
) |
Income before income taxes |
|
109,142 |
|
|
27,279 |
|
|
300% |
|
Income tax expense |
|
39,379 |
|
|
14,656 |
|
|
169% |
|
Net income before income from
equity-accounted investments |
|
69,763 |
|
|
12,623 |
|
|
453% |
|
Income from equity-accounted investments |
|
298 |
|
|
351 |
|
|
(15% |
) |
Net income |
|
70,061 |
|
|
12,974 |
|
|
440% |
|
Add net loss attributable to non-controlling interest |
|
(50 |
) |
|
(3 |
) |
|
nm |
|
Net income attributable to Net1 |
|
70,111 |
|
|
12,977 |
|
|
440% |
|
40
|
|
In South African Rand |
|
Table 4 |
|
(US GAAP) |
|
|
|
Year ended June 30, |
|
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
ZAR |
|
|
ZAR |
|
|
% |
|
|
|
000 |
|
|
000 |
|
|
change |
|
Revenue |
|
6,047,244 |
|
|
3,938,426 |
|
|
54% |
|
Cost of goods sold, IT processing, servicing and support |
|
2,705,528 |
|
|
1,714,523 |
|
|
58% |
|
Selling, general and administration |
|
1,745,784 |
|
|
1,668,514 |
|
|
5% |
|
Equity instruments issued pursuant to BEE transactions |
|
118,740 |
|
|
- |
|
|
nm |
|
Depreciation and amortization |
|
418,838 |
|
|
353,637 |
|
|
18% |
|
Operating income |
|
1,058,354 |
|
|
201,752 |
|
|
425% |
|
Interest income |
|
154,046 |
|
|
105,249 |
|
|
46% |
|
Interest expense |
|
77,694 |
|
|
69,388 |
|
|
12% |
|
Income before income taxes |
|
1,134,706 |
|
|
237,613 |
|
|
378% |
|
Income tax expense |
|
409,408 |
|
|
127,661 |
|
|
221% |
|
Net income before income from
equity-accounted investments |
|
725,298 |
|
|
109,952 |
|
|
560% |
|
Income from equity-accounted investments |
|
3,098 |
|
|
3,057 |
|
|
1% |
|
Net income |
|
728,396 |
|
|
113,009 |
|
|
545% |
|
Add net loss attributable to non-controlling interest |
|
(520 |
) |
|
(26 |
) |
|
nm |
|
Net income attributable to Net1 |
|
728,916 |
|
|
113,035 |
|
|
545% |
|
The
increase in revenue was primarily due to the recovery of implementation costs
related to our SASSA contract, a higher contribution from KSNET, more low-margin
transaction fees generated from beneficiaries using the South African National
Payment System, higher prepaid airtime sales driven by the rollout of our
prepaid airtime product, an increase in the number of UEPS-based loans and more
ad hoc terminal and card sales.
The
increase in cost of goods sold, IT processing, servicing and support was
primarily due to higher expenses incurred from increased usage of the South
African National Payment System by beneficiaries and higher prepaid airtime,
terminal and card sales. These increases were offset by the substantial
elimination of expenses related to our SASSA contract implementation, which we
completed in the fourth quarter of fiscal 2013.
In
USD, our selling, general and administration expense decreased due to the
substantial elimination of SASSA contract implementation costs and lower legal
fees in connection with the US government investigations in the current year,
which was offset by increases in goods and services purchased from third
parties.
Our
operating income margin for fiscal 2014 and 2013 was 18% and 5%, respectively.
We discuss the components of operating income margin under Results of
operations by operating segment. The increase is primarily attributable to the
recovery of implementation costs related to our SASSA contract and the
substantial elimination of implementation costs in fiscal 2014, and was
partially offset by the non-cash charge related to the equity instruments issued
pursuant to our BEE transactions.
The
grant date fair value of the equity instruments issued pursuant to our December
2013 BEE transactions was $11.3 million (ZAR 118.7 million) and was expensed in
full in fiscal 2014.
In
ZAR, depreciation and amortization were higher primarily as a result of an
increase in depreciation related to assets used to service our obligations under
our SASSA contract, which was partially offset by no MediKredit and FIHRST
intangible asset amortization as the these intangible assets were fully
amortized at the end of June 2013.
Interest
on surplus cash increased to $14.8 million (ZAR 154.0 million) from $12.1
million (ZAR 105.2 million), due primarily to higher average daily ZAR cash
balances.
In
US dollars, interest expense decreased to $7.5 million (ZAR 77.7 million) from
$8.0 million (ZAR 69.4 million), due to a lower average long-term debt balance
on our South Korean debt as well as lower interest rate resulting from our
refinancing concluded in October 2013.
Fiscal
2014 tax expense was $39.4 million (ZAR 409.4 million) compared to $14.7 million
(ZAR 127.7 million) in fiscal 2013. Our effective tax rate for fiscal 2014, was
36.1% and was higher than the South African statutory rate as a result of
non-deductible expenses (including the expense related to the equity instruments
issued pursuant to our BEE transactions, interest expense related to our
long-term South Korean borrowings and stock-based compensation charges).
41
Our
effective tax rate for the fiscal 2013, was 53.7% and was higher than the South
African statutory rate primarily as a result of non-deductible expenses
(including interest expense related to our long-term South Korean borrowings and
stock-based compensation charges) and South African dividend withholding taxes.
Results
of operations by operating segment
The
composition of revenue and the contributions of our business activities to
operating income are illustrated below
Table 5 |
|
In United States Dollars (US GAAP) |
|
|
|
Year ended June 30, |
|
|
|
2014 |
|
|
% of |
|
|
2013 |
|
|
% of |
|
|
% |
|
Operating Segment |
|
$ 000 |
|
|
total |
|
|
$ 000 |
|
|
total |
|
|
change |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing |
|
261,577 |
|
|
45% |
|
|
242,739 |
|
|
54% |
|
|
8% |
|
International transaction processing |
|
152,725 |
|
|
26% |
|
|
135,954 |
|
|
30% |
|
|
12% |
|
Financial inclusion and
applied technologies |
|
207,595 |
|
|
36% |
|
|
108,001 |
|
|
24% |
|
|
92% |
|
Subtotal:
Operating segments |
|
621,897 |
|
|
107% |
|
|
486,694 |
|
|
108% |
|
|
28% |
|
Intersegment eliminations |
|
(40,241 |
) |
|
(7% |
) |
|
(34,547 |
) |
|
(8% |
) |
|
16% |
|
Consolidated
revenue |
|
581,656 |
|
|
100% |
|
|
452,147 |
|
|
100% |
|
|
29% |
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing |
|
61,401 |
|
|
60% |
|
|
(21,316 |
) |
|
(92% |
) |
|
nm |
|
International transaction
processing |
|
21,952 |
|
|
22% |
|
|
14,208 |
|
|
61% |
|
|
55% |
|
Financial inclusion and applied technologies |
|
60,685 |
|
|
60% |
|
|
57,491 |
|
|
248% |
|
|
6% |
|
Subtotal: Operating segments |
|
144,038 |
|
|
142% |
|
|
50,383 |
|
|
217% |
|
|
186% |
|
Corporate/Eliminations |
|
(42,240 |
) |
|
(42% |
) |
|
(27,221 |
) |
|
(117% |
) |
|
55% |
|
Consolidated operating income |
|
101,798 |
|
|
100% |
|
|
23,162 |
|
|
100% |
|
|
340% |
|
Table 6 |
|
In South African Rand (US GAAP) |
|
|
|
Year ended June 30, |
|
|
|
2014 |
|
|
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
ZAR |
|
|
% of |
|
|
ZAR |
|
|
% of |
|
|
% |
|
Operating Segment |
|
000 |
|
|
total |
|
|
000 |
|
|
total |
|
|
change |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing |
|
2,719,511 |
|
|
45% |
|
|
2,114,378 |
|
|
54% |
|
|
29% |
|
International transaction processing |
|
1,587,821 |
|
|
26% |
|
|
1,184,227 |
|
|
30% |
|
|
34% |
|
Financial inclusion and
applied technologies |
|
2,158,282 |
|
|
36% |
|
|
940,743 |
|
|
24% |
|
|
129% |
|
Subtotal:
Operating segments |
|
6,465,614 |
|
|
107% |
|
|
4,239,348 |
|
|
108% |
|
|
53% |
|
Intersegment eliminations |
|
418,370 |
|
|
(7% |
) |
|
300,922 |
|
|
(8% |
) |
|
39% |
|
Consolidated
revenue |
|
6,047,244 |
|
|
100% |
|
|
3,938,426 |
|
|
100% |
|
|
54% |
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing |
|
638,362 |
|
|
60% |
|
|
(185,673 |
) |
|
(92% |
) |
|
nm |
|
International transaction
processing |
|
228,226 |
|
|
22% |
|
|
123,759 |
|
|
61% |
|
|
84% |
|
Financial inclusion and applied technologies |
|
630,918 |
|
|
60% |
|
|
500,775 |
|
|
248% |
|
|
26% |
|
Subtotal: Operating segments |
|
1,497,506 |
|
|
142% |
|
|
438,861 |
|
|
217% |
|
|
241% |
|
Corporate/Eliminations |
|
(439,152 |
) |
|
(42% |
) |
|
(237,109 |
) |
|
(117% |
) |
|
85% |
|
Consolidated operating income |
|
1,058,354 |
|
|
100% |
|
|
201,752 |
|
|
100% |
|
|
425% |
|
South
African transaction processing
In
ZAR, the increase in segment revenues was primarily due the recovery of
implementation costs related to our SASSA contract and more low-margin
transaction fees generated from beneficiaries using the South African National
Payment System. In addition, revenue from the distribution of social welfare
grants grew modestly during the year and was in-line with the increase in unique
welfare cardholder recipients, net of removal of invalid and fraudulent
beneficiaries.
Our
operating income (loss) margin for fiscal 2014 and 2013 was 23% and (9)%,
respectively, and has increased primarily due to the recovery of implementation
costs related to our SASSA contract and the substantial elimination of SASSA
implementation costs in fiscal 2014.
42
International
transaction-based activities
Revenue
increased primarily due to higher transaction volume at KSNET during fiscal 2014
but was partially offset by the expiration and non-renewal of NUETS contract
with its Iraqi customer in the third quarter of fiscal 2013. Operating income
during fiscal 2014 was higher due to increase in revenue contribution from
KSNET, but partially offset by the loss of the NUETS Iraqi contract as well as
ongoing losses related to our XeoHealth launch in the United States.
Operating
income margin for the segment is lower than for most of our South African
transaction processing businesses. Operating income margin for the year to date
fiscal 2014 and 2013 was 14% and 10%, respectively.
Financial
inclusion and applied technologies
Financial
inclusion and applied technologies revenue and operating income increased
primarily due to higher prepaid airtime sales driven by the rollout of our
prepaid airtime product, an increase in the number of UEPS-based loans as we
rolled out our product nationally, an increase in intersegment revenues and more
ad hoc terminal and smart card sales. The increase in operating income was
partially offset by UEPS-based lending national roll-out expenses and the
establishment of the allowance for doubtful finance loans. Smart Life did not
contribute to operating income in fiscal 2014 due to the FSB suspension of our
license.
Operating
income margin for the Financial inclusion and applied technologies segment
decreased to 29% from 53%, primarily as a result of more low-margin prepaid
airtime and hardware sales.
Corporate/
Eliminations
The
increase in our corporate expenses resulted primarily from the non-cash charge
related to the equity instruments issued pursuant to our BEE transactions,
increases in general corporate audit fees, executive emoluments and other
corporate head office-related expenses purchased from third parties, partially
offset by lower US government investigation expenses.
Our
corporate expenses also include acquisition-related intangible asset
amortization; expenditure related to compliance with Sarbanes; non-employee
directors fees; employee and executive bonuses; stock-based compensation; audit
fees; directors and officers insurance premiums; telecommunications expenses;
property-related expenditures including utilities, rental, security and
maintenance; and elimination entries.
Fiscal
2013 Compared to Fiscal 2012
The
following factors had an influence on our results of operations during fiscal
2013 as compared with the same period in the prior year:
- Unfavorable impact from the strengthening of the US dollar:
The US dollar appreciated by 14% against the ZAR during fiscal 2013
which negatively impacted our reported results;
- SASSA implementation costs: We completed the bulk enrollment
of recipient cardholders and beneficiaries under our SASSA contract during
fiscal 2013 and incurred implementation and staff costs of $66.5 million,
including the cost of UEPS/EMV smart cards issued, compared with $10.9 million
in fiscal 2012;
- DOJ and SEC investigation-related expenses: We incurred DOJ
and SEC investigation-related expenses of $5.9 million in fiscal 2013;
- Allowance for doubtful accounts receivable relating to expired Iraqi
contracts: We have provided $2.3 million related to expired NUETS
Iraqi customer contracts;
- Fair value charge resulting from issue of equity instrument pursuant
to BEE transaction: The fair value charge of $14.2 million related to
our BEE transaction negatively impacted our reported results during fiscal
2012;
- Fiscal 2012 impacted by change in South African tax law: As
a result of the change in South African tax law that replaced STC with a
dividends withholding tax, fiscal 2012 tax expense included a net taxation
benefit of $10.1 million, as we recorded a $18.3 million deferred tax benefit
which was offset by an $8.2 million foreign tax credit valuation allowance;
and
- Profit on liquidation of SmartSwitch Nigeria: In fiscal
2012, we recorded a non-cash profit of $4.0 million on the liquidation of
SmartSwitch Nigeria.
43
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 7 |
|
(US GAAP) |
|
|
|
Year ended June 30, |
|
|
|
2013 |
|
|
2012 |
|
|
% |
|
|
|
$ 000 |
|
|
$ 000 |
|
|
change |
|
Revenue |
|
452,147 |
|
|
390,264 |
|
|
16% |
|
Cost of goods sold, IT processing, servicing and support |
|
196,834 |
|
|
141,000 |
|
|
40% |
|
Selling, general and administration |
|
191,552 |
|
|
137,404 |
|
|
39% |
|
Equity instrument issued pursuant to BEE transaction |
|
- |
|
|
14,211 |
|
|
nm |
|
Depreciation and amortization |
|
40,599 |
|
|
36,499 |
|
|
11% |
|
Operating income |
|
23,162 |
|
|
61,150 |
|
|
(62% |
) |
Interest income |
|
12,083 |
|
|
8,576 |
|
|
41% |
|
Interest expense |
|
7,966 |
|
|
9,345 |
|
|
(15% |
) |
Income before income taxes |
|
27,279 |
|
|
60,381 |
|
|
(55% |
) |
Income tax expense |
|
14,656 |
|
|
15,936 |
|
|
(8% |
) |
Net income before income from
equity-accounted investments |
|
12,623 |
|
|
44,445 |
|
|
(72% |
) |
Income from equity-accounted investments |
|
351 |
|
|
220 |
|
|
60% |
|
Net income |
|
12,974 |
|
|
44,665 |
|
|
(71% |
) |
(Add) Less net (loss) income attributable to
non-controlling interest |
|
(3 |
) |
|
14 |
|
|
nm |
|
Net income attributable to Net1 |
|
12,977 |
|
|
44,651 |
|
|
(71% |
) |
|
|
In South African Rand |
|
Table 8 |
|
(US GAAP) |
|
|
|
Year ended June 30, |
|
|
|
2013 |
|
|
2012 |
|
|
|
|
|
|
ZAR |
|
|
ZAR |
|
|
% |
|
|
|
000 |
|
|
000 |
|
|
change |
|
Revenue |
|
3,938,426 |
|
|
3,012,292 |
|
|
31% |
|
Cost of goods sold, IT processing, servicing and support |
|
1,714,523 |
|
|
1,088,322 |
|
|
58% |
|
Selling, general and administration |
|
1,668,514 |
|
|
1,058,190 |
|
|
58% |
|
Equity instrument issued pursuant to BEE transaction |
|
- |
|
|
112,066 |
|
|
nm |
|
Depreciation and amortization |
|
353,637 |
|
|
281,722 |
|
|
26% |
|
Operating income |
|
201,752 |
|
|
471,992 |
|
|
(57% |
) |
Interest income |
|
105,249 |
|
|
66,195 |
|
|
59% |
|
Interest expense |
|
69,388 |
|
|
72,130 |
|
|
(4% |
) |
Income before income taxes |
|
237,613 |
|
|
466,057 |
|
|
(49% |
) |
Income tax expense |
|
127,661 |
|
|
123,004 |
|
|
4% |
|
Net income before income from
equity-accounted investments |
|
109,952 |
|
|
343,053 |
|
|
(68% |
) |
Income from equity-accounted investments |
|
3,057 |
|
|
1,698 |
|
|
80% |
|
Net income |
|
113,009 |
|
|
344,751 |
|
|
(67% |
) |
(Add) Less net (loss) income attributable to
non-controlling interest |
|
(26 |
) |
|
108 |
|
|
nm |
|
Net income attributable to Net1 |
|
113,035 |
|
|
344,643 |
|
|
(67% |
) |
The
increase in revenue was primarily due to incremental revenue resulting from our
new SASSA contract and a higher contribution from KSNET.
The
increase in cost of goods sold, IT processing, servicing and support was
primarily due to higher expenses related to the implementation of our new SASSA
contract which includes the UEPS/EMV smart cards issued during fiscal 2013.
Our
selling, general and administration expense increased primarily due to the SASSA
contract implementation costs described above, legal fees of approximately $5.9
million (ZAR 51.7 million) in connection with the government investigations and
the allowance for doubtful accounts receivable for expired NUETS contracts. Our
selling, general and administration expense for fiscal 2012 included SASSA
contract implementation costs of $10.9 million (ZAR 83.9 million) and cash
bonuses of $5.4 million (ZAR 41.8 million) related to our SASSA tender award and
a non-cash profit related to the liquidation of SmartSwitch Nigeria of $4.0
million.
44
The
grant date fair value of the equity instrument issued pursuant to our January
2012 BEE transaction was $14.2 million (ZAR 112.1 million) and was expensed in
full in fiscal 2012. The option expired unexercised in fiscal 2013.
Our
operating income margin for fiscal 2013 and 2012 was 5% and 16%, respectively.
We discuss the components of the operating income margin under Results of
operations by operating segment. The decrease is primarily attributable to
higher implementation costs related to the SASSA contract, DOJ and SEC
investigation costs and the NUETS allowance for doubtful accounts receivable in
fiscal 2013.
Depreciation
and amortization increased primarily as a result of an increase in depreciation
related to assets used to service our obligations under our SASSA contract.
Interest
on surplus cash increased to $12.1 million (ZAR 105.2 million) from $8.6 million
(ZAR 66.2 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 9.0% to
8.5% per annum.
Interest
expense decreased to $8.0 million (ZAR 69.4 million) from $9.3 million (ZAR 72.1
million) due to a lower average long-term debt balance.
Total
fiscal 2013 tax expense was $14.7 million (ZAR 127.7 million) compared to $16.0
million (ZAR 123.0 million) in fiscal 2013. 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 $8.2 million related to foreign tax credits. Our
effective tax rate for fiscal 2013, was 53.7% and was higher than the South
African statutory rate primarily as a result of non-deductible expenses
(including interest expense related to our long-term South Korean borrowings and
stock-based compensation charges) and South African dividend withholding taxes.
Our effective tax rate for fiscal 2012, was 26.4% and was lower than the South
African statutory rate as a result of a change in South African tax law which
resulted in a net deferred taxation benefit and a non-taxable profit on
liquidation of SmartSwitch Nigeria, which was partially offset by an equity
instrument issued pursuant to our BEE transaction and non-deductible expenses
(including interest expense related to our long-term South Korean borrowings and
stock-based compensation charges) and the creation of a valuation allowance.
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, |
|
|
|
2013 |
|
|
% of |
|
|
2012 |
|
|
% of |
|
|
% |
|
Operating Segment |
|
$ 000 |
|
|
total |
|
|
$ 000 |
|
|
total |
|
|
change |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing |
|
242,739 |
|
|
54% |
|
|
194,630 |
|
|
50% |
|
|
25% |
|
International transaction processing |
|
135,954 |
|
|
30% |
|
|
120,625 |
|
|
27% |
|
|
13% |
|
Financial inclusion and applied
technologies |
|
108,001 |
|
|
24% |
|
|
90,792 |
|
|
20% |
|
|
19% |
|
Subtotal: Operating segments |
|
486,694 |
|
|
108% |
|
|
406,047 |
|
|
97% |
|
|
20% |
|
Intersegment
eliminations |
|
(34,547 |
) |
|
(8% |
) |
|
(15,783 |
) |
|
3% |
|
|
119% |
|
Consolidated
revenue |
|
452,147 |
|
|
100% |
|
|
390,264 |
|
|
100% |
|
|
16% |
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing |
|
(21,316 |
) |
|
(92% |
) |
|
33,906 |
|
|
55% |
|
|
nm |
|
International transaction processing |
|
14,208 |
|
|
61% |
|
|
14,649 |
|
|
24% |
|
|
(3% |
) |
Financial inclusion and applied technologies |
|
57,491 |
|
|
248% |
|
|
45,884 |
|
|
75% |
|
|
25% |
|
Subtotal:
Operating segments |
|
50,383 |
|
|
217% |
|
|
94,439 |
|
|
154% |
|
|
(47% |
) |
Corporate/Eliminations |
|
(27,221 |
) |
|
(117% |
) |
|
(33,289 |
) |
|
(54% |
) |
|
(18% |
) |
Consolidated operating income |
|
23,162 |
|
|
100% |
|
|
61,150 |
|
|
100% |
|
|
(62% |
) |
45
Table 10 |
|
In South African Rand (US GAAP) |
|
|
|
Year ended June 30, |
|
|
|
2013 |
|
|
|
|
|
2012 |
|
|
|
|
|
|
|
|
|
ZAR |
|
|
% of |
|
|
ZAR |
|
|
% of |
|
|
% |
|
Operating Segment |
|
000 |
|
|
total |
|
|
000 |
|
|
total |
|
|
change |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing |
|
2,114,378 |
|
|
54% |
|
|
1,502,271 |
|
|
50% |
|
|
41% |
|
International transaction processing |
|
1,184,227 |
|
|
30% |
|
|
931,056 |
|
|
31% |
|
|
27% |
|
Financial inclusion and applied
technologies |
|
940,743 |
|
|
24% |
|
|
700,787 |
|
|
23% |
|
|
34% |
|
Subtotal: Operating segments |
|
4,239,348 |
|
|
108% |
|
|
3,134,114 |
|
|
104% |
|
|
35% |
|
Intersegment
eliminations |
|
(300,922 |
) |
|
(8% |
) |
|
(121,822 |
) |
|
(4% |
) |
|
147% |
|
Consolidated
revenue |
|
3,938,426 |
|
|
100% |
|
|
3,012,292 |
|
|
100% |
|
|
31% |
|
Operating (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing |
|
(185,673 |
) |
|
(92% |
) |
|
261,706 |
|
|
55% |
|
|
nm |
|
International transaction processing |
|
123,759 |
|
|
61% |
|
|
113,070 |
|
|
24% |
|
|
9% |
|
Financial inclusion and applied technologies |
|
500,775 |
|
|
248% |
|
|
354,160 |
|
|
75% |
|
|
41% |
|
Subtotal:
Operating segments |
|
438,861 |
|
|
217% |
|
|
728,936 |
|
|
154% |
|
|
(40% |
) |
Corporate/Eliminations |
|
(237,109 |
) |
|
(117% |
) |
|
(256,944 |
) |
|
(54% |
) |
|
(8% |
) |
Consolidated operating income |
|
201,752 |
|
|
100% |
|
|
471,992 |
|
|
100% |
|
|
(57% |
) |
South
African transaction processing
In
ZAR, the increases in segment revenue were primarily due to higher revenues
earned for a full year under our new SASSA contract and low-margin transaction
fees generated from beneficiaries using the South African National Payment
System.
Our
operating (loss) income margin for fiscal 2013 and 2012 was (9%) and 17%,
respectively, and has declined primarily due to the higher SASSA implementation
costs.
International transaction-based activities
KSNET
continues to contribute the majority of our revenues and operating income in
this operating segment. Revenue increased primarily due to KSNETs revenue
growth during fiscal 2013 and was offset by the expiration and non-renewal of
NUETS contract with its Iraqi customer. Operating income was negatively
impacted by this expiration and non-renewal and the related allowance for
doubtful accounts receivable, ongoing start-up expenditures related to our
XeoHealth launch in the United States, ongoing losses at Net1 Virtual Card and
Net1 UTA as well as ongoing competition in the South Korean marketplace, but was
partially offset by increased revenue contributions from KSNET.
Operating
margin for the segment is lower than most of our South African transaction
processing businesses. Operating income margin for fiscal 2013 and 2012 was 10%
and 12%, respectively.
Financial inclusion and applied technologies
Our
revenue from this operating segment increased because of higher intersegment
fees and ad hoc hardware sales to external customers and an increase in the
number of smart card-based accounts as a result of the new SASSA contract,
offset lower UEPS-based lending revenue as a result of a decrease in the number
of loans granted. Our revenue per smart card account decreased in fiscal 2013,
as a result of a change in our pricing for these accounts after taking into
consideration the lower price and higher volumes under the new SASSA contract.
The new pricing was effective from April 1, 2012, and reduced the average
monthly revenue per smart card from ZAR5.50 to ZAR4.00 and the operating income
margin from 45.45% to 28.50% .
Segment
operating income increased due to the higher intersegment fees and ad hoc
hardware sales to external customers, offset by a lower smart-card account
operating margin, on-going start-up expenditure incurred to establish our Smart
Life insurance business and lower UEPS-based lending activity. Smart Life did
not contribute to operating income in fiscal 2013 or 2012.
Operating
income margin for the Financial inclusion and applied technologies segment
increased to 53% from 51%, primarily as a result of higher intersegment fees,
offset by increased start-up expenditures related to Smart Life and other
financial services offerings.
46
Corporate/
Eliminations
Our
fiscal 2013 corporate expenses include increased legal and other fees we
incurred in connection with the US government investigations and higher
stock-based compensation charges. Our fiscal 2012 corporate expenses include a
charge related to our equity instrument issued pursuant to our BEE transaction
and a $4.0 million profit related to the liquidation of SmartSwitch Nigeria.
Our
corporate expenses also include acquisition-related intangible asset
amortization; expenditure related to compliance with Sarbanes; non-executive
directors fees; employee and executive 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.
Presentation of quarterly revenue and operating income by
segment for fiscal 2012 to 2014
The
tables below present quarterly revenue and operating income generated by our
three reportable segments for the fiscal 2014, 2013 and 2012, and
reconciliations to consolidated revenue and operating income (loss), as well as
the US dollar/ ZAR exchange rates applicable per fiscal quarter and year:
Table 11 |
|
In United States Dollars (US GAAP) |
|
|
|
Fiscal 2014 |
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Full |
|
|
|
1 |
|
|
2 |
|
|
3 |
|
|
4 |
|
|
Year |
|
Operating Segment |
|
$000 |
|
|
$000 |
|
|
$000 |
|
|
$000 |
|
|
$000 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing |
|
57,161 |
|
|
58,754 |
|
|
57,397 |
|
|
88,265 |
|
|
261,577 |
|
International transaction processing |
|
37,541 |
|
|
37,738 |
|
|
35,245 |
|
|
42,201 |
|
|
152,725 |
|
Financial inclusion and applied
technologies |
|
36,796 |
|
|
50,480 |
|
|
56,226 |
|
|
64,093 |
|
|
207,595 |
|
Subtotal: Operating segments |
|
131,498 |
|
|
146,972 |
|
|
148,868 |
|
|
194,559 |
|
|
621,897 |
|
Intersegment eliminations |
|
(8,004 |
) |
|
(9,689 |
) |
|
(10,742 |
) |
|
(11,806 |
) |
|
(40,241 |
) |
Consolidated
revenue |
|
123,494 |
|
|
137,283 |
|
|
138,126 |
|
|
182,753 |
|
|
581,656 |
|
Operating (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing |
|
6,461 |
|
|
7,128 |
|
|
9,137 |
|
|
38,675 |
|
|
61,401 |
|
International transaction processing |
|
5,524 |
|
|
5,139 |
|
|
4,642 |
|
|
6,647 |
|
|
21,952 |
|
Financial inclusion and applied technologies |
|
12,835 |
|
|
13,265 |
|
|
16,459 |
|
|
18,126 |
|
|
60,685 |
|
Subtotal:
Operating segments |
|
24,820 |
|
|
25,532 |
|
|
30,238 |
|
|
63,448 |
|
|
144,038 |
|
Corporate/Eliminations |
|
(8,420 |
) |
|
(6,730 |
) |
|
(6,289 |
) |
|
(20,801 |
) |
|
(42,240 |
) |
Consolidated operating income |
|
16,400 |
|
|
18,802 |
|
|
23,949 |
|
|
42,647 |
|
|
101,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income and expense items: $1 = ZAR |
|
10.0001 |
|
|
10.1592 |
|
|
10.8743 |
|
|
10.4218 |
|
|
10.3966 |
|
Table 12 |
|
In United States Dollars (US GAAP) |
|
|
|
Fiscal 2013 |
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Full |
|
|
|
1 |
|
|
2 |
|
|
3 |
|
|
4 |
|
|
Year |
|
Operating Segment |
|
$000 |
|
|
$000 |
|
|
$000 |
|
|
$000 |
|
|
$000 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing |
|
62,420 |
|
|
61,708 |
|
|
60,415 |
|
|
58,196 |
|
|
242,739 |
|
International transaction processing |
|
32,397 |
|
|
33,664 |
|
|
33,700 |
|
|
36,193 |
|
|
135,954 |
|
Financial inclusion and
applied technologies |
|
26,615 |
|
|
25,563 |
|
|
26,214 |
|
|
29,609 |
|
|
108,001 |
|
Subtotal:
Operating segments |
|
121,432 |
|
|
120,935 |
|
|
120,329 |
|
|
123,998 |
|
|
486,694 |
|
Intersegment eliminations |
|
(9,750 |
) |
|
(9,493 |
) |
|
(9,188 |
) |
|
(6,116 |
) |
|
(34,547 |
) |
Consolidated
revenue |
|
111,682 |
|
|
111,442 |
|
|
111,141 |
|
|
117,882 |
|
|
452,147 |
|
Operating (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing |
|
(3,299 |
) |
|
(6,233 |
) |
|
(11,587 |
) |
|
(197 |
) |
|
(21,316 |
) |
International
transaction-based activities |
|
3,329 |
|
|
3,583 |
|
|
2,033 |
|
|
5,263 |
|
|
14,208 |
|
Financial inclusion and applied technologies |
|
14,913 |
|
|
14,286 |
|
|
14,038 |
|
|
14,254 |
|
|
57,491 |
|
Subtotal: Operating segments |
|
14,943 |
|
|
11,636 |
|
|
4,484 |
|
|
19,320 |
|
|
50,383 |
|
Corporate/Eliminations |
|
(5,618 |
) |
|
(6,664 |
) |
|
(9,210 |
) |
|
(5,729 |
) |
|
(27,221 |
) |
Consolidated operating income (loss) . |
|
9,325 |
|
|
4,972 |
|
|
(4,726 |
) |
|
13,591 |
|
|
23,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income and expense items: $1
= ZAR |
|
8.2606 |
|
|
8.7405 |
|
|
8.4662 |
|
|
9.1863 |
|
|
8.7105 |
|
47
Table 13 |
|
In United States Dollars (US GAAP) |
|
|
|
Fiscal 2012 |
|
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Full |
|
|
|
1 |
|
|
2 |
|
|
3 |
|
|
4 |
|
|
Year |
|
Operating Segment |
|
$000 |
|
|
$000 |
|
|
$000 |
|
|
$000 |
|
|
$000 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing |
|
45,632 |
|
|
43,985 |
|
|
43,753 |
|
|
61,260 |
|
|
194,630 |
|
International transaction processing |
|
31,053 |
|
|
29,446 |
|
|
28,635 |
|
|
31,491 |
|
|
120,625 |
|
Financial inclusion and
applied technologies |
|
24,454 |
|
|
19,771 |
|
|
19,591 |
|
|
26,976 |
|
|
90,792 |
|
Subtotal:
Operating segments |
|
101,139 |
|
|
93,202 |
|
|
91,979 |
|
|
119,727 |
|
|
406,047 |
|
Intersegment eliminations |
|
(1,213 |
) |
|
(1,144 |
) |
|
(1,315 |
) |
|
(12,111 |
) |
|
(15,783 |
) |
Consolidated
revenue |
|
99,926 |
|
|
92,058 |
|
|
90,664 |
|
|
107,616 |
|
|
390,264 |
|
Operating (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing |
|
17,001 |
|
|
13,549 |
|
|
5,590 |
|
|
(2,234 |
) |
|
33,906 |
|
International transaction
processing |
|
4,346 |
|
|
3,519 |
|
|
3,295 |
|
|
3,489 |
|
|
14,649 |
|
Financial inclusion and applied technologies |
|
11,968 |
|
|
9,479 |
|
|
9,078 |
|
|
15,359 |
|
|
45,884 |
|
Subtotal: Operating segments |
|
33,315 |
|
|
26,547 |
|
|
17,963 |
|
|
16,614 |
|
|
94,439 |
|
Corporate/Eliminations |
|
(2,469 |
) |
|
(6,319 |
) |
|
(5,485 |
) |
|
(19,016 |
) |
|
(33,289 |
) |
Consolidated operating income (loss) . |
|
30,846 |
|
|
20,228 |
|
|
12,478 |
|
|
(2,402 |
) |
|
61,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income and expense items: $1
= ZAR |
|
7.0939 |
|
|
8.1752 |
|
|
7.8521 |
|
|
8.0329 |
|
|
7.7186 |
|
Liquidity and Capital Resources
At
June 30, 2014, our cash balances were $58.7 million, which comprised mainly
ZAR-denominated balances of ZAR 411.9 million ($38.9 million), KRW-denominated
balances of KRW 14.9 billion ($14.7 million) and US dollar-denominated balances
of $3.7 million and other currency deposits, primarily euro, of $1.4 million.
The increase in our cash balances from June 30, 2013, was primarily due to
higher cash generated from our core business and the recovery of implementation
costs from SASSA, which increase was partially offset by higher corporate tax
payments, the expansion of our UEPS-based lending business, acquisition of
terminals to maintain and expand our South Korean business activities, the
repayment of a portion of our South Korean debt and acquisition of substantially
all of the remaining shares of KSNET that we did not already own.
We
currently believe that our cash and credit facilities are sufficient to fund our
future operations 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 South Korea in short-term
investment accounts at South Korean banking institutions. In addition, we are
required to invest the interest payable under our South Korean debt facilities
due in the next six months in an interest reserve account in South 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.
During
December 2013, we increased our short-term South African credit facility with
Nedbank Limited to ZAR 400 million ($37.8 million). The short-term facility
comprises of an overdraft facility of up to ZAR 250 million and indirect and
derivative facilities of up to ZAR 150 million, which includes letters of
guarantee, letters of credit and forward exchange contracts. As of June 30,
2014, we have used none of the overdraft and ZAR 139.0 million ($13.1 million)
of the indirect and derivative facilities to obtain foreign exchange contracts
and to support guarantees issued by Nedbank to various third parties on our
behalf. Refer to Note 12 to the consolidated financial statements for more
information about the terms of this facility.
48
As
of June 30, 2014, we had outstanding long-term debt of KRW 78.3 billion
(approximately $77.2 million translated at exchange rates applicable as of June
30, 2014) under credit facilities with a group of South Korean banks. The loans
bear interest at the South Korean CD rate in effect from time to time (2.65% as
of June 30, 2014) plus a margin of 3.10% for one of the term loan facilities and
the revolver and a margin of 2.90% for the other term loan facility. Scheduled
repayments of the term loans and loan under the revolving credit facility are as
follows: October 2014 (KRW 15 billion), April 2016, 2017 and 2018 (KRW 10
billion each) and October 2018 (KRW 30 billion plus all outstanding loans under
our revolving credit facility). Refer to Note 13 to the consolidated financial
statements for more information about the terms of this facility.
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 recipient cardholders.
In
addition, as a transaction processor, and in certain instances as a claims
adjudicator, we receive cash
from:
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
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 South 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 2014 decreased to $37.1 million (ZAR
386.2 million) from $55.9 million (ZAR 513.7 million) for fiscal 2013. Excluding
the impact of interest paid under our South Korean debt facility and taxes
presented in the table below, the decrease in cash from operating activities
resulted from the expansion of our UEPS-based lending book, offset by cash
inflows from improved trading activity, the recovery of implementation costs
from SASSA and the substantial elimination of implementation costs related to
our SASSA contract in fiscal 2014. During fiscal 2014, we paid interest of $5.2
million under our South Korean debt facility.
Cash
flows from operating activities for fiscal 2013 increased to $55.9 million (ZAR
513.7 million) from $20.4 million (ZAR 157.5 million) for fiscal 2012. Excluding
the impact of interest paid under our South Korean debt facility and taxes
presented in the table below, the increase in cash provided by operating
activities resulted from a more favorable trading environment, notwithstanding
the significant implementation costs paid in fiscal 2013, an increase in
accounts payable and a decrease in prefunding to merchants participating in our
merchant acquiring system. These increases to operating cash flows were offset
by a moderate increase in accounts receivable and inventory and lower other
payables and taxes which all decrease operating cash flow. During fiscal 2013,
we paid interest of $7.1 million under our South Korean debt facility.
During
fiscal 2014, we made a first provisional tax payment of $13.3 million (ZAR 137.8
million) and a second provisional tax payment of $25.0 million (ZAR 266.6
million) related to our 2014 tax year in South Africa. We also paid taxes
totaling $3.9 million in other tax jurisdictions, primarily South Korea.
During
fiscal 2013, we made a first provisional tax payment of $6.8 million (ZAR 58.7
million), a second provisional tax payment of $7.2 million (ZAR 72.5 million)
related to our 2013 tax year in South Africa and paid dividend withholding taxes
of $1.6 million (ZAR 14.9 million) related to cross-border intercompany
dividends paid. We made an additional second provisional tax payments of $3.1
million (ZAR 25.5 million) related to our 2012 tax year in South Africa. We also
paid taxes totaling $3.3 million in other tax jurisdictions, primarily South
Korea.
49
Taxes
paid during fiscal 2014, 2013 and 2012 were as follows:
Table 14 |
|
Year ended June 30, |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
ZAR |
|
|
ZAR |
|
|
ZAR |
|
|
|
000 |
|
|
000 |
|
|
000 |
|
|
000 |
|
|
000 |
|
|
000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First provisional payments |
|
13,292 |
|
|
6,757 |
|
|
15,014 |
|
|
137,773 |
|
|
58,693 |
|
|
123,271 |
|
Second provisional payments |
|
25,004 |
|
|
7,228 |
|
|
8,485 |
|
|
266,573 |
|
|
72,451 |
|
|
71,458 |
|
Taxation paid related to prior years |
|
228 |
|
|
3,072 |
|
|
3,326 |
|
|
2,360 |
|
|
25,517 |
|
|
24,803 |
|
Taxation refunds received |
|
(36 |
) |
|
(65 |
) |
|
(287 |
) |
|
(400 |
) |
|
(480 |
) |
|
(2,121 |
) |
Dividend withholding taxation |
|
- |
|
|
1,610 |
|
|
- |
|
|
- |
|
|
14,916 |
|
|
- |
|
Secondary taxation on companies |
|
- |
|
|
- |
|
|
1,811 |
|
|
- |
|
|
- |
|
|
14,615 |
|
Total South
African taxes paid |
|
38,488 |
|
|
18,602 |
|
|
28,349 |
|
|
406,306 |
|
|
171,097 |
|
|
232,026 |
|
Foreign taxes paid, primarily
South |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Korea |
|
3,929 |
|
|
3,298 |
|
|
2,355 |
|
|
41,506 |
|
|
29,468 |
|
|
18,288 |
|
Total tax paid |
|
42,417 |
|
|
21,900 |
|
|
30,704 |
|
|
447,812 |
|
|
200,565 |
|
|
250,314 |
|
Cash
flows from investing activities
Cash
used in investing activities for fiscal 2014 includes capital expenditure of
$23.9 million (ZAR 248.5 million), primarily for the acquisition of payment
processing terminals in South Korea.
Cash
used in investing activities for fiscal 2013 includes capital expenditure of
$22.7 million (ZAR 198.1 million), primarily for payment vehicles and related
equipment for our SASSA contract and acquisition of payment processing terminals
in South Korea.
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 South Korea and POS
devices to service our merchant acquiring system in South Africa.
During
fiscal 2013 we paid, net of cash acquired, $1.9 million (ZAR 16.8 million) for
N1MS and $0.2 million for SmartSwitch Botswana. During fiscal 2012, we received
a net settlement of $4.9 million from the former shareholders of KSNET. We also
paid $4.5 million (ZAR 34.8 million) for the Eason prepaid electricity and
airtime business during fiscal 2012.
Cash
flows from financing activities
During
the fiscal 2014, we refinanced our South Korean debt and used $70.6 million of
these new borrowings and $16.4 million of our surplus cash to repay the $87.0
million due under our old facility. In addition, we paid the facility fees
related to our new South Korean borrowings of approximately $0.9 million. During
fiscal 2014, we utilized approximately $2.1 million of these new borrowings to
pay quarterly interest due in South Korea.
During
fiscal 2014, we paid approximately $2.0 million for substantially all of the
shares of KSNET we did not already own. We utilized our South African short-term
facility during fiscal 2014 and have repaid the full amount outstanding as of
June 30, 2014.
During fiscal 2013, we made a scheduled $14.5 million long-term debt repayment.
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.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
50
Capital Expenditures
Capital
expenditures for the years ended June 30, 2014, 2013 and 2012 were as follows:
Table 15 |
|
Year ended June 30, |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
ZAR |
|
|
ZAR |
|
|
ZAR |
|
Operating Segment |
|
000 |
|
|
000 |
|
|
000 |
|
|
000 |
|
|
000 |
|
|
000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing |
|
3,425 |
|
|
9,400 |
|
|
23,332 |
|
|
35,608 |
|
|
81,879 |
|
|
180,090 |
|
International transaction processing |
|
19,393 |
|
|
12,490 |
|
|
14,994 |
|
|
201,621 |
|
|
108,794 |
|
|
115,733 |
|
Financial inclusion and applied
technologies |
|
1,088 |
|
|
857 |
|
|
841 |
|
|
11,312 |
|
|
7,465 |
|
|
6,491 |
|
Consolidated total |
|
23,906 |
|
|
22,747 |
|
|
39,167 |
|
|
248,541 |
|
|
198,138 |
|
|
302,314 |
|
Our
capital expenditures for fiscal 2014, 2013 and 2012, 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, 2014, of $0.2 million related mainly to computer equipment required to
maintain and expand operations. We expect to fund these expenditures through
internally-generated funds. In addition to these capital expenditures, we expect
that capital spending for fiscal 2015 will also relate to expanding our
operations in South Korea and South Africa.
Contractual Obligations
The
following table sets forth our contractual obligations as of June 30, 2014:
Table 16 |
|
Payments due by Period, as of June 30, 2014 (in $ 000s) |
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
than 1 |
|
|
1-3 |
|
|
3-5 |
|
|
than 5 |
|
|
|
Total |
|
|
year |
|
|
years |
|
|
years |
|
|
years |
|
Long-term debt obligations
(A) |
|
88,049 |
|
|
18,605 |
|
|
26,024 |
|
|
43,420 |
|
|
- |
|
Operating lease obligations |
|
7,587 |
|
|
3,490 |
|
|
3,734 |
|
|
363 |
|
|
- |
|
Purchase obligations |
|
5,541 |
|
|
5,541 |
|
|
- |
|
|
- |
|
|
- |
|
Capital commitments |
|
190 |
|
|
190 |
|
|
- |
|
|
- |
|
|
- |
|
Other long-term obligations
(B) |
|
23,477 |
|
|
- |
|
|
- |
|
|
- |
|
|
23,477 |
|
Total |
|
124,844 |
|
|
27,826 |
|
|
29,758 |
|
|
43,783 |
|
|
23,477 |
|
|
(A) |
Includes $77.2 million of long-term debt discussed
under Liquidity and capital resources and includes interest payable at
the rate applicable as of June 30, 2014. |
|
(B) |
Includes policy holder liabilities of $22.2 million
related to our insurance business. |
51
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, 2014, and 2013, our
outstanding foreign exchange contracts were as follows:
As
of June 30, 2014
|
|
Fair market |
|
|
Notional amount |
Strike price |
value price |
|
Maturity |
EUR 182,272.50 |
ZAR 15.2077 |
ZAR 14.5803 |
|
July 21, 2014 |
EUR 182,272.50 |
ZAR 15.3488 |
ZAR 14.5803 |
|
July 21, 2014 |
EUR 180,022.50 |
ZAR 15.4228 |
ZAR 14.6542 |
|
August 20, 2014 |
EUR 180,022.50 |
ZAR 15.2819 |
ZAR 14.6542 |
|
August 20, 2014 |
EUR 180,022.50 |
ZAR 15.3623 |
ZAR 14.7367 |
|
September 22, 2014 |
EUR 180,022.50 |
ZAR 15.5041 |
ZAR 14.7367 |
|
September 22, 2014 |
EUR 181,570.50 |
ZAR 15.5739 |
ZAR 14.8119 |
|
October 20, 2014 |
EUR 181,570.50 |
ZAR 15.4316 |
ZAR 14.8119 |
|
October 20, 2014 |
EUR 180,022.50 |
ZAR 15.6552 |
ZAR 14.8982 |
|
November 20, 2014 |
EUR 180,022.50 |
ZAR 15.5136 |
ZAR 14.8982 |
|
November 20, 2014 |
EUR 180,022.50 |
ZAR 15.5970 |
ZAR 14.9874 |
|
December 22, 2014 |
EUR 180,022.50 |
ZAR 15.7391 |
ZAR 14.9874 |
|
December 22, 2014 |
EUR 174,424.50 |
ZAR 15.8119 |
ZAR 15.0671 |
|
January 20, 2015 |
EUR 174,424.50 |
ZAR 15.6729 |
ZAR 15.0671 |
|
January 20, 2015 |
As of June 30, 2013
|
|
Fair market |
|
|
Notional amount |
Strike price |
value price |
|
Maturity |
EUR 4,000,000 |
ZAR 9.06 |
ZAR 10.1397 |
|
September 30, 2013
|
Translation Risk
Translation
risk relates to the risk that our results of operations will vary significantly
as the US dollar is our reporting currency, but we earn most of our revenues and
incur most of our expenses in ZAR. The US dollar to ZAR exchange rate has
fluctuated significantly over the past three years. As exchange rates are
outside our control, there can be no assurance that future fluctuations will not
adversely affect our results of operations and financial condition.
Interest
Rate Risk
As
a result of our normal borrowing and leasing activities, our operating results
are exposed to fluctuations in interest rates, which we manage primarily through
our regular financing activities. In addition, outstanding indebtedness under
our long-term South Korean debt facilities bear interest at the South Korean CD
rate plus 3.10% and 2.90%, respectively. As interest rates, and specifically the
South Korean CD rate, are outside our control, there can be no assurance that
future increases in interest rates, specifically the South Korean CD rate, will
not adversely affect our results of operations and financial condition. As of
June 30, 2014, the South Korean CD rate was 2.65% .
52
The
following table illustrates the effect on our annual expected interest charge,
translated at exchange rates applicable as of June 30, 2014, as a result of a
change in the South Korean CD rate. The effects of a hypothetical 1% increase
and a 1% decrease in the South Korean CD rate as of June 30, 2014, is shown. The
selected 1% hypothetical change does not reflect what could be considered the
best or worst case scenarios.
|
|
As of June 30, 2014 |
|
Table 17 |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
|
|
annual |
|
|
|
|
|
|
|
|
|
expected |
|
|
|
Annual |
|
|
Hypothetical |
|
|
interest charge |
|
|
|
expected |
|
|
change in |
|
|
after change in |
|
|
|
interest |
|
|
South |
|
|
South Korean |
|
|
|
charge |
|
|
Korean CD |
|
|
CD rate |
|
|
|
($ 000) |
|
|
rate |
|
|
($ 000) |
|
Interest on debt facility |
|
4,408 |
|
|
1% |
|
|
5,189 |
|
|
|
|
|
|
(1% |
) |
|
3,645 |
|
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.
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.
UEPS-based microlending credit risk
We
are exposed to credit risk in our UEPS-based microlending activities, which
provides unsecured short-term loans to qualifying customers. We manage this risk
by performing an affordability test for each prospective customer and assign 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 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 26% 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, 2014, 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.
53
The
following table summarizes our exchange-traded equity securities with equity
price risk as of June 30, 2014. The effects of a hypothetical 10% increase and a
10% decrease in market prices as of June 30, 2014, 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, 2014 |
|
Table 18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 . |
|
8,068 |
|
|
10% |
|
|
8,875 |
|
|
0.21% |
|
|
|
|
|
|
(10% |
) |
|
7,261 |
|
|
(0.21% |
) |
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-55 of this
Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not
applicable.
54
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, 2014.
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 US 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 US 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 in 1992. Based on this evaluation, management concluded that
our internal control over financial reporting was effective as of June 30, 2014.
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, 2014, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and 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, 2014, based
on criteria established in Internal ControlIntegrated Framework
(1992) 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 the
accompanying 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, 2014, based on the
criteria established in Internal ControlIntegrated Framework (1992)
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, 2014 of the Company and our
report dated August 28, 2014, expressed an unqualified opinion on those
financial statements.
/s/ Deloitte & Touche (South Africa)
Registered
Auditors
28 August 2014
National Executive: LL Bam Chief Executive AE Swiegers Chief
Operating Officer GM Pinnock Audit
DL Kennedy Risk Advisory NB Kader Tax TP
Pillay Consulting K Black Clients & Industries
JK Mazzocco Talent &
Transformation MJ Jarvis Finance M Jordan Strategy S Gwala Managed Services
TJ Brown Chairman of the Board MJ Comber Deputy Chairman of the
Board
A full list of partners and directors is available on request
56
ITEM 9B. OTHER INFORMATION
None.
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 2014 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 2014 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 2014 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 2014 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 2014 annual meeting of shareholders
entitled Audit and Non-Audit Fees.
58
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-55]. |
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 |
|
Herewith |
|
Form |
|
Exhibit |
|
Filing Date |
|
|
|
|
|
|
|
|
|
|
|
3.1 |
|
Amended and Restated Articles of Incorporation |
|
|
|
8-K |
|
3.1 |
|
December 1, 2008 |
|
|
|
|
|
|
|
|
|
|
|
3.2 |
|
Amended and Restated By-Laws of Net 1 UEPS
Technologies, Inc. |
|
|
|
8-K |
|
3.2 |
|
November 5, 2009 |
|
|
|
|
|
|
|
|
|
|
|
4.1 |
|
Form of common stock certificate |
|
|
|
S-1 |
|
4.1 |
|
June 20, 2005 |
|
|
|
|
|
|
|
|
|
|
|
10.1 |
|
Distribution Agreement, dated July 1, 2002,
between Net 1 UEPS Technologies, Inc. and Net 1 Investment Holdings (Pty)
Limited |
|
|
|
S-4 |
|
10.1 |
|
February 3, 2004 |
|
|
|
|
|
|
|
|
|
|
|
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 |
|
10.2 |
|
February 3, 2004 |
|
|
|
|
|
|
|
|
|
|
|
10.3 |
|
Technology License Agreement between Net 1
Investment Holdings (Proprietary) Limited and Visa International Service
Association |
|
|
|
S-1 |
|
10.12 |
|
May 26, 2005 |
|
|
|
|
|
|
|
|
|
|
|
10.4 |
|
Product License Agreement between Net 1
Holdings S.a.r.1. and Net 1 Operations S.a.r.1. |
|
|
|
S-4/A |
|
10.8 |
|
April 21, 2004 |
|
|
|
|
|
|
|
|
|
|
|
10.5 |
|
Non Exclusive UEPS License Agreement between
Net 1 Investment Holdings (Proprietary) Limited and SIA Netcards |
|
|
|
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 |
59
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* |
Amended and Restated Stock
Incentive Plan of Net 1 UEPS Technologies, Inc. |
|
14A |
A
|
October 28, 2009 |
|
|
|
|
|
|
10.12* |
Form of Restricted Stock
Agreement |
|
10-K |
10.13 |
August 23, 2012 |
|
|
|
|
|
|
10.13* |
Form of Stock Option Agreement
|
|
10-K |
10.14 |
August 23, 2012 |
|
|
|
|
|
|
10.14* |
Form of Restricted Stock
Agreement (non- employee directors) |
|
10-K |
10.15 |
August 23, 2012 |
|
|
|
|
|
|
10.15 |
Form of Option issued by the
Company to Business Venture Investments No 1567 (Proprietary) Limited (RF)
|
|
8-K |
99.2 |
January 26, 2012 |
|
|
|
|
|
|
10.16 |
Contract for the Payment of
Social Grants dated February 3, 2012 between CPS and SASSA |
|
8-K |
99.1 |
February 6, 2012 |
|
|
|
|
|
|
10.17 |
Service Level Agreement dated
February 3, 2012 between CPS and SASSA |
|
8-K |
99.2 |
February 6, 2012 |
|
|
|
|
|
|
10.18 |
Agreement of Lease, Memorandum
of an agreement entered into by and between Buzz Trading 199 (Pty) Ltd and
Net 1 Applied Technologies South Africa (Pty) Ltd dated May 7, 2013 |
|
10-Q |
10.25 |
May
9, 2013 |
|
|
|
|
|
|
10.19 |
KRW 85,000,000,000 Senior
Facilities Agreement dated October 28, 2013, between Net 1 Applied
Technologies Korea, as borrower, Hana Bank, as agent and security agent,
financial institutions listed therein as original lenders and Hana Daetoo
Securities Co., Ltd., as mandated lead arranger. |
|
8-K |
10.24 |
October 31, 2013 |
|
|
|
|
|
|
10.20 |
Relationship Agreement dated
December 10, 2013 between Net 1 UEPS Technologies, Inc., Net 1 Applied
Technologies South Africa (Proprietary) Limited, Business Venture
Investments No 1567 (Proprietary) Limited (RF) and Mosomo Investment
Holdings (Proprietary) Limited. |
|
8-K |
10.25 |
December 10, 2013 |
|
|
|
|
|
|
10.21 |
Relationship Agreement dated
December 10, 2013 between Net 1 UEPS Technologies, Inc., Net 1 Applied
Technologies South Africa (Proprietary) Limited, Born Free Investments 272
(Pty) Ltd and Mazwi Yako. |
|
8-K |
10.26 |
December 10, 2013 |
|
|
|
|
|
|
10.22 |
Facility Letter between Nedbank
Limited and Net1 Applied Technologies South Africa Limited and certain of
its subsidiaries dated as of December 13, 2013 and First Addendum thereto
dated as of December 18, 2013 |
|
8-K |
10.27 |
December 19, 2013 |
|
|
|
|
|
|
10.23 |
Addendum dated January 31,
2014, to the Relationship Agreement between Net 1 UEPS Technologies, Inc.,
Net 1 Applied Technologies South Africa (Proprietary) Limited, Business
Venture Investments No 1567 (Proprietary) Limited (RF) and Mosomo
Investment Holdings (Proprietary) Limited. |
|
10-Q |
10.28 |
February 6, 2014 |
|
|
|
|
|
|
10.24 |
Addendum dated January 31,
2014, to the Relationship Agreement between Net 1 UEPS Technologies, Inc.,
Net 1 Applied Technologies South Africa (Proprietary) Limited, Born Free
Investments 272 (Pty) Ltd and Mazwi Yako. |
|
10-Q |
10.29 |
February 6, 2014 |
60
10.25 |
Second Addendum dated March 14,
2014, to the Relationship Agreement between Net 1 UEPS Technologies, Inc.,
Net 1 Applied Technologies South Africa (Proprietary) Limited, Business
Venture Investments No 1567 (Proprietary) Limited (RF) and Mosomo
Investment Holdings (Proprietary) Limited. |
|
8-K |
10.30 |
March 18, 2014 |
|
|
|
|
|
|
10.26 |
Second Addendum dated March 14,
2014, to the Relationship Agreement between Net 1 UEPS Technologies, Inc.,
Net 1 Applied Technologies South Africa (Proprietary) Limited, Born Free
Investments 272 (Pty) Ltd and Mazwi Yako. |
|
8-K |
10.31 |
March 18, 2014 |
|
|
|
|
|
|
10.27* |
Service Agreement between
KSNET, Inc. and Phil- Hyun Oh dated June 30, 2014 |
|
8-K |
10.1 |
July 2, 2014 |
|
|
|
|
|
|
10.28* |
Service Agreement between Net1
Applied Technologies Korea and Phil-Hyun Oh dated June 30, 2014 |
|
8-K |
10.2 |
July 2, 2014 |
|
|
|
|
|
|
12 |
Statement of Ratio of Earnings
to Fixed Charges |
X |
|
|
|
|
|
|
|
|
|
14 |
Amended and Restated Code of
Ethics |
X |
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
31.2 |
Certification of Principal
Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the
Securities Exchange Act of 1934, as amended |
X |
|
|
|
|
|
|
|
|
|
32 |
Certification pursuant to 18
USC Section 1350 |
X |
|
|
|
|
|
|
|
|
|
101.INS |
XBRL Instance Document |
X |
|
|
|
|
|
|
|
|
|
101.SCH |
XBRL Taxonomy Extension Schema |
X |
|
|
|
|
|
|
|
|
|
101.CAL |
XBRL Taxonomy Extension
Calculation Linkbase |
X |
|
|
|
|
|
|
|
|
|
101.DEF |
XBRL Taxonomy Extension
Definition Linkbase |
X |
|
|
|
|
|
|
|
|
|
101.LAB |
XBRL Taxonomy Extension Label
Linkbase |
X |
|
|
|
|
|
|
|
|
|
101.PRE |
XBRL Taxonomy Extension
Presentation Linkbase |
X |
|
|
|
__________________________
* Indicates a management contract
or compensatory plan or arrangement.
61
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 28, 2014
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.
Net 1 UEPS Technologies, Inc. - Form 10-K
NAME |
TITLE |
DATE |
|
|
|
|
Chief Executive Officer, Chairman
of the Board and |
August 28, 2014 |
/s/ Serge C.P. Belamant |
Director (Principal Executive
Officer) |
|
Serge C.P. Belamant |
|
|
|
|
|
|
Chief Financial Officer,
Treasurer and Secretary and |
August 28, 2014 |
/s/ Herman Gideon Kotzé |
Director (Principal Financial and
Accounting Officer) |
|
Herman Gideon Kotzé |
|
|
|
|
|
/s/ Paul Edwards |
Director |
August 28, 2014 |
Paul Edwards |
|
|
|
|
|
/s/ Alasdair Jonathan Kemsley Pein |
Director |
August 28, 2014 |
Alasdair Jonathan Kemsley Pein |
|
|
|
|
|
/s/ Christopher Stefan Seabrooke |
Director |
August 28, 2014 |
Christopher Stefan Seabrooke |
|
|
62
NET 1 UEPS TECHNOLOGIES, INC.
LIST OF CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and 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, 2014 and
2013, 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, 2014. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
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, 2014 and 2013, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2014 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, 2014, based on the criteria established in
Internal Control Integrated Framework (1992) issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated August
28, 2014 expressed an unqualified opinion on the Company's internal control over
financial reporting.
/s/ Deloitte & Touche (South Africa)
Registered
Auditors
28 August 2014
National Executive: LL Bam Chief Executive AE Swiegers Chief
Operating Officer GM Pinnock Audit
DL Kennedy Risk Advisory NB Kader Tax TP
Pillay Consulting K Black Clients & Industries
JK Mazzocco Talent &
Transformation MJ Jarvis Finance M Jordan Strategy S Gwala Managed Services
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, 2014 and 2013
|
|
2014 |
|
|
2013 |
|
|
|
(In thousands, except share data) |
|
ASSETS |
|
CURRENT ASSETS |
|
|
|
|
|
|
Cash and cash equivalents |
$ |
58,672 |
|
$ |
53,665 |
|
Pre-funded
social welfare grants receivable (Note 4) |
|
4,809 |
|
|
2,934 |
|
Accounts receivable, net (Note
5) |
|
148,067 |
|
|
102,614 |
|
Finance loans
receivable, net (Note 5) |
|
53,124 |
|
|
8,350 |
|
Inventory (Note 6) |
|
10,785 |
|
|
12,222 |
|
Deferred income
taxes (Note 20) |
|
7,451 |
|
|
4,938 |
|
Total current assets before settlement assets |
|
282,908 |
|
|
184,723 |
|
Settlement assets |
|
725,987 |
|
|
752,476 |
|
Total current
assets |
|
1,008,895 |
|
|
937,199 |
|
PROPERTY, PLANT AND EQUIPMENT, net (Note 8) |
|
47,797 |
|
|
48,301 |
|
EQUITY-ACCOUNTED INVESTMENTS |
|
878 |
|
|
1,183 |
|
GOODWILL (Note 9) |
|
186,576 |
|
|
175,806 |
|
INTANGIBLE ASSETS, net (Note 9) |
|
68,514 |
|
|
77,257 |
|
OTHER LONG-TERM ASSETS (Note 7 and Note 10) |
|
38,285 |
|
|
36,576 |
|
TOTAL ASSETS |
|
1,350,945 |
|
|
1,276,322 |
|
LIABILITIES |
|
CURRENT LIABILITIES |
|
|
|
|
|
|
Accounts payable |
|
17,101 |
|
|
26,567 |
|
Other payables (Note 11) |
|
42,257 |
|
|
33,808 |
|
Current portion
of long-term borrowings (Note 13) |
|
14,789 |
|
|
14,209 |
|
Income taxes payable |
|
7,676 |
|
|
2,275 |
|
Total current liabilities before settlement obligations |
|
81,823 |
|
|
76,859 |
|
Settlement obligations |
|
725,987 |
|
|
752,476 |
|
Total
current liabilities |
|
807,810 |
|
|
829,335 |
|
DEFERRED INCOME TAXES (Note 20) |
|
15,522 |
|
|
18,727 |
|
LONG-TERM BORROWINGS (Note 13) |
|
62,388 |
|
|
66,632 |
|
OTHER LONG-TERM LIABILITIES (Note 10) |
|
23,477 |
|
|
21,659 |
|
TOTAL
LIABILITIES |
|
909,197 |
|
|
936,353 |
|
COMMITMENTS AND CONTINGENCIES (Note 24) |
|
|
|
|
|
|
EQUITY |
|
COMMON STOCK (Note
14) Authorized:
200,000,000 with $0.001 par
value; Issued
and outstanding shares, net of treasury - 2014: 47,819,299; 2013:
45,592,550 |
|
63 |
|
|
59 |
|
PREFERRED
STOCK Authorized
shares: 50,000,000 with $0.001 par
value; Issued
and outstanding shares, net of treasury: 2014: -; 2013: - |
|
- |
|
|
- |
|
ADDITIONAL PAID-IN CAPITAL |
|
202,401 |
|
|
160,670 |
|
TREASURY SHARES, AT COST: 2014: 15,883,212;
2013: 13,455,090 (Note 14) |
|
(200,681 |
) |
|
(175,823 |
) |
ACCUMULATED OTHER COMPREHENSIVE LOSS (Note 15) |
|
(82,741 |
) |
|
(100,858 |
) |
RETAINED EARNINGS |
|
522,729 |
|
|
452,618 |
|
TOTAL NET1 EQUITY |
|
441,771 |
|
|
336,666 |
|
NON-CONTROLLING
INTEREST |
|
(23 |
) |
|
3,303 |
|
TOTAL EQUITY |
|
441,748 |
|
|
339,969 |
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ |
1,350,945 |
|
$ |
1,276,322 |
|
See accompanying notes to consolidated financial statements.
F-3
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
for the years ended June 30, 2014, 2013 and
2012
|
|
2014 |
|
|
|
2013 |
|
|
|
2012 |
|
|
|
(In thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE (Note 16) |
$ |
581,656 |
|
|
$ |
452,147 |
|
|
$ |
390,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
rendered |
|
518,297 |
|
|
|
430,268 |
|
|
|
362,679 |
|
Loan-based fees received |
|
33,560 |
|
|
|
6,613 |
|
|
|
8,433 |
|
Sale of
goods |
|
29,799 |
|
|
|
15,266 |
|
|
|
19,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
goods sold, IT processing, servicing and support |
|
260,232 |
|
|
|
196,834 |
|
|
|
141,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administration |
|
168,072 |
|
|
|
191,552 |
|
|
|
137,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
instruments issued pursuant to BEE transactions (Note 17) |
|
11,268 |
|
|
|
- |
|
|
|
14,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
40,286 |
|
|
|
40,599 |
|
|
|
36,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
101,798 |
|
|
|
23,162 |
|
|
|
61,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME |
|
14,817 |
|
|
|
12,083 |
|
|
|
8,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE |
|
7,473 |
|
|
|
7,966 |
|
|
|
9,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES |
|
109,142 |
|
|
|
27,279 |
|
|
|
60,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE (Note 20) |
|
39,379 |
|
|
|
14,656 |
|
|
|
15,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME BEFORE EARNINGS FROM EQUITY-
ACCOUNTED INVESTMENTS |
|
69,763 |
|
|
|
12,623 |
|
|
|
44,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS FROM EQUITY-ACCOUNTED INVESTMENTS |
|
298 |
|
|
|
351 |
|
|
|
220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
70,061 |
|
|
|
12,974 |
|
|
|
44,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(ADD) LESS: NET (LOSS) INCOME ATTRIBUTABLE
TO NON- CONTROLLING INTEREST |
|
(50 |
) |
|
|
(3 |
) |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO NET1 |
$ |
70,111 |
|
|
$ |
12,977 |
|
|
$ |
44,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, in United States
dollars: (Note 21) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings attributable to Net1 shareholders |
|
1.51 |
|
|
|
0.28 |
|
|
|
0.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings attributable to Net1 shareholders |
|
1.50 |
|
|
|
0.28 |
|
|
|
0.99 |
|
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, 2014,
2013 and 2012
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
$ |
70,061 |
|
$ |
12,974 |
|
$ |
44,665 |
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME (LOSS): |
|
|
|
|
|
|
|
|
|
Net unrealized income on
asset available for sale, net of tax |
|
288 |
|
|
915 |
|
|
1,547 |
|
Release
of foreign currency translation reserve related to
sale/ liquidation
of businesses (Note 19) |
|
4,277 |
|
|
- |
|
|
- |
|
Movement in foreign
currency translation reserve |
|
13,730 |
|
|
(26,051 |
) |
|
(43,617 |
) |
TOTAL
OTHER COMPREHENSIVE INCOME (LOSS) |
|
18,295 |
|
|
(25,136 |
) |
|
(42,070 |
) |
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME (LOSS) |
|
88,356 |
|
|
(12,162 |
) |
|
2,595 |
|
|
|
|
|
|
|
|
|
|
|
Add
comprehensive loss attributable to non-controlling interest |
|
50 |
|
|
3 |
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE
INCOME (LOSS) ATTRIBUTABLE
TO NET1 |
$ |
88,406 |
|
$ |
(12,159 |
) |
$ |
2,708 |
|
See accompanying notes to consolidated financial statements.
F-5
NET 1 UEPS TECHNOLOGIES, INC.
Consolidated Statement of Changes in
Equity for the year ended June 30, 2012 (dollar amounts in
thousands)
|
|
|
|
|
Net 1 UEPS Technologies, Inc. Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
Number |
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
of |
|
|
|
|
|
of shares, |
|
|
Additional |
|
|
|
|
|
other |
|
|
Total |
|
|
Non- |
|
|
|
|
|
|
of |
|
|
|
|
|
Treasury |
|
|
Treasury |
|
|
net of |
|
|
Paid-In |
|
|
Retained |
|
|
comprehensive |
|
|
Net1 |
|
|
controlling |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Shares |
|
|
treasury |
|
|
Capital |
|
|
Earnings |
|
|
(loss) income |
|
|
Equity |
|
|
Interest |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2011 |
|
58,427,239 |
|
$ |
59 |
|
|
(13,274,434 |
) |
$ |
(174,694 |
) |
|
45,152,805 |
|
$ |
138,420 |
|
$ |
394,990 |
|
$ |
(33,779 |
) |
$ |
324,996 |
|
$ |
3,014 |
|
$ |
328,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted (Note 18) |
|
582,729 |
|
|
|
|
|
|
|
|
|
|
|
582,729 |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation charge (Note 18) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,909 |
|
|
|
|
|
|
|
|
2,909 |
|
|
|
|
|
2,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of stock-based compensation charge
(Note 18) |
|
(5,976 |
) |
|
|
|
|
|
|
|
|
|
|
(5,976 |
) |
|
(134 |
) |
|
|
|
|
|
|
|
(134 |
) |
|
|
|
|
(134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity instrument charge (Note 17) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,211 |
|
|
|
|
|
|
|
|
14,211 |
|
|
|
|
|
14,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury shares acquired (Note 14) |
|
|
|
|
|
|
|
(180,656 |
) |
|
(1,129 |
) |
|
(180,656 |
) |
|
|
|
|
|
|
|
|
|
|
(1,129 |
) |
|
|
|
|
(1,129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilization of APIC pool related to vested
restricted stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56 |
) |
|
|
|
|
|
|
|
(56 |
) |
|
|
|
|
(56 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidation of SmartSwitch Nigeria (Note
19) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
280 |
|
|
280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of 10% of Smart Life (Note 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
188 |
|
|
188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KSNET purchase accounting adjustment (Note
3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63 |
) |
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,651 |
|
|
|
|
|
44,651 |
|
|
14 |
|
|
44,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss (Note 15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41,943 |
) |
|
(41,943 |
) |
|
(127 |
) |
|
(42,070 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2012 |
|
59,003,992 |
|
$ |
59 |
|
|
(13,455,090 |
) |
$ |
(175,823 |
) |
|
45,548,902 |
|
$ |
155,350 |
|
$ |
439,641 |
|
$ |
(75,722 |
) |
$ |
343,505 |
|
$ |
3,306 |
|
$ |
346,811 |
|
F-6
NET 1 UEPS TECHNOLOGIES,
INC.
Consolidated Statement of
Changes in Equity for the year ended June 30, 2013 (dollar
amounts in thousands)
|
|
|
|
|
Net 1 UEPS Technologies, Inc. Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
Number |
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
of |
|
|
|
|
|
of shares, |
|
|
Additional |
|
|
|
|
|
other |
|
|
Total |
|
|
Non- |
|
|
|
|
|
|
of |
|
|
|
|
|
Treasury |
|
|
Treasury |
|
|
net of |
|
|
Paid-In |
|
|
Retained |
|
|
comprehensive |
|
|
Net1 |
|
|
controlling |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Shares |
|
|
treasury |
|
|
Capital |
|
|
Earnings |
|
|
(loss) income |
|
|
Equity |
|
|
Interest |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2012 |
|
59,003,992 |
|
$ |
59 |
|
|
(13,455,090 |
) |
$ |
(175,823 |
) |
|
45,548,902 |
|
$ |
155,350 |
|
$ |
439,641 |
|
$ |
(75,722 |
) |
$ |
343,505 |
|
$ |
3,306 |
|
$ |
346,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
(Note 18) |
|
21,569 |
|
|
|
|
|
|
|
|
|
|
|
21,569 |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock option
(Note 18) |
|
30,000 |
|
|
- |
|
|
|
|
|
|
|
|
30,000 |
|
|
240 |
|
|
|
|
|
|
|
|
240 |
|
|
|
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
charge (Note 18) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,387 |
|
|
|
|
|
|
|
|
4,387 |
|
|
|
|
|
4,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of stock-based
compensation charge (Note 18) |
|
(55,333 |
) |
|
|
|
|
|
|
|
|
|
|
(55,333 |
) |
|
(480 |
) |
|
|
|
|
|
|
|
(480 |
) |
|
|
|
|
(480 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilization of APIC pool
related to vested restricted stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
|
(11 |
) |
|
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N1MSs acquisition (Note 3) |
|
47,412 |
|
|
|
|
|
|
|
|
|
|
|
47,412 |
|
|
1,184 |
|
|
|
|
|
|
|
|
1,184 |
|
|
|
|
|
1,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,977 |
|
|
|
|
|
12,977 |
|
|
(3 |
) |
|
12,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
(Note 15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,136 |
) |
|
(25,136 |
) |
|
|
|
|
(25,136 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2013 |
|
59,047,640 |
|
$ |
59 |
|
|
(13,455,090 |
) |
$ |
(175,823 |
) |
|
45,592,550 |
|
$ |
160,670 |
|
$ |
452,618 |
|
$ |
(100,858 |
) |
$ |
336,666 |
|
$ |
3,303 |
|
$ |
339,969 |
|
F-7
NET 1 UEPS TECHNOLOGIES,
INC.
Consolidated Statement of
Changes in Equity for the year ended June 30, 2014 (dollar
amounts in thousands)
|
|
|
|
|
Net 1 UEPS Technologies, Inc. Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
Number |
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
of |
|
|
|
|
|
of shares, |
|
|
Additional |
|
|
|
|
|
other |
|
|
Total |
|
|
Non- |
|
|
|
|
|
|
of |
|
|
|
|
|
Treasury |
|
|
Treasury |
|
|
net of |
|
|
Paid-In |
|
|
Retained |
|
|
comprehensive |
|
|
Net1 |
|
|
controlling |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Shares |
|
|
treasury |
|
|
Capital |
|
|
Earnings |
|
|
(loss) income |
|
|
Equity |
|
|
Interest |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance July 1, 2013 |
|
59,047,640 |
|
$ |
59 |
|
|
(13,455,090 |
) |
$ |
(175,823 |
) |
|
45,592,550 |
|
$ |
160,670 |
|
$ |
452,618 |
|
$ |
(100,858 |
) |
$ |
336,666 |
|
$ |
3,303 |
|
$ |
339,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue of common stock (Note
14) |
|
4,400,000 |
|
|
4 |
|
|
|
|
|
|
|
|
4,400,000 |
|
|
25,050 |
|
|
|
|
|
|
|
|
25,054 |
|
|
|
|
|
25,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
(Note 14) |
|
|
|
|
|
|
|
(2,428,122 |
) |
|
(24,858 |
) |
|
(2,428,122 |
) |
|
|
|
|
|
|
|
|
|
|
(24,858 |
) |
|
|
|
|
(24,858 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
(Note 18) |
|
187,963 |
|
|
|
|
|
|
|
|
|
|
|
187,963 |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock option
(Note 18) |
|
26,667 |
|
|
- |
|
|
|
|
|
|
|
|
26,667 |
|
|
198 |
|
|
|
|
|
|
|
|
198 |
|
|
|
|
|
198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity instruments charge
(Note 17) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,268 |
|
|
|
|
|
|
|
|
11,268 |
|
|
|
|
|
11,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
charge (Note 18) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,724 |
|
|
|
|
|
|
|
|
3,724 |
|
|
|
|
|
3,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of stock-based
compensation charge (Note 18) |
|
(7,171 |
) |
|
|
|
|
|
|
|
|
|
|
(7,171 |
) |
|
(6 |
) |
|
|
|
|
|
|
|
(6 |
) |
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit from
vested stock awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of KSNET
non-controlling interest (Note 14) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,492 |
|
|
|
|
|
(178 |
) |
|
1,314 |
|
|
(3,276 |
) |
|
(1,962 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N1MSs acquisition (Note 3) |
|
47,412 |
|
|
|
|
|
|
|
|
|
|
|
47,412 |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,111 |
|
|
|
|
|
70,111 |
|
|
(50 |
) |
|
70,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
(Note 15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,295 |
|
|
18,295 |
|
|
- |
|
|
18,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2014 |
|
63,702,511 |
|
$ |
63 |
|
|
(15,883,212 |
) |
$ |
(200,681 |
) |
|
47,819,299 |
|
$ |
202,401 |
|
$ |
522,729 |
|
$ |
(82,741 |
) |
$ |
441,771 |
|
$ |
(23 |
) |
$ |
441,748 |
|
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, 2014, 2013 and
2012
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
NET INCOME |
$ |
70,061 |
|
$ |
12,974 |
|
$ |
44,665 |
|
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Depreciation and
amortization |
|
40,286 |
|
|
40,599 |
|
|
36,499 |
|
Earnings from equity-accounted
investments |
|
(298 |
) |
|
(351 |
) |
|
(220 |
) |
Fair value adjustment
|
|
(55 |
) |
|
631 |
|
|
(3,375 |
) |
Interest payable |
|
2,100 |
|
|
4,313 |
|
|
8,823 |
|
Facility fee amortized
|
|
738 |
|
|
302 |
|
|
389 |
|
(Profit) Loss on disposal of property,
plant and equipment |
|
(434 |
) |
|
110 |
|
|
(64 |
) |
Net loss on sale of 10%
of Smart Life |
|
- |
|
|
- |
|
|
81 |
|
Loss (Profit) on
deconsolidation of subsidiaries and business (Note 19) |
|
55 |
|
|
- |
|
|
(3,994 |
) |
Realized loss on sale
of Smart Life investments |
|
- |
|
|
- |
|
|
25 |
|
Stock compensation charge, net of
forfeitures (Note 18) |
|
3,718 |
|
|
3,907 |
|
|
2,775 |
|
Fair value of BEE
equity instruments granted (Note 17) |
|
11,268 |
|
|
- |
|
|
14,211 |
|
Increase in accounts and
finance loans receivable, and pre-funded grants receivable |
|
(101,447 |
) |
|
(5,726 |
) |
|
(31,974 |
) |
Decrease (Increase) in
inventory |
|
780 |
|
|
(2,890 |
) |
|
(5,271 |
) |
Increase (Decrease) in accounts payable
and other payables |
|
12,671 |
|
|
8,113 |
|
|
(18,496 |
) |
Increase (Decrease) in
taxes payable |
|
5,523 |
|
|
(2,748 |
) |
|
(7,483 |
) |
Decrease in deferred taxes |
|
(7,821 |
) |
|
(3,317 |
) |
|
(16,185 |
) |
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
37,145 |
|
|
55,917 |
|
|
20,406 |
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
(23,906 |
) |
|
(22,747 |
) |
|
(39,167 |
) |
Proceeds from disposal of property, plant and equipment |
|
2,990 |
|
|
510 |
|
|
764 |
|
Net cash outflow from sale of MediKredit
(Note 19) |
|
(669 |
) |
|
- |
|
|
- |
|
Proceeds from sale of business (Note 19) |
|
186 |
|
|
- |
|
|
- |
|
Capital reduction/ repayment of loan by
equity-accounted investment |
|
539 |
|
|
3 |
|
|
122 |
|
Acquisitions, net of cash acquired (Note 3) |
|
- |
|
|
(2,143 |
) |
|
(6,154 |
) |
Settlement from former shareholders of
KSNET (Note 3) |
|
- |
|
|
- |
|
|
4,945 |
|
Acquisition of available-for-sale securities (Note 7) |
|
- |
|
|
- |
|
|
(948 |
) |
Purchase of investments related to Smart
Life |
|
- |
|
|
- |
|
|
(2,320 |
) |
Proceeds from maturity of investments related to Smart Life
|
|
- |
|
|
- |
|
|
2,321 |
|
Other investing activities, net |
|
570 |
|
|
545 |
|
|
(1 |
) |
Net change in settlement assets |
|
(1,350 |
) |
|
(423,984 |
) |
|
(252,101 |
) |
NET CASH USED IN INVESTING ACTIVITIES |
|
(21,640 |
) |
|
(447,816 |
) |
|
(292,539 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Repayment of long-term borrowings (Note 13)
|
|
(87,008 |
) |
|
(14,508 |
) |
|
(19,172 |
) |
Long-term borrowings obtained (Note 13) |
|
73,677 |
|
|
- |
|
|
- |
|
Proceeds from bank overdraft |
|
24,580 |
|
|
- |
|
|
- |
|
Repayment of bank overdraft |
|
(23,335 |
) |
|
- |
|
|
- |
|
Acquisition of interests in KSNET (Note 14)
|
|
(1,968 |
) |
|
- |
|
|
- |
|
Payment of facility fee (Note 13) |
|
(872 |
) |
|
- |
|
|
- |
|
Proceeds from issue of common stock (Note
18) |
|
198 |
|
|
240 |
|
|
- |
|
Acquisition of treasury stock (Note 14) |
|
- |
|
|
- |
|
|
(1,129 |
) |
Proceeds on sale of 10% of Smart Life (Note
3) |
|
- |
|
|
- |
|
|
107 |
|
Net change in settlement obligations |
|
1,350
|
|
|
423,984 |
|
|
252,101 |
|
NET
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES |
|
(13,378 |
) |
|
409,716 |
|
|
231,907 |
|
Effect of exchange rate changes on cash |
|
2,880
|
|
|
(3,275 |
) |
|
(15,914 |
) |
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS |
|
5,007 |
|
|
14,542 |
|
|
(56,140 |
) |
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR |
|
53,665 |
|
|
39,123 |
|
|
95,263 |
|
CASH AND CASH EQUIVALENTS AT END OF
YEAR |
$ |
58,672 |
|
$ |
53,665 |
|
$ |
39,123 |
|
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, 2014, 2013 and 2012
|
(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 on-line real-time healthcare management
solutions in the United States. The Companys technology is widely used in South
Africa today, where it distributes pension and welfare payments to recipient
cardholders in South Africa, provides financial services, 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,
processes third-party and associated payroll payments for employees and provides
mobile telephone top-up transactions for the major South African mobile
carriers. Through KSNET, the Company offers card processing, payment gateway
(PG) and banking value-added network services (VAN) in South 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, 2014, 2013 and 2012.
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 other currencies, primarily South Korean won (KRW), as
their functional currency. 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 selling,
general and administration expense on the Companys consolidated statement of
operations for the period.
F-10
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
2. SIGNIFICANT
ACCOUNTING POLICIES (continued)
Allowance for doubtful accounts receivable
Allowance for doubtful finance loans receivable
The
Company regularly reviews the ageing of outstanding amounts due from borrowers
and adjusts the allowance based on managements estimate of the recoverability
of the finance loans receivable. The Company writes off finance loans receivable
and related service fees if a borrower is in arrears with repayments for more
than three months or dies.
Allowance for doubtful accounts receivable
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 or
loss. The Company does not recognize cumulative losses in excess of its
investment or loans in an equity-accounted investment except if it has an
obligation to provide additional financial support. Dividends received from an
equity-accounted investment reduce the carrying value of the Companys
investment.
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.
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.
F-11
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(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, 2014, 2013 and 2012 |
(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 within 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 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 recipient
cardholders.
Recipient
cardholders 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 recipient cardholder 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
recipient cardholder 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, 2014, 2013 and 2012 |
(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, 2014, 2013 and 2012 |
(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.
Microlending service fee
The
Company provides short-term loans to customers in South Africa and charges and
recognizes monthly service fee revenue over the term of the loan. The monthly
service fee amount is fixed upon initiation and does not change over the term of
the loan.
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 welfare benefits, if:
|
|
there is persuasive evidence of
an agreement; |
|
|
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.
F-15
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
2. SIGNIFICANT
ACCOUNTING POLICIES (continued)
Revenue recognition (continued)
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.
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, 2014, 2013 and 2012, the Company
incurred research and development expenditures of $2.2 million, $1.3 million and
$3.9 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, 2014, 2013 and 2012 |
(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.
The
Company measured its South African income taxes and deferred income taxes for
the years ended June 30, 2014, 2013 and 2012, using the enacted statutory tax
rate in South Africa of 28%. 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.
As
of June 30, 2014, the Company intends to permanently reinvest its non-US
undistributed earnings of $356.5 million in those non-US jurisdictions.
Accordingly, the Company has not recognized a deferred tax liability related to
future distributions of these undistributed earnings. It is not practicable for
the Company to estimate the amount of unrecognized deferred tax liability
because of the complexities of the calculations involved. The Company will be
required to record a tax charge if it is no longer able 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 deferred tax asset valuation allowances, the
Company assesses the realizability of its deferred tax assets, and based on all
available evidence, both positive and negative, determines whether it is more
likely than not that the deferred tax assets or a portion thereof will be
realized.
Reserves
for uncertain tax positions are recognized in the financial statements for
positions which are not considered more likely than not of being sustained based
on the technical merits of the position on audit by the tax authorities. For
positions that meet the more likely than not standard, 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 expense 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 equity-based 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, 2014, 2013 and 2012 |
(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 this 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 recipient cardholders
of social welfare grants, (2) 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
and (3) as of June 30, 2013, cash received from healthcare plans which the
Company disburses to healthcare service providers once it adjudicates claims.
Settlement
obligations comprise (1) amounts that the Company is obligated to disburse to
recipient cardholders of social welfare grants, (2) amounts that the Company is
obligated to pay to customer employees, payroll-related payees and other payees
designated by the customer and (3) as of June 30, 2013, amounts which are due to
healthcare service providers after claims have been adjudicated and reconciled,
provided that the Company shall have previously received such funds from
healthcare plan customers.
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.
In
February 2013, the FASB issued guidance regarding Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income. This guidance
requires entities to present (either on the face of the statement of operations
or in the notes) the effects on the line items of the statement of operations
for amounts reclassified out of accumulated other comprehensive income. The
guidance is effective for the Company beginning July 1, 2013 and is applied
prospectively. The adoption of this guidance did not have a material impact on
the Companys financial statements.
Recent accounting pronouncements not yet adopted as of June 30, 2014
In
March 2013, the FASB issued guidance regarding Parents Accounting for the
Cumulative Translation Adjustment Upon Derecognition of Certain Subsidiaries or
Groups of Assets Within a Foreign Entity or of an Investment in a Foreign
Entity. This guidance requires that the parent release any related
cumulative translation adjustment into net income only if the sale or transfer
results in the complete or substantially complete liquidation of the foreign
entity in which the subsidiary or group of assets had resided. The guidance is
effective for the Company beginning July 1, 2014. Early adoption is permitted.
The Company is currently evaluating the impact of this guidance on its financial
statements on adoption.
F-18
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
2. SIGNIFICANT
ACCOUNTING POLICIES (continued)
Recent accounting pronouncements not yet adopted as of June 30, 2014 (continued)
In
May 2014, the FASB issued guidance regarding Revenue from Contracts with
Customers. This guidance requires an entity to recognize revenue when a
customer obtains control of promised goods or services in an amount that
reflects the consideration to which the entity expects to receive in exchange
for those goods or services. In addition, the standard requires disclosure of
the nature, amount, timing, and uncertainty of revenue and cash flows arising
from contracts with customers. The guidance is effective for the Company
beginning July 1, 2017. Early adoption is not permitted. The Company expects
that this guidance will have a material impact on its financial statements and
is currently evaluating the impact of this guidance on its financial statements
on adoption.
3. ACQUISITIONS
The
cash paid, net of cash received related to the Companys various acquisitions
during the years ended June 30, 2014, 2013 and 2012 are summarized in the table
below:
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
Net1 Mobile Solutions
Proprietary Limited (N1MS) (formerly Pbel) |
$ |
- |
|
$ |
1,913 |
|
$ |
- |
|
|
SmartSwitch Botswana (Proprietary) Limited
(SmartSwitch Botswana) |
|
- |
|
|
230 |
|
|
- |
|
|
The Smart Life Insurance
Company Limited (Smart Life) |
|
- |
|
|
- |
|
|
1,673 |
|
|
Prepaid business |
|
- |
|
|
- |
|
|
4,481 |
|
|
Total cash paid,
net of cash received |
$ |
- |
|
$ |
2,143 |
|
$ |
6,154 |
|
2014 acquisitions
None.
2013 acquisitions
SmartSwitch Botswana (Proprietary) Limited
On
December 7, 2012, the Company acquired 50% of the outstanding and issued
ordinary shares in SmartSwitch Botswana, a Botswana private company, for BWP 6.3
million (approximately $0.8 million) in cash. As a result of this transaction,
SmartSwitch Botswana is now a wholly-owned subsidiary and is consolidated in the
Companys financial statements. SmartSwitch Botswana had previously been
recorded as an equity-accounted investment. SmartSwitch Botswana has been
allocated to the Companys International transaction processing operating
segment.
N1MS (formerly Pbel)
On
September 14, 2012, the Company acquired all of the outstanding and issued
ordinary shares in N1MS, a South African private company, for ZAR 33 million
(approximately $3.8 million). ZAR 23 million of the purchase price was paid in
cash and the remaining ZAR 10 million was paid by issuing 142,236 shares of the
Companys common stock, which are earned by the sellers to the extent that N1MS
achieves certain pre-defined financial performance milestones over a three-year
measurement period. The 142,236 shares are divided into three equal tranches of
47,412 shares and the sellers earn the shares for each tranche only if the
milestones for that particular tranche are achieved. However, the sellers will
be entitled to earn all 142,236 shares if the cumulative pre-defined N1MS
projected profit over the measurement period is achieved or if the Company
decides to abandon its Mobile Virtual Card initiative. During the years ended
June 30, 2014 and 2013, N1MS achieved its pre-defined financial performance
milestones and the sellers earned 47,412 shares of the Companys common stock in
each year.
The
Company had historically engaged the services of N1MS to perform software
development services, primarily software utilized on mobile phones and by
cash-accepting kiosks. All software developed was the Companys property. Prior
to the acquisition, N1MS was jointly owned by the Companys chief executive
officer, Dr. Serge Belamant and his son, Mr. Philip Marc Belamant. Dr. Belamant
is a non-employee director of N1MS and Mr. Philip Marc Belamant is its chief
executive officer. Prior to the acquisition, Mr. Philip Marc Belamant was not
employed by the Company. See also Note 25.
F-19
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
3. ACQUISITIONS
(continued)
2013 acquisitions (continued)
N1MS (continued)
The Company believes that the acquisition of N1MS is important in the
execution of its strategy to commercialize and develop its world-wide virtual
card patents and to supply secure, leading-edge technological solutions to the
global payments market with particular focus on mobile-based payment solutions.
N1MS has been allocated to the Companys South African transaction processing
operating segment.
The
final purchase price allocation of SmartSwitch Botswana and N1MS acquisitions,
translated at the foreign exchange rates applicable on the date of acquisition,
is provided in the table below:
|
|
SmartSwitch |
|
|
|
|
|
|
|
|
|
Botswana |
|
|
N1MS |
|
|
Total |
|
Cash and cash equivalents |
$ |
584 |
|
$ |
660 |
|
$ |
1,244 |
|
Accounts receivable, net |
|
- |
|
|
234 |
|
|
234 |
|
Inventory |
|
150 |
|
|
- |
|
|
150 |
|
Other current assets |
|
- |
|
|
- |
|
|
- |
|
Property, plant and equipment, net |
|
472 |
|
|
92 |
|
|
564 |
|
Intangible assets (Note 9) |
|
- |
|
|
1,785 |
|
|
1,785 |
|
Goodwill (Note 9) |
|
657 |
|
|
1,710 |
|
|
2,367 |
|
Other payables |
|
(218 |
) |
|
(65 |
) |
|
(283 |
) |
Income taxes payable |
|
- |
|
|
(93 |
)
|
|
(93 |
)
|
Deferred tax liabilities |
|
(17 |
) |
|
(494 |
) |
|
(511 |
) |
Fair value of
assets and liabilities on acquisition |
|
1,628 |
|
|
3,829 |
|
|
5,457 |
|
Less:
gain on re-measurement of previously held interest
in
SmartSwitch Botswana |
|
(328 |
) |
|
- |
|
|
(328 |
) |
Less: carrying value of SmartSwitch Botswana, an
equity
accounted investment, at the acquisition date |
|
(486 |
)
|
|
- |
|
|
(486 |
)
|
Total
purchase price |
$ |
814 |
|
$ |
3,829 |
|
$ |
4,643 |
|
Pro
forma results of operations have not been presented because the effect of the
SmartSwitch and N1MS acquisitions, individually and in the aggregate, were not
material to the Company. During the year ended June 30, 2013, the Company
incurred acquisition-related expenditure of $0.1 million related to these
acquisitions. Since the closing of the SmartSwitch Botswana acquisition, it has
contributed revenue and net income of $0.7 million and $0.02 million,
respectively, for the year ended June 30, 2013. Since the closing of the N1MS
acquisition, it has contributed revenue and incurred a net loss, after acquired
intangible asset amortization, net of taxation, of $1.1 million and $0.5
million, respectively, for the year ended June 30, 2013.
2012 acquisitions
Acquisition of prepaid airtime and electricity business
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).
F-20
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
3. ACQUISITIONS
(continued)
2012 acquisitions (continued)
Acquisition of prepaid airtime and electricity business (continued)
The
business has been integrated with EasyPay and allocated to the Companys South
African transaction processing operating segment.
Smart Life
On
July 1, 2011, the Company acquired Smart Life (formerly known as Saambou Life
Assurers Limited), a South African long-term insurance company, for ZAR 13.0
million (approximately $1.8 million) in cash. Prior to its acquisition by the
Company, 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. Smart Life has been allocated to the
Companys Financial inclusion and applied technologies operating segment. In
November 2011, the Company sold 10% of Smart Life to a strategic partner for
$0.1 million and recognized a loss on sale of $0.08 million.
The
acquisition of Smart Life provides the Company with an opportunity to offer
relevant insurance products directly to its existing customer and employee base
in South Africa.
The
final purchase price allocation of the prepaid business and Smart Life
acquisitions, translated at the foreign exchange rates applicable on the date of
acquisition, are provided in the table below:
|
|
|
Prepaid |
|
|
|
|
|
|
|
|
|
|
business |
|
|
Smart Life |
|
|
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 |
|
During
the year ended June 30, 2012, the Company did not incur transaction-related
expenditures related to these acquisitions.
KSNET Inc. (KSNET) - 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. 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 was
applied against the goodwill recognized on the acquisition of KSNET and has
reduced the goodwill balance. As required by the Companys South Korean debt
agreement, the Company used the settlement proceeds to prepay a portion of its
outstanding debt thereunder. The prepayment was made on January 30, 2012.
F-21
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
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 2014
payment service commenced on July 1, 2014, but the Company pre-funded certain
merchants participating in the merchant acquiring systems in the last two days
of June 2014. The July 2013 payment service commenced on July 1, 2013, but the
Company pre-funded certain merchants participating in the merchant acquiring
systems in the last two days of June 2013.
5. ACCOUNTS
RECEIVABLE, net and FINANCE LOANS RECEIVABLE, net
Accounts receivable, net
|
|
|
2014 |
|
|
|
|
2013 |
|
|
|
Accounts receivable, trade, net |
$ |
64,885 |
|
|
|
$ |
41,225 |
|
|
|
Accounts receivable, trade, gross |
|
66,198 |
|
|
|
|
45,926 |
|
|
|
Allowance for doubtful
accounts receivable, end of year |
|
1,313 |
|
|
|
|
4,701 |
|
|
|
Beginning of year |
|
4,701 |
|
|
|
|
788 |
|
|
|
Deconsolidation |
|
(32 |
) |
|
|
|
- |
|
|
|
Reversed to
statement of operations |
|
(1,455 |
) |
|
|
|
(93 |
) |
|
|
Charged to statement of operations |
|
714 |
|
|
|
|
4,622 |
|
|
|
Utilized |
|
(2,451 |
) |
|
|
|
(5 |
) |
|
|
Foreign currency adjustment |
|
(164 |
) |
|
|
|
(611 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments to agents in South Korea that are
amortized over the contract period |
|
46,591 |
|
|
|
|
32,412 |
|
|
|
Other receivables |
|
36,591 |
|
|
|
|
28,977 |
|
|
|
Total accounts receivable, net |
$ |
148,067 |
|
|
|
$ |
102,614 |
|
|
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 from
customers from the sale of hardware, software licenses and SIM cards and
provision of transaction processing services. During the year ended June 30,
2014, 2013 and 2012, respectively, the Company recorded a bad debt expense of
$0.6 million, $0.4 million and $0.2 million.
Finance loans receivable, net
|
|
|
2014 |
|
|
|
2013 |
|
|
Finance loans receivable, gross |
$ |
56,207 |
|
|
$ |
8,350 |
|
|
Allowance for doubtful finance loans receivable, end of
year |
|
3,083
|
|
|
|
- |
|
|
Beginning of
year |
|
- |
|
|
|
- |
|
|
Charged to statement of
operations |
|
3,652 |
|
|
|
- |
|
|
Utilized |
|
(513 |
) |
|
|
- |
|
|
Foreign currency adjustment |
|
(56 |
) |
|
|
- |
|
|
Total finance loans receivable, net |
$ |
53,124 |
|
|
$ |
8,350 |
|
The
Company updated its accounting policy for the allowance for doubtful finance
loans receivable during the year ended June 30, 2014, as a result of the
increase in its UEPS-based lending book which is included in finance loans
receivable in its consolidated balance sheet. The Company does not believe that
an allowance for doubtful finance loans receivable is required for finance loans
receivable as of June 30, 2013, because this was an established book and has
been recovered. The Company did not expense any unrecoverable finance loans
receivable during the year ended June 30, 2014, because these loans were written
off directly against the allowance for doubtful finance loans receivable. The
Company recorded an unrecoverable finance loans receivable expense of $0.2
million during each of the years ended June 30, 2013 and 2012, respectively.
F-22
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
6. INVENTORY
The Companys inventory as of June 30, 2014 and 2013, is presented in
the table below:
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
|
|
Finished goods |
$ |
10,785 |
|
$ |
12,222 |
|
|
$ |
10,785 |
|
$ |
12,222 |
|
7. FAIR VALUE OF
FINANCIAL INSTRUMENTS
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.
Risk management
The
Company seeks to reduce its exposure to currencies other than the South African
rand through a policy of matching, to the extent possible, assets and
liabilities denominated in those currencies. In addition, the Company uses
financial instruments in order to economically hedge its exposure to exchange
rate and interest rate fluctuations arising from its operations. The Company is
also exposed to equity price and liquidity risks as well as credit risks.
Currency exchange risk
The
Company is subject to currency exchange risk because it purchases inventories
that it is required to settle in other currencies, primarily the euro and US
dollar. The Company 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.
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 three years. As
exchange rates are outside the Companys control, there can be no assurance that
future fluctuations will not adversely affect the Companys results of
operations and financial condition.
Interest rate risk
As
a result of its normal borrowing and leasing activities, the Companys operating
results are exposed to fluctuations in interest rates, which it manages
primarily through regular financing activities. The Company generally maintains
limited investment in cash equivalents and has occasionally invested in
marketable securities.
Credit risk
Credit
risk relates to the risk of loss that the Company would incur as a result of
non-performance by counterparties. The Company maintains credit risk policies
with regard to its counterparties to minimize overall credit risk. These
policies include an evaluation of a potential counterpartys financial
condition, credit rating, and other credit criteria and risk mitigation tools as
the Companys management deems appropriate.
With
respect to credit risk on financial instruments, the Company maintains a policy
of entering into such transactions only with South African and European
financial institutions that have a credit rating of BBB or better, as determined
by credit rating agencies such as Standard & Poors, Moodys and Fitch
Ratings.
F-23
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
7. FAIR VALUE OF
FINANCIAL INSTRUMENTS (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. 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.
|
The following section describes the valuation methodologies the Company
uses to measure financial assets and liabilities at fair value.
F-24
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
7. FAIR VALUE OF
FINANCIAL INSTRUMENTS (continued)
Financial instruments (continued)
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 Johannesburg Stock Exchange (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. Finbond issues financial products and services under a mutual
banking licence and also has a microlending offering. 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, 2014, 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, 2014, is approximately 26%. 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 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 (level 2). The Company has no
derivatives that require fair value measurement under level 1 or 3 of the fair
value hierarchy.
F-25
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
7. FAIR VALUE OF
FINANCIAL INSTRUMENTS (continued)
Financial instruments (continued)
Derivative transactions - Foreign exchange contracts (continued)
The Companys outstanding foreign exchange contracts are as
follows:
As of June 30, 2014
|
|
Fair market |
|
|
Notional amount |
Strike price |
value price |
|
Maturity |
EUR 182,272.50 |
ZAR 15.2077 |
ZAR 14.5803 |
|
July 21, 2014 |
EUR 182,272.50 |
ZAR 15.3488 |
ZAR 14.5803 |
|
July 21, 2014 |
EUR 180,022.50 |
ZAR 15.4228 |
ZAR 14.6542 |
|
August 20, 2014 |
EUR 180,022.50 |
ZAR 15.2819 |
ZAR 14.6542 |
|
August 20, 2014 |
EUR 180,022.50 |
ZAR 15.3623 |
ZAR 14.7367 |
|
September 22, 2014 |
EUR 180,022.50 |
ZAR 15.5041 |
ZAR 14.7367 |
|
September 22, 2014 |
EUR 181,570.50 |
ZAR 15.5739 |
ZAR 14.8119 |
|
October 20, 2014 |
EUR 181,570.50 |
ZAR 15.4316 |
ZAR 14.8119 |
|
October 20, 2014 |
EUR 180,022.50 |
ZAR 15.6552 |
ZAR 14.8982 |
|
November 20, 2014 |
EUR 180,022.50 |
ZAR 15.5136 |
ZAR 14.8982 |
|
November 20, 2014 |
EUR 180,022.50 |
ZAR 15.5970 |
ZAR 14.9874 |
|
December 22, 2014 |
EUR 180,022.50 |
ZAR 15.7391 |
ZAR 14.9874 |
|
December 22, 2014 |
EUR 174,424.50 |
ZAR 15.8119 |
ZAR 15.0671 |
|
January 20, 2015 |
EUR 174,424.50 |
ZAR 15.6729 |
ZAR 15.0671 |
|
January 20, 2015 |
As of June 30, 2013
|
|
Fair market |
|
|
Notional amount |
Strike price |
value price |
|
Maturity |
EUR 4,000,000 |
ZAR 9.06 |
ZAR 10.1397 |
|
September 30, 2013
|
The
following table presents the Companys assets and liabilities measured at fair
value on a recurring basis as of June 30, 2014, 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 |
$ |
1,800 |
|
$ |
- |
|
$ |
- |
|
$ |
1,800 |
|
|
Investment in Finbond (available for sale
assets included in other long-term assets) |
|
- |
|
|
- |
|
|
8,068 |
|
|
8,068 |
|
|
Other |
|
- |
|
|
47 |
|
|
- |
|
|
47 |
|
|
Total assets at fair value |
$ |
1,800 |
|
$ |
47 |
|
$ |
8,068 |
|
$ |
9,915 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
$ |
- |
|
$ |
164 |
|
$ |
- |
|
$ |
164 |
|
|
Total
liabilities at fair value |
$ |
- |
|
$ |
164 |
|
$ |
- |
|
$ |
164 |
|
F-26
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
7. FAIR VALUE OF
FINANCIAL INSTRUMENTS (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, 2013, 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 |
$ |
1,833 |
|
$ |
- |
|
$ |
- |
|
$ |
1,833 |
|
|
Investment in Finbond (available for sale assets included
in other long-term assets) |
|
- |
|
|
- |
|
|
8,303
|
|
|
8,303
|
|
|
|
Other |
|
- |
|
|
147 |
|
|
- |
|
|
147 |
|
|
Total assets at fair value |
$ |
1,833 |
|
$ |
147 |
|
$ |
8,303 |
|
$ |
10,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange
contracts |
$ |
- |
|
$ |
436 |
|
$ |
- |
|
$ |
436 |
|
|
Total liabilities at fair value |
$ |
- |
|
$ |
436 |
|
$ |
- |
|
$ |
436 |
|
Changes
in the Companys investment in Finbond (Level 3 that are measured at fair value
on a recurring basis) were insignificant during the years ended June 30, 2014
and 2013, respectively. There have been no transfers in or out of Level 3 during
the years ended June 30, 2014 and 2013, respectively.
Trade, finance loans and other receivables
Trade,
finance loans and other receivables originated by the Company are stated at cost
less allowance for doubtful accounts receivable. The fair value of trade,
finance loans 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 assets at fair value on a nonrecurring basis when they are
deemed to be other-than-temporarily impaired. The Company has no liabilities
that are measured at fair value on a nonrecurring basis. The Company reviews the
carrying values of its assets 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 assets 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 assets 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.
F-27
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
8. PROPERTY, PLANT
AND EQUIPMENT, net
Summarized
below is the cost, accumulated depreciation and carrying amount of property,
plant and equipment as of June 30, 2014 and 2013:
|
|
2014 |
|
|
2013 |
|
Cost: |
|
|
|
|
|
|
Land |
$ |
967 |
|
$ |
858 |
|
Building and structures |
|
530 |
|
|
471 |
|
Computer
equipment |
|
110,393 |
|
|
101,536 |
|
Furniture and office equipment
|
|
6,686 |
|
|
7,864 |
|
Motor vehicles
|
|
20,575 |
|
|
22,127 |
|
Plant and equipment |
|
68
|
|
|
253
|
|
|
|
139,219 |
|
|
133,109 |
|
Accumulated depreciation: |
|
|
|
|
|
|
Land |
|
- |
|
|
- |
|
Building and structures |
|
128 |
|
|
92 |
|
Computer
equipment |
|
73,908 |
|
|
69,573 |
|
Furniture and office equipment
|
|
4,799 |
|
|
5,627 |
|
Motor vehicles
|
|
12,519 |
|
|
9,263 |
|
Plant and equipment |
|
68
|
|
|
253
|
|
|
|
91,422 |
|
|
84,808 |
|
Carrying amount: |
|
|
|
|
|
|
Land |
|
967 |
|
|
858 |
|
Building and structures |
|
402 |
|
|
379 |
|
Computer
equipment |
|
36,485 |
|
|
31,963 |
|
Furniture and office equipment
|
|
1,887 |
|
|
2,237 |
|
Motor vehicles
|
|
8,056 |
|
|
12,864 |
|
Plant and equipment |
|
- |
|
|
- |
|
|
$ |
47,797 |
|
$ |
48,301 |
|
9. GOODWILL AND
INTANGIBLE ASSETS, net
Goodwill
Summarized below is the movement in the carrying value of goodwill for
the years ended June 30, 2014, 2013 and 2012:
|
|
|
Gross |
|
|
Accumulated |
|
|
Carrying |
|
|
|
|
value |
|
|
impairment |
|
|
value |
|
|
Balance as of July 1, 2011 |
$ |
258,084 |
|
$ |
(48,514 |
)
|
$ |
209,570 |
|
|
Reduction in goodwill: KSNET net settlement
(Note 3) |
|
(4,239 |
) |
|
- |
|
|
(4,239 |
) |
|
Foreign currency adjustment
(1) |
|
(28,957 |
)
|
|
6,363 |
|
|
(22,594 |
)
|
|
Balance as of June 30, 2012 |
|
224,888 |
|
|
(42,151 |
) |
|
182,737 |
|
|
Acquisition of N1MS (Note 3)
|
|
1,710 |
|
|
- |
|
|
1,710 |
|
|
Acquisition of SmartSwitch Botswana (Note 3)
|
|
657 |
|
|
- |
|
|
657 |
|
|
Foreign currency adjustment
(1) |
|
(8,697 |
)
|
|
(601 |
)
|
|
(9,298 |
)
|
|
Balance as of June 30, 2013 |
|
218,558 |
|
|
(42,752 |
) |
|
175,806 |
|
|
Loss on liquidation of
Net1 Universal Electronic Technologies (Austria) GmbH and
associated entities (Net1 UTA) (Note 19) |
|
(44,445 |
)
|
|
44,445 |
|
|
- |
|
|
Foreign currency adjustment (1) |
|
12,463 |
|
|
(1,693 |
) |
|
10,770 |
|
|
Balance as of June 30, 2014 |
$ |
186,576 |
|
$ |
- |
|
$ |
186,576 |
|
(1) the foreign currency adjustment represents the effects of
the fluctuations between the South African rand and the South Korean won, and
the US dollar on the carrying value.
F-28
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(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 N1MS and SmartSwitch Botswana represents the
excess of cost over the fair value of acquired net assets. The N1MS and
SmartSwitch Botswana 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.
N1MS has been allocated to the Companys South African transaction processing
operating segment and SmartSwitch Botswana to the International transaction
processing operating segment.
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,
2014 and 2013, 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.
The
Company changed its reportable segments during June 2014 (refer to Note 23).
Goodwill has been allocated to the Companys reportable segments as follows:
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
|
|
South African transaction processing |
$ |
28,517 |
|
$ |
30,525 |
|
International transaction processing |
|
128,427 |
|
|
113,972 |
|
Financial inclusion and applied
technologies |
|
29,632 |
|
|
31,309 |
|
Total |
$ |
186,576 |
|
$ |
175,806 |
|
Intangible assets, net
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. No intangible assets have been impaired
during the years ended June 30, 2014, 2013 and 2012, respectively.
Summarized below is the carrying value and accumulated amortization of
intangible assets as of June 30, 2014 and 2013:
|
|
|
As
of June 30, 2014 |
|
|
As
of June 30, 2013 |
|
|
|
|
Gross |
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
Net |
|
|
|
|
carrying |
|
|
Accumulated |
|
|
carrying |
|
|
carrying |
|
|
Accumulated |
|
|
carrying |
|
|
|
|
value |
|
|
amortization |
|
|
value |
|
|
value |
|
|
amortization |
|
|
value |
|
|
Finite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
$ |
98,676 |
|
$ |
(41,273 |
) |
$ |
57,403 |
|
$ |
90,469 |
|
$ |
(29,818 |
) |
$ |
60,651 |
|
|
Software and unpatented |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
technology |
|
33,604 |
|
|
(26,207 |
) |
|
7,397 |
|
|
34,951 |
|
|
(22,151 |
) |
|
12,800 |
|
|
FTS patent |
|
3,619 |
|
|
(3,619 |
) |
|
- |
|
|
3,873 |
|
|
(3,873 |
) |
|
- |
|
|
Exclusive licenses |
|
4,506 |
|
|
(4,506 |
) |
|
- |
|
|
4,506 |
|
|
(4,506 |
) |
|
- |
|
|
Trademarks |
|
6,890 |
|
|
(3,176 |
) |
|
3,714 |
|
|
6,611 |
|
|
(2,805 |
) |
|
3,806 |
|
|
Customer database |
|
- |
|
|
- |
|
|
- |
|
|
614 |
|
|
(614 |
) |
|
- |
|
|
Total finite-lived intangible assets . |
$ |
147,295 |
|
$ |
(78,781 |
) |
$ |
68,514 |
|
$ |
141,024 |
|
$ |
(63,767 |
) |
$ |
77,257 |
|
F-29
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(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, 2014, 2013 and 2012 was $16.6 million,
$18.2 million, and $19.4 million, respectively.
Future
estimated annual amortization expense for the next five fiscal years, assuming
exchange rates prevailing on June 30, 2014, 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.
2015 |
$ |
15,831 |
|
2016 |
|
11,838 |
|
2017 |
|
9,421 |
|
2018 |
|
9,421 |
|
2019 |
|
9,074 |
|
Thereafter |
$ |
12,624 |
|
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 years ended June 30, 2014 and 2013:
|
|
Reinsurance |
|
|
Insurance |
|
|
|
assets (1) |
|
|
contracts (2) |
|
Balances acquired on July 1,
2012 |
$ |
23,595 |
|
$ |
(23,701 |
) |
Claims and policyholders benefits under
insurance contracts |
|
(211 |
) |
|
146 |
|
Foreign currency adjustment
(3) |
|
(3,827 |
) |
|
3,844 |
|
Balance as of June 30, 2013 |
|
19,557 |
|
|
(19,711 |
) |
Claims and policyholders
benefits under insurance contracts |
|
2,790 |
|
|
(3,063 |
) |
Foreign currency adjustment (3)
|
|
(1,285 |
) |
|
1,296
|
|
Balance as of
June 30, 2014 |
$ |
21,062 |
|
$ |
(21,478 |
)
|
|
(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-30
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 years ended June 30, 2014 and 2013:
|
|
|
|
|
Investment |
|
|
|
Assets (1) |
|
|
contracts (2) |
|
Balances acquired on July 1,
2012 |
$ |
1,109 |
|
$ |
(1,109 |
) |
Foreign currency adjustment (3)
|
|
(156 |
) |
|
156
|
|
Balance as of
June 30, 2013 |
|
953 |
|
|
(953 |
) |
Maturity claims under investment contracts
|
|
(202 |
) |
|
202 |
|
Foreign currency adjustment
(3) |
|
(63 |
) |
|
63 |
|
Balance as of June 30, 2014 |
$ |
688
|
|
$ |
(688 |
) |
|
(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
Summarized below is the breakdown of other payables as of June 30, 2014 and
2013:
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
|
|
Participating merchants
settlement obligation |
$ |
2,118 |
|
$ |
2,005 |
|
Payroll-related payables |
|
991 |
|
|
1,611 |
|
Accruals |
|
10,704 |
|
|
10,522 |
|
Value-added tax payable |
|
3,477 |
|
|
2,560 |
|
Other |
|
7,027 |
|
|
7,009 |
|
Provisions |
|
17,940 |
|
|
10,101 |
|
|
$ |
42,257 |
|
$ |
33,808 |
|
12. SHORT-TERM FACILITIES
South Africa
The
Companys short-term South African credit facility with Nedbank Limited
comprises an overdraft facility of up to ZAR 250 million and indirect and
derivative facilities of up to ZAR 150 million, which include letters of
guarantee, letters of credit and forward exchange contracts. As of June 30,
2014, the interest rate on the overdraft facility was 7.85% . On July 18, 2014,
the interest rate on the overdraft facility was increased to 8.10% due to an
increase in the South Africa repurchase rate by 0.25% . The Company has ceded
its investment in Cash Paymaster Services Proprietary Limited (CPS), a wholly
owned South African subsidiary, as security for its repayment obligations under
the facility. A commitment fee of 0.35% per annum is payable on the monthly
unutilized amount of the overdraft portion of the short-term facility. The
Company is required to comply with customary non-financial covenants, including,
without limitation, covenants that restrict its ability to dispose of or
encumber its assets, incur additional indebtedness or engage in certain business
combinations. As of June 30, 2014, the Company had not utilized any of its ZAR
250.0 million ($23.6 million, translated at exchange rates applicable as of June
30, 2014) overdraft facility. The Company had utilized approximately ZAR 139.0
million ($13.1 million, translated at exchange rates applicable as of June 30,
2014) of its facility to obtain foreign exchange contracts from the bank and to
enable the bank to issue guarantees, including stand-by letters of credit, in
order for the Company to honor its obligations to third parties requiring such
guarantees (refer to Note 24). As of June 30, 2013, the Company had utilized
none of these facilities.
F-31
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
12. SHORT-TERM FACILITIES
(continued)
South Korea
The
Company obtained a KRW 10 billion short-term overdraft facility from Hana Bank,
a South Korean bank, in January 2014. As of June 30, 2014, the interest rate on
the overdraft facility was 4.98% . The Company has ceded the warehouse it owns
in South Korea as security for its repayment obligations under the facility. As
of June 30, 2014, the Company had not utilized any of its KRW 10.0 billion ($9.9
million, translated at exchange rates applicable as of June 30, 2014) overdraft
facility. The facility expires in January 2015.
13. LONG-TERM BORROWINGS
In
October 2013, the Company refinanced its long-term South Korean credit facility
and signed a new five-year senior secured facilities agreement (the Facilities
Agreement) with a consortium of South Korean banks. The Facilities Agreement
provides for three separate facilities to the Companys wholly owned subsidiary,
Net1 Applied Technologies Korea (Net1 Korea): a Facility A loan of up to KRW
60.0 billion ($59.2 million), a Facility B loan of up to KRW 15 billion ($14.8
million) and a Facility C revolving credit facility of up to KRW 10.0 billion
($9.9 million) (all facilities denominated in KRW and translated at exchange
rates applicable as of June 30, 2014).
The
Facility A and B loans were fully drawn on October 29, 2013, and used to repay
KRW 75.0 billion ($70.6 million) of the KRW 92.4 billion ($87.0 million) loan
outstanding under the Companys refinanced South Korean credit facility. The
remaining outstanding KRW 17.4 billion ($16.4 million) balance of that facility
was paid from cash on hand on October 29, 2013. In addition, the Company drew
KRW 1.1 billion ($1.0 million) of the revolving credit facility on October 29,
2013, to pay fees and expenses related to the Facilities Agreement and drew
approximately KRW 2.2 billion ($2.1 million) during the last six months of the
year ended June 30, 2014, to pay interest due under the Facilities Agreement.
The carrying value as of June 30, 2014, was $77.2 million. As of June 30, 2014,
the carrying amount of the long-term borrowings approximated its fair value.
Interest
on the loans and revolving credit facility is payable quarterly and is based on
the South Korean CD rate in effect from time to time plus a margin of 3.10% for
the Facility A loan and Facility C revolving credit facility; and a margin of
2.90% for the Facility B loan. The CD rate was 2.65% on June 30, 2014 and
therefore the interest rate in effect as of June 30, 2014, for the Facility A
loan and Facility C revolving credit facility was 5.75% and for the Facility B
loan was 5.55%, respectively. A commitment fee of 0.3% is payable on any
un-drawn and un-cancelled amount of the revolving credit facility.
The
Company paid facilities fees of approximately KRW 0.9 billion ($0.9 million) on
October 29, 2013, and amortized approximately $0.3 million of these fees during
the year ended June 30, 2014. The Company has expensed the remaining prepaid
facility fees related to the Companys refinanced South Korean credit facility
of approximately $0.4 million during the year ended June 30, 2014. Total
interest expense related to the new and refinanced facilities during the year
ended June 30, 2014, 2013 and 2012, was $4.8 million, $7.1 million and $8.8
million, respectively.
The
Facility A loan is repayable in three scheduled annual installments of KRW 10
billion in April 2016, 2017 and 2018, with a final installment of KRW 30 billion
due at the maturity date (October 29, 2018). The Facility B loan is repayable in
full on October 29, 2014. The Facility C revolving credit facility is repayable
in full on the maturity date. Prepayment of the revolving credit facility may be
withdrawn at any time up to three months before the maturity date.
The
loans under the Facilities Agreement are secured by 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 to maintain agreed leverage and debt service coverage ratios and
restricts Net1 Koreas ability to make certain distributions with respect to its
capital stock, prepay other debt, encumber its assets, incur additional
indebtedness, or engage in certain business combinations. 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).
F-32
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
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 legally
available funds. 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.
The
Companys number of shares, net of treasury, presented in the consolidated
balance sheets and consolidated statement of changes in equity includes
participating non-vested equity shares (specifically contingently returnable
shares) as described in Note 18Amended and Restated Stock Incentive
PlanRestricted StockGeneral Terms of Awards. The following table presents
reconciliation between the number of shares, net of treasury, presented in the
consolidated statement of changes in equity and the number of shares, net of
treasury, excluding non-vested equity shares that have not vested during the
years ended June 30, 2014, 2013 and 2012:
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares, net of treasury: |
|
|
|
|
|
|
|
|
|
|
Statement of changes in equity |
|
47,819,299 |
|
|
45,592,550 |
|
|
45,548,902 |
|
|
Less: Non-vested equity shares that have not vested as of end
of year
(Note 18) |
|
385,778 |
|
|
405,226 |
|
|
646,617 |
|
|
Number of shares, net of treasury excluding non-vested
equity
shares that have not vested |
|
47,433,521 |
|
|
45,187,324 |
|
|
44,902,285 |
|
Common stock repurchases
The
Companys Board of Directors has authorized the repurchase of up to $100 million
of common stock. 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.
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, the Company repurchased 180,656 shares for approximately $1.1 million.
The Company did not repurchase any of its shares during the years ended June 30,
2014 and 2013, under this authorization. However, during the year ended June 30,
2014, the Company repurchased 2,428,122 shares for approximately $24.9 million
as described below under December 2013 Black Economic Empowerment
transactionsSalient terms of the BEE Relationship Agreements.
F-33
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
14. COMMON STOCK (continued)
December 2013 Black Economic Empowerment transactions
On
December 10, 2013, the Company entered into definitive agreements relating to
two Black Economic Empowerment (BEE) transactions. On April 16, 2014, the
Company implemented these transactions and issued 4,400,000 shares of its common
stock to its BEE partners after all the agreed conditions had been satisfied. On
June 6, 2014, the Company repurchased approximately 2.4 million of these shares
of common stock and the BEE partners used the proceeds from the repurchase to
settle their obligations due to the South African subsidiary of the Company, as
described below.
Salient terms of the BEE Relationship Agreements
Pursuant to Relationship
Agreements between the Company and its BEE partners, the Company sold an
aggregate of 4,400,000 shares of its common stock (BEE shares), which are
contractually restricted as to resale as described below, for a purchase price
of ZAR 60.00 per share. This price represented 75% of the closing price of the
Companys common stock on the JSE on December 6, 2013, the date the Company
completed final negotiation of the terms of these BEE transactions.
The
Relationship Agreements provided for the entire purchase price for the BEE
shares to be financed through a five-year loan to be extended to each of the BEE
partners by a South African subsidiary of the Company. The obligations of the
BEE partners under the loans were several, and not joint. Each of the BEE
partners granted the lender a security interest in all the BEE shares purchased
by such BEE partner to secure the repayment of its loan. The principal amount of
the loans made by the subsidiary was contributed by Net1 to the equity capital
of the subsidiary. As a result of the making of the loans, the net cash position
of the Company after the sale of the BEE shares remained unchanged.
The
loans bore interest at a rate equal to the Johannesburg Interbank Rate plus 300
basis points. Interest on the loans was payable semi-annually in arrears on
January 1 and July 1 of each year. 10% of the outstanding principal amount of
the loans was payable on each of the first and second anniversaries of the date
of issuance of the BEE shares, 15% of the outstanding principal amount of the
loans was payable on each of the third and fourth anniversaries of the date of
issuance of the BEE shares and the remaining outstanding principal amount of the
loans was payable on the fifth anniversary of the date of issuance of the BEE
shares. Further, the entire outstanding principal amount of the loans was
payable if the price of the Companys common stock on the JSE equals or exceeds
ZAR 120.00 per share at any time during term of the loans. The loans to the BEE
partners did not provide that they were recourse only to the BEE shares.
Nevertheless, the Company expected that the sole source of repayment of the
loans will be proceeds from the sale of its shares by the BEE partners from time
to time, in open market or in privately negotiated transactions.
Upon
the occurrence of certain trigger events with respect to a BEE partner, the
BEE shares held by that BEE partner may be repurchased by the Company or one of
its designees. These trigger events include the following:
|
|
failure by the BEE partner to pay any amount due on its
loan (including interest) to the lender (in this case, the Company may
repurchase only that number of shares which would raise sufficient funds
to settle any amount due and unpaid); |
|
|
any other breach by the BEE partner (or in certain
circumstances its shareholders) of any provision of the Relationship
Agreement, including without limitation, its failure to maintain its BEE
status; |
|
|
the Companys common stock trades at or below ZAR 60.00
on the JSE or at or below the equivalent trading price on Nasdaq;
|
|
|
the occurrence of certain insolvency events or
liquidation proceedings affecting the BEE partner; or |
|
|
the BEE partner fails to satisfy any judgment or
arbitration award granted or made against it within 7 days.
|
If
the trigger event involved a failure by a BEE partner to pay any amount due on
its loan, then the repurchase price is the volume-weighted average price of the
Companys common stock on the Nasdaq for the period of 30 trading days prior to
the trigger event (30-day VWAP). In the case of other trigger events, the
repurchase price is the lower of the 30-day VWAP or ZAR 60.00 per share.
The
Companys share price exceeded ZAR 120.00 on June 4, 2014 and all outstanding
amounts then became due and payable. The BEE partners were unable to pay all
outstanding amounts due on June 5, 2014, and accordingly a trigger event
occurred. The Company purchased a total of 2,428,122 shares of its common stock,
at the determined VWAP of ZAR109.98, from the BEE partners. The BEE partners
used the proceeds from the sale of these shares in order to settle all
outstanding amounts due to the South African subsidiary of the Company.
F-34
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
14. COMMON STOCK (continued)
December 2013 Black Economic Empowerment transactions (continued)
Salient terms of the BEE Relationship Agreements (continued)
The
BEE shares are contractually restricted as to resale for a period of five years
from the date of issuance, with the exception of periodic sales which would have
been made to fund the repayment of principal and interest on the loans if they
had not been repaid in full in June 2014. In addition, the Company may call the
BEE shares then owned by the BEE partners, either in exchange for a minority
interest in CPS or for a cash payment equal to the 30-day VWAP. Further, after
the fifth anniversary of the date of issuance of the BEE shares, the Company
will have a right of first refusal on the shares owned by the BEE partners.
Acquisition of KSNET non-controlling interests
During
the year ended June 30, 2014, the Company acquired all of the issued share
capital of KSNET, Inc. that it did not previously own for approximately $2.0
million in cash. The Company intends to realize certain South Korean tax
efficiencies in the future and is currently discussing the feasibility with its
South Korean tax advisors. 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 KSNET. The difference between the fair value of the
consideration paid and the amount by which the non-controlling interest was
adjusted, of $1.5 million, was recognized in total Net1 equity.
15. ACCUMULATED OTHER
COMPREHENSIVE (LOSS) INCOME
The
table below presents the change in accumulated other comprehensive (loss) income
per component during years ended June 30, 2014, 2013 and 2012:
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
unrealized |
|
|
|
|
|
|
|
Accumulated |
|
|
income (loss) |
|
|
|
|
|
|
|
Foreign |
|
|
on asset |
|
|
|
|
|
|
|
currency |
|
|
available for |
|
|
|
|
|
|
|
translation |
|
|
sale, net of |
|
|
|
|
|
|
|
reserve |
|
|
tax |
|
|
Total |
|
|
|
|
000 |
|
|
000 |
|
|
000 |
|
|
Balance as of July 1, 2011 |
$ |
(31,647 |
) |
$ |
(2,132 |
) |
$ |
(33,779 |
) |
|
Movement in foreign
currency translation reserve |
|
(43,490 |
) |
|
- |
|
|
(43,490 |
) |
|
Unrealized loss on
asset available for sale, net of tax of $602 . |
|
- |
|
|
1,547 |
|
|
1,547 |
|
|
Balance as of June 30, 2012 |
|
(75,137 |
) |
|
(585 |
) |
|
(75,722 |
) |
|
Movement in foreign
currency translation reserve |
|
(26,051 |
) |
|
- |
|
|
(26,051 |
) |
|
Unrealized loss on
asset available for sale, net of tax of $356 . |
|
- |
|
|
915 |
|
|
915 |
|
|
Balance as of June 30, 2013 |
|
(101,188 |
) |
|
330 |
|
|
(100,858 |
) |
|
Movement in foreign
currency translation reserve |
|
13,552 |
|
|
- |
|
|
13,552 |
|
|
Release
of foreign currency translation reserve related
to sale/ liquidation of businesses
|
|
4,277
|
|
|
- |
|
|
4,277
|
|
|
Unrealized loss on
asset available for sale, net of tax of $112 . |
|
- |
|
|
288 |
|
|
288 |
|
|
Balance as of June 30, 2014 |
$ |
(83,359 |
) |
$ |
618 |
|
$ |
(82,741 |
)
|
The
Company released a net loss of $4.3 million from its foreign currency
translation reserve to selling, general and administration expense on its
consolidated statement of operations during the year ended June 30, 2014, as a
result of the sale and liquidation of certain subsidiaries (See also Note 19).
There were no other reclassifications from accumulated other comprehensive loss
to comprehensive (loss) income during the year ended June 30, 2014. There were
no reclassifications from accumulated other comprehensive loss to comprehensive
(loss) income during the year ended June 30, 2013.
F-35
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
16. REVENUE
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
Services rendered comprising mainly fees
and commissions |
$ |
518,297 |
|
$ |
430,268 |
|
$ |
362,679 |
|
Loan-based fees received |
|
33,560 |
|
|
6,613 |
|
|
8,433 |
|
Sale of goods comprising mainly hardware
and software sales |
|
29,799 |
|
|
15,266 |
|
|
19,152 |
|
|
$ |
581,656 |
|
$ |
452,147 |
|
$ |
390,264 |
|
Services
rendered comprising mainly fees and commissions for the year ended June 30,
2014, includes a once-off receipt of $26.6 million related to the recovery of
additional implementation costs incurred during the beneficiary re-registration
process during the years ended June 30, 2013 and 2012. During the years ended
June 30, 2014, 2013 and 2012, the Company did not recognize any revenue using
the percentage of completion method.
17. EQUITY INSTRUMENTS ISSUED
PURSUANT TO BEE TRANSACTIONS
2014 transactions
On
April 16, 2014, the Company issued 4,400,000 shares of its common stock pursuant
to the BEE transactions discussed in Note 14. The charge related to the equity
instruments issued pursuant to the BEE transactions was determined to be
approximately $11.3 million and was expensed in full during the year ended June
30, 2014, because the BEE partners owned the shares on the issue date. This was
a book entry and no cash was actually paid. The charge recorded was determined
as the difference between the fair value of the loans provided to the BEE
partners and the fair value of the equity instruments granted to the BEE
partners.
The
fair value of the loans provided to the BEE partners was determined to be their
face value. The fair value of the equity instruments was calculated utilizing an
adjusted Monte Carlo simulation discounted cash flow model which was developed
for the purpose of the valuation of these BEE transactions. Cash flows were
calculated for each simulated share price path, taking into account the bespoke
features of the BEE transactions, as well as the expected interest and capital
repayments (funded through the expected sales of BEE shares). The adjustment
to the Monte Carlo simulation model incorporates a jump diffusion process to
the standard Geometric Brownian Motion simulation, in order to capture the
discontinuous share price jumps observed in the Companys share price movements
on stock exchanges on which it is listed. Therefore, the simulated share price
paths capture the idiosyncrasies of the observed Company share price movements.
For each simulation, the resulting expected cash flows were discounted to the
valuation date.
The
Company used an expected volatility of 21.04%, an expected life of five years, a
risk free rate of 7.90% and no future dividends in its calculation of the fair
value of the equity instrument. The estimated expected volatility was calculated
based on the Companys 30 day VWAP share price using the exponentially weighted
moving average of returns.
2012 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 BEE transaction that it entered
into on January 25, 2012. The option expired unexercised on April 19, 2013. The
fair value of the option was determined as approximately $14.2 million and was
expensed in full during the year ended June 30, 2012 because the option vested
immediately on the grant date. This was a book entry and no cash was actually
paid. Accordingly, the expense recorded during the year ended June 30, 2012, was
not reversed during the year ended June 30, 2013, because the option had vested
in full on the grant date.
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 was calculated based on the Companys 250 day
volatility.
F-36
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
18. 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.
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 2014,
2013 and 2012. The table below presents the range of assumptions used to value
options granted during the years ended June 30, 2014, 2013 and 2012:
|
2014 |
|
2013 |
|
2012 |
Expected volatility |
50% |
|
49% |
|
37% - 39% |
Expected dividends |
0% |
|
0% |
|
0% |
Expected life (in years) |
3 |
|
3 |
|
3 |
Risk-free rate |
0.9% |
|
0.3% |
|
1.9% - 0.9% |
Restricted Stock
General Terms of Awards
Shares
of restricted stock are considered to be participating non-vested equity shares
(specifically contingently returnable shares) for the purposes of calculating
earnings per share (refer Note 21) because, as discussed in more detail below,
the recipient is obligated to transfer any unvested restricted stock back to the
Company for no consideration and these shares of restricted stock are eligible
to receive non-forfeitable dividend equivalents at the same rate as common
stock. 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.
F-37
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
18. STOCK-BASED COMPENSATION
(continued)
Amended and Restated Stock Incentive Plan (continued)
Restricted Stock (continued)
General Terms of Awards (continued)
Restricted
stock awarded to non-employee directors and employees of the Company vests
ratably over a three-year period. Recipients are entitled to all rights of a
stockholder of the Company except as otherwise provided in the restricted stock
agreements. These rights include the right to vote and receive dividends and/or
other distributions. However, the restricted stock agreements generally prohibit
transfer of any nonvested and forfeitable restricted stock. If a recipient
ceases to be a member of the Board of Directors or an employee 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.
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 October and
November 2010
In
October 2010, the Remuneration Committee approved an award of 60,000 shares of
restricted stock to an executive officer 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.
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 provided
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
were 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 was 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
determined 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 was not equal to or exceeded the Fundamental
EPS target for such year, no award shares would vest or become nonforfeitable on
the corresponding vesting date but would have been available to become vested
and nonforfeitable as of a subsequent vesting date if the Fundamental EPS target
for a subsequent fiscal year was met; provided that the recipients service
continued 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. The remaining two-thirds of the restricted stock
award did not vest because the financial performance target of $1.90 was not met
for June 30, 2013. Refer also Stock option and restricted stock
activityrestricted stock below.
F-38
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
18. STOCK-BASED COMPENSATION
(continued)
Amended and Restated Stock Incentive Plan (continued)
Stock Appreciation Rights
The
Remuneration Committee also may grant stock appreciation rights, either singly
or in tandem with underlying stock options. Stock appreciation rights entitle
the holder upon exercise to receive an amount in any combination of cash or
shares of common stock (as determined by the Remuneration Committee) equal in
value to the excess of the fair market value of the shares covered by the right
over the grant price. No stock appreciation rights have been granted.
Stock option and restricted stock activity
Options
The following table summarizes stock option activity for the years ended June
30, 2014, 2013 and 2012:
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
|
Average |
|
|
|
|
|
|
|
average |
|
|
Contractual |
|
|
Intrinsic |
|
|
Grant |
|
|
|
|
Number of |
|
|
exercise |
|
|
Term |
|
|
Value |
|
|
Date Fair |
|
|
|
|
shares |
|
|
price ($) |
|
|
(in years) |
|
|
($000) |
|
|
Value ($) |
|
|
Outstanding
July 1, 2011 |
|
2,120,656 |
|
|
18.44 |
|
|
6.82 |
|
|
243 |
|
|
|
|
|
Granted under Plan: August 2011 |
|
165,000 |
|
|
6.59 |
|
|
10.00 |
|
|
297 |
|
|
1.80 |
|
|
Granted under Plan: October
2011 |
|
202,000 |
|
|
7.98 |
|
|
10.00 |
|
|
442 |
|
|
2.19 |
|
|
Forfeitures |
|
(240,073 |
) |
|
21.68
|
|
|
|
|
|
- |
|
|
|
|
|
Outstanding
June 30, 2012 |
|
2,247,583 |
|
|
16.28 |
|
|
6.43 |
|
|
602 |
|
|
- |
|
|
Granted under Plan: August 2012 |
|
431,000 |
|
|
8.75 |
|
|
10.00 |
|
|
1,249 |
|
|
2.90 |
|
|
Exercised |
|
(30,000 |
) |
|
7.98 |
|
|
|
|
|
24 |
|
|
|
|
|
Outstanding June 30, 2013 |
|
2,648,583 |
|
|
15.15 |
|
|
5.98 |
|
|
313 |
|
|
|
|
|
Granted under Plan: August
2013 |
|
224,896 |
|
|
7.35 |
|
|
10.00 |
|
|
568 |
|
|
2.53 |
|
|
Exercised |
|
(26,667 |
) |
|
7.00 |
|
|
|
|
|
91 |
|
|
|
|
|
Forfeited |
|
(136,420 |
) |
|
23.51 |
|
|
|
|
|
- |
|
|
|
|
|
Outstanding June 30, 2014 |
|
2,710,392 |
|
|
14.16 |
|
|
5.38
|
|
|
3,909 |
|
|
|
|
The following table presents stock options vesting and expecting to vest as of
June 30, 2014:
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Number of |
|
|
price |
|
|
Term |
|
|
Value |
|
|
|
shares |
|
|
($) |
|
|
(in years) |
|
|
($000) |
|
Vested and expecting to vest June 30,
2014 |
|
2,710,392 |
|
|
14.16 |
|
|
5.38 |
|
|
3,909 |
|
These options have an exercise price range of $6.59 to $24.46.
F-39
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
18. STOCK-BASED COMPENSATION
(continued)
Stock option and restricted stock activity (continued)
Options (continued)
The following table presents stock options that are exercisable as of June 30,
2014:
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
average |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Number of |
|
|
exercise |
|
|
Term |
|
|
Value |
|
|
|
shares |
|
|
price ($) |
|
|
(in years) |
|
|
($000) |
|
Exercisable June 30, 2014 |
|
2,085,830 |
|
|
16.01 |
|
|
4.54 |
|
|
1,789 |
|
During
the years ended June 30, 2014, 2013 and 2012, approximately 462,333, 442,666,
and 300,000 stock options became exercisable, respectively. Included in the
442,666 stock options are 30,000 stock options with respect to which the
Remuneration Committee of the Board agreed to accelerate vesting prior to the
resignation of a non-employee director. The stock option vesting was accelerated
in recognition of this directors long service and valued contributions. During
the year ended June 30, 2014, the Company received $0.2 million from 26,667
stock options exercised by employees. During the year ended June 30, 2013, the
Company received approximately $0.2 million from 30,000 stock options exercised
by the non-employee director that resigned. No stock options were exercised
during the year ended June 30, 2012. During the years ended June 30, 2014 and
2012, respectively, employees forfeited 136,420 and 240,073 stock options. There
were no forfeitures during the years ended June 30, 2013. The Company issues new
shares to satisfy stock option exercises.
Restricted stock
The following table summarizes restricted stock activity for the years
ended June 30, 2014, 2013 and 2012:
|
|
Number of |
|
|
|
Weighted |
|
|
|
Shares of |
|
|
|
Average Grant |
|
|
|
Restricted |
|
|
|
Date Fair Value |
|
|
|
Stock |
|
|
|
($000) |
|
Non-vested July 1, 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 |
|
Total vested |
|
(33,808 |
) |
|
|
|
|
Forfeitures |
|
(5,976 |
) |
|
|
50 |
|
Non-vested
June 30, 2012 |
|
646,617 |
|
|
|
7,061 |
|
Granted August 2012 |
|
21,569 |
|
|
|
189 |
|
Vested August 2012 |
|
(23,436 |
) |
|
|
216 |
|
Vested February
2013 |
|
(183,333 |
) |
|
|
1,016 |
|
Vested May 2013 |
|
(858 |
) |
|
|
7 |
|
Total vested |
|
(207,627 |
) |
|
|
|
|
Forfeitures |
|
(55,333 |
) |
|
|
407 |
|
Non-vested June 30, 2013 |
|
405,226 |
|
|
|
4,393 |
|
Granted August 2013 |
|
187,963 |
|
|
|
1,382 |
|
Vested August
2013 |
|
(16,907 |
) |
|
|
161 |
|
Vested February 2014 |
|
(183,333 |
) |
|
|
1,742 |
|
Total vested |
|
(200,240 |
) |
|
|
|
|
Forfeitures |
|
(7,171 |
) |
|
|
84 |
|
Non-vested June 30, 2014 |
|
385,778 |
|
|
|
3,534 |
|
F-40
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
18. STOCK-BASED COMPENSATION
(continued)
Stock option and restricted stock activity (continued)
Restricted stock (continued)
The
fair value of restricted stock vested during the years ended June 30, 2014, 2013
and 2012, was $1.9 million, $1.2 million and $0.2 million, respectively.
Non-employee directors resigning during the years ended June 30, 2014 and 2012,
respectively forfeited 7,171 and 5,976 shares of restricted stock that had not
vested. Included in the 23,436 shares of restricted stock that vested in August
2012 are 8,547 shares with respect to which the Remuneration Committee of the
Board agreed to accelerate vesting prior to the resignation of a non-employee
director. The second and third tranche totaling 55,333 shares of restricted
stock granted in November 2010 to two executive officers did not vest because
the agreed performance target was not achieved. Forfeited shares of restricted
stock are returned to the Company and, in accordance with the Plan, are
available for future issuances by the Remuneration Committee.
Stock-based compensation charge and unrecognized compensation cost
The
Company has recorded a net stock compensation charge of $3.7 million, $3.9
million and $2.8 million for the years ended June 30, 2014, 2013 and 2012,
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, 2014 |
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
charge |
$ |
3,724 |
|
$ |
- |
|
$ |
3,724 |
|
|
Reversal of stock compensation charge related
to restricted stock forfeited |
|
(6 |
) |
|
- |
|
|
(6 |
) |
|
Total year
ended June 30, 2014 |
$ |
3,718 |
|
$ |
- |
|
$ |
3,718 |
|
|
Year ended June 30, 2013 |
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
charge |
$ |
4,387 |
|
$ |
- |
|
$ |
4,387 |
|
|
Reversal of stock compensation charge related
to restricted stock forfeited |
|
(480 |
) |
|
- |
|
|
(480 |
) |
|
Total year
ended June 30, 2013 |
$ |
3,907 |
|
$ |
- |
|
$ |
3,907 |
|
|
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 |
|
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, 2014, the total unrecognized compensation cost related to stock
options was approximately $0.9 million, which the Company expects to recognize
over approximately two years. As of June 30, 2014, the total unrecognized
compensation cost related to restricted stock awards was approximately $2.3
million, which the Company expects to recognize over approximately two years.
F-41
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
18. STOCK-BASED COMPENSATION
(continued)
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 $1.6 million and $1.4 million,
respectively, for the years ended June 30, 2014 and 2013, 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.
19. DECONSOLIDATION OF
BUSINESSES SOLD OR LIQUIDATED AND DISPOSAL OF BUSINESS
The
profit (loss) on deconsolidation of businesses sold or liquidated and disposal
of business during the years ended June 30, 2014, 2013 and 2012 are summarized
in the table below:
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
Profit on sale of MediKredit Integrated
Healthcare Solutions Proprietary Limited (MediKredit) |
$ |
4,125 |
|
$ |
- |
|
$ |
- |
|
|
Profit on disposal of assets related to the business of Net
1 Universal Electronic Technological Solutions (Pty) Ltd (NUETS
business) |
|
2,081 |
|
|
- |
|
|
- |
|
|
Loss on liquidation of Net1 UTA |
|
(6,261 |
)
|
|
- |
|
|
- |
|
|
Profit on liquidation of SmartSwitch Nigeria |
|
- |
|
|
- |
|
|
3,994 |
|
|
Net profit (loss) for the year
ended June 30, |
$ |
(55 |
)
|
$ |
- |
|
$ |
3,994 |
|
2014 transactions
Sale of MediKredit
On
June 17, 2014, the Company sold its MediKredit subsidiary to an unrelated third
party. The Company has recorded a profit of approximately $4.1 million related
to the sale in selling, general and administration expense on its consolidated
statement of operations for the year ended June 30, 2014. The profit has been
allocated to corporate/eliminations. The sales price will be paid in three
tranches, approximately 57% on June 17, 2014, approximately 14% on June 1, 2015,
and the remainder on June 1, 2016. In addition, the parties have agreed that
MediKredit may continue to operate at the Companys premises at no cost to the
purchaser until September 30, 2014. Furthermore, the parties have agreed that
MediKredit will provide certain development, support and maintenance services
(collectively Services) related to technology used in the United States at no
cost to the Company up to an amount of $0.3 million, translated at the foreign
exchange rates applicable as of June 30, 2014. The Company determined that the
Services comprise part of the sales price of MediKredit and have increased the
profit on sale accordingly. In addition, the Company has determined that the
provision of an operating area within the Companys premises represents an
obligation on it, and has reduced the profit on sale accordingly. The fair value
of the Services and free rental of premises has been determined using prices
that would have been charged between unrelated third parties. Finally, the
Company was required to release a gain of approximately $2.0 million from its
foreign currency transaction reserve which has been included in the profit on
sale. During the year ended June 30, 2014, the Company incurred
transaction-related expenditure of $0.01 million related to the sale of
MediKredit.
The
purchaser is contingently obligated to pay the Company additional amounts based
on future expansion of the MediKredit business in certain circumstances. The
Company has not recorded any of these amounts during the year ended June 30,
2014, as none of the contingent events have occurred as of June 30, 2014.
F-42
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
19. DECONSOLIDATION OF
BUSINESSES SOLD OR LIQUIDQATED AND DISPOSAL OF BUSINESS (continued)
2014 transactions (continued)
Disposal of assets related to NUETS business
On
June 30, 2014, the Company sold the NUETS business, which consisted primarily of
customer contracts, other than contracts for UEPS systems in Botswana and
Namibia, and equipment for approximately $2.2 million in cash. The Company
received $0.2 million of these cash proceeds in June 2014, and the remaining
$2.0 million was received in July 2014, and is included in accounts receivable,
net, as of June 30, 2014. The Company has recorded a profit of approximately
$2.1 million on the sale in selling, general and administration expense on its
consolidated statement of operations for the year ended June 30, 2014. The
profit has been allocated to corporate/eliminations. The shareholders of the
purchaser comprise a former employee of the Company, a US-based economic
development equity fund and other unrelated individuals and private companies.
The Company has provided the purchaser with a non-exclusive, perpetual,
worldwide license to use the Companys UEPS technology. The purchaser may not
use this technology in South Africa to provide payment services and specifically
may not use the technology in any manner to service the Ministry of Social
Development in South Africa and/or SASSA. The parties have agreed that the
Company will provide certain administrative and technical support services
related to the NUETS business until March 2015. During the year ended June 30,
2014, the Company incurred transaction-related expenditure of $0.06 million
related to the sale of NUETS business.
Liquidation of Net1 UTA
The
Company has substantially liquidated its Net1 UTA business due to an inability
to implement and expand its technology into new markets on a profitable basis.
Net1 UTAs operations were streamlined a number of years ago and the Company did
not incur significant cash costs to liquidate Net1 UTA. However, the Company was
required to release approximately $6.3 million from its foreign currency
transaction reserve which has resulted in a loss on liquidation of Net1 UTA.
This non-cash loss on liquidation of Net1 UTA has been recorded in selling,
general and administration expense on its consolidated statement of operations
for the year ended June 30, 2014. The loss has been allocated to
corporate/eliminations.
2012 transaction
Liquidation of SmartSwitch Nigeria
The
Company 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 shareholders of SmartSwitch Nigeria 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 Company has recorded the profit in selling, general and
administration expense on its consolidated statement of operations for the year
ended June 30, 2012. The profit has been allocated to corporate/eliminations.
F-43
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
20. INCOME TAXES
Income tax provision
The table below presents the components of income before income taxes
for the years ended June 30, 2014, 2013 and 2012:
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
South Africa |
$ |
121,338 |
|
$ |
38,654 |
|
$ |
67,054 |
|
United States |
|
(9,923 |
) |
|
(10,075 |
) |
|
(6,340 |
) |
Other |
|
(2,273 |
) |
|
(1,300 |
) |
|
(333 |
) |
Income before income taxes |
$ |
109,142 |
|
$ |
27,279 |
|
$ |
60,381 |
|
Presented
below is the provision for income taxes by location of the taxing jurisdiction
for the years ended June 30, 2014, 2013 and 2012:
|
|
2014 |
|
|
|
2013 |
|
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax |
$ |
61,902 |
|
|
$ |
33,968 |
|
|
$ |
49,092 |
|
South Africa |
|
41,326 |
|
|
|
15,418 |
|
|
|
26,787 |
|
United States
|
|
14,838 |
|
|
|
16,061 |
|
|
|
20,746 |
|
Other |
|
5,738
|
|
|
|
2,489
|
|
|
|
1,559
|
|
Deferred taxation (benefit)
charge |
|
(7,887 |
) |
|
|
(4,915 |
) |
|
|
(4,598 |
) |
South Africa |
|
(3,345 |
) |
|
|
(2,037 |
) |
|
|
(2,941 |
) |
United States
|
|
(107 |
) |
|
|
(331 |
) |
|
|
31 |
|
Other |
|
(4,435 |
) |
|
|
(2,547 |
) |
|
|
(1,688 |
) |
Capital gains tax |
|
202 |
|
|
|
7 |
|
|
|
1,465 |
|
Secondary taxation on companies |
|
- |
|
|
|
- |
|
|
|
327 |
|
Change in tax rate |
|
- |
|
|
|
- |
|
|
|
(18,315 |
) |
Foreign tax credits generated United States
|
|
(14,838 |
) |
|
|
(14,404 |
) |
|
|
(12,035 |
)
|
Income tax
provision |
$ |
39,379 |
|
|
$ |
14,656 |
|
|
$ |
15,936 |
|
There
were no significant capital gains taxes paid during the years ended June 30,
2014 and 2013, respectively. The capital gains tax paid during the year ended
June 30, 2012, represents the taxes paid resulting from an intercompany capital
transaction in South Africa.
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, 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.
There
were no changes to the enacted tax rate in the years ended June 30, 2014 and
2013. 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.
F-44
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
20. INCOME TAXES (continued)
Income tax provision (continued)
The
movement in the valuation allowance for the year ended June 30, 2014, relates to
releases of the valuation allowance resulting from the utilization of foreign
tax credits during the year and deconsolidation of net operating loss
carryforwards for MediKredit. The movement in the valuation allowance for the
year ended June 30, 2013, relates to valuation allowances for foreign tax
credits and valuation allowances related to net operating loss carryforwards for
the Companys South African subsidiaries, primarily MediKredit. As a result of
the change in South African tax law during the year ended June 30, 2012, and the
Companys intention to permanently reinvest its undistributed earnings in South
Africa, the Company did not believe it would be able to recover foreign tax
credits previously recognized of $8.2 million. The movement in the valuation
allowance during the year ended June 30, 2012, included a valuation allowance
related to this foreign tax credits.
Net1
included actual and deemed dividends received from one of its South African
subsidiaries in its years ended June 30, 2014, 2013 and 2012, 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, 2014, 2013
and 2012, 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, 2014, 2013 and 2012 is as follows:
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
Income tax rate reconciliation: |
|
|
|
|
|
|
|
|
|
Income taxes at fully-distributed South
African tax rates |
|
28.00% |
|
|
28.00% |
|
|
28.00% |
|
Non-deductible items |
|
4.71% |
|
|
6.78% |
|
|
6.60% |
|
Foreign tax rate differential
|
|
1.89% |
|
|
10.39% |
|
|
7.22% |
|
Foreign tax credits |
|
(13.59% |
) |
|
(52.80% |
) |
|
(21.12% |
) |
Taxation on deemed dividends
in the United States |
|
13.46% |
|
|
57.32% |
|
|
31.29% |
|
Capital gains tax paid |
|
0.19% |
|
|
0.03% |
|
|
2.43% |
|
Secondary taxation on
companies |
|
-% |
|
|
-% |
|
|
0.54% |
|
Movement in valuation allowance |
|
1.23% |
|
|
9.40% |
|
|
1.23% |
|
Prior year adjustments |
|
0.19% |
|
|
(5.39% |
) |
|
0.53% |
|
Change in tax law |
|
-%
|
|
|
-%
|
|
|
(30.33% |
) |
Income tax
provision |
|
36.08% |
|
|
53.73% |
|
|
26.39% |
|
The
non-deductible items during the year ended June 30, 2014, relates principally to
expenses that are not deductible for tax purposes, including the charge related
to the equity awards issued pursuant to the Companys BEE transactions,
stock-based compensation charges, costs incurred to support foreign related
entities and interest expense. The non-deductible items during the year ended
June 30, 2013, relates principally to expenses that are not deductible for tax
purposes, including stock-based compensation charges, costs incurred to support
foreign related entities and interest expense. The non-deductible items during
the year ended June 30, 2012, relates principally to expenses that are not
deductible for tax purposes, including stock-based compensation charges,
interest expense and an equity award issued pursuant to the Companys BEE
transaction. The foreign tax rate differential represents the difference between
statutory tax rates in South Africa and foreign jurisdictions, primarily the
United States.
F-45
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
20. 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:
|
|
2014 |
|
|
2013 |
|
Total deferred tax
assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating
loss carryforwards |
$ |
1,901 |
|
$ |
12,024 |
|
Provisions and accruals |
|
5,470 |
|
|
3,164 |
|
FTS patent |
|
909 |
|
|
1,088 |
|
Intangible assets |
|
123 |
|
|
17,150 |
|
Foreign tax
credits |
|
23,338 |
|
|
24,637 |
|
Other |
|
7,765
|
|
|
5,537
|
|
Total deferred tax assets before valuation allowance |
|
39,506 |
|
|
63,600 |
|
Valuation
allowances |
|
(25,153 |
) |
|
(54,117 |
) |
Total deferred tax assets, net of valuation
allowance |
|
14,353 |
|
|
9,483 |
|
|
|
|
|
|
|
|
Total deferred tax
liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets |
|
16,600 |
|
|
18,729 |
|
Other |
|
5,824
|
|
|
4,543
|
|
Total deferred tax liabilities |
|
22,424 |
|
|
23,272 |
|
|
|
|
|
|
|
|
Reported as |
|
|
|
|
|
|
Current deferred tax assets |
|
7,451 |
|
|
4,938 |
|
Long term
deferred tax liabilities |
|
15,522 |
|
|
18,727 |
|
Net deferred
income tax liabilities |
$ |
8,071 |
|
$ |
13,789 |
|
Decrease in total deferred tax assets before valuation allowance
Net operating loss carryforwards
Net
operating loss carryforwards have decreased primarily due to the sale of
MediKredit and substantial liquidation of Net1 UTA during the year ended June
30, 2014. Net operating loss carryforwards related to these entities as of June
30, 2013, were provided in full in previous years. In addition, the Company
provided for the full net operating losses incurred by MediKredit and Net1 UTA
during the year ended June 30, 2014. The Company deconsolidated MediKredits net
operating loss carryforwards and associated valuation allowance of $3.1 million
when it was sold in June 2014. Furthermore, as a result of the substantial
liquidation of Net1 UTA in 2014, the full valuation allowance of $8.9 million
has been applied against its net operating loss carryforwards.
Intangible assets
Included
in total deferred tax assets intangible assets as of June 30, 2013, 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 expected to amortize these license rights in its tax returns over a
period of 15 years. Any unused amounts were not expected to be carried forward
to the subsequent year of assessment. During the years ended June 30, 2014, 2013
and 2012, Net1 UTA utilized approximately $0.02 million, $0.05 million and $0.04
million, respectively, of these license rights against its taxable income. As a
result of the substantial liquidation of Net1 UTA in 2014, the full valuation
allowance of $8.0 million has been applied against the gross carrying value of
this deferred tax asset. Accordingly, there was no impact on the Companys
income tax expense during the year ended June 30, 2014.
F-46
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
20. 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. The Company did not utilize the goodwill deferred
tax asset during the years ended June 30, 2014 and 2013, respectively. As a
result of the substantial liquidation of Net1 UTA in 2014, the full valuation
allowance of $7.9 million has been applied against the gross carrying value of
this deferred tax asset. Accordingly, there was no impact on the Companys
income tax expense during the year ended June 30, 2014.
Decrease in total deferred tax liabilities
Intangible assets
Deferred
tax liabilities intangible assets have decreased during the year ended June
30, 2014, primarily as a result of the amortization of the underlying KSNET
intangible assets during the year.
Decrease in valuation allowance
At
June 30, 2014, the Company had deferred tax assets of $14.4 million (2013: $9.5
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, 2014, the Company had a valuation allowance of $25.2 million (2013:
$54.1 million) to reduce its deferred tax assets to estimated realizable value.
The movement in the valuation allowance for the years ended June 30, 2014 and
2013, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
Tax |
|
|
operating |
|
|
|
|
|
|
|
|
|
|
|
|
|
tax |
|
|
deductible |
|
|
loss carry- |
|
|
FTS |
|
|
|
|
|
|
|
Total |
|
|
credits |
|
|
goodwill |
|
|
forwards |
|
|
patent |
|
|
Other |
|
|
July 1, 2012 |
$ |
47,496 |
|
$ |
19,089 |
|
$ |
17,985 |
|
$ |
9,560 |
|
$ |
660 |
|
$ |
202 |
|
|
Reversed to statement of operations |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
Charged to statement of operations |
|
8,201 |
|
|
5,547 |
|
|
- |
|
|
2,621 |
|
|
- |
|
|
33 |
|
|
Utilized |
|
(1,733 |
) |
|
- |
|
|
(1,643 |
) |
|
- |
|
|
(90 |
) |
|
- |
|
|
Foreign currency adjustment |
|
153 |
|
|
- |
|
|
615 |
|
|
(367 |
) |
|
(96 |
) |
|
1 |
|
|
June 30, 2013 |
|
54,117 |
|
|
24,636 |
|
|
16,957 |
|
|
11,814 |
|
|
474 |
|
|
236 |
|
|
Reversed to statement of operations |
|
(1,412 |
) |
|
(1,412 |
) |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
Charged to statement of operations |
|
1,442 |
|
|
113 |
|
|
- |
|
|
1,329 |
|
|
- |
|
|
- |
|
|
Utilized |
|
(26,698 |
) |
|
- |
|
|
(17,682 |
) |
|
(9,016 |
) |
|
- |
|
|
- |
|
|
Deconsolidation |
|
(3,075 |
) |
|
- |
|
|
- |
|
|
(3,075 |
) |
|
- |
|
|
- |
|
|
Foreign currency adjustment |
|
779 |
|
|
- |
|
|
725 |
|
|
192 |
|
|
(105 |
) |
|
(33 |
) |
|
June 30, 2014 |
$ |
25,153 |
|
$ |
23,337 |
|
$ |
- |
|
$ |
1,244
|
|
$ |
369
|
|
$ |
203
|
|
F-47
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
20. INCOME TAXES
(continued)
Deferred tax assets and liabilities (continued)
Net operating loss carryforwards and foreign tax credits
United States
As of June 30, 2014, Net1 had net operating loss carryforwards that
will expire, if unused, as follows:
Year of expiration
|
|
US net |
|
|
|
operating loss |
|
|
|
carry |
|
|
|
forwards |
|
2024 |
$ |
3,340 |
|
During
the year ended June 30, 2014 and 2013, 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, 2014 and
2013, respectively. The unused foreign tax credits generated expire after ten
years in 2023, 2022, 2021, 2020 and 2019.
South Africa
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.
Uncertain tax positions
As
of each of June 30, 2014 and 2013, respectively the Company has unrecognized tax
benefits of $1.2 million, all of which would impact the Companys effective tax
rate. The Company files income tax returns mainly in South Africa, South Korea,
Austria, Botswana and in the US federal jurisdiction. As of June 30, 2014, the
Companys South African subsidiaries are no longer subject to income tax
examination by the South African Revenue Service for periods before June 30,
2009. 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, 2014, 2013 and 2012:
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
Unrecognized tax benefits - opening balance
|
$ |
1,150 |
|
$ |
1,314 |
|
$ |
2,664 |
|
Gross decreases - tax positions in prior
periods |
|
- |
|
|
(170 |
) |
|
(1,159 |
) |
Gross increases - tax
positions in current period |
|
38 |
|
|
216 |
|
|
97 |
|
Lapse of statute limitations |
|
- |
|
|
- |
|
|
- |
|
Foreign currency adjustment
|
|
(28 |
) |
|
(210 |
) |
|
(288 |
) |
Unrecognized tax benefits - closing balance |
$ |
1,160 |
|
$ |
1,150 |
|
$ |
1,314 |
|
As
of each of June 30, 2014 and 2013, the Company had accrued interest related to
uncertain tax positions of approximately $0.2 million, respectively, on its
balance sheet.
F-48
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
21. EARNINGS PER SHARE
Basic
earnings per share include shares of restricted stock that meet the definition
of a participating security because these shares 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, 2014, 2013 and 2012, reflects
only undistributed earnings. The computation below of basic earnings per share
excludes the net income attributable to shares of unvested restricted stock
(participating non-vested restricted stock) from the numerator and excludes the
dilutive impact of these unvested shares of restricted stock from the
denominator.
Diluted
earnings per share has been calculated to give effect to the number of shares of
additional common stock that would have been outstanding if the potential
dilutive instruments had been issued in each period. Stock options are included
in the calculation of diluted earnings per share utilizing the treasury stock
method and are not considered to be participating securities as the stock
options do not contain non-forfeitable dividend rights. The calculation of
diluted earnings per share includes the dilutive effect of a portion of the
restricted stock granted to employees in October 2010, November 2010 and
February 2012 as these shares of restricted stock are considered contingently
returnable shares for the purposes of the diluted earnings per share calculation
and the vesting conditions in respect of a portion of the restricted stock had
been satisfied. The vesting conditions are discussed in Note 18.
The
following table presents net income attributable to Net1 (income from continuing
operations) and the share data used in the basic and diluted earnings per share
computations using the two-class method for the years ended June 30, 2014, 2013
and 2012:
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
|
(in thousands except percent and |
|
|
|
per share data) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
Net income
attributable to Net1 |
$ |
70,111 |
|
$ |
12,977 |
|
$ |
44,651 |
|
Undistributed earnings |
|
70,111 |
|
|
12,977 |
|
|
44,651 |
|
Percent
allocated to common shareholders (Calculation 1) |
|
99% |
|
|
99% |
|
|
99% |
|
Numerator for earnings per
share: basic and diluted |
$ |
69,376 |
|
$ |
12,836 |
|
$ |
44,397 |
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
Denominator for
basic earnings per share: weighted-average common 3 |
|
|
|
|
|
|
|
|
|
shares outstanding |
|
45,997 |
|
|
45,057 |
|
|
44,930 |
|
Effect of
dilutive securities: |
|
|
|
|
|
|
|
|
|
Performance shares related to acquisition |
|
- |
|
|
95 |
|
|
- |
|
Stock options |
|
119 |
|
|
30 |
|
|
45 |
|
Denominator
for diluted earnings per share: adjusted
weighted average
common shares outstanding and assumed conversion |
|
46,116 |
|
|
45,182 |
|
|
44,975 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
Basic |
$ |
1.51 |
|
$ |
0.28 |
|
$ |
0.99 |
|
Diluted |
$ |
1.50 |
|
$ |
0.28 |
|
$ |
0.99 |
|
|
|
|
|
|
|
|
|
|
|
(Calculation 1) |
|
|
|
|
|
|
|
|
|
Basic
weighted-average common shares outstanding (A) |
|
45,997 |
|
|
45,057 |
|
|
44,930 |
|
Basic
weighted-average common shares outstanding
and unvested restricted
shares expected to vest (B) |
|
46,484 |
|
|
45,553 |
|
|
45,187 |
|
Percent
allocated to common shareholders (A) / (B) |
|
99% |
|
|
99% |
|
|
99% |
|
Options
to purchase 1,516,240 shares of the Companys common stock at prices ranging
from $7.35 to $24.46 per share were outstanding during the year ended June 30,
2014, 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 August 22, 2022, were still outstanding as of June 30, 2014.
F-49
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
22. SUPPLEMENTAL CASH FLOW
INFORMATION
Supplemental cash flow information:
The following table presents the supplemental cash flow disclosures for the
years ended June 30, 2014, 2013 and 2012:
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received from interest |
$ |
14,703 |
|
$ |
12,043 |
|
$ |
9,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
$ |
6,969 |
|
$ |
7,927 |
|
$ |
9,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
$ |
42,417 |
|
$ |
21,900 |
|
$ |
30,704 |
|
The
cash flows associated with the December 2013 BEE transactions and buy back of
shares from the BEE partners as described in Note 14 were all denominated in
South African rand and net settled and there were no actual cash flow
transactions between the parties. The Company would have recorded the following
movements in its investing and financing activities in its consolidated
statement of cash flows for the year ended June 30, 2014, if cash had actually
flowed between the parties as follows:
|
2014 |
Cash (used in ) provided by investing
activities: |
|
Loans provided to BEE partners
|
($25,054) |
Loans repaid by
BEE partners |
$24,574 |
|
|
Cash provided by (used in) financing
activities: |
|
Issue of shares of the Companys
common stock to BEE partners |
$25,054 |
Purchase of
shares from BEE partners |
($24,858)
|
In
addition, the equity instrument charges discussed in Note 17 and expensed during
the years ended June 30, 2014 and 2012, respectively, are book entries and were
not paid in cash.
23. OPERATING SEGMENTS
Change to internal reporting structure and restatement of previously reported
information
During
June 2014, the Companys chief operating decision maker simplified its operating
and internal reporting structures from five reportable segments to three.
Previously reported information has been restated.
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 currently has three reportable segments: South African transaction
processing, International transaction processing and Financial inclusion and
applied technologies. The South African transaction processing and Financial
inclusion and applied technologies segments operate mainly within South Africa
and the International transaction processing segment operates mainly within
South Korea. The Companys reportable segments offer different products and
services and require different resources and marketing strategies and share the
Companys assets.
F-50
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
23. OPERATING SEGMENTS
(continued)
Operating segments (continued)
The
South African transaction processing segment currently consists mainly of a
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
recipient cardholders paid. Utility providers and banks are charged a fee for
transaction processing services performed on their behalf at retailers. This
segment has individually significant customers that each provides more than 10%
of the total revenue of the Company. For the year ended June 30, 2014, there was
one such customer, providing 27% of total revenue (2013: one such customer,
providing 42% of total revenue; 2012: one such customer, providing 41% of total
revenue).
The
International transaction processing segment consists mainly of activities in
South Korea from which the Company 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 South Korea. The segment also generates transaction
fee revenue from transaction processing of UEPS-enabled smartcards in Botswana
and, until February 2013, through NUETS initiative in Iraq as well as
transaction processing of medical-related claims in the United States.
The
Financial inclusion and applied technologies 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, and the provision of short-term loans as a
principal. This segment also includes fee income and associated expenses from
merchants and card holders using the Companys merchant acquiring system, the
sale of prepaid products (electricity and airtime) as well as the sale of
hardware and software. Finally, the Company earns premium income from the sale
of life insurance products and investment income through its insurance business.
Corporate/eliminations
includes the Companys head office cost center and the amortization of
acquisition-related intangible assets. The charges related to the BEE equity
instrument issued during the years ended June 30, 2014 and 2012 (refer to Note
17), and the profit related to the deconsolidation of subsidiaries and disposal
of business (refer to Note 19), during the years ended June 30, 2014 and 2012,
has been allocated to corporate/eliminations.
The
reconciliation of the reportable segments revenue to revenue from external
customers for the years ended June 30, 2014, 2013 and 2012, respectively, is as
follows:
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
From |
|
|
|
Reportable |
|
|
Inter- |
|
|
external |
|
|
|
Segment |
|
|
segment |
|
|
customers |
|
South African transaction
processing |
$ |
261,577 |
|
$ |
11,543 |
|
$ |
250,034 |
|
International transaction processing |
|
152,725 |
|
|
- |
|
|
152,725 |
|
Financial inclusion and
applied technologies |
|
207,595 |
|
|
28,698 |
|
|
178,897 |
|
Total for the year ended June
30, 2014 |
|
621,897 |
|
|
40,241 |
|
|
581,656 |
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing |
|
242,739 |
|
|
495 |
|
|
242,244 |
|
International transaction
processing |
|
135,954 |
|
|
- |
|
|
135,954 |
|
Financial inclusion and applied technologies
|
|
108,001 |
|
|
34,052 |
|
|
73,949 |
|
Total for the
year ended June 30, 2013 |
|
486,694 |
|
|
34,547 |
|
|
452,147 |
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing |
|
194,630 |
|
|
3,011 |
|
|
191,619 |
|
International transaction processing |
|
120,625 |
|
|
- |
|
|
120,625 |
|
Financial inclusion and
applied technologies |
|
90,792 |
|
|
12,772 |
|
|
78,020 |
|
Total for the year ended June
30, 2012 |
$ |
406,047 |
|
$ |
15,783 |
|
$ |
390,264 |
|
F-51
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
23. OPERATING SEGMENTS
(continued)
The
Company does not allocate interest income, interest expense or income tax
expense to its reportable segments. The Company evaluates segment performance
based on segment operating income before acquisition-related intangible asset
amortization which represents operating income before acquisition-related
intangible asset amortization and allocation of expenses allocated to
Corporate/Eliminations, all under GAAP. The reconciliation of the reportable
segments measure of profit or loss to income before income taxes for the years
ended June 30, 2014, 2013 and 2012, respectively, is as follows:
|
|
For the years ended June 30, |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
Reportable segments measure
of profit or loss |
$ |
144,038 |
|
$ |
50,383 |
|
$ |
94,439 |
|
Operating income:
Corporate/Eliminations |
|
(42,240 |
) |
|
(27,221 |
) |
|
(33,289 |
) |
Interest income |
|
14,817 |
|
|
12,083 |
|
|
8,576 |
|
Interest expense |
|
(7,473 |
) |
|
(7,966 |
) |
|
(9,345 |
) |
Income before income taxes |
$ |
109,142 |
|
$ |
27,279 |
|
$ |
60,381 |
|
The
following tables summarize segment information which is prepared in accordance
with GAAP for the years ended June 30, 2014, 2013 and 2012:
|
|
For the years ended June 30, |
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
Revenues |
|
|
|
|
|
|
|
|
|
South African transaction processing |
$ |
261,577 |
|
$ |
242,739 |
|
$ |
194,630 |
|
International
transaction processing |
|
152,725 |
|
|
135,954 |
|
|
120,625 |
|
Financial inclusion and applied technologies |
|
207,595 |
|
|
108,001 |
|
|
90,792 |
|
Total |
|
621,897 |
|
|
486,694 |
|
|
406,047 |
|
Operating income (loss) |
|
|
|
|
|
|
|
|
|
South African
transaction processing |
|
61,401 |
|
|
(21,316 |
) |
|
33,906 |
|
International transaction processing |
|
21,952 |
|
|
14,208 |
|
|
14,649 |
|
Financial
inclusion and applied technologies |
|
60,685 |
|
|
57,491 |
|
|
45,884 |
|
Subtotal: Operating segments |
|
144,038 |
|
|
50,383 |
|
|
94,439 |
|
Corporate/Eliminations |
|
(42,240 |
) |
|
(27,221 |
) |
|
(33,289 |
) |
Total |
|
101,798 |
|
|
23,162 |
|
|
61,150 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
South African transaction processing |
|
7,036 |
|
|
7,516 |
|
|
2,982 |
|
International
transaction processing |
|
15,823 |
|
|
14,183 |
|
|
13,209 |
|
Financial inclusion and applied technologies |
|
874 |
|
|
678 |
|
|
751 |
|
Subtotal: Operating segments |
|
23,733 |
|
|
22,377 |
|
|
16,942 |
|
Corporate/Eliminations |
|
16,553 |
|
|
18,222 |
|
|
19,557 |
|
Total |
|
40,286 |
|
|
40,599 |
|
|
36,499 |
|
Expenditures for
long-lived assets |
|
|
|
|
|
|
|
|
|
South African
transaction processing |
|
3,425 |
|
|
9,400 |
|
|
23,332 |
|
International transaction processing |
|
19,393 |
|
|
12,490 |
|
|
14,994 |
|
Financial
inclusion and applied technologies |
|
1,088 |
|
|
857 |
|
|
841 |
|
Subtotal: Operating segments |
|
23,906 |
|
|
22,747 |
|
|
39,167 |
|
Corporate/Eliminations |
|
- |
|
|
- |
|
|
- |
|
Total |
$ |
23,906 |
|
$ |
22,747 |
|
$ |
39,167 |
|
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.
F-52
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
23. OPERATING SEGMENTS
(continued)
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:
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
South Africa |
$ |
428,931 |
|
$ |
317,916 |
|
$ |
272,063 |
|
South Korea |
|
146,667 |
|
|
129,338 |
|
|
114,096 |
|
Rest of world |
|
6,058 |
|
|
4,893 |
|
|
4,105 |
|
Total |
$ |
581,656 |
|
$ |
452,147 |
|
$ |
390,264 |
|
Long-lived assets based on the geographic location for the years ended
June 30, are presented in the table below:
|
|
|
|
|
Long-lived assets |
|
|
|
|
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
South Africa |
$ |
105,627 |
|
$ |
117,858 |
|
$ |
140,308 |
|
South Korea |
|
229,830 |
|
|
213,589 |
|
|
224,272 |
|
Rest of world |
|
6,593
|
|
|
7,676
|
|
|
6,911
|
|
Total |
$ |
342,050 |
|
$ |
339,123 |
|
$ |
371,491 |
|
24. COMMITMENTS AND
CONTINGENCIES
Operating lease commitments
The Company leases certain premises. At June 30, 2014, the future
minimum payments under operating leases consist of:
Due within 1 year |
$ |
3,490 |
|
Due within 2 years |
|
2,608 |
|
Due within 3 years |
|
1,126 |
|
Due within 4 years |
|
363 |
|
Due within 5 years |
$ |
- |
|
Operating
lease payments related to the premises and equipment were $7.5 million, $15.9
million and $7.5 million, respectively, for the years ended June 2014, 2013 and
2012, respectively.
Capital commitments
As
of June 30, 2014 and 2013, the Company had outstanding capital commitments of
approximately $0.2 million and $0.3 million, respectively.
Purchase obligations
As
of June 30, 2014 and 2013, the Company had purchase obligations totaling $5.5
million and $3.9 million, respectively. The purchase obligations as of June 30,
2014, primarily include inventory that will be delivered to the Company and sold
to customers in the next twelve months.
F-53
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
24. COMMITMENTS AND
CONTINGENCIES (continued)
Guarantees
The
South African Revenue Service and certain of the Companys customers, suppliers
and other business partners have asked the Company to provide them with
guarantees, including standby letters of credit, issued by a South African bank.
The Company is required to procure these guarantees for these third parties to
operate its business.
Nedbank
has issued guarantees to these third parties amounting to ZAR 135.1 million
($12.8 million, translated at exchange rates applicable as of June 30, 2014) and
thereby utilizing part of the Companys short-term facility. The Company in turn
has provided nonrecourse, unsecured counter-guarantees to Nedbank for ZAR 125.0
million ($11.8 million, translated at exchange rates applicable as of June 30,
2014). The Company pays commission of between 0.2% per annum to 2.0% per annum
of the face value of these guarantees and does not recover any of the commission
from third parties.
The
Company has not recognized any obligation related to these counter-guarantees in
its consolidated balance sheet as of June 30, 2014. The maximum potential amount
that the Company could pay under these guarantees is ZAR 135.1 million ($12.8
million, translated at exchange rates applicable as of June 30, 2014). The
guarantees have reduced the amount available for borrowings under the Companys
short-term credit facility described in Note 12.
Contingencies
Securities Litigation
On
December 24, 2013, Net1, its chief executive officer and its chief financial
officer were named as defendants in a purported class action lawsuit filed in
the United States District Court for the Southern District of New York alleging
violations of the federal securities laws.
The
lawsuit alleges that Net1 made materially false and misleading statements
regarding its business and compliance policies in its SEC filings and other
public disclosures. The lawsuit was brought on behalf of a purported shareholder
of Net1 and all other similarly situated shareholders who purchased its
securities between August 27, 2009 and November 27, 2013. The lawsuit seeks
unspecified damages. The Company believes this lawsuit has no merit and intends
to defend it vigorously.
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.
25. RELATED PARTY TRANSACTIONS
As
described in Note 3, on September 14, 2012, the Company acquired all of the
outstanding and issued ordinary shares in N1MS. In 2010, the Company had engaged
the services of N1MS to perform software development services, primarily
software utilized on mobile phones and by cash-accepting kiosks. All software
developed under this engagement became the Companys property. During the years
ended June 30, 2013 and 2012, the Company recognized expenses of approximately
$0.1 million and $0.8, respectively, for software development services provided
by N1MS prior to it becoming a subsidiary of the Company. As of June 30, 2013,
and since acquisition, the Companys has eliminated all intercompany balance
sheet accounts with N1MS on consolidation.
F-54
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial
statements |
for the years ended June 30, 2014, 2013 and 2012 |
(All amounts
stated in thousands of United States Dollars, unless otherwise stated) |
26. UNAUDITED QUARTERLY
RESULTS
The
following tables contain selected unaudited consolidated statements of
operations information for each quarter of fiscal 2014 and 2013:
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended |
|
|
|
|
Jun 30, |
|
|
Mar 31, |
|
|
Dec 31, |
|
|
Sep 30, |
|
|
June 30, |
|
|
|
|
2014 |
|
|
2014 |
|
|
2013 |
|
|
2013 |
|
|
2014 |
|
|
|
|
(In thousands except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
$ |
182,753 |
|
$ |
138,126 |
|
$ |
137,283 |
|
$ |
123,494 |
|
$ |
581,656 |
|
|
Operating income |
|
42,647 |
|
|
23,949 |
|
|
18,802 |
|
|
16,400 |
|
|
101,798 |
|
|
Net income attributable to
Net1 |
$ |
28,584 |
|
$ |
17,182 |
|
$ |
12,749 |
|
$ |
11,596 |
|
$ |
70,111 |
|
|
Net income per share, in United States
dollars |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
attributable to Net1 shareholders |
$ |
0.59 |
|
$ |
0.38 |
|
$ |
0.28 |
|
$ |
0.25 |
|
$ |
1.51 |
|
|
Diluted earnings attributable to
Net1 shareholders |
$ |
0.58 |
|
$ |
0.37 |
|
$ |
0.28 |
|
$ |
0.25 |
|
$ |
1.50 |
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended |
|
|
|
|
Jun 30, |
|
|
Mar 31, |
|
|
Dec 31, |
|
|
Sep 30, |
|
|
June 30, |
|
|
|
|
2013 |
|
|
2013 |
|
|
2012 |
|
|
2012 |
|
|
2013 |
|
|
|
|
(In thousands except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
$ |
117,882 |
|
$ |
111,141 |
|
$ |
111,442 |
|
$ |
111,682 |
|
$ |
452,147 |
|
|
Operating (loss) income |
|
13,591 |
|
|
(4,726 |
) |
|
4,972 |
|
|
9,325 |
|
|
23,162 |
|
|
Net income (loss)
attributable to Net1 |
$ |
8,285 |
|
$ |
(4,681 |
) |
$ |
2,629 |
|
$ |
6,744 |
|
$ |
12,977 |
|
|
Net income (loss per share, in United States
dollars |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
(loss) attributable to Net1 shareholders |
$ |
0.18 |
|
$ |
(0.10 |
) |
$ |
0.06 |
|
$ |
0.15 |
|
$ |
0.28 |
|
|
Diluted earnings (loss)
attributable to Net1 shareholders |
$ |
0.18 |
|
$ |
(0.10 |
) |
$ |
0.06 |
|
$ |
0.15 |
|
$ |
0.28 |
|
27. SUBSEQUENT EVENTS
On August 27, 2014, the Company entered into a sale and subscription agreement with Business Venture Investments No 1567 (Proprietary) Limited (RF) (BVI), one of the Companys BEE partners, in preparation for any new potential SASSA tender. Pursuant to the sale and subscription agreement: (i) the Company repurchased BVIs remaining 1,837,432, shares of the Companys common stock for approximately $9.2 million in cash (translated at exchange rates prevailing as of August 27, 2014) and (ii) BVI has subscribed for new ordinary shares of CPS representing approximately 12.5% of CPS ordinary shares outstanding after the subscription for $1.4 million in cash (translated at exchange rates prevailing as of August 27, 2014). In connection with transactions described above, the CPS shareholder agreement that was negotiated as part of the original December 2013 Relationship Agreement became effective.
*********************
F-55
EXHIBIT 12
Statement regarding computation of ratio of earnings to
fixed charges
|
|
Year ended June 30, |
|
|
|
2014 |
|
|
|
2013 |
|
|
|
2012 |
|
|
|
2011 |
|
|
|
2010 |
|
|
|
(in thousands, except for ratio of earnings
to fixed charges) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expensed and capitalized |
$ |
7,473 |
|
|
$ |
7,966 |
|
|
$ |
9,345 |
|
|
$ |
8,672 |
|
|
$ |
1,047 |
|
Amortized premiums, discounts and capitalized expenses
related to indebtedness |
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Estimate of the interest within rental
expense |
|
709 |
|
|
|
1,430 |
|
|
|
678 |
|
|
|
628 |
|
|
|
472 |
|
Preference security dividend requirements of consolidated
subsidiaries |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed charges |
|
8,182 |
|
|
|
9,396 |
|
|
|
10,023 |
|
|
|
9,300 |
|
|
|
1,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add |
|
117,324 |
|
|
|
36,675 |
|
|
|
70,404 |
|
|
|
45,710 |
|
|
|
80,399 |
|
Pretax income from continuing operations before adjustment
for non-controlling interests in consolidated subsidiaries or income or
loss from equity investees |
|
109,142 |
|
|
|
27,279 |
|
|
|
60,381 |
|
|
|
36,410 |
|
|
|
78,880 |
|
Fixed charges |
|
8,182 |
|
|
|
9,396 |
|
|
|
10,023 |
|
|
|
9,300 |
|
|
|
1,519 |
|
Amortization of capitalized interest |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Distributed income of equity investees |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Your share of pre-tax losses of equity investees for which
charges arising from guarantees are included in fixed charges |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less |
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
Interest capitalized |
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Preference security dividend requirements of consolidated
subsidiaries |
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Non-controlling interest in pre-tax income
of subsidiaries that have not incurred fixed charges |
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings |
$ |
117,324 |
|
|
$ |
36,675 |
|
|
$ |
70,404 |
|
|
$ |
45,710 |
|
|
$ |
80,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earnings to fixed charges |
|
14.34 |
|
|
|
3.90 |
|
|
|
7.02 |
|
|
|
4.92 |
|
|
|
52.93 |
|
Exhibit 14.1
NET1 UEPS TECHNOLOGIES,
INC.
(Net1)
CODE OF ETHICS
1
1.1 |
Policy |
|
|
|
Net1 UEPS TECHNOLOGIES, INC. and all its subsidiaries
(collectively referred to in this document as Net1) are committed to a
policy of fair dealing and integrity in the conduct of their business.
This commitment, which is actively endorsed by the Board of Directors of
Net1, is based on a fundamental belief that business should be conducted
honestly, fairly and legally. Net1 expects all employees, directors and
other representatives to share its commitment to high moral, ethical and
legal standards. Net1 has established this code as part of its overall
policies and procedures. To the extent that other Net1 policies and
procedures conflict with this code, you should follow this code. |
|
|
1.2 |
Understanding the Code |
|
|
|
This document outlines Net1s Code of Ethics, which
applies equally to all employees and other representatives of Net1. The
term employees has been used in the broadest sense and includes: all staff
with whom a service contract exists, management, non-management,
directors, contractors, consultants and temporary staff. The code is
designed to inform employees of policies in various areas. Please study
the code carefully so that you understand Net1s expectations and your
obligations. |
|
|
|
Compliance with the code by all employees is mandatory.
If employees become aware of, or suspect, a contravention of the code,
they must promptly and confidentially advise their line manager, the Human
Resources Manager or a member of the Internal Audit Department (provided
such person was not involved in the alleged violation). Net1s efforts to
ensure observance of, and adherence to, the goals and policies outlined in
this code mandate that the you must promptly bring to the attention of
your line manager, the Human Resources Manager or a member of the Internal
Audit Department (provided such person was not involved in the alleged
violation) any material transaction, relationship, act, failure to act,
occurrence or practice that you believe, in good faith, is inconsistent
with, in violation of, or reasonably could be expected to give rise to a
violation of, this code. |
|
|
|
The matter will be investigated and dealt with according
to the NETNet1s Disciplinary Code of Conduct. Failure to report
violations of the code will itself be considered a serious violation of
this code. It is NETNet1s policy that no retaliation or other adverse
action will be taken against any employee for good- faith reports of code
violations. Persons who discriminate, retaliate or harass may be subject
to civil, criminal and administrative penalties, as well as disciplinary
action, up to and including termination of
employment. |
2
Managers set an example for other
employees and are often responsible for directing the actions of others. Every
manager and supervisor is expected to take necessary actions to ensure
compliance with this code, to provide guidance and assist employees in resolving
questions concerning the code and to permit employees to express any concerns
regarding compliance with this code. No one has the authority to order another
employee to act in a manner that is contrary to this code.
Any waivers of or amendments to this
code must be in writing and must be approved in advance by the Audit Committee
of the Board of Directors. Waivers and amendments, and the reason therefore,
shall be disclosed as required under applicable law and regulations. If
employees are in doubt about the application of the code, they should discuss
the matter with their line manager, the Human Resources Manager, or the Internal
Audit Department.
The most current version of this code
will be distributed to all employees, posted and maintained on Net1s website,
and filed as an exhibit to Net1s Annual Report on Form 10-K. Net1s Annual
Report on Form 10-K shall disclose that the code is maintained on the website
and shall disclose that substantive amendments and waivers will also be posted
on Net1s website.
2. COMPLIANCE WITH LAWS AND
REGULATIONS |
Employees must comply with all applicable laws and regulations
which relate to their activities for and on behalf of Net1. Net1 will not
tolerate any violation of the law or unethical business dealing by any employee,
including any payment for, or other participation in, an illegal act, such as
bribery.
Net1 is committed to full compliance with the laws and
regulations of the cities, states and countries in which it operates. You must
comply with all applicable laws, rules and regulations in performing your duties
for Net1. Numerous federal, state and local laws and regulations define and
establish obligations with which Net1, its employees and agents must comply.
Under certain circumstances, local country law may establish requirements that
differ from this code. You are expected to comply with all local country laws in
conducting Net1s business. If you violate these laws or regulations in
performing your duties for Net1, you not only risk individual indictment,
prosecution and penalties, as well as civil actions and penalties, but also
subject Net1 to the same risks and penalties. If you violate these laws in
performing their duties for Net1, you may be subject to immediate disciplinary
action, including possible termination of your employment or affiliation with
Net1.
3
2. COMPLIANCE WITH LAWS AND
REGULATIONS (continued) |
Employees must ensure that their conduct cannot be interpreted
as being in any way in contravention of applicable laws and regulations
governing the operations of Net1.
2.1 |
Foreign Corrupt Practices Act |
|
|
|
Net1 employees are expressly prohibited from, directly or
indirectly, offering payment, promising to pay, or authorizing the payment
of any money, or offering any gift or non-monetary offer or benefit,
promising to give a gift or non-monetary offer or benefit, or authorizing
the giving of anything of value to any foreign official or any foreign
political party, official of any foreign political party, or candidate for
governmental or political office for purposes of: |
|
|
|
(i) influencing any act or decision of that foreign
official, political party or candidate in his/her/its official
capacity, |
|
|
|
(ii) inducing that foreign official, candidate or
political party to do or omit to do any act in violation of the lawful
duty of that official, candidate or party, or |
|
|
|
(iii) securing any improper advantage; or |
|
|
|
(iv) inducing that foreign official, candidate or
political party to use his/her/its influence with a foreign government or
instrumentality to affect or influence any act or decision of that
government or instrumentality, in order to assist Net1 or its
employee in obtaining or retaining business for or with, or directing
business to, Net1. |
|
|
|
Various countries also have laws that prohibit commercial
bribery. Accordingly, these laws are not limited in scope to bribery of
foreign officials and typically prohibit bribes or inducements to an
individual or business to improperly influence decision-making. As such,
it is Net1s policy that nothing of value should be provided to any person
for the purpose of improperly obtaining or retaining business or otherwise
gaining an improper business advantage. Violations of this policy are
taken very seriously, as they can subject both Net1 and the individual to
criminal and civil penalties, up to and including imprisonment. |
|
|
2.2 |
Copyrighted or Licensed Material |
|
|
|
It is both illegal and unethical to engage in practices
that violate copyright laws or licensing agreements. Net1 requires that
all employees respect the rights conferred by such laws and agreements and
refrain from making unauthorized copies of protected materials, including
but not limited to printed matter, musical recordings, and computer
software. |
4
2. COMPLIANCE WITH LAWS AND
REGULATIONS (continued) |
2.3 |
Competitive Relationships |
|
|
|
It is unethical and unlawful to
collaborate with competitors or their agents or representatives for the purpose
of establishing or maintaining rates or prices at any particular level, or to
collaborate in any way in the restraint of trade. |
Employees are expected to perform their duties conscientiously,
honestly and in accordance with the best interests of Net1 to optimize business
objectives.
Employees must not use their positions, or knowledge gained
through their employment with Net1, for private or personal advantage or in such
a manner that a conflict or an appearance of conflict arises between Net1s
interest and their personal interests. A conflict could arise where an
employees family, or a business with which the employee or family is associated
obtains a gain, advantage or profit by virtue of the employees position with
Net1 or knowledge gained through that position.
Every employee must promptly inform Net1 of any business
opportunities that come to the attention of the employee that relate to an
existing or prospective business of Net1.
If employees feel that a course of action which they have
pursued, are pursuing or are contemplating pursuing, may involve them in a
conflict of interest situation or a perceived conflict of interest situation,
they should immediately make all the facts known to the person to whom they
report and the Human Resources Manager, or Internal Audit Department.
3.1 |
Outside Activities, Employment and
Directorships |
|
|
|
|
We all share a very real responsibility to contribute to
our local communities, and Net1 encourages employees to participate in
religious, charitable, educational and civic activities. |
|
|
|
|
Employees should, however, avoid acquiring any business
interest or participating in any activity outside Net1 which would create,
or appear to create: |
|
|
|
|
a) |
an excessive demand upon their time, attention and energy
which would deprive Net1 of their best efforts on the job; or |
|
b) |
a conflict of interest - that is, an obligation, interest
or distraction which would interfere or appear to interfere with the
independent exercise of judgment in Net1s best
interest. |
Employees other than outside directors
may not take up outside employment without the prior written approval of the
Human Resources Manager.
5
3. CONFLICT OF INTEREST
(continued) |
3.1 |
Outside Activities, Employment and Directorships
(continued) |
|
|
|
Employees who hold, or have been invited to hold, outside
directorships should take particular care to ensure compliance with all
provisions of this Code. When outside business directorships are being
considered by employees, other than outside directors, prior written
approval must be obtained from the Chief Executive of Net1 or Executive
Director responsible for the division. |
|
|
3.2 |
Relationships with Clients, Customers and
Suppliers |
|
|
|
Net1 recognizes that relationships with clients,
customers and suppliers give rise to many potential situations where
conflicts of interest, real or perceived, may arise. Employees should
ensure that they are independent, and are seen to be independent, from any
business organization having a contractual relationship with Net1 or
providing goods or services to Net1, if such a relationship might
influence or create the impression of influencing their decisions in the
performance of their duties on behalf of Net1. In such circumstances,
employees should not invest in, or acquire a financial interest, directly
or indirectly, in such an organization. |
|
|
3.3 |
Gifts, Hospitality and Favors |
|
|
|
Conflicts of interest can arise where employees are
offered gifts, hospitality or other favors which might, or could be
perceived to, influence their judgment in relation to business
transactions such as the placing of orders and contracts. |
|
|
|
An employee should not accept gifts, hospitality or other
favors from suppliers of goods or services to Net1. However, the
acceptance of the following would not be considered contrary to such
policy: |
|
a) |
advertising matter of limited commercial value; |
|
b) |
occasional business entertaining such as lunches,
cocktail parties or dinners; and |
|
c) |
occasional personal hospitality such as tickets to
sporting events or theatres. |
Any bribe or attempted bribe must be
reported to the employees line manager as soon as possible. It is the intention
that dealings with any supplier which offers bribes will be terminated.
Certain functions or operating areas
may have more detailed rules governing the receipt of gifts, hospitality or
other favors.
In addition, no bribes of any kind
should be made by any Net1 employee to any customer or potential customer to
secure business.
6
3. CONFLICT OF INTEREST
(continued) |
3.3 |
Gifts, Hospitality and Favors
(continued) |
|
|
|
|
Providing the occasional gifts to customers, as set out
below, would not be considered contrary to such a policy: |
|
|
|
|
a) |
advertising matter of limited commercial value; |
|
b) |
occasional business entertaining such as lunches,
cocktail parties or dinners; and |
|
c) |
occasional personal hospitality such as tickets to
sporting events or theatres. |
3.4 |
Personal Investments |
|
|
|
|
Net1 respects the right of all employees to make personal
investment decisions as they see fit, as long as these decisions do not
contravene any provisions of this Code, any applicable legislation, or any
policies or procedures established by the various operating areas of Net1,
and provided these decisions are not made on the basis of material
non-public information acquired by reason of an employees connection with
Net1. Employees should not permit their personal investment transactions
to have priority over transactions for Net1 and its clients. |
|
|
|
|
When considering the application of this section,
employees should ensure that no investment decision made for their own
account could reasonably be expected to influence adversely their judgment
or decisions in the performance of their duties on behalf of
Net1. |
|
|
|
|
Employees involved in performing investment activities on
behalf of Net1 and those who by the nature of their duties or positions
are exposed to price-sensitive information relating to Net1 are subject to
additional rules governing personal investments. These may be imposed by
the Companies Act, the Stock Exchange of Johannesburg, Banks Act,
Financial Services Board, Securities Regulation Panel and other regulatory
bodies, industry associations and management. The rules include
requirements for employees to: |
|
|
|
|
a) |
obtain prior written approval for, and to report on,
their personal investment activity and the investment activity of those
persons with whom they have a close relationship; and |
|
b) |
refrain from dealing in the shares of entities that Net1
deals with during certain restricted periods, as well as Net1 subsidiaries
and associates. |
7
3. CONFLICT OF INTEREST
(continued) |
3.5 |
Insider Information and Insider Trading |
|
|
|
Employees may receive information concerning Net1 or one
of its affiliates, business partners, clients, or customers that is
confidential and not generally known by the public. If that information is
material (i.e., publication of that information is likely to affect the
market price of the stock of the entity to which the information relates),
then the employee has an ethical and legal obligation not to (a) act on
that information (i.e., buy or sell stock based on that information), (b)
disclose that information to others, or (c) advise others to buy or sell
the stock of the entity to which that information relates, until such
information becomes public. An employees direct or indirect use of or
sharing of such confidential, privileged, or otherwise proprietary
business information of Net1or its partners, clients, or customers for
financial gain, including investment by the employee or the transmission
of this information to others so that they can use this information for
their financial gain, constitutes insider trading, which is a criminal
offense. Please refer to Net1s Insider Trading Policy Compliance Manual
for more information. |
|
|
3.6 |
Remuneration |
|
|
|
No employee may receive commissions or other remuneration
related to the sale of any product or service of Net1 except as
specifically provided under an individuals terms of employment or as
specifically agreed with management. No member of Net1s audit committee
shall receive any compensation not permitted by the rules of the
Securities and Exchange Commission, The Nasdaq Stock Market, and other
applicable law. |
|
|
|
Employees may not receive any money or any thing of value
(other than Net1s regular remuneration or other incentives), either
directly or indirectly, for negotiating, procuring, recommending or aiding
in any transaction made on behalf of Net1, nor have any direct or indirect
financial interest in such a transaction. |
8
Net1 supports employment equity in the work place which seeks
to identify, develop and reward each employee who demonstrates the qualities of
individual initiative, enterprise, hard work and loyalty in their job. Net1
supports and complies with the Basic Conditions of Employment Act and the
Employment Equity Act.
All employees have the right to work in an environment which is
free from any form of discrimination, directly or indirectly, on any arbitrary
ground, including, but not limited to race, gender, sex, ethnic or social
origin, color, sexual orientation, age, disability, religion, conscience,
belief, political opinion, culture, language, marital status or family
responsibility. An employee should report any cases of actual or suspected
discrimination to their line manager or the Human Resources Manager.
Employees with illness or disabilities may continue to work,
provided that they are able to continue to perform satisfactorily the essential
duties of their jobs and do not present a safety or health hazard to themselves
or others.
5. ENVIRONMENTAL RESPONSIBILITY
|
5.1 |
Health and Safety |
|
|
|
Net1 is committed to taking every reasonable precaution
to ensure a safe work environment for all employees. |
|
|
|
Employees who become aware of circumstances relating to
Net1s operations or activities which pose a real or potential health or
safety risk should report the matter to their line manager and the Human
Resources Manager. It is Net1s policy that no retaliation or other
adverse action will be taken against any employee for good-faith
reports. |
|
|
5.2 |
Environmental Management |
|
|
|
Net1 is committed to developing operating policies to
address the environmental impact of its business activities by integrating
pollution control, waste management and rehabilitation activities into
operating procedures. Employees should give appropriate and timely
attention to environmental issues. |
9
Net1 accepts the personal participation of its employees in the
political process and respects their right to absolute privacy with regard to
personal political activity. Net1 will not attempt to influence any such
activity provided there is no disruption to workplace activities and it does not
contribute to industrial unrest.
Net1 funds, goods or services, however, may not be used as
contributions to political parties or their candidates, and Net1 facilities must
not be made available to candidates or campaigns, unless specifically
authorized.
7. Net1S FUNDS AND PROPERTY
|
Net1 has developed a number of internal controls to safeguard
its assets and imposes strict standards to prevent fraud and dishonesty. It is
every employees responsibility to implement, maintain and enhance the
effectiveness of the control environment in which they operate. All employees
who have access to Net1s funds in any form must at all times follow prescribed
procedures for recording, handling and protecting such funds. Operating areas
may implement policies and procedures relating to the safeguarding of Net1
property, including computer software.
Employees must at all times ensure that Net1s funds and
property are used only for legitimate Net1 business purposes. Where an employee
requires Net1 funds to be spent, it is the employees responsibility to use good
judgment on Net1s behalf and to ensure that appropriate value and authorization
is received for such expenditure.
All payments made by or on behalf of Net1 for any purpose must
be fully and accurately described in the documents and records supporting the
payment. No false, improper, or misleading entries shall be made in the books
and records of Net1.
Complete and accurate information is to be given in response to
inquiries from Net1s Internal Audit Department and certified public
accountants.
If employees become aware of any evidence that Net1 funds or
property may have been or are likely to be used in a fraudulent or improper
manner they should immediately and confidentially advise Net1 as set out in the
contravention of the code section of this document. It is Net1s policy that no
retaliation or other adverse action will be taken against any employee for
good-faith reports.
10
Accurate and reliable records of many kinds are necessary to
meet Net1s legal and financial obligations and to manage the affairs of Net1.
Net1s books and records should reflect all business
transactions in an accurate and timely manner. Undisclosed or unrecorded
revenues, expenses, assets or liabilities are not permissible, and the employees
responsible for accounting and record-keeping functions are expected to be
diligent in enforcing proper practices.
9.1 |
Supervision of Relatives and Others |
|
|
|
Close relatives and domestic partners shall not work
directly or indirectly under the supervision of one another without prior
written approval. Close relative means, but is not limited to, a spouse,
sister, brother, sister-in-law, brother-in-law, father, mother,
father-in-law, mother-in-law, step-parent, aunt, uncle, first cousin,
child, step-child, foster child, or grandparent. Domestic partner means,
but is not limited to, husband, wife, or a person the employee currently
resides with in an intimate, romantic or sexual relationship. If such a
situation should arise, it should be immediately brought to the attention
of a direct manager of Human Resources. |
|
|
|
Net1 also requires that employees disclose to Human
Resources the existence of an intimate, romantic or sexual relationship
between employees where there exists a direct chain of command
supervisor/subordinate relationship. Decisions concerning such employees
will be made on a case-by-case basis by Human Resources. |
|
|
9.2 |
Restrictions on Former Government
Employees |
|
|
|
Former U.S. Government employees or U.S. military
officers are generally prohibited from representing Net1 in matters in
which the government has substantial interest and where the employee had
prior responsibility. Retired senior government officials and regular
military officers are further restricted from selling to, or in some
instances, contacting their former agency or military service. The
duration of these prohibitions and the matters to which they apply depend
on the type of previous government employment. Net1S legal department
should be contacted to help identify which restrictions
apply. |
11
10. DEALING WITH OUTSIDE PERSONS AND ORGANIZATIONS
|
10.1 |
Prompt Communications |
|
|
|
Net1 strives to achieve complete, accurate, fair,
understandable and timely communications with all parties with whom it
conducts business, as well as government authorities and the public. All
employees must take all steps necessary to assist Net1 in fulfilling its
disclosure responsibilities. In addition, prompt and effective internal
communication is encouraged. |
|
|
|
A prompt, courteous and accurate response should be made
to all reasonable requests for information and other client
communications. Any complaints should be dealt with in accordance with
internal procedures established by various operating areas of Net1 and
applicable laws. |
|
|
10.2 |
Media Relations |
|
|
|
In addition to everyday communications with outside
persons and organizations, Net1 will, on occasion, be asked to express its
views to the media on certain issues. |
|
|
|
When communicating publicly on matters that involve Net1
business, employees must not presume to speak for Net1 on any matter,
unless they are certain that the views they express are those of Net1 and
it is Net1s desire that such views be publicly disseminated. Employees
approached by the media should immediately contact the department or
individual responsible for corporate communications. |
|
|
|
An employee, when dealing with anyone outside Net1,
including public officials, must take care not to compromise the integrity
or damage the reputation of any outside individual, business, or
government body, or that of Net1. |
|
|
|
As a general rule, Net1s position on public policy or
industry issues will be dealt with by senior management of Net1 and
existing policies in this regard must be adhered to. The text of the
articles for publication, public speeches and addresses about Net1 and its
business should be reviewed in advance with the individual responsible for
public relations. |
|
|
|
Employees should separate their personal roles from
Net1s position when communicating on matters not involving Net1 business.
They should be especially careful to ensure that they are not identified
with Net1 when pursuing personal or political activities, unless this
identification has been specifically authorized in advance by
Net1. |
12
11. PRIVACY AND CONFIDENTIALITY |
In the regular course of business, Net1 accumulates a
considerable amount of information. The following principles are to be observed:
11.1 |
Obtaining and Safeguarding Information |
|
|
|
Information necessary for Net1s business should be
reliable, accurate and its confidentiality maintained. When personal
information is needed, wherever possible, it should be obtained directly
from the person concerned. Only reputable and reliable sources should be
used to supplement this information. |
|
|
|
Information should only be retained as long as it is
needed or as required by law, and it is every employees responsibility to
ensure that such information is physically secured and
protected. |
|
|
11.2 |
Access to Information |
|
|
|
Any information with respect to any product, plan or
business transaction of Net1, or personal information regarding employees,
including their salaries, must be kept strictly confidential
(Confidential Information) and must not be disclosed or used for
improper purposes by any employee unless and until proper authorization
for such disclosure has been obtained. Once authorization has been
obtained, all information required by stakeholders either on request or
due to statutory requirements must be accurately disclosed. In addition,
operating areas may implement policies and procedures to prevent improper
transmission within Net1 of material non-public information. |
|
|
11.3 |
Termination of Employment |
|
|
|
The obligation to preserve the confidentiality of
Confidential Information acquired in the course of employment with Net1
does not end upon termination of employment. The obligation continues
indefinitely until Net1 authorizes disclosure, or until the Confidential
Information legally enters the public domain. |
|
|
|
Immediately upon the termination of employment for any
reason, or when otherwise requested by Net1, employees are required to
return to Net1 all above- mentioned Confidential Information, including
documents, information and other property. |
|
|
11.4 |
Former Employment |
|
|
|
New employees will not be assigned to work where they
might be required to use or disclose trade secrets or confidential
information belonging to their former employers. New employees should not
take away from their former place of employment any information that might
be considered proprietary or confidential. |
13
12. OBLIGATIONS OF EMPLOYEES |
It is of paramount importance to Net1 that all disclosure in
reports and documents that Net1 files with, or submits to, the SEC, and in other
public communications made by Net1 is full, fair, accurate, timely and
understandable. You must take all steps available to assist Net1 in fulfilling
these responsibilities consistent with your role within the Net1. In particular,
you are required to provide prompt and accurate answers to all inquiries made to
you in connection with the Net1s preparation of its public reports and
disclosure.
All employees must perform their duties diligently, effectively
and efficiently, and in particular:
a) |
support and assist Net1 to fulfill its commercial and
ethical obligations and objectives as set out in this Code; |
|
|
b) |
avoid any waste of resources, including time; |
|
|
c) |
be committed to improve productivity, achieve the maximum
quality standards, reduce ineffectiveness, and avoid unreasonable
disruption of activities at work; |
|
|
d) |
commit to honoring their agreed terms and conditions of
employment; |
|
|
e) |
not act in any way that may jeopardize the shareholders
rights to a reasonable return on investment; |
|
|
f) |
act honestly and in good faith at all times and report
any harmful activity they observe in the workplace; |
|
|
g) |
recognize fellow employees rights to freedom of
association and not intimidate fellow employees; |
|
|
h) |
pay due regard to environmental, public health and safety
conditions in and around the workplace; and |
|
|
i) |
act within their powers and not carry on the business of
Net1 recklessly. |
The Employee acknowledges that Net1 shall be the owner of the
copyright in any work which is eligible for copyright and which is created or
executed by the Employee, whether alone or with others, in the course and scope
of employment.
All work created or executed by the Employee and for which
copyright exists shall unless the Employee established the contrary, be deemed
to have been created or executed in the course and scope of employment with
Net1.
14
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
The following is a list of subsidiaries of the
Company as of June 30, 2014, omitting subsidiaries which, considered in the
aggregate, would not constitute a significant subsidiary.
NAME |
WHERE ORGANIZED |
|
|
Net1 Applied Technologies South Africa
(Pty) Ltd |
Republic of South
Africa |
|
|
Cash Paymaster Service (Pty) Ltd |
Republic of South
Africa |
|
|
Net1 Finance Holdings (Pty) Ltd |
Republic of South
Africa |
|
|
Moneyline Financial Services (Pty) Ltd |
Republic of South
Africa |
|
|
Net1 Mobile Solutions ((Pty) Ltd |
Republic of South
Africa |
|
|
Prism Holdings (Pty) Ltd |
Republic of South
Africa |
|
|
EasyPay (Pty) Ltd |
Republic of South
Africa |
|
|
RMT Systems (Pty) Ltd |
Republic of South
Africa |
|
|
Prism Payment Technologies (Pty) Ltd |
Republic of South
Africa |
|
|
Net1 FIHRST Holdings (Pty) Ltd |
Republic of South
Africa |
|
|
Net1 Universal Electronic Technological
Solutions (Pty) Ltd |
Republic of South
Africa |
|
|
The Smart Life Insurance Company Limited
|
Republic of South
Africa |
|
|
KSNET, Inc. |
Republic of Korea
|
|
|
Net1 Applied Technologies Korea |
Republic of Korea
|
|
|
SmartSwitch Netherlands CV |
Netherlands
|
|
|
Net1 Applied Technologies Netherlands BV
|
Netherlands
|
|
|
NUEP Holdings S.a.r.l. |
Luxembourg
|
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration
Statement No. 333-180059 on Form S-3 and Nos. 333-126958, 333-140042 and
333-170395 on Form S-8 of our reports dated August 28, 2014, relating to the
consolidated financial statements of Net 1 UEPS Technologies, Inc. and its
subsidiaries (collectively, the Company), and the effectiveness of the
Companys internal control over financial reporting, appearing in this Annual
Report on Form 10-K of Net 1 UEPS Technologies, Inc. for the year ended June 30,
2014.
/s/ Deloitte & Touche (South Africa)
Registered
Auditors
August 28, 2014
National Executive: LL Bam Chief Executive AE Swiegers Chief
Operating Officer GM Pinnock Audit
DL Kennedy Risk Advisory NB Kader Tax TP
Pillay Consulting K Black Clients & Industries
JK Mazzocco Talent &
Transformation MJ Jarvis Finance M Jordan Strategy S Gwala Managed Services
TJ Brown Chairman of the Board MJ Comber Deputy Chairman of the
Board
A full list of partners and directors is available on
request
Exhibit 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
I, Serge Belamant, certify that:
1. I have reviewed this annual
report on Form 10-K of Net 1 UEPS Technologies, Inc. (Net1) for the year ended
June 30, 2014;
2. Based on my knowledge, this
report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the
financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of
operations and cash flows of Net1 as of, and for, the periods presented in this
report;
4. Net1s other certifying
officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for Net1 and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to Net1, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, 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;
(c)
Evaluated the effectiveness of Net1s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d)
Disclosed in this report any change in Net1s internal control over financial
reporting that occurred during Net1s most recent fiscal quarter (Net1s fourth
fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, Net1s internal control over
financial reporting; and
5.
Net1s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to Net1s auditors and
the Audit Committee of Net1s Board of Directors (or persons performing the
equivalent functions):
(a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect Net1s ability to record, process, summarize and report
financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in Net1s internal control over financial reporting.
Date: August 28, 2014 |
/s/ Serge Belamant |
|
Serge Belamant |
|
Chief Executive Officer
|
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
RULES 13A-14(A) AND 15D-14(A)
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED
I, Herman Kotzé, certify that:
1. I have reviewed this annual
report on Form 10-K of Net 1 UEPS Technologies, Inc. (Net1) for the year ended
June 30, 2014;
2. Based on my knowledge, this
report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the
financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of
operations and cash flows of Net1 as of, and for, the periods presented in this
report;
4. Net1s other certifying
officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for Net1 and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to Net1, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, 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;
(c)
Evaluated the effectiveness of Net1s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d)
Disclosed in this report any change in Net1s internal control over financial
reporting that occurred during Net1s most recent fiscal quarter (Net1s fourth
fiscal quarter in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, Net1s internal control over
financial reporting; and
5. Net1s other certifying
officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to Net1s auditors and the Audit Committee of
Net1s Board of Directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect Net1s ability to record, process, summarize and report
financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees
who have a significant role in Net1s internal control over financial
reporting.
Date: August 28, 2014 |
/s / Herman Kotzé |
|
Herman Kotzé |
|
Chief Financial Officer
|
Exhibit 32
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Net 1 UEPS
Technologies, Inc. (Net1) on Form 10-K for the period ended June 30, 2014, as
filed with the Securities and Exchange Commission on the date hereof (the
Report), Serge Belamant and Herman Kotze, Chief Executive Officer and Chief
Financial Officer, respectively, of Net1, certify, pursuant to 18 U.S.C. § 1350,
that to their knowledge:
|
1. |
The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended;
and |
|
|
|
|
2. |
The information contained in the Report fairly presents,
in all material respects, the financial condition and results of
operations of Net1. |
Date: August 28, 2014 |
/s/: Dr. Serge C. P.
Belamant |
|
Name: Dr. Serge C. P. Belamant
|
|
Chief Executive Officer and
Chairman |
|
of the Board |
|
|
Date: August 28, 2014 |
/s/: Herman Kotzé |
|
Name: Herman Kotzé |
|
Chief Financial Officer,
Treasurer and |
|
Secretary
|
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