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, 2015
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, |
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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 registrants 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 registrants common stock
held by non-affiliates of the registrant as of December 31, 2014 (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 $270,658,800. This calculation does not
reflect a determination that persons are affiliates for any other purposes.
As of August 18, 2015, 46,679,565 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 2015
Annual Meeting of Shareholders are incorporated by reference into Part III of
this Form 10-K.
NET 1 UEPS TECHNOLOGIES, INC. |
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INDEX TO ANNUAL REPORT ON FORM 10-K |
Year Ended June 30, 2015 |
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 during our 2016
fiscal year, which runs from July 1, 2015 to June 30, 2016.
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 automated teller machine, 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, integrated
circuit card (chip/smart card) technologies, and the design and provision of
financial and value-added services to our cardholder base.
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 ZAZOO 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, India and Colombia.
2
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 worlds 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
transacting accounts, 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 2015 Nilson Report, according to which worldwide annual general purpose
card purchase dollar volume increased 16.5% to $23.8 trillion in 2014, while
transaction volume increased by 13.2% to 230 billion transactions and cards
issued increased by 12.9% to 9.5 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 prepaid 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: The rapid growth of online commerce and
the emergence of mobile devices as the preferred access channel for transacting
online has created a global opportunity for the provision of secure payment
services to online retailers and service providers. Our ZAZOO business unit is
focused on providing secure payment solutions for all card-not-present
transactions through the application of our MVC and other proprietary solutions.
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 or as applications on mobile phones and provide our users with secure
payment and banking functionality.
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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.
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:
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Transparent and automatic recovery of
transactions; |
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Transaction cancellation; |
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Refunds; |
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Multiple audit trails; |
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Offline loading and spending; |
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Biometric identification; |
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Continuous debit; |
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Multiple wallets; |
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Morphing of other common payment systems,
such as EMV; |
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Automatic credit; |
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Automatic debit; |
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Interest calculations; and |
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Milking / batching of large transaction
volumes in an off-line environment. |
Our UEPS technology incorporates the software, smart cards,
payment terminals, back-end processing infrastructure, biometric systems 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 distributors 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. Our UEPS/EMV
solution therefore expands our addressable market to include developed economies
with established payment networks. The UEPS/EMV technology removes the hurdle,
often perceived in developed economies, of operating a proprietary or
closed-loop system by providing a truly inter-operable payment solution.
4
Mobile Virtual Card
We developed MVC, an innovative mobile phone-based payment
solution that enables secure purchases with no disruption to existing merchant
infrastructures and provides significant incentives for all stakeholders.
MVC utilizes existing and traditional payment methods but
enhances them by replacing or tokenizing plastic card data with 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.
MVC 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).
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 are constantly expanding the applicability of the software 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, direct deposit or other electronic wallets.
The benefits of MVC include, for:
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Card issuersincreased transactional
revenues from existing accounts, driving more transactional revenues and
elimination of fraudulent card use. |
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Mobile network operatorsrevenues from
payments, reduced churn and opportunities for powerful co-branding
schemes. |
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Consumersconvenience, peace of mind,
ease of use and rewards. |
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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, to be the provider of choice for secure mobile payment
and other card-not-present transactions and to provide our transaction
processing, value-added services processing and healthcare processing services
globally. To achieve these goals, we are pursuing the following strategies:
Build on our significant and established
infrastructuresWe control significant components of the payment
infrastructure in South Africa, South Korea, Botswana and Namibia and we believe
that we are well-positioned to leverage our existing asset base to continue to
gain market share and build upon the critical mass that we have developed.
For example, in 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. Through our national distribution
platform and relationships with a number of leading companies across multiple
industries, we believe that we can provide many of the services consumed by our
cardholders who would normally not have access to these services or would
otherwise have to rely on the informal sector. We have already introduced
several services to our cardholder and merchant base, such as low cost, high
functionality bank accounts, microloans, life insurance, bill payment, prepaid
mobile top-up and prepaid utility services. We have a network of mobile ATMs to
provide services to our cardholders, and we have commenced with the rollout of a
fixed ATM network. We aim to increase the adoption of our existing services by
expanding our cardholder base and our transacting network, and we aim to
increase our service offerings by developing new products and distribution
networks.
5
Our latest product, EasyPay Everywhere, provides our target
market with an affordable all-inclusive transactional bank account with
unfettered access to financial services such as microloans, life insurance,
remittances, value added services such as prepaid utilities and bill payments
through their mobile phones and our national network of ATMs and POS devices.
We plan to follow a similar approach in the other markets where
we have an established infrastructure, taking into account the specific
requirements of the local legislation, the composition of the local payment
system and the specific components that we own or control. In markets where we
do not have an established infrastructure, we intended to collaborate with local
partners to provide a similar end-to-end solution.
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 as well. 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 and business 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. We plan to expand our market share in the mobile solutions and
card-not-present processing markets by pursuing partnerships or supply
relationships with online merchants, virtual card issuers, payment services
processors, mobile remittance providers and other online service providers.
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 provide us with
technologies or solutions complementary to our current offerings. Our recent
acquisition of a 44% interest in Transact 24 Limited, a Hong Kong based payment
services provider, for example, provides us with access to the rapidly growing
Chinese financial technology market and its participants, such as China UnionPay
and Alipay.
Our Business Units
Our company is organized into the following business units:
ZAZOO
Our ZAZOO business unit is managed from London, United Kingdom
with business development support branches in South Africa, 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.
ZAZOO offers an array of products and services that cater for
the needs of the global market and comprises of the following key business
lines:
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MVC & VerificationOur 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. |
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Third Party PaymentsThrough FIHRST we are the
largest provider of third party and payroll associated payments in South
Africa, servicing over 1,950 employee groups that represent approximately
620,000 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
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. |
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Prepaid Vending Our Prepaid Vending business line
handles multichannel distribution of electronic products and services
aimed at a variety of markets. Across Africa and abroad, our VTU solutions
create 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. |
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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 to SMS Mega Promotions, tailor-made for each MNO
with a focus to maximize subscriber activity, brand perception and
profitability. |
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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 offerings
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.
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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 of 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). |
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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 Triple Data Encryption Algorithm, also known as
TDES, EMV and Payment Card Industry, or 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.
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This business unit has been allocated to our South African
processing, International 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 national payment solutions provider. KSNET has the broadest
product offering in the South Korean payment solutions market, 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:
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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.
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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 a growing component of payments, driven by increased wire-line
and wireless broadband penetration, 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 is relatively small.
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This business unit has been allocated to our International
transaction processing reporting segment.
7
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 2015,
2014 and 2013 fiscal years, we derived approximately 24%, 27%, and 42% of our
revenues respectively, from CPS social welfare grant distribution business.
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.
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 prepaid 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.
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 electricityEasyPay 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. |
8
|
|
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 Corporation, or SABC, 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. |
|
|
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.
This business unit has been allocated to our South African
transaction processing reporting segment.
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 transacting accounts, microfinance, life
insurance 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.
Our Smart Life business unit owns a life insurance license and
resumed trading with effect from July 1, 2015, following the upliftment of the
suspension of its license by the South African Financial Services Board, or FSB.
We offer our customer base the insurance products applicable to this
market segment, focusing on group life and funeral insurance policies.
Our latest product, EasyPay Everywhere, provides our target
market with an affordable all-inclusive transactional bank account with
unfettered access to financial services such as microloans, life insurance,
remittances, value added services such as prepaid utilities and bill payments
through their mobile phones and our national network of ATMs and POS devices.
This business unit has been allocated to our Financial
inclusion and applied technologies reporting segment.
Applied Technology
Our Applied Technology business unit is managed from
Johannesburg, South Africa, and is responsible for the deployment of our South
African ATM and POS network and the sale of biometric and POS solutions to
various South African banks, retailers and financial services providers.
Our ATM network is fully EMV-compliant and integrated into the
South African national payment system. We deploy our ATMs in areas where our
UEPS/EMV cardholders have limited access to the national payment system, or
where the cost of accessing the national payment system through other service
providers is prohibitive for our cardholders.
This business unit has been allocated to our South African
transaction processing and Financial inclusion and applied technologies
reporting segments.
9
XeoHealth
Our XeoHealth business unit operates in the U.S. 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.
This business unit 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 and our affordable EasyPay Everywhere transactional account, our
competitors include the local banks and other transaction processors. The South
African banks and the South African Post Office, or SAPO, also offer low cost
bank accounts that enable account holders to receive their salaries, wages or
social grants 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. Our current SASSA
contract expires in 2017; however, as directed by the South African
Constitutional Court, SASSA is conducting a new tender process which may result
in the award of a new tender prior to the expiration of our contract. Although
we have decided not to compete in SASSAs latest tender process, we will remain
the service provider unless and until a new contractor is appointed and our
services have been phased out
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 2.6 billion transactions during
the twelve months ended June 2015 valued at trillions of ZAR.
In the South African ATM network market, we compete against the
South African banks, ATM Solutions and Spark ATM Systems, who collectively have
a market share in excess of 90%.
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.
10
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, Samsung 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 2015, 2014 and 2013, we incurred research and
development expenditures of $2.4 million, $2.2 million and $1.3 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 as well as the design and development of
our MVC concept and mobile payment applications. For example, we continually
improve 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 hardware platforms that are not proprietary to us
but 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 2015, 2014 and 2013. 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 |
|
|
|
|
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
|
$ |
000 |
|
$ |
000 |
|
$ |
000 |
|
$ |
000 |
|
$ |
000 |
|
$ |
000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South Africa |
|
461,425 |
|
|
428,931 |
|
|
317,916 |
|
|
72,467 |
|
|
105,627 |
|
|
117,858 |
|
|
South Korea |
|
160,853 |
|
|
146,667 |
|
|
129,338 |
|
|
202,682 |
|
|
229,830 |
|
|
213,589 |
|
|
Rest of world |
|
3,701 |
|
|
6,058 |
|
|
4,893 |
|
|
20,058 |
|
|
6,593 |
|
|
7,676 |
|
|
Total |
|
625,979 |
|
|
581,656 |
|
|
452,147 |
|
|
295,207 |
|
|
342,050 |
|
|
339,123 |
|
Employees
As of June 30, 2015, we had 4,764 employees. On a segmental
basis, 217 employees were part of our management, 2,579 were employed in South
African transaction processing, 242 were employed in International transaction
processing, and 1,726 were employed in Financial inclusion and applied
technologies and corporate/eliminations activities.
On a functional basis, four of our employees were part of
executive management, 122 were employed in sales and marketing, 208 were
employed in finance and administration, 327 were employed in information
technology and 4,103 were employed in operations.
As of June 30, 2015, approximately 76 of the 2,579 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 169 of the 221 employees we have in South Korea who perform
international transaction-based activities were members of the KSNET Union. We
believe that we have a good relationship with our employees and these
unions.
11
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 a 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, 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 |
61 |
Chief Executive Officer, Chairman and Director |
Mr. Herman G. Kotzé |
45 |
Chief Financial
Officer, Treasurer, Secretary and Director |
Mr. Phil-Hyun Oh |
56 |
Chief Executive Officer and President, KSNET, Inc. |
Mr. Nitin Soma |
48 |
Senior Vice
President of 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
We have historically derived a substantial portion of our
revenues from our SASSA contract for the payment of social grants. However, we
have decided not to participate in the latest SASSA tender and have begun to
focus our South African business on providing financial products and services
independently of SASSA through our EasyPay Everywhere bank account and ATM
infrastructure. If this strategy is unsuccessful, we would not be able to
replace the lost revenue from the SASSA contract and our results of operations,
financial position, cash flows and future growth would suffer.
We have historically derived a substantial portion of our
revenues from our contract with SASSA for the payment of social grants. Our
current five-year SASSA contract, which we were awarded through a tender process
in 2012, expires in March 2017. As ordered by the South African Constitutional
Court in its April 2014 ruling, SASSA is currently running a new tender process,
but we have decided not to participate in it. Instead, we have begun to focus
our South African business on providing transactional products and services
through our EasyPay Everywhere bank accounts and ATM infrastructure. While we
have begun and will continue to market our products and services to all unbanked
and under-banked persons in South Africa, including social grant beneficiaries,
we may provide these services independently of SASSA. While we believe that our
financial services offerings are convenient and cost-effective and the results
from our initial rollout have been promising, our continued success will depend
on the extent to which South African customers adopt our financial products and
services on a widespread basis. Factors which may prevent us from successfully
growing our South African financial services business include, but are not
limited to:
|
- |
underestimation of the number of customers that
will obtain an EasyPay Everywhere bank account and use our ATM
infrastructure; |
|
- |
lack of adoption of our EasyPay Everywhere and
related products by customers as anticipated; |
|
- |
competition in the marketplace; |
|
- |
political interference; |
|
- |
changes in the regulatory environment in which
we intend to operate; |
|
- |
dependence on existing suppliers to provide the
hardware (such as ATMs, cards and POS devices) we require to execute our
rollout as anticipated; |
|
- |
logistical and communications challenges; and
|
|
- |
loss of key technical and operations staff,
particularly during the rollout phase. |
If SASSA appoints a new contractor, our current contract
will terminate. We are unable to predict what the terms and timing of any
transitional arrangement would be.
As ordered by the South African Constitutional Court in its
April 2014 ruling, SASSA is currently running a new tender process for a
five-year contract relating to the payment of social grants. The Courts ruling
does not require SASSA to award a new tender, though we expect that any decision
not to make an award would be subject to judicial review and scrutiny.
We have determined that it is not in our best interest to
participate in the tender process. We cannot predict what the timing or ultimate
outcome of the tender process will be, or if a new tender award will be made at
all after the process is complete. Our current contract would terminate in the
event that SASSA awards a new contract to a third party. We would then have to
negotiate the terms of phasing out our activities with SASSA and the new
contractor.
Further, the Court's November 29, 2013 judgment also stated
that CPS is deemed to be an organ of state for the purpose of the contract
concluded pursuant to the previous tender process. The Court stated that, in
this regard, CPS has constitutional obligations that go beyond its contractual
obligations. It is not clear what these obligations may entail in respect of the
current and any potential future government contract in South Africa. We cannot
predict what the financial implications may be if we are required to continue
with the provision of our services without a valid contract, or during any
transitional period required for the orderly transfer of our current services to
a successful bidder.
13
We are, and in the future may be, subject to litigation
in which private parties may seek to recover, on behalf of SASSA, amounts paid
to us under our SASSA contract. If such litigation were to be successful and
require us to repay substantial monies to SASSA, such repayment would adversely
affect our results of operations, financial position and cash flows.
On April 2, 2015, Corruption Watch, a South African non-profit
civil society organization, filed a Notice of Motion with the High Court of
South Africa, notifying the Court that it intends to apply for an order by the
Court to review and set aside the decision of SASSAs Chief Executive Officer to
approve the payment to us of ZAR317 million. Corruption Watch claims that there
was no lawful basis for the decision to make the payment to us, and that the
decision was unreasonable and irrational and did not comply with South African
legislation. We have been named as a respondent in the Notice of Motion. On
April 17, 2015 we filed a Notice of Intention to Oppose with the Court.
As discussed in Item 3Legal Proceedings, the payments being
challenged by Corruption Watch represent amounts paid to us by SASSA for the
costs we incurred in performing additional beneficiary registrations beyond
those that we were contractually required to perform under our SASSA contract.
These amounts were paid in full settlement of the claim we submitted to SASSA
for these additional costs. We believe that Corruption Watchs claim is without
merit and we intend to defend it vigorously. However, we cannot predict how the
Court will rule on the matter.
In addition, the April 2014 Constitutional Court ruling
ordering SASSA to re-run the tender process requires us to file with the Court,
after completion of our SASSA contract, an audited statement of our expenses,
income and net profit under the contract. It is conceivable that one or more
third parties may in the future institute litigation challenging our right to
retain a portion of the amounts we will have received from SASSA under our
contract. We cannot predict whether any such litigation will be instituted, or
if it is, whether it would be successful.
Any successful challenge to our right to receive and retain
payments from SASSA that requires substantial repayments would adversely affect
our results of operations, financial position and cash flows.
The DOJ is investigating whether we have violated the
Foreign Corrupt Practices Act, or FCPA, and other federal criminal laws and the
South African Hawks are investigating the corruption allegations related to the
SASSA tender awarded to us in 2012 contained in South African media reports.
As we have previously reported, in late November 2012, the U.S.
Department of Justice commenced an investigation into whether we violated the
FCPA and other U.S. federal criminal laws by engaging in a scheme to make
corrupt payments to officials of the South Africa government in connection with
securing our 2012 SASSA contract and whether we violated federal securities laws
in connection with statements made by us in our SEC filings regarding this
contract. In addition, the SEC commenced its own investigation.
On June 8, 2015, we received a letter from the SEC stating that
it had concluded its investigation and that it did not intend to recommend an
enforcement action against us. It is our understanding that the DOJ
investigation remains ongoing.
These investigations have been costly for us. We incurred
significant legal costs during fiscal 2013 and 2014 in responding to the U.S.
governments requests for information, managements time has been diverted from
other matters relating to our business and we have suffered harm to our business
reputation. In particular, in fiscal 2013, the FSB suspended Smart Lifes
insurance license. Even though the SEC has concluded its investigation and Smart
Lifes license suspension has recently been lifted, we cannot predict when the
DOJ investigation will be completed or the impact or outcome of that
investigation.
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.
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 after we conducted our
own internal investigation into the allegations contained in certain South
African press articles. We found no evidence substantiating any of the press
allegations and, as we could not progress the matter any further internally
because we do not have access to the personal financial records of the alleged
perpetrators, we filed the Section 34 application to prompt the Hawks to conduct
a wider investigation into the allegations. 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. We cannot predict when the
Hawks investigation will be completed or the impact or outcome of that
investigation.
14
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 in fiscal 2012 through fiscal 2015, 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 current 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 current 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.
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, 2015, we had approximately $59.6 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.
15
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 2014 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 1-5 increased from 32% in 2004 to 66% in 2014. As the competition to bank
the unbanked in South Africa intensifies, we may not be successful in marketing
our low-cost EasyPay Everywhere 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.
The majority of these finance loans made are for a period of
six months or less. We have created an allowance for doubtful finance loans
receivable related to this book. Management has considered factors including the
period of the UEPS-loan outstanding, creditworthiness of the customers and the
past payment history of the borrower when creating the allowance. 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.
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.
16
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, to numerous qualified individuals leaving 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.
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.
17
The period between our initial contact with a potential
customer and the sale of our UEPS products or services to that customer tends to
be long and may be subject to delays which may have an impact on our
revenues.
The period between our initial contact with a potential
customer and the purchase of our UEPS products and services is often long and
subject to delays associated with the budgeting, approval and competitive
evaluation processes that frequently accompany significant capital expenditures.
A lengthy sales cycle may have an impact on the timing of our revenues, which
may cause our quarterly operating results to fall below investor expectations. A
customers decision to purchase our products and services is often
discretionary, involves a significant commitment of resources, and is influenced
by customer budgetary cycles. To sell our products and services successfully we
generally must educate our potential customers regarding the uses and benefits
of our products and services, which can require the expenditure of significant
time and resources; however, there can be no assurance that this significant
expenditure of time and resources will result in actual sales of our products
and services.
Our proprietary rights may not adequately protect our
technologies.
Our success depends in part on our obtaining and maintaining
patent, trade secret, copyright and trademark protection of our technologies in
the United States and other jurisdictions as well as successfully enforcing this
intellectual property and defending this intellectual property against
third-party challenges. We will only be able to protect our technologies from
unauthorized use by third parties to the extent that valid and enforceable
intellectual property protections, such as patents or trade secrets, cover them.
In particular, we place considerable emphasis on obtaining patent and trade
secret protection for significant new technologies, products and processes.
Furthermore, the degree of future protection of our proprietary rights is
uncertain because legal means afford only limited protection and may not
adequately protect our rights or permit us to gain or keep our competitive
advantage.
We cannot predict the breadth of claims that may be allowed or
enforced in our patents. For example, we might not have been the first to make
the inventions covered by each of our patents and patent applications or to file
patent applications and it is possible that none of our pending patent
applications will result in issued patents. It is possible that others may
independently develop similar or alternative technologies. Also, our issued
patents may not provide a basis for commercially viable products, or may not
provide us with any competitive advantages or may be challenged, invalidated or
circumvented by third parties.
We also rely on trade secrets to protect our technology,
especially where we believe patent protection is not appropriate or obtainable.
However, trade secrets are difficult to protect. We have confidentiality
agreements with employees, and consultants to protect our trade secrets and
proprietary know-how. These agreements may be breached and or may not have
adequate remedies for such breach. While we use reasonable efforts to protect
our trade secrets, our employees, consultants or others may unintentionally or
willfully disclose our information to competitors. If we were to enforce a claim
that a third party had illegally obtained and was using our trade secrets, our
enforcement efforts would be expensive and time consuming, and the outcome would
be unpredictable. Moreover, if our competitors independently develop equivalent
knowledge, methods and know-how, it will be more difficult for us to enforce our
rights and our business could be harmed. If we are not able to defend the patent
or trade secret protection position of our technologies, then we will not be
able to exclude competitors from developing or marketing competing
technologies.
We also rely on trademarks to establish a market identity for
some of our products. To maintain the value of our trademarks, we might have to
file lawsuits against third parties to prevent them from using trademarks
confusingly similar to or dilutive of our registered or unregistered trademarks.
Also, we might not obtain registrations for our pending trademark applications,
and might have to defend our registered trademark and pending trademark
applications from challenge by third parties.
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.
18
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 one we have co-established in Namibia and our
recent non-controlling investments in Hong Kong and Nigeria. 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
non-controlling interest. Non-controlling 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.
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 or
depots and we will therefore bear the full cost of certain uninsured losses or
theft in connection with the cash handling 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.
19
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.
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 broad-based 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 legislative framework for the promotion of broad-based
black economic empowerment in South Africa has been established through the
Broad-Based Black Economic Empowerment Act, No. 53 of 2003, as amended in 2013,
and amended BEE codes of good practice, the sector-specific codes of good
practice, or Sector Codes, and sector-specific transformation charters, or
Transformation Charters, published pursuant thereto. Sector Codes are a sector
code of good practice that are aligned with the BEE codes of good practice and
share the same status as the BEE codes of good practice which were initially published by
the South African government in February 2007. Sector Codes are fully binding
between and among businesses operating in an industry.
20
In June 2012 the South African government promulgated the
Information and Communications Technology, or ICT, Charter, one of the Sector
Codes, to which certain of our businesses are subject to. Achievement of BEE
objectives is measured by a scorecard which establishes a weighting for the
various components of BEE. Scorecards are independently reviewed by accredited
BEE scorecard verification agencies which issue a certificate that presents an
entitys BEE Recognition Levels, or BEE status.
The codes of good practice were reviewed by the South African
Department of Trade and Industry, or dti, and a new set of codes of good
practice were promulgated in October 2013. The new codes of good practice came
into effect on May 1, 2015, and have different requirements and emphasis to the
old codes of good practice. Furthermore, on May 15, 2015, the dti issued a
Notice of Clarification which further extended the transitional period
for the alignment of Sector Codes with the new set of codes of good practice to
October 31, 2015. The dti stated in its notice that it would consider repealing
any Sector Codes that are not aligned and ready by October 31, 2015. Compliance
with either the requirements of the amended ICT Charter, if properly aligned
with the new codes of good practice by October 31, 2015, or the new codes of
good practice, by us may negatively affect our future BEE status.
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 status will be important for us to
remain competitive in the South African marketplace and we continually seek ways
to improve our BEE status, especially the equity component of our BEE status.
For instance, 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 status. 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. Furthermore, in August
2014, we entered into a Subscription and Sale of Shares Agreement with Business
Venture Investments No 1567 Proprietary Limited (RF), or BVI, one of our BEE
partners, in preparation for any new potential SASSA tender. Pursuant to the
agreement: (i) we repurchased BVIs remaining shares of Net1 common stock and
BVI subscribed for new ordinary shares of CPS, representing approximately 12.5%
of CPS ordinary shares outstanding after the subscription.
It is possible that we may find it necessary to issue
additional shares to improve our BEE status. 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
U.S. dollars. This means that as long as the ZAR remains our primary operating
currency, depreciation in the ZAR against the U.S. dollar, and to a lesser
extent, the South Korean won against the U.S. dollar, 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 U.S. dollar/ZAR exchange rate has historically been
volatile and we expect this volatility to continue. During fiscal 2015 and 2014,
respectively, the ZAR was significantly weaker against the U.S. dollar than
during most of the preceding several years, which adversely affected our 2015
and 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.
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 U.S. dollars or euros. We have used
forward contracts in order to hedge our economic exposure to the ZAR/U.S. 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.
21
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.
We may not be able to effectively and efficiently manage
the current electricity supply disruptions in South Africa which could adversely
affect our results of operations, financial position, cash flows and future
growth.
Our businesses in South Africa are dependent on electricity
generated and supplied by the state-owned utility, Eskom, in order to operate.
Eskom is currently unable to generate and supply the amount of electricity
required by South Africans, and the entire country has recently experienced
significant and largely unpredictable electricity supply disruptions. Eskom has
implemented a number of short- and long-term mitigation plans to correct these
issues; however, we believe that these disruptions will continue until the
commissioning of new electricity-generating power stations in South Africa.
As part of our business continuity programs, we have installed
back-up diesel generators in order for us to continue to operate our core data
processing facilities in Cape Town and Johannesburg in the event of intermittent
disruptions to our electricity supply. However, as a result of the high number
of disruptions, we have been required to utilize our back-up generating capacity
on a more regular basis. Consequently, we have had to perform additional
monitoring and maintenance of these generators as well as sourcing and managing
diesel fuel levels. We may also be required to replace these generators on a
more frequent basis due to the additional burden placed on them.
Our results of operations, financial position, cash flows and
future growth could be adversely affected if Eskom is unable to commission new
electricity-generating power stations in a timely manner, or at all, or if we
are unable to effectively and efficiently test, maintain, source fuel for and
replace our generators.
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 U.S. 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, 2015, approximately 90% 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.
22
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.
Operating in South Africa and other emerging markets
subjects us to greater risks than those we would face if we operated in more
developed markets.
Emerging markets such as South Africa, as well as some of the
other markets into which we have recently begun to expand, including African
countries outside South Africa, South America, Southeast Asia and Central and
Eastern Europe, are subject to greater risks than more developed markets.
While we focus our business primarily on emerging markets
because that is where we perceive there to be the greatest opportunities to
market our products and services successfully, the political, economic and
market conditions in many of these markets present risks that could make it more
difficult to operate our business successfully.
Some of these risks include:
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political and economic instability, including
higher rates of inflation and currency fluctuations; |
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high levels of corruption, including bribery of
public officials; |
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loss due to civil strife, acts of war or
terrorism, guerrilla activities and insurrection; |
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a lack of well-developed legal systems which
could make it difficult for us to enforce our intellectual property and
contractual rights; |
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logistical, utilities (including electricity
and water supply) and communications challenges; |
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potential adverse changes in laws and
regulatory practices, including import and export license requirements and
restrictions, tariffs, legal structures and tax laws; |
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difficulties in staffing and managing
operations and ensuring the safety of our employees; |
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restrictions on the right to convert or
repatriate currency or export assets; |
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greater risk of uncollectible accounts and
longer collection cycles; |
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indigenization and empowerment programs; |
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exposure to liability under the United
Kingdoms Bribery Act 2010; and |
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exposure to liability under U.S. securities and foreign
trade laws, including the FCPA, and regulations established by the U.S.
Department of Treasurys Office of Foreign Assets Control, or OFAC.
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Many of these countries and regions are in various stages of
developing institutions and political, legal and regulatory systems that are
characteristic of democracies. However, institutions in these countries and
regions may not yet be as firmly established as they are in democracies in the
developed world. Many of these countries and regions are also in the process of
transitioning to a market economy and, as a result, are experiencing changes in
their economies and their government policies that can affect our investments in
these countries and regions. Moreover, the procedural safeguards of the new
legal and regulatory regimes in these countries and regions are still being
developed and, therefore, existing laws and regulations may be applied
inconsistently. In some circumstances, it may not be possible to obtain the
legal remedies provided under those laws and regulations in a timely manner.
As the political, economic and legal environments remain
subject to continuous development, investors in these countries and regions face
uncertainty as to the security of their investments. Any unexpected changes in
the political or economic conditions in these or neighboring countries or others
in the region may have a material adverse effect on the international
investments that we have made or may make in the future, which may in turn have
a material adverse effect on our business, operating results, cash flows and
financial condition.
23
Risks Relating to Government Regulation
The South African National Credit Regulator has applied
to cancel the registration of our subsidiary, Moneyline Financial Services (Pty)
Ltd, as a credit provider. If the registration is cancelled, we will not be able
to provide UEPS-based loans to our customers, which would harm our business.
Moneyline provides microloans to our UEPS/EMV cardholders.
Moneyline is a registered credit provider under the South African National
Credit Act, or NCA, and is required to comply with the NCA in the operation of
its lending business. On September 22, 2014, the South African National Credit
Regulator, or NCR, issued a press release stating that it has applied to the
National Consumer Tribunal to cancel Moneylines registration, based on an
investigation concluded by the NCR.
The NCR's press release alleges, among other things, that
Moneyline contravened the NCA by including child support grants and foster child
grants in the affordability assessments performed by Moneyline prior to granting
credit to these borrowers, and that the procedures followed and documentation
maintained by Moneyline are not in accordance with the NCA. We have reviewed
NCRs application and believe that it contains numerous factual inaccuracies. We
believe that Moneyline has conducted its business in compliance with NCA and we
are opposing the NCRs application. However, if the NCRs application is
successful, Moneyline would be prohibited from operating its microlending
business, which could have a material adverse effect on our results of
operations and cash flows.
We are required to comply with certain U.S. 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 U.S. 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 U.S. 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.
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 EasyPay
EveryWhere 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 EasyPay Everywhere 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 EasyPay Everywhere business activities requires us to be
registered as a bank in South Africa or to have access to an existing banking
license.
24
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 EasyPay Everywhere 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 act as intermediaries
between financial product suppliers and consumers in South Africa to register as
financial service providers. Smart Life was granted an Authorized Financial
Service Provider, or FSP, license on June 9, 2015. We are in the process of
applying for several other FSP licenses under this Act in order to sell other
financial products as a registered FSP. 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.
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 2015 fiscal year, our stock price ranged from a low of $10.21 to a
high of $19.70. We expect that the trading price of our common stock may
continue to be volatile as a result of a number of factors, including, but not
limited to the following:
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government or regulatory investigations,
including developments in the current U.S. government investigations;
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fluctuations in currency exchange rates,
particularly the U.S. dollar/ZAR exchange rate; |
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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; |
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quarterly variations in our operating results,
especially if our operating results fall below the expectations of
securities analysts and investors; |
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announcements of acquisitions, disposals or
impairments of intangible assets; |
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the timing of or delays in the commencement,
implementation or completion of major projects; |
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large purchases or sales of our common stock;
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general conditions in the markets in which we
operate; and |
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economic and financial conditions.
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25
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 47% of our outstanding common stock is owned by two
shareholders. Based on their most recent SEC filings disclosing ownership of our
shares, International Value Advisers, LLC, or IVA, and Allan Gray Proprietary
Limited, beneficially owned approximately 28% and 19% of our outstanding common
stock, respectively.
The interests of IVA and Allan Gray may be different from or
conflict with the interests of our other shareholders. As a result of the
ownership by IVA and Allan Gray, they will be able, if they act together, to
significantly 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.
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.
26
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:
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the court or arbitral body which pronounced the judgment
had international jurisdiction and competence to entertain the case
according to the principles recognized by South African law with reference
to the jurisdiction of foreign courts; |
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the judgment is final and conclusive (that is,
it cannot be altered by the court which pronounced it); |
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the judgment has not lapsed; |
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the recognition and enforcement of the judgment by South
African courts would not be contrary to public policy in South Africa,
including observance of the rules of natural justice which require that no
award is enforceable unless the defendant was duly served with documents
initiating proceedings, that he was given a fair opportunity to be heard
and that he enjoyed the right to be legally represented in a free and fair
trial before an impartial tribunal; |
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the judgment was not obtained by improper or
fraudulent means; |
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the judgment does not involve the enforcement
of a penal or foreign revenue law or any award of multiple or punitive
damages; and |
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the enforcement of the judgment is not otherwise
precluded by the provisions of the Protection of Business Act 99 of 1978
(as amended), of the Republic of South Africa. |
It has been the policy of South African courts to award
compensation for the loss or damage actually sustained by the person to whom the
compensation is awarded. South African courts have awarded compensation to
shareholders who have suffered damages as a result of a diminution in the value
of their shares based on various actions by the corporation and its management.
Although the award of punitive damages is generally unknown to the South African
legal system, that does not mean that such awards are necessarily contrary to
public policy.
27
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.
- Remainder of this page left blank -
28
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 153 depot facilities. We also lease additional office
space in Johannesburg, Cape Town and Durban, South Africa; London, United
Kingdom; Seoul, South Korea; Mumbai, India; and Frederick, Maryland. These
leases expire at various dates through 2018.
We own land and buildings in Ahnsung, Kyung-gi, South Korea,
that is used for the storage of business documents. We believe that we have
adequate facilities for our current business operations.
ITEM 3. LEGAL PROCEEDINGS
Challenge to Payment by SASSA of Additional
Implementation Costs
On March 25, 2015, Corruption Watch, a South African non-profit
civil society organization, filed a Notice of Motion with the High Court of
South Africa, notifying the Court that it intends to apply for an order by the
Court to review and set aside the decision of SASSAs Chief Executive Officer to
approve the payment to us of ZAR 317 million (approximately ZAR 277 million,
excluding VAT). Corruption Watch claims that there was no lawful basis for the
decision to make the payment to us, and that the decision was unreasonable and
irrational and did not comply with South African legislation. We have been named
as a respondent in the Notice of Motion. On April 17, 2015 we filed a Notice of
Intention to Oppose with the Court.
As we previously disclosed, in June 2014, we received
approximately ZAR 277 million, excluding VAT, from SASSA, related to the
recovery of additional implementation costs we incurred during the beneficiary
re-registration process in fiscal 2012 and 2013. After we signed our SASSA
contract, SASSA requested that we biometrically register all social grant
beneficiaries (including child grant beneficiaries), in addition to the grant
recipients who were issued with the SASSA-branded UEPS/EMV smart cards. We
agreed to SASSAs request, and as a result, we performed approximately 11
million additional registrations beyond those that we were contractually
required to perform in consideration for our monthly service fee. Accordingly,
we claimed a cost recovery from SASSA, supported by a factual findings
certificate from an independent auditing firm. SASSA agreed to pay us the ZAR
277 million as full settlement of the additional costs we incurred.
We believe that Corruption Watchs claim is without merit, and
we intend to defend it vigorously. However, we cannot predict how the Court will
rule on the matter.
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 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:
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directly or indirectly making false reports and providing
false information to members of the South African media, 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; |
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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,
in which it sought to set aside the award of the tender to us; |
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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; |
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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 |
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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$38.9 million based on the ZAR/U.S. dollar
exchange rate on June 30, 2015) 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.
29
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.
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. We cannot predict when the Hawks investigation will be completed
or the impact or outcome of that investigation.
NCR application for the cancelation of Moneylines
registration as a credit provider
On September 23, 2014 the NCR applied to the South African
National Consumer Tribunal, or Tribunal, to cancel the registration of our
subsidiary, Moneyline Financial Services (Pty) Ltd, or Moneyline, for breach of
the NCA based on an investigation concluded by it. Pursuant to the
investigation, the NCA also issued two Compliance Notices one to CPS and one
to Moneyline. The Compliance Notice issued to Moneyline accused it of having
access into the Grindrod Bank Accounts of social grant beneficiaries which
enables them (sic) to see the spending patterns of beneficiaries and
deposit loan amounts into such accounts. The Compliance Notice issued to CPS
accused it of providing information about social grant beneficiaries to
Moneyline in breach of section 68(1) of the NCA. The Compliance Notices demanded
that both CPS and Moneyline take the appropriate steps to address the alleged
non-compliance with the NCA and to report in writing to the NCR, along with an
independent audit report, that they were no longer non-compliant as alleged by
the Compliance Notices.
We opposed the issuance of the Compliance Notices and the
Tribunal granted our requested orders that both Compliance Notices be set aside.
Regarding the NCRs application to cancel the registration of
Moneyline, the NCR applied to amend its original statement of claim shortly
before the scheduled date for the hearing into this matter. We agreed to the
filing of an amended statement of claim and we have filed our response thereto.
The Tribunal is now expected to schedule a hearing to decide on the NCRs
application. We cannot predict when these hearings will take place, or what the
outcome will be.
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 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. On July 23, 2014, the Court appointed a lead plaintiff and
lead counsel. On September 22, 2014, the lead plaintiff filed an amended
complaint alleging that we made materially false and misleading statements in
that we failed to disclose material adverse information and misrepresented the
truth about our finances and business prospects. The amended complaint seeks
unspecified damages on behalf of the lead plaintiff and all other similarly
situated shareholders who purchased our securities between January 18, 2012 and
December 4, 2012, which is a shorter class period than proposed in the original
complaint. On January 16, 2015, we filed a motion to dismiss plaintiffs amended
complaint for failure to state a claim. On March 6, 2015, plaintiff filed an
opposition to our motion to dismiss its complaint, and we filed a reply brief on
March 27, 2015. 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.
30
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market information
Our common stock is listed on The Nasdaq Global Select Market,
or Nasdaq, in the United States under the symbol UEPS and on the JSE in South
Africa under the symbol NT1. The Nasdaq is our principal market for the
trading of our common stock.
The following table sets forth, for the periods indicated, the
high and low sales prices of our common stock as reported by Nasdaq.
Period |
|
|
High |
|
|
Low |
|
Quarter ended September 30,
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 |
|
Quarter ended September 30,
2014 |
|
$ |
14.24 |
|
$ |
10.38 |
|
Quarter ended December 31, 2014 |
|
$ |
13.27 |
|
$ |
10.21 |
|
Quarter ended March 31, 2015
|
|
$ |
14.90 |
|
$ |
11.24 |
|
Quarter ended June 30, 2015 |
|
$ |
19.70 |
|
$ |
12.19 |
|
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 14, 2015, there
were 11 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
As described in detail in footnote 14 to our consolidated
financial statements, in August 2014, we repurchased 1,837,432 shares of our
common stock from BVI, one of our BEE partners, pursuant to a Subscription and
Sale of Shares Agreement, at a price of ZAR 52.98 per share.
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.
31
Share performance graph
The chart below compares the five-year cumulative return,
assuming the reinvestment of dividends, where applicable, on our common stock
with that of the S&P 500 Index and the NASDAQ Industrial Index. This graph
assumes $100 was invested on June 30, 2010, in each of our common stock, the
S&P 500 companies, and the companies in the NASDAQ Industrial Index.
32
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data
should be read together with Item 7Managements Discussion and Analysis of
Financial Condition and Results of Operations and Item 8Financial Statements
and Supplementary Data. The following selected historical financial data as of
June 30, 2015 and 2014, and for the three years ended June 30, 2015 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, 2013, 2012 and 2011 and for the years ended June
30, 2012 and 2011, 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 U.S.
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 |
|
|
|
|
|
|
2015 |
|
|
2014(1) |
|
|
2013(1) |
|
|
2012(1) |
|
|
2011(2) |
|
Revenue |
$ |
625,979 |
|
$ |
581,656 |
|
$ |
452,147 |
|
$ |
390,264 |
|
$ |
343,420 |
|
Cost of goods sold, IT processing, servicing
and support |
|
297,856 |
|
|
260,232 |
|
|
196,834 |
|
|
141,000 |
|
|
109,858 |
|
Selling, general and
administrative |
|
158,919 |
|
|
168,072 |
|
|
191,552 |
|
|
137,404 |
|
|
119,692 |
|
Equity instruments granted pursuant to BEE
transactions (3) |
|
- |
|
|
11,268 |
|
|
- |
|
|
14,211 |
|
|
- |
|
Depreciation and amortization
|
|
40,685 |
|
|
40,286 |
|
|
40,599 |
|
|
36,499 |
|
|
34,671 |
|
Impairment losses |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
41,771 |
|
Operating income |
|
128,519 |
|
|
101,798 |
|
|
23,162 |
|
|
61,150 |
|
|
37,428 |
|
Interest income |
|
16,355 |
|
|
14,817 |
|
|
12,083 |
|
|
8,576 |
|
|
7,654 |
|
Interest expense |
|
4,456 |
|
|
7,473 |
|
|
7,966 |
|
|
9,345 |
|
|
8,672 |
|
Income before income taxes |
|
140,418 |
|
|
109,142 |
|
|
27,279 |
|
|
60,381 |
|
|
36,410 |
|
Income tax expense |
|
44,136 |
|
|
39,379 |
|
|
14,656 |
|
|
15,936 |
|
|
33,525 |
|
Net income attributable to Net1 |
|
94,735 |
|
|
70,111 |
|
|
12,977 |
|
|
44,651 |
|
|
2,647 |
|
Income from continuing
operations per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
$ |
2.03 |
|
$ |
1.51 |
|
$ |
0.28 |
|
$ |
0.99 |
|
$ |
0.06 |
|
Diluted |
$ |
2.02 |
|
$ |
1.50 |
|
$ |
0.28 |
|
$ |
0.99 |
|
$ |
0.06 |
|
(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, |
|
|
|
|
|
|
2015(1) |
|
|
2014(1) |
|
|
2013(1) |
|
|
2012(1) |
|
|
2011(1) |
|
Cash flows provided by
operating activities |
$ |
135,258 |
|
$ |
37,145 |
|
$ |
55,917 |
|
$ |
20,406 |
|
$ |
66,223 |
|
Cash flows used in investing activities |
$ |
59,483 |
|
$ |
21,640 |
|
$ |
447,816 |
|
$ |
292,539 |
|
$ |
323,685 |
|
Cash flows (used in) provided
by financing activities. |
$ |
(4,516 |
) |
$ |
(13,378 |
) |
$ |
409,716 |
|
$ |
231,907 |
|
$ |
183,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income margin |
|
21% |
|
|
18% |
|
|
5% |
|
|
16% |
|
|
11% |
|
(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.
33
Consolidated Balance Sheet Data:
(in thousands)
|
As of June 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2011 |
|
Cash and cash equivalents |
$ |
117,583 |
|
$ |
58,672 |
|
$ |
53,665 |
|
$ |
39,123 |
|
$ |
95,263 |
|
Total current assets before settlement assets
|
|
329,307 |
|
|
282,908 |
|
|
184,723 |
|
|
175,236 |
|
|
213,421 |
|
Goodwill |
|
166,437 |
|
|
186,576 |
|
|
175,806 |
|
|
182,737 |
|
|
209,570 |
|
Intangible assets |
|
47,124 |
|
|
68,514 |
|
|
77,257 |
|
|
93,930 |
|
|
119,856 |
|
Total assets |
|
1,286,430 |
|
|
1,350,945 |
|
|
1,276,322 |
|
|
955,893 |
|
|
781,645 |
|
Total current liabilities before settlement
obligations |
|
82,198 |
|
|
81,823 |
|
|
76,859 |
|
|
73,377 |
|
|
102,406 |
|
Total long-term debt |
|
50,762 |
|
|
62,388 |
|
|
66,632 |
|
|
79,760 |
|
|
111,776 |
|
Total equity |
$ |
478,785 |
|
$ |
441,748 |
|
$ |
339,969 |
|
$ |
346,811 |
|
$ |
328,010 |
|
- Remainder of this page left blank -
34
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in
conjunction with Item 6Selected Financial Data and Item 8Financial
Statements and Supplementary Data. In addition to historical consolidated
financial information, the following discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions.
See Item 1A Risk Factors and Forward Looking Statements.
Overview
We are a leading provider of payment solutions and transaction
processing services across multiple industries and in a number of emerging
economies.
We have developed and market a comprehensive transaction
processing solution that encompasses our smart card-based alternative payment
system for the unbanked and under-banked populations of developing economies and
for mobile transaction channels. Our market-leading system can enable the
billions of people globally who generally have limited or no access to a bank
account to enter affordably into electronic transactions with each other,
government agencies, employers, merchants and other financial service providers.
Our 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 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, integrated
circuit card (chip/smart card) technologies, and the design and provision of
financial and value-added services to our cardholder base.
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 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 ZAZOO 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, Malawi, Cameroon, the Philippines, India 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.
35
We have found that we have greater revenue and profit
opportunities, however, by acting as a service provider instead of a supplier.
In this approach we own and operate the UEPS ourselves, charging one-time and
on-going fees for the use of the system either on a fixed or ad valorem basis.
This is the case in South Africa, where we distribute welfare grants on behalf
of the South African government 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 prepaid utility sales, 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 U.S., 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 are reflected in our International transaction
processing segment.
Finally, we have entered into business partnerships or joint
ventures to introduce our payment solutions to markets such as Namibia and more
recently through T24 Hong Kong and One Credit in Nigeria. 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 our proprietary technologies 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 U.S. 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 2015
ZAZOO
We established ZAZOO in the United Kingdom to oversee the
global expansion of our mobile payments and value-added services businesses,
including the activities currently conducted through our N1MS business unit.
ZAZOOs management is focused on worldwide growth opportunities, especially in
the UK, Europe, the United States, Nigeria, India and other developed and
emerging markets. ZAZOO coordinates all research and development, operations and
marketing activities associated with N1MS mobile businesses.
ZAZOO entered into strategic collaborations with Uber,
Microsoft and Cell C (one of South Africas largest mobile operators) during the
third quarter of fiscal 2015 for our VCPay mobile application. VCPay is a mobile
phone-based application that generates transaction specific virtual MasterCards
that can be used for online purchases, or in brick-and-mortar retailers, that
accept manual card-not-present payments. Users can also send a virtual card to
friends or family anywhere via email, SMS, MMS or WhatsApp, making it simpler
than ever before to send funds to third parties. VCPay is fully interoperable
and does not require merchants to change the way in which payments are accepted
online or via mobile applications, like Uber. We believe that VCPay bridges the
electronic payment requirement gap for online or in-application payments by
providing an immediate, safe and secure payment solution to anybody, regardless
of their banking status.
Our collaboration with Uber in South Africa enables people who
do not own credit cards to now use VCPay to pay for the Uber service.
36
As a result of our collaboration with Microsoft and Cell C,
ZAZOO agreed to sponsor a R250 VCPay voucher to consumers who purchase the new
Microsoft Lumia 535 on a Cell C contract. The new device became available on
Cell Cs talk and data contracts beginning February 1, 2015, and the initial
batch was packaged with the VCPay voucher for new owners to use in completing a
purchase of their choice when using our VCPay service.
Introduction of EasyPay Everywhere EPE and EPE ATMs in
South Africa
In June 2015, we began the rollout of our business-to-consumer,
or B2C, EasyPay Everywhere offering in South Africa. EPE is a fully
transactional account created to serve the needs of South Africas unbanked and
under-banked population, and is available to all consumers regardless of their
financial or social status. The EPE account offers customers a comprehensive
suite of financial and various financial inclusion services, such as prepaid
products, in a economical, convenient and secure solution. EPE provides account
holders with a UEPS-EMV debit MasterCard, mobile and internet banking services,
ATM and POS services, as well as loans, insurance and other financial products
and value-added services.
To support the rollout of EPE, we deployed ATMs, which are both
EMV-and UEPS-compliant, and provided biometric verification as well as proof of
life functionality, in South Africa. We placed these ATMs with our merchant
partners and within our own branches, creating a new delivery channel for our
products and services that did not previously exist. Although capital intensive,
our ATM rollout has already begun to make a positive contribution to our
reported results. We have been able to expand our customer base because our ATMs
accept all EMV-compliant cards. We currently have approximately 640 operational
ATMs, and we are actively deploying more ATMs in high demand areas. We will
continue to expand our ATM footprint in fiscal 2016.
World Food Program
The Southern Africa Regional Office of the United Nations World
Food Program, or the WFP, has awarded to us a contract for 12 countries that are
members of the Southern African Development Community. Under the terms of the
contract, we distribute cash and food grants to hundreds of thousands of WFP
beneficiaries in these countries.
Our technology makes use of the existing infrastructure in each
territory and allows for the biometric verification of all beneficiaries
regardless of whether or not such infrastructure is biometrically enabled. In
certain situations, we utilize our patented variable PIN technology in
conjunction with fingerprint or voice verification methods using any mobile
phone. We do not expect that this socially responsible initiative will
necessarily translate into a meaningful financial contributor for us in the
short term, but we strongly believe that the exposure and credibility associated
with winning and operating a project of this nature and scale will create
further opportunities for us to implement the same or similar solutions in other
contexts. We are currently finalizing our deployment contract with the WFP
office based in South Africa.
Strategic investments
During the fourth quarter of fiscal 2015, we made two strategic
investments in Hong Kong and Nigeria, acquiring a significant noncontrolling
stake in each company. Both investments represent opportunities in specific
markets with companies that have an established local presence, knowledge, and
customer relationships, and where the introduction of our technology or
solutions can enhance the breadth of their offerings and in turn the market
opportunity.
T24
In May 2015, we acquired a 43.88% interest in Transact24
Limited, or T24, a specialist Hong Kong-based payment services company. We
believe that our investment in T24s business will complement our existing
products and will further expand our product suite and geographic reach. In
addition, the T24 management team has a wealth of experience in transaction
processing, and will provide us with specialist marketing business development
resources to expand the adoption of the Net1 product range including our Mobile
Virtual Card product. T24 also provides us with an entry into the rapidly
growing Chinese e-commerce and transaction processing markets through its
established relationships with China UnionPay, the only domestic bank card
organization and interbank network in China, and AliPay, Chinas leading third
party online payment platform.
T24s primary business activities include:
|
|
Chinese debit card acquiring T24 has
processing relationships with China UnionPay, AliPay and five other
Chinese gateways |
|
|
Credit card acquiring T24 has acquiring relationships
with banks and processing institutions in the UK, Germany, Australia and
Mauritius. T24 also offers a white-labeled credit card acquiring gateway
to entities who wish to outsource the technical integration and operations
of their acquiring gateways; |
|
|
Automated clearing house, or ACH, processing T24
provides unsecured loan ACH processing for Tribal and State- licensed
lenders in the U.S.; |
|
|
Prepaid card issuing and processing T24 issues U.S.
Dollar-denominated Visa prepaid cards, South African Rand- denominated
MasterCard prepaid cards and Hong Kong Dollar-denominated China UnionPay
prepaid cards. |
37
One Credit
In May 2015, we acquired a 25% interest in One Credit Limited,
a leading Nigerian consumer finance company focused on providing credit to
unbanked, salaried Nigerian consumers. We have also agreed to provide One Credit
with a credit facility of up to $10 million in the form of convertible debt.
We believe that we can assist One Credit to grow its market
share through the provision of its financial technology products and services,
which have been designed to address the biggest challenge facing Nigerian
financial institutions the ability to provide seamless and cashless services
in an environment that poses significant logistical and infrastructural
obstacles. In addition, our solutions will enhance One Credits credit risk
management and expand the current product offering to these customers. By
acquiring a significant minority stake, we believe that we will be able to
actively participate in the formulation and execution of the One Credit business
plan, including its delivery platforms.
Withdrawal from 2014 SASSA tender process
We decided to withdraw from the 2014 SASSA tender process and
did not submit a bid. We reached this conclusion after careful consideration of
all the relevant factors, including financial feasibility of the RFP, further
questions raised by prospective bidders, execution of our strategic plan, legal
risks, reputational risk, and long term value creation for shareholders.
We believe that the deployment of our business plan, which
focuses on providing a comprehensive suite of transactional products and
services, will allow us to service all South Africas unbanked and under-banked
citizens including social grant beneficiaries, but independently and without
SASSAs limitations and constraints. Our business plan includes the continued
successful deployment of our EasyPay Everywhere bank account, biometric ATMs and
mobile portal, our suite of financial and added value services utilizing our
proven and innovative technological systems. We believe that these activities
will ensure a sustainable business model that will, over time, far exceed the
benefits that could be realized from being the successful bidder for the SASSA
RFP.
In addition, the execution of the business plan will no longer
be limited by a five year contract (or potentially shorter if legally
challenged) and provides us with the ability to freely determine pricing that is
both competitive and profitable and removes any unknown or contingent
liabilities associated with government contracts. We also expect to have more
management bandwidth, which we believe will enable us to accelerate our
international expansion.
The South African Constitutional Courts order dated March 19,
2015 determined that SASSA should award the tender by October 15, 2015. Our
current contract terminates in the event that SASSA awards a new contract to a
third party and we will then have to negotiate the terms of phasing out our
activities with SASSA and the new contractor.
See Item 1ARisk FactorsWe have historically derived a
substantial portion of our revenues from our SASSA contract for the payment of
social grants. However, we have decided not to participate in the latest SASSA
tender and we are not sure when, or if, a new contractor will be appointed. If a
new contractor is appointed, our current contract terminates and we are unable
to predict what the terms and timing of any transitional arrangement will be
and If SASSA appoints a new contractor, we are unable to predict what the
terms and timing of any transitional arrangement will be.
Regulatory developments
Conclusion of SEC investigation commenced in 2012
On June 8, 2015, we were notified by the Foreign Corrupt
Practices Act unit of the Division of Enforcement of the SEC, advising us that
it had concluded its investigation of us and it did not intend to recommend an
enforcement action. It is our understanding that the DOJ investigation is
continuing.
Smart Life to resume writing new insurance policies in
fiscal 2016
We complied with the conditions imposed by the South African
Financial Services Board, or FSB, to uplift the suspension of Smart Lifes
license to provide long-term insurance products, which resulted in the FSB
withdrawing the prohibition to conduct new business issued by it approximately
two years ago. In early fiscal 2016, we resumed marketing and business
development activities for the distribution of our simple, low-cost life
insurance products.
38
Transactions in preparation for SASSA tender commenced in
late calendar 2014
On August 27, 2014, we entered into a Subscription and Sale of
Shares Agreement with BVI, one of our BEE partners, in preparation for the SASSA
tender that we expected would commence in late calendar 2014. Pursuant to the
agreement: (i) we repurchased BVIs remaining 1,837,432 shares of Net1 common
stock for approximately ZAR 97.4 million in cash ($9.2 million translated at
exchange rates prevailing as of August 27, 2014) and (ii) BVI subscribed for new
ordinary shares of Cash Paymaster Services (Pty) Ltd, or CPS, representing
approximately 12.5% of CPS ordinary shares outstanding after the subscription
for ZAR 15.0 million in cash (approximately $1.4 million 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.
Critical Accounting Policies
Our consolidated financial statements have been prepared in
accordance with U.S. 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. 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 2015 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 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.
39
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 2015 and 2014, respectively, we
recorded a decrease of $2.6 million and $29.0 million, and in fiscal 2013, we
recorded an increase of $6.6 million 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 $3.2 million, $3.7 million and $3.9 million for fiscal 2015, 2014
and 2013, respectively.
Equity instruments
We recorded non-cash charges of $11.3 million associated with
the issuance of equity instruments as part of the BEE transactions during fiscal
2014, as these equity instruments were fully vested in that year.
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.
40
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, 2015, 2014 or 2013, 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.
Recent accounting pronouncements not yet adopted as of
June 30, 2015
Refer to Note 2 of our consolidated financial statements for a
full description of recent accounting pronouncements not yet adopted as of June
30, 2015, 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, |
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
ZAR : $ average exchange rate
|
|
11.4494 |
|
|
10.3798 |
|
|
8.8462 |
|
Highest ZAR : $ rate during period |
|
12.5779 |
|
|
11.2579 |
|
|
10.3587 |
|
Lowest ZAR : $ rate during
period |
|
10.5128 |
|
|
9.6259 |
|
|
8.0444 |
|
Rate at end of period |
|
12.2854 |
|
|
10.5887 |
|
|
9.8925 |
|
|
|
|
|
|
|
|
|
|
|
KRW : $ average exchange rate |
|
1,078 |
|
|
1,068 |
|
|
1,112 |
|
Highest KRW : $ rate during
period |
|
1,139 |
|
|
1,147 |
|
|
1,162 |
|
Lowest KRW : $ rate during period |
|
1,009 |
|
|
1,014 |
|
|
1,019 |
|
Rate at end of period |
|
1,128 |
|
|
1,014 |
|
|
1,144 |
|
41
42
Translation Exchange Rates
We are required to translate our results of operations from ZAR
to U.S. dollars on a monthly basis. Thus, the average rates used to translate
this data for the years ended June 30, 2015, 2014 and 2013, 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, |
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
Income and expense items: $1
= ZAR |
|
11.4275 |
|
|
10.3966 |
|
|
8.7105 |
|
Income and expense items: $1 = KRW |
|
1,073 |
|
|
1,049 |
|
|
1,072 |
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items: $1 = ZAR |
|
12.2854 |
|
|
10.5887 |
|
|
9.8925 |
|
Balance sheet items: $1 = KRW
|
|
1,128 |
|
|
1,014 |
|
|
1,144 |
|
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 U.S. GAAP. We analyze
our results of operations both in U.S. 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
U.S. dollar and ZAR on our reported results and because we use the U.S. 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 2015 results exclude MediKredit and NUETS business from
July 1, 2014. Fiscal 2013 results include SmartSwitch Botswana from December 1,
2012 and N1MS from September 1, 2012. Refer also to Note 3 to the consolidated
financial statements.
Fiscal 2015 Compared to Fiscal 2014
The following factors had an influence on our results of
operations during fiscal 2015 as compared with the same period in the prior
year:
|
|
Unfavorable impact from the strengthening of the
U.S. dollar against the ZAR: The U.S. dollar appreciated by 10%
against the ZAR during fiscal 2015 which negatively impacted our reported
results; |
|
|
Continued growth in financial inclusion services:
We continued to expand our financial inclusion service offerings
during fiscal 2015, which resulted in higher revenues and operating income
from more sales of low-margin prepaid airtime and UEPS-based lending;
|
|
|
Increased contribution by KSNET: Our
results were positively impacted by growth in our Korean operations;
|
|
|
Increase in the number of SASSA grants paid:
Our revenue and operating income increased as a result of the
higher number of SASSA UEPS/EMV cardholders paid during fiscal 2015
compared with 2014; |
|
|
$26.6 million recovery of expenses in fiscal 2014:
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; |
|
|
Fair value charge resulting from issue of equity
instruments pursuant to BEE transactions in fiscal 2014: The fair
value non-cash charge of $11.3 million related to our BEE transactions
adversely impacted our reported results during fiscal 2014; and |
|
|
Lower DOJ and SEC investigation-related expenses:
We incurred DOJ and SEC investigation-related expenses of $0.2
million during fiscal 2015 compared to $3.9 million during 2014.
|
Consolidated overall results of operations
This discussion is based on the amounts which were prepared in
accordance with U.S. GAAP.
43
The following tables show the changes in the items comprising
our statements of operations, both in U.S. dollars and in ZAR:
|
|
In United
States Dollars |
|
Table 3 |
|
(U.S. GAAP) |
|
|
|
Year ended June 30, |
|
|
|
2015 |
|
|
2014 |
|
|
% |
|
|
$ |
000 |
|
$ |
000 |
|
|
change |
|
Revenue |
|
625,979 |
|
|
581,656 |
|
|
8% |
|
Cost of goods sold, IT processing, servicing
and support |
|
297,856 |
|
|
260,232 |
|
|
14% |
|
Selling, general and
administration |
|
158,919 |
|
|
168,072 |
|
|
(5% |
) |
Equity instruments issued pursuant to BEE
transactions |
|
- |
|
|
11,268 |
|
|
nm |
|
Depreciation and amortization
|
|
40,685 |
|
|
40,286 |
|
|
1% |
|
Operating income |
|
128,519 |
|
|
101,798 |
|
|
26% |
|
Interest income |
|
16,355 |
|
|
14,817 |
|
|
10% |
|
Interest expense |
|
4,456 |
|
|
7,473 |
|
|
(40% |
) |
Income before income taxes
|
|
140,418 |
|
|
109,142 |
|
|
29% |
|
Income tax expense |
|
44,136 |
|
|
39,379 |
|
|
12% |
|
Net income before income from
equity-accounted investments |
|
96,282 |
|
|
69,763 |
|
|
38% |
|
Income from equity-accounted investments |
|
452 |
|
|
298 |
|
|
52% |
|
Net income |
|
96,734 |
|
|
70,061 |
|
|
38% |
|
Less (add) net income (loss) attributable to
non-controlling interest |
|
1,999 |
|
|
(50 |
) |
|
nm |
|
Net income attributable to
Net1 |
|
94,735 |
|
|
70,111 |
|
|
35% |
|
|
|
In South
African Rand |
|
Table 4 |
|
(U.S. GAAP) |
|
|
|
Year ended June 30, |
|
|
|
2015 |
|
|
2014 |
|
|
|
|
|
|
ZAR |
|
|
ZAR |
|
|
% |
|
|
|
000 |
|
|
000 |
|
|
change |
|
Revenue |
|
7,153,375 |
|
|
6,047,244 |
|
|
18% |
|
Cost of goods sold, IT processing, servicing
and support |
|
3,403,749 |
|
|
2,705,528 |
|
|
26% |
|
Selling, general and
administration |
|
1,816,047 |
|
|
1,745,784 |
|
|
4% |
|
Equity instruments issued pursuant to BEE
transactions |
|
- |
|
|
118,740 |
|
|
nm |
|
Depreciation and amortization
|
|
464,928 |
|
|
418,838 |
|
|
11% |
|
Operating income |
|
1,468,651 |
|
|
1,058,354 |
|
|
39% |
|
Interest income |
|
186,897 |
|
|
154,046 |
|
|
21% |
|
Interest expense |
|
50,921 |
|
|
77,694 |
|
|
(34% |
) |
Income before income taxes
|
|
1,604,627 |
|
|
1,134,706 |
|
|
41% |
|
Income tax expense |
|
504,364 |
|
|
409,408 |
|
|
23% |
|
Net income before income from
equity-accounted investments |
|
1,100,263 |
|
|
725,298 |
|
|
52% |
|
Income from equity-accounted investments |
|
5,165 |
|
|
3,098 |
|
|
67% |
|
Net income |
|
1,105,428 |
|
|
728,396 |
|
|
52% |
|
Less (add) net income (loss) attributable to
non-controlling interest |
|
22,844 |
|
|
(520 |
) |
|
nm |
|
Net income attributable to
Net1 |
|
1,082,584 |
|
|
728,916 |
|
|
49% |
|
The increase in revenue was primarily due to higher
contributions from our financial inclusion products and growth at KSNET. These
increases were offset by the recovery of implementation costs related to our
SASSA contract received in 2014.
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 more prepaid
airtime sold.
In ZAR, our selling, general and administration expense
increased due to increases in goods and services purchased from third parties.
Our operating income margin for fiscal 2015 and 2014 was 21%
and 18%, respectively. We discuss the components of operating income margin
under Results of operations by operating segment. The increase is primarily
attributable to higher transaction volumes in South Africa, including prepaid
airtime sales, lending and SASSA grants paid.
The grant date fair value of the equity instruments issued
pursuant to our December 2014 BEE transactions was $11.3 million (ZAR 118.7
million) and was expensed in full in fiscal 2014.
44
Depreciation and amortization were higher primarily as a result
of an increase in depreciation related to more terminals used to provide
transaction processing in Korea and the roll-out of ATMs in South Africa, which
was partially offset by no Eason intangible asset amortization as these
intangible assets were fully amortized at the end of June 2014.
Interest on surplus cash increased to $16.4 million (ZAR 186.9
million) from $14.8 million (ZAR 154.0 million), due primarily to higher average
daily ZAR cash balances.
Interest expense decreased to $4.5 million (ZAR 50.9 million)
from $7.5 million (ZAR 77.7 million), due to a lower average long-term debt
balance on our South Korean debt and a lower interest rate.
Fiscal 2015 tax expense was $44.1 million (ZAR 504.4 million)
compared to $39.4 million (ZAR 409.4 million) in fiscal 2014. Our effective tax
rate for fiscal 2015, was 31.4% and was higher than the South African statutory
rate as a result of non-deductible expenses (including consulting and legal).
Our effective tax rate for the 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).
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 (U.S.
GAAP) |
|
|
|
Year ended June 30, |
|
|
|
2015 |
|
|
% of |
|
|
2014 |
|
|
% of |
|
|
% |
|
Operating
Segment |
$ |
000 |
|
|
total |
|
$ |
000 |
|
|
total |
|
|
change |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing |
|
236,452 |
|
|
38% |
|
|
261,577 |
|
|
45% |
|
|
(10% |
) |
International transaction processing |
|
164,554 |
|
|
26% |
|
|
152,725 |
|
|
26% |
|
|
8% |
|
Financial inclusion and
applied technologies |
|
272,600 |
|
|
44% |
|
|
207,595 |
|
|
36% |
|
|
31% |
|
Subtotal:
Operating segments |
|
673,606 |
|
|
108% |
|
|
621,897 |
|
|
107% |
|
|
8% |
|
Intersegment eliminations |
|
(47,627 |
) |
|
(8% |
) |
|
(40,241 |
) |
|
(7% |
) |
|
18% |
|
Consolidated
revenue |
|
625,979 |
|
|
100% |
|
|
581,656 |
|
|
100% |
|
|
8% |
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing |
|
51,008 |
|
|
40% |
|
|
61,401 |
|
|
60% |
|
|
(17% |
) |
International transaction
processing |
|
26,805 |
|
|
21% |
|
|
21,952 |
|
|
22% |
|
|
22% |
|
Financial inclusion and applied technologies
|
|
72,725 |
|
|
57% |
|
|
60,685 |
|
|
60% |
|
|
20% |
|
Subtotal: Operating segments |
|
150,538 |
|
|
118% |
|
|
144,038 |
|
|
142% |
|
|
5% |
|
Corporate/Eliminations |
|
(22,019 |
) |
|
(18% |
) |
|
(42,240 |
) |
|
(42% |
) |
|
(48% |
) |
Consolidated operating income |
|
128,519 |
|
|
100% |
|
|
101,798 |
|
|
100% |
|
|
26% |
|
Table 6 |
|
In South African Rand (U.S.
GAAP) |
|
|
|
Year ended June 30, |
|
|
|
2015 |
|
|
|
|
|
2014 |
|
|
|
|
|
|
|
|
|
ZAR |
|
|
% of |
|
|
ZAR |
|
|
% of |
|
|
% |
|
Operating
Segment |
|
000 |
|
|
total |
|
|
000 |
|
|
total |
|
|
change |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing |
|
2,702,055 |
|
|
38% |
|
|
2,719,511 |
|
|
45% |
|
|
(1% |
) |
International transaction processing |
|
1,880,441 |
|
|
26% |
|
|
1,587,821 |
|
|
26% |
|
|
18% |
|
Financial inclusion and
applied technologies |
|
3,115,137 |
|
|
44% |
|
|
2,158,282 |
|
|
36% |
|
|
44% |
|
Subtotal:
Operating segments |
|
7,697,633 |
|
|
108% |
|
|
6,465,614 |
|
|
107% |
|
|
19% |
|
Intersegment eliminations |
|
(544,258 |
) |
|
(8% |
) |
|
(418,370 |
) |
|
(7% |
) |
|
30% |
|
Consolidated
revenue |
|
7,153,375 |
|
|
100% |
|
|
6,047,244 |
|
|
100% |
|
|
18% |
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction processing |
|
582,894 |
|
|
40% |
|
|
638,362 |
|
|
60% |
|
|
(9% |
) |
International transaction
processing |
|
306,314 |
|
|
21% |
|
|
228,226 |
|
|
22% |
|
|
34% |
|
Financial inclusion and applied technologies
|
|
831,065 |
|
|
57% |
|
|
630,918 |
|
|
60% |
|
|
32% |
|
Subtotal: Operating segments |
|
1,720,273 |
|
|
118% |
|
|
1,497,506 |
|
|
142% |
|
|
15% |
|
Corporate/Eliminations |
|
(251,622 |
) |
|
(18% |
) |
|
(439,152 |
) |
|
(42% |
) |
|
(43% |
) |
Consolidated operating income |
|
1,468,651 |
|
|
100% |
|
|
1,058,354 |
|
|
100% |
|
|
39% |
|
45
South African transaction processing
In ZAR, revenue increased in fiscal 2015 compared to fiscal
2014 (after excluding the impact of the recovery in fiscal 2014 of
implementation costs related to our SASSA contract). The increase in segment
revenues exclusive of such recovery was primarily due to more low-margin
transaction fees generated from beneficiaries using the South African National
Payment System and more inter-segment transaction processing activities. 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, offset by
the loss of MediKredit revenue as a result of the sale of that business.
Our operating income margin for fiscal 2015 and 2014 was 22%
and 23%, respectively. Our operating margin for fiscal 2014 was positively
impacted by the recovery of implementation costs related to our SASSA contract.
Excluding the impact of this $26.6 million recovery from SASSA, our operating
income margin for fiscal 2014 was 15%. Our fiscal 2015 operating income margin
is higher than our adjusted fiscal 2014 operating income margin (of 15%) due to
more higher-margin inter-segment transaction processing activities, the
elimination of MediKredit losses and an increase in the number of beneficiaries
paid in fiscal 2015.
International transaction-based activities
Revenue increased primarily due to higher transaction volume at
KSNET during fiscal 2015. Operating income during fiscal 2015 was higher due to
increase in revenue contribution from KSNET, but partially offset by ZAZOO
start-up costs in the UK and India. Operating income and margin for fiscal 2015,
was also positively impacted by a refund of approximately $1.7 million that had
been paid several years ago in connection with industry-wide litigation that has
now been finalized. Operating income margin for fiscal 2015 and 2014 was 16% and
14%, respectively, and was higher in fiscal 2015 primarily due to the refund
referred to above.
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, and, in ZAR, an
increase in intersegment revenues. Fiscal 2014 operating income includes
expenses related to the national rollout of our UEPS-based lending offering and
the establishment of the allowance for doubtful finance loans in fiscal 2014.
Smart Life did not contribute to operating income in fiscal 2015 and 2014 due to
the FSB suspension of its license.
The South African National Credit Act, or
NCA, made certain industry-wide amendments, which became effective March 13,
2015. These amendments were introduced primarily to address over-indebtedness of
South African consumers and now require lenders to perform a stricter
affordability assessment. We expect that compliance with the amended legislation
will continue to have a modest impact on our UEPS-based lending business in
fiscal 2016.
Notwithstanding the national rollout expenses incurred in fiscal
2014, operating income margin for the Financial inclusion and applied
technologies segment decreased to 27% from 29%, primarily as a result of more
low-margin prepaid airtime and the sale of competitively-priced financial
inclusion products to address the needs of the broader market.
Corporate/ Eliminations
The decrease in our corporate expenses was primarily due to the
non-cash charge in fiscal 2014 related to the equity instruments issued pursuant
to our BEE transactions, lower U.S. government investigations-related and U.S.
lawsuit expenses, audit fees and other corporate head office-related
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.
46
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
U.S. dollar against the ZAR: The U.S. 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: 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 U.S. GAAP.
The following tables show the changes in the items comprising
our statements of operations, both in U.S. dollars and in ZAR:
|
|
In United
States Dollars |
|
Table 7 |
|
(U.S. 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% |
|
47
|
|
In South
African Rand |
|
Table 8 |
|
(U.S. 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 U.S. 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 U.S. 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).
48
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 9 |
|
In United States Dollars (U.S.
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 10 |
|
In South African Rand (U.S.
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.
49
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
rollout 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 U.S. 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.
Liquidity and Capital Resources
At June 30, 2015, our cash balances were $117.6 million, which
comprised ZAR-denominated balances of ZAR 1.3 billion ($104.8 million),
KRW-denominated balances of KRW 7.9 billion ($7.0 million) and U.S.
dollar-denominated balances of $4.0 million and other currency deposits,
primarily euro, of $1.8 million. The increase in our cash balances from June 30,
2014, was primarily due to the expansion of all of our core businesses, and to a
lesser extent, to the cash conservation resulting from the sale of
loss-incurring businesses, offset by provisional tax payments, investments,
capital expenditures and the scheduled Korean debt repayment in October 2014.
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
U.S. 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.
We have a short-term South African credit facility with Nedbank
Limited of ZAR 400 million ($32.6 million), which consists of (i) a primary
amount of up to ZAR 200 million, which is immediately available, and (ii) a
secondary amount of up to ZAR 200 million, which is not immediately available.
The primary amounts comprises an overdraft facility of up to ZAR 50 million and
indirect and derivative facilities of up to ZAR 150 million, which includes
letters of guarantee, letters of credit and forward exchange contracts.
50
As of June 30, 2015, we have used none of the overdraft and ZAR
139.6 million ($11.4 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.
As of June 30, 2015, we had outstanding long-term debt of KRW
67.3 billion (approximately $59.6 million translated at exchange rates
applicable as of June 30, 2015) 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 (1.80% as of June 30, 2015) 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. We repaid the KRW 15 billion other term loan facility in full in
October 2014 in accordance with the repayment schedule. Scheduled remaining
repayments of the term loans and loan under the revolving credit facility are as
follows: 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, 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 2015 increased
to $135.3 million (ZAR 1.5 billion) from $37.1 million (ZAR 386.2 million) for
fiscal 2014. Excluding the impact of interest received, interest paid under our
Korean debt and taxes presented in the table below, the increase in cash from
operating activities resulted from improved trading activity during fiscal 2015.
During fiscal 2015, we paid interest of $3.6 million under our South Korean debt
facility.
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.
During fiscal 2015, we made a first provisional tax payment of
$18.9 million (ZAR 217.2 million) and a second provisional tax payment of $16.2
million (ZAR 199.8 million) related to our 2015 tax year in South Africa. We
also paid taxes totaling $7.6 million in other tax jurisdictions, primarily
South Korea.
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.
51
Taxes paid during fiscal 2015, 2014 and 2013 were as follows:
Table 11 |
|
Year ended June 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
ZAR |
|
|
ZAR |
|
|
ZAR |
|
|
|
000 |
|
|
000 |
|
|
000 |
|
|
000 |
|
|
000 |
|
|
000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First provisional payments
|
|
18,910 |
|
|
13,292 |
|
|
6,757 |
|
|
217,241 |
|
|
137,773 |
|
|
58,693 |
|
Second provisional payments |
|
16,234 |
|
|
25,004 |
|
|
7,228 |
|
|
199,779 |
|
|
266,573 |
|
|
72,451 |
|
Taxation paid related to
prior years |
|
2,408 |
|
|
228 |
|
|
3,072 |
|
|
26,395 |
|
|
2,360 |
|
|
25,517 |
|
Taxation refunds received |
|
(468 |
) |
|
(36 |
) |
|
(65 |
) |
|
(5,396 |
) |
|
(400 |
) |
|
(480 |
) |
Dividend withholding taxation
|
|
737 |
|
|
- |
|
|
1,610 |
|
|
8,702 |
|
|
- |
|
|
14,916 |
|
Total South
African taxes paid |
|
37,821 |
|
|
38,488 |
|
|
18,602 |
|
|
446,721 |
|
|
406,306 |
|
|
171,097 |
|
Foreign taxes paid, primarily South |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Korea |
|
7,638 |
|
|
3,929 |
|
|
3,298 |
|
|
86,857 |
|
|
41,506 |
|
|
29,468 |
|
Total tax paid |
|
45,459 |
|
|
42,417 |
|
|
21,900 |
|
|
533,578 |
|
|
447,812 |
|
|
200,565 |
|
We expect to pay additional second provisional payments in
South Africa of approximately $3.9 million (ZAR 48.0 million translated at
exchange rates applicable as of June 30, 2015) related to our 2015 tax year in
the first quarter of fiscal 2016.
Cash flows from investing activities
Cash used in investing activities for fiscal 2015 includes
capital expenditure of $36.4 million (ZAR 416.4 million), primarily for the
acquisition of payment processing terminals in Korea and the rollout of ATMs in
South Africa.
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.
During fiscal 2015, we paid $13.2 million for non-controlling
interests in businesses based in Nigeria and Hong Kong.
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.
Cash flows from financing activities
During fiscal 2015, we made a scheduled Korean debt repayment
of $14.1 million, repurchased BVIs remaining 1,837,432 shares of Net1 common
stock for approximately $9.2 million, received $1.4 million from BVI for 12.5%
of CPS issued and outstanding ordinary shares and paid a dividend of $1.0
million to certain of our non-controlling interests. We also utilized
approximately $3.8 million of our Korean borrowings to pay quarterly interest
due and received approximately $2.0 million from the exercise of stock options.
During 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 that 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.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
52
Capital Expenditures
Capital expenditures for the years ended June 30, 2015, 2014
and 2013 were as follows:
Table 12 |
|
Year ended June 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
ZAR |
|
|
ZAR |
|
|
ZAR |
|
Operating Segment |
|
000 |
|
|
000 |
|
|
000 |
|
|
000 |
|
|
000 |
|
|
000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
South African transaction
processing |
|
7,008 |
|
|
3,425 |
|
|
9,400 |
|
|
80,084 |
|
|
35,608 |
|
|
81,879 |
|
International transaction processing |
|
28,205 |
|
|
19,393 |
|
|
12,490 |
|
|
322,312 |
|
|
201,621 |
|
|
108,794 |
|
Financial inclusion and
applied technologies |
|
1,223 |
|
|
1,088 |
|
|
857 |
|
|
13,976 |
|
|
11,312 |
|
|
7,465 |
|
Consolidated total |
|
36,436 |
|
|
23,906 |
|
|
22,747 |
|
|
416,372 |
|
|
248,541 |
|
|
198,138 |
|
Our capital expenditures for fiscal 2015, 2014 and 2013, 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, 2015, of $3.4 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 2016 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, 2015:
Table 13 |
|
Payments due by Period, as of
June 30, 2015 (in $ 000s) |
|
|
|
|
|
|
Less |
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
than 1 |
|
|
1-3 |
|
|
3-5 |
|
|
than 5 |
|
|
|
Total |
|
|
year |
|
|
years |
|
|
years |
|
|
years |
|
Long-term debt obligations
(A) |
|
66,906 |
|
|
3,554 |
|
|
22,409 |
|
|
40,943 |
|
|
- |
|
Operating lease obligations |
|
7,176 |
|
|
3,828 |
|
|
2,927 |
|
|
421 |
|
|
- |
|
Purchase obligations |
|
5,029 |
|
|
5,029 |
|
|
- |
|
|
- |
|
|
- |
|
Capital commitments |
|
3,391 |
|
|
3,391 |
|
|
- |
|
|
- |
|
|
- |
|
Other long-term obligations
(B) |
|
2,205 |
|
|
- |
|
|
- |
|
|
- |
|
|
2,205 |
|
Total |
|
84,707 |
|
|
15,802 |
|
|
25,336 |
|
|
41,364 |
|
|
2,205 |
|
|
(A) |
Includes $59.6 million of long-term debt discussed
under Liquidity and capital resources and includes interest payable at
the rate applicable as of June 30, 2015. |
|
(B) |
Includes policy holder liabilities of $1.2 million
related to our insurance business. |
|
(C) |
We have excluded cross-guarantees in the aggregate
amount of $11.0 million issued as of June 30, 2015, to Nedbank to secure
guarantees it has issued to third parties on our behalf as the amounts
that will be settled in cash are not known and the timing of any payments
is uncertain. |
53
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 U.S. 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 U.S. dollar and the euro, on the other hand. As of June 30, 2015,
and 2014, our outstanding foreign exchange contracts were as follows:
As of June 30, 2015
|
|
|
Fair market |
|
|
Notional amount
|
Strike
price |
value price |
Maturity |
|
EUR
526,263.00 |
ZAR 15.1145 |
ZAR 13.6275 |
July 20, 2015
|
|
EUR 526,263.00 |
ZAR 15.2025 |
ZAR 13.7062 |
August 20, 2015 |
|
EUR
526,263.00 |
ZAR 15.2944 |
ZAR 13.7898 |
September 21,
2015 |
|
EUR 526,263.00 |
ZAR 15.3809 |
ZAR 13.8683 |
October 20, 2015 |
|
EUR
509,516.00 |
ZAR 15.4728 |
ZAR 13.9540 |
November 20,
2015 |
|
EUR 529,865.00 |
ZAR 15.5654 |
ZAR 14.0397 |
December 21, 2015 |
|
EUR
526,663.00 |
ZAR 15.6625 |
ZAR 14.1239 |
January 20,
2016 |
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
|
Translation Risk
Translation risk relates to the risk that our results of
operations will vary significantly as the U.S. dollar is our reporting currency,
but we earn most of our revenues and incur most of our expenses in ZAR. The U.S.
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, 2015, the South Korean CD rate was 1.80%.
54
The following table illustrates
the effect on our annual expected interest charge, translated at exchange rates
applicable as of June 30, 2015, as a result of a change in the South Korean CD
rate. The effects of a hypothetical 1% (i.e. 100 basis points) increase and a 1%
decrease in the South Korean CD rate as of June 30, 2015, is shown. The selected
1% hypothetical change does not reflect what could be considered the best or
worst case scenarios.
|
|
As of June 30, 2015 |
|
Table 14 |
|
|
|
|
|
|
|
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 |
|
2,922 |
|
|
1% |
|
|
3,518 |
|
|
|
|
|
|
(1% |
) |
|
2,325 |
|
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 27% of the issued share capital of
Finbond Group Limited which are exchange-traded equity securities. The fair
value of these securities as of June 30, 2015, 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.
55
The following table summarizes our exchange-traded equity
securities with equity price risk as of June 30, 2015. The effects of a
hypothetical 10% increase and a 10% decrease in market prices as of June 30,
2015, is also shown. The selected 10% hypothetical change does not reflect what
could be considered the best or worst case scenarios.
|
|
As of June 30, 2015 |
|
Table 15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. |
|
7,488 |
|
|
10% |
|
|
8,237 |
|
|
0.16% |
|
|
|
|
|
|
(10% |
) |
|
6,739 |
|
|
(0.16% |
)
|
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-54 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
56
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, 2015.
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
U.S. 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 U.S. 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 2013. Based on this
evaluation, management concluded that our internal control over financial
reporting was effective as of June 30, 2015. 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, 2015, that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Net 1 UEPS Technologies,
Inc.
Johannesburg, South Africa
We have audited the internal control over financial reporting
of Net 1 UEPS Technologies, Inc. and subsidiaries (the Company) as of June 30,
2015, based on criteria established in Internal ControlIntegrated
Framework (2013) 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,
2015, based on the criteria established in Internal ControlIntegrated
Framework (2013) 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, 2015 of the Company
and our report dated August 20, 2015, expressed an unqualified opinion on those
financial statements.
/s/ Deloitte & Touche (South Africa)
Johannesburg,
South Africa
Registered Auditors
August 20, 2015
National Executive: *LL Bam Chief Executive *AE Swiegers Chief
Operating Officer *GM Pinnock Audit
DL Kennedy Risk Advisory *NB Kader Tax TP
Pillay Consulting S Gwala Business Process Solutions
*K Black Clients & Industries *JK Mazzocco Talent &
Transformation *MJ Jarvis Finance *M Jordan Strategy
*TJ Brown Chairman of the Board
*MJ Comber Deputy Chairman of the Board
A full list of partners and directors is available on request
*Partner and Registered Auditor
58
ITEM 9B. OTHER INFORMATION
None.
- Remainder of this page left blank -
59
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 2015 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 2015 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 2015 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 2015 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 2015 annual
meeting of shareholders entitled Audit and Non-Audit Fees.
60
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-54.
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
|
61
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
|
62
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 |
|
|
|
|
|
|
|
|
|
10.29 |
|
Subscription and Sale of Shares Agreement dated August
27, 2014, between Net 1 UEPS Technologies, Inc., Net 1 Applied
Technologies South Africa (Proprietary) Limited, Business Venture
Investments No 1567 (Proprietary) Limited (RF), Mosomo Investment Holdings
(Proprietary) Limited and Cash Paymaster Services (Proprietary) Ltd
|
|
10-Q |
|
10.29 |
|
November 6, 2014 |
|
|
|
|
|
|
|
|
|
12 |
|
Statement of Ratio of Earnings to Fixed Charges |
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
Amended and Restated Code of Ethics |
|
10-K |
|
14 |
|
August 28, 2014 |
|
|
|
|
|
|
|
|
|
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. |
|
|
|
|
|
|
63
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 20, 2015
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
NAME |
TITLE |
DATE |
|
|
|
|
Chief Executive Officer, Chairman of the Board
and |
August 20, 2015 |
/s/ Serge C.P. Belamant |
Director (Principal Executive Officer) |
|
Serge C.P. Belamant |
|
|
|
|
|
|
Chief Financial Officer, Treasurer and
Secretary and |
August 20, 2015 |
/s/ Herman Gideon Kotzé |
Director (Principal Financial and Accounting
Officer) |
|
Herman Gideon Kotzé |
|
|
|
|
|
/s/ Paul Edwards |
Director |
August 20, 2015 |
Paul Edwards |
|
|
|
|
|
/s/ Alasdair Jonathan Kemsley Pein |
Director |
August 20, 2015 |
Alasdair Jonathan Kemsley Pein |
|
|
|
|
|
/s/ Christopher Stefan Seabrooke |
Director |
August 20, 2015 |
Christopher Stefan Seabrooke |
|
|
64
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.
Johannesburg, South Africa
We have audited the accompanying consolidated balance sheets of
Net 1 UEPS Technologies, Inc. and subsidiaries (the Company) as of June 30,
2015 and 2014, 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, 2015. 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, 2015 and 2014, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2015 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, 2015, based on the
criteria established in Internal Control Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated August 20, 2015 expressed an unqualified opinion on the
Company's internal control over financial reporting.
/s/ Deloitte & Touche (South Africa)
Johannesburg,
South Africa
Registered Auditors
August 20, 2015
National Executive: *LL Bam Chief Executive *AE Swiegers Chief
Operating Officer *GM Pinnock Audit
DL Kennedy Risk Advisory *NB Kader Tax TP
Pillay Consulting S Gwala Managed Services
*K Black Clients & Industries *JK Mazzocco Talent &
Transformation *MJ Jarvis Finance *M Jordan Strategy *TJ
Brown Chairman of the Board *MJ Comber Deputy Chairman of the Board
A full list of partners and directors is available on
request
*Partner and Registered Auditor
F-2
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED
BALANCE SHEETS
as of June 30, 2015 and 2014
|
|
2015 |
|
|
2014 |
|
|
|
(In thousands,
except share data) |
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
Cash and cash equivalents |
$ |
117,583
|
|
$ |
58,672 |
|
Pre-funded social
welfare grants receivable (Note 4) |
|
2,306 |
|
|
4,809 |
|
Accounts receivable, net (Note 5) |
|
148,768 |
|
|
148,067 |
|
Finance loans
receivable, net (Note 5) |
|
40,373 |
|
|
53,124 |
|
Inventory (Note 6) |
|
12,979 |
|
|
10,785 |
|
Deferred income
taxes (Note 20) |
|
7,298 |
|
|
7,451 |
|
Total current assets before settlement assets
|
|
329,307 |
|
|
282,908 |
|
Settlement assets |
|
661,916 |
|
|
725,987 |
|
Total current assets |
|
991,223 |
|
|
1,008,895 |
|
PROPERTY, PLANT AND EQUIPMENT, net (Note 8)
|
|
52,320 |
|
|
47,797 |
|
EQUITY-ACCOUNTED INVESTMENTS
|
|
14,329 |
|
|
878 |
|
GOODWILL (Note 9) |
|
166,437 |
|
|
186,576 |
|
INTANGIBLE ASSETS, net (Note
9) |
|
47,124 |
|
|
68,514 |
|
OTHER LONG-TERM ASSETS (Note 7 and Note 10)
|
|
14,997 |
|
|
38,285 |
|
TOTAL ASSETS |
|
1,286,430 |
|
|
1,350,945 |
|
LIABILITIES |
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
Accounts payable
|
|
21,453 |
|
|
17,101 |
|
Other payables (Note 11) |
|
45,595 |
|
|
42,257 |
|
Current portion of
long-term borrowings (Note 13) |
|
8,863 |
|
|
14,789 |
|
Income taxes payable |
|
6,287 |
|
|
7,676 |
|
Total current liabilities before settlement obligations |
|
82,198 |
|
|
81,823 |
|
Settlement obligations |
|
661,916 |
|
|
725,987 |
|
Total
current liabilities |
|
744,114 |
|
|
807,810 |
|
DEFERRED INCOME TAXES (Note
20) |
|
10,564 |
|
|
15,522 |
|
LONG-TERM BORROWINGS (Note 13) |
|
50,762 |
|
|
62,388 |
|
OTHER LONG-TERM LIABILITIES
(Note 10) |
|
2,205 |
|
|
23,477 |
|
TOTAL
LIABILITIES |
|
807,645 |
|
|
909,197 |
|
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 - 2015:46,679,565;
2014: 47,819,299 |
|
64 |
|
|
63 |
|
PREFERRED STOCK |
|
|
|
|
|
|
Authorized shares:
50,000,000 with $0.001 par
value; Issued and
outstanding shares, net of treasury: 2015: -; 2014: - |
|
- |
|
|
- |
|
ADDITIONAL PAID-IN CAPITAL
|
|
213,896 |
|
|
202,401 |
|
TREASURY SHARES, AT COST: 2015: 18,057,228;
2014: 15,883,212 (Note 14) |
|
(214,520 |
) |
|
(200,681 |
) |
ACCUMULATED OTHER
COMPREHENSIVE LOSS (Note 15) |
|
(139,181 |
) |
|
(82,741 |
) |
RETAINED EARNINGS |
|
617,868 |
|
|
522,729 |
|
TOTAL NET1 EQUITY |
|
478,127 |
|
|
441,771 |
|
NON-CONTROLLING
INTEREST |
|
658 |
|
|
(23 |
) |
TOTAL EQUITY |
|
478,785 |
|
|
441,748 |
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ |
1,286,430 |
|
$ |
1,350,945 |
|
See accompanying notes to consolidated financial statements.
F-3
NET 1 UEPS TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
for the years ended June 30, 2015, 2014 and
2013
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
|
(In thousands,
except per share data) |
|
REVENUE (Note 16) |
$ |
625,979 |
|
$ |
581,656 |
|
$ |
452,147 |
|
Services
rendered |
|
536,046 |
|
|
518,297 |
|
|
430,268 |
|
Loan-based fees received |
|
62,235 |
|
|
33,560 |
|
|
6,613 |
|
Sale of
goods |
|
27,698 |
|
|
29,799 |
|
|
15,266 |
|
|
|
|
|
|
|
|
|
|
|
EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
goods sold, IT processing, servicing and support |
|
297,856 |
|
|
260,232 |
|
|
196,834 |
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administration |
|
158,919 |
|
|
168,072 |
|
|
191,552 |
|
|
|
|
|
|
|
|
|
|
|
Equity
instruments issued pursuant to BEE transactions (Note 17) |
|
- |
|
|
11,268 |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
40,685 |
|
|
40,286 |
|
|
40,599 |
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
128,519 |
|
|
101,798 |
|
|
23,162 |
|
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME |
|
16,355 |
|
|
14,817 |
|
|
12,083 |
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE |
|
4,456 |
|
|
7,473 |
|
|
7,966 |
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES |
|
140,418 |
|
|
109,142 |
|
|
27,279 |
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE (Note 20) |
|
44,136 |
|
|
39,379 |
|
|
14,656 |
|
|
|
|
|
|
|
|
|
|
|
NET INCOME BEFORE EARNINGS FROM EQUITY-
ACCOUNTED INVESTMENTS |
|
96,282 |
|
|
69,763 |
|
|
12,623 |
|
|
|
|
|
|
|
|
|
|
|
EARNINGS FROM EQUITY-ACCOUNTED INVESTMENTS
|
|
452 |
|
|
298 |
|
|
351 |
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
96,734 |
|
|
70,061 |
|
|
12,974 |
|
|
|
|
|
|
|
|
|
|
|
LESS (ADD): NET INCOME (LOSS) ATTRIBUTABLE TO
NON- CONTROLLING INTEREST |
|
1,999 |
|
|
(50 |
) |
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO NET1 |
$ |
94,735 |
|
$ |
70,111 |
|
$ |
12,977 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share, in United States
dollars: (Note 21) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings attributable to Net1 shareholders |
|
2.03 |
|
|
1.51 |
|
|
0.28 |
|
Diluted earnings attributable to Net1 shareholders |
|
2.02 |
|
|
1.50 |
|
|
0.28 |
|
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, 2015,
2014 and 2013
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
$ |
96,734 |
|
$ |
70,061 |
|
$ |
12,974 |
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME
(LOSS): |
|
|
|
|
|
|
|
|
|
Net
unrealized income on asset available for sale, net of tax |
|
422 |
|
|
288 |
|
|
915 |
|
Release
of foreign currency translation reserve related to sale/ liquidation of
businesses (Note 19) |
|
- |
|
|
4,277 |
|
|
- |
|
Movement in
foreign currency translation reserve |
|
(57,074 |
) |
|
13,730 |
|
|
(26,051 |
) |
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
|
|
(56,652 |
)
|
|
18,295 |
|
|
(25,136 |
)
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS) |
|
40,082 |
|
|
88,356 |
|
|
(12,162 |
)
|
(Less)
Add comprehensive (income) loss attributable to non-controlling interest
|
|
(1,787 |
) |
|
50 |
|
|
3 |
|
COMPREHENSIVE INCOME (LOSS) |
|
|
|
|
|
|
|
|
|
ATTRIBUTABLE TO NET1 |
$ |
38,295 |
|
$ |
88,406 |
|
$ |
(12,159 |
)
|
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, 2013 (dollar
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
Net 1 UEPS Technologies, Inc.
Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
of |
|
|
|
|
|
Number of |
|
|
Additional |
|
|
|
|
|
other |
|
|
Total |
|
|
Non- |
|
|
|
|
|
|
of |
|
|
|
|
|
Treasury |
|
|
Treasury |
|
|
shares, 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 |
) |
N1MS 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-6
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
of |
|
|
|
|
|
Number of |
|
|
Additional |
|
|
|
|
|
other |
|
|
Total |
|
|
Non- |
|
|
|
|
|
|
of |
|
|
|
|
|
Treasury |
|
|
Treasury |
|
|
shares, 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 |
) |
N1MS 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 |
|
F-7
NET 1 UEPS TECHNOLOGIES,
INC.
Consolidated Statement of
Changes in Equity for the year ended June 30, 2015 (dollar
amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
Net 1 UEPS Technologies, Inc.
Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
of |
|
|
|
|
|
Number of |
|
|
Additional |
|
|
|
|
|
other |
|
|
Total |
|
|
Non- |
|
|
|
|
|
|
of |
|
|
|
|
|
Treasury |
|
|
Treasury |
|
|
shares, net of |
|
|
Paid-In |
|
|
Retained |
|
|
comprehensive |
|
|
Net1 |
|
|
controlling |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Shares |
|
|
treasury |
|
|
Capital |
|
|
Earnings |
|
|
(loss) income |
|
|
Equity |
|
|
Interest |
|
|
Total |
|
Balance July 1, 2014 |
|
63,702,511 |
|
$ |
63 |
|
|
(15,883,212 |
) |
$ |
(200,681 |
) |
|
47,819,299 |
|
$ |
202,401 |
|
$ |
522,729 |
|
$ |
(82,741 |
) |
$ |
441,771 |
|
$ |
(23 |
) |
$ |
441,748 |
|
Repurchase of common stock (Note 14) |
|
|
|
|
|
|
|
(1,837,432 |
) |
|
(9,151 |
) |
|
(1,837,432 |
) |
|
|
|
|
|
|
|
|
|
|
(9,151 |
) |
|
|
|
|
(9,151 |
) |
Restricted stock granted
(Note 18) |
|
213,237 |
|
|
|
|
|
|
|
|
|
|
|
213,237 |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
- |
|
Exercise of stock option (Note 18) |
|
773,633 |
|
|
1 |
|
|
(336,584 |
) |
|
(4,688 |
) |
|
437,049 |
|
|
6,732 |
|
|
|
|
|
|
|
|
2,045 |
|
|
|
|
|
2,045 |
|
Stock-based compensation
charge (Note 18) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,195 |
|
|
|
|
|
|
|
|
3,195 |
|
|
|
|
|
3,195 |
|
Income tax benefit from vested stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
483 |
|
|
|
|
|
|
|
|
483 |
|
|
|
|
|
483 |
|
Transactions with
non-controlling interest (Note 14) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,085 |
|
|
404 |
|
|
|
|
|
1,489 |
|
|
(82 |
) |
|
1,407 |
|
Dividends paid to non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
(1,024 |
) |
|
(1,024 |
) |
N1MS acquisition (Note 3) |
|
47,412 |
|
|
|
|
|
|
|
|
|
|
|
47,412 |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,735 |
|
|
|
|
|
94,735 |
|
|
1,999 |
|
|
96,734 |
|
Other comprehensive income
(Note 15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,440 |
) |
|
(56,440 |
) |
|
(212 |
) |
|
(56,652 |
) |
Balance June 30, 2015 |
|
64,736,793 |
|
$ |
64 |
|
|
(18,057,228 |
) |
$ |
(214,520 |
) |
|
46,679,565 |
|
$ |
213,896 |
|
$ |
617,868 |
|
$ |
(139,181 |
) |
$ |
478,127 |
|
$ |
658 |
|
$ |
478,785 |
|
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, 2015, 2014 and
2013
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES |
|
|
|
|
|
|
|
|
|
NET INCOME |
$ |
96,734 |
|
$ |
70,061 |
|
$ |
12,974 |
|
ADJUSTMENTS TO RECONCILE NET
INCOME TO NET CASH |
|
|
|
|
|
|
|
|
|
PROVIDED BY OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
40,685 |
|
|
40,286 |
|
|
40,599 |
|
Earnings from
equity-accounted investments |
|
(452 |
) |
|
(298 |
) |
|
(351 |
) |
Fair
value adjustment |
|
248 |
|
|
(55 |
) |
|
631 |
|
Interest payable |
|
1,283 |
|
|
2,100 |
|
|
4,313 |
|
Facility
fee amortized |
|
208 |
|
|
738 |
|
|
302 |
|
(Profit) Loss on disposal
of property, plant and equipment |
|
(296 |
) |
|
(434 |
) |
|
110 |
|
Loss (Profit) on
deconsolidation of subsidiaries and business (Note 19) |
|
- |
|
|
55 |
|
|
- |
|
Stock compensation
charge, net of forfeitures (Note 18) |
|
3,195 |
|
|
3,718 |
|
|
3,907 |
|
Fair
value of BEE equity instruments granted (Note 17) |
|
- |
|
|
11,268 |
|
|
- |
|
Decrease
(Increase) in accounts and finance loans receivable, and pre-funded grants
receivable |
|
1,399 |
|
|
(101,447 |
) |
|
(5,726 |
) |
(Increase) Decrease in inventory |
|
(3,846 |
) |
|
780 |
|
|
(2,890 |
) |
(Decrease) Increase in
accounts payable and other payables |
|
(850 |
) |
|
12,671 |
|
|
8,113 |
|
Increase
(Decrease) in taxes payable |
|
606 |
|
|
5,523 |
|
|
(2,748 |
) |
Decrease in deferred
taxes |
|
(3,656 |
) |
|
(7,821 |
) |
|
(3,317 |
) |
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
135,258 |
|
|
37,145 |
|
|
55,917 |
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
(36,436 |
) |
|
(23,906 |
) |
|
(22,747 |
) |
Proceeds from disposal of property, plant and
equipment |
|
857 |
|
|
2,990 |
|
|
510 |
|
Net cash outflow from sale of
MediKredit (Note 19) |
|
- |
|
|
(669 |
) |
|
- |
|
Proceeds from sale of business (Note 19) |
|
1,895 |
|
|
186 |
|
|
- |
|
(Acquisition of equity of)/
Capital reduction/ repayment of loan by equity-accounted investment |
|
(13,200 |
) |
|
539 |
|
|
3 |
|
Acquisitions, net of cash acquired (Note 3)
|
|
- |
|
|
- |
|
|
(2,143 |
) |
Other investing activities,
net |
|
(29 |
) |
|
570 |
|
|
545 |
|
Net change in settlement assets |
|
(12,570 |
) |
|
(1,350 |
) |
|
(423,984 |
) |
NET CASH USED IN INVESTING ACTIVITIES |
|
(59,483 |
) |
|
(21,640 |
) |
|
(447,816 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Repayment of long-term
borrowings (Note 13) |
|
(14,128 |
) |
|
(87,008 |
) |
|
(14,508 |
) |
Long-term borrowings obtained (Note 13) |
|
3,765 |
|
|
73,677 |
|
|
- |
|
Acquisition of treasury stock
(Note 14) |
|
(9,151 |
) |
|
- |
|
|
- |
|
Sale of equity to non-controlling interest
(Note 14) |
|
1,407 |
|
|
- |
|
|
- |
|
Dividends paid to
non-controlling interest |
|
(1,024 |
) |
|
- |
|
|
- |
|
Proceeds from issue of common stock (Note 18)
|
|
2,045 |
|
|
198 |
|
|
240 |
|
Payment of facility fee (Note
13) |
|
- |
|
|
(872 |
) |
|
- |
|
Proceeds from bank overdraft |
|
- |
|
|
24,580 |
|
|
- |
|
Repayment of bank overdraft
|
|
- |
|
|
(23,335 |
) |
|
- |
|
Acquisition of interests in KSNET (Note 14)
|
|
- |
|
|
(1,968 |
) |
|
- |
|
Net change in settlement
obligations |
|
12,570 |
|
|
1,350 |
|
|
423,984 |
|
NET
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES |
|
(4,516 |
) |
|
(13,378 |
) |
|
409,716 |
|
Effect of exchange rate
changes on cash |
|
(12,348 |
) |
|
2,880 |
|
|
(3,275 |
) |
NET INCREASE IN CASH AND CASH
EQUIVALENTS |
|
58,911 |
|
|
5,007 |
|
|
14,542 |
|
CASH AND CASH EQUIVALENTS
BEGINNING OF YEAR |
|
58,672 |
|
|
53,665 |
|
|
39,123 |
|
CASH AND CASH EQUIVALENTS AT END OF
YEAR |
$ |
117,583 |
|
$ |
58,672 |
|
$ |
53,665 |
|
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, 2015, 2014 and 2013
|
(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, 2015, 2014 and 2013.
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 U.S. 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, 2015, 2014 and 2013
|
(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, 2015, 2014 and 2013
|
(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, 2015, 2014 and 2013
|
(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, 2015, 2014 and 2013
|
(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, 2015, 2014 and 2013
|
(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, 2015, 2014 and 2013
|
(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 expenditure is charged to net income
in the period in which it is incurred. During the years ended June 30, 2015,
2014 and 2013, the Company incurred research and development expenditures of
$2.4 million, $2.2 million and $1.3 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, 2015, 2014 and 2013
|
(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, 2015, 2014 and 2013, using
the enacted statutory tax rate in South Africa of 28%.
As of June 30, 2015, the Company intends to permanently
reinvest its non-U.S. undistributed earnings of $442.1 million in those non-U.S.
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, 2015, 2014 and 2013
|
(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 and (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.
Settlement obligations comprise (1) amounts that the Company is
obligated to disburse to recipient cardholders of social welfare grants, and (2)
amounts that the Company is obligated to pay to customer employees,
payroll-related payees and other payees designated by the customer.
The balances at each reporting date may vary widely depending
on the timing of the receipts and payments of these assets and obligations.
Recent accounting pronouncements
adopted
The following summary of recent accounting pronouncements
reflects only the new authoritative accounting guidance issued that is relevant
and applicable to the Company.
In March 2013, the Financial Accounting Standards Board
(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, 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, 2015
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.
In August 2015, the FASB issued guidance regarding Revenue
from Contracts with Customers, Deferral of the Effective Date. This guidance
defers the required implementation date specified in Revenue from Contracts
with Customers to December 2017. Public companies may elect to adopt the
standard along the original timeline. 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.
F-18
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(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, 2015 (continued)
In August 2014, the FASB issued guidance regarding
Disclosure of Uncertainties About an Entitys Ability to Continue as a Going
Concern. This guidance requires an entity to perform interim and annual
assessments of its ability to continue as a going concern within one year of the
date that its financial statements are issued. An entity must provide certain
disclosures if conditions or events raise substantial doubt about the entitys
ability to continue as a going concern. The guidance is effective for the
Company beginning July 1, 2017. Early adoption is permitted. The Company is
currently assessing the impact of this guidance on its financial statements
disclosure.
In February 2015, the FASB issued guidance regarding
Amendments to the Consolidation Analysis. This guidance amends both the
variable interest entity and voting interest entity consolidation models. The
requirement to assess an entity under a different consolidation model may change
previous consolidation conclusions. The guidance is effective for the Company
beginning July 1, 2016. Early adoption is permitted. The Company is currently
assessing the impact of this guidance on its financial statements disclosure.
In July 2015, the FASB issued guidance regarding Simplifying
the Measurement of Inventory. This guidance requires entities to measure
most inventory at the lower of cost and net realizable value, thereby
simplifying the current guidance under which an entity must measure inventory at
the lower of cost or market (market in this context is defined as one of three
different measures). The guidance will not apply to inventories that are
measured by using either the last-in, first-out (LIFO) method or the retail
inventory method (RIM). The guidance is effective for the Company beginning
July 1, 2017. Early adoption is permitted. The Company is currently assessing
the impact of this guidance on its financial statements disclosure.
The cash paid, net of cash received related to the Companys
various acquisitions during the years ended June 30, 2015, 2014 and 2013 are
summarized in the table below:
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
Net1 Mobile Solutions
Proprietary Limited (N1MS) (formerly Pbel) |
$ |
- |
|
$ |
- |
|
$ |
1,913 |
|
SmartSwitch Botswana (Proprietary) Limited
(SmartSwitch Botswana) |
|
- |
|
|
- |
|
|
230 |
|
Total cash paid,
net of cash received |
$ |
- |
|
$ |
- |
|
$ |
2,143 |
|
2015 acquisitions
None.
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.
F-19
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
3. |
ACQUISITIONS (continued) |
2013 acquisitions (continued)
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 were entitled to earn all 142,236 shares if the cumulative
pre-defined N1MS projected profit over the measurement period was achieved or if
the Company decides to abandon its Mobile Virtual Card initiative. During the
years ended June 30, 2015, 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.
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.
F-20
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(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 2015 payment service commenced on July 1, 2015, but
the Company pre-funded certain merchants participating in the merchant acquiring
systems in the last two days of June 2015. 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.
5. |
ACCOUNTS RECEIVABLE, net and FINANCE LOANS RECEIVABLE,
net |
Accounts receivable, net
|
|
2015 |
|
|
|
2014 |
|
Accounts receivable, trade,
net |
$ |
48,951 |
|
|
$ |
64,885 |
|
Accounts receivable, trade,
gross |
|
50,907 |
|
|
|
66,198 |
|
Allowance for
doubtful accounts receivable, end of year |
|
1,956 |
|
|
|
1,313 |
|
Beginning of year |
|
1,313 |
|
|
|
4,701 |
|
Deconsolidation |
|
- |
|
|
|
(32) |
|
Reversed to statement of operations |
|
(61) |
|
|
|
(1,455) |
|
Charged to statement of operations |
|
1,580 |
|
|
|
714 |
|
Utilized |
|
(654) |
|
|
|
(2,451) |
|
Foreign currency adjustment |
|
(222) |
|
|
|
(164) |
|
|
|
|
|
|
|
|
|
Cash payments to agents in
South Korea that are amortized over the contract period |
|
53,431 |
|
|
|
46,591 |
|
Other receivables |
|
46,386 |
|
|
|
36,591 |
|
Total accounts receivable, net |
$ |
148,768 |
|
|
$ |
148,067 |
|
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. The Company did not record a bad
debt expense during the year ended June 30, 2015. During the year ended June 30,
2014 and 2013, respectively, the Company recorded a bad debt expense of $0.6
million and $0.4 million.
Finance loans receivable, net
|
|
2015 |
|
|
2014 |
|
Finance loans receivable,
gross |
$ |
44,600 |
|
$ |
56,207 |
|
Allowance for doubtful finance loans
receivable, end of year |
|
4,227 |
|
|
3,083 |
|
Beginning of year |
|
3,083 |
|
|
- |
|
Charged to
statement of operations |
|
3,392 |
|
|
3,652 |
|
Utilized |
|
(1,705) |
|
|
(513) |
|
Foreign currency
adjustment |
|
(543) |
|
|
(56) |
|
Total finance loans receivable,
net |
$ |
40,373 |
|
$ |
53,124 |
|
The Company did not expense any unrecoverable finance loans
receivable during the year ended June 30, 2015 and 2014, respectively, 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 the year ended June 30, 2013.
F-21
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
The Companys inventory as of June 30, 2015 and 2014, is
presented in the table below:
|
|
|
2015 |
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
Finished goods |
$ |
12,979 |
|
$ |
10,785 |
|
|
|
$ |
12,979 |
|
$ |
10,785 |
|
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 U.S. 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 U.S. 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 U.S. dollar is its reporting
currency, but it earns most of its revenues and incurs most of its expenses in
ZAR. The U.S. 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-22
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(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-23
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(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, 2015,
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.
The Companys ownership interest in Finbond as of June 30,
2015, is approximately 27%. The Company has no rights to participate in the
financial, operating, or governance decisions made by Finbond. The Company also
has no participation on Finbonds board of directors whether through contractual
agreement or otherwise. Consequently, the Company has concluded that it does not
have significant influence over Finbond and therefore equity accounting is not
appropriate.
Derivative transactions - Foreign
exchange contracts
As part of the Companys risk management strategy, the Company
enters into derivative transactions to mitigate exposures to foreign currencies
using foreign exchange contracts. These foreign exchange contracts are
over-the-counter 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-24
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(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, 2015
|
|
|
Fair market |
|
|
Notional amount |
Strike price |
value price |
Maturity |
|
EUR 526,263.00 |
ZAR 15.1145 |
ZAR 13.6275 |
July 20, 2015 |
|
EUR 526,263.00 |
ZAR 15.2025 |
ZAR 13.7062 |
August 20, 2015 |
|
EUR 526,263.00 |
ZAR 15.2944 |
ZAR 13.7898 |
September 21, 2015 |
|
EUR 526,263.00 |
ZAR 15.3809 |
ZAR 13.8683 |
October 20, 2015 |
|
EUR 509,516.00 |
ZAR 15.4728 |
ZAR 13.9540 |
November 20, 2015 |
|
EUR 529,865.00 |
ZAR 15.5654 |
ZAR 14.0397 |
December 21, 2015 |
|
EUR 526,663.00 |
ZAR 15.6625 |
ZAR 14.1239 |
January 20, 2016
|
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 |
F-25
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(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, 2015,
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 |
$ |
1,640 |
|
$ |
- |
|
$ |
- |
|
$ |
1,640 |
|
|
Investment in Finbond
(available for sale assets included in other long-term assets) |
|
- |
|
|
- |
|
|
7,488 |
|
|
7,488 |
|
|
Other |
|
- |
|
|
1,259 |
|
|
- |
|
|
1,259 |
|
|
Total assets at
fair value |
$ |
1,640 |
|
$ |
1,259 |
|
$ |
7,488 |
|
$ |
10,387 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
$ |
- |
|
$ |
452 |
|
$ |
- |
|
$ |
452 |
|
|
Total liabilities at fair value |
$ |
- |
|
$ |
452 |
|
$ |
- |
|
$ |
452 |
|
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 |
|
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, 2015 and 2014, respectively. There have been no transfers
in or out of Level 3 during the years ended June 30, 2015 and 2014,
respectively.
F-26
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
7. |
FAIR VALUE OF FINANCIAL INSTRUMENTS
(continued) |
Financial instruments (continued)
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. The
Company owns 25% of One Credit Limited and has provided it a credit facility of
up to $10 million in the form of convertible debt, none of which had been
utilized as of June 30, 2015.
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, 2015 and 2014:
|
|
|
2015 |
|
|
2014 |
|
|
Cost: |
|
|
|
|
|
|
|
Land |
$ |
869 |
|
$ |
967 |
|
|
Building and
structures |
|
477 |
|
|
530 |
|
|
Computer equipment |
|
121,033 |
|
|
110,393 |
|
|
Furniture and
office equipment |
|
6,295 |
|
|
6,686 |
|
|
Motor vehicles |
|
17,660 |
|
|
20,575 |
|
|
Plant and
equipment |
|
- |
|
|
68 |
|
|
|
|
146,334 |
|
|
139,219 |
|
|
Accumulated depreciation: |
|
|
|
|
|
|
|
Land |
|
- |
|
|
- |
|
|
Building and
structures |
|
134 |
|
|
128 |
|
|
Computer equipment |
|
75,681 |
|
|
73,908 |
|
|
Furniture and
office equipment |
|
4,901 |
|
|
4,799 |
|
|
Motor vehicles |
|
13,298 |
|
|
12,519 |
|
|
Plant and
equipment |
|
- |
|
|
68 |
|
|
|
|
94,014 |
|
|
91,422 |
|
|
Carrying amount: |
|
|
|
|
|
|
|
Land |
|
869 |
|
|
967 |
|
|
Building and
structures |
|
343 |
|
|
402 |
|
|
Computer equipment |
|
45,352 |
|
|
36,485 |
|
|
Furniture and
office equipment |
|
1,394 |
|
|
1,887 |
|
|
Motor vehicles |
|
4,362 |
|
|
8,056 |
|
|
Plant and
equipment |
|
- |
|
|
- |
|
|
|
$ |
52,320 |
|
$ |
47,797 |
|
F-27
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
9. |
GOODWILL AND INTANGIBLE ASSETS,
net |
Goodwill
Summarized below is the movement in the carrying value of
goodwill for the years ended June 30, 2015, 2014 and 2013:
|
|
Gross |
|
|
Accumulated |
|
|
Carrying |
|
|
|
value |
|
|
impairment |
|
|
value |
|
Balance as of July 1, 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 |
|
Foreign currency
adjustment (1) |
|
(20,139 |
) |
|
- |
|
|
(20,139 |
) |
Balance as of June 30, 2015 |
$ |
166,437 |
|
$ |
0 |
|
$ |
166,437 |
|
(1) the foreign currency adjustment represents the effects of
the fluctuations between the South African rand and the Korean won, and the U.S.
dollar on the carrying value.
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, 2015 and 2014, indicated that the fair value of
the Companys reporting units exceeded their carrying values and therefore the
Companys reporting units were not at risk of potential impairment.
Goodwill has been allocated to the Companys reportable
segments as follows:
|
|
South |
|
|
|
|
|
Financial |
|
|
|
|
|
|
African |
|
|
International |
|
|
inclusion and |
|
|
|
|
|
|
transaction |
|
|
transaction |
|
|
applied |
|
|
Carrying |
|
|
|
processing |
|
|
processing |
|
|
technologies |
|
|
value |
|
Balance as of June 30, 2013
|
$ |
30,525 |
|
$ |
113,972 |
|
$ |
31,309 |
|
$ |
175,806 |
|
Loss on liquidation of Net1
Universal Electronic Technologies (Austria)
GmbH and associated entities (Net1
UTA) (Note 19) |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Foreign currency
adjustment (1) |
|
(2,008 |
) |
|
14,455 |
|
|
(1,677 |
) |
|
10,770 |
|
Balance as of June 30, 2014 |
|
28,517 |
|
|
128,427 |
|
|
29,632 |
|
|
186,576 |
|
Foreign currency
adjustment (1) |
|
(3,938 |
) |
|
(12,908 |
) |
|
(3,293 |
) |
|
(20,139 |
) |
Balance as of June 30, 2015 |
$ |
24,579 |
|
$ |
115,519 |
|
$ |
26,339 |
|
$ |
166,437 |
|
(1) the foreign currency adjustment represents the effects of
the fluctuations between the South African rand and the Korean won, and the U.S.
dollar on the carrying value.
F-28
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
9. |
GOODWILL AND INTANGIBLE ASSETS, net
(continued) |
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, 2015, 2014 and 2013,
respectively.
Summarized below is the carrying value and accumulated
amortization of intangible assets as of June 30, 2015 and 2014:
|
|
As of June 30, 2015 |
|
|
As of June 30, 2014 |
|
|
|
Gross |
|
|
|
|
|
Net |
|
|
Gross |
|
|
|
|
|
Net |
|
|
|
carrying |
|
|
Accumulated
|
|
|
carrying |
|
|
carrying |
|
|
Accumulated |
|
|
carrying |
|
|
|
value |
|
|
amortization |
|
|
value |
|
|
value |
|
|
amortization |
|
|
value |
|
Finite-lived intangible
assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
$ |
88,109 |
|
$ |
(45,312 |
) |
$ |
42,797 |
|
$ |
98,676 |
|
$ |
(41,273 |
) |
$ |
57,403 |
|
Software
and unpatented technology |
|
29,964 |
|
|
(28,323 |
) |
|
1,641 |
|
|
33,604 |
|
|
(26,207 |
) |
|
7,397 |
|
FTS patent |
|
3,119 |
|
|
(3,119 |
) |
|
- |
|
|
3,619 |
|
|
(3,619 |
) |
|
- |
|
Exclusive
licenses |
|
4,506 |
|
|
(4,506 |
) |
|
- |
|
|
4,506 |
|
|
(4,506 |
) |
|
- |
|
Trademarks |
|
6,094 |
|
|
(3,408 |
) |
|
2,686 |
|
|
6,890 |
|
|
(3,176 |
) |
|
3,714 |
|
Total finite-lived intangible
assets. |
$ |
131,792 |
|
$ |
(84,668 |
) |
$ |
47,124 |
|
$ |
147,295 |
|
$ |
(78,781 |
) |
$ |
68,514 |
|
Amortization expense charged for the years to June 30, 2015,
2014 and 2013 was $19.4 million, $16.6 million, and $18.2 million, respectively.
Future estimated annual amortization expense for the next five
fiscal years, assuming exchange rates prevailing on June 30, 2015, 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.
|
2016 |
$10,808 |
|
2017 |
8,448 |
|
2018 |
8,446 |
|
2019 |
8,134 |
|
2020 |
7,951 |
|
Thereafter |
$3,337 |
F-29
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
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, 2015 and 2014:
|
|
Reinsurance |
|
|
Insurance |
|
|
|
assets (1) |
|
|
contracts (2) |
|
Balances acquired on July 1,
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 |
) |
Claims and policyholders
benefits under insurance contracts |
|
30 |
|
|
(55 |
) |
Transfer to reinsurer(4) |
|
(18,000 |
) |
|
18,000 |
|
Foreign currency adjustment
(3) |
|
(2,909 |
) |
|
2,966 |
|
Balance as of June
30, 2015 |
$ |
183 |
|
$ |
(567 |
) |
|
(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 U.S. dollar. |
|
(4) |
Smart Life has agreed to transfer certain fully reinsured
policies to the reinsurer pursuant to conditions imposed by
the |
South African Financial Service Board to uplift the suspension
of its life insurance license.
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).
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, 2015 and
2014:
|
|
|
|
|
Investment |
|
|
|
Assets (1) |
|
|
contracts (2) |
|
Balances acquired on July 1,
2013 |
$ |
953 |
|
$ |
(953 |
) |
Maturity claims under investment contracts
|
|
(202 |
) |
|
202 |
|
Foreign currency adjustment
(3) |
|
(63 |
) |
|
63 |
|
Balance as of June
30, 2014 |
|
688 |
|
|
(688 |
) |
Foreign currency adjustment
(3) |
|
(95 |
) |
|
95 |
|
Balance as of June
30, 2015 |
$ |
593 |
|
$ |
(593 |
) |
|
(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 U.S.
dollar. |
The Company does not offer any investment products with
guarantees related to capital or returns.
F-30
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
Summarized below is the breakdown of other payables as of June
30, 2015 and 2014:
|
|
|
2015 |
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
Participating merchants
settlement obligation |
$ |
400 |
|
$ |
2,118 |
|
|
Payroll-related payables |
|
1,008 |
|
|
991 |
|
|
Accruals |
|
14,484 |
|
|
10,704 |
|
|
Value-added tax payable |
|
3,327 |
|
|
3,477 |
|
|
Other |
|
9,361 |
|
|
7,027 |
|
|
Provisions |
|
17,015 |
|
|
17,940 |
|
|
|
$ |
45,595 |
|
$ |
42,257 |
|
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, 2015, the interest rate on the overdraft facility was 8.10%. On July
23, 2015, the interest rate on the overdraft facility was increased to 8.35% 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.
On July 30, 2015, the Company reduced the overdraft facility
component of the Companys available aggregate facility with Nedbank from up to
ZAR 250 million to up to ZAR 50 million, effective July 30, 2015. The aggregate
amount of the facility remained at up to ZAR 400 million; however, the terms of
the facility have been modified so that the aggregate amount now consists of (i)
a primary amount of up to ZAR 200 million, which is immediately available, and
(ii) a secondary amount of up to ZAR 200 million, which is not immediately
available. The overdraft facility and the indirect and derivative facilities are
both included within the primary amount.
As of each of June 30, 2015 and 2014, respectively, the Company
had not utilized any of its ZAR 250.0 million ($20.3 million, translated at
exchange rates applicable as of June 30, 2015) overdraft facility. As of June
30, 2015, the Company had utilized approximately ZAR 139.6 million ($11.4
million, translated at exchange rates applicable as of June 30, 2015) of its ZAR
150 million indirect and derivative facilities 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, 2014,
the Company had utilized approximately ZAR 139.0 million ($13.1 million,
translated at exchange rates applicable as of June 30, 2014) of its indirect and
derivative facilities.
South Korea
The Company obtained a KRW 10 billion short-term overdraft
facility from Hana Bank, a South Korean bank, in January 2014. The facility
expired in January 2015 and was renewed for one year and now expires in January
2016. As of June 30, 2015, the interest rate on the overdraft facility was 3.60%
. The Company has ceded the warehouse it owns in South Korea as security for its
repayment obligations under the facility. As of each of June 30, 2015 and 2014,
respectively, the Company had not utilized any of its KRW 10.0 billion ($8.9
million, translated at exchange rates applicable as of June 30, 2015) overdraft
facility.
F-31
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
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 ($53.2 million), a Facility B loan of
up to KRW 15 billion ($13.3 million) and a Facility C revolving credit facility
of up to KRW 10.0 billion ($8.9 million) (all facilities denominated in KRW and
translated at exchange rates applicable as of June 30, 2015).
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 Company drew approximately KRW 4.0 billion ($3.8 million)
during the year ended June 30, 2015, to pay interest due under the Facilities
Agreement. The carrying value as of June 30, 2015, was $59.6 million. As of June
30, 2015, 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 1.80%
on June 30, 2015, and therefore the interest rate in effect as of June 30, 2015,
for the Facility A loan and Facility C revolving credit facility was 4.90%. 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 $0.2
million and $0.3 million of these fees during the years ended June 30, 2015 and
2014, respectively. 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, 2015, 2014 and 2013, was $3.6 million, $4.8 million and $7.1 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 was repaid 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).
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.
F-32
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
14. |
COMMON STOCK (continued) |
Common stock (continued)
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, 2015, 2014 and 2013:
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
Number of shares, net of
treasury: |
|
|
|
|
|
|
|
|
|
Statement of
changes in equity |
|
46,679,565 |
|
|
47,819,299 |
|
|
45,592,550 |
|
Less: Non-vested
equity shares that have not vested as of end of year (Note 18) |
|
341,529 |
|
|
385,778 |
|
|
405,226 |
|
Number
of shares, net of treasury excluding non-vested equity shares that have
not vested |
|
46,338,036 |
|
|
47,433,521 |
|
|
45,187,324 |
|
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. The
Company did not repurchase any of its shares during the years ended June 30,
2015 and 2014, under this authorization. However, during the year ended June 30,
2015, the Company entered into a Subscription and Sale of Shares 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 agreement: (i) the Company repurchased BVIs remaining 1,837,432
shares of the Companys common stock for approximately ZAR 97.4 million in cash
($9.2 million translated at exchange rates prevailing as of August 27, 2014) and
(ii) BVI has subscribed for new ordinary shares of Cash Paymaster Services (Pty)
Ltd (CPS) representing approximately 12.5% of CPS ordinary shares outstanding
after the subscription for ZAR 15.0 million in cash (approximately $1.4 million
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. In addition, 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, 2015, 2014 and 2013
|
(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. In South Africa, it is customary for BEE equity
investment transactions in companies, including publicly-traded companies, to be
priced at a substantial discount to the fair value or current trading price of
the subject companys shares. The 25% discount was negotiated between the
parties on an arms length basis and took into account a number of factors
reflecting the lack of liquidity of the BEE shares due to the contractual
provisions described below.
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.
F-34
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(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 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.
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 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, 2015, 2014
and 2013:
|
|
|
|
|
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, 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 |
) |
Movement
in foreign currency translation reserve |
|
(56,862 |
) |
|
- |
|
|
(56,862 |
) |
Unrealized loss on asset
available for sale, net of tax of $97 |
|
- |
|
|
422 |
|
|
422 |
|
Balance as of June 30, 2015 |
$ |
(140,221 |
) |
$ |
1,040 |
|
$ |
(139,181 |
)
|
F-35
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
15. |
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
(continued) |
There were no reclassifications from accumulated other
comprehensive loss to comprehensive (loss) income during the year ended June 30,
2015 and 2013. 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.
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
Services rendered
comprising mainly fees and commissions |
$ |
536,046 |
|
$ |
518,297 |
|
$ |
430,268 |
|
Loan-based fees received |
|
62,235 |
|
|
33,560 |
|
|
6,613 |
|
Sale of goods comprising
mainly hardware and software sales |
|
27,698 |
|
|
29,799 |
|
|
15,266 |
|
|
$ |
625,979 |
|
$ |
581,656 |
|
$ |
452,147 |
|
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, 2015, 2014 and 2013, 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.
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.
F-36
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
18. |
STOCK-BASED COMPENSATION
(continued) |
Amended and Restated Stock Incentive
Plan (continued)
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 three 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
2015, 2014 and 2013. The table below presents the range of assumptions used to
value options granted during the years ended June 30, 2015, 2014 and 2013:
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
Expected volatility |
|
60% |
|
|
50% |
|
|
49% |
|
Expected dividends |
|
0% |
|
|
0% |
|
|
0% |
|
Expected life (in years) |
|
3 |
|
|
3 |
|
|
3 |
|
Risk-free rate |
|
1.0% |
|
|
0.9% |
|
|
0.3% |
|
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.
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.
F-37
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(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)
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 November 2010
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 were not vested and
nonforfeitable as of November 10, 2013, were 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.
Market Conditions - Restricted Stock
Granted in August and November 2014
In August and November 2014, respectively, the Remuneration
Committee approved an award of 127,626 and 71,530 shares of restricted stock to
employees. These shares of restricted stock will vest in full only on the date,
if any, the following conditions are satisfied: (1) the closing price of the
Companys common stock equals or exceeds $19.41 (subject to appropriate
adjustment for any stock split or stock dividend) for a period of 30 consecutive
trading days during a measurement period commencing on the date that the Company
files its Annual Report on Form 10-K for the fiscal year ended 2017 and ending
on December 31, 2017 and (2) the recipient is employed by the Company on a
full-time basis when the condition in (1) is met. If either of these conditions
is not satisfied, then none of the shares of restricted stock will vest and they
will be forfeited. The $19.41 price target represents a 20% increase, compounded
annually, in the price of the Companys common stock on Nasdaq over the $11.23
closing price on August 27, 2014.
F-38
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
18. |
STOCK-BASED COMPENSATION
(continued) |
Restricted Stock (continued)
Market Conditions - Restricted Stock
Granted in August and November 2014 (continued)
The 127,626 and 71,530 shares of restricted stock are
effectively forward starting knock-in barrier options with a strike price of
zero. The fair value of these shares of restricted stock was calculated
utilizing an adjusted Monte Carlo simulation discounted cash flow model which
was developed for the purpose of the valuation of these shares. For each
simulated share price path, the market share price condition was evaluated to
determine whether or not the shares would vest under that simulation. 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.
In scenarios where the shares do not vest, the final vested
value at maturity is zero. In scenarios where vesting occurs, the final vested
value on maturity is the share price on vesting date. The value of the grant is
the average of the discounted vested values. The Company used an expected
volatility of 76.01%, an expected life of approximately three years, a risk-free
rate of 1.27% and no future dividends in its calculation of the fair value of
the 127,626 shares of restricted stock. The Company used an expected volatility
of 63.73%, an expected life of approximately three years, a risk-free rate of
1.21% and no future dividends in its calculation of the fair value of the 71,530
shares of restricted stock. Estimated expected volatility was calculated based
on the Companys 30 day VWAP share price using the exponentially weighted moving
average of returns.
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, 2015, 2014 and 2013:
|
|
|
|
|
|
|
|
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, 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 |
|
|
|
|
Granted under Plan: August
2014 |
|
464,410 |
|
|
11.23 |
|
|
10.00 |
|
|
2,113 |
|
|
4.55 |
|
Exercised |
|
(773,633 |
) |
|
8.35 |
|
|
|
|
|
3,845 |
|
|
|
|
Outstanding June 30,
2015 |
|
2,401,169 |
|
|
15.34 |
|
|
4.74 |
|
|
11,516 |
|
|
|
|
F-39
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(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 vesting and
expecting to vest as of June 30, 2015:
|
|
|
|
|
|
|
|
|
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, 2015 |
|
2,401,169 |
|
|
15.34 |
|
|
4.74 |
|
|
11,516 |
|
These options have an exercise price range of $7.35 to $24.46.
The following table presents stock options that are exercisable
as of June 30, 2015:
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
average |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
|
Number of |
|
|
exercise |
|
|
Term |
|
|
Value |
|
|
|
|
shares |
|
|
price ($) |
|
|
(in years) |
|
|
($000) |
|
|
Exercisable June 30, 2015
|
|
1,643,163 |
|
|
17.82 |
|
|
2.96 |
|
|
5,234 |
|
During the years ended June 30, 2015, 2014 and 2013,
approximately 330,967, 462,333, and 442,666 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, 2015, the Company received
approximately $2.0 million from 201,395 stock options exercised. The remaining
572,238 stock options were exercised through recipients delivering 336,584
shares of the Companys common stock to the Company on September 9, 2014, to
settle the exercise price due. 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.
During the years ended June 30, 2014, employees forfeited 136,420 stock options.
There were no forfeitures during the years ended June 30, 2015 and 2013,
respectively. The Company issues new shares to satisfy stock option exercises.
F-40
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(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
The following table summarizes restricted stock activity for
the years ended June 30, 2015, 2014 and 2013:
|
|
|
Number of |
|
|
Weighted |
|
|
|
|
Shares of |
|
|
Average Grant |
|
|
|
|
Restricted |
|
|
Date Fair Value
|
|
|
|
|
Stock |
|
|
($000) |
|
|
Non-vested July 1, 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 |
|
|
Granted August 2014 |
|
141,707 |
|
|
581 |
|
|
Granted November
2014 |
|
71,530 |
|
|
229 |
|
|
Total granted
|
|
213,237 |
|
|
|
|
|
Vested August
2014 |
|
(74,152) |
|
|
828 |
|
|
Vested February 2015 |
|
(183,334) |
|
|
2,400 |
|
|
Total vested |
|
(257,486) |
|
|
|
|
|
Non-vested June 30, 2015
|
|
341,529 |
|
|
1,759 |
|
The fair value of restricted stock vested during the years
ended June 30, 2015, 2014 and 2013, was $3.2 million, $1.9 million and $1.2
million, respectively. A non-employee director resigning during the year ended
June 30, 2014, forfeited 7,171 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.
F-41
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
18. |
STOCK-BASED COMPENSATION
(continued) |
Stock-based compensation charge and
unrecognized compensation cost
The Company has recorded a net stock compensation charge of
$3.2 million, $3.7 million and $3.9 million for the years ended June 30, 2015,
2014 and 2013, 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, 2015 |
|
|
|
|
|
|
|
|
|
Stock-based compensation charge
|
$ |
3,195 |
|
$ |
- |
|
$ |
3,195 |
|
Total year ended June 30, 2015 |
$ |
3,195 |
|
$ |
- |
|
$ |
3,195 |
|
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 |
|
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, 2015, the total unrecognized compensation cost
related to stock options was approximately $1.6 million, which the Company
expects to recognize over approximately two years. As of June 30, 2015, the
total unrecognized compensation cost related to restricted stock awards was
approximately $1.2 million, which the Company expects to recognize over
approximately two years.
Tax consequences
The Company has recorded a deferred tax asset of approximately
$1.4 million and $1.6 million, respectively, for the years ended June 30, 2015
and 2014, 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, 2015, 2014
and 2013 are summarized in the table below:
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
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 |
) |
|
- |
|
Net profit (loss) for the year
ended June 30, |
$ |
- |
|
$ |
(55 |
) |
$ |
- |
|
F-42
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
19. |
DECONSOLIDATION OF BUSINESSES SOLD OR LIQUIDATED AND
DISPOSAL OF BUSINESS (continued) |
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 agreed
that MediKredit would continue to operate at the Companys premises at no cost
to the purchaser until September 30, 2014. Furthermore, the parties agreed that
MediKredit 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 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, 2015 and 2014, respectively, as none of the contingent
events occurred during these years.
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 $1.9 million was received in July 2014, and was included in accounts
receivable, net, as of June 30, 2014. The Company 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 U.S.-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 agreed that the
Company 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 had substantially liquidated its Net1 UTA business
during the year ended June 30, 2014, 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.
F-43
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
Income tax provision
The table below presents the components of income before income
taxes for the years ended June 30, 2015, 2014 and 2013:
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
South Africa |
$ |
137,138 |
|
$ |
121,338 |
|
$ |
38,654 |
|
United States |
|
(7,286 |
) |
|
(9,923 |
) |
|
(10,075 |
) |
Other |
|
10,566 |
|
|
(2,273 |
) |
|
(1,300 |
) |
Income before income taxes |
$ |
140,418 |
|
$ |
109,142 |
|
$ |
27,279 |
|
Presented below is the provision for income taxes by location
of the taxing jurisdiction for the years ended June 30, 2015, 2014 and 2013:
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
Current income tax |
$ |
48,795 |
|
$ |
61,902 |
|
$ |
33,968 |
|
South Africa |
|
39,901 |
|
|
41,326 |
|
|
15,418 |
|
United States
|
|
3,109 |
|
|
14,838 |
|
|
16,061 |
|
Other |
|
5,785 |
|
|
5,738 |
|
|
2,489 |
|
Deferred taxation (benefit)
charge |
|
(2,292) |
|
|
(7,887) |
|
|
(4,915) |
|
South Africa |
|
398 |
|
|
(3,345) |
|
|
(2,037) |
|
United States
|
|
485 |
|
|
(107) |
|
|
(331) |
|
Other |
|
(3,175) |
|
|
(4,435) |
|
|
(2,547) |
|
Capital gains tax |
|
- |
|
|
202 |
|
|
7 |
|
Foreign tax credits generated United States
|
|
(2,367) |
|
|
(14,838) |
|
|
(14,404) |
|
Income tax
provision |
$ |
44,136 |
|
$ |
39,379 |
|
$ |
14,656 |
|
There were no significant capital gains taxes paid during the
years ended June 30, 2015, 2014 and 2013.
There were no changes to the enacted tax rate in the years
ended June 30, 2015, 2014 and 2013.
The movement in the valuation allowance for the year ended June
30, 2015, relates primarily to the release of the valuation allowance resulting
from the utilization of foreign tax credits during the year. 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.
Net1 included actual and deemed dividends received from one of
its South African subsidiaries in its years ended June 30, 2015, 2014 and 2013,
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, 2015, 2014
and 2013.
F-44
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
20. |
INCOME TAXES (continued) |
Income tax provision (continued)
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, 2015, 2014 and 2013, is as follows:
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
Income tax rate
reconciliation: |
|
|
|
|
|
|
|
|
|
|
Income taxes at fully-distributed South
African tax rates |
|
28.00% |
|
|
28.00% |
|
|
28.00% |
|
|
Non-deductible
items |
|
2.36% |
|
|
4.71% |
|
|
6.78% |
|
|
Foreign tax rate differential
|
|
0.06% |
|
|
1.89% |
|
|
10.39% |
|
|
Foreign tax
credits |
|
(1.68% |
) |
|
(13.59% |
) |
|
(52.80% |
) |
|
Taxation on deemed dividends in
the United States |
|
3.46% |
|
|
13.46% |
|
|
57.32% |
|
|
Capital gains
tax paid |
|
0.00% |
|
|
0.19% |
|
|
0.03% |
|
|
Movement in valuation allowance
|
|
(0.08% |
) |
|
1.23% |
|
|
9.40% |
|
|
Prior year
adjustments |
|
(0.69% |
) |
|
0.19% |
|
|
(5.39% |
) |
|
Income tax
provision |
|
31.43% |
|
|
36.08% |
|
|
53.73% |
|
The non-deductible items during the year ended June 30, 2015,
include primarily legal and consulting fees incurred that are not deductible for
tax purposes. 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
foreign tax rate differential represents the difference between statutory tax
rates in South Africa and foreign jurisdictions, primarily the United States.
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:
|
|
|
2015 |
|
|
2014 |
|
|
Total deferred tax
assets |
|
|
|
|
|
|
|
Net operating loss carryforwards
|
$ |
1,216 |
|
$ |
1,901 |
|
|
Provisions and
accruals |
|
5,653 |
|
|
5,470 |
|
|
FTS patent |
|
691 |
|
|
909 |
|
|
Intangible
assets |
|
616 |
|
|
123 |
|
|
Foreign tax credits |
|
20,212 |
|
|
23,338 |
|
|
Other |
|
7,330 |
|
|
7,765 |
|
|
Total deferred
tax assets before valuation allowance |
|
35,718 |
|
|
39,506 |
|
|
Valuation allowances |
|
(22,550 |
) |
|
(25,153 |
) |
|
Total deferred tax assets, net of valuation allowance
|
|
13,168 |
|
|
14,353 |
|
|
Total deferred tax
liabilities: |
|
|
|
|
|
|
|
Intangible assets |
|
11,510 |
|
|
16,600 |
|
|
Other |
|
4,924 |
|
|
5,824 |
|
|
Total deferred
tax liabilities |
|
16,434 |
|
|
22,424 |
|
|
Reported as |
|
|
|
|
|
|
|
Current deferred tax assets |
|
7,298 |
|
|
7,451 |
|
|
Long term
deferred tax liabilities |
|
10,564 |
|
|
15,522 |
|
|
Net deferred
income tax liabilities |
$ |
3,266 |
|
$ |
8,071 |
|
F-45
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(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
liabilities
Intangible assets
Deferred tax liabilities intangible assets have decreased
during the year ended June 30, 2015, primarily as a result of the amortization
of the underlying KSNET intangible assets during the year.
Decrease in valuation allowance
At June 30, 2015, the Company had deferred tax assets of $13.2
million (2014: $14.4 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, 2015, the Company had a valuation allowance of
$22.6 million (2014: $25.2 million) to reduce its deferred tax assets to
estimated realizable value. The movement in the valuation allowance for the
years ended June 30, 2015 and 2014, is presented below:
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
Tax |
|
|
operating |
|
|
|
|
|
|
|
|
|
|
|
|
tax |
|
|
deductible |
|
|
loss carry- |
|
|
FTS |
|
|
|
|
|
|
Total |
|
|
credits |
|
|
goodwill |
|
|
forwards |
|
|
patent |
|
|
Other |
|
July 1, 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 |
|
Reversed to statement of operations |
|
(3,126 |
) |
|
(3,126 |
) |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Charged to statement of
operations |
|
794 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
794 |
|
Utilized |
|
(128 |
) |
|
- |
|
|
- |
|
|
(128 |
) |
|
- |
|
|
- |
|
Foreign currency adjustment
|
|
(143 |
) |
|
- |
|
|
- |
|
|
(28 |
) |
|
(115 |
) |
|
- |
|
June 30, 2015 |
$ |
22,550 |
|
$ |
20,211 |
|
$ |
- |
|
$ |
1,088 |
|
$ |
254 |
|
$ |
997 |
|
Net operating loss carryforwards
and foreign tax credits
United States
As of June 30, 2015, Net1 had net operating loss carryforwards
that will expire, if unused, as follows:
|
Year of expiration |
|
U.S. net operating
|
|
|
|
|
loss carry |
|
|
|
|
forwards |
|
|
2025 |
$ |
2,974 |
|
During the year ended June 30, 2015 and 2014, 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, 2015 and 2014, respectively. The unused foreign tax credits
generated expire after ten years in 2024, 2023, 2022, 2021 and 2020.
F-46
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(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 (continued)
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 June 30, 2015 and 2014, the Company has unrecognized tax
benefits of $2.3 million and $1.2 million, respectively, 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 U.S. federal
jurisdiction. As of June 30, 2015, the Companys South African subsidiaries are
no longer subject to income tax examination by the South African Revenue Service
for periods before June 30, 2010. 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, 2015, 2014 and 2013:
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
Unrecognized tax benefits -
opening balance |
$ |
1,160 |
|
$ |
1,150 |
|
$ |
1,314 |
|
Gross decreases - tax positions
in prior periods |
|
- |
|
|
- |
|
|
(170 |
) |
Gross increases
- tax positions in current period |
|
1,311 |
|
|
38 |
|
|
216 |
|
Lapse of statute limitations |
|
- |
|
|
- |
|
|
- |
|
Foreign currency
adjustment |
|
(149 |
) |
|
(28 |
) |
|
(210 |
) |
Unrecognized tax benefits - closing balance |
$ |
2,322 |
|
$ |
1,160 |
|
$ |
1,150 |
|
As of June 30, 2015 and 2014, the Company had accrued interest
related to uncertain tax positions of approximately $0.3 million and $0.2
million, respectively, on its balance sheet.
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, 2015, 2014 and
2013, 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, February 2012, August 2014 and November 2014 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.
F-47
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
21. |
EARNINGS PER SHARE
(continued) |
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, 2015, 2014 and 2013:
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
|
(in thousands except
percent and |
|
|
|
|
|
|
per share data)
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
Net income attributable to Net1 |
$ |
94,735 |
|
$ |
70,111 |
|
$ |
12,977 |
|
Undistributed
earnings |
|
94,735 |
|
|
70,111 |
|
|
12,977 |
|
Percent allocated to common shareholders (Calculation 1) |
|
99% |
|
|
99% |
|
|
99% |
|
Numerator for
earnings per share: basic and diluted |
$ |
93,750 |
|
$ |
69,376 |
|
$ |
12,836 |
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
Denominator for
basic earnings per share: weighted-average common shares outstanding |
|
46,247 |
|
|
45,997 |
|
|
45,057 |
|
Effect of dilutive
securities: |
|
|
|
|
|
|
|
|
|
Performance shares related to acquisition |
|
|
|
|
- |
|
|
95 |
|
Stock options |
|
152 |
|
|
119 |
|
|
30 |
|
Denominator
for diluted earnings per share: adjusted
weighted average
common shares outstanding and assumed conversion |
|
46,399 |
|
|
46,116 |
|
|
45,182 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
Basic |
$ |
2.03 |
|
$ |
1.51 |
|
$ |
0.28 |
|
Diluted |
$ |
2.02 |
|
$ |
1.50 |
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
(Calculation 1) |
|
|
|
|
|
|
|
|
|
Basic
weighted-average common shares outstanding (A) |
|
46,247 |
|
|
45,997 |
|
|
45,057 |
|
Basic
weighted-average common shares outstanding and unvested restricted shares
expected to vest (B) |
|
46,733 |
|
|
46,484 |
|
|
45,553 |
|
Percent allocated
to common shareholders (A) / (B) |
|
99% |
|
|
99% |
|
|
99% |
|
Options to purchase 1,597,751 shares of the Companys common
stock at prices ranging from $11.23 to $24.46 per share were outstanding during
the year ended June 30, 2015, 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 27, 2024, were still outstanding as of
June 30, 2015.
22. |
SUPPLEMENTAL CASH FLOW
INFORMATION |
Supplemental cash flow information
The following table presents the supplemental cash flow
disclosures for the years ended June 30, 2015, 2014 and 2013:
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
Cash received from interest
|
$ |
16,399 |
|
$ |
14,703 |
|
$ |
12,043 |
|
Cash paid for interest |
$ |
4,360 |
|
$ |
6,969 |
|
$ |
7,927 |
|
Cash paid for income taxes
|
$ |
45,459 |
|
$ |
42,417 |
|
$ |
21,900 |
|
As discussed in Note 18, during the year ended June 30, 2015,
employees exercised stock options through the delivery 336,584 shares of the
Companys common stock at the closing price on September 9, 2014 or $13.93 under
the terms of their option agreements. These shares are included in the Companys
total share count and amount reflected as treasury shares on the consolidated
balance sheet as of June 30, 2015 and consolidated statement of changes in
equity for the year ended June 30, 2015.
F-48
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
22. |
SUPPLEMENTAL CASH FLOW INFORMATION
(continued) |
Supplemental cash flow information
(continued)
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 year ended June 30, 2014 are book entries and
were not paid in cash.
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.
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, 2015, there was one such customer, providing 24% of total revenue
(2014: one such customer, providing 27% of total revenue; 2013: one such
customer, providing 42% of total revenue).
The Financial inclusion and applied technologies segment
derives revenue from the provision of short-term loans as a principal and the
provision of smart card accounts, as a fixed monthly fee per card is charged for
the maintenance of these accounts. 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.
F-49
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
23. |
OPERATING SEGMENTS
(continued) |
Operating segments (continued)
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
includes start up costs related to ZAZOO in the UK and India and 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.
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 year ended June
30, 2014 (refer to Note 17), and the profit related to the deconsolidation of
subsidiaries and disposal of business (refer to Note 19), during the year ended
June 30, 2014, has been allocated to corporate/eliminations.
The reconciliation of the reportable segments revenue to
revenue from external customers for the years ended June 30, 2015, 2014 and
2013, respectively, is as follows:
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
From |
|
|
|
Reportable |
|
|
Inter- |
|
|
external |
|
|
|
Segment |
|
|
segment |
|
|
customers |
|
South African transaction
processing |
$ |
236,452 |
|
$ |
20,521 |
|
$ |
215,931 |
|
International transaction processing |
|
164,554 |
|
|
- |
|
|
164,554 |
|
Financial inclusion and
applied technologies |
|
272,600 |
|
|
27,106 |
|
|
245,494 |
|
Total for the year ended June
30, 2015 |
|
673,606 |
|
|
47,627 |
|
|
625,979 |
|
|
|
|
|
|
|
|
|
|
|
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 |
|
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, 2015, 2014 and 2013, respectively, is as follows:
|
|
For the years ended June 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
Reportable segments measure
of profit or loss |
$ |
150,538 |
|
$ |
144,038 |
|
$ |
50,383 |
|
Operating income:
Corporate/Eliminations |
|
(22,019 |
) |
|
(42,240 |
) |
|
(27,221 |
) |
Interest income
|
|
16,355 |
|
|
14,817 |
|
|
12,083 |
|
Interest expense |
|
(4,456 |
) |
|
(7,473 |
) |
|
(7,966 |
) |
Income before income taxes |
$ |
140,418 |
|
$ |
109,142 |
|
$ |
27,279 |
|
F-50
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
23. |
OPERATING SEGMENTS
(continued) |
The following tables summarize segment information which is
prepared in accordance with GAAP for the years ended June 30, 2015, 2014 and
2013:
|
|
For the years ended June 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
Revenues |
|
|
|
|
|
|
|
|
|
South African
transaction processing |
$ |
236,452 |
|
$ |
261,577 |
|
$ |
242,739 |
|
International transaction processing |
|
164,554 |
|
|
152,725 |
|
|
135,954 |
|
Financial
inclusion and applied technologies |
|
272,600 |
|
|
207,595 |
|
|
108,001 |
|
Total |
|
673,606 |
|
|
621,897 |
|
|
486,694 |
|
Operating income (loss) |
|
|
|
|
|
|
|
|
|
South African transaction processing |
|
51,008 |
|
|
61,401 |
|
|
(21,316 |
) |
International
transaction processing |
|
26,805 |
|
|
21,952 |
|
|
14,208 |
|
Financial inclusion and applied technologies |
|
72,725 |
|
|
60,685 |
|
|
57,491 |
|
Subtotal: Operating segments |
|
150,538 |
|
|
144,038 |
|
|
50,383 |
|
Corporate/Eliminations |
|
(22,019 |
) |
|
(42,240 |
) |
|
(27,221 |
) |
Total |
|
128,519 |
|
|
101,798 |
|
|
23,162 |
|
Depreciation and
amortization |
|
|
|
|
|
|
|
|
|
South African
transaction processing |
|
7,093 |
|
|
7,036 |
|
|
7,516 |
|
International transaction processing |
|
17,846 |
|
|
15,823 |
|
|
14,183 |
|
Financial
inclusion and applied technologies |
|
808 |
|
|
874 |
|
|
678 |
|
Subtotal: Operating segments |
|
25,747 |
|
|
23,733 |
|
|
22,377 |
|
Corporate/Eliminations |
|
14,938 |
|
|
16,553 |
|
|
18,222 |
|
Total |
|
40,685 |
|
|
40,286 |
|
|
40,599 |
|
Expenditures for long-lived assets |
|
|
|
|
|
|
|
|
|
South African transaction processing |
|
7,008 |
|
|
3,425 |
|
|
9,400 |
|
International
transaction processing |
|
28,205 |
|
|
19,393 |
|
|
12,490 |
|
Financial inclusion and applied technologies |
|
1,223 |
|
|
1,088 |
|
|
857 |
|
Subtotal: Operating segments |
|
36,436 |
|
|
23,906 |
|
|
22,747 |
|
Corporate/Eliminations |
|
- |
|
|
- |
|
|
- |
|
Total |
$ |
36,436 |
|
$ |
23,906 |
|
$ |
22,747 |
|
The segment information as reviewed by the chief operating
decision maker does not include a measure of segment assets per segment as all
of the significant assets are used in the operations of all, rather than any
one, of the segments. The Company does not have dedicated assets assigned to a
particular operating segment. Accordingly, it is not meaningful to attempt an
arbitrary allocation and segment asset allocation is therefore not presented.
It is impractical to disclose revenues from external customers
for each product and service or each group of similar products and services.
Geographic Information
Revenues based on the geographic location from which the sale
originated for the years ended June 30, are presented in the table below:
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
South Africa |
$ |
461,425 |
|
$ |
428,931 |
|
$ |
317,916 |
|
South Korea |
|
160,853 |
|
|
146,667 |
|
|
129,338 |
|
Rest of world |
|
3,701 |
|
|
6,058 |
|
|
4,893 |
|
Total |
$ |
625,979 |
|
$ |
581,656 |
|
$ |
452,147 |
|
F-51
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
23. |
OPERATING SEGMENTS
(continued) |
Geographic Information (continued)
Long-lived assets based on the geographic location for the
years ended June 30, are presented in the table below:
|
|
|
|
|
Long-lived assets |
|
|
|
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
South Africa |
$ |
72,467 |
|
$ |
105,627 |
|
$ |
117,858 |
|
South Korea |
|
202,682 |
|
|
229,830 |
|
|
213,589 |
|
Rest of world |
|
20,058 |
|
|
6,593 |
|
|
7,676 |
|
Total |
$ |
295,207 |
|
$ |
342,050 |
|
$ |
339,123 |
|
24. |
COMMITMENTS AND
CONTINGENCIES |
Operating lease commitments
The Company leases certain premises. At June 30, 2015, the
future minimum payments under operating leases consist of:
|
Due within 1 year |
$ |
3,828 |
|
|
Due within 2 years |
$ |
2,133 |
|
|
Due within 3 years |
$ |
794 |
|
|
Due within 4 years |
$ |
314 |
|
|
Due within 5 years |
$ |
107 |
|
Operating lease payments related to the premises and equipment
were $6.8 million, $7.5 million and $15.9 million, respectively, for the years
ended June 2015, 2014 and 2013, respectively.
Capital commitments
As of June 30, 2015 and 2014, the Company had outstanding
capital commitments of approximately $3.4 million and $0.2 million,
respectively.
Purchase obligations
As of June 30, 2015 and 2014, the Company had purchase
obligations totaling $5.0 million and $5.5 million, respectively. The purchase
obligations as of June 30, 2015, primarily include inventory that will be
delivered to the Company and sold to customers in the next twelve months.
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 134.5 million ($11.0 million, translated at exchange rates applicable as
of June 30, 2015) 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 ($10.2 million, translated
at exchange rates applicable as of June 30, 2015). 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, 2015. The
maximum potential amount that the Company could pay under these guarantees is
ZAR 134.5 million ($11.0 million, translated at exchange rates applicable as of
June 30, 2015). The guarantees have reduced the amount available for borrowings
under the Companys short-term credit facility described in Note 12.
F-52
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
24. |
COMMITMENTS AND CONTINGENCIES
(continued) |
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 was
brought on behalf of a purported shareholder of Net1 and all other similarly
situated shareholders who purchased Net1s securities between August 27, 2009
and November 27, 2013. On July 23, 2014, the Court appointed a lead plaintiff
and lead counsel. On September 22, 2014, the lead plaintiff filed an amended
complaint alleging that Net1 made materially false and misleading statements in
that it failed to disclose material adverse information and misrepresented the
truth about the Companys finances and business prospects. The amended complaint
seeks unspecified damages on behalf of the lead plaintiff and all other
similarly situated shareholders who purchased Net1s securities between January
18, 2012 and December 4, 2012, which is a shorter class period than proposed in
the original complaint. On January 16, 2015, Net1 filed a motion to dismiss
plaintiffs amended complaint for failure to state a claim. On March 6, 2015,
plaintiff filed an opposition to Net1s motion to dismiss its complaint, and the
Company filed a reply brief on March 27, 2015. No motion for class certification
has been filed. 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 year ended June 30, 2013, the Company recognized expenses
of approximately $0.1 million 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.
26. |
UNAUDITED QUARTERLY
RESULTS |
The following tables contain selected unaudited consolidated
statements of operations information for each quarter of fiscal 2015 and 2014:
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended |
|
|
|
Jun 30, |
|
|
Mar 31, |
|
|
Dec 31, |
|
|
Sep 30, |
|
|
June 30, |
|
|
|
2015 |
|
|
2015 |
|
|
2014 |
|
|
2014 |
|
|
2015 |
|
|
|
|
|
|
(In
thousands except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
$ |
164,286 |
|
$ |
151,121 |
|
$ |
154,131 |
|
$ |
156,441 |
|
$ |
625,979 |
|
Operating income |
|
32,613 |
|
|
31,966 |
|
|
30,815 |
|
|
33,125 |
|
|
128,519 |
|
Net income attributable to
Net1 |
$ |
23,914 |
|
$ |
24,358 |
|
$ |
22,374 |
|
$ |
24,089 |
|
$ |
94,735 |
|
Net income per share, in United States
dollars |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
attributable to Net1 shareholders |
$ |
0.51 |
|
$ |
0.52 |
|
$ |
0.48 |
|
$ |
0.51 |
|
$ |
2.03 |
|
Diluted earnings attributable to
Net1 shareholders |
$ |
0.51 |
|
$ |
0.52 |
|
$ |
0.48 |
|
$ |
0.51 |
|
$ |
2.02 |
|
F-53
NET 1 UEPS TECHNOLOGIES, INC. |
Notes to the consolidated financial statements
|
for the years ended June 30, 2015, 2014 and 2013
|
(All amounts
stated in thousands of United States Dollars, unless otherwise stated)
|
26. |
UNAUDITED QUARTERLY RESULTS
(continued) |
|
|
|
|
|
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 |
|
*********************
F-54
EXHIBIT 12
Statement regarding computation of ratio of earnings to
fixed charges
|
|
Year ended June 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2013 |
|
|
2012 |
|
|
2011 |
|
|
|
(in
thousands, except for ratio of earnings to fixed charges) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expensed and capitalized |
$ |
4,456 |
|
$ |
7,473 |
|
$ |
7,966 |
|
$ |
9,345 |
|
$ |
8,672 |
|
Amortized premiums, discounts
and capitalized expenses related to indebtedness Estimate of the
interest within rental expense |
|
650 |
|
|
709 |
|
|
1,430 |
|
|
- 678 |
|
|
- 628 |
|
Preference security dividend requirements
of consolidated subsidiaries |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed charges |
|
5,106 |
|
|
8,182 |
|
|
9,396 |
|
|
10,023 |
|
|
9,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add |
|
145,524 |
|
|
117,324 |
|
|
36,675 |
|
|
70,404 |
|
|
45,710 |
|
Pretax income from continuing operations
before adjustment for non-controlling interests in consolidated
subsidiaries or income or loss from equity investees |
|
140,418 |
|
|
109,142 |
|
|
27,279 |
|
|
60,381 |
|
|
36,410 |
|
Fixed charges |
|
5,106 |
|
|
8,182 |
|
|
9,396 |
|
|
10,023 |
|
|
9,300 |
|
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 |
|
328 |
|
|
- |
|
|
- |
|
|
- |
|
|
|
|
Interest capitalized |
|
|
|
|
|
|
|
|
|
|
- |
|
|
- |
|
Preference security dividend requirements
of consolidated subsidiaries |
|
|
|
|
|
|
|
|
|
|
- |
|
|
- |
|
Non-controlling interest in
pre-tax income of subsidiaries that have not incurred fixed
charges |
|
328 |
|
|
|
|
|
|
|
|
- |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings |
$ |
145,196 |
|
$ |
117,324 |
|
$ |
36,675 |
|
$ |
70,404 |
|
$ |
45,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earnings to fixed
charges |
|
28.44 |
|
|
14.34 |
|
|
3.90 |
|
|
7.02 |
|
|
4.92 |
|
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
The following is a list of subsidiaries of the Company as of
June 30, 2015, 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 |
|
|
Zazoo Limited |
England and Wales |
|
|
Netpay Solutions Private Limited |
Republic of India |
|
|
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 Nos. 333-126958, 333-140042 and 333-170395 on Form S-8 of our reports
dated August 20, 2015, 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, 2015.
/s/ Deloitte & Touche (South Africa)
Johannesburg, South Africa
Registered Auditors
August 20, 2015
National Executive: *LL Bam Chief Executive *AE Swiegers Chief
Operating Officer *GM Pinnock Audit DL Kennedy Risk Advisory *NB Kader Tax TP
Pillay Consulting S Gwala Business Process Solutions
*K Black Clients & Industries *JK Mazzocco Talent & Transformation *MJ Jarvis
Finance *M Jordan Strategy *TJ Brown Chairman of the Board *MJ Comber Deputy
Chairman of the Board
A full list of partners and directors is available on
request
*Partner and Registered Auditor
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, 2015;
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 20, 2015 |
/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, 2015;
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 20, 2015 |
/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, 2015, 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 20, 2015 |
/s/: Dr. Serge C. P. Belamant |
|
Name: Dr. Serge C. P. Belamant |
|
Chief Executive Officer and Chairman of the
Board |
|
|
Date: August 20, 2015 |
/s/: Herman Kotzé |
|
Name: Herman Kotzé |
|
Chief Financial Officer, Treasurer and
Secretary |
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